Southwest Airlines Just Held An Earnings Call From An Alternate Reality — Everything’s Fine, Except What They Lit On Fire

Most of the media reporting on Southwest Airlines earnings has been exuberant, “record revenue” “exceeded expectations” – but revenue for the airline was actually flat. It was up 1%, which means it was down in real (inflation-adjusted) terms. Profit was down. And since loyalty revenue was up 7% (which actually underperforms), other revenue underpeformed even further. Wall Street opened unimpressed:

The pitch of the airline’s third quarter earnings call is that their new revenue initiatives – basic economy, paid checked bags, paid seat assignments – were going to drive big improvements for the airline’s revenue and customers like it. Reality is more mixed, at best.

The major theme here, I think, is ‘the seen versus unseen’ where they add up revenue for things they’re now selling and don’t subtract revenue that they’re longer earning. That makes the specific changes they’re making look good, but the overall financial performance of the airline doesn’t really improve.

  • Are customers over being angry at Southwest? In CEO Bob Jordan’s opening comments, he noted that Southwest’s net promoter score has returned to levels from before announcing their policy changes in March. That acknowledges customers were very unhappy with the changes! And today’s numbers don’t factor customers who aren’t flying them because of changes, only those who still are.

    Later Jordan offered that there’s a 4 point higher net promoter score on planes that have been reconfigured for extra legroom already ‘without the opportunity for paid seat assignments’ yet. Of course! Customers get extra legroom free as a surprise. They get more space they don’t have to pay for, and they like that!

  • They’re starting to make money from seat sales, but that costs them revenue they no longer earn. They’re expecting $1 billion in incremental revenue from seat sales in 2026, and then $1.5 billion in 2027. It’s unclear why they’d see a 50% increase in the second year, when 2026 will have basically a full year of paid seats.

    In any case, they can’t really be talking about net revenue from the change because they’ve been generating hundreds of millions annually from the sale of early bird check-in and A1-15 boarding which they mostly lose with assigned seats. And it’s not yet clear whether fares fall as seat assignments unbundle from the ticket cost, offsetting this revenue as well. The point is that they focus on the easily observable and ignore unseen or second order effects.

  • They expect flight credit breakage “benefits” from the change in policies (cue evil laugh, “Bwah-ha-ha!”). Flight credits didn’t used to expire, but will now expire in a year for most fares and six months for basic economy. And expiration is based on date of ticket issuance – if you buy a ticket 9 months out and cancel close to departure, your credit is now valid only for 3 months. If you bought a basic economy ticket you get no credit at all. And they make assumptions about what portion of customer money they keep when those credits expire.

  • Not much benefit from basic economy yet Southwest now sells basic economy fares, but they say that won’t really generate revenue benefits until they’re flying planes with paid seat assignments. Outside of more draconian flight credit expiration on basic economy, there isn’t that strong a reason to spend more on fare until you can buy a more expensive ticket to be able to also pay more for a seat.

  • Scaled down bag fee revenue is a success? They say they’re happy with bag fee revenue, which they talk about as “about a billion dollars” but they don’t estimate lost ticket sales or lower fares from pulling checked bags out of the fare. Southwest used to explain the reason not to charge bag fees was that they’d generate $1.5 billion – so they’ve lowered expectations – and they used to say that this would cost them $1.8 billion in ticket sales which they now ignore.

  • Lounges look likely as part of new strategy coming next year. J.P. Morgan’s Jamie Baker called out the lounge survey I was first to report on where the airline referenced its ‘hubs’ which was the first time the airline has formally used that word. Bob Jordan talked about lounges as potentially how they’d “widen [their] offerings” to improve the economics of Rapid Rewards and the cobrand card, what products customers want in a lounge and where to locate lounges based on where their customers are. The airline plans to lay out the ‘what comes next’ in strategy early in 2026.

    Southwest acknowledges that their cobrand revenue lags, because they aren’t attracting premium cardmembers who value premium products and lounges.

