Southwest Airlines Aktie

All right. Awesome. So thank you, guys, everyone, for joining us. My name is David Vernon. I cover the airlines and transports for Bernstein. We are pleased to have Southwest Airlines here, Bob Jordan, the CEO; Ryan Martinez in Finance; Danielle Collins in IR with us as well.

So thank you all for coming out to support the conference. Bob, I'm going to -- or actually, before we get started, if you do have questions, you want to put through the pigeon hole. I've got the other side of that technology here. So feel free to put them in there, and I'll see if I can work them into the conversation. With that, I'm going to let Bob kick us off with some prepared remarks, and we'll get into the Q&A. Bob, thank you for joining us.

Thank you so much. And I was told I have to say, look at your screen, there's a cautionary statement that has to be there. So please read all those words in detail. And -- but anyway, thanks for doing this. Really appreciate it, and thanks for the time. I'll just give you a quick sort of lay of the land of how is the business performing.

Obviously, we put a lot of changes in the last 18 months. The biggest transformation in the history of Southwest Airlines, it really was a fundamental change to our business. We didn't change our core. So the best domestic network, the most nonstops, the best people, the best service, the most reliable operation, one of the Wall Street Journal ranking is fifth year in a row, JD Power win.

So the fundamentals of the company didn't change, but we really did change the product to move our product towards what our customers have told us they want. It was great to see that come home in terms of our financial performance in the first quarter so -- which is the first quarter that you have everything in place, but our operating margins were up 810 basis points year-over-year and we led the industry in net margin. And that's without having first class and long-haul international, some of those products that our network carrier friends have said are really performing.

But it was good to see the fundamental change in the business show up any fundamental change in the financial performance of the -- of our company, which I think is an enduring change. Our customers are really taking to the products. They want them, they're buying them. We're seeing no drop off in demand for our -- from our customers for the products. We're seeing market share move away, particularly in our business customers because now we're offering them things that they want.

They want access to extra legroom and different products. Just as an example only, so our March business revenues were up 25% year-over-year, and that trend has sustained itself in April and May, which is a great sign. The biggest question, of course, is what is the consumer doing now, the industry with Fuel Up has had 7 consecutive fare increases since February 1. Southwest has participated in all of those.

That's the most that I could remember in my 38 years in the industry, but with fares up though that much, there's been no drop off in at all. So no indication that the consumer is elastic in the spare environment. So leisure business across geographies, across all points in the booking curve, the consumer remains very strong despite this rise in fares. So I'm becoming increasingly bullish that we will be able to cover these fuel increases with revenue increases.

As you look forward, I think the last thing maybe the -- one of the questions at some point, fuel will abate, and you'll see fuel prices come down. One of the questions, of course, is, well, how sticky will these increases be. And I think the backdrop is very constructive. I think we -- our network competitors, you can tell, we're all focused on ratable production of results, steady production of results, sustainable margins.

And so I do think that produces a backdrop where we'll -- there'll be -- we'll certainly not attempt to give some of these fare increases back. Obviously, you hate to see somebody go out of business, but with Spirit out of business, I think that helps that environment. So I do think the backdrop is constructive when fuel drops to retain the revenue and yield increases that we've seen.

But bottom line for Southwest Airlines, demand is really strong. Our customers want the products, they're booking the products. Our business customers want the products. Our Rapid Rewards enrollments were up 37% in the first quarter. Our tier qualification was up 60% year-over-year in the first quarter. And we're seeing satisfaction scores now with the extra leg room, assign seating, the satisfaction scores for our tier customers is over 90%. So to me, it all tells you, the product is moving the right way for our customers, the business results, the financial results are moving in the right direction for our shareholders, and I think this is a durable and sustainable change in the airline.

All right. So the product changes that you've implemented. I think one of the keys users you want us to leave with here is that they're working. Customers are buying up to these products, and it's having the kind of results you want. We can dig in a little bit more to the relative part of that. But so let's say we've got the business transformed with the new products. As you think about where Southwest fits in the industry landscape going forward, what's your vision for the single reason why a customer would choose Southwest over your competitors?

Well, the core reasons, I mean we carry 500,000 customers a day. The core reason that customers -- the core reasons that customers have always picked us. the best domestic network, the most nonstops, which means the most convenient flights, the #1 operator, the best service provided by those best people, the best hospitality, those core reasons that customers have always selected it Southwest Airlines have not changed. So those continue.

We are America's choice in terms of an airline. Now you tack on to that, the products that they want and the commitment by the company to continue to pursue the consumer and pursue the products that they want. It just provides a very strong base for an airline that is a more attractive to consumer than any other airline. So we're not going to become Delta and United and American in terms of serving 120 for international destinations.

It took them decades to build that. But we're going to remain the carrier that has the best flight schedule, the best operator, the best hospitality, the best people and over time, connect that to more and more and more products that our customers and our noncustomers want and that allows us to provide more choice and better service and a better option for all Americans.

And as you think about the places where you think the business will be different, say, 5 years from now, right? If we've reset the product landscape, we've segmented the cabin, we've added fees and buy ups, which has sort of kind of been the where the industry has been, you're there. Where do you take it next? Like what's the next sort of 3- to 5-year path. Obviously, the upgrades on the WiFi, how do you want to think about like what's going to be most different about if we're sitting here again 3 or 4 years, which I hope we are. And we look back and we say, okay, what's different? What do you think is going to be most different about the airline?

Well, and again, you're talking about fees and all, again, all done. It is, but I just want to point out, again, that we added things that our customers wanted. So it wasn't that we're just charging new fees now. We are providing you options all the way from basic all the way to extra legroom to pay for things that you want is very different than I'm just slapping the fee on top of a project we already had. So I just want to make sure...

Acknowledge that. 100%.

Yes. We're meeting the consumer where they are, where I think we'll be, if we're sitting here talking 5 years from now as we will have continued to greatly expand the product offering and not just to expand it for egos sake, as an example, but expanding it because I want to give you fewer and fewer reasons to book another airline. They feel like you need to travel on another airline. So Again, all speculation. But we think we'll have more optionality within the cabin. It could include true first class.

We'll have far more domestic destinations that we can provide for you. We just opened acreage a couple of weeks ago, the Caribbean. We're continuing to add destinations at a very swift pace here in 2026. And but we'll also offer you access to destinations that we don't serve today. I think it's likely that we'll over that period of time, delve into long-haul international.

Again, these are all ideas. But we know these are things that our customers want. If you dial back just a couple of years, we now have 7 partnerships with other airlines, and we can get you to nearly any place in the world connecting with those partners, none of that existed even 24 months ago, but the desire is to meet our consumers' needs offer them the things that we can't offer you today. And it just logically means that things like lounges and a credit card that goes with that and more premium and more destinations, including more long-haul destinations. And if you take long haul as an example, again, it's out there.

It is something that we're thinking about. But I say we don't have to become Delta United American, but a handful of destinations, 8 to 10 to 12 pick off the vast majority of the traffic, the vast majority of the places that our customers want to go. So we don't have to be Delta America and United in terms of that huge wide long-haul network. But through the right destinations, we can be highly relevant in our customer base in terms of where they want to go.

Okay. And as you think about that again, that 3- to 5-year path, not trying to get to some sort of specific guidance.

I think you are. You keep asking.

Well, I try to get there without getting it. But as you think about that 3- to 5-year path, when you're looking at whether it's margins, returns, free cash flow conversion, how do you -- how would you package that for an investor who is not in the weeds on RASM and CASM and is not digging into the flight segment performance by route. If you're trying to package this for a generalist investor, and you're saying to yourself, hey, look, Southwest used to be this business that led the industry in margins and returns. We've gone through some transition. Now we're going on a path. Look, where is the end state.

I think if you're asking me, so I took my Southwest Airlines had often just say, well, why would I invest in Southwest? What's the argument? You've got a terrific company with terrific fundamentals that had stood still on the product front for a long time and had a huge base of loyal customers, but just didn't offer them the many products and product choices that they want to buy, and we've changed that.

And dispelled a couple of sort of these in named theories about Southwest, number one, that our customers either wouldn't want to buy those things or couldn't buy those things because somehow we have a less affluent customer which is hogwash, if you look at the results. And second, that we couldn't get to industry returns, top of industry returns without having first-class premium long-haul international because of the growth there. Our first quarter results dispel that. We have been able to be to meet the top end of the industry margins and not have those products. So -- and our customers are buying them.

So you've got a company that has incredible strengths that now has in place a much more durable return for and margins for our shareholders. and that's durable and sustained. On top of that, we have a lot that we can add. We can add -- we're going to continue to optimize the things that we put in place. We've just begun to optimize the product buy ups and the way we think about seat ancillaries and the way we think about the number of seats on the aircraft that are available to monetize. So there's more to come in terms of optimizing what we put in place without adding new things like lounges and long haul.

So there's more from a returns perspective. So I look at the company and say, I think the market has substantially undervalued the change in our earnings power and the sustainability and durability of that earnings power with the products we put in place today; number two, has not even begun to thought about the value of optimizing those products beyond what we implemented in January '27. And third, not begun to give us credit for the things that we can continue to do to add to the products to make them even more attractive, even put more earnings on the table for our shareholders.

So there's a very long and sustainable shareholder return story here, the number one, the marketplace is not given us full credit for. Number two is sustainable for a very long period of time. And if I'm a long-term investor, that's exactly the play I want.

Okay. So maybe let's change gears for a second and talk about the transition that you've just gone through because it has been pretty massive in a very concentrated period very massive right? As you look at the initiatives, and I'm not sure how you want to bucket it, but if you can help us kind of understand the things that you've implemented which of those changes has outperformed your internal models?

And where has maybe the customer reaction surprised you one way or the other, right? You've been around the business a long time for a long time. You're of the view that the product didn't need to change and then to your credit, you pivoted and you led the team through the change. But as you think about what you implemented, what's overperformed, where is the customer action been most surprising to you?

Yes. And I don't know if I was of the opinion that the product didn't need to change. I think I felt like we needed to move to a science heating as an example for a long time. We did a lot of research. And so we knew that of our customers wanted to move to a science. 88% of customers who would not fly Southwest, that was the reason. They would not fly us. They wanted a sign seating. The #1 reason families would not fly Southwest Airlines was because in open seating, we could not guarantee that you would sit next to your kids.

So I had high confidence that those things would work. So I have very high confidence in and the product changes and high confidence in the company's ability to execute that. We also made some changes that were tougher like the implementation of bag fees. Now a lot of ways not to have to bag fees. All you have to do is have that Southwest Airlines, Chase Rapid awards Visa in your wallet or have tier. But I don't know that I was surprised at all. Number one, the products are performing or outperforming our expectations. And again, that's without continuing to optimize.

So I think if anything that surprises in time you make fundamental changes, you always have a nagging worry about what could go wrong. I wasn't surprised, but I'm incredibly pleased with, number one, the companies flawless implementation of all this stuff. These are huge massive changes with lots of technology behind them. We did the site seating boarding, all those changes were done overnight on January '27. And the first day of operation, we led the industry in on-time performance, and we led the industry in the lowest number of cancels. So we beat the industry on the day we changed everything about how the company operates. So while I knew we could do that, I was pleasantly surprised at the quality of that implementation.

And then second, I've been pleasantly surprised at our customers' response to these products. they're taking to the products as -- or even better than I expected. And our business customers, in particular, are really taken to the products. So I mean, we're seeing satisfaction scores that are higher than in the open seating world as an example. So I've been pleasantly surprised to the upside more than anything.

Okay. And I guess one question that I get asked sometimes, and I'd love to get your view on this, right? Like you've implemented these changes. Everything is going well, then we had this massive fuel price spike. And obviously, there's the bankruptcy of some spirit and pass coming out, fares are better. What gives you confidence that the behaviors that you're seeing in the early results will endure.

And maybe more importantly, how are you keeping on top of that issue in terms of like saying, okay, look, we have home to these changes and everybody kind of accepted it, but now over time, maybe things are changing. Like how do you think about the durability? And how do you think about managing that? Because it's got to be -- you don't really have a good track record to go against, right?

Yes, but we know a lot about booking curves and how our customers perform. So yes, you're looking for is this a blip or is this sustained? And back to the strength of of the demand right now. It's across, again, all geographies, all customer sets and all points in the booking curve. So if this was somehow just a reaction to the January changes you'd see a blip in a fall back, and we're not seeing that. If anything, we're seeing a an acceleration in our customer scores as we move away from January '27 and continue to make improvements.

We're seeing these really large and I'm not updating today. So just the guide really large guys in terms of the performance. So I mean, when was the last time, if ever, you heard somebody guide high double-digit RASM performance, unit revenue perform I've been with the airline industry for 38 years, no one has ever produced high double-digit RASM performance in a quarter. It just doesn't happen. It's a testimony to the fact that the revenue production of the products is working and is a testimony to the fact that our customers want it. So if anything, I see acceleration in the take rate of the products rather than some worry that this was somehow a blip in temporary, which tells me that the product changes were the right things to do.

Our customers go back to the open seating world, we always have had and still have off-the-chart enviable NPS scores because our customers love the product, they loved the network and the fact that we have more point-to-point nonstop flights. But above all, they love our service and our people. Our people are the brand differentiator. They do things for their customers that no other airline would do. And you take all of that, that is still intact and you stack on top of it the products that -- and the choice that our customers have wanted for a very long time, and it's an unstoppable combination.

Okay. Well, on the network side, you have also been making some changes, right? Obviously, the move into hair has been gone back to Midway, Dulles spec. You've seen some changes around Reagan and where you're flying in and out of. I remember like one of the first times we had a chance to sit down like this, I asked this question around or maybe it was one of your Investor Days, right? Where are you going in the network? Is it dots on the map or thickness of the lines. And it does feel like there are some of the really high utilization routes in the network have come off a bit. Is that something you're also seeing? And how are you thinking about where you want to put assets into the market going forward?

Well, you have to be willing to be -- you have to be willing to adapt the network is an ever-changing beast, right? It is constantly moving around as you see demand move. So you've got to be willing to make changes. And I wouldn't read any more into the Dulles on or changes than those just were not producing the returns that we wanted, and that capacity can be better used in markets like San Diego, Austin, Nashville, places where we have a super high demand, and we're continuing to grow. So you've got to constantly be looking at the network and being willing to make changes.

And we're doing -- you have to be aggressive and we're willing to do that. On the thin lines, thick lines kind of thing, there have been fundamental change over the last 5 years to a decade. Where you have a much higher difference between peak and off-peak performance. And so you have times of the day that used to make sense to be profitable like late night, deep off peak, and they just don't make since any longer. You have days of the week that performed very differently than they used to.

So you have to, again, be willing to deploy capacity and be variable with your capacity deployment to the right times of the day, day of week and routes. And so what you're seeing from Southwest is actually a, number one, a higher degree of willingness to be adaptable with the network. And then number two, a higher degree of capabilities, technology and otherwise that allow us to do that.

And so the utilization component being maybe a little bit less in some parts of the market, does that change the return profile of the business or you compensate that from [indiscernible].

Yes, we still have -- because of the way the network flows, we still have the highest aircraft utilization in the business. The -- everybody's cost structures have floated up, especially with labor costs coming up, you know that. But our gap to our network carrier competitors, as an example, is still about 20% on a unit cost basis. And that's really driven by the fact that we utilize our aircraft much more efficiently than others do.

