LUV Posts Q3 Results with Shorts at Their Lowest in Months

Southwest Airlines reported third-quarter results today with short sellers having spent the past month unwinding positions, leaving the stock's lending market looser than it has been all year.

The short unwind has been substantial. Short interest dropped 10.5% over the past week to 4.4% of free float, down from nearly 5.8% in mid-September. The retreat accelerated through October, with positions falling on four of the past five sessions. Borrow availability, now at 2,379%, is the highest reading of the past 52 weeks, up from 949% as recently as October 13. At 0.44%, cost to borrow remains firmly low. The ORTEX short score has eased to 40.3, down from 44.7 on October 13, consistent with a market that was reducing rather than building its short case before the print. Options traders were less sanguine: the put/call ratio closed at 0.92, nearly two standard deviations above its 20-day average of 0.80, reflecting more demand for downside protection than the short interest data alone would suggest. The 52-week high on the PCR is 1.40, so the reading signals caution rather than panic.

The analyst community has been trimming targets without pulling ratings. UBS cut its target from $53 to $52 on October 16 while maintaining a Buy. Susquehanna and TD Cowen both lowered targets earlier in the month, to $45 and $47 respectively, also holding their ratings. The direction of travel has been downward: BMO cut from $60 to $50 in late September, and Barclays moved from $65 to $58 in early September. The mean target across the Street sits at $49.18, roughly 24% above Tuesday's close of $39.65. The bull case centres on the basic economy fare rollout lifting load factors and the aircraft sales programme generating cash. The bear case is execution risk from the assigned seating transition, which was scheduled for completion through 2026, combined with pressure on close-in fares. The PE multiple is 9.9x, with EV/EBITDA at 5.2x, neither particularly stretched for the sector.

Ownership dynamics add a layer of complexity that earnings alone will not resolve. Elliott Investment Management remains on the Schedule 13D register as an activist filer, though its disclosed stake has dropped from 9.3% to 4.9% since its last filing in April. With the position sitting just below the 5% threshold, any further reduction may never trigger a fresh disclosure. That said, PRIMECAP and Franklin Templeton have both crossed 10% ownership in recent filings, providing a counterweight of longer-term holders. JP Morgan Asset Management added more than 4 million shares in the most recently reported quarter. Schedule 13D/G positions are event-driven disclosures around the 5% threshold; stakes are as last disclosed, and holders dropping below 5% may exit without further filing.

One mechanical dynamic worth tracking beyond the earnings itself is index positioning. ORTEX puts a 65% probability on LUV being dropped from both the CRSP US Large and CRSP US Mid indices at the December 2026 Quarterly Review, with the rank date on December 4. The stock needs to close above $43.20 to stay on the right side of the exit line. At $39.65, it is 8.9% below that level. The implied selling pressure from trackers would be roughly $244 million combined across both indices, against about 1.1 days of normal trading volume. The December announcement date is December 7, with a trade date of December 22.

The three previous earnings prints produced day-one moves of -8.2%, -5.4%, and +1.5%. Two of the three saw the stock still lower five days later. With the Q3 print now in, how the result lands relative to the yield and load factor story, and whether management updates guidance on the seating transition, will determine whether the short unwind continues or finds a reason to reverse.