The airline is nearly complete in its transformation from a carrier that does something differently into being just like its competitors, but less than. They’ve jettisoned free checked bags and started charging for seat assignments, started expiring flight credits and selling basic economy fares.

Yet they don’t fly customers long haul, don’t have first class, don’t have ovens in the galleys to serve meals. They don’t have seat back entertainment, standard power outlets, or high speed wifi. And they don’t have lounges or widespread international partners for its frequent flyer program.

So they’ve turned themselves into ‘American and JetBlue but less than.’ Southwest used to earn huge customer loyalty and their stock was prized by Wall Street because it wasn’t the same commodity offering as competitors. Now it is.

They’re starting free wifi this week, but with very little bandwidth. They already have the worst wifi in the U.S. industry, among airlines that have it. Now there’ll be far more demands on that system. Surely they won’t want to stay at the bottom of the industry, so they’ll begin next year to offer more of what other airlines do.

Their days of outperforming the industry – decade on decade of profits every quarter, when the rest of the industry loses money – are almost certainly over. But they’ll keep saying they’re winning.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. They’ve killed the Golden Goose and shed everything that differentiated themselves from everyone else.. Look for a Jet Blue / SWA merger within a couple of years.

  2. But you can transfer Chase UR points with a transfer bonus to Southwest for a limited time! Oof. What a mess.

  3. “It’s unclear why they’d see a 50% increase in the second year, when 2026 will have basically a full year of paid seats.”

    Maybe they’re planning to raise the price by 50%?

  4. I would think revenue earned from adding lounges would be weak. Travelers who value quality lounges are already flying other airlines when appropriate. The typical SW passenger is not very likely to pay for lounge access. To be sure, some will pay for lounge access, especially since they may lack long lines and crowds but most will not.

  5. Southwest can’t keep pretending that sticking to its “everyone’s equal” model will work forever. The market has changed, and travelers now expect real comfort options, not just open seating and free pretzels. The airline’s once-great simplicity has turned into stagnation, and the earnings show it. Without a true premium cabin, Southwest is ignoring the most profitable part of the market –business travelers and higher-end leisure passengers who’ll happily pay extra for space, service, and a quieter experience. Adding bag fees and seat assignments might squeeze out some short-term cash, but it doesn’t fix the long-term problem. Every major legacy competitor has a premium product that aids in driving loyalty, brand equity, and to some extent even the credit card partnerships. Southwest doesn’t, and that’s at least partly why its growth has stalled. A domestic premium cabin isn’t about becoming a luxury airline; it’s about survival. Without it, Southwest is taking on enormous strategic risk. And the airline must move very quickly to rectify this glaring disadvantage or it’s just a matter of time before it will dissolve.

  6. @Mike Hunt — Herb’s vision was to make air travel accessible to everyone through low costs, not to make ‘everyone equal.’ The new leadership (and activist investors) have lost sight of putting ‘people first’ (happy employees, happy customers, etc.) and are indeed ‘killing the golden goose’ here as @Lucky Larry said above (good one!)

  7. The only true answer is that once the entire new business model is implemented does it make more money than previous same periods when it was free bags and open seating. Bag fees are overwhelmingly more profitable than fares. So if planes are less full but bag fees more than make up for lost seat sales then Southwest from a business standpoint made the right decision assuming that continues long term.

    Southwest is not a charity. The goal is not to enable people to fly for less than the cost of providing the service.

  8. @Gary

    This all sounds like yet one more swirl around the drain as SWA fades away.

    You study the industry.

    Who do you see picking up SWA equipment or routes when the lights finally go out?

  9. I’ll use up my travel funds and points where I can, but it’s unclear what routes they will be since they’ve cut service to/from ATL. For ATL-LGA nonstop I’ll look to JetBlue if they survive.

  10. There is a culture of toxic positivity at SWA. Contrasting points of view are brushed under the rug and dismissed in favor of views through rose colored glasses.

