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Southwest Airlines Co. (LUV) stock surged over 12% following the release of its fourth quarter 2025 earnings report, closing at $45.95 on January 29, 2026. The dramatic rally came as the airline announced a transformative shift in its business model and issued guidance that significantly exceeded Wall Street expectations.

After 54 years of quirky open seating and free checked bags, Southwest has embarked on the most ambitious transformation in company history, implementing assigned seating, extra legroom options, and baggage fees that are expected to drive substantial profit growth in 2026.

Q4 Results Show Early Success of Southwest’s Business Model Overhaul
 

Southwest Airlines reported fourth quarter 2025 net income of $323 million, or $0.61 per diluted share, representing a 23.8% increase year-over-year. Adjusted earnings came in at $0.58 per share, matching analyst expectations, while revenue reached a record $7.44 billion.

For the full year 2025, the company generated adjusted EBIT of $574 million, exceeding its prior guidance of $500 million, demonstrating that its transformation initiatives are already gaining traction.

The company’s sweeping changes implemented throughout 2025 fundamentally altered its half-century business model. Southwest began charging for checked bags for the first time, launched basic economy fares, and optimized its Rapid Rewards loyalty program with variable earn and burn rates.

The airline also amended its co-brand agreement with Chase, expanded its online presence through partnerships with Expedia and Priceline, and announced six new strategic international partnerships. Most significantly, assigned and extra legroom seating became operational on January 27, 2026, just days before the earnings announcement.

CEO Bob Jordan emphasized the company’s operational excellence alongside its transformation, noting that Southwest earned the top ranking in The Wall Street Journal’s Best U.S. Airlines of 2025. The company outperformed its cost reduction goals and strengthened operational reliability through new technology deployments.

Despite the impact of Winter Storm Fern, which cost an estimated $30-40 million, the airline maintained strong momentum heading into 2026. Southwest also returned $2.9 billion to shareholders through dividends and share repurchases during 2025, repurchasing approximately 14% of outstanding shares.

2026 Earnings Forecast Sparks Sharp Rally in LUV Shares
 

Southwest’s guidance for 2026 represents the primary catalyst behind the stock’s surge. The airline expects adjusted earnings per share of at least $4.00 for the full year, more than quadrupling the $0.93 adjusted EPS delivered in 2025 and substantially exceeding the $3.19 consensus estimate.

For the first quarter 2026, Southwest forecasts adjusted EPS of at least $0.45, compared to Wall Street’s expectation of $0.33, with revenue per available seat mile (RASM) expected to rise 9.5% year-over-year.

Management emphasized that the $4.00 guidance represents the lower end of internal forecasts, suggesting potential upside as the company gains visibility into booking behavior related to assigned and extra legroom seating.

CFO Tom Doxey indicated the company wanted additional time before providing an upper bound to the forecast, allowing more data to come in about the new initiatives. The airline expects particular strength from upsell revenue associated with close-in bookings, which are typically made by business and price-flexible customers, as well as overall growth in both business and leisure segments driven by the more attractive product offering.

Capacity plans call for growth of 2% to 3% in 2026 compared to 2025, nearly doubling last year’s expansion rate. Southwest expects to receive 66 Boeing 737-8 aircraft deliveries while retiring approximately 60 older aircraft. The company ended 2025 with $3.2 billion in cash and maintains a leverage ratio of 2.4x, preserving its investment-grade rating while continuing opportunistic share repurchases.

With strong first quarter bookings, the elimination of its most distinctive policy quirks, and new revenue streams from seat assignments and baggage fees, Southwest is positioning itself for what management describes as significant earnings growth and long-term success.

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