Key Takeaways
- Southwest Airlines shares rose 4% today after third-quarter revenue hit a record $8.4 billion and adjusted EPS of $0.66 beat the $0.58 analysts expected.
- Southwest’s higher fares are working: unit revenue rose 21.6%, and its adjusted operating margin widened 4.8 points, even with $821 million more in fuel costs.
- Fuel led Southwest to cut its 2026 adjusted EPS forecast to $2.60 to $2.85, down from $3.25 to $4.25 in July.
- Southwest will share its multi-year targets at its Capital Markets Day on March 2, 2027.
Southwest Airlines (LUV) stock is up 4% today on a down day for the broader market. The airline reported record third-quarter revenue after Wednesday’s close.
That outweighed a big cut to its 2026 profit forecast, and the cut comes down to fuel.
Customers are paying up
Revenue rose 21.2% to $8.4 billion, ahead of the $8.24 billion analysts expected. Adjusted EPS of $0.66 beat the $0.58 consensus. CEO Bob Jordan said demand stayed strong even as Southwest lapped the bag fees and other changes it rolled out last year…
- Unit revenue rose 21.6%, an all-time record and above the 17.5% to 19.5% Southwest guided for in July
- The average fare climbed 26.9% to $231.69, with capacity down 0.4%
- Adjusted operating margin widened 4.8 points to 5.4%
And it managed all that while paying $821 million more for fuel. That cost Southwest $1.08 per share of adjusted earnings, more than the $0.66 it actually earned.
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Fuel did the damage
Southwest now expects 2026 adjusted EPS of $2.60 to $2.85, a long way down from the $3.25 to $4.25 it forecast back in July. The midpoint also lands a bit under the around $2.80 analysts were expecting, and the fourth-quarter range of $0.55 to $0.80 falls short of the around $0.85 consensus.
Fuel is what drove the cut, with Southwest paying $3.92 a gallon in the third quarter against the $3.70 to $3.75 it had planned for. It’s now budgeting about $4.55 for the fourth quarter. Southwest isn’t alone here, since it’s the third major U.S. airline this month to trim its 2026 forecast because of fuel costs.
Southwest still expects fourth-quarter unit revenue to rise 19% to 21%. “Robust demand has continued in the fourth quarter,” Jordan said. On Thursday’s call, Southwest said about 65% of fourth-quarter revenue is already booked.
And even the low end of the new range is nearly triple what Southwest earned in 2025…
Analysts’ 2026 estimate is $2.71, inside the new range, and they expect $4.28 in 2027.
Still cheap after the jump
Southwest traded at 11x forward earnings at Wednesday’s close, well below its five-year average of 21x…
Today’s jump takes that closer to 12x.
My take: I like what the fare reset is doing for Southwest, and with the whole industry paying more for fuel, this looks like a sector problem more than a Southwest one. At around 12x forward earnings, I think investors are right to look past the cut.
The catch is that CEO Bob Jordan told CNBC on Thursday that Southwest is planning as if higher fuel costs last into 2027, so the 2027 estimates could come down too. I’ll be watching the Capital Markets Day on March 2, 2027, when the company lays out its multi-year targets, as the next real test.
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