Southwest Airlines Co. 2026 Q3 Earnings Call

Hello, everyone, and welcome to Southwest Airlines' third quarter 2026 earnings call. In just a moment, we will share prepared remarks, after which we will move into Q&A. Joining me today are Bob Jordan, our President and Chief Executive Officer, Justin Jones, our Chief Commercial Officer, and rounding that out, Tom Doxey, our Chief Financial Officer. Before we begin, a reminder that we will be making forward-looking statements which are based on our current expectations of future performance, and our actual results could differ materially from expectations. Also, we will reference our non-GAAP results, which exclude special items that are called out and reconciled to GAAP results in our earnings release. With that, I will turn the call over to Bob.

Thank you, Danielle, and good morning, everybody. Well, last quarter we talked about the transformation reaching an important milestone with all of our major initiatives contributing throughout the entire quarter for the first time. Our third quarter performance and fourth quarter outlook both demonstrate that the earnings power we have built is durable. In the third quarter, we delivered an adjusted operating margin of 5.4% of 4.8 points year-over-year, and that is despite an $820 million year-over-year headwind from higher fuel prices. We expect to be the only major U.S. carrier to deliver year-over-year margin expansion here in the third quarter. After-tax return on invested capital was 11.3%, and we generated a third quarter record of $8.4 billion of operating revenue.

Adjusted earnings per share were $0.66, representing a 500% increase year-over-year, and above the midpoint of our guidance range, despite a less favorable fuel environment than we anticipated at the time of our last earnings call. Demand for the Southwest product remained strong throughout the quarter. Broad-based demand strength was evident across all geographies and products, including managed business, leisure, loyalty, and co-brand. We generated record third quarter passenger revenue and achieved the highest passenger yield in our history, providing further evidence that our strategy is resonating with customers. We also delivered an all-time record RASM performance, exceeding the high end of our guidance range and cost that came in within expectations. Justin and Tom will take you through the underlying revenue and cost drivers in more detail in a moment.

With the transformation complete, our work has shifted from building to optimizing the business and delivering the next set of customer experience improvements. Both are focused on unlocking the next phase of value creation through stronger earnings, higher returns, and continued margin expansion. We are already making meaningful progress, and I'm particularly excited about the investments we continue to introduce across our product offering as well as our recently announced loyalty program enhancements that will further strengthen the value proposition of Rapid Rewards. As we announced at Media Day last week, we're evolving Rapid Rewards from a program that primarily rewards customers for flying with Southwest into one that delivers value throughout the travel journey.

Beginning January 1, we'll introduce new ways for members to earn recognition and rewards, including a new Platinum tier, enhanced benefits along the path to status, and additional opportunities to engage through our co-brand credit card. We're expanding how members can use their points with international loyalty partnerships and partner redemption launching next spring, and the ability to redeem points for ancillary purchases, including seat selection to follow later in 2027. Together, these enhancements make Rapid Rewards more engaging, more flexible, and more valuable for our members while strengthening the role that loyalty plays across the Southwest experience. In addition, we continue the installation of Starlink ultra-fast Wi-Fi on all of our aircraft, available free to Rapid Rewards members, with the fleet-wide rollout expected to be complete by this time next year. Additionally, we recently introduced the Southwest Icon Lounge network.

The name Icon celebrates Southwest's 55-year legacy and the people, moments, and ideas that have made the airline what it is today. From Herb Kelleher's maverick people first hospitality to the customers and employees who continue to shape our story. Lounges are already under construction in Austin, Baltimore, Honolulu, and Nashville, with at least seven additional locations planned as we expect to welcome our first lounge guests in fourth quarter next year. The Southwest Icon Lounge network will serve as the foundation for a new premium credit card launching in 2027. Premium cards have been among the strongest performing products in the co-brand market, and this gives Southwest an opportunity to participate in that segment for the first time. On the digital front, we recently became the first U.S. airline to make flight shopping available through ChatGPT.

