Oct 22, 2026 earnings call — Loyalty and product investments drive margin expansion
Southwest reported a third quarter record of 8.4 billion of operating revenue and an adjusted operating margin of 5.4%.
Revenue $8.4B (est $8.3B) · EPS $0.66 (est $0.57)
Key quotes
"Beginning January 1, we will introduce new ways for members to earn recognition and rewards including a new platinum tier, enhanced benefits along the path of status, and additional opportunities to engage through our co brand credit card."
"we continue the installation of Starlink ultrafast 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."
Analyst Q&A 15
Loyalty value and international flights
Q (Jamie Baker · JPMorgan): Does offering long-haul awards change Rapid Rewards economics and could Southwest do something creative with loyalty like Air Canada did?
A: Management said the loyalty improvements they announced will add value as they come online through next year, including lounge openings and partnerships that let members take international trips. They view these changes as upside and are focused on creating value with current initiatives; a loyalty transaction is not on their radar now.
"And these program changes are happening between now through the end of next year with our kind of initial set of lounge openings happening at the back of next year." — Anthony Roach
Used aircraft values and RASM beat
Q (Catherine O'Brien · Goldman Sachs): How do you view secondary market aircraft values and are gains included in guidance? Also, what drove the RASM beat in 3Q?
A: Tom said aircraft sales are a cash story and he expects secondary values to remain strong unless a major macro shock occurs; gains were included and he noted depreciation and salvage adjustments will reduce future gains. Justin said passenger fares were about $3 above forecast and passenger volumes exceeded expectations, with September especially strong and managed business travel improving RASM.
"My view is that those will remain strong barring some sort of significant macro change." — Tom Doxey (CFO)
2027 deliveries and depreciation timing
Q (Duane Pfennigwerth · Evercore): Any early thoughts on 2027 deliveries and retirements, and when did the depreciation change start?
A: Tom said 2027 should have more deliveries than 2026, including 27 MAX 7s that will start to deliver and enter service next year, and they will provide specifics in three months. He said the depreciation impact was present this quarter but will be a full-quarter effect in the fourth quarter, with more details in the 10-Q.
"you should think of 2027 total deliveries to be higher than in 2026, and we will give you more specifics in 3 months." — Tom Doxey (CFO)
Core vs optimization and lounges role
Q (Conor Cunningham · Melius): How much of your revenue strength is core business versus optimization, and are lounges needed before further product segmentation like first class?
A: Justin said about two thirds of the fourth quarter strength is from core business and one third from optimization. Anthony said the lounge network and premium card will accelerate co-brand growth and drive value, and Bob added the initiatives stack together to improve the customer offering rather than build to one single product like first class.
"I would say it is around 2 thirds core business and then a third of it on the optimization side of things." — Justin Jones
Fare increases and buy-ups
Q (Sheila Kahyaoglu · Jefferies): Why were average fares up 27% with flat load factors, and what are the buy-up trends from basic to choice and to extra legroom?
A: Bob said higher fares reflect strong broad demand and also demand unique to Southwest from new products, with no sign fares are eroding demand. Justin said buy-ups are well above historical levels but they focus on optimizing total customer revenue across fares and seats rather than a single buy-up percentage.
"What matters to us is the total revenue production across fares and seats." — Justin Jones
Widebody, MAX 10 and connectivity gains
Q (Michael Linenberg · Deutsche Bank): Would adding wide bodies or the MAX 10 require reopening the pilot contract, and how are you doing on connections?
A: Bob said recent reports about ordering wide bodies were not credible and that operating more than 175 seats would require going back to the pilot contract when it opens next year; adding another 737 variant is easier than a widebody. Justin said connectivity and connecting traffic growth have boosted yields and load factors, combining point-to-point operations with hub-like commercial build drives strong RASM.
"Correct. And in fact, if we wanted to operate more than 175 we would go back to the pilot." — Robert E. Jordan (CEO)
EBIT from initiatives and other revenue
Q (Thomas Fitzgerald · TD Cowen): What incremental EBIT in 2027 comes from prior initiatives and can other revenue accelerate with new credit card and upgrades?
A: Tom said the seat initiative is on track to deliver about $1 billion of EBIT in 2027 similar to 2026 expectations, and bag fees have tracked to the $1 billion target with some upside this year. He said many loyalty and co-brand initiatives are executing now and focus on improving loyalty revenue, with more specifics to come at Capital Markets Day and the 2027 guide.
