Southwest Airlines (NYSE: LUV) ended 2025 in what many would refer to as an investor’s paradox. Profits have declined sharply, and yet shares are trading at the highest relative returns of any major US airline. Through the first nine months of 2025, Southwest’s profits fell around 42% versus 2024, all while the stock gained roughly 24% year-to-date, narrowly beating out both Delta Air Lines (NYSE: DAL) and United Airlines (NYSE: UAL).
Investors are looking past a soft 2025 demand background and focusing instead on a complete 2026 overhaul driven by global activist investment management firm Elliott Investment Management. This includes the addition of paid extra-legroom seats, assigned seating, and new fare bundles, all aimed at closing the gap with full-service rivals. Management has said that early bookings support the premium-seating business case, while analysts see a step-change in earnings power once the changes roll out.
Southwest Stock Outperformed Expectations In 2025
Southwest Airlines stock hit a roughly 2.5-year high in December, even as the carrier trimmed its 2025 outlook. This impressive rally reflects a sweeping shift away from Southwest’s one-size-fits-all model. Starting on January 27, 2026, the carrier has elected to fully move assigned seating and sell extra-legroom rows for a fee, all while rolling out new fare tiers such as basic economy. However, there are still some situations in which fund managers have elected not to short the carrier’s shares, even as they do, at the surface level, appear somewhat overvalued.
Management has projected that assigned seating and extra legroom could add about $1 billion in pretax earnings in 2026 and $1.5 billion in 2027. Wall Street equity research analysts have leaned heavily into this story. Barclays has been one of the notable houses to have upgraded the stock and outlined materially higher EPS expectations, citing improved revenue generation once the new products are live, according to a breakdown from CNBC. A recent government shutdown and higher overall fuel costs weighed down on bookings.
Why Have Profits Fallen So Much?
The profit slide that has been so highly publicized is much less about any single event and more about a year of layered financial headwinds that the carrier has had to navigate. Profits through the first nine months were down around 42%. Southwest Airlines said that demand in 2025 slipped earlier in the year, prompting the company to trim expectations. Then, a 43-day government shutdown disrupted the global air travel system.
Federal Aviation Administration (FAA) staffing strains led to a mandated flight reduction at 40 major airports, which weighed on bookings and revenues across the board. Southwest Airlines also responded by cutting its full-year earnings before interest and taxes (EBIT) forecast to around $500 million. Fuel prices were another factor that harmed the airline’s financial prospects, with higher prices squeezing margins just as the carrier was attempting to protect its low-fare value proposition.
Finally, the airline has elected to spend to reposition the business, with the carrier investing in cabin retrofits, commercial changes, and other kinds of systems work, all ahead of its 2026 product rollout. Across the board, weaker demand and disruption have led to materially lower profits, even before the 2026 revenue lift arrives.
Southwest Airlines Cuts Guidance Amid “Macroeconomic Uncertainty”
Bob Jordan, the CEO of Southwest Airlines, still believed that the airline is well-positioned amidst the macroeconomic uncertainty.
Why Do Ratings Remain So High?
Analysts are not rating Southwest so positively based on what it learned in 2025, but rather the earnings power that the carrier is expecting will arrive in 2026 and 2027. The carrier is going to be abandoning decades of product simplicity, including open seating and a largely uniform offering, to adopt the revenue levers needed to create margin growth.
Management has said early booking patterns support the commercial case and have projected roughly $1 billion of incremental pretax earnings in 2026 and $1.5 billion in 2027 from seating changes. Barclays analyst Brandon Oglenski most notably upgraded the stock in mid-December and laid out a multi-year earnings path to have EPS exceeding $4 per share in 2026 and $6 in 2027.
This step-change story and a share price trading at multi-year highs help keep analyst ratings high even while near-term profits are weak. Investors expect the shift to broaden the overall customer mix, materially improve revenue generation, and reduce the discount needed to protect load factors.