As more customers use AI tools to research, plan, and ultimately book their travel, this allows Southwest to engage earlier in the decision-making process and create a more seamless path from trip planning to booking. Collectively, we continue to make a huge investment in our customer experience. In less than a year from now, we expect to complete our fleet-wide Starlink rollout, finish key cabin retrofit initiatives including in-seat power, open our first premium Icon lounges, launch a new premium co-brand credit card Expand Rapid Rewards with a new Platinum tier and introduce new airline loyalty partnerships and redemption opportunities. We don't view these as standalone products. They are designed to work together as a connected loyalty ecosystem that expands the value of Rapid Rewards, strengthens customer engagement, and creates additional opportunities to grow both loyalty and the economics of the program over time.

While our efforts to optimize the business and invest in the customer experience are already producing encouraging results, they represent only a fraction of the opportunity we see ahead. I am pleased to announce that we will host a Capital Markets Day in New York on March 2, 2027. We look forward to sharing our multi-year financial framework, the targets we are managing towards, and the actions we are taking to achieve them. We will also discuss plans to further strengthen Southwest's competitive position and unlock additional long-term value for employees, customers, and shareholders. Finally, none of what we have accomplished would be possible without our people. They are and always will be the heart of the Southwest brand. We have accrued approximately $165 million in profit sharing year to date, reflecting our longstanding belief that when Southwest succeeds, our people share in that success.

To our employees across the system, thank you for everything that you do for our customers and for each other. With that, I will turn it over to Justin.

Thank you, Bob. To build on Bob's comments, RASM increased 21.6% year over year, exceeding the high end of our 17.5%-19.5% guidance range and setting an all-time record. Notably, this performance was achieved while lapping the 2025 implementation of bag fees and other initiatives, a headwind we flagged last quarter. Passenger yield and volumes both exceeded our expectations during the quarter. September produced record RASMs and passenger yield, reflecting strong customer demand and sustained travel activity beyond the traditional summer travel season. Our performance provides tangible evidence that the actions we've taken to strengthen our network and product offering are working. On the network, we're concentrating capacity in our strongest markets, including Nashville, Las Vegas, Orlando, Austin, and San Diego, while reallocating capacity from lower performing markets.

These changes are further supported from improved connectivity through redesigned banks in all our major airports, expanded red-eye flying, and partnerships that bring more customers into the Southwest network. At the same time, assigned seating, extra legroom offerings, more tailored offers, and dynamic pricing are helping us serve a broader range of customers while better capturing the value of the network we have built. Importantly, these initiatives work together. By concentrating our network where we can win and giving customers more choice in how they travel with us, we're attracting more customers, increasing engagement, and improving the economics of those markets. The progress we're making is also evident among business customers. This quarter included 20 of the top 50 corporate booking days in company history, and two of the quarter's three months set records for unique managed business travelers flown.

Year over year managed business passenger revenue growth improved sequentially in every quarter of 2026, and we have seen double-digit growth in both new and reactivated travelers, reflecting strong adoption of our enhanced offerings. Turning to our outlook, the strength we saw in the third quarter continues to support our expectations for the fourth quarter. We expect fourth quarter RASM to increase 19%-21% year over year. As in the third quarter, our outlook reflects lapping bag fees and other initiatives. With approximately 65% of fourth quarter revenue already booked, demand remains healthy and broad-based. Corporate demand continues to perform well, and the pricing environment remains constructive. With that, I will turn it over to Tom.

Thanks, Justin. Our cost performance continues to be a key differentiator. Third quarter CASM-X increased 3.8% year over year on capacity down 0.4% within the guidance range that we provided in July. As Bob noted, we delivered a 5.4% adjusted operating margin and adjusted earnings per share of $0.66 above the midpoint of our guidance. Those results came despite fuel costs that were $109 million or $0.14 of EPS higher than the assumptions underlying our guidance three months ago. To me, that is a clear signal of how much our business has changed and the strength of Southwest's positioning within the industry. Even with a significant fuel headwind, strong revenue execution and disciplined cost performance allowed us to expand adjusted operating margin by 4.8 points year over year and deliver earnings growth.