Southwest's Rocky Q3 Outlook Sparks Doubts Over Steep Q4 Profit Climb

Southwest Airlines Company LUV shares are trading relatively flat on Friday.

On Wednesday, the company reported second-quarter adjusted earnings of 43 cents per share, which missed the Street consensus estimate of 51 cents per share.

Quarterly revenue also came in below expectations at $7.24 billion, missing the $7.3 billion analyst estimate.

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Goldman Sachs analyst Catherine O’Brien reiterated the Sell rating on the stock, raising the price forecast from $23 to $24.

Southwest Airlines (LUV) shares fell around 11% on Thursday, underperforming peer airlines in coverage, which were down about 5% on average.

O’Brien observes that the sharp stock decline mainly to two factors: first, a weaker-than-expected outlook for the September quarter, with Goldman Sachs’ loss per share estimate widening to 12 cents compared to the Street’s forecast of positive 13 cents; and second, a full-year EBIT forecast that implies an unusually steep ramp in fourth-quarter unit revenue, or Revenue per Available Seat Mile (RASM).

Management noted on the earnings call that to achieve the full-year EBIT target, fourth-quarter RASM would need to rise by roughly 6 percentage points year-over-year, translating to a 13% sequential increase, which would be the highest in the past 15 years outside of the pandemic rebound in 2020 and 2021.

Historically, fourth-quarter RASM has increased an average of only 2% sequentially over the last 15 years, with the 7% gain last year already marking an above-average performance amid improving supply, post-election demand, and stronger revenue initiatives.

Despite the near-term challenges, O’Brien raises his full-year 2025 EPS estimate to 80 cents from 75 cents, reflecting stronger revenue and buyback forecasts, though partially offset by higher unit costs and fuel prices.

With a reduced share count outlook, he also raises the price target to $24 from $23, though this still implies 28% downside from current levels; his Sell rating remains unchanged.

Price Action: LUV shares are trading lower by 0.27% to $33.1 at last check Friday.

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