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    LUV
    Earnings call· Jun 2026(Q2 FY26)

    SOUTHWEST AIRLINES CO LUV

    Jul 23, 2026 Source

    Executive summary

    Southwest Airlines Q2 FY26 — Strong Earnings and Revenue Growth Driven by Transformation

    Southwest Airlines delivered strong Q2 FY26 results, showcasing the benefits of its transformation initiatives which have diversified revenue streams and enhanced earnings power. The company achieved record revenues and significant margin expansion despite substantial fuel cost increases. Management is now focused on optimizing its network, products, and commercial capabilities to further expand margins and ensure earnings durability, while maintaining a strong balance sheet.

    Highlights

    8

    • Achieved a 9% after-tax return on invested capital.

    • Adjusted operating margin of 6.7%, a 3.3 point improvement year-over-year.

    • Adjusted EPS of $0.94, up approximately 120% year-over-year, exceeding initial guidance and consensus.

    • Adjusted unit revenues increased 20.1% year-over-year to an all-time quarterly record.

    • Managed business revenues grew 30% year-over-year to a new all-time quarterly record.

    • Rapid Rewards new member enrollments increased 35% year-over-year, with overall program size reaching nearly 100 million members.

    • Chase co-branded credit card account growth was up 28% year-over-year.

    • CASM-X increased just 3.4% year-over-year on near flat capacity, below the low end of prior guidance.

    Concerns

    2

    • Experienced a nearly $900 million year-over-year increase in second quarter fuel expense.

    • Full-year 2026 adjusted EPS guidance updated to $3.25 to $4.25, replacing the prior expectation of "at least $4", reflecting the forward fuel curve as of July 17.

    Guidance & targets

    4
    CategoryTargetConfidence
    Full-year 2026 Adjusted EPS
    $3.25 to $4.25
    high materiality
    Medium
    Third Quarter Unit Revenue (RASM) growth
    17.5% to 19.5% year-over-year
    high materiality
    High
    Third Quarter CASM-X increase
    3.5% to 4% year-over-year
    medium materiality
    High
    Third Quarter Capacity growth
    flat to down 1%
    high materiality
    High

    Operational metrics

    19
    After-tax return on invested capital
    9%
    Q2 FY26

    First time all major initiatives were contributing throughout the entire quarter.

    Adjusted operating margin
    6.7%3.3 point improvement year-over-year
    Q2 FY26

    Despite nearly $900 million year-over-year increase in second quarter fuel expense.

    Liquidity
    $5.3 billionabove our target of approximately $4.5 billion
    Q2 FY26 end

    Ended the quarter with liquidity above target.

    Gross leverage ratio
    2.1ximproved from 2.4x at year-end 2025
    Q2 FY26 end

    Within stated range despite macro volatility.

    Fuel price
    $3.92
    Q2 FY26

    Average fuel price during the quarter.

    Estimated year-to-date fuel headwind
    $1.33
    YTD FY26

    Estimated impact on earnings per share.

    Profit sharing accrued
    over $100 million
    YTD FY26

    Accrued for employees, reflecting belief in sharing success.

    Rapid Rewards new member enrollments
    35%year-over-year
    Q2 FY26

    Customer response to enhanced product offering showing strong engagement.

    Rapid Rewards total members
    nearly 100 millionrecord high
    Q2 FY26

    Overall program size reached a record.

    Chase co-branded credit card account growth
    28%year-over-year
    Q2 FY26

    Exceptionally strong card acquisitions.

    Managed business revenues
    30%year-over-year
    Q2 FY26

    Reached a new all-time quarterly record, surpassing prior quarter's record.

    Completion factor ranking
    first
    Q2 FY26

    Ranked first among large domestic carriers.

    Mishandled baggage performance
    improvedyear-over-year
    Q2 FY26

    Improved even with higher volumes of gate checked bags.

    Customer complaint rate
    lowest
    Q2 FY26

    Maintained the lowest rate among major U.S. airlines.

    Aircraft sales gain
    ~1 point
    Q2 FY26

    Gains on sales of aircraft contributed to CASM-X.

    Q3 bookings in place
    ~65%
    Q3 FY26

    Booked about 65% in place for Q3.

    Q3 yields
    24%year-over-year
    Q3 FY26

    Yields running up 24% year-over-year compared to 13% for Q2 at this point.

    Incremental cost savings
    hundreds of millions of dollars
    YTD FY26

    Incremental savings found since the beginning of the year, incorporated into full-year guide.

    Fuel sourcing
    50%
    Q2 FY26

    Approximately 50% of fuel sourced from Gulf Coast.

