Southwest trims 2026 profit outlook on fuel

Southwest Airlines (LUV) reduced its full-year 2026 adjusted earnings per share guidance on October 21, 2026, as higher jet fuel costs weighed on profitability. The company now expects adjusted EPS between $2.60 and $2.85 for the year. This compares with a July forecast range of $3.25 to $4.25 per share. The revision places fuel costs at the center of the airline’s financial outlook for the remainder of 2026.

Management also provided guidance for the fourth quarter of 2026, projecting adjusted EPS of $0.55 to $0.80. The airline expects unit revenue, a key measure of pricing and demand, to increase by as much as 21% year over year in the quarter. Capacity is forecast to grow by up to 4% over the same period. These forecasts indicate Southwest plans modest growth while relying on revenue gains to help offset cost pressures.

The guidance cut accompanied the release of Southwest’s third-quarter 2026 financial results. Operating revenues reached $8.422 billion in the quarter, an increase of 21.2% year over year and a record performance for the company. Net income totaled $270 million, or $0.55 diluted earnings per share. On an adjusted basis, net income was $328 million, equal to $0.66 adjusted EPS, exceeding market expectations cited in separate reporting.

Operating margin for the third quarter was 4.5%, up 4.0 percentage points from a year earlier. On an adjusted basis, operating margin was 5.4%, improving by 4.8 percentage points year over year. These margin gains occurred despite a significant rise in fuel costs and higher overall operating expenses. Total operating expenses increased 16.3% year over year to $8.0 billion.

Fuel remained the primary source of earnings pressure in the third quarter. Southwest reported an average fuel cost of $3.92 per gallon, above earlier internal assumptions of $3.70 to $3.75 per gallon. The higher prices pushed fuel expense up by $821 million compared with the third quarter of 2025. The company said this increase represented a $1.08 headwind to adjusted EPS for the period.

Despite the fuel cost shock, Southwest’s revenue and margin performance showed improvement versus the prior year. The combination of record operating revenue and higher margins suggests that pricing and demand conditions supported results. However, the magnitude of the fuel expense increase was sufficient to force a downward revision to full-year earnings expectations. This dynamic reflects broader margin pressure linked to elevated jet fuel prices across the airline industry.

Southwest ended the third quarter of 2026 with liquidity of $5.6 billion. This financial position provides a buffer as the company navigates higher operating costs and a more constrained earnings outlook. Management’s decision to grow capacity by up to 4% year over year, while targeting strong unit revenue gains, signals a focus on disciplined growth rather than aggressive expansion.

Looking ahead to the fourth quarter and full year, Southwest’s performance will depend on its ability to sustain robust revenue trends while managing volatile fuel expenses. The updated guidance range for 2026 reflects both record revenue momentum and the drag from significantly higher fuel prices. Investors and industry observers are likely to monitor whether unit revenue growth and margin improvements can continue to counterbalance cost pressures into 2027.