A good example over the last few years is, we actually rather than pad the turns, pad the block, we actually took 5 minutes out of every turn and created 18 free aircraft by doing that. We built the capability and began flying redeye flights. And the combination of those 2 is roughly 40 free aircraft because we're basically just utilizing the existing aircraft more. So no 1 can touch us in terms of aircraft SP-4 Utilization and productivity.

And so the vision that is to continue to be more point less sort of hub because you've built -- started to build some connecting in the schedules. It seems to me like. But when I look at it, so say relative to Pre-COVID to now, you've got a little bit more emphasis on connectivity and BWI in some of your bigger markets.

Yes. I would say we're a hybrid. So we have very large cities that we do more connecting in. But again, one of the core strengths of this company is that we have the best domestic network, and we have the most nonstop flights and consumers choose nonstop flights. And that offering is key in terms of our -- as a key part of our core capabilities as an airline.

Again, you're always going to adapt. I mean, as you grow a fundamental part of growth and becoming larger, we're now roughly 4,000 flights a day is -- and you have more dots on the map, you can't escape having more connectivity as you add more dots. And that is really the -- what's happening there versus a desire to become more hub like.

And as you think about that idea of getting to international long haul right? How do you think -- where does that fit in your network? Is that kind of like as you think about gateways, is that most naturally going to be Baltimore? Like how do you think about were.

Yes. We're just not far enough along with that. These are really ideas. I think you start with, again, you go back to what is it two things, what is it our customers want from Southwest Airlines that we cannot provide today? I want to give our customers fewer and fewer and fewer reasons they have to choose United, Delta, American and others because they don't want to. They love Southwest Airlines, we are the brand that they love. They want to choose us and they simply can't because we don't offer them the thing that they want, like flying long haul.

So it really comes out of what is that our customers want. And then second, this is a huge tied to the Rapid Rewards program. So the loyalty programs and co-brand are a huge part of the financials of an airline and having long-haul aspirational destination kind of routes really, really enhances the co-brand program as well. So it's much a part of that. That's as much the reason it is even destinations that our customers want. But we're just in the really early stages.

So I have a very smart question here..

Baltimore would be a natural popping off point.

So I have a very smart question here that kind of feeds into this idea around choice. So you said that Assigned Seating was the one reason why people would not use Southwest. That's no longer there. What's the #1 reason now that customers wouldn't use Southwest?

I think I would flip it around and say, what are the next set of things that our customers want. And the next two are number one, highly reliable, fast WiFi is incredibly important. So you saw us -- we signed a deal with Starlink, very smart, and we've got our first aircraft outfitted for test and we'll have roughly 300 aircraft in the fleet converted by the end of the year, and it's going to be neck and neck, but I think we'll be the first to have our full fleet converted to LEO. And these are incredibly fast like sitting at your home gaming kind of speeds. And so the move with Starlink will solve that.

I'm really happy about that. And then second, the next thing that we see our customers want or a lounge network. And it's not just business customers. It is leisure and business. And I've been very public that we're working on that and not ready to announce or say anything today, but just -- it is public that we're out there leasing space. So those are the top two things. And as you can tell, we're tackling both.

All right. So with the -- you talked -- you haven't seen any sort of demand response to the higher fares that have gone through. You mentioned 7 consecutive fare increases that have well been widely supported by the industry. If you sold the whole cabin at the latest round of fare increases, does that cover $4 and change jet fuel? Or is there still more room the industry has to kind of work to push forward to get to full recovery at.

Yes. No. If you just took today's revenue environment or yield environment and you -- and you took fuel prices as they are today. No, no, it's not close. So you still -- you need further increases to fully cover the rise in fuel this far. But -- it's, well, it's ever changing. Fuel is moving every single day. But because we've seen our customers and consumers be very, very resilient in the face of fare increases. And I think it's the economy, but I think for Southwest because we're offering the products, I think a big piece of this for us is we're selling them products that they want. And so we have an outsized demand that others are not seeing.

And I also think that consumers are prioritizing travel it's higher on the priority list than it was pre-COVID. And we're going to see fuel abate as far as -- my guess is at some point we'll have an agreement, fuel will come down. I do think it's going to take longer -- far longer than the fuel forward curves would say. So I do think you're going to have higher fuel for longer. But the combination of fuel will abate. And customers have been very resilient, makes me more and more bullish that we will be able to cover these fuel prices with revenue increases.

But we still have a little bit room to go.

We have a ways to go. We're not there yet.

If I were to ask you to [indiscernible] fuel tank, tank indicator on it. It's okay to say no. It's a question I get asked, so I'm trying to get...

Well, you've seen a lot of this. We're going to cover 40% this quarter and 60% in the next quarter. I've shied away from that because it's -- I think it's just a math exercise. You can plug any number you want in there. And the market is going to dictate that. it is logical, I think, to think that you've got 7 fare increases that as -- if you do, if those prices continue to go up, it's logical that, that pace might slow down because that's a lot. But again, I'm bullish on the thought that we'll get to the point here where revenues can cover fuel in total.

And we get to the other side of this and filters to come down, the $65,000 question is how much do you keep and how much does the industry give away back to the consumer.

Well, first off, you got to start with, while prices are up, I believe that fares, if you look at the last sort of since COVID began in the last 6 years, even with prices being up, they are up only roughly what broad inflation has been up over the same period of time. So we're not talking about fares are way ahead of what's going on with the prices.

So they're basically just now catching up to inflation. I do think because the -- there's more discipline in the industry now. The network carriers, in particular, Southwest Airlines, we are all focused on ratable production of earnings, dependable production of earnings. And so I think there's a desire to behave rationally and operate the business in a way that you can produce the appropriate rate of return for our shareholders.

As much as you hate to see a competitor go out of business because it's people, nice jobs, Spirit going out, I think allows us to be even more rational in how we think about that because typically, the airlines suffering the most is the 1 that's going to behave the most irrational in terms of pricing. That's the history of the industry. So I think that adds stability. So I'm actually very bullish that the industry will retain a much higher percent of the fare increases that would be typical historically.

Okay. And as you think about that structural change with the ULCC model maybe not dead but on the ropes with the introduction of basic and segmentation. What do you think about the prospects of future consolidation from where we are today or future potentially maybe companies that are struggling to make it at today's fuel prices actually kind of maybe following Spirit?

Well, and you said you'll see season on the ropes, too. I think, if anything, and this has been coming for a long period of time. Cost in the industry broadly, especially labor costs have really come up over the last 5 years, and you sort of move to an industry rate for labor and that big rise, I think, in cost and particularly labor costs, I think, was as damaging to a spirit as anything because they were a spill carrier, taking spill, which means lower fares.

And that only works if you have a significantly lower cost structure and with labor rates commoditizing themselves, I think that just became very, very hard for that model. On the M&A front, it's kind of one of those -- we were talking about this morning kind of they're sort of both sides of the same coin, which is everybody that I talk to thinks this historically, this is the kind of environment that's ripe for consolidation and where you typically see M&A.

And I do think everybody believes that this is an administration that it would potentially be easier to do some transactions under. But on the flip side of that, I've not talked to anybody that really knows what that might be because you had a lot of discussion of JetBlue. I can't speak for JetBlue, but I don't -- given the debt load, I don't see I don't see necessarily a lot of interest there. You've got some very small carriers, the bees folks, I don't really know about that.

So that really leaves the network carriers and Southwest Airlines. We're all very large. A combination of any of those would be roughly 40%, 42%, which historically would never pass muster in terms of an approval with DOJ or DOT. So while I think the -- the timing feels right for consolidation, nobody that I talked to a sort of thumb to put a thumb to what that might be.

And so from a Southwest perspective, you're philosophically open to the idea, but don't necessarily see the right set of combinations like

Well, no, there's really -- no, there's nothing that we're -- I never say never, but there's nothing that we're working on. I mean just like being open to the product changes that forever, we say we have one product, we do it this way. we have on boarding, we do it this way and woke up and said, look, our customers are telling us something different. We can't do that. We've got to provide what our customers want no matter what we think sitting here at the table inside the company.

So on the M&A front, I think you apply the same thing and say, you got to be open to things that might make sense. That would be good for the company, good for our shareholders. It's just not -- there's no -- there's nothing obvious. So it's not a no. It's just -- I don't know -- I don't have a clue what that would be because nothing comes to mind.

Okay. And as you think about the topic of cost inflation, which you mentioned a second ago with respect to the industry getting to a set wage. As you think about the product changes you're making and then the potential also for additional enhancements, whether that would be a true first class cabin or a lounge or whatever it is. Those are going to be layering in some costs as well. So how do you think about offsetting that cost of investing in the product? Should investors be expecting you to be basically working revenue against that cost inflation and netting a positive? Or are there additional levers that you can pull from a productivity and a cost standpoint that would allow you to maybe absorb some of that cost of a higher service product?

Yes. Again, I can't -- I'm a little bit in the jam here because I can't talk to you about -- there's not much to add on things that are hypothetical and things that we are working on, they're just confidential, and I can't give you a lot of detail, but I would come back to where is sort of like your capital allocation guardrails, there are guardrails around how we run this airline. And while all costs have come up, on a relative basis, we're a low-cost carrier. So our unit costs are 20% below the network carriers.

So as we add amenities, we're going to do that in a way that is consistent with our cost profile and in a way that maintains the cost differential. As we add things like new products, we're only going to do that if it makes sense. And that means makes sense on an accretive margin basis. So if we were to add further premium, Obviously, you're dedensifying the aircraft to do that.

We would only do that if it is obvious that the sum total is margin accretive to the carrier. So we're not going to do things just because we desire to do that. We're going to do them because it makes sense of the business. Our customers want it. and it is a good thing for our shareholders. We haven't talked about this, but sort of -- but to me, it kind of ties together. We've talked an awful lot about the product in the last 18 months, the product changes and all that we've done at the carrier at the airline there.

What we haven't talked about is what I've seen in terms of what's changed in terms of how this company operates itself. We've been around a long time. I've been there 38 years, and I've seen the biggest change in how we fundamentally run this company that I've seen in my whole career, help West Airlines. There's an incredible focus on discipline, cost discipline, agility efficiency. It was very painful, but we did our first ever corporate layoff about a little more than a year ago, I took out 15%.

And that delayering and focus in corporate broad an incredible change in the pace at which we operate, the pace at which we make decisions and that fundamental change to how we operate ourselves is showing up across the company in terms of the pace that we execute. There's a reason we executed all those product changes in 18 months, and they went in flawlessly. And I think it's a change to how we operate this company. There's a reason that you've seen 4 quarters now of incredible cost discipline.

Our unit costs in the first quarter were up 2.3% and 1.2 points of that was because of a row of seats that we took out for extra legroom on the 700 aircraft. So otherwise, they would have been up 1.1%. That's not by chance. It's because there is an incredible focus on discipline, cost discipline and managing this company in a way that I've just not seen before and bodes well for the future.

And as you think about artificial intelligence and the use of LMs in the business, either on the revenue-producing side or the cost side or the customer engagement side. Is that -- are you looking at that as a lever of productivity that hasn't been tapped yet? Or how are you thinking about -- or how is the company thinking about incorporating those tools? And what do you see as the potential to see..

Oh, yes. We're we can go on for a very long time. So everybody focuses on the productivity aspect. But you've got productivity, you have the ability to dissect and ingest titanic amounts of data to understand what's happening in patterns and trends like revenue management or aircraft. You have a lot that's going on in terms of the rise of Agentic.

So yes, this is a huge topic. You just take some examples we are using AI extensively in the area of customer handling. So taking our customer care area and not just improving processes, but improving how we respond to customers, the pace at which we respond, how we recommend and predict what we should be doing for the customer and then kind of human in the loop, handling those. There's a lot of discussion going on around exactly how our agent is going to play in this space.

So you've got -- every platform is transitioning to using that to selling you. So selling your trip through chat EBT and then on the back end basis, making all those bookings and putting your trip together, there's a huge impact to a company like Southwest Airlines in terms of how we position our platforms to deal with those agents more and more productively. Because what you can't do is lose the ability to monetize ancillaries and seats and buy up in terms of how the agent works with our platforms and our agents. So I'm going on and online, but it's such a huge change. And I think there is a stunning level of capability here.

And so maybe just one last quick question before I'm going to let you land the plane here on refreshing the [indiscernible].

I'm not a pilot. You do not want me to land the plane.

Land the presentation. So the CapEx envelope and a free cash flow conversion profile of the business, how does that look over the next couple of years? Should we be expecting or at least -- should investors should be expecting or penciling in some additional investments. I'm not sure if Starlink is a need to move around that or lounges could be just given the price of real estate on an airport, especially in attractive airport. Like how should we be thinking about the CapEx envelope kind of going forward and free cash conversion?

Yes. I think the -- yes, StarLink. Both Starlink and how we're thinking about lounges, they were not materially impacts. It's really -- and we've been investing a lot in the customer experience, new interiors and WiFi and new seating and but those are already embedded and they are also relatively immaterial. It's really aircraft. We have a couple of years here where we have a bit of a bubble in terms of aircraft just because we over the last 3 or 4 years, we got behind the Boeing deliveries.

And so they're going to be a little lumpy potentially in kind of '27, '28, '29, still TBD, but -- but no, over -- and again, this is not huge, but a little higher than expected. So -- but over a longer period of time, we'll have very stable CapEx. And as we continue to improve the margins in the business will drive more free cash flow. We're very disciplined with our guardrails around capital allocation. You saw us buy more shares back in the last 18 months, about 14% of outstanding.

That was really returning excess cash that we had put on the balance sheet during COVID back to our shareholders an extraordinary period. So -- we're going to use operating cash flow to fund investments like CapEx and then we'll fund share repurchases as an example, out of free cash flow. I think longer term, in fact, the reason why we are such a good long-term investment in addition to the fundamental margins that are going to be put on the business of the changes.

You've got a period of time here where we are -- a lot of the CapEx is just taking 700s that are retiring and putting new MAXs in place. And that's a huge in PV and win every single time that we do that. That's an 18% improvement in operating expenses between those two aircraft. You get to the early 2030s. And we essentially have a very young MAX fleet with very, very few retirements for about a decade.

So you're setting up a decade with great operating cost because you have new aircraft, low maintenance and very low CapEx because we have very few retirements, and so it sets up strong free cash flow. It sets up strong cost performance in the business. You couple that with the products that we put in place, and it sets up strong customer demand, all that yields I think, continued margin expansion and a terrific story for a terrific long-term story for our shareholders and our potential shareholders.

All right. Well, we've got about a minute left. That's a pretty good wrap-up of a compelling longer-term story. Anything else you'd like to add for a longer-term investor that might be sort of top of mind or message you want to leave with.

No. I mean as you can tell, I'm not just the CEO. I'm a believer in the story. These are fundamental changes to Southwest, but they're all just to meet the customers' needs. It's working. It's showing up in demand. It's showing up in the financials. There's far more to come, so I see far more potential for ongoing margin expansion. And this is a great company with great fundamentals, above all the best people in the industry, and I am an absolute believer in the story, and I'm an absolute believer in this company.

All right. Well, with that, I think we're going to wrap it up. Thank you all for attending. Thank you for listening in on the webcast. Thank you to the Southwest team for coming. And Bob always, I learned a lot when I speak to you. So thank you for supporting the conference and coming out to join us. Thank you.

All right. Appreciate it.

Hello, everyone, and welcome to the Southwest Airlines First Quarter 2026 Conference Call. I'm Nick and I will be monitoring today's call, which is being recorded. A replay will be available on southwest.com in the Investor Relations section. [Operator Instructions]

Now Danielle Collins, Managing Director of Investment Relations will begin the discussion. Please go ahead, Danielle.

