10-Q · April 23, 2026
Southwest reported a record first-quarter operating revenue of $7,249 million (up $821 million or 12.8% YoY) and swung to operating income of $330 million from a prior-year operating loss of $223 million, producing GAAP…
Earnings analysis · 10-Q
LUV earnings analysis
Filed October 22, 2026 · Our reading of the company's report
The latest report
Southwest delivered a strong third quarter, with revenue up 21.2% year over year to $8.422 billion, GAAP operating margin expanding to 4.5% from 0.5%, and GAAP diluted EPS rising to $0.55 from $0.10. Enhanced fares,…
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Southwest delivered a strong third quarter, with revenue up 21.2% year over year to $8.422 billion, GAAP operating margin expanding to 4.5% from 0.5%, and GAAP diluted EPS rising to $0.55 from $0.10. Enhanced fares, assigned seating, extra-legroom products, and ancillary revenue drove record unit revenue, but fuel expense increased 61.7% and underlying non-fuel unit costs rose 3.8%. Liquidity is supported by $3.6 billion of unrestricted cash and $2.5 billion of nine-month operating cash flow, although a $7.2 billion working capital deficit, higher debt costs, and substantial capital spending temper the outlook.
Reported figures
- Earnings per share
- $0.55
- Operating margin
- 4.5%
What stood out
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Record revenue driven by passenger strength
Third-quarter operating revenue rose 21.2% year over year to a record $8.422 billion, with passenger revenue increasing 22.8% to $7.754 billion. Revenue also exceeded the provided consensus estimate of $8.247 billion.
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Sharp operating margin expansion
GAAP operating income increased to $379 million from $35 million, lifting operating margin to 4.5% from 0.5% in the prior-year quarter. Excluding special items, operating margin improved to 5.4% from 0.6%.
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Material EPS improvement
GAAP diluted EPS increased to $0.55 from $0.10, while diluted EPS excluding special items increased to $0.66 from $0.11. Nine-month GAAP diluted EPS was $1.47 versus $0.21 in the prior-year period.
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Enhanced product supports unit revenue
Passenger yield increased 23.3% year over year to 21.41 cents per revenue passenger mile, and RASM increased 21.6% to 18.55 cents. Management attributed the gains to broad demand strength, premium fare selection, assigned and extra-legroom seating, and ancillary products.
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Operating cash flow improved
Operating cash flow was $513 million in the quarter versus $287 million a year earlier and $2.5 billion for the first nine months versus $1.5 billion. The nine-month increase was aided by a $1.1 billion increase in air traffic liability from seasonal advance bookings.
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Liquidity remains substantial
Southwest held $3.6 billion of unrestricted cash at September 30, 2026, maintained investment-grade ratings from all three major agencies, and had approximately $15.8 billion of unencumbered aircraft and related assets.
What to watch
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Fuel exposure threatens earnings
Aircraft fuel and related taxes increased 61.7% to $2.152 billion, while fuel cost per gallon rose 63.3% to $3.92. The company discontinued its fuel hedging program in 2025 and expects to consume approximately 573 million gallons in the fourth quarter; a one-cent-per-gallon price change would affect quarterly fuel expense by $5.7 million.
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Underlying costs remain elevated
Operating expenses increased 16.3% year over year to $8.043 billion, including a 10.0% increase in salaries, wages, and benefits to $3.542 billion. Excluding fuel, profit sharing, and special items, unit costs still increased 3.8%, reflecting wage-rate inflation.
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Large working capital deficit
The company reported a working capital deficit of approximately $7.2 billion at September 30, 2026. Although management considers this typical for airlines because of advance ticket sales and other air traffic liabilities, it leaves current liabilities materially above current assets.
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Higher fleet investment requirements
Nine-month gross capital expenditures were $2.5 billion versus $1.9 billion in the prior-year period, primarily due to aircraft progress and delivery payments. Management expects 2026 net capital spending of $2.5 billion to $2.75 billion.
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Debt costs and leverage rising
Interest expense increased 100.0% year over year in the quarter and 56.7% for the first nine months, primarily because of debt financing transactions. The company drew a $500 million senior secured term loan and added $1.0 billion of incremental term-loan commitments during 2026.
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No formal risk-factor update
The filing states that there were no material changes to the risk factors disclosed in the 2025 Form 10-K. However, Boeing and FAA dependencies remain relevant: the company had 487 firm MAX orders through 2031, while the timing and quantity of future deliveries remain subject to Boeing production capability and required FAA approvals.
Management's outlook
The 10-Q does not provide numeric revenue or EPS guidance. Management expects 2026 net capital spending of $2.5 billion to $2.75 billion, including proceeds from asset sales and sale-leaseback transactions. The filing also expects fourth-quarter 2026 fuel consumption of approximately 573 million gallons.
Earlier filings 1
This is our reading of a public filing, not the filing itself. Analysis can contain errors; check the source document for full context.