Southwest Airlines has become a contrarian value idea built on margin mean reversion.
Profitability fell well below pre-pandemic norms after years of cost inflation, a slow rebound in domestic unit revenue, and delays to new aircraft.
Management is now rolling out revenue and product changes while signaling sequential improvement through the back half of 2025 and further acceleration in 2026.
That creates a window for investors who believe margins can migrate back toward historical levels rather than remain stuck in low single digits.
Southwest’s second-quarter update set the tone, the carrier said unit revenue should range from down 2% to up 2% in the third quarter on roughly flat capacity, while non-fuel unit costs are expected to rise 3.5% to 5.5% year over year.
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The company also reiterated that recent self-help moves are adding incremental revenue and should accelerate into late 2025 and 2026.
That guidance, plus disclosure that it has terminated its fuel-hedging program, gives analysts clearer inputs for modeling a path from depressed margins back to mid-cycle levels.
In May, Southwest ended its long-running universal free-checked-bags perk and outlined fees of $35 for a first checked bag and $45 for a second, with exemptions for certain fare bundles and elite tiers.
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The company said initial financial benefits ran ahead of expectations.
Those changes, combined with a new basic fare and the reintroduction of travel-credit expirations, move Southwest closer to the product segmentation that helped rivals grow revenue per seat.
The next wave arrives with assigned and premium seating, which goes live for travel beginning January 27, 2026.
Management framed the shift as part of a broader customer refresh that includes extra-legroom rows and in-seat power, positioning the airline to monetize seat choice while preserving operational simplicity.
Fleet and supply are the other half of the reversion argument, southwest finished the June quarter with 810 aircraft and lifted its 2025 delivery assumption to 47 Boeing 737-8s as Boeing works to stabilize output.
Certification of the smaller 737 MAX 7, the model Southwest has long planned to deploy for gauge optimization and fuel burn, is now expected in 2026, a timeline that, if met, would help normalize capacity plans and maintenance costs through mid-decade.
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Boeing is also pushing to raise 737 production from current levels, which would ease the industry’s delivery bottleneck.
Southwest’s latest 10-Q flagged wage inflation and airport costs as tailwinds for unit expenses, and the company called out timing effects from engine overhauls and retrofit work ahead of the extra-legroom launch.
The mean-reversion thesis hinges on those headwinds being transitory and outweighed by the ramp in ancillary revenue and the mix benefits of newer MAX aircraft.
There are risks, any slippage in Boeing’s certification or production targets would keep Southwest leaning on an aging subfleet longer than planned, which crimps efficiency gains.
Competitive dynamics in U.S. leisure travel also remain fluid, as discount carriers reset networks and capacity after a turbulent year.
Our coverage of Spirit Airlines details how upheaval at ultra-low-cost peers can ripple through fares and capacity planning.
For Boeing, recent order news underscores the stakes for the narrowbody skyline, as seen in our report on Turkish Airlines’ commitment for Boeing 737 MAX aircraft.
Southwest is slated to report third-quarter results and host a call on October 23. Clarity on Boeing’s certification path would also help frame 2026–2027 capacity and maintenance plans.
If management can show that revenue initiatives are compounding as unit costs retreat from peak growth rates, the logic of a margin mean-reversion value play strengthens.