Hello, everyone, and welcome to Southwest Airlines First Quarter 2026 Earnings Call. In just a moment, we will share our prepared remarks, after which we will move into Q&A. Joining me today are Bob Jordan, our President and Chief Executive Officer; Andrew Watterson, our Chief Operating Officer; and Tom Doxey, our Chief Financial Officer.

Before we begin, A quick reminder that in today's session, we will be making forward-looking statements, which are based on our current expectations of future performance, and our actual results could differ materially from expectations. Also, we will reference our non-GAAP results, which exclude special items that are called out and reconciled to GAAP results in our earnings press release.

With that, I'll turn the call over to Bob.

Thank you, Danielle, and good morning, everyone. We appreciate you joining us today. First quarter 2026 represents an important milestone for Southwest as all our previously announced initiatives are now in place and contributing to our results and what a difference a year makes. That broad set of commercial, operational and cost and efficiency actions represent a fundamental transformation of our business model, and is translating into strong customer demand for our new product, strong financial results and strong margin expansion. The financial tailwind provided by these initiatives is meaningful, as indicated by our results.

Our first quarter EPS of $0.45 was in line with our guidance in January and represents a significant year-over-year improvement from a loss of $0.26 per share, or an adjusted loss per share of $0.13, and these results were delivered [indiscernible] backdrop of significantly higher fuel costs, which represented a $0.22 EPS headwind in the quarter further illustrating the underlying momentum that we're seeing across the business. First quarter operating margin of 4.6% was an 8.1 point improvement year-over-year, or 6.6 points on an adjusted basis, a powerful change in how the company generates earnings. We also generated $1.4 billion in operating cash flow in the quarter, an increase of 65% from the first quarter of 2025.

Now that the contributions from our initiatives have kicked in, I want to reflect on two potential narratives that have been brought up occasionally regarding Southwest Airlines. The first being, because we don't serve long-haul international markets, and like material exposure to premium segments, we would be unable to generate margins that are in line with carriers that do have those attributes. And second, that our customer base is somehow different and would therefore be unwilling to respond to our product changes, and pay more for segmented products and seat ancillaries.

As evidenced by our first quarter results, we are proving those arguments wrong. Southwest has significant fundamental and enduring [indiscernible] the largest domestic network, the most nonstop flights, and a #1 position in nearly half of the 50 largest U.S. airports. Operational excellence that resulted in Southwest being named the Wall Street Journal's Best U.S. Airline of 2025, cost discipline and operational efficiency, and importantly, legendary service and hospitality provided by our incredible people. Those core strengths, coupled with our new product offering, are fundamentally changing the financial margins that we produce.

Our transform business model is being stress tested and this unique environment of geopolitical upheaval and much higher fuel prices. Against this challenging backdrop, our first quarter operating margin of 4.6% and our year-over-year unit revenue growth of 11.2% demonstrate the strength of our new model. Moreover, in the second quarter, we expect unit revenue growth between 16.5% and 18.5%, which I expect to be industry-leading by a wide margin. That's all proof that our existing customer base, and the new customers we are attracting, want and are willing to pay for our new products and our product attributes. In other words, they love the Southwest product. While the external environment remains uncertain, we are confident about how we are positioned, a wholesale change to the business model and product offering that is being battle-tested by higher fuel prices and geopolitical tensions, yet is producing top-tier industry financial results.

Looking deeper at the results, demand remained strong across geographies, customer segments and both business and leisure. And the customer take rate for our enhanced product offering and seating ancillaries is strong as well. Passenger revenue growth, operating revenue and unit revenue each set first quarter records with March marking our largest operating revenue month in our history. Going forward, we remain squarely focused on continued margin expansion and are taking actions to further improve financial results, including aggressively optimizing our product and revenue initiatives such as the recent increase in bag fees, taking targeted actions to further reduce nonfuel costs, and drive efficiency across the business. And you saw a portion of that come through in our first quarter CASM-X increase of 2.3%, well below our guide of 3.5%.

Continuing enhancements to our product offering, such as our new partnership with Starlink. By the end of the year, Starlink will be available on at least 300 aircraft, and roughly 2/3 of our fleet will be equipped with in-seat power, and larger overhead [indiscernible]. We expect these changes, combined with recent product enhancements to continue to drive growth in corporate business travel.

We are aggressively managing our network, reducing lower return flying and redeploying that capacity to higher margin opportunities, such as the recently announced suspension of operations at [ Chicago Air and Washington Dulos ], and we had a handful of flights at both airports, which were underperforming. And we entered 2026 with a disciplined capacity plan, and now expect full year capacity growth of approximately 2% at the low end of our prior 2% to 3% range, driven by ongoing schedule optimization and network refinement.

Turning to the outlook. There is significant economic and geopolitical uncertainty, and it's not possible to know with confidence all the ways the industry could be inactive. That said, we do know two things. Fuel prices are much higher. And if that is sustained, it will require higher ticket prices to offset that increase in fuel. Given the ongoing macroeconomic uncertainty, updating our full year adjusted EPS guide of $4 would not be productive at this time. Achieving this outcome would require lower fuel prices, and/or stronger revenue performance to offset higher fuel expense. We will continue to monitor conditions closely and provide updates to our guidance as appropriate.

For the second quarter, we expect EPS in the range of $0.35 to $0.65 using an average fuel price range of $4.10 to $4.15 based on the forward curve as of April 16. The EPS guide represents significant [ expected ] earnings and margin expansion year-over-year.

In closing, while fuel is an external factor, and we were operating in a volatile macro environment, our first quarter results are proof there is strong customer demand for our new products. Our initiatives are working. Our significant core strengths remain and that combination is producing top of industry margins. I want to say how proud I am of our people. The progress we are seeing across the business is the direct result of the work they do every day, delivering for each other, our customers and our shareholders. We are just 18 months removed from announcing our initial transformational initiatives, and I could not be prouder of our teams for the discipline and excellence, which they continue to deliver.

And with that, I will turn it over to Andrew to cover revenues and operational performance.

Thanks, Bob. The first quarter was an important one for our operations as our teams delivered industry-leading reliability while executing a significant amount of change across the airline. This included the successful implementation of assigned seating and extra legroom on January 27. The with the operation ranking first among our peers, an on-time performance and completion factor on launch day.

Q1 RASM was up 11.2% year-over-year, well above our guidance of at least 9.5%, reflecting the contribution from our new product offering, as well as broad [indiscernible] across the network. Operating revenue of $7.2 billion was an all-time record for first quarter. We also announced adjustments to our network. As Bob mentioned, we announced the suspension of operations at [ O'Hare and Dulles ], where we'll be consolidating our operation in Chicago Midway, [ Rigan National ] and Baltimore, and [indiscernible] capacity to high-performing opportunities.

At the same time, we are seeing strong performance in markets where we've added capacity, including San Diego, Orlando and Nashville. We will continue to evaluate future network and capacity adjustments that we feel will be accretive to our performance. Separately, we are seeing our initiatives resonate with customers, as demonstrated by several examples. We have seen a meaningful shift in customer purchasing behavior.

The mix of customers buying up from our base product increased from approximately 20% at 2025, to roughly 60% in the first quarter of 2026, with ancillary upsell performance also meet expectations. We're also seeing clear traction with business travelers. Managed corporate revenue increased 16% in the first quarter and 25% in March, marking the largest quarter and month in our history. And reinforcing that our enhanced product is resonating with higher yield customers. At the same time, engagement across our [indiscernible] program continues to strengthen. Enrollments increased 37% year-over-year. And the number of customers earning tier status rose 62%, demonstrating both strong acquisition of new customers and deeper loyalty from existing base.

We continue to deliver a safe and reliable operation, improve efficiency across the system and support the continued evolution of our product offering. Our people have done an outstanding job navigating a period of significant change. I want to thank them for their continued dedication.

With that, I'll turn it over to Tom.

Thanks, Andrew. We continue to demonstrate strong cost discipline to start the year with first quarter CASM-X up 2.3% year-over-year on a capacity increase of 1.5%, and in spite of a 1.2 point headwind from the removal of 6 seats on our 737-700 fleet to accommodate new extra [indiscernible] seating.

Fuel prices increased meaningfully during the quarter. We have forecasted a first quarter price per gallon of $2.40 and ended up at $2.73 per gallon, increasing fuel expense by approximately $164 million. In spite of the dramatic increase in fuel cost and other operational headwinds experienced during the quarter, we hit our EPS guide. We also delivered the highest adjusted net margin of the large U.S. airlines during the first quarter. With our cost discipline, initiative contribution revenue strength and operational excellence, allowing us to deliver the margin expansion that Bob outlined earlier.

We ended the quarter with $4.8 billion in liquidity and a leverage ratio of 2.2x. Having a strong investment-grade balance sheet, and high relative margins within the industry is a key strategic advantage for Southwest, especially during times of industry stress, where our strength creates the opportunity for further separation between Southwest and other airlines.

During the quarter, we entered into a $500 million secured term loan facility backed by a small portion of previously unencumbered aircraft, which we used to pay down the final portion of our payroll support program loans [indiscernible] would have otherwise moved to a higher interest rate in the second quarter. We also returned capital to shareholders through share repurchases of $1.25 billion and $93 million in dividends. We have $450 million remaining in our current share repurchase authorization.

Looking ahead, our focus remains on managing what we can control. Driving efficiency, maintaining disciplined cost management and investing smartly in our product and operations. We expect second quarter CASM-X to increase 3.5% to 4% year-over-year on a capacity increase of 0.5% at the midpoint. Consistent with Bob's comments, based on what we see today, we continue to expect margin expansion and earnings growth in 2026, and will continue to be nimble and opportunistic in the way that we manage the business.

And with that, I'll turn it back to Danielle for Q&A.

Thank you, Tom. This concludes our prepared remarks. We will now open the line for analyst questions. To help us manage time efficiently, we ask that you please ask you 1 or 2 questions back to back at the onset.

[Operator Instructions] And the first question will come from Mike Linenberg with Deutsche Bank.

My two questions here. Just, Andrew, the upsell out of the bottom bucket from 20% to 60%, do you have a sense of what that average increase in fare is going from that 20% to 60%?

And then just my second question to Bob. Just thoughts about potentially competing against the government controlled or a government-owned carrier. I mean, whether it's sound industrial policy or not? So I'll let you roll that one over.

Yes. Thanks. It's Andrew. So I'll start with the first one. I'm not going to break down it [indiscernible] product by fair product, but I will say that, obviously, we had an 11.6% yield increase year-over-year. And at least half of that came from people voluntarily decided to pay more by buying up. So we have, kind of, secular yield trends going on, and then we have people voluntarily buying up, which creates the extra yield boost. And so net-net, we're super pleased with it.

Mike it's Bob, and on the second -- with [ Spirit ]. I mean, it's a tough situation. We've got a lot of people that are affected, but it's a tough industry. I mean, things come around. I've been here 38 years, you have you have wars. You have fuel spikes. You have economic issues, recessions. And you got to be prepared for the long term as a business because the shocks are going to happen. And that's why we've created a very resilient business here at Southwest Airlines to prepare for those things.

On competition, we're focused on improving ourselves and competing with the top of the industry. And it's showing in the results. If you look at the first quarter, you got an 8-point margin expansion year-over-year. Our net margin is going to be the best amongst the large U.S. carriers. If you look at the second quarter guide and the spread between our unit revenues and our unit cost is a 14-point expansion. So we're focused on building a resilient business continuing to optimize from the transformation. Our customers love the products, and that is where all of our focus is.

The next question will come from Jamie Baker with JPMorgan.

A couple for Tom. So the first question has to do with the second quarter RASM guide. I realize you hadn't previously given us the synced guide, nor had your competitors. But there was enough info out there that we all kind of backed in how the second quarter was looking before the start of the war. And that's my question. Since the war start, we've seen several points in second quarter RASM improvement on your competitors, but your second quarter guide seems, kind of, in line with what we were thinking before the war. Maybe we just got lucky, but for the sake of investors on the call, can you tell us how many points of RASM improvement went into this second quarter outlook as fares began to rise?

And then second, still considerable consternation [ around your ] traffic liability. It's flat year-on-year. I know there was some language in last night's 10-Q. Maybe the way to clear this up would be -- and I don't know if you have your finger tips, but under the old methodology, what would the ATL have been at the end of the first quarter? I'm asking because squaring a flat ATL out with such strong revenue growth is -- well, it's difficult for me, and we continue to take a lot of questions on it.

Jamie, it's Andrew. Tom -- give me the first one, he'll take the second one. The RASM guide is us looking at our current trends, which have accelerated and projecting that forward. I know many airlines were talking about fuel recapture and making assumptions about fuel recapture. I think we're -- that's sort of a dangerous game. We are taking our current trends, which are very strong. We have even stronger yield traction than we did in Q1, once again, with stable volumes. We're taking that and pushing it forward.

If there were an acceleration in the environment from today, then there would be upside to that. But [ we'd ] rather just take the current trends and project that forward to get a good [ center cut ] RASM guide.

Yes. Jamie, on the ATLs, talking about old versus new methodology, we're not going to get into the detail of exactly what the different percentages are and how they allocate between the different buckets. So we've talked about is that what we've moved toward, as we have this new agreement with Chase, is very much industry standard. It's very much where a lot of our peers are in the way that we either bank into ATL loyalty revenue or recognize it in one of the revenue categories.

And I think as you look at ATLs just generally, there's nothing unusual to note. You look at the sequential trends, you look how it compares to other carriers. There's nothing unusual to note in what those trends are.

The next question will come from Conor Cunningham with Melius Research.

Maybe following up on that response to Jamie's first question. Just -- why is it a dangerous game to assume some sort of fuel recapture throughout the remainder of the year? Is it that you're fearful of demand [indiscernible]? Just -- I think there's a big debate on just how straightforward like recapture is in general. So if you could just talk about that.

And then, Tom, the capital allocation [indiscernible] clearly things are changing a fair bit. Your free cash flow profile probably took a step back with the rise in fuel. So just trying to understand the buyback going forward from here, you bought back a lot in the first quarter. Your leverage has gone up a little bit. You've talked about that. But if you could just frame up the changes in how you think about capital allocation?

Conor, thanks. It's Bob. I'll take the first, and then Tom will take the second. Just on the fair environment generally. Certainly, we've seen a willingness to move fares along. There's been constructive pricing behavior. But at the end of the day, this "percent of fuel recovery", which is really what you would put on top of your trend, it's going to be dictated by market conditions, not by some academic formula, or target of calculated recovery. So based on that, we believe what is most fair is to put current trends in because you cannot predict at what point consumers and demand is going to be -- you're going to begin to see demand destruction based on the pricing environment.

So we've run current trends through. If we see upside to that, then that's upside to our guide. And bottom line, we're focused on what we can control. We're taking actions against pricing like [indiscernible] increase. We're taking actions, obviously, along the broader pricing front. We have made some close-in demand shaping reductions to capacity. We already had low capacity in place for the year. So we're taking actions against the things that we can control, aggressive cost discipline, and the fare environment will ultimately play out based on market conditions.

