Southwest Airlines Plunges 10.5%—Is This a Buying Opportunity or a Death Spiral?

Summary
• Southwest Airlines (LUV) crashes 12.5% after missing Q2 earnings and revenue targets.
• GAAP earnings fall 33% YoY amid 9% salary and 11% landing fee hikes.
• $2B stock buyback announced amid 15x forward P/E and 1.9% dividend yield.
• Intraday price swings from $36.25 high to $32.40 low signal panic selling.
Southwest Airlines (LUV) is reeling from a brutal 12.5% intraday selloff following a disastrous Q2 earnings report. The airline missed both revenue and profit targets, with GAAP earnings collapsing 33% year-over-year despite only a 1.5% revenue decline. Rising labor and landing costs, not fuel prices, dragged results lower. A $2B buyback and 15x forward P/E now sit under a $33.51 price, testing whether this is a contrarian play or a death spiral.

Q2 Earnings Miss and Rising Costs Trigger Sharp Selloff
Southwest Airlines' stock collapsed after reporting adjusted earnings of $0.43/share and revenue of $7.24B, missing Wall Street's $0.51/share and $7.29B targets. GAAP earnings plummeted 33% to $0.39/share, dragged down by a 9% spike in salaries and 11% increase in landing fees. Despite a 30% drop in fuel costs, these expenses offset revenue gains from new luggage fees. The sell-off reflects investor fears about margin compression in a sector facing labor and infrastructure cost pressures.

Airlines Sector Struggles Amid Rising Costs
The broader airlines sector faces similar headwinds, with United Airlines reporting 5.9% capacity growth but 4% revenue per available seat mile (TRASM) declines. Delta Air Lines (DAL) fell 1.57% as industry-wide concerns about labor costs and airport fees persist. Southwest's 33% earnings drop mirrors sector-wide margin pressures, though its 15x forward P/E and $2B buyback offer a potential discount compared to peers.

Options for Short-Term Volatility and ETF Positioning
• 200-day MA: $31.62 (below current price)
• RSI: 73.15 (overbought)
• MACD: 1.32 (bullish divergence)
• Bollinger Bands: $30.69–$39.55 (price near lower band)
• Support/Resistance: 30.69 (lower band), 35.12 (middle MA), 39.55 (upper band)

Technical indicators suggest oversold conditions near the Bollinger lower band, with RSI hinting at short-term overbought conditions. A 5% downside to $31.83 would test critical support. For options, LUV20250801P32.5 and LUV20250801P31.5 stand out:

• LUV20250801P32.5: Put option, strike $32.50, 2025-08-01 expiry. IV: 30.51% (moderate), leverage: 133.96%, delta: -0.2536 (moderate sensitivity), theta: -0.0044 (slow decay), gamma: 0.1995 (high sensitivity). Turnover: 152,929. Payoff at $31.83: $0.67/share. This contract offers strong leverage for a moderate price drop while holding up to 152,929 shares of liquidity.
• LUV20250801P31.5: Put option, strike $31.50, 2025-08-01 expiry. IV: 32.44% (moderate), leverage: 372.11%, delta: -0.1074 (low sensitivity), theta: -0.007374 (moderate decay), gamma: 0.108374 (moderate sensitivity). Turnover: 748. Payoff at $31.83: $0.33/share. This option provides explosive leverage for a smaller move, ideal for aggressive short-term bearish bets.

If $32.50 breaks, LUV20250801P32.5 offers significant downside capture. Aggressive bulls may consider LUV20250801C32 into a bounce above $35.12 (middle MA).

Backtest Southwest Airlines Stock Performance
The backtest of LUV's performance after a -10% intraday plunge shows mixed results. While the 3-day win rate is 52.12%, the 10-day win rate is slightly lower at 50.25%. The strategy has a higher win rate over 30 days at 51.10%, indicating that LUV may rebound relatively quickly from such a significant drop. The maximum return during the backtest period was 1.94% over 59 days, suggesting that while there is a chance of a positive return, the recovery period could be lengthy.

Southwest Airlines at a Pivotal Crossroads: Watch for $30.50 Support or Buyback Impact
Southwest's $33.51 price near the Bollinger lower band and 200-day MA suggests oversold conditions, but the $2B buyback could stabilize shares if the $30.50 level holds. United's -1.57% decline signals sector-wide fragility, but Southwest's 15x forward P/E and 1.9% yield present a discount to peers. Watch for a breakdown below $30.50 or a rebound above $35.12 (middle MA) to determine whether this is a contrarian play or a death spiral. Delta Air Lines (DAL)'s -1.57% move underscores the sector's vulnerability to cost pressures.