Southwest Airlines Stock Surges on Premiumization Hopes Amid Skepticism

What happened

Southwest Airlines shares have surged 23% year-to-date in 2026, driven by investor optimism following the launch of assigned seating and bag fees as part of its transformation plan. However, the latest DeepValue report reveals that despite these initiatives, key financial metrics like RASM have shown minimal growth, with only a 0.4% increase in Q3 2025, and EBIT guidance has been repeatedly cut to around $500 million for 2025. The stock now trades at elevated multiples, such as 57x trailing P/E, which embeds assumptions of a smooth revenue and margin recovery that are not yet supported by operational data. Market sentiment is crowded and optimistic, but early stress signals include high valuation and deteriorating Altman Z-scores, indicating balance sheet strain. This disconnect between market enthusiasm and fundamental performance highlights the fragility of the rally, as evidence of meaningful monetization from premiumization remains lacking.

Implication

The share price surge reflects high expectations for assigned seating and bag fees to drive significant revenue uplift, but historical data shows weak RASM growth and cost pressures diluting benefits. Valuation is stretched at 57x trailing P/E, implying a perfect recovery scenario without supporting evidence from recent quarterly reports. With a balance sheet stretched by $15.6 billion in fleet commitments and aggressive buybacks, Southwest has limited downside protection if domestic demand softens or premiumization backfires. Crowded sentiment and early stress signals, such as guidance cuts and financial stress markers, heighten the risk of a sharp correction on any execution misstep. Therefore, it is prudent to wait for concrete evidence of sustained RASM improvement and margin expansion before considering new positions, aligning with a more conservative base case.

Thesis delta

The DeepValue report maintained a 'POTENTIAL SELL' rating due to unproven initiatives and high valuation, and the recent stock surge does not alter this thesis. Fundamental concerns regarding weak EBIT margins, cost inflation, and leverage remain unresolved, making the risk/reward less favorable as the price approaches bull scenario levels without evidence. Any shift would require sustained RASM growth of ≥1% YoY for multiple quarters, which has not yet been demonstrated.