And Conor on capital allocation, as we mentioned in the prepared remarks, having a strong and efficient investment-grade balance sheet is a key [indiscernible]. You hear others talk about their desire to get there. The fact that we're there gives us the ability, of course, to borrow lower rates. And as we think about how we move forward, and just how we navigate, it's all about staying within guardrails that keep us there. And we've been very consistent about what those guardrails are about liquidity, see where we are relative to that this quarter. And then we've actually floated down on the debt ratio despite of being in, I think, a more challenging environment as the business and the EBITDA generation that has occurred in business has improved, we've actually floated down on that debt ratio.

And maybe just as a side note, that ratio is a gross debt-to-EBITDA ratio. And so it's, I think even compared to some of the others out there, a very conservative way to look at it. So as it relates to share buybacks, it's always going to come back to staying within those guardrails. And we don't know exactly what's ahead, but we've seen incremental cash generation from the business, versus where we were before in spite of today's environment, and we'll just follow that and stay within our guardrails.

The next question will come from Catherine O'Brien with Goldman Sachs.

So my first question, really, it's hard to tease apart of the macro from the initiatives, hence the move to EPS guidance. But there were a couple of things you thought could drive upside to your EPS outlook in January, including a step-up in close in extra legroom purchases from corporate travelers and potential market share gains. Can you update us on those efforts specifically, how they've been going versus your initial plan?

And then second, a related question and a bit of a follow-up to Mike's. Great to see the big step-up in buy-up in 1Q puts the launch of your new seating products. Can you just break down how much of that is cash sales, loyalty points being redeemed in credit card perks?

The [indiscernible] we gave in our prepared remarks, the corporate numbers have responded. You saw that they were back weighted to March. So once the assigned seating and [indiscernible] went in place, we saw an uptick both from current customers, but also new customers. So we're seeing an acceleration of new unique customers in our corporate channels which indicates a kind of desire now to fly Southwest Airlines. And well also within the same existing network of accounts we've seen buy up to the higher fares as corporate policy allows them to buy up. So those numbers we quoted are indicative of the consumers behaving like we anticipated.

And as far as the redemptions, I think cash has accelerated more than redemptions on the fare products, which is consistent with what we wanted to do. We went to more variable burn in our earning -- excuse me, on our rep awards last year. And so that tends to do on the best flight to put your redemption mix down, the cash mix up.

The next question will come from Ravi Shanker with Morgan Stanley.

So maybe just kind of similar but different on the theme of RASM. To the extent possible, if you looked at your earnings for the year, ex fuel on both cost and revenue. So let's say, you were to use Feb 28 assumptions. Do you think you're still on track for at least [ $4 ] of EPS for the full year. And I think you have pointed to upside to that?

And maybe as a follow-up, what innings do you think you're with -- you're in when it comes to monetizing some of these internal initiatives and kind of how much do you have left in the [ tank ]?

Yes, Ravi, thanks so much. The -- I think the short story is, but for fuel, everything is on track and performing, sort of, at or maybe slightly better than we expected. It's really just a story of fuel. I mean it's a $0.22 headwind in the first quarter. It's a $1 billion headwind in the second quarter or 10 points of margin. So it's very material. But no, yes, the only change to how we were thinking about the full year right now is fuel.

And I just did want to address the guide as well. There's been some reporting that we pulled our guide. We did not pull our full year guide. There are scenarios where absolutely we could still hit the $4. It depends on fuel and revenue trends from here. We just felt like it was not productive to introduce a new guide, or a range, given how volatile fuel is day to day to day.

On your second question of what inning are you in, in terms of optimizing the current initiatives? I do believe we have a ways to run. Our original forecast, or the plan, would be to get to full run rate because these bake in over time based on the booking curve, to get to run rate here in the third quarter. And then, of course, we have opportunities to optimize fair product buy up, optimize the way we think about seat ancillaries. And then on top of that, we're going to continue to continue to enhance the product.

You saw the Starlink announcement, continue to make a push into business who loves the new product. I mean the fact that March revenues on the business side were up 25% is a huge indicator of that. But yes, we're -- our run rate was expected in the third quarter on the initiative performance, and then we have room from there.

The next question will come from Scott Group with Wolfe Research.

So I just wanted to follow up on that sort of last answer, Bob. Like your comment that the only change really is fuel and everything else is sort of in line, maybe slightly better. I mean, I guess it feels like everyone else is saying, yes, fuel is a lot higher, but now our revenue assumptions are a lot higher, too, as where the whole industry is sort of working to pass through fuel. Would you not agree with that sort of comment?

And then maybe just along those lines with fuel, like there's certainly a sense of, hey, the industry -- this is the first sort of like big fuel spike where you guys aren't hedged and that's, sort of, helping the industry pass through fuel quicker? Like are you approaching fuel pass-through differently than maybe you have in the past? Or maybe do you think you're approaching it differently than the industry?

Yes. The first question, where would we be but [indiscernible] is all again hypothetical. You're trying to compare what would the industry have done with pricing and fares as compared to what is happening today. With the rise of fuel, no doubt, there is -- it's a more constructive backdrop, I believe, in terms of pricing. So yes, I think it's fair to say that the pricing environment is stronger, and we didn't give you a range. We gave you at least $4. So we did not give you what that upper range would be. But it's a more instructive fair environment, certainly than I would have expected.

And then you just look at Southwest performance. We are demonstrating incredible cost discipline. In the first quarter, you had cost come in -- unit costs come in at [ 2.3 ]. And then you had a [ 1.2 ] headwind in that from seat removal. So the cost discipline, which is [indiscernible] It's not timing. It's not odd transactions. It's structural improvements in cost is certainly helping here at Southwest as well. Which is the whole point about the fact that looking at revenue trends, it's going to take -- revenues is going to take fuel, but our $4 is absolutely not off the table.

And then on hedging, we've talked about this many times. Hedging had become very expensive. The cost of hedging, because of volatility we were spending about $150 million a year in hedging. So just -- if you look back over a period of time, we just made no sense to hedge. And of course, I mean, you can't predict an extraordinary circumstance like a war. If we all could, you'd hedge and then you wouldn't, and that's -- it's unreasonable to think you could do something like that. I do think the fact that we are all basically unhedged puts the industry in a position where you're going to take -- and we're all going to take actions to deal with the fact that fuel is rising at an extraordinary rate, which again is why you're seeing a constructive pricing environment right now.

The next question will come from Duane Pfennigwerth with Evercore ISI.

This might be tricky to -- this might be tricky to announce sequentially here. But just the first was on fleet requirements. How has your plan for retirements or used aircraft sales changed, if at all? And if you could walk us through any cash flow or cash flow 1 and 2 P&L impacts from aircraft sales?

And then Bob, my follow-up. Organizationally, Southwest has been very focused on rolling out these initiatives, executing on these initiatives. Are you now in a better place, or more prepared to consider potential consolidation scenarios?

Duane, I'll take your first one on the fleet side. You've seen the numbers that we've talked about for this year and the [ 60s ] for aircraft coming in new from Boeing. No change there. We're feeling confident about what we're seeing out of Boeing every month. Things seem to just be getting better and better there about their ability to deliver on time. And so the retirements that we have are very much tied to the aircraft that are coming in. You've seen what we've guided around -- both for this year and kind of high-level commentary that we've given for the next several years around capacity. No major changes there. And so the quantity of retirements really will just depend on the timing with which those new aircraft deliver, which again are becoming more and more predictable by the week.

Duane on your second. The -- organizationally, I think the -- there's been a lot of organizational efficiency that's been put into place here at Southwest at both on the front line and then especially here in sort of the corporate side of the business in the last year. The business is moving at an incredibly agile pace in terms of change. You're seeing that come through in the execution of the transformation and then continuing to add focus on our customer, add attributes at our customer [indiscernible]. So we're moving at a pace that I've just not seen here at Southwest. So our ability to deal with any issue, I think, is better than it was a year or 2 ago, period.

We don't comment on what consolidation and what could happen in the industry. There's lots of rumors out there. We're focused on what we can control. There's no value in focusing on rumors. There's no value focusing on fuel because you don't have one thing that you can do about it. But things change and if the -- if some of that were to become real, then obviously, we would take a look and decide what our response to that would be. But we don't comment on those things.

The next question will come from Atul Maheswari with UBS.

Based on the full year guide on capacity, it implies that the back half capacity growth, it's going to be closer to 3%. So you're accelerating capacity in the back half at a time when others are cutting. So just some rationale for the implied capacity growth acceleration in the back half in this fuel backdrop [indiscernible]

And then as my second question on the cost out performance. I know you mentioned those are structural. But if you could provide some key buckets of the cost outperformance, or the improvement that you're seeing currently, that would be helpful along those lines.

If I can add just one quick one is, what's [indiscernible] what should we think about the CASM-X in the back half on the 3% [indiscernible] growth?

Yes. Atul, it's Bob. I'll take the first, and then Tom will take the second on cost. Our -- we entered the year 2026 with a very disciplined cost plan. Capacity up 2 to 3. We've been modestly trimming that as we move throughout the year. I would call that sort of normal demand shaping where you take a look in their flights that just don't make sense anymore, and you either cut that capacity, or you cut that capacity and then you redeploy. We've also had aggressive with moves like you saw with [indiscernible] and [ Dallas ] to take underperforming markets and deal with those and then move capacity to markets that are performing, the San Diego and Nashville, et cetera, of the network.

We've taken our second quarter capacity down, as you saw. We're now expected to grow roughly 0.5 point. And I just would point to the fact that we'll continue that close in demand shaping and capacity activity in the third quarter. We'll do that in the fourth quarter. So I understand your point, but I would not read through -- I wouldn't read that through as the final number. But again, you've heard others talking about cutting capacity. We started there. We started with a well thought out conservative, constructive capacity plan for the year at 2 to 3 points, and that's now become 2. So you're seeing others come back to us, not others go below our capacity plans.

And Atul, on the cost question. The cost performance that you're seeing, and Bob referenced this a bit earlier. But this is structural, this is representing great work that's happening across a lot of the teams, not relating to timing or transactions or other things. And as you think about some of the bigger buckets that are there, for us, the people expense represents just shy of half of our cost structure. And so we need to make sure that as we're operating that we're doing that in an efficient way.

You've heard us talk a lot about how important it is that we continue to run a really high-quality operation. It is a cost-efficient thing to be running as good an operation as we are now. And so we look to be as efficient as we can be out there. Some of the other big buckets that we have, technology for one, we have come a long way. Lauren and her team are just phenomenal in the tool that they built. But we did have a bit of catch-up that we were doing, and that gives us the ability to kind of back up a bit, while still maintaining the strong trajectory in technology transformation. So you're seeing some savings there.

And then maybe the third and final bucket I'll raise is just on the, kind of, maintenance and fleet side of things. As you're going through a replacement of older, less efficient aircraft and replacing those with brand new, more efficient 737 MAXs, you just want to make sure that you're doing that as far as component maintenance and other things. You're doing that in the most efficient way that you can. I think we are one of the best in the world at doing that type of optimization work. And you're seeing that showing up in the number quarter after quarter after quarter as we do that.

The next question will come from Savi Syth with Raymond James.

Maybe, I think Duane, just to follow up on Duane's question there. Just curious what the aircraft sales benefits were in 1Q and expected in 2Q in the P&L, in terms of understanding what the core cost is?

And maybe for the second question, just to follow up on that. Just how are you thinking about aircraft sales going forward? Because it feels like as you catch up to this kind of delayed MAX delivery that we will see this kind of continue for a few years yet. So just kind of curious your thoughts there.

Yes. Thanks, Savi. We had 5 aircraft sales that we did. There were three 737-700s. There were two 737-800s that we sold. So those 5 aircraft. And about a $30 million or $40 million book impact there. So not super material to the cost numbers that you saw. So everything you're seeing in the cost numbers is around the structural changes that we're making in the business.

The next question will come from John Godyn with the Citigroup.

Bob, I wanted to follow up on the topic of consolidation. And it's not about rumors, news or anything like that. I mean you were pivotal and central to the [indiscernible] deal many years ago. I feel like there must be learnings from that. There must be kind of a philosophy on when consolidation, or being involved in it matters? And adds value, when it doesn't? I think [indiscernible] just more historical context and plugging into the company's philosophy today rather than any commentary on what's going out there right now?

Yes, John, thanks for the question. And it's pretty basic to my mind. Again, as you sort of go back and reflect on [ AirTran ], it -- and yes, it was involved in that deal heavily. It's, number one, [indiscernible]. In other words, you have the pieces they get put together have to result in synergies. They have to result in goodness in terms of geographies served. You have to be compatible enough thinking about things like aircraft holders. So at the end of the day, if it doesn't paper out financially and other -- it doesn't make sense to pursue.

Second, you've got to have a chance to pass [indiscernible] and get it approved. If it's -- no matter how good it might look if you have too much overlap as an example and your odds of approval it's too risky. And no matter what you think, it's not something that you can pursue. And we've always been pro competition, pro-consumer here at Southwest. So the combo has to be something that's good for your customers. It's got to -- in particular, add geographies, add to the network, potentially add products, but serve them in a better way. And that's how we thought about [ AirTran ]. It met all of those. The geographic combination made sense. The synergies were there, the cultures were similar. And at the end of the day, that was a great thing for Southwest Airlines.

It can't be simply because, hey, it's good time to do something, or the rest of the industry is doing something. It has to make sense fundamentally.

The next question will come from Tom Fitzgerald with TD Cowen.

Just curious on -- just within the outlook for 2Q RASM, or just even kind of broadly over the balance of the year, do you anticipate load factors getting back up into the 80% range? And it's just one concern we hear a lot from investors, like is longer than the 70% range. There's like that risk that there's maybe -- or a concern that there's share loss in some of the more competitive markets?

Yes, I'll take that. So if you look at our Q1 RASM and you kind of put back to Q1 of 2019, you see our RASM on a [indiscernible] basis has outperformed the carriers to report so far, the big 3 in particular. And so obviously, that's the metric that matters. But the year-over-year, year over 6 years, you drive RASM.

Bob mentioned we [indiscernible], and I got employee questions about, hey, Andrew, the flights are always full. Well full flight does not mean a profitable fight. And so one of the most [indiscernible] things you can do in the airline business is chase market share or chase volume. You have to go after RASM and our RASM is performing with us on a year-over-year basis, [indiscernible] year-over-year basis, [indiscernible] 7-year basis. It is working for us. And so we'll continue to focus on that.

And that [indiscernible] going up, so be it. And in our calculations, we look at the incremental cost to carry as well as [indiscernible] we get as we price and we accept them reject demand every day. So for us, it's working, we'll continue to push RASM as hard as we can, and we're seeing extraordinary good yield protraction right now, and that's that drives -- that's a vehicle for high RASM, we will pursue it.

The next question will come from Brandon Oglenski with Barclays.

I mean, maybe if I can just follow up on that because there seems to be like this fickle market view that a high-teens RASM guide is somehow indicative that Southwest is incrementally losing share. And I know we've kind of beat around the bush on this, but I don't know, Bob or Andrew, do you want to comment on that?

And then maybe incrementally for the second part of my question, how dynamic have you gotten to pricing these incremental products that you just haven't had before? Is there more upside to come on figuring out what people's value they put on these products is?

Sure, I'll start. I mean you're growing slower, as Bob mentioned. So therefore, your share will drop, and that should be fine. You look at the number of people on board your aircraft, once again, footing back to preendemic, the number of the people in the aircraft is flat to up. The aircraft have gotten bigger. So our aircraft size is 160. The big 3, I think, is about 120, 130. So it's a much bigger aircraft size. Other airlines with big aircraft also see this challenge.

