By Rajesh Kumar Singh and Nandan Mandayam
CHICAGO, July 22 (Reuters) – Southwest Airlines lowered the floor of its 2026 profit forecast and projected third-quarter earnings below Wall Street estimates on Wednesday, as volatile fuel costs blunted gains from higher fares and new revenue initiatives.
The results provide an early read on whether Southwest can build a stronger earnings model without adding much flying.
The airline is seeking to generate more revenue from each flight through checked-bag fees, assigned seating and extra-legroom options, while increasing income from corporate travel, its loyalty program and credit-card partnerships.
That strategy appears to be gaining traction: revenue rose sharply in the second quarter on essentially flat capacity, allowing the carrier to grow sales without expanding its schedule.
But the weaker outlook shows that the industry-wide fuel shock is still powerful enough to limit the earnings payoff from Southwest’s revenue gains.
The carrier now expects full-year adjusted earnings of $3.25 to $4.25 per share, replacing its previous forecast of at least $4. The low end of the new range, however, exceeds analysts’ average estimate of $3.17, according to data compiled by LSEG.
Southwest forecast third-quarter adjusted earnings of 50 cents to 75 cents per share, below analysts’ estimate of 82 cents.
Shares of the carrier fell about 1% in extended trading.
Jet fuel prices more than doubled after the Iran war began, driving U.S. airline fuel bills up 85% from a year earlier in May to nearly $6.7 billion.
Prices retreated sharply from their spring peak after a fragile U.S.-Iran truce in June, but climbed again as hostilities resumed in July.
Southwest reported second-quarter adjusted earnings of 94 cents per share, nearly double analysts’ average estimate of 51 cents. But its fuel expense rose by nearly $900 million from a year earlier, reducing adjusted earnings by $1.17 per share.
For the third quarter, it expects to pay an average of $3.70 to $3.75 per gallon, based on the forward market as of July 17.
Limited domestic seat growth and strong demand have helped carriers raise fares and recover part of the increase in fuel costs.
REVENUE STRATEGY GAINS TRACTION
Southwest’s adjusted unit revenue, a broad measure of pricing and demand, rose about 20% in the second quarter, while capacity was virtually unchanged. Average passenger fares increased nearly 21%.
The carrier said demand for its enhanced products remained robust. Managed-business revenue rose 30% in the second quarter from a year ago. Loyalty enrollment and credit-card acquisitions also grew strongly.
Southwest expects third-quarter unit revenue to rise 17.5% to 19.5% from a year earlier, with capacity ranging from down 1% to flat.
It also lowered planned full-year capacity growth to about 1.5% from 2%, reinforcing its focus on generating more revenue from its existing schedule rather than adding flights.
That strategy carries a near-term cost. Southwest is removing six seats from each Boeing 737-700 to create extra-legroom rows, adding 1.1 percentage points to third-quarter non-fuel unit-cost growth.
(Reporting by Rajesh Kumar Singh in Chicago and Nandan Mandayam in Bengaluru; Editing by Shilpi Majumdar and Aurora Ellis)
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