  11. Herb has rolled over in his grave. If I wanted any of these things, I could choose literally any other airline.

    I have known CEOs who loved flying southwest. The reality is that even business travelers mostly fly in coach because most seats are coach seats. And most southwest flights are around 2 hours or less , which is bearable in coach for all but the tallest people. When I traveled frequently for work, I would try to fly southwest because I could use the points efficiently for family vacations. That and the cards kept us fat in points for years.

    No longer. I’m done with southwest and flying American and Frontier instead.

  12. @Ralph – no reason to expect lights to go out, Southwest has a strong balance sheet (Elliott’s interest… they’ve been doing share buybacks.. hasn’t helped the stock). Retrenchment, though, in some markets may continue.

  13. All these comments are funny. Did they or didnt they make money in the 3rd quarter? Everyone makes it seem like the sky is falling. Armchair Ceo’s in the chat

  14. @George Nathan Romey – Southwest is adding up the positive revenue and not deducting the negatives in the way they talk about their progress. That is not how this works.

    Their load factor is actually up, because they’ve been optimizing more for connecting traffic than in the past.

  15. Spending money on lounges is almost as stupid as funds expiration. Lounges will become a reason to dislike Southwest, for all the same reasons that people dislike Priority Pass. It can’t deliver on expectations. Funds expiration has probably killed advance bookings more than 3 months out, and it eliminates customer lock-in, making us free agents for each new booking.

  16. The ONLY reason I fly them now is the Companion Pass. If I’m flying solo, I’m going with best route cheapest fare. There is NO difference any longer.

  17. Another original and unique premise of WN was to fly routes/airport others didn’t, like DAL and HOU. One problem is that Wall Street demands growth, but there is little more growth in that.

  18. @1990 – You’re right about Herb’s vision being focused on accessibility and people. But putting people first in today’s market means giving them choices, not just sticking with what worked decades ago. A premium cabin would not betray Southwest’s roots. It would expand them. It is about recognizing that some travelers are willing to pay more for space and comfort while still keeping the same friendly, no-nonsense service that made Southwest famous. The real problem is not adding options. It is refusing to adapt while the rest of the industry moves forward. That is how you actually end up killing the golden goose.

  19. @DS – They did make money, but the concern isn’t about this quarter. It’s about the long-term trend. Margins are shrinking, costs are rising, and the product has barely changed in 20 years while competitors have evolved. Nobody’s saying the sky is falling today. What people are saying is that Southwest’s model is losing its edge, and if they don’t modernize soon, the profits everyone’s pointing to now won’t be there five years down the road.

  20. I’m certainly not sweating over losing $5.60. But I was surprised when I canceled an award flight last week to see that the TSA fee (the $5.60) expires in January. Is there any other domestic airline that expires award fees as opposed to refunding, let alone expiring them on a 6-12 month from booking timeline?
    Having said that, given the travel credit expiration policy, I will only book award tickets going forward. I’d rather lose $5.60 than the entire cash fare.

  21. Elliot Capital tell more lies than Enron. There’s no way SWA isn’t tanking hard. If they’re make money it’s something like selling the planes and the gates.

    I want an airline that gets me from A to B with minimum BS and maximum reliablity. I remember when SWA was that airline. I built a business all over Texas knowing I could fly out in the morning and back to Dallas Love Field in the afternoon. I’ve been A-list pref’d for forever. Now I feel like flying SWA is a miserable experience – gate checked bags and delays and just hating seeing the airline destroyed.

    If you stand around A-16 when you’re boarding (with all the other A-list pref’ds) you hear how much we HATE the airline, and the red line is going to be boarding groups. We’ve experienced them at other airlines and even in “group 1” it’s a miserable experience trying to get past everyone.

    If you don’t have a better product you can’t compete with zoom, vonlane, jsx, and just driving. And SWA doesn’t have a better product when they lose the things we loved about them. AA will put me in a real first class seat, they have real lounges, and I can fly their partners to Europe and Australia. All I wanted was an easy, dependable airline and a pleasant flying experience – take that away and SWA is just lucky as hell they fly out of Love and Hobby.

