Southwest Airlines (LUV)
How to read Southwest Airlines' FY2025 filings: load factor down to 77.4%, computed free cash flow of −$831M, and fuel hedging discontinued in 2025.
Educational analysis for professional use. This profile is not investment advice or a recommendation to buy or sell any security, and it is not personalised.
Snapshot
Load Factor as the Warning Signal
Southwest Airlines filled fewer seats in 2025 on a network that barely grew. Load factor, the share of seats flown with a paying passenger, fell 3.0 points to 77.4%, while capacity in available seat miles (ASMs: one seat flown one mile) rose only 1.6%.
Revenue per ASM (RASM) was 15.59¢ and cost per ASM excluding fuel and oil (CASM ex-fuel) was 12.44¢: an ex-fuel spread of roughly 3.2¢, the narrowest of the four US carriers. With costs fixed, lower load factor cuts RASM and so narrows that spread.
The load factor guide treats the low to high 80s as the usual range for mature networks. IATA's North America average for FY2025 was 82.9%. Ryanair's 94% is measured on bookings, counting no-shows as filled.
The Point-to-Point Model
Southwest flies one aircraft type directly between city pairs, where Delta, United and American route passengers through hubs. On cost it is close to United: 12.44¢ against 12.64¢, though United defines ex-fuel cost differently. On revenue it trails, with the lowest FY2025 RASM of the four. Checked-bag fees arrived in 2025, the year load factor fell, and assigned seating followed in January 2026.
Its capacity growth was small beside United's 6.1% or Ryanair's 9.2%, so the load-factor fall reflects weaker demand, not over-expansion.
Fuel Hedging Exit and FCF
Southwest discontinued fuel hedging in 2025, and the derivative note in its FY2025 annual report (10-K) says it does not intend to add more. Like most US majors it now carries full market fuel exposure, without the offset Delta gets from owning the Monroe refinery. The fuel and hedging guide sets the two side by side.
Capex of $2,673 million exceeded operating cash flow of $1,842 million, so free cash flow computed from the cash-flow statement was −$831 million. Southwest publishes no FCF figure of its own, and carriers define it differently, so the FCF guide labels each: Delta's $4.64 billion is non-GAAP (company-defined), and American's −$83 million is on its own definition.
Southwest's own leverage measure, adjusted debt of $5,981 million (including operating leases) over adjusted EBITDAR (EBITDA before aircraft rent), was 2.4× at 31 December 2025, the same as Delta's gross ratio. Net of about $3.2 billion of cash, adjusted debt is about $2.75 billion.
What to Watch in the Financials
Recovery runs through load factor. It needs to return towards the low 80s before RASM can recover on the same cost base. Track revenue passenger miles (RPMs: one paying passenger flown one mile) against ASMs each quarter.
Ex-fuel cost is the line Southwest controls. If reliability fixes add labour cost before load factor recovers, the spread narrows; the RASM and CASM guide treats spreads below 3¢ as the narrow end of the range.
Unhedged fuel. Reported fuel cost now moves with US Gulf Coast jet prices: $4.354/gallon on 22 September 2026 (EIA), against the mid-cycle $2.85/gallon in our through-cycle models.
Valuation Framework
A Southwest model must state the load factor and RASM it assumes before applying any multiple, because FY2025 EBITDAR was earned at a load factor three points below the year before. The sector convention screens airlines on EV/EBITDAR of normalised earnings, in a band of about 4–7×.
Key Risks
Operations come first: a point-to-point network has no connecting traffic to refill seats that poor reliability empties. Ultra-low-cost and basic-economy fares on Southwest's densest routes can cap RASM even if load factor recovers.
With capex above operating cash flow, Southwest cannot fund growth and return capital together without using the balance sheet, and fleet renewal and reliability spending may keep capex high.
Peer Context
Ryanair shows the high-density low-cost model and ended its FY2025 with €1.30 billion of net cash. Delta, at an 84% load factor and a 5.7¢ unit spread, is the hub-carrier end of the US set in the Airlines Sector Primer.
EBITDAR builds from a thin unit margin on seat miles, the leases are capitalised into net debt, and the value moves on what a small load-factor drop costs.
The Excel model is the primer's airline build live across 11 sheets: EBITDAR from seat miles and unit margin, leases capitalised into adjusted net debt, a through-cycle EV/EBITDAR valuation for a network carrier and a low-cost carrier, a load-factor downturn, a lease-adjusted leverage screen and a sensitivity grid. Change the unit revenue, fuel or leases and the value moves.