Using an unlevered Free Cash Flow to Firm (FCFF) model, we project Southwest Airlines Co.'s cash flows over 5 years with line-by-line expense modeling. Revenue is projected revenue growing from 14.2% to 8.8% annually, with expenses (COGS, SG&A, R&D) held at historical ratios. Depreciation is computed from a vintage matrix based on a 5-year useful life. Working capital is modeled using historical turnover days (DSO 19, DPO 5, DIO 14). At a 7.8% WACC with mid-year discounting, the terminal value (92% of enterprise value) is derived by applying the industry peer median EV/EBITDA multiple of 22.6x to Year 6 EBITDA. After subtracting net debt, the equity value implies a fair price of $283.88 per share, suggesting LUV is undervalued by 619.2% at the current price of $39.47.
Adjust parameters to explore scenarios. Changes are for exploration only and do not affect saved valuations.
| 2026 | 2027 | 2028 | 2029 | 2030 | Terminal | |
|---|---|---|---|---|---|---|
| Profit Before Tax | 4,452 | 4,660 | 4,836 | 5,028 | 5,470 | 5,606 |
| (−) Net Interest | 390 | 408 | 423 | 440 | 479 | 491 |
| (+) D&A | 2,553 | 3,098 | 2,986 | 2,979 | 3,294 | 3,376 |
| EBITDA | 7,394 | 8,166 | 8,245 | 8,447 | 9,242 | 9,473 |
| (−) Tax | 1,092 | 1,143 | 1,186 | 1,234 | 1,342 | — |
| (−) CapEx | 3,237 | 3,388 | 3,516 | 3,656 | 3,977 | — |
| (−) ΔWC | 771 | 108 | 91 | 100 | 229 | — |
| Free Cash Flow (FCF) | 2,294 | 3,527 | 3,452 | 3,458 | 3,695 | — |
| Peers' EBITDA Multiple | 22.6x | |||||
| Terminal Value | 214,571 | |||||
| WACC / Discount Rate | 7.76% | |||||
| Timing of FCF (mid year) | 0.5 | 1.5 | 2.5 | 3.5 | 4.5 | 5 |
| Present Value of FCF | 2,209 | 3,152 | 2,863 | 2,662 | 2,639 | 147,648 |
| Enterprise Value | 161,174 | |||||
| Projection Period | 13,526 | 8.4% | ||||
| Terminal Value | 147,648 | 91.6% | ||||
| (−) Current Net Debt | 2,750 | |||||
| Equity Value | 158,424 | |||||
| (÷) Outstanding Shares | 558M | |||||
| Fair Price | $284 | +619.3% | ||||
| WACC \ EV/EBITDA Exit Multiple | 18.6x | 20.6x | 22.6x | 24.6x | 26.6x |
|---|---|---|---|---|---|
| 5.8% | $260 | $285 | $311 | $337 | $362 |
| 6.8% | $248 | $273 | $297 | $322 | $346 |
| 7.8% | $237 | $261 | $284 | $307 | $331 |
| 8.8% | $227 | $249 | $271 | $294 | $316 |
| 9.8% | $217 | $238 | $260 | $281 | $302 |
Current price: $39.47. Green = undervalued, Red = overvalued.
Based on default parameters
This is an unlevered Free Cash Flow to Firm (FCFF) model with a 5-year projection period. Revenue, expenses, D&A, and working capital are projected using the same line-by-line approach as the Growth Exit models. The key difference is the terminal value methodology: instead of assuming perpetual cash flow growth, the terminal value is calculated by applying the industry peer median EV/EBITDA multiple to the projected Year 6 EBITDA.
Using a peer exit multiple anchors the terminal value to how the market currently prices comparable companies, rather than relying on a theoretical perpetual growth assumption. This approach captures relative valuation dynamics and is particularly useful when a company is expected to converge toward industry-average profitability over time. The sensitivity matrix shows how fair value changes across different WACC and EV/EBITDA multiple scenarios.