So I don't think it's anything to do about inherently [indiscernible] to Southwest Airlines. You see all the metrics we talk about is we have always been attractive. We got incrementally attractive with these new products. And we were monetizing that mostly on the back of yield in a high-fuel environment, that is the path to prosperity is giving it on the back of yield.

And I just want to add a little perspective here because now the narrative is, yes, [ 17.5% ] guided RASM is not enough. And then even though load factor is up somehow, we must be losing share, and there's -- our customers love these new products, and there's incredible demand. But if you just go back a bit here over the last 18 months, the narratives about Southwest from the naysayers, I think they're becoming increasingly desperate a bit here.

First, it was Southwest won't change. And then it became, well, Southwest can't execute the changes that they've talked about. And then it was, well, they got them done but their customers aren't going to want to buy the new products. Now there's some wonky argument about accounting and ATL and then we're losing share. And if you just step back, ignore all that junk and look at the results, terrific product demand. Best net margin of the large U.S. carriers, a 17.5% unit revenue growth in the second quarter, which is off the charts. Business revenue up 25% in March. The transformation is working. Customers love the product, and it is transforming our financial results. And I just would say, too, you've got to always examine the motives of those that are pushing [indiscernible], especially one that's increasingly irrational.

The next question will come from Sheila Kahyaoglu with Jefferies.

Maybe just related to all the fuel comments and capacity comments, Bob. I could see why you're frustrated at the same time [ to ]. I guess at what fuel price do you make further changes to capacity? And as a follow-up to that. How do we think about when fuel prices and how fuel prices impact your aircraft sales or deliveries? And how you think about changing them for how long they stay at these elevated levels?

Yes. I'll -- maybe Tom on the second one. The -- I'll take the first one. It's really hypothetical because fuel has been around -- I mean really day-to-day, you're seeing 8%, 10% moves day-to-day. We are -- again, and you're not in control of exactly how fast and how much you can raise fares. There's market dynamics at play. But there is a lot of constructive fair movement. We're seeing that. And as clearly revenues and therefore, fares are underneath the increase in fuel. So we've not caught the increase in fuel by any stretch of imagination, which is why you're continuing to see fares move in the industry.

So I can't predict exactly where fuel is going. And so therefore, I can't predict exactly where [indiscernible] and fares are going. Which is why I indicate we're just using the forward curve. We'll continue to be dynamic. We'll continue to react. We came in again to the year with a very disciplined capacity plan and we'll continue to be aggressive in redeploying capacity to better performing markets. And then, yes, it really -- if fuel really moves up from here, obviously, we would take further actions. But I think trying to -- trying to indicate what those might be is just speculation at this point. Just so that we'll be aggressive though.

And then the follow-on question on aircraft, having such a large fleet of mostly unencumbered owned airplanes gives us tons of flexibility. So that will really just be an output of how and where we're looking to grow, and to what levels and the flexibility is there to retire or retain to adjust to whatever the environment might be.

The next question will come from Dan McKenzie with Seaport Global.

So my question is similar to a prior one trying to get at M&A philosophically. And I guess my question really is, how [indiscernible] is the investment-grade rating? And is that something you'd ever be willing to put at risk temporarily if it de-checked all the boxes that you talked about, Bob?

And then Secondly, I guess, Andrew, Southwest is doing so much on merchandising. And just going back to that question about how much room is left in the tank. The revenue upsell at the time of sale seems pretty compelling, pretty -- communicated pretty well. But I'm curious how big the upsell opportunity is after the sale, what you're doing here? And what percent of revenue that could ultimately be?

So Dan, I'll take the first one, and this goes to comments I made earlier. The investment-grade rating for us is a differentiator. There are only 3 airlines in the world that have an investment-grade rating. And so as we look at the activities that we do, just know that, along with the guardrails that I referenced earlier are a filter that we use to evaluate different opportunities or different decisions that we make within the business.

And on your second question, I think when we originally gave some of our values before for initiatives that you kind [indiscernible] extra legroom. We talked about how we expected the kind of that to improve as we kind of bake it in from this year into next year. So obviously, there is still upside to come from it. The time of sale, we are seeing very good traction as we indicated by our in our prepared remarks. But we're also still continuing to optimize that. We're happy with it.

The stand-alone seats. Some of that comes at sale, but there is a very kind of sharp inside the week before departure booking curve there, and we have dynamic pricing tools that we have deployed to help us that, and we expect a benefit there, all those in the same vein that we expect to improve from this year into next. And there's also other opportunities that Bob talked about that we're looking at to make taking into the next level, including getting some more share shift on this. So overall, as Bob said, it's working better than we expected. There is implied room to come in our business case, and we think there's room on top of that for upside.

The next question will come from Chris Wetherbee with Wells Fargo.

I just want to try to make sure I understand this. I [indiscernible] ask this question that's been asked a bunch of time, but I'm just curious. Since March 1, how many fare increases have you put through? Just putting initiatives aside, I guess, how many have you participated in the industry just to give a sense of kind of how that's played out?

I count 5 broad industry-wide fare moves and another one underway today.

Have you participated in all of them?

Those all stuck and which means all care has participated.

The next question will come from David Vernon with Bernstein.

So I guess I should say, yes. So if you look about the Rapid Rewards information that's in the earnings release, they were talking about enrollments up 37% [indiscernible] Is there any -- is there any color you can give us around how the card program is performing as far as total spend or sign-ups for the card? Just trying to figure out like how the card program is performing during this period?

I would say that we saw improvement with the rollout in the mid last year of the new card. Our remuneration was up 8% approximately year-over-year, which is, I think, just shy of the other airlines, and we don't yet have a high fee credit card which is a source of much of the gains across the card industry. And so we're really encouraged that without that key aspect, we're at 8%, and we expect that to accelerate if we can offer that kind of card.

The next question will come from Chris Stathoulopoulos with SIG.

Okay. I'll keep it to one call. So -- one question. On demand elasticity destruction, although I prefer the former, I guess, term there. If you could contextualize the part of your network that is perhaps more resilient than others. So whether it's some inherent pricing power due to network architecture or otherwise, as we consider what is likely going to be, I guess, some weakening in certain parts of this K-shape recovery, however you want to describe it. But parts of your network that you believe for whatever reason, are more resilient, or have some inherent pricing power around them?

This is Andrew. We are seeing extraordinarily strong fares and strong demand across the entire network across all customer segments across different travel types. The only place seen weakness are the mix in [indiscernible] and Hawaii because of weather and political activities. And even those have seen a sequential improvement in the last couple of weeks. So it is -- when we say broad-based, we very much mean broad-based.

And the other thing I would add, just with the fundamental change in the financial performance of the business and the fundamental change in our margins, whatever is happening in the customer response. So at some point, you do begin to see some pushback on fare increases, which, again, as Andrew said, there's absolutely no sign of that obviously, with higher margins now, top of the industry margins and that performance allows us to look at the business and markets in a different way because they're performing.

So markets flipping from a performer to an underperformer is very different when you're near breakeven than when you're producing top of the industry margins.

Thank you for that, Bob. We'll have time for one last question.

And the next question will come from Michael Goldie with BMO Capital Markets.

Going back to costs for maintenance expense, is the performance that we're seeing driven by delivery of new aircraft and then divesting of older equipment, or is anything else changing that's driving that maintenance performance?

And then just a follow-up on headcount. We've seen head count per ASM climb quite a bit since 2019. I get that part of that is investing in network resiliency. Are we at the right levels? Or are you going to grow into these resources over time?

Thanks, Michael. So on the maintenance side, there's several buckets that are there. What you referenced, which is the ability to be efficient in the way that you are retiring a fleet type, that's certainly part of it. And I think we've consistently quarter-to-quarter-to-quarter, got more and more efficient in the way that we're doing that, especially as it relates to the 737-700, the smaller, less fuel-efficient aircraft as we're bringing the new MAXs into the fleet. So that is definitely a contributor. And we have many, many years ahead of that continuing to occur for us as we continue that transition with hundreds of airplanes, new airplanes on order.

Apart from that, though, there is efficiency around the way that we're managing our supply chain and other elements of the program that are also contributing to that maintenance expense being as efficient as it has been.

And then to your second question on headcount. So much of the head count expense that we have is variable. And so yes, we do look at head count in and of itself as it relates to the front line, but it's really more about having the right number of people so that you have the right folks in the right places so that you're not having to have more premium pay and other things that would result from not having kind of an efficient set up across our operations.

And then on the indirect side for headcount, you've heard us talk about the fact that we, year-to-year, are keeping head count [indiscernible] flat, which as we go through attrition and other things, you'd probably see the head count come down just a bit to be able to enable the dollars to stay flat year-to-year-to-year.

That wraps up today's call. We appreciate everyone for joining us.

The conference has concluded. Thank you all for attending. We'll meet again here next quarter.

I think this is our final presentation before an amazing box of lunch and I'm sure everybody is excited for. So very happy to welcome Southwest Airlines back to the stage. Obviously, an anchor tenant of this conference for the last couple of decades. We've got Bob Jordan, obviously, the CEO at the end. Andrew Watterson, thank you for joining us, Chief Commercial Officer.

Tom Doxey, certainly no stranger to this event. And where did Daniel -- okay sitting in the front, but I still want people to become more familiar with you since you're also somewhat new to the bench. So Bob, let me turn it over to you for any sort of prepared remarks. And we'll have a nice healthy chat.

All right, Jamie. Hey, thanks so much. And yes, we're bringing up near the rear here. So that's all right. But yes, we're no stranger. Thanks for having us. We appreciate it. I like to be here every year. I've got just a couple of remarks. We don't have a formal presentation. We really want to have a conversation. And I talk to you about what's going on in Southwest I'd give you just a couple of points.

As you know, last year 2025 was the most transformational year in the history of Southwest Airlines, we changed our product. We added different revenue streams, we went into different distribution channels. So a huge year of transformation. It all went very, very well, and I'm very proud to say that we ran a terrific operation at the same time and won the Wall Street Journal #1 airline ranking for 2025.

So very proud of our people and that execution. We're seeing strong proof point that the initiatives are working and that is in 2 categories. Number one, customers are buying the products. They want the new products that we are selling. And then it is showing up in the revenue performance. So the revenue, we'll talk a lot about that today.

You've heard that from the carriers, there's broad-based revenue strength, but we are seeing specific revenue strength in the products, the new initiatives and products that we're selling at Southwest. And I think basically, the headline there is everything that we told you about the initiatives and the program, what they would deliver and everything we told you at fourth quarter earnings in January is fully on track.

Of course, the only wildcard is fuel that faces all of us. And again, we've got no presentation, we've got some questions from Jamie. We want to have a conversation about what's going on at Southwest. You also saw that we had no 8-K out this morning.

As we described, especially in our fourth quarter results, we're simplifying our approach to guiding and really moving to leaning heavily on EPS guidance as the strategy. At the end of the day, earnings what we produce for our shareholders is what matters.

And so that's part of the reason there. And again, a big piece of that, too, is that our earnings -- our EPS guide that we gave you in January stands. Another reason that we didn't have an 8-K out this morning.

Again, like you've heard from others, we're seeing broad-based demand strength. That strength is in all geographies. It's across all fare structures, it's across business, it's leisure, and as far as we have visibility, that demand strength is across all forward months. And again, unique to Southwest Airlines, we're seeing a lot of strength in the demand for our new products the seat ancillaries.

And I would just point out, we talked a lot about this earlier in the year. The broad-based demand is something we all see, the strength that is coming from the initiatives is unique to Southwest Airlines. So $1 billion in bag fees a year, the over $1 billion in the assigned seating product upsell and seat ancillaries, those things are very unique to Southwest and only Southwest because only Southwest Airlines has those initiatives.

And while we all wish fuel that wasn't at the point that it is, I am incredibly glad to have that extra revenue source coming online and being optimized at a point where we are seeing high fuel, and it certainly acts as a hedge for us.

And then last, given what we know standing here today, if you look at the forward fuel and you run the fuel curves out, we continue to expect significant margin expansion and earnings growth in 2026.

So with that brief introduction to the business, I'd love to just spend the balance of our time on what's on your minds. Jamie, you've got questions. So let's get to that.

Grab a seat. Strap in. So I do want to talk about the evolution at Southwest. I think I joked with you once or twice, but primarily with Gary Kelly, as the industry was evolving, I felt -- so this goes back over a decade, I felt that Southwest was failing to evolve, failing to keep pace with the industry.

And I used to joke with Gary in middle age kind of sucks, but there comes a point where you can't fit in your college jeans anymore, and you just kind of you have to embrace change. I never thought I would see so much evolution at Southwest as what we've seen in the last year, and it was a year ago today or a year ago at our conference that you really blew the doors off and brought the new plan to the market.

So kind of a 2-part question. One, in terms of the execution of evolution over the last year. I'm curious what grade you would give yourself and second, have we put the lion's share of Southwest evolution behind us? If not, what inning are we in?

Yes. I think, first off, I don't have any of my college jeans, they'd be 45 years old at this point. So I have no idea whether I'd fit into them or not. But I think it is -- I understand your question. I think it's -- I don't spend any time thinking about what could have been 10 years ago or 5 years ago. The whole point is adapting to what we need to do today.

This whole thing obviously, it creates value for our shareholders. But this whole thing is about driving to meet the needs of the customer in 2026 and beyond. Our customers want product choice. Our customers want an evolution of our product, power at every seat back, the larger bins, extra legroom options.

And so it is all about meeting the customers' needs. What we know is that customers love Southwest Airlines, highest NPS scores, best operation. But if we don't offer the product, they -- if we don't offer it and they want it, they cannot fly Southwest, so we're committed -- so this 18-month journey has been about evolving to meet the needs of our customers. 88% of folks that would not fly Southwest Airlines, it was because we had open seating and not assigned seating. And about 80% of customers that do fly Southwest wanted assigned seating rather than open seating.

So time line aside, you must adapt. I'm very proud of the fact that the company adapted very quickly. And all of this change has been done in 18 months and done while at the same time, we ran a terrific operation and won The Wall Street Journal Award.

The next point of your question in terms of -- so I'd give not me, I'd give the company a high grade for that execution, both pace, quality and hitting the mark. What comes next is the same thing. It is what do we need to continue to do to meet the needs of our customers and evolve.

I'll tell you right now, we're focused on optimizing the products we've just put in. They're performing extremely well, and that's customer demand, and that's revenue. But there's room to continue to optimize and produce even better financial results for our shareholders. So what comes next is going to be on the product side. It's going to be continued network evolution.

We know we have -- the products are much more favorable to our business customers, but there's work to do to gain more business share so again, nothing to report today specifically, but this is all about meeting the needs and the demands of your customers.

And I guess building on that, and you're not going to hurt my feelings if you don't remember this, but I think about 6 or 7 quarters ago, I have seen what the value proposition of Southwest really was. And just to give you the background, I think there's a perception that Wall Street analysts tend to map out their questions long before the conference calls start.

And maybe my competitors do that, but just indulge me for a second. I asked a question that -- I was already in the queue. I didn't know what I was going to ask in my son who would just move to Seattle texted me and he's like, Dad, should I get the Delta credit card or the Alaska credit card. I said, I don't know. I'm busy what about the Southwest card. He said, well, Southwest doesn't really appeal to me.

That happened about 10 seconds before I had to come up with a question. So the question I asked was, how would you describe the value proposition of Southwest Airlines to somebody who is just kind of entering the workforce and looking to start from scratch.

And quite honestly, I think the team stumbled a little bit. It bounced around. I did not think it was an A-plus answer. So I'm going to give you a second chance. I hope that's not too obnoxious. There's been a lot of evolution...

