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

Southwest Airlines Co. (LUV.US) reported third-quarter 2026 results after the market close on October 21, becoming the third major U.S. airline this month to cut its full-year 2026 profit forecast due to rising fuel prices. Despite a significant increase in fuel costs, the company still achieved record revenue in the third quarter, driving a substantial year-over-year expansion in margins; CEO Bob Jordan said passengers continue to book despite higher fares, and demand remains strong. The earnings report shows that Southwest Airlines Co.'s third-quarter total operating revenue was $8.4 billion, up 21.2% year over year, a record for the third quarter; net income was $270 million, or $0.55 per diluted share; excluding special items, adjusted net income was $328 million and adjusted earnings per share were $0.66, above 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%, up 4.0 percentage points year over year; the adjusted operating margin was 5.4%, up 4.8 percentage points year over year. Unit revenue (RASM) surged 21.6% year over year, the highest level in the company's history, and exceeded prior guidance even as capacity edged down 0.4% year over year. Cost-side pressure came mainly from fuel. Third-quarter operating expenses were $8.0 billion, up 16.3% year over year, or up 15.4% excluding special items; unit costs excluding fuel, special items and profit sharing (CASM-X) rose 3.4% year over year. The average fuel price for the quarter reached $3.92 per gallon, above the prior assumption of $3.70 to $3.75, and fuel expense increased by $821 million year over year, a drag of about $1.08 on adjusted earnings per share. Based on higher fuel costs, Southwest Airlines Co. expects full-year 2026 adjusted earnings per share of $2.60 to $2.85, below its July forecast of $3.25 to $4.25. The company expects fourth-quarter adjusted earnings per share of $0.55 to $0.80, capacity growth of 3% to 4% year over year, unit revenue growth of 19% to 21% year over year, and unit costs excluding fuel and other items up 4.0% to 4.5% year over year, including an approximately 1.0 percentage point headwind from removing six seats on 737-700s to install larger-space seats; fourth-quarter fuel costs are 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 and full-year capacity growth of about 1.2%, down from prior guidance of about 1.5%; for the full year it expects to take delivery of 67 Boeing Company 737-8/737-7 aircraft and retire about 60. On demand, Jordan said in the earnings report that customers are responding positively to Southwest Airlines Co.'s upgraded product, which is directly reflected in the results; demand remains strong after absorbing last year's bag fees and other commercial initiatives, confirming the durability of the earnings power the company has built even in the face of sharply higher fuel costs. In the third quarter, Southwest Airlines Co.'s average fare was $231.69, up nearly 27% from the same period in 2025, excluding ancillary fees; revenue passengers fell 3.2% to 33.47 million. In recent years, Southwest Airlines Co. has continued to reshape its long-standing business model, scrapping old policies such as two free checked bags per person and open seating, and has begun charging for many seat assignments and raising bag fees to move closer to its major competitors. On the balance sheet, as of quarter-end, the company had $5.6 billion in liquidity, including $3.6 billion in cash and equivalents and a $2.0 billion revolving credit facility; gross leverage was 1.9x, and the net book value of unencumbered aircraft and related assets was about $15.8 billion. In the third quarter the company paid $176 million in dividends, with $450 million remaining under its $2.0 billion share repurchase authorization. The fleet totaled 803 aircraft at quarter-end; the company took delivery of 20 Boeing Company 737-8s during the quarter and retired or sold 20, with gains on the related sales of about $214 million. On the strategic front, Southwest Airlines Co. announced during the quarter the launch of its first airport lounge network, Southwest Icon Lounge, expected to welcome guests in 2027; an upgrade to its Rapid Rewards loyalty program with a new Platinum tier; becoming the first U.S. airline to offer flight search through ChatGPT; and adding TAP Air Portugal and LOT Polish Airlines as its 10th and 11th international partners. Starlink in-flight WiFi retrofits continue, with full fleet coverage expected by fall 2027. Jordan said that with the transformation complete, the company's focus has shifted to business optimization and the next wave of customer experience upgrades to open the next phase of value creation, "we are confident in further improving profitability, improving returns and expanding margins." The company also announced it will host a Capital Markets Day in New York on March 2, 2027, at which it will present a multi-year financial framework and management targets. At the industry level, Delta Air Lines, Inc. and United Airlines also cut their full-year profit outlooks when reporting third-quarter results, and both posted third-quarter revenue and profit below expectations. By contrast, Southwest Airlines Co.'s third-quarter revenue and adjusted earnings per share both beat expectations, but higher fuel costs still put clear pressure on its full-year profit guidance.