A month has gone by since the last earnings report for Southwest Airlines (LUV). Shares have lost about 10.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Southwest due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the latest earnings report in order to get a better handle on the important drivers.

Southwest Airlines Q2 Earnings Beat Estimates

Southwest Airlines reported second-quarter 2026 adjusted earnings of 94 cents per share, up 118.6% year over year and 80.8% above the Zacks Consensus Estimate of 52 cents. Record operating revenues of $8.43 billion rose 16.4% but missed the consensus mark of $8.58 billion by 1.7%.

Results benefited from demand for enhanced products, record managed business revenues and cost discipline despite an $889 million increase in fuel expense. Adjusted unit revenues jumped 20.1%, while adjusted operating margin expanded 3.3 points to 6.7%.

LUV's Passenger Revenues Power Top-Line Growth

Passenger revenues, which accounted for 91.9% of the top line, increased 16.9% year over year to $7.75 billion. The improvement reflected higher fares and strong customer response to Southwest’s expanded commercial offerings.

Freight revenues rose 13.6% to $50 million. Other operating revenues increased 11.2% to $637 million, providing another source of growth beyond ticket sales.

Southwest Airlines Posts Stronger Revenue Productivity

Revenue passenger miles, a measure of traffic, increased 1.2% year over year to 37.35 billion. Capacity, measured in available seat miles, edged up only 0.2% to 47.09 billion, allowing demand growth to outpace supply.

The load factor improved 0.8 percentage points to 79.3%. Average passenger fare climbed 20.9% to $225.61, while passenger revenue per available seat mile advanced 16.7% to 16.45 cents. Revenue passengers carried declined 3.3% to 34.3 million.

LUV Controls Non-Fuel Costs as Fuel Expense Surges

Total operating expenses increased 16.1% year over year to $8.15 billion. Aircraft fuel and related taxes surged 67% to $2.22 billion, representing the largest cost headwind during the quarter.

Fuel cost per gallon increased 69% to $3.92. Still, cost per available seat mile excluding fuel, special items and profit sharing rose a more moderate 3.4% to 12.45 cents, coming in below the company’s prior guidance.

Adjusted operating income climbed 138.8% to $585 million. Reported operating income increased 26.7% to $285 million despite the sharp rise in fuel costs.

Southwest Airlines' Commercial Initiatives Gain Traction

Managed business revenues reached a quarterly record and increased 30% year over year. The performance highlighted stronger demand from corporate customers and broadened the company’s revenue mix.

Rapid Rewards enrollment rose 35%, while the loyalty program reached nearly 100 million members and posted record tier qualifiers. Acquisitions for the Chase co-branded credit card accelerated 28%, with double-digit growth in every month of the quarter.

Southwest also completed service rollouts to five new destinations and added Air Premia as its ninth airline partner. The carrier operated its first aircraft equipped with Starlink connectivity during the quarter.

LUV Generates Higher Operating Cash Flow

Southwest ended June with cash and cash equivalents of $3.79 billion, up from $3.23 billion at the end of 2025. Total liquidity was $5.3 billion, including a $1.5 billion revolving credit facility.

Net cash provided by operating activities rose to $530 million from $401 million a year earlier. Capital expenditures totaled $818 million, while proceeds from property and equipment sales reached $258 million.

The company paid $88 million in dividends during the quarter. It ended the period with $3.79 billion of long-term debt, excluding current maturities, and reported gross leverage of 2.1 times.

Southwest Airlines Issues Q3 and 2026 Guidance

For third-quarter 2026, Southwest expects adjusted earnings of 50-75 cents per share. Capacity is projected to decline 1% to remain flat, while unit revenues are forecast to increase 17.5-19.5% year over year.

Third-quarter cost per available seat mile excluding fuel, special items and profit sharing is expected to rise 3.5-4%. Fuel cost per gallon is projected between $3.70 and $3.75.

For 2026, management expects adjusted earnings of $3.25-$4.25 per share, replacing its prior expectation of at least $4. Capacity growth is now forecast at roughly 1.5%, down from 2%. Net capital spending is expected near the low end of, or below, the previously announced $3-$3.5 billion range.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

The consensus estimate has shifted -12.83% due to these changes.

VGM Scores

Currently, Southwest has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for value investors.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Interestingly, Southwest has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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Southwest Airlines Co. (LUV): Free Stock Analysis Report

This article originally published on Zacks Investment Research (zacks.com).

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