Is This Texas-Based Company a Buy in Airline Stocks?

Broadly speaking, airline stocks aren't doing anything worth writing home about in 2025, and making that disappointment all the more glaring is strength in the broader industrials sector, the home to airline equities.

Count Southwest Airlines (NYSE: LUV) among the carriers wearing on investors' patience. The stock is sporting a double-digit year-to-date loss extending a decade-long slide over which the shares have lost more than more than a third of their value as earnings per share tumbled almost 80%.

Those are rough data points and confirm at least one thing: Management has its work cut out when it comes to restoring investor confidence.

Southwest could fly high, but patience is required

Despite the government shutdown and tariff headwinds, Southwest notched record third-quarter operating revenue of $6.9 billion while reiterating a 2025 earnings before interest and taxes (EBIT) forecast of $600 million to $800 million. The airline added that it expects operating revenue will be an all-time high in the current quarter.

Southwest is amid a transformation, but the stock could reward long-term investors. Image source: Getty Images.

Those are inklings that the company's turnaround, described by CEO Bob Jordan as "the most significant transformation" in Southwest's history, is taking shape. Call it a transformation or a turnaround, but the fact is corporate overhauls take time, hence the need for investors to be patient. Indeed, transformation is an accurate descriptor because Southwest is doing things that probably make some frequent fliers shudder, including charging for checked bags and assigning seats, if you can believe it.

Those changes might sound daunting, particularly given Southwest's reputation for being customer-friendly in an industry not always known for that. However, there are some goodies involved, proving the carrier is focusing on customer "luv." For example, Rapid Rewards members can access free Wi-Fi on Southwest flights, and starting in January, seats with more legroom -- a real air travel luxury -- will be available. To be precise, more than 400 Southwest planes have been altered for legroom purposes.

Additionally, the transformation includes some potential growth outlets. When it released third-quarter results on Oct. 22, Southwest announced the addition of four new domestic routes and a partnership with EVA Air that will bring that carrier's travelers to four major U.S. airports to connect to flights bound for Asia.

The burden of proof in the turnaround plan will be profitability over revenue. Southwest is flying high in the latter category, but it's on a multi-year run of deteriorating earnings. The company estimates the makeover plan could add another $4 billion in EBIT by 2027, but it remains to be seen if that timeline is acceptable to already wary investors.

Southwest has a balance sheet to boast about

The airline industry is incredibly cost-intensive with fuel, fleet upgrades, and labor contributing mightily to carriers' expenses. That explains why so many airlines carry significant amounts of debt, but some analysts say Southwest has the best balance sheet among domestic airlines.

It's hard to argue with that assertion, as Southwest concluded the third quarter with $3 billion in cash on hand and access to a $1.5 billion credit revolver. That sound-by-comparison sheet also enables return of capital to shareholders, which totaled $439 million in the quarter ending in September ($189 million of dividends and $250 million in buybacks).

When it comes to controlling costs, the Boeing 737 MAX aircraft Southwest is waiting to take delivery of are more fuel-efficient than the planes they're replacing. So, by upgrading its fleet, Southwest is engaging in a form of cost-cutting. But that's not a free lunch because those lower operating expenses arrive by way of higher capital spending in the form of those new planes.

Some of the expense of new aircraft could be offset by sales of older planes and cash could be raised by selling and leasing back some aircraft, but in the latter scenario, the carrier gets upfront cash flow and long-term lease liabilities.

So while Southwest is engaging in an overhaul, much of the near- to medium-term case for the stock boils down to how much latitude investors will extend before the shares gain altitude.

Todd Shriber has no position in any of the stocks mentioned. The Motley Fool recommends Southwest Airlines. The Motley Fool has a disclosure policy.