Southwest’s Earnings Just Dropped — Falling Profits Show The Turnaround Isn’t Working, Cheaper Jet Fuel Kept Them Profitable

Southwest Airlines released its 2025 fourth quarter and full year financial results after market close. And the clear takeaway from these numbers seems to be that their turnaround plan is not working. Or at least it’s not working… yet. CEO Bob Jordan says it positions them to succeed in the future. We shall see.

You would not expect a strategy of taking the most financially successful airline in history, discarding everything unique about their business model, and copying financial laggards JetBlue and American – but worse because they lack AC seat power, seat back entertainment, functional wifi, first class, lounges (yet!) and ovens for hotel meals on board – to a recipe for success.

They often talk about the billion dollars that checked bag fees are generating. Except they aren’t!

1. Before adopting checked bag fees, Southwest claimed that they’d generate $1.5 billion. So when they’ve talked about annual $1 billion run rates that is underpeforming expectations.

2. And they always explained that it would cost them $1.8 billion in lost revenue (passengers who no longer choose them for the free checked bags).

3. They no longer ‘net out’ these losses against the revenue, in order to claim success.

4. But more importantly, the money doesn’t actually show up in net revenue. Southwest Airlines passenger revenue grew just 2.2% in 2025. That’s less than the rate of inflation (~ 2.6%).

Southwest Airlines made less money in 2025 than they did in 2024. Full year net profit in 2024 was $465 million vs. $441 million in 2025.

So what accounts for the profit they did make? It wasn’t checked bag fees. Note that they didn’t grow revenue! They actually say it was cost cuts, primarily layoffs.

Outperformed the previously provided estimate of $370 million in cost reduction, including the first Company layoff of non-contract and management Employees

Although, in fact, their fuel expenses fell $655 million year-over-year … on average the price of a barrel of oil was 14.5% lower in 2025. Without this they would have lost money. And holding fuel constant, they performed nearly $700 million worse in 2025 than the did a year earlier, even with checked bag fees or because Southwest Airlines wasn’t as desirable to fly.

And what are they doing now with the money they’re making? Stock buy backs.

Southwest earned $441 million in profit for the year, but bought back $2.9 billion in shares. I wrote in 2024 that share buybacks were the real goal of their activist investors and when Southwest capitulated to Elliott Management I wrote that’s exactly what to expect.

There’s nothing inherently wrong with buying back shares. That’s just a tax-efficient way of returning capital to shareholders when you don’t have a productive way to invest it at a market rate of return. Share counts should not only ever go up.

But what investors were interested in wasn’t a Southwest ‘turnaround’ although to be sure that would be desireable. Their original deck underscored the attractiveness of the airline’s ‘unlevered balance sheet’. They could sell planes, lease them back, and use the cash for buy backs. And the problem is that this now adds costs that makes them less profitable, and they do have productive uses for it – the new fleets they need to expand and new airport lounges are costly, capital-intensive projects!

A big part of the problem with American Airlines – was the $12.53 billion in stock they bought back, essentially with borrowed money (at an average share price of ~ $39.25, or three times today’s price). As a result, they’ve avoided buying widebodies, limited investments in clubs, and faced a significant drag from interest payments.

Southwest Airlines was insular and bloated. They were slow-moving. There are changes they needed to make to their business for a long time. For instance, sticking to just Boeing 737-700 and -800 aircraft (including the MAX) doesn’t let them serve enough markets or feed enough passengers. Not selling tickets through online travel agencies was a mistake.

• They were losing out on a lot of customers, for instance anyone with American Express points or Citi points booking through those bank portals. That alone had to be at least 5 to 8 points of load factor.

• And they were unusually dependent on passengers on one side of most of their routes. For a flight between Dallas and Sarasota, Savannah or Syracuse, instead of traffic being evenly split between passengers from both ends of the route they were heavily skewed to Dallas passengers only because that’s who knew to go to Southwest Airlines to search for flights. They lost anyone looking up flights on Expedia.

• Of course, once they add third party distribution they’re comparing their fares against competitors. And Southwest, with bag fees bundled, was often more expensive! And then there’s a natural drive to unbundle (basic economy), especially since the Department of Transportation rule requiring displaying airfares with the cost of a checked bag was enjoined by the courts. They hadn’t innovated, they were stuck in a tough spot, and they had no other ideas but copying everyone else – and Elliott Management didn’t, either.

They don’t fly long haul international and didn’t have partners, which meant they didn’t just lose the business of their customers when those customers flew abroad (and many chose to give other airlines their business because they could use all of their flying to earn status that way) but they also couldn’t offer Europe and beyond as an enticement to frequent flyers to get and spend on their credit card. So they were losing out on revenue that’s fueling profits for the rest of the industry.

Southwest needed to make changes but they didn’t need to give up what made them special. And though the airline will keep spinning that everything they do is successful (just as they did before making these changes!), the numbers tell the real story.