Southwest Airlines has posted a surprising third-quarter profit – beating expectations – and saw its share price rise more than 3% as a result.
Profits totalled $54 million in the third quarter, though down 19.4% from the same period last year. Operating revenues were at a record $6.9bn, up 1.1%.
Passenger revenues were up 1% to $6.3bn and other revenues were up 2.9% to $594 million. Freight revenues were down 2.3% to $42 million.
Operating expenses were up 1.2% to $6.9 million, resulting in an operating profit of $35 million, down 7.9% compared to the third quarter of last year.
Unit revenues were up 0.4% to 15.25 cents, while unit costs were up 0.4% to 15.17 cents.
Southwest said the better-than-expected results were driven by unit revenues and costs improving more than anticipated.
Sales were supported by the introduction of baggage fees, which came into effect in the second quarter of this year, thus ending the airline's long-standing free baggage policy.
Southwest said its launch of assigned and extra legroom seating for travel - also a first for the airline - will begin at the end of January next year, with bookings currently in line with expectations. The company has so far retrofitted over 400 aircraft for extra legroom seating.
The airline clarified in its earnings call that, with extra legroom seating available for purchase up to 48 hours prior to flight departure, that the bookings “in line with expectations” refer to customers flying on aircraft that have the reconfigured legroom sections available.
However, the airline is retrofitting its entire fleet, which began with the 737 MAX 8 and 737-800 in April. The airline was aiming to retrofit the 737-700 after the summer, but has shifted this to January 2026.
With the 737-700 retrofits now moved to next year, the company expects capacity to be up 1.5% for the full year.
“The shift is expected to maximise revenue potential during the holiday travel period and still meet the company’s operational date milestone of January 27, 2026 for assigned and extra legroom seating,” Southwest said in its results.
“We see literally a knife edge on January 27 in our bookings of pre- and post-assigned seating: we see a knife-edge yield improvement,” management said in its earnings call.
“Clearly, customers are voting with their wallets. Our surveys found that customers like the assigned seating and extra legroom.”
Management said that it had studied a wide range of industry data to inform its outlook on the booking curve for these new initiatives, given that it was a first for the company.
“We see a disproportionate customer reaction to the ability to buy an assigned seat or upgrade to product that includes it,” management said. “That gives us confidence that we will see a revenue- positive customer reaction as we go throughout the booking curve.”
Eight 737 MAX 8 aircraft were delivered to Southwest during the quarter, with 16 aircraft retired. This included the retirement of 15 737-700s and the sale of one 737-800, with four more expected to be sold in the fourth quarter.
The airline now expects 53 deliveries of the 737 MAX 8 this year, up from a previous estimate of 47. Additionally, the airline maintains its plans to retire 55 aircraft this year.
Fourth-quarter capacity is expected to be up around 6% compared to last year, while unit revenues are forecast to be up 1% to 3%. Unit costs for the quarter are anticipated to be up 1.5% to 2.5%. Fuel costs are estimated to be $2.20 to $2.30 per gallon.
For the full year, the company guides an EBIT result of $600 to $800 million.