Not any more obnoxious than normal. It's true.

No, just pushing this bank's credit cards you got to give them that.

Your value proposition is things like price. And for a long time, we really -- we laid our value proposition at the feet of one thing, policies. Bags fly free as a policy, credit -- flight credits that never expires a policy. But customers are going to choose you in part for that, but in a large part for, do you offer the product that I want. There's more demand for product differentiation than ever.

Do you fly and have a nonstop where I want to go. And the evolution of the product is really meant to attack that and make the product more relevant to our customers, which means they're going to want to get the credit card. The credit card comes with amazing benefits like free bags and higher seat choice, those kinds of things.

And then we are looking to continue to enhance. Nothing to report today. You've heard me talk many times about the potential for lounges. That's an active discussion. We would only do that if it makes sense from a financial threshold perspective, but it's very clear that customers have that high on their value proposition list.

And then second, for us, for Southwest Airlines, it is the feature that allows you to have an even more premium credit card, which makes the Rapid Rewards and the co-brand program even more financially -- improves the returns and makes it more viable. It's another example of if you can't offer it, they can't buy it.

But ultimately, one of the largest advantages that we have, if not the largest, is service and our people. We have the highest NPS scores for a reason, and it's because our folks go out of the way to produce what we call golden rule service, understand the need of the person in front of them, take action, a lot of times heroic action and fix the problem, be fun.

And while that's maybe a bit on the margin, as we have products that are similar to other carriers, the one completely outstanding difference is our people, the way they make you feel and the service that they provide, in particular on aircraft.

Excellent. Very good answer. Thank you. This came up at a breakfast that we had together this morning, but I think there's a perception, and maybe this is a question for Andrew, but I think there's a perception that Southwest really skews to a more price elastic demographic.

And I've always pushed back on that, but I'd be very interested to hear any sort of facts and figures that you can throw out that would address that because I don't think of you as uniquely targeting the lowest end of the demand curve.

Yes. So it's true that we have a full range of customers. Our higher-end customers, the over $200,000 household income, we have a fairly high proportion slightly less than the big 3, but far more than the ULCCs or the LCCs.

I think it really depends on where you live in the United States, how you think about that because one of the tenets of like your appeal is your schedule and a place like New York where Wall Street analysts maybe located, we're not terribly relevant.

We bring people to New York. We're not really a New York's carrier. There's at least 4 that I think they're our New York's carrier. We're not one of them. We are the carrier in Nashville. We are the carrier in SoCal. We all have the carrier in many places, Phoenix, Denver, lots of places around the country.

I would think Laguna conference, everybody flies you in.

Exactly. Yes. And so in those places our predicament was we would have a whole these people would travel us short haul, right? If somebody need to go for Orange County up to The Bay, maybe they would fly us because we have lots of options around The Bay, not just SFO.

But if you're flying longer haul, frankly, our product did not appeal to you. So our customer set shared their wallet with their competitors when they were flying further field. Intrawest, we had them, they can go east of Denver, we didn't.

And so having a product now that appeals to these people so they can share their wall back us is really dynamic we're after here, and it's really starting to pay dividends because people found that willingly will give us more money for when they could select their own seat when they really tailor their offering rather than this kind of one-size-fits-all offering we had before that works well if you're going in San Diego, Sacramento, but didn't work well if you're going to East Coast.

And so this is obviously the first time in your history that you've really made a conscious decision to lean into premium demand and you're kind of starting from scratch and you don't have lay-flat international. So I'm not going in that direction.

I'm just -- I'm trying to think Delta's at 49% of revenue coming through premium channels or for premium products, I should say. I assume United is in that ballpark or Canada just got off the stage, 25 to 30, but they're moving north.

How high can you -- one, how are you going to define that number? And given what you currently have on the drawing board where can you take that -- I don't see you're going to 49%. I mean it's just not that much of the LOPAs allocated to better products. But how do we think about the road map for further leaning into premium. That's the question.

Yes. I'd say, number one, we are focused on optimizing the products that we have just put in place and seeing the optimal benefit. There's work to optimize the fair buy-ups between product choices. There's work to optimize and dynamically price things like seat ancillaries.

So we have a lot of opportunity I mean the product or for forming a terrific both from a demand and a pricing perspective. But we have an opportunity to continue to optimize that. And based on those learnings and share and where we might need to look. We'll continue to look at other more premium.

It really leaves 2 things. It leaves sort of true first class and then long-haul international, which would drag something else. So but we're focused on optimizing the products in place. I would also say that if you look at our -- all of our guides for the first quarter, it would imply that Southwest operating margins would be back in the hunt being top of industry.

And I think that's material in that what we've been -- what you've been told over and over and over is you could only be there if you have premium and you have long-haul international because that is where the revenues and drivers are coming from.

So it tells you something about our underlying product strength, which is the best domestic network, the best people in best service, the best operation is backed up by the Wall Street Journal rankings and now a much more appealing product to our customers without having long-haul international and 2 x 2 first class.

And we're going to be and we're in the hunt to have top of industry margins. It tells you something about the strength of the underlying product even absent those 2 things.

So expand on that. Do you think that's largely a function just at the network, the momentum that you have, the cost structure, I think it's a very valid point. If you were to just transcribe everybody's EPS guide into a margin number, put them in front of us without identifying the airline. I'm not sure I would be able to pick out deltas versus Southwest.

I think it's all. So it's a combination of all of those things that make Southwest attractive. Again, the most nonstops, the best network, the best people, the best frequent flyer program, high NPS scores, this terrific -- it all comes together and now with a product offering that appeals to folks that want to fly longer haul to business, the folks that want some level of premium and it's very hard to tear it apart, but you put all that together and that says that we -- even without having those other attributes, we have a very appealing product because we're attracting customers that even without that allow us to be at or near top of the industry in terms of operating margins.

It also shows you where we can go as we continue to add -- think about adding not just optimizing what we have continuing to optimize the network, continuing to pull in more business passengers, but then more products and services. It just shows you the upside for Southwest Airlines.

Okay. Since you mentioned corporate, any update on corporate momentum here in the quarter, how you track that?

Andrew, do you want to take that?

Yes. Yes. We've seen strong both on price because corporates are buying up. The product-based segmentation that we've kind of embraced now along with the rest of the industry of basic, but also product-based sell-up.

The corporate is responding well on the price side and the volume side. And in fact, for March, if we didn't sell $1 more of corporate travel, March would be our biggest corporate travel month in our history. As of last Friday, and we still have half a month ago and corporate books close in, as you know.

I reiterate that in this room today, even though you weren't here, that's a cool sound bite.

Yes. Corporate is really working for us. We kind of professionalized that, stood it up a couple of years ago. So we have the infrastructure. We have a sales force from the distribution channels, and we just have the product to go with it. So now our sales force arm with a better product is winning more business for us.

So on corporate, and I don't know how you would gather this, but do you have any feel for the percentage of corporate revenue, where policy will pay for the upsell. So for example, at JPMorgan, as long as I don't move cabins, I can basically spend with impunity anything I want, intra cabin.

I think it's that way at other investment banks who got friends around the industry. But for other businesses, are companies reimbursing business travelers for that? Or is that coming out of pocket?

It's broadly a reimbursement. Each company, each industry is a little bit different and that moves with the economy. But broadly speaking, block basic, number one. Number two, allow you to add on a bag or a reasonable seat this within the coach cabin very easily.

The very high end of consultants and banks may offer by first-class domestic. But for the large majority of the corporate warriors, they are flying coach and they can expense seats, and that kind of stuff within that coach cabin.

Including allowing you to expense the extra legroom.

Yes. Yes. That was the point. So the evolution seems to be successfully embraced by passengers on an increasing basis. What's been the internal embrace of all of this change particularly in the cabin because I do see social media post, so they wouldn't let me move one seat over, flight attendant, they're having to police things. I mean how much of a strain is this putting on a culture that had developed sort of decades of muscle memory?

Yes. I think I separate it because there were actually 2 things going on. It was an incredibly successful implementation of all of these things. But with anything that is huge changed overnight, we changed our seating and our boarding completely. .

Flip a switch overnight. And by the way, that next day, when we operated in that new environment, we beat Delta, American, United and on-time performance and cancel rate.

And you have a large storm, right?

That's exactly right. So I'm very -- I use that a lot because I'm very proud of, we put all this stuff in and still be the network carriers in terms of performance. But any huge change, you're going to have things that you discover. So we have discovered the way some of the seat assignment algorithms work.

It was clumping folks, and that's been fixed. And in some cases, somebody that is A-List, so their tier. They ended up in a lower boarding group than we intended. So those -- this is all designed to be configurable so we can literally change it on the fly.

So those are being worked and so I would put that in a very small but sometimes noisy category, but it is a very small percent of all folks that are flying and as you know, social media has a tendency to amplify things.

So I would put that all in the category of expected tweaking of the product after it was implemented. And that's moving very quickly. Where our employees on board with this evolution of Southwest Airlines, absolutely. I have been at Southwest 38 years. I've never seen, especially the frontline embrace change because they saw many things.

Number one, they're going to be able to serve their customers better. If you're a flight attendant, you now know the name of the person sitting in a seat, and you can serve them better. You know their history with us and you can provide very personalized service, which is what they want to do.

It helps clean up the way we board now helps clean up some of the preboarding issues that we were known for. And so our employees saw operational improvements coming from this. But most of all, they saw, I love serving my customer, and now I can serve them better.

So I've never seen a set of changes that were more embraced by our 60,000 frontline employees than this.

Excellent. I think we got a question from Mark Streeter.

We've got a couple. So Bob thank you for the quote not more obnoxious than normal. I think I'm going to use that again t to describe Jamie.

I was just responding.

So I love that. That's a keeper. We'll be remembering that. Okay. So on the lounge strategy, you said you're tying it, of course, to how you're thinking about cards. And so when you look at the American Express Delta relationship, they both built up lounge networks kind of independently. American Express came maybe a little bit later, obviously, after the Delta lounge network.

But Delta was already fully established. So when I think about Southwest maybe pursuing a lounge strategy, well, and I haven't talked to my internal colleagues on this, but Chase has a lounge network right now.

So is there an opportunity for Southwest and Chase for you to maybe piggyback off of some of that? Is there a way to maybe sort of co-brand allowance together or get your premium card customers access to the Sapphire lounge network. Is that on the table?

In fairness, as Etihad already has in some of our facilities.

Yes, I think I would say nothing to report. Today, we've been frank that it's something we are considering, given customer demand and the value that it would create with this more premium card that would provide lounge excess. Obviously, yes, we have a terrific and strong partner with Chase.

So to the extent that our wants and needs intersected, that would be wonderful. But again, nothing to report. I would just tell you that we're the way we think about something like this is it is, again, in the context of pursuing what customers want from Southwest because we want to give you fewer and fewer reasons to fly somebody else.

And then number two, we're a low-cost, high-efficiency carrier. So the construct of adding something, an attribute like lounges has to fit in the financial thresholds that maintain our goal of returns and financial efficiency, all those things.

So it's got to fit both. So we aren't -- we wouldn't do something that violates that tenets simply because it is highly favorable to our customers. So just know that as we think about things like this, we will do it in the Southwest way in terms of making sure that it fits our financial structure, especially.

Great. And Tom, last year at our conference, I think it might have been day #2 or something like that for you?

Yes. I do remember when you asked me a very specific question on day 2.

And I'm the obnoxious one?

I owe you an apology for that.

I don't know, did Jamie grade your answer?

Jamie said, And I'm the obnoxious one?

Yes. Exactly. Because it was a little unfair for me and in the room or on the webcast, what I asked Tom a year ago was how do you think about the balance sheet and leverage targets and so forth. And to be fair, right, you were dealing with Elliott as a very large shareholder, you were turning over all rocks as we've talked about going through all the changes we talked about.

Can you maybe just eventually, as last year progressed, you did land on some balance sheet targets. And can you maybe just talk about sort of that dynamic between the boardroom, I know you're not going to talk about what your large shareholder wanted, but as you try to balance shareholder returns and the sort of lines that you've drawn in the sand with how far you'll take leverage on the balance sheet and liquidity down. Maybe just sort of talk about that interplay and why you landed where you landed?

Yes. Maintaining a strong and efficient investment-grade balance sheet is really important to us. It's a strategic differentiator for us. You've seen us go out with some great terms on financing here in the past 12 months. We have the lowest debt balance in the industry. And we need to make sure that we're maintaining that.

And so we put guardrails in place gross debt to EBITDAR between 1x and 2.5x. And the idea there is everybody can see where our ratings are. And you also know the components that make up those ratings. And so we were very deliberate about putting guardrails in place so it allow us to stay where we are, given how important that is.

We also have a liquidity target of $4.5 billion that includes $1.5 billion of undrawn revolver that's there. It's nice when the banks take part -- we pay them in other ways. So it's nice when they take part of that liquidity cost for us. And so there -- to give you some of the behind the scenes, there is a lot of broad support as we talked through maintaining that and the guardrails that would ultimately keep that in place.

And then just one quick follow-up on the balance sheet, you recently raised some secured debt. I know it was at attractive rates, but did you really say versus where you could have raised unsecured debt? Why the pivot? Was it just to keep some secured lenders happy? Or -- why did you do that?

Yes. There was a bit of savings that we have there. You talked with folks about the level of unsecured assets that we had -- our unencumbered assets that we have upwards of $40 billion of unencumbered assets.

And you talk with folks, some of whom are in this room today, and they tell you, you get credit for having assets in that category, but it kind of gets to a lot of diminishing returns. And so we did take a very small portion of that group, and we're going to save a little bit of borrowing costs there as we did that.

And ultimately, this will be to help refinance some of the government debt that has rate adjustments that's coming due this year.

I have sort of a consolidation question that I want to ask you. When I think about, gosh, News Air, making a run on frontier in bankruptcy, the ATA involvement -- Midway, AirTran. I think what all of those events have in common was that they were at or near the bottom of an economic cycle.

I have long applauded Southwest for putting its balance sheet to good use during periods of industry strain. I hope that we are not on the precipice of a protracted $4 at [ carrier ] environment. If we are or better yet the next downturn that comes along, should we still -- should I still consider Southwest as an entity that uniquely tries to harness the power of the downturn?

Or are you just at a certain size and scope now that -- the plan for the next downturn is just kind of hunker in the bunker and make it to the other side, then all will be right with the world. Should we still view you as an opportunistic hunter during times of periods of industry strain.

There is a lot in that question.

And I started with that one.

You almost have to put M&A aside because while there -- it can be more attractive in certain periods, it really comes down to the specific carrier and the reasons network, can this be approved, synergies, all that fleet that really make that attractive, which I think actually drive the transaction more than the downturn and.

So I'd almost -- I'd just say that we don't comment on those kinds of things. And this has been part of our history if it makes sense, it's something we'll consider. I think I would flip it around and say when you think about a period of a protracted -- and no of us know what fuel prices are going to do, whether this is a 1-month spike, it's a 9-month spike.

What I'd focus on is in either of those conditions, we are well positioned. Number one, as Tom said, we have strong balance sheet discipline and financial discipline overall. Two, we have a strong cost structure a focus on efficiency and costs. And I would say, through what we've been through in the last 24 months and even far more renewed focused on agility, cost discipline, what you're seeing come through the quarters.

