The Southwest Airlines story

What drives the business

• Southwest's point-to-point network and single Boeing 737 aircraft type underpin its focus on competitive fares, simpler operations and aircraft utilization, with 803 aircraft serving 117 destinations at December 31, 2025.
• The airline introduced bag fees for most fare products in May 2025 and began assigned and extra legroom seating in January 2026, changing how it earns revenue beyond the base ticket.
• In the quarter to June 2026, tickets contributed $6.1 billion, or 72% of revenue, while bags and seats contributed $875 million and the credit card contributed $637 million.
• Managed business revenues increased 30 percent in the quarter to June 2026, Rapid Rewards reached nearly 100 million members, and Chase co-branded credit card acquisitions increased 28% from a year earlier.
• Southwest amended its Boeing purchase agreement in 2025 to align deliveries with network plans amid aircraft delays, while redeye flights, faster aircraft turns and a shift toward longer routes support greater use of its fleet.

What the price assumes

At $42.28, the reverse DCF implies operating earnings growth of 11.3% a year for ten years, using operating earnings as a stand-in for free cash flow and a 10.2% discount rate.

That compares with operating earnings growth of -18.6% a year over the last 10 years and TenQ's -7.3% check, which moves that historical rate halfway toward 4%.

Revenue growth accelerated to 9.5% over the last twelve months from a three-year annual pace of 5.6%, but negative free cash flow means the valuation assumption describes an earnings recovery rather than demonstrated cash generation.

Value LUV on your own assumptions

What could change the story

• Fuel expense increased by $889 million in the quarter to June 2026, and Southwest closed its fuel hedging portfolio in 2025, leaving fuel price volatility a significant constraint on profitability.
• A $285 million reversal of previously recognized revenue from non-expiring flight credits reflected higher redemption expectations, helping explain the gap between the quarter's reported operating margin of 3.4% and adjusted operating margin of 6.7%.
• Over the last twelve months, the 3.5% operating margin and 6.2% return on employed capital failed TenQ's respective checks, leaving limited room for revenue gains to be absorbed by costs.
• Southwest ended June 2026 with $5.3 billion in liquidity, but negative free cash flow and a 0.49 near-term liquidity ratio remain constraints despite that funding cushion.
• Dependence on Boeing deliveries and FAA certification of the MAX 7 could disrupt fleet modernization and capacity plans.

What to watch next

• For the quarter to September 2026, Southwest expects revenue per available seat mile to rise between 17.5 percent and 19.5 percent, even as comparisons include the earlier introduction of bag fees.
• Its corresponding cost growth forecast, excluding fuel, special items and profit sharing, is between 3.5 percent and 4.0 percent, making the gap between revenue and cost growth a key measure of the transition.
• Adjusted EPS guidance is $0.50 to $0.75 for the quarter to September 2026, with fuel assumed at $3.70 to $3.75 per gallon based on the July 2026 forward curve.
• Cash generation should be read alongside Southwest's expectation for 2026 net capital spending toward the low end of, or below, $3.0 billion to $3.5 billion, including proceeds from aircraft transactions.

Sources

• Southwest Airlines's earnings release, filed with the SEC
• Its latest 10-Q or 10-K, for the risk factors
• The LUV stock report, for every figure and check