Southwest Airlines Co.

Southwest reported second-quarter adjusted EPS of $0.94, up approximately 120% year over year. Adjusted operating margin was 6.7%, a 3.3-point improvement year over year, while adjusted unit revenues increased 20.1% year over year and adjusted operating revenues increased 20.3% on capacity growth of only 0.2%. Adjusted operating revenue reached a record $8.7 billion, and cash flow from operations was $500 million in the quarter, with nearly $2 billion generated in the first half. Management said fuel expense rose nearly $900 million year over year in the second quarter, and fuel averaged $3.92 per gallon. For the third quarter, Southwest expects unit revenue growth of 17.5% to 19.5% year over year and CASM ex to increase 3.5% to 4.0% on capacity flat to down 1%. For full-year 2026, adjusted EPS is now expected to be $3.25 to $4.25, replacing the prior expectation of at least $4, and management said this reflects the forward fuel curve as of July 17 and assumes current fare and demand trends remain broadly intact.

Bob Jordan said the quarter showed the first full-quarter benefit of all major transformation initiatives, arguing that Southwest now has a broader, more diversified set of revenue levers than ever before. He emphasized that the business is seeing strong demand and pricing, with revenue strength driven not just by fuel recovery but by the company’s own initiatives, including product changes, managed business, and co-brand growth. His tone was notably confident and upbeat, repeatedly saying the transformation is working and that Southwest is now focused on optimizing the network, pricing, and products to unlock further margin expansion.

Tom Doxey highlighted strong cash generation and balance sheet strength, saying operating cash flow was $500 million in the quarter, up more than 32% year over year, and liquidity ended at $5.3 billion, above the roughly $4.5 billion target. He said gross leverage was 2.1x, improved from 2.4x at year-end 2025, and framed the company’s investment-grade balance sheet as a key differentiator. On costs, he cited “hundreds of millions of dollars” of incremental savings already in the full-year guide, said third-quarter CASM ex should rise 3.5% to 4.0%, and noted that aircraft-sale gains are durable and were worth “just north of maybe a point or so” of CASM ex in the quarter.

Analysts pressed management on the sharp Q3 unit revenue guide versus Q2, and management said the sequential change is mainly a timing issue from comparing against last year’s new initiatives, especially bag fees, rather than any sign of demand deceleration. Questions also focused on capacity growth into Q4 and 2027; Justin Jones said Southwest will keep capacity growth modest and concentrated in points of strength, not broad network expansion. On costs and free cash flow, Tom Doxey said the remaining savings are already in guidance and that free cash flow conversion will depend largely on aircraft delivery timing and fleet transactions. Management also addressed operational delays, saying smaller turn-time issues tied to the new product rollout are being worked down and should improve by the holiday peak.