S&P Global Ratings upgraded Southwest Airlines Inc.’s outlook to stable from negative, affirming the carrier’s issuer credit rating at BBB. The change reflects expectations for sustained earnings growth and improved credit metrics, despite projected increases in fuel and capital expenditures.
The rating agency cited a 400-basis-point improvement in adjusted EBITDA margins to 10.2% since the second quarter of 2024. S&P expects leverage to remain below 1.5x, with funds from operations to debt sustained above 70%, supported by historical performance above 60% over the past two years. Debt to EBITDA is projected to hover around 1x, providing a buffer against the 1.5x downside threshold.
Southwest’s revenue growth is forecast to accelerate to 16%-18% in 2026 before moderating in 2027, driven by a $3.3 billion increase in passenger revenue. Ancillary revenue is set to benefit from five additional months under the airline’s revised baggage fee policy, adding an estimated $1.5 billion. Jet fuel prices are projected to rise to $3.60 per gallon in 2026 from $2.42 in 2025, increasing total fuel costs by $2.6 billion.
Free operating cash flow, after net capital expenditures, is forecast at $100 million in 2026 and $580 million in 2027. Gross capital expenditures are assumed to total $3.5 billion annually in both years, partially offset by $1.2 billion in asset sales and sale-leasebacks in 2026 and $850 million in 2027.
As of the second quarter, Southwest held $3.8 billion in cash and cash equivalents, with a $2 billion undrawn revolving credit facility. Unencumbered assets amounted to $15.7 billion, providing additional liquidity support.
