Southwest Airlines (LUV.US) Lowers 2026 Earnings Guidance: Rising Fuel Costs, but Record Q3 Revenue and Strong Demand Support Profit Resilience

According to Smart Finance APP, Southwest Airlines (LUV.US) released its Q3 2026 earnings after the market closed on October 21, becoming the third major U.S. airline this month to lower its full-year 2026 profit forecast due to rising fuel prices. Despite significant increases in fuel costs, the company achieved record revenue in the third quarter, leading to a substantial year-over-year expansion in profit margins. CEO Bob Jordan stated that despite higher ticket prices, passengers continue to book flights, and demand remains strong.

The financial report shows that Southwest Airlines’ total operating revenue for the third quarter was $8.4 billion, a year-on-year increase of 21.2%, setting a new record for the third quarter. Net profit was $270 million, with diluted earnings per share of $0.55. Excluding special items, adjusted net profit was $328 million, and adjusted earnings per share were $0.66, higher than the LSEG consensus estimate of $0.58. Adjusted revenue was $8.42 billion, also above the market expectation of $8.25 billion. In terms of profitability, the company’s operating margin was 4.5%, an increase of 4.0 percentage points year-on-year; adjusted operating margin reached 5.4%, up 4.8 percentage points year-on-year. Revenue per available seat mile (RASM) surged 21.6% year-on-year, reaching a historical high, and exceeded earlier guidance even as capacity declined 0.4% year-on-year.

Cost pressures mainly came from fuel. Q3 operating expenses were $8 billion, a year-on-year increase of 16.3%; excluding special items, the increase was 15.4%. Excluding fuel, special items, and profit sharing, unit cost (CASM-X) rose 3.4% year-on-year. The average fuel price for the quarter was $3.92 per gallon, higher than the previous assumption of $3.70 to $3.75, leading to an $821 million year-on-year increase in fuel expenses and about $1.08 drag on adjusted EPS.

Due to rising fuel costs, Southwest Airlines expects adjusted earnings per share for 2026 to be $2.60 to $2.85, lower than July’s estimate of $3.25 to $4.25. For Q4, the company expects adjusted EPS to be $0.55 to $0.80, capacity to increase 3%-4% year-on-year, RASM up 19%-21% YoY, and CASM-X up 4.0%-4.5% YoY, with about 1.0 percentage point headwind from removing 6 seats per 737-700 to add larger space seating. Q4 fuel cost is expected to be about $4.55 per gallon. For the full year, the company expects net capital expenditures of $2.5 billion to $2.75 billion, year-on-year capacity growth of about 1.2% (down from previous guidance of ~1.5%), and to take delivery of 67 Boeing 737-8/737-7s while retiring about 60 aircraft.

On the demand side, Jordan stated in the financial report that customer response to upgraded Southwest Airlines products has been positive, which is reflected directly in the results. Even after absorbing the impact from last year’s introduction of baggage fees and other commercial initiatives, demand remains strong, confirming the company’s built-in earnings durability—even in the face of sharply rising fuel costs. In Q3, Southwest Airlines’ average ticket price was $231.69, up nearly 27% over the same period in 2025 (not including ancillary charges). The number of revenue passengers decreased by 3.2% to 33.47 million. In recent years, Southwest Airlines has continually remodeled its long-term commercial model: old policies such as two free checked bags per person and open seating were cancelled, and the company began charging for many seat selections and added baggage fees to move closer to its major competitors.

On the balance sheet, at the end of the quarter the company had liquidity of $5.6 billion, including $3.6 billion in cash and equivalents and a $2.0 billion revolving credit facility. Gross leverage ratio was 1.9x, and the net value of unencumbered aircraft and related assets was about $15.8 billion. In Q3, the company paid dividends worth $176 million, with $450 million remaining under the $2 billion stock repurchase authorization. At quarter-end, the fleet comprised 803 aircraft, with 20 Boeing 737-8s delivered and 20 aircraft retired or sold, bringing about $214 million in related sales income.

Strategically, Southwest Airlines announced the launch of its first airport lounge network, Southwest Icon Lounge™, expected to open to customers in 2027. It upgraded its Rapid Rewards loyalty program by adding a new Platinum status; became the first U.S. airline to offer flight search functions via ChatGPT; and added TAP Air Portugal and LOT Polish Airlines as its 10th and 11th international partners. The Starlink in-flight WiFi retrofit continues, with full fleet coverage expected by fall 2027. Jordan said that with the transformation completed, the company’s focus has shifted to business optimization and the next set of customer experience enhancements to drive the next phase of value creation: “We are confident in our ability to further increase earnings, improve returns, and expand margins.” The company also announced it will hold a Capital Markets Day in New York on March 2, 2027, at which it will release multi-year financial frameworks and management objectives.

At the industry level, Delta Air Lines and United Airlines also lowered their full-year profit forecasts after reporting third-quarter results, with both companies’ third-quarter revenues and profits below expectations. In contrast, Southwest Airlines exceeded expectations for Q3 revenue and adjusted EPS, though rising fuel costs still place significant pressure on its full-year profit guidance.