Southwest Surges 19% on 330% Profit Growth Forecast
Carrier guides 2026 EPS to $4+ as assigned seating, bag fees transform business. Stock posts best day in years.
Southwest Airlines just convinced Wall Street that its transformation is working.
Shares exploded 19% Thursday—the carrier's best single-day gain in years—after management guided 2026 adjusted EPS to at least $4.00. That's not a typo. Southwest expects to more than triple profits this year, smashing the $3.19 consensus estimate that analysts had penciled in.
The rally added roughly $5 billion to the airline's market cap. After years of underperforming its legacy carrier peers, Southwest appears ready to close the gap.
The Transformation Thesis
Two days before earnings, Southwest officially retired its famous open-seating policy. The carrier that built its brand on "bags fly free" and no seat assignments is now charging for both.
These aren't minor tweaks. Assigned seating and "Even More Room" premium sections could eventually generate over $1.5 billion in annual incremental revenue, according to analyst estimates. Bag fees will add hundreds of millions more. The entire value proposition is changing.
Management's guidance reflects early traction. For Q1 2026, Southwest expects adjusted EPS of at least $0.45, compared to a $0.13 loss in the prior year period. Revenue per available seat mile should increase at least 9.5% year-over-year.
The Numbers
Q4 2025 results were solid if unspectacular—full-year net income of $441 million, or $0.79 per share. Adjusted earnings hit $0.93 per share.
What matters is the trajectory. Southwest completed $2.6 billion in share repurchases during 2025, representing about 14% of shares outstanding. Management clearly believes the stock is undervalued.
The 2026 EPS guidance of $4.00+ represents the lower end of internal forecasts, according to the company. That qualifier suggests upside if execution continues.
What Changed
Southwest's struggles over the past few years stemmed from a cost structure built for the pre-pandemic era. The carrier's famous efficiency—quick turnarounds, point-to-point routes, single aircraft type—stopped translating to margins as competitors adapted.
Elliott Management's activist campaign last year accelerated the rethinking. CEO Bob Jordan survived the proxy fight but accepted dramatic changes to the business model.
The shift to assigned seating removes a longstanding customer complaint. Premium sections open revenue streams that legacy carriers have monetized for years. Bag fees, while controversial with loyal customers, align Southwest with industry standard.
Together, these changes could push operating margins toward double digits—territory Southwest hasn't reached consistently in years.
Sector Implications
The airline sector broadly benefited from the results. Delta reported strong 2026 guidance earlier this month, suggesting industry-wide demand remains robust despite economic uncertainty.
Travel stocks have outperformed in 2026. Royal Caribbean jumped 18% on record bookings just days ago. Consumers continue prioritizing experiences over goods.
Southwest trades at roughly 10x its 2026 EPS guidance—cheap relative to its historical average and the broader market. If execution continues, multiple expansion could add to returns beyond earnings growth.
Technical Picture
The 19% gap cleared resistance that had contained the stock since mid-2024. Volume was exceptional—more than five times the average.
Key levels to watch: $45 support (Thursday's opening gap), $50 psychological resistance, and the 2022 highs near $55. A move above $50 would confirm the breakout and likely attract momentum traders.
For traders, the risk is straightforward: transformation stories can disappoint. If assigned seating drives customer defection or cost savings miss targets, the stock will give back gains quickly. But Thursday's action suggests institutional investors are betting the "New Southwest" will deliver.