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Investing.com -- UBS upgraded Southwest Airlines (NYSE:LUV) from Sell to Neutral this week, citing the airline’s “whatever it takes” approach to driving financial improvement.
The firm believes “their increasingly assertive changes raise the potential for improving financial performance despite the weaker cyclical backdrop.”
UBS raised its 2025 EPS estimate to $1.68 from $1.54 and 2026 EPS to $2.55 from $2.10 while increasing its price target for the stock to $36 from $29.
Southwest’s recent decision to charge for checked bags marks a major shift from its long-standing policy of free bags.
UBS estimates the airline could generate $275 million to $1.1 billion in additional annual revenue depending on how many passengers opt to check bags.
In addition, Southwest is rolling out a basic economy fare, a move UBS sees as “a more aggressive segmentation strategy which should ultimately support utilization and stronger revenue on its regular economy and extra legroom seats.”
The bank estimates that if 33% of seats were converted to extra legroom, with 50% paid utilization at a $40 premium per seat, this could generate $900 million in revenue.
On the cost side, Southwest’s plan to lay off 2,200 employees should result in a $300 million annual cost reduction, a move UBS sees as another “meaningful support for improving margin.”
However, UBS warns that “the softer cycle backdrop is a partial offset to LUV’s revenue and cost-side initiatives,” with airline demand softening in Q1 and a weaker macro environment expected to persist into 2026.
The firm believes these factors could “constrain upside potential for EPS and the stock” if demand remains weak longer than expected.
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