Southwest Airlines ratings affirmed at BBB+ as Fitch keeps negative outlook

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Southwest Airlines BBB+ rating

Highlights

Fitch affirms Southwest Airlines Co.'s BBB+ rating and Negative Outlook, citing margin gains and first-quarter revenue per available seat mile rising 11.2%.
Negative Outlook reflects near-term free cash flow constraints from the fleet renewal cycle and $3 billion expected borrowing in 2026 for aircraft and repurchases.
Southwest spent $2.55 billion on share repurchases in 2025 and $1.25 billion in Q1 2026, with end-Q1 liquidity at $4.8 billion and unencumbered assets at $16.5 billion.

Fitch cites revenue momentum and balance sheet support

As reported by Fitch Ratings, the agency has affirmed Southwest Airlines Co.'s Long-Term Issuer Default Rating at BBB+ and maintained a Negative Outlook. Fitch says the rating is supported by improving revenue and margin momentum, a healthy U.S. demand environment, and the airline's financial flexibility, including adequate liquidity and a large pool of unencumbered assets.

Fitch points to signs that Southwest's strategic initiatives are gaining traction, with first-quarter results and second-quarter revenue guidance indicating early progress. Operating margin, excluding special items, expands by more than 600 basis points in the first quarter, helped by 11.2% growth in revenue per available seat mile.

The agency also says industry demand remains supportive, even as higher jet fuel costs weigh on the sector. Airlines report record bookings in the first quarter of 2026, and early indications suggest recent fare increases aimed at recovering fuel costs are holding.

Fleet spending and shareholder returns weigh on outlook

The Negative Outlook reflects Fitch's expectation that near-term free cash flow generation remains constrained by Southwest's fleet replacement cycle. Fitch says this pressure is partly moderated because the spending is tied to fleet renewal and because the carrier retains the ability to defer aircraft deliveries if needed.

At the same time, the agency says elevated shareholder returns have increased borrowing and reduced liquidity, keeping leverage near the upper end of BBB+ rating sensitivities unless margins and free cash flow improve on a sustained basis. Southwest spent $2.55 billion on share repurchases in 2025 and another $1.25 billion in the first quarter, according to Fitch.

Fitch says liquidity totals $4.8 billion at the end of the first quarter of 2026, equal to 16.7% of last-12-month revenue, while unencumbered assets are estimated at $16.5 billion. Although Southwest reduces gross debt by $3.2 billion over the past two years, Fitch expects the company to borrow at least $3 billion in 2026 to fund aircraft deliveries and repurchases.

In our earlier article on Alaska Air Group’s proposed loyalty program term loan, we covered how the carrier aimed to bolster liquidity as higher jet fuel prices and elevated debt tied to its Hawaiian acquisition pressured credit metrics. We also noted Fitch’s view that heavy capex and ongoing share buybacks would keep free cash flow negative near term, even though Alaska had sizable unencumbered assets supporting financial flexibility.

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