Why has Southwest (LUV) risen by 5% following its most recent earnings announcement?

Southwest Airlines: Recent Performance and Earnings Overview

It has been a month since Southwest Airlines (LUV) released its last earnings report. During this period, the company's stock price has risen by approximately 5%, outpacing the S&P 500 index.

Investors may be questioning whether this upward momentum will persist as the next earnings release approaches, or if a correction is on the horizon. Before examining recent analyst and investor sentiment, let's review the highlights from the latest earnings announcement to understand the key drivers.

Fourth Quarter 2025 Earnings Highlights

Southwest Airlines delivered mixed results for the fourth quarter of 2025. The company exceeded the Zacks Consensus Estimate for earnings, but revenue fell short of expectations.

• Earnings per share reached $0.58, surpassing the consensus estimate of $0.56 and marking a 3.6% increase from the previous year.
• Total revenue came in at $7.44 billion, slightly below the expected $7.52 billion, but still up 7.4% year-over-year.
• Passenger revenue, which made up 91.1% of total revenue, grew 7.6% to $6.78 billion.

The quarter's performance was supported by successful revenue strategies and ongoing cost management, resulting in solid financial outcomes and positive momentum. Looking ahead, 2026 appears promising for Southwest, thanks to a focus on customer experience, operational improvements, and significant progress from transformative initiatives launched in the prior year.

Key Operating Metrics

• Revenue passenger miles, a measure of airline traffic, increased 3.2% year-over-year to 35.56 billion.
• Available seat miles (capacity) rose 5.8% to 46.05 billion.
• As capacity growth outpaced traffic, the load factor (seat occupancy rate) declined by 2 percentage points to 77.2%.
• Passenger revenue per available seat mile (PRASM) climbed 1.7% to 14.73 cents.
• Revenue per available seat mile (RASM) increased 1.5% to 16.16 cents.

Expenses and Profitability

• Operating income for the quarter was $391 million, up from $278 million a year earlier. On an adjusted basis (excluding special items), operating income was $380 million compared to $397 million in the previous year.
• Total adjusted operating expenses (excluding profit sharing, special items, and fuel and oil costs) rose 6.6% year-over-year.
• Unit costs (CASM), excluding fuel, oil, profit-sharing, and special items, increased 0.8% year-over-year.
• Fuel cost per gallon (including taxes) edged up 1.2% to $2.45.

Financial Position

• At the end of the fourth quarter, Southwest held $3.23 billion in cash and cash equivalents, up from $2.90 billion at the end of the prior quarter.
• Long-term debt (excluding current maturities) stood at $4.57 billion, compared to $4.08 billion previously.
• Operating activities generated $295 million in cash during the quarter.
• Net capital expenditures for the quarter were $859 million.
• Throughout 2025, Southwest repurchased $2.6 billion in shares and distributed $399 million in dividends.

Future Outlook

• For the first quarter of 2026, Southwest expects unit revenue to increase by at least 9.5% year-over-year.
• Adjusted earnings per share are projected to be at least $0.45 for the first quarter.
• Capacity is anticipated to rise by 1-2% year-over-year in Q1 2026.
• Unit costs (CASM-X) are forecasted to grow nearly 3.5%, reflecting a 1.1-point impact from removing six seats from each Boeing 737-700 to provide more legroom.
• Fuel costs per gallon are expected to average around $2.40 in Q1 2026.
• For the full year 2026, capacity is projected to increase by 2-3%, with adjusted earnings per share of at least $4.00 (the lower end of internal guidance).
• Net capital expenditures are estimated between $3.0 billion and $3.5 billion, with plans to receive 66 new Boeing 737-8 aircraft and retire nearly 60 planes.

Recent Estimate Revisions

Over the past month, analyst estimates for Southwest have generally moved higher. The consensus estimate has increased by 30.94% as a result of these adjustments.

VGM Score Analysis

Currently, Southwest holds a Growth Score of D, indicating below-average growth prospects. However, its Momentum Score is a solid B, and it boasts an A for Value, placing it among the top stocks for value investors. The overall VGM Score is C, which may appeal to those seeking a balanced investment approach.

Stock Outlook

With upward-trending estimates and significant positive revisions, Southwest Airlines has earned a Zacks Rank #1 (Strong Buy). The stock is expected to deliver above-average returns in the coming months.

Industry Comparison: United Airlines

Southwest is part of the Zacks Transportation - Airline sector. Over the past month, United Airlines (UAL), another major player in the industry, has seen its stock climb 12%. United's latest quarterly report, covering the period ending December 2025, showed:

• Revenue of $15.4 billion, up 4.8% year-over-year.
• Earnings per share of $3.10, compared to $3.26 in the prior year.
• For the current quarter, United is expected to earn $1.31 per share, a 44% increase from the previous year.
• The Zacks Consensus Estimate for United has remained steady over the past 30 days.
• United holds a Zacks Rank #3 (Hold) and a VGM Score of B.

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