Southwest Airlines is cutting its full-year profit forecast as fuel costs climb

Southwest Airlines reduced its annual profit forecast on Wednesday due to soaring fuel costs overwhelming gains from increased fares and business restructuring. The Dallas-based airline anticipates adjusted earnings of $2.60 to $2.85 per share in 2026, a decline from its previous forecast of $3.25 to $4.25. The midpoint of the revised range falls below analysts' average estimate of $2.85 per share.

The carrier also predicted fourth-quarter earnings falling short of Wall Street expectations, highlighting the difficulties US airlines face as rising fuel costs diminish revenue from significant fare hikes. Southwest, once renowned for free checked bags and open seating, has been transforming its business to appeal to more affluent travelers and generate revenue through new products and fees.

Despite carrying fewer passengers, the airline is generating more revenue. However, the fuel shock is complicating the assessment of how much of these revenue gains will translate into profits.

Airfare to Southwest's average passenger fare increased by nearly 27% in the third quarter, driving revenue to a record $8.4 billion. The airline also reported a higher adjusted operating margin, despite substantial fuel costs. "With the transformation complete, our efforts have shifted to optimizing the business," CEO Bob Jordan stated, noting strong demand for the fourth quarter.

Fuel expenses surged by $821 million from a year ago, and Southwest expects further increases in jet fuel prices in the final quarter. The company's third-quarter adjusted earnings amounted to 66 cents per share, exceeding analysts' expectations of 58 cents and surpassing the 11 cents earned the previous year. The outlook underscores the challenges posed by higher airfares, which have not completely shielded US airlines from the fuel shock triggered by the Iran war.

Delta Air Lines has cautioned that airlines may need to further limit flight growth next year to maintain higher fares, while United Airlines anticipates persistent elevated fuel costs throughout 2027, complicating profit margin improvement efforts.

Southwest plans to boost capacity by 3% to 4% in the fourth quarter, following a slight reduction in September. The carrier will disclose its long-term financial targets at an investor event in March and will provide updates on its financial performance to analysts and investors on Thursday morning.