Southwest Airlines started its Oct. 22 earnings call with a number that could make even the most loyal investors nervous. In Q3, higher fuel prices cost the airline $820 million more than the year-ago period.
Then CEO Bob Jordan delivered the twist: the airline still managed to grow its profit margins thanks to steady demand despite higher airfares and new bag fees. Airfares have risen 27%, and in April, Southwest increased its bag fees by $10.
Notably, Jordan expects the growth to continue amid a challenging macro backdrop and elevated fuel prices.
Southwest margins grow despite fuel
Jordan said the airline’s adjusted operating margin rose 4.8 points to 5.4%. He expects Southwest (LUV) to be the only major U.S. carrier with year-over-year margin expansion this quarter.
Also Read: Southwest Airlines’ CEO signals more changes for flyers
For every $100 in sales, Southwest retains $5.40 in operating profit, up from just $0.60 last year.
Southwest sees room to “continue to expand margins, even in an environment of high fuel,” Jordan said.
Here is how the third-quarter looked:
- Revenue: A third-quarter record of $8.4 billion.
- Earnings: Adjusted earnings per share of $0.66, up 500% from a year earlier.
- Unit revenue: Revenue per available seat mile (RASM) rose 21.6%, beating guidance of 17.5% to 19.5%.
- Returns: After taxes, return on invested capital stood at 11.3%.
CFO Tom Doxey added a key detail. Fuel cost Southwest $109 million more than it planned for in July, which works out to $0.14 a share.
The airline still beat the midpoint of its earnings guidance.
Why higher fares are sticking
The obvious question is whether flyers will continue paying more amid rising inflation and slower consumer spending.
Southwest had a forecast for the average ticket price. Chief Commercial Officer Justin Jones said airline fares came in about $3 higher.
Normally, higher prices mean fewer buyers. Yet customer footfall in Q3 exceeded expectations.
Southwest set records for Revenue per Available Seat Mile, or RASM, and passenger yield in September, which is the average fare per mile flown. Travel demand usually cools after summer, which was not the case this year.
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Jefferies analyst Sheila Kahyaoglu noted that average fares rose 27% while load factors, the share of seats filled, stayed flat.
Jordan said fares remain below 2019 levels after adjusting for inflation. He sees no sign that higher prices are hurting demand.
Business travel stood out as revenue in the segment rose 29% while business passengers rose roughly 9% on flat capacity.
Doxey said the $1 billion bag fee target is on track, which unlocked a new revenue stream. Seat assignments and extra legroom should grow from $1 billion in operating profit in 2026 to about $1.5 billion in 2027, “if not ahead.”
Jones said about two-thirds of the fourth quarter strength comes from the core business and the rest is tied to optimization.
Scott Olson / Getty Images
Southwest’s network and loyalty plan
Jordan says Southwest’s overhaul, which includes bag fees, assigned seating, extra legroom seats, dynamic pricing, and a redesigned network, is over.
Now the company will double down on operational efficiency.
Southwest is adding flights in its strongest markets, including Nashville, Las Vegas, Orlando, Austin, and San Diego.
Jones said 95% of fourth-quarter seat growth is at airports where Southwest is already the top carrier.
Related: JetBlue, Southwest Airlines, and Allegiant make pricing move
Jordan expects 2026 capacity growth of about 1.2%, well below peers, stating:
“We are not going to chase growth at the expense of returns or profitability.”
Loyalty is the next lever for LUV stock given:
- A new Platinum tier for Rapid Rewards starts Jan. 1.
- Starlink internet should reach the full fleet by this time next year.
- Icon lounges are under construction in Austin, Baltimore, Honolulu and Nashville.
- A premium credit card arrives in 2027.
Jordan also dismissed reports of a widebody order. He said there was “no credibility” to them.
Fuel and late flights remain risks
None of this suggests investing in LUV stock is risk-free.
Southwest’s fourth quarter outlook assumes fuel near $4.55 a gallon. It expects adjusted earnings per share of $0.55 to $0.80 in Q4, and $2.60 to $2.85 for the full year.
Management tied higher costs to four factors: heavy maintenance on some older Boeing 737 jets, higher frontline labor costs including healthcare, the cost of flights running late, and a choice to spend more on advertising this quarter.
Jordan called the jump an outlier and said costs should move lower in early 2027. He also admitted on-time performance is “not where we want it to be.”
Southwest booked $96 million in gains on retiring planes and $118 million on sale leasebacks in the third quarter.
Doxey said updated salvage value assumptions will cut depreciation by a bit more than 10%, but will ultimately reduce future gains.
My take on Southwest stock
I think the margin story is more durable than a fuel shock would suggest. And loyalty upgrades give customers more reasons to stay.
Asked whether Southwest can beat its peers next year, Doxey was blunt. “I do think we can beat everybody else,” he said.
Management did not provide an outlook for 2027, and fuel can move higher than estimates.
The next checkpoint is Capital Markets Day in New York on March 2, 2027, when Southwest will share its multiyear targets.
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