"We have talked about going from $1 billion of EBIT in 2026 to about $1 billion in EBIT again for the seat side of it in 2027." — Tom Doxey (CFO)
International strategy and gap
Q (John Godyn · Citi): Can you review the international strategy and whether a more meaningful push is needed to close gaps versus network carriers?
A: Bob noted Southwest lacks long-haul international and premium offerings but pointed out the company is outperforming peers in unit revenue growth and margin expansion even without those products. He said that gap represents upside if they choose to pursue it in the future, but current focus is on driving value with existing initiatives.
"So I see all of that as upside in the future if we decide to pursue that." — Robert E. Jordan (CEO)
On-time performance fixes and retirements
Q (Savanthi Syth · Raymond James): Are the fixes for on-time performance working and will retirements increase in 2027?
A: Bob admitted OTP is below desired levels but said schedule improvements beginning in January and maintenance timing will reduce costs in 2027. Andrew explained targeted process and tech changes starting in November will address the last part of turns to reduce extreme delays, and Tom said retirements will increase next year with specifics to be provided in three months.
"So these changes will start going out in November and then also ramp up through when those schedules go live." — Andrew Watterson
Loyalty vs peers and corporate demand
Q (Christian Wetherbee · Wells Fargo): Where is Rapid Rewards versus peers and what feedback on corporate demand do you hear that affects growth?
A: Anthony said the initiatives like lounges and the premium card create upside and will accelerate co-brand growth into next year. Justin said managed business is strong, business passengers were up roughly 9% and business revenues up 29%, and full-fleet Starlink and lounges coming in 2027 should continue to fuel managed-business growth.
"we really see that as a way to accelerate the growth as we get towards the back half of next year." — Anthony Roach
Outperforming industry next year
Q (Scott Group · Wolfe): Directionally, can Southwest again outperform peers on RASM and CASM next year given changes this year?
A: Tom said they see a path to meaningfully expand margins year over year even in a high fuel environment because of revenue initiatives and cost discipline. He explicitly stated confidence they can beat the rest of the industry.
"we absolutely see a path to expanding margins meaningfully year over year even if fuel is high." — Tom Doxey (CFO)
Further optimization potential
Q (Brandon Oglenski · Barclays): Have you fully optimized pricing and seat upsells, or is there more value to capture?
A: Justin said there is a lot more to do and they are in early stages building a more sophisticated commercial engine around Southwest's strengths. He noted dozens of quick improvements exist, like enabling upgrades via the app, and they have many initiatives to drive incremental value in 2027.
"we are just in the very early stages of that and Tony and I probably have a list of 30 pretty quick hit things that we can do that drive incremental value." — Justin Jones
2027 capacity and share repurchases
Q (Andrew Didora · BofA): Should we expect 4%–5% growth early next year and are you open to share repurchases given available leverage and asset sales?
A: Bob said they will manage capacity dynamically and will not chase growth at the expense of returns, stressing disciplined, targeted growth in markets of strength. Justin added most growth targets Southwest number-one markets and many markets improved margins year over year; Tom reiterated capital allocation guardrails including liquidity and a 1 to 2.5x gross debt-to-EBITDAR range.
"We are concentrating capacity behind our strongest market positions which is improving the economics of those markets overall and is building leadership positions that we believe can produce more durable earnings over time." — Justin Jones
RASM uplift and ChatGPT plugin trial
Q (Ravi Shanker · Morgan Stanley): Can you quantify RASM uplift for 2027 from Rapid Rewards changes and Starlink, and any takeaways from the ChatGPT integration?
A: Bob said they have not given specific RASM numbers for 2027 from those items but see benefits from Starlink and other initiatives. Justin said the ChatGPT plugin is an early exploration with very small numbers so far, intended to learn how customers use AI agents for travel inspiration and distribution.
"No, we have not given specific numbers for 2027 RASM for those items." — Robert E. Jordan (CEO)
Free cash flow and CapEx outlook
Q (Atul Maheswari · UBS): How should we think about free cash conversion and CapEx for 2027 and beyond as earnings expand?
A: Tom said operating cash flow has improved with profitability and free cash flow will depend largely on the number of aircraft taken offset by proceeds from asset sales. He reiterated they have not given specific cash guidance for next year.
"the flow from operating cash flow to free cash flow will largely maybe stay the obvious, but largely depend on the quantity of aircraft that we are taking offset by the proceeds that we have as we are selling assets." — Tom Doxey (CFO)