    I’ll be a-list next year, not preferred, for the first time in forever and once I earn the 2026 companion pass that will be the end of the SWA business card – chase sapphire is just so much better. I feel bad but I don’t think Herb would want me to fly the new SWA, I think he’d be ashamed of it.

  22. Yeeeeesh. So they pissed off a huge portion of their loyal customer base, upended their entire business model and spent millions (more?) on changes just to get revenue growth that didn’t even match inflation? And trailed UAL (revenue up 2.6%) and Delta (up 4.1%). And what happens when passengers start flying and realizing that “choose your own seat” means the same shitty 8 different boarding groups that every other airline uses, full overhead bins and mass chaos at boarding and deplaning?

  23. @Mike Hunt – It’s clear that Southwest Airlines reached the end of growth with its existing model. That doesn’t imply copying other underperforming airlines will restore their outperformance. It won’t. Maybe nothing will, but the current vision doesn’t get them back to where they used to be.

  24. @Gary – That’s a fair point. But adding a premium cabin does not have to mean turning into American or United. It could be something uniquely Southwest in tone and execution. Maybe friendlier, more efficient, and still low stress. The issue is not about imitation. It is about evolution. But as you correctly point out, the current model has hit a ceiling, and refusing to adapt will only lock them into stagnation. A modernized premium tier could give Southwest new revenue potential without completely sacrificing what made it special in the first place.

  25. Canceled my SW card just before the annual fee posted. Was happy to get rid of it. Sadly, I still have ~$400 in flight credits I have to use up and then I’ll be done with SW. A shame… I always LUVed flying them and now I can’t fathom paying more for less (from my home airport, SW was rarely cheaper but flew them for the liberal change/cancel policies and free bags).

  26. I haven’t flown Southwest in a year, but I wonder how the usually cheerful crew are right now.

  27. @Mike Hunt — I’ll believe when I see it (both an actual First Class and lounges.) So far, Elliott isn’t putting any money towards those major capital investments. They’re just nickeling and diming.

  28. @Mike Hunt – “That’s a fair point. But adding a premium cabin does not have to mean turning into American or United.”

    True, but they’ve already gone to bag fees, seat fees, expiring credits, and basic economy. They’ve added an extra legroom section. And they’re talking about lounges.

  29. @Gary Leff — Talk is cheap, and those lounges take forever to set up, unless they’re going to create a ‘partnership’ with pre-existing ones. But, if the idea is to have brand new ones, look no further than the C1 Landing at LGA B… +2 years minimum to set up.

  30. Yea, what people forgot along the way was that SWA’s main growth was not low prices but a SIMPLIFIED PRICING STRUCTURE. When you log in and picked the flight to, the month grid showed the lowest price that day so for most of their customers – you can switch days … to save $200 (in theory) … now that flight might mean 2 stops but some people do not care if it saves $200 (they had flights from the west coast to Charlotte that might stop in PHX and St Louis but some people will take it if it saves them $200). At this time, no other large airline offered this especially the Big 3 (or at one point, the Big 7 where you might be paying $1k more than than the guy sitting next to you – if you had status, etc, etc, pricing was opaque, diff on a Tuesday night versus Wed morning? – as someone who worked in corporate, yea, M-F, I had no worries or thought about it but for the average person? SWA was like a shuttle, here are the tiers of pricing (at first 2, then 4) … you know the rules, no seats assigned, no classes, , show up, status meant not much – you get a soda and a bag of chips/peanuts. Then other airlines started borrowing the tiers and the month pricing grid … so after branding and delivering a brand, you cannot just switch overnight … it’s like VW trying to sell the $85k sedan … it’s possible if if you of business and then come back because people have forgotten what you were before like if TWA came back … now, all you have done is cause chaos … get out your cameras they day they switch to assigned seating … stay away from any terminal SWA is in …

  31. I have one flight with SW left, then cancelling both CC’s. Zero empathy for them. Going from flying with them 90% of the time, to 0%.

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