    Industry KPIs

    8
    MetricValueDetails
    Fuel$3.92per gallon
    Casm ex3.4%%
    Capacity0.2%%
    Fleet mro~1 pointof CASM-X
    Unit revenue20.1%%
    Loyalty co brand35%%
    Demand indicatorsRobust
    Premium diverse revenue mix30%%

    Product announcements

    3
    ProductTypeDetails
    Starlink equipped aircraftlaunch
    Airline partner network expansionexpansion
    Anchorage serviceexpansion

    Deals & partnerships

    1
    Air PremiaExpansion of airline partner network

    Southwest expanded its airline partner network to 9 carriers with the addition of Air Premia in early July.

    Risks & headwinds

    2
    Volatile and elevated fuel pricesQ2 FY26, YTD FY26

    Nearly $900 million year-over-year increase in second quarter fuel expense; estimated year-to-date fuel headwind of approximately $1.33 per share.

    Mitigation: Industry recapture has been swift and pricing has remained sticky. Fuel procurement team effectively managed through dynamic market conditions, including moving lower-priced Gulf Coast products to the West Coast.

    Headwind from lapping 2025 initiativesQ3 FY26

    Q3 unit revenue outlook includes a year-over-year headwind from lapping the 2025 implementation of bag fees and other initiatives (bag fees alone are about $1 billion a year).

    Mitigation: Strong demand and constructive pricing environment are expected to be sustained. The underlying strength of demand and fares continues into Q3, with no deceleration.

    What to watch in Q3 FY26

    5

    On-time performance (OTP) improvement

    Next couple of months, by the next high-volume period on the holidays.
    CurrentOTP has come down, with small-scale delays in the last 10 minutes of turn.
    TargetMuch more flattering OTP number.

    Why it matters

    Improving OTP will enhance customer experience and operational efficiency, supporting overall reliability and competitive advantage.

    So we've focused our ground operations team on how they can reengineer the last 10 minutes now that we've pretty much stabilized the changes to our boarding product so we can scrape that back and have that OTP number be much more flattering as we go forward.

    Q&A highlights

    5

    Asked about the Q3 unit revenue guide's sequential deceleration compared to Q2, and the long-term growth strategy, particularly regarding capacity ramp in Q4 and 1Q '27.

    Management explained the Q3 unit revenue guide includes a headwind from lapping 2025 initiatives (e.g., bag fees, which are about $1 billion annually), making the comparable base higher. Without this, Q3 would be sequentially ahead of Q2. Long-term growth will be modest, with capacity discipline focused on strengthening existing market positions rather than expanding into new, underperforming markets.

    “The Q3 RASM guide is pretty simple to me. It includes the headwind from the initiatives that we put in place about a year ago in 2025, one of which was bag fees. Bag fees alone is about $1 billion a year. So we're just starting off at a much higher base.”

    asked by Conor Cunningham · answered by Robert Jordan

    2 min read5 chapters

    Detailed Narrative

    01

    Transformation Initiatives Driving Performance

    The second quarter marked the first time all major initiatives were fully contributing, leading to a 9% after-tax return on invested capital and a 3.3 point year-over-year improvement in adjusted operating margin to 6.7%. This transformation has broadened and diversified revenue streams, creating a more resilient business model. The company's focus has now shifted to optimizing the network, refining new products and pricing, growing managed business revenues, and expanding co-brand opportunities.

    02

    Operational Excellence and Customer Satisfaction

    Southwest ranked first among large domestic carriers in completion factor and improved mishandled baggage performance year-over-year in Q2. The company also maintained the lowest customer complaint rate among major U.S. airlines. These operational achievements, combined with enhanced product offerings, contributed to improved Trip Net Promoter Score and #1 ranking in customer satisfaction among economy passengers in the JD Power 2026 North America Airline Satisfaction Study for the fifth consecutive year.

    03

    Robust Demand and Revenue Environment

    Forward bookings remain robust, and the company is optimistic about sustained strong demand and pricing. Q2 adjusted unit revenues increased 20.1% year-over-year to an all-time quarterly record, with adjusted operating revenues reaching a record $8.7 billion. This revenue strength is attributed to both the constructive pricing environment and the idiosyncratic benefits of Southwest's initiatives, which are improving revenue quality and strengthening customer acquisition.

    04

    Financial Strength and Cost Discipline

    The company generated $0.5 billion in operating cash flow in Q2, a 32% year-over-year increase, and ended the quarter with $5.3 billion in liquidity, above its target of $4.5 billion. The gross leverage ratio improved to 2.1x, within the target range of 1x to 2.5x. Cost discipline continued, with CASM-X increasing only 3.4% year-over-year on near flat capacity, below prior guidance, driven by broad-based efficiency efforts across the company.

    05

    Product and Network Enhancements

    Southwest continues to evolve its product offering, with the first Starlink-equipped aircraft entering service recently. The airline partner network expanded to nine carriers with the addition of Air Premia in early July. The rollout of service to five new destinations, including Anchorage in May, was completed, demonstrating ongoing efforts to broaden product offerings and deepen customer engagement.

    AI-generated summary of the company’s earnings call. Not investment advice.