And then we are local. We have great fares, and we have tended to win in periods of a challenge for consumers. So gas prices go up, consumers pull back a bit. You see things like premium pullback, and that's where Southwest is one. And you've seen us take advantage. I'm not predicting this by putting a little more capacity in when it's a period that even more than normal favors us.

It's only been a few weeks -- it's very hard to understand or know what the environment is going to create. But again, I think I would just say that we are the best positioned carrier financially the product, the initiatives that are uniquely helping support and offset fuel for Southwest Airlines, our cost structure and then our appeal to our customers to weather this, whether it is 3 months, 9 months, whatever the period of time, we will be the carrier that weathers this the best.

Excellent. Any questions from the field? We got one.

Hi Bob. My question is, as you kind of look back on the results of the changes so far, really important ones like since seating and the boarding groups. You mentioned a lot about optimizing and is it possible that there's an ability to optimize while also improving in the case that you still are expanding partnerships with ANA.

You just recently announced you're pulling out of IAD and O'Hare. Is this more of an effort to double down on your focus cities and kind of get with, I guess, get with the program that the other airlines are doing, focusing on a hub system? And how would you say that's affecting your margins?

Yes. The answer is all. So we -- our initiatives and the reach of the product, reach of the network will continue. So adding partners as you know, we've added distribution. So we'll optimize our products. All that continues. At the same time, we have a lot of opportunity to tune what we put in place but it's really all.

We're focused on creating more and more value out of the initiatives that have been successfully implemented at Southwest, focusing on creating value out of our new and expanding partnerships focusing on creating more value out of winning even more business customers because we have a more attractive product, optimizing the network on and on and on.

It's all in focus, and we can do all of those things at the same time. The whole purpose is to be more attractive to our customers, number one; and number two, produce more value for our shareholders.

Gentlemen, thank you very much. Look forward to every next year. Thank you.

Thank you, Jamie.

Hello, everyone, and welcome to the Southwest Airlines Fourth Quarter 2025 Conference Call. My name is Jamie, and I will be monitoring today's conference call, which is being recorded. A replay will be available on southwest.com in the Investor section. [Operator Instructions]

Now Danielle Collins, Managing Director of Investor Relations, will begin the discussion. Please go ahead, Danielle.

Thank you. Hello, everyone, and welcome to Southwest Airlines Fourth Quarter 2025 Earnings Call. In just a moment, we'll share our prepared remarks, after which we will move to Q&A. Joining me today are Bob Jordan, our President and Chief Executive Officer; Andrew Watterson, our Chief Operating Officer; and Tom Doxey, our Chief Financial Officer.

Before we begin, a reminder that today's session will make forward-looking statements, which are based on our current expectations of future performance, and our actual results could differ materially from expectations. Also, we will reference our non-GAAP results, which exclude special items that are called out and reconciled to GAAP results in our earnings press release.

With that, I'll turn the call over to Bob.

Thank you, Danielle, and good morning, everyone, and thank you for joining our earnings call today. We've been looking forward to 2026 when all the incredible work undertaken by the Southwest team will show dramatically improved results. First, however, a few comments on this past year and our fourth quarter 2025 results. The fourth quarter capped a year of meaningful transformation and accelerated execution at Southwest. We finished the year in the quarter strong for both revenue and cost, achieving full year EBIT of $574 million, which was above our prior of $500 million. operating revenues of $7.4 billion for fourth quarter and $28 billion for the full year were quarterly and annual records.

Our fourth quarter and full year results underscore that our initiatives are generating the desired results and provide great momentum as we head into 2026. We also ran a terrific operation coming in #1 in on-time performance, completion factor and the lowest extreme delays in December and our strong operational performance throughout the year led to Southwest earning the top spot as the Wall Street Journal's Best U.S. Airline of 2025. I'm proud of the results, but I'm especially proud of our people. who are the ones that getting this done every single day, day in and day out.

Before moving to 2026 in the exciting year ahead, I want to underscore some of the key initiatives that we successfully implemented in 2025 and here are the larger ones. We changed our product offering, including the implementation of bag fees, addition of a basic economy fare product and flight credit expiration, optimized our Rapid Rewards program, including variable earn and burn rates, amended our co-brand credit card agreement with Chase including new benefits and improved economics, launched free Wi-Fi for loyalty program members in partnership with T-Mobile, expanded our online presence through new partnerships with Expedia and Priceline, outperformed our $370 million cost reduction target for 2025, including the first layoff of noncontract and management employees.

Added 6 new airline partners, launched Getaways by Southwest added Red Eye flying, reduced turn time to increased aircraft utilization, deployed new technology to boost operational reliability, a key enabler of our top spot in the Wall Street Journal ranking of airlines, discontinued the fuel hedging program, completed $2.6 billion in share buybacks in 2025 and representing about 14% of shares outstanding while maintaining our investment grade rating.

And on Tuesday, we implemented a signed an extra leg room seating, which required retrofitting over 800 aircraft. It is just a stunning list of initiatives undertaken by the Southwest team, all implemented on time and all delivered with excellence. In my 38-year career in this industry, I cannot think of another airline that embarked on so many fundamental changes to their business model and in such a short time, let alone, executed so well. The list of initiatives falls into 2 categories: 1 focused on offering a significantly better experience for our customers and the other focused on revenue growth and operational efficiency. Collectively, the large investments we have made result in a fundamental transformation and evolution of our business model while building on our core historic strengths, the largest domestic network, a strong balance sheet unmatched customer loyalty to our brand, outstanding service and hospitality, low cost and operational efficiency, our unique culture and especially our unrivaled people.

This transformation is expected to result in a significant step-up in how we grow earnings as compared to the past few years and for 2026, we are forecasting earnings that are dramatically higher than 2025. For the full year, we are not yet guiding an EPS range while being well above Wall Street consensus, we are providing EPS guidance that represents the lower end of our internal forecast. With that qualifier, we are guiding full year 2026 adjusted EPS of at least $4, which is materially higher than 2025 adjusted EPS of $0.93.

Let me share our reasoning why we are not yet providing an upper range for 2026 earnings. Aside an extra light room seating became operational just 2 days ago, and we see earnings upside based on how booking behavior related to those initiatives unfolds, specifically upsell revenue from close-in bookings, which are more closely affiliated with business and price flexible customers; and second, we expect growth in both the business and leisure customer base driven by our new, more attractive product offering. We expect to have better visibility to the upside potential from these initiatives in the next month or 2, and we'll provide range-bound EPS guidance when the current quarter results are reported, if not before. Also going forward, we plan to follow the industry norm of providing guidance to investors using broad company forecasts and results.

This means we will step back from providing details and specific numbers around activities such as bag fees, assigned seating, the co-brand program and so on. I believe that Southwest 2026 earnings growth will stand out when compared to other major airlines. This is largely due to the nature of the many initiatives we have implemented initiatives that were previously implemented by other airlines over the last decade or more where Southwest is implementing these initiatives now, and the work will not stop here. We see meaningful opportunities ahead to grow earnings from areas such as route network optimization under a backdrop of improved operating margins in the business, increasing our corporate customer base, driven by product changes that better appeal to the business traveler.

And this is a long-term journey, and we believe that executed well, we will see the rewards and additional cost takeout and efficiency efforts. We have an exciting year ahead as we continue to deliver for our customers and for our shareholders. I am incredibly proud of our people. They are the ones getting it done every single day, running a strong operation, serving our customers and transforming our company for the future.

And with that, I will turn it over to Andrew.

Thank you, Bob. From a network perspective, Q4 capacity grew 5.8% year-over-year despite the fleet count being roughly flat year-over-year. Efficiency initiatives like reduced turn times and the introduction of red eye flying allowed us to maximize asset utilization while maintaining industry-leading reliability. For the full year, operating revenue increased 1.7% year-over-year, supported by initiatives kicking in, and strong demand that drove both traffic and realized fares. My comment on realized flares reflects effective buyouts from the changes we implemented. Fourth quarter RASM, which was impacted by the FAA mandate schedule cuts was down slightly at negative 0.2% year-over-year.

Looking on the strong foundation, we're entering Q1 with momentum and confidence. We expect RASM to increase by at least 9.5% year-over-year with contributions from yield, load factor initiatives and loyalty programs. Q1 capacity is expected to grow between 1% and 2% year-over-year, even as we operate with approximately 7 fewer team and our extra legroom offering. All aircraft conversions, technology development and employee training were completed on schedule. Customer response has been overwhelmingly positive. And these products are expected to be meaningful contributors to further revenue growth and customer satisfaction at 2026. I want to take a moment and reflect on the changes implemented 2 days ago. Overnight, we made the switch to assigned seating, implemented a differentiated service in our new extra legroom section and changed our boarding process.

On Tuesday, we operated more than 3,200 flights as a different airline while continuing to deliver our usual high-quality operation, a testament to our incredible team. These initiatives are just enhancements. They represent a fundamental transformation and how Southwest delivers value to customers and shareholders. We're evolving our product to meet the needs of today's travelers while staying true to the Southwest brand. In summary, Southwest is executing with discipline and delivering results that position us for sustained success. Our operational reliability product changes and strong demand trends give us confidence as we move into 2026.

I'll now turn it over to Tom.

Thanks, Andrew. We delivered a solid quarter with an EBIT of $386 million. We continued our strong cost performance with CASM ex up 0.8% year-over-year despite operating less capacity than initially planned. Our fourth quarter performance reflects the strength of the transformation underway at Southwest and reflects well on our evolving culture, one that is relentlessly pursuing new revenue streams and operational efficiencies in areas that in the past we had not focused on. At the same time, we continue to invest heavily in our customers, our people and our technology to position Southwest for long-term success.

Looking ahead, our initiatives, which represent a deep fundamental transformation of our business are set to drive significant earnings growth in 2026. The impact from the initiatives launched in 2025 is well understood by us at this stage of the rollout and we have confidence in our ability to deliver meaningful margin expansion and strong earnings growth this year. As Bob stated, for full year 2026, we are providing an adjusted EPS guide of at least $4 which represents the lower end of our forecast. For the first quarter of 2026, we are guiding an adjusted EPS of at least $0.45 per share, which also represents the lower end of our forecast and compares to a loss of $0.13 in the first quarter of 2025. We expect continued strong cost discipline, with CASM ex projected to increase approximately 3.5% year-over-year which includes approximately 1.1 points of impact from the removal of 6 seats from our 737-700 fleet to enable extra-legroom seating. We plan to keep management head count expense flat to 2025 levels in 2026 and will also be focused on operational efficiency within our frontline teams.

Turning to fleet. Boeing continues to execute on its delivery commitments. We expect 66 Boeing 737-8 deliveries in 2026 and anticipate retiring 60 aircraft during the year. Full year net capital spending is expected to be in the range of $3 billion to $3.5 billion. In November, we issued $1.5 billion unsecured bonds at industry-leading terms. We ended the quarter with $3.2 billion in cash and a gross leverage ratio of 2.4x, both within our targets. During 2025, we repurchased $2.6 billion of shares and distributed $399 million in dividends. At the same time, we plan to make the necessary investments in our business while staying within the guardrails that support our investment-grade rating.

In closing, 2026 is positioned to be a year of significant margin expansion and earnings growth for Southwest, and we remain confident in our ability to deliver and create long-term value for our shareholders.

And with that, I'll pass it back to Danielle to start our Q&A.

Thank you, Tom. This concludes our prepared remarks. [Operator Instructions]

[Operator Instructions] Our first question today comes from Catherine O'Brien from Goldman Sachs.

So first question is, I realize it's very early innings on the rollout of your seat products. But I'm just trying to get a sense of how you're thinking about the upside to your base case you shared today. How does January booked RASM compare to 1 half February? And how do both of those time frames compared to that 9.5% base case guide I'm just trying to get a sense of like what you're evaluating on potential upside. Is that higher upsell potentially higher upsell going forward, share shift, something else? I know that was a long first one. Second one I'll keep it quick. You beat your 4Q CASM guide pretty handily. What drove that? Anything shift out of the quarter we should be aware of as we model '26 CASM-ex beyond 1Q?

It's Bob. I'll take the first one, and then Tom will take the second. On the upper range, well, first, I would just say that bookings for everything related to our new products and initiatives all look really good. So everything is on track. We're just not ready to provide an upper range or upside today. I mean it's really simple. We've got lots of booking data related to the new initiatives, but we have limited data regarding close-in bookings and the behavior of fare upsell and seat ancillaries, especially with those close-in bookings overweight business and customers that are more flexible and that tends to have higher ancillary take rates. So we just need to see it. .

And by the way, I'm dying to know the upside as well and asking Andrew every day. But seriously, we will let you know as soon as possible. We just need a month or 2 to really see the potential. And then maybe separate from that, we're not stopping there. We have -- there's no victory lap. We have Other things that we are focusing on above and beyond this potential with the current initiatives, I mean we have the opportunity for more cost takeout, efficiency, network optimization, with our new products, we think we can grow our corporate share. And of course, we're going to continue to optimize the revenue initiatives that we've just put in place.

Catie, thanks for your question on cost. I'm really excited -- continue to be really excited about the way in which the entire management team is aligned and spending smartly and being efficient with our costs. There's no shift that we're talking about today out of 4Q into 1Q. So this is truly us going in and finding efficiencies in different areas of the business and its widespread throughout really every line item there, we're finding cost items.

Our next question comes from Conor Cunningham from Melius Research.

Just on the load factor decline in 3Q -- sorry, in 4Q and then it just was larger than the decline in 3Q. Can you just help frame up what's happening there? I was under the impression that you were pushing for additional loads given this OTA distribution and so on. And within that comment, maybe you could talk about like is there a load factor target that you need to hit your bag fee target for 2026.

And then my second question, sorry. I was hoping you could talk about the decline in the I realize that there's a revised credit -- chase agreement in there. But just if you could just frame up the drivers, I think that there is some concern out there in terms of like there being a larger decline from 3Q to 4Q and then you expect a pretty big revenue uplift in 2026. So just any thoughts around there would be helpful.

It's Andrew, I'll take the first one. And so I'd say that our employees are super engaged with the new Southwest and extends to our tech ops employees, and they did such a great job of retrofits of the aircraft overnight. They get so efficient that we were able to delay the 700 retrofits until January. Because the 700, as you probably know, we took out a row of seats. Now doing that late in the booking curve means there's limited revenue upside, but there is revenue upside, especially in the peak holiday travel dates. And extending that in that came out of it almost 0 cost and so doing that was EBIT positive.

And so we don't manage the business to -- for any kind of submetric of load factor yield. We're largely managing for RASM or the RASM/CASM spread. And so in that situation, we chose a decision to maximize earnings but was unflagging perhaps a load factor, but it was the right decision. That's how we want to manage the company.

And to your second question on APLs, one of the benefits that we have now is we have more differentiation in our product and the ability to provide differentiation to those that are at different levels within in the loyalty program is that more of the revenue can be recognized -- loyalty revenue can be recognized sooner whereas previously, we had to wait primarily the benefit that was derived from being in the program was when you would ultimately redeem points. Well, now, depending on your status, you have the ability to derive a benefit. You may book a flight paying cash tomorrow, where you have the ability because of your status to select a seat for free.

You may have the ability to have a free bag or bags. So those are benefits that can be derived sooner. So that differentiation that we have in our product offering now allows us to recognize more revenue sooner so obviously, that means that there is less that falls into that ATL category. So if anyone is looking at that ATL category and seeing that it's smaller, and trying to forecast some sort of revenue weakness in the future. That's not what's happening.

Our next question comes from Jamie Baker from JPMorgan.

