Southwest Cuts 2026 Profit Forecast on Higher Fuel Even as Q3 Revenue Hits Record

Southwest Cuts 2026 Profit Forecast on Higher Fuel Even as Q3 Revenue Hits Record

Southwest Airlines reported record third-quarter 2026 revenue and better-than-expected adjusted earnings on October 21, but cut its full-year 2026 adjusted earnings guidance sharply because of higher fuel costs. The carrier now expects $2.60 to $2.85 per share on an adjusted basis for 2026, down from a July forecast of $3.25 to $4.25. It is the third major U.S. airline this month to lower its 2026 profit outlook on fuel. Southwest is mid-turnaround, having scrapped free bags and open seating in favor of assigned seats and fees, and Q3 shows the new pricing is paying off even as fuel eats the gains.

Record Q3 Revenue of $8.42B and Record Unit Revenue

Southwest posted third-quarter 2026 operating revenue of $8.4 billion, up 21.2% year over year and a company record for the quarter; adjusted revenue of $8.42 billion beat the consensus estimate of $8.25 billion. Revenue per available seat mile (RASM) reached an all-time record of 18.55 cents, up 21.6% year over year on capacity down 0.4%. Adjusted earnings per share came in at 66 cents against expectations of 58 cents, with adjusted net income of $328 million. On a GAAP basis, net income was $270 million, or 55 cents per diluted share, versus $54 million, or 10 cents, a year earlier.

Fuel at $3.92 a Gallon Added $821M of Cost

Third-quarter 2026 fuel cost averaged $3.92 per gallon, above prior assumptions of $3.70 to $3.75. Fuel expense rose $821 million versus the third quarter of 2025, a $1.08 headwind to adjusted EPS. The average passenger fare was $231.69, up 26.9% from $182.56 a year earlier. Operating margin was 4.5%, up 4.0 points year over year, and adjusted operating margin was 5.4%, up 4.8 points. Revenue passengers carried fell 3.2% to 33.47 million.

Full-Year Guide Cut to $2.60–$2.85; Q4 Fuel Near $4.55

Southwest guided 2026 adjusted EPS to $2.60 to $2.85, down from $3.25 to $4.25 in July. Fourth-quarter adjusted EPS is expected at 55 to 80 cents, with RASM up 19% to 21% year over year and capacity up 3% to 4%. Fourth-quarter fuel is assumed at about $4.55 per gallon, based on the forward curve as of October 15, 2026 (an internal estimate of $4.553), which caps Q4 profitability. Unit costs excluding fuel (CASM-X) are expected up 4.0% to 4.5% year over year.

CEO: Earnings Power "Durable" Despite Fuel

"Demand remained strong as we lapped last year's bag fee and other commercial initiatives, reinforcing our belief that the earnings power we've built is durable, even with significantly higher fuel costs," CEO Bob Jordan said in the earnings release. Managed business revenue reached a third-quarter record, with 20 of the 50 all-time top managed business booking days occurring during the quarter. Southwest returned $176 million to shareholders through dividends, reported $5.6 billion in total liquidity and gross leverage of 1.9x.

Turnaround: Fees, Assigned Seats and Extra-Legroom Revenue

Over the past several years Southwest has been remaking its long-standing model, scrapping policies such as two free checked bags per passenger and open seating in favor of charging for many seat assignments and adding a bag fee, similar to major competitors. The earnings release also announced a new Rapid Rewards Platinum tier, the first Southwest airport lounges (Icon Lounge) expected in 2027, and the first U.S. airline flight shopping through ChatGPT. In a September employee video, Jordan said customers "want access to extra legroom and different products," and that the experience will keep evolving to give customers "more reasons to choose us."

What's Next: March 2, 2027 Capital Markets Day

Southwest plans to host a Capital Markets Day in New York City on March 2, 2027 to share its multi-year financial framework, targets and path to achieving them. For 2026 it expects 67 Boeing 737-8 and 737-7 deliveries and about 60 aircraft retirements, with full-year capacity growth of roughly 1.2%. Jordan said the company looks forward to sharing "our multi-year financial framework, the targets we are managing toward, and our path to achieving them" at that event.