Expanding Point-To-Point Networks And Urbanization Will Fuel Domestic Travel

Key Takeaways

• Incremental revenue and margin gains are accelerating from product changes, distribution partnerships, and customer acquisition beyond analysts' initial expectations.
  
• Fleet modernization, tech upgrades, and capital discipline are cementing Southwest's low-cost edge and ensuring sustainable long-term growth.
  
• Overreliance on domestic markets, rising labor and maintenance costs, fleet concentration, regulatory pressures, and declining business travel all pose threats to sustained profitability and growth.

Catalysts

Operates as a passenger airline company that provides scheduled air transportation services in the United States and near-international markets.

• Analyst consensus recognizes Southwest's product upgrades, but actual upside is likely much higher as the shift to bag fees, assigned seating, and basic economy is already running ahead of initial estimates, with retrofit and policy changes unlocking incremental revenue and net margin gains at a faster pace than the Street expects.
  
• While analysts broadly expect higher booking volumes from new distribution channels, the sustained booking outperformance on Expedia-driven largely by genuinely new customers-suggests a durable structural uplift in revenue, and this momentum is likely to compound as further partnerships and co-branded credit card enhancements accelerate.
  
• Southwest's large, point-to-point network and enhanced connectivity are uniquely positioned to capitalize on surging demand from the growth of secondary metropolitan areas and expanding business hubs in the U.S., powering route expansion and share gains, which should drive long-term revenue growth and higher load factors.
  
• As hybrid and remote work become embedded in corporate culture, Southwest's frequency-based network and flexible fare structure will increasingly attract "bleisure" and off-peak travelers, filling seats more efficiently, raising load factors, and boosting earnings durability through improved aircraft utilization.
  
• Fleet modernization, ongoing operational technology upgrades, and a disciplined capital allocation framework-including aggressive share buybacks and a shift to a liquidity target-will reinforce Southwest's low-cost advantage and operational reliability, supporting a sustainable expansion of net margins and earnings over the long term.

Southwest Airlines Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Southwest Airlines compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Southwest Airlines's revenue will grow by 7.3% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 1.4% today to 7.8% in 3 years time.
• The bullish analysts expect earnings to reach $2.6 billion (and earnings per share of $5.44) by about August 2028, up from $392.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 9.9x on those 2028 earnings, down from 41.1x today. This future PE is lower than the current PE for the US Airlines industry at 10.5x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.71%, as per the Simply Wall St company report.

Southwest Airlines Future Earnings Per Share Growth

Risks

• Southwest's lack of international route diversification and heavy dependence on the U.S. domestic market leaves it highly exposed to domestic economic downturns or shifts in American travel behavior, potentially driving volatility and risk to top-line revenues and earnings.
  
• Persistent upward pressure from labor costs, exacerbated by a tightening labor market and increased union influence, threatens to inflate Southwest's already high fixed expenses, constraining future net margins and overall profitability.
  
• The company's ongoing reliance on an aging, undiversified Boeing 737 fleet creates risk of rising maintenance costs and CAPEX, along with exposure to manufacturer-specific disruptions, which over time could compress margins and adversely affect free cash flow.
  
• Increasing legislative and regulatory scrutiny on carbon emissions is likely to lead to added costs-through carbon taxes or compliance measures-which will either be passed on to customers, dampening demand and revenues, or absorbed by Southwest, eroding net margins.
  
• The growing normalization of remote work and digital meetings is expected to structurally depress business travel demand, limiting Southwest's ability to fully restore or expand high-yield segments, thereby restricting long-term revenue growth and earning power.

Valuation

• The assumed bullish price target for Southwest Airlines is $46.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Southwest Airlines's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $46.0, and the most bearish reporting a price target of just $19.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $33.9 billion, earnings will come to $2.6 billion, and it would be trading on a PE ratio of 9.9x, assuming you use a discount rate of 10.7%.
• Given the current share price of $30.7, the bullish analyst price target of $46.0 is 33.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.