Yes, a couple for Tom. So with assigned seating broadly anticipated by customers, I'd have thought there might have been a surge in early bird bookings given that there's this significant ramp from the new initiatives. But I guess, asked differently, wasn't there already a meaningful amount of early bird in the base? I just kind of thought people have front-run the changes by protecting themselves with that.

And then second, with so many changes that Southwest taking place. I reckon that the team isn't going to rule anything out. But maybe for Bob, can you disclose if you have any aircraft RFPs in the market. This is not usually a state secret. Everybody knew Delta had a wide-body campaign, stuff like that. Just curious if you can comment on that.

Yes, Jamie, I'll take the quick one, I'll take the first, and then Andrew will take the second because it's quick. No, we do not have any active aircraft RFPs in the market.

And then the other one, the early bird, we -- if I understand your question correctly, we see selling early departures after Tuesday. And so now people can get a good seat by buying the stand-alone ancillary. And we do see stand-alone ancillary accelerate close in, and that's the part that Bob talked about, we don't fully understand yet and expect to have in the next month or 2 more insights on how the booking curve ends for those higher fare passengers.

Well, so maybe I misunderstood. I thought 4 weeks ago, somebody could have bought early bird to kind of avoid the seating fees that's not how it worked?

Not for departures on Tuesday, the 27th and beyond. All those were just seat assignment. We do have a kind of upgraded boarding, early boarding, you could do, and we didn't really push it and promote it that much because -- we didn't want to add customer confusion. We will do that later, but that's a modest thing. The large money is coming from fare upsells. So buying a higher fare product or buying stand-alone ancillary. .

Jamie, I think the easy thing is upgraded boarding and early bird, the old ancillaries ended on Monday with open seating and the new ancillary started on Tuesday from a revenue perspective, and that's the best way to think about it. .

Our next question comes from Scott Group from Wolfe Research.

So just a couple of things. So big picture, usually when ancillary goes up, fare goes down historically. What do you think is sort of different here? Is there any way to sort of share like what percent is going since Tuesday is going basic versus prior? And then maybe just, Tom, like a modeling kind of question, like I'm guessing January, you didn't have seats, it's the toughest comp, like are we exiting the quarter with like RASM in the teens or something like that? Is that the implication of this guide?

Yes, I'll take the first one and Tom will take the second. I think they're really disconnected. So ancillaries, especially now that a lot of that is a seat ancillary, which comes much later it tends to be a separate decision from the fair purchase, the original booking and purchase of the ticket. So we don't see the correlation in terms of the ancillaries go up, the fare goes down. I mean all of this change, especially with the science seating and extra legroom is driven from a revenue benefit perspective by offering customers choice and then giving them buy-up opportunities at the time that they book and then giving them ancillary opportunities at the time, for example, when they select a seat. But no, we don't see that correlation at all that you're discussing.

And to your second question, of course, we're not going to give RASM guidance by month, but it is a true statement that the extra lager seats and the seat assignments those enhanced unit revenues. .

Our next question comes from Mike Linenberg from Deutsche Bank.

So yes, 2 questions. I have a CapEx question for Tom and a revenue question for Andrew. So I guess, Tom, in the release, you did give us the CapEx number, although you indicated that it was a net number. So presumably, either -- I don't know if there's either sale leasebacks or there's aircraft divestitures. Can you give us a rough sense of maybe what the gross CapEx number is? Or maybe to give us a sense of divestiture gains from aircraft sales in 2025? .

Sure, Mike. So we'll stick with the rents that we've guided. There is an element of aircraft sales that are there that bring that down from the gross number. But we'll stick with what's out there in the public number is the net CapEx.

Okay. But it's specifically aircraft sales offsetting it. It's not sale-leaseback gains or anything else?

That's correct. .

Okay. Great. And then just my question to Andrew. Segmentation, it's kind of a new thing. I mean, maybe you'll disagree with me, but I think it is somewhat of a new thing for Southwest. I mean, even in your commentary -- you said that you're learning a lot about customer behavior. As we think about how things evolve, sort of what inning are we in? And what are the milestones that you're going to look for that things are really starting to pick up? And maybe as a kind of a easier here? I know in the past, I recall you indicating that the majority of your bookings or tickets sold used to be in the lowest air bucket.

And I would suspect that, that's going to change, especially as people want the assignees and the extra legroom. Can you just give us sort of thoughts on how you see that evolving and maybe some of the key milestones?

Thanks, Mike. The -- yes, we're going from a kind of favorable base segmentation. We always had segmentation like device purchases and stuff like that to a product-based segmentation, which you can kind of pay more to get more. And so the question becomes, who will pay more to get more from our current customer base. And we're seeing that our current customers who previously bought the kind of base products all in, wanted to buy up. They wanted more from us.

They wanted the ability to buy these extra product features and even if they're buying early in the booking curve, they're willing to pay for them. And of course, later in the booking curve where most of those people are that are price flexible, you expect to see a kind of a surge of people demanding the higher products. And so we expect to go from like 80-plus percent by the lowest fare product down to something half or less buying the very basic product. And so we don't know what they'll look over the full booking curve for the full year to high season, low season, but we know that, that accelerates at the end, and that's kind of what we're waiting for. So the level of acceleration we see through the kind of February and March where you have low season, high season will give us a really good idea of what the upside is for this.

Our next question comes from John Godyn from Citigroup.

Congrats on the big RASM guide. I wanted to just sort of reask it a little bit on the 9.5%. What is literally in that number? And what is -- and it sounds like there's a low expectation of the ancillaries coming in, but it's not like you have 0. I just wanted to kind of understand really what's in there versus what could be upside. That's question one. And question two, it seems like there's a decent chance this year is an all-time high EPS annual year for you. When I look at the last time that happened, ASM growth was considerably higher. So as you get back to your return target, I'm curious how we should be thinking about a reacceleration in growth?

Yes. I'll take the first one and then maybe a combo maybe, Andrew, on the sick one, especially the thinking about capacity. Thinking about breaking down RASM detail. I mean, last year, just got a pause. It was just a fundamental transformation of the business model of this company. And it went extremely well. I'm so very pleased and proud of our people. And now all of that -- I mean, all these initiatives, they are the business. They are the new business, the Southwest Airlines. It's not a set of initiatives any longer.

And we're managing that way. And -- so everything in our 2026 guides include those run rates coming off of the implementation in '25 and then of course, the science eating launch year on Tuesday and that's just how we're managing the business. And we're focused even more beyond that on the additional upside managing those initiatives and optimizing and then our incremental opportunities, again, like network optimization, further cost takeout. So we are moving to, as you obviously know, an EPS guide, everything related to the initiatives and the run rates are baked in. And that's how we're thinking about managing the business, and we will provide the upside once we are able to quantify it.

And then on the growth, I mean we're not thinking about any kind of crazy growth rates or anything like that. We're thinking about mostly in addition to whatever modest growth rates we choose is a reallocation of capacity. And so we have a product now that we see demand for that before we weren't offering and then also the water line for all of our markets rises with increased profitability. So we have a great opportunity to redeploy capacity within our current footprint to have less of a negative and more of a positive by moving capacity around. That's what we're really focused on in the next 12 to 24 months. And we think that's upside to the numbers we've currently given you. .

Our next question comes from Duane Pfennigwerth from Evercore ISI.

I wanted to follow up, Tom, on a comment you made about the loyalty, faster loyalty rev rec. I assume there was a bump up with the bag fees and now another bump up with seats and extra legroom. So whatever the RASM tailwind was from rev rec in 4Q, it's likely larger now in 1Q. I wonder if you would frame how many points of your 10 points in RASM growth is due to rev rec policy changes? And then my follow-up, do you have any data or early learnings on receptivity of seats or maybe uplift in core Southwest markets versus maybe more jump ball markets where you have lower share.

Thanks, Duane. We haven't quantified publicly what the change is there. There's a shift that goes where the split prior was part ATL part of the revenue. Now it's part ATL, some to other revenue and some of the passenger revenue. But the exact percentages there, some of that relates to the way that our program is structured. And so we don't get into the details of that. our Qs and Ks have a bit more color on it, but we don't go into the specific percentages.

The second one, we find that the new product is giving us a strong tailwind in all of our markets. So it's not just a traditional Southwest stronghold we see the benefit. It's across all customer segments and across all geographies. And what's really encouraging for us. .

Our next question comes from Tom Fitzgerald from TD Cowen.

Just curious on the extra [indiscernible], I think last fall, we had talked about that hitting the full run rate potential in the third quarter. Is that still the expectation as you sit here today? And then on the fuel side, I think at one point last year, Tom, we had talked about there being like a nice -- with bag fees there've been a nice fuel offset from the bag implementation. And I'm wondering if you started to see that this year.

Yes. I think previously in our guidance, we've given that we expect next year that we have the full run rate benefit of the seats. Obviously, we're endeavoring to get that faster. We know there's a ramp-up as customers adapt to. That's also part of a discussion of we don't -- of the complete upside. But right now, we're seeing a strong initial reaction, as I said earlier, both to buy-ups and seed ancillaries. .

And Tom, I love that you asked about fuel. Just last week, I'll brag a little bit about our operations team here. Just last week, I was at a meeting where we were walking through the full list of fuel savings initiatives that we have. You are correct. One of those is that as we carry fewer bags overall, which we knew would be a by-product of the bag fee, there are fewer bags on board the aircraft and there is a fuel savings that comes from that. But there are so many other things that we're doing as a company, new technology tools that we have that are helping us as well as just the behavior that we have in our airports and our maintenance facilities to be able to save fuel. So often in this industry, we talk about CASM ex and it's appropriate. But fuel is a big expense, too, and we're doing a lot to become more efficient there as well.

Our next question comes from Atul Maheswari from UBS.

Two questions. First, based on your implied RASM for the full year and based on what we've heard from others, it would appear that if you all hit your outlooks, there might be a meaningful shift in airline revenues as a percentage of GDP this year versus the past few years? I know you can only see for Southwest. So the question is, is the incremental revenues that you're generating this year? Is that primarily coming from your existing customers who always wanted to spend more at Southwest, but basically could not in the past since you did not have that offering and that would explain why the revenue GDP equation moves to the right? Or is the incremental revenues that you're generating this year coming from attracting customers of other airlines, which would mean that the revenue GDP equation does not change much for the overall industry even as Southwest generates significant revenue dollars.

So that's question one. And then a question 2 in the at least $4 EPS target, what is assumed for macro given Southwest and really the product industry clearly lost a good portion of revenues last year due to macro issues. So in that $4, what portion like that you get back?

Yes, Atul, it's Bob. I can take both of those. Really, the -- what's in our guide for 2026 is it's the performance of the initiatives kind of on our current customer base. So there's no assumption number one of a big snapback in the macro, and there is no assumption net of a big share shift. And now again, I do think with the far more attractive product offering, especially to our business customers, that is part of the upside that we can pursue over time. That's a longer journey. But I do think the product offering now certainly appeals more to everybody, but certainly appeals more to our business customers. So that is something we'll be attacking this year, and that provides additional upside. But no, to be specific, there's not a share shift in the calculation and there's not a planned snapback in the economy in the macro. .

Our next question comes from Savi Syth from Raymond James.

Congratulations to the kind of greater Southwest team on that #1 Wall Street Journal ranking, especially in a year that you've been kind of doing a lot of change. I know you're not providing kind of granular guidance, but I was curious, Tom, if you could provide color on CASM ex progression through the year. particularly, is it fair that the 3.5% pressure in 1Q is maybe the high watermark, especially with capacity stepping up? And then maybe for my second question. On the corporate front, I'm curious what kind of corporate revenue growth you saw in 4Q and maybe what the trends are that you're seeing so far in 1Q? .

Thanks, Savi, and thanks for the shout out on the Wall Street Journal #1 ranking. It is a big deal. Another thing to brag about our really great operations team and for people. On CASM ex, we've given guidance for the first quarter. That will be -- we'll give guidance for unit cost and unit revenues during the quarters. And so it won't go beyond 1Q. But what I will say is that I feel like we have a good handle for what the costs are this year. It's been a couple of years now since we've had our labor agreements. It usually takes a little bit of time for some of those costs to come in.

And so now that we're a couple of years separated for that and we've got, I think, a pretty good view on what cost will look like for the year, and we're able to take that into account as we develop the full year EPS number that we've given to you today.

And for corporate, you pulled out government, which was kind of volatile there in Q4. Our corporate business is up mid-single digits. And then entering this year and in January, we had very high bookings that others have reported. So a very strong start to the year in corporate bookings. The benefit, though, as we talked about before, is the new product. We invested in our corporate infrastructure a while ago, a couple of years ago. We have now presence in the distribution channels. We have a sales force the kind of BTN rankings about how well we are to do business. We're #2 just behind delta. And so what's missing is a product that the corporate travelers want to buy.

And frankly, the companies let them expense and so having this new product, we will combine that with marketing efforts, our sales force efforts, incremental distribution efforts, and we think there's upside to our corporate business from this new product on top of the infrastructure we already built.

Our next question comes from Andrew Didora from Bank of America.

Andrew, I know you mentioned earlier that obviously managed to RASM at a yield or load factor. But just curious like if you could give us any color on kind of how you're thinking about load factor, particularly here into 1Q. Obviously, you're coming off a pretty low base last year, I think, around 74%, historically, 1Q are closer to 80%. So any thoughts around that would be helpful. And then for my second question, I know, Bob, you spoke to the opportunity for maybe some more cost take out this year. Could you speak to maybe where that going from and maybe how to think about CASM and cost opportunities in a 2% to 3% growth world?

Yes, Andrew, I'll let me just give it a start. The may point was a couple of things. I don't want anybody to think that we're done. I mean there's no victory lap years, as I said, there's a lot of hard work to have. We're pleased the momentum but we are not done. This is a journey, and we're going to keep pressing on additional opportunities beyond the transformation that's been underway. So we took a lot of cost out last year, more this year. We doubled the original cost target. We did our first corporate layoff, which was tough. But what I can tell you is nothing broke the company as anything is moving faster.

There's more agility, more pace. And so I think that's been somewhat enlightening that we can press harder. And so the -- our corporate overhead will be down -- head count will be down again this year. So I'm just admitting that we're going to press even harder on cost, on efficiency, so we're not ready to quantify anything yet, but just making sure that everybody understands that we are done with this transformation, we will be attacking other opportunities throughout the year.

I would say our teams, revenue management, marketing, we focus on revenue maximization. We don't get caught up in load factor yield. Now our tools and our people now include the incremental upsells we get an incremental passenger comes with a bag fee, a seat fee, other type of ancillaries, that's included under our calculus. So quantitatively, that's in there, but they're all about revenue maximization not going after the submetrics because that can really lead you down a bad path. And I think just look at revenue maximization, we have done a good job over the last months of doing that, and we'll continue to do that going forward. .

Our next question comes from Ravi Shanker from Morgan Stanley.

Sorry to go back to the Jan 27 change is obviously an important topic here. So I had one topic with multiple questions. I think you said that it's going better than expected. A, can you confirm that? And b, can you -- do you guys know if both the incoming revenues and the book away are higher than expected? Or is the book away lower than you initially expected? And maybe a second question on the same topic. Is there a risk that the ancillary revenues are higher out of the gate because people are maybe taken by surprise with some of the changes and maybe that normalizes over time? Or do you think it gets better from here?

I'll try to go through your questions there. So yes, the EOR and the preferred seats since season in general is going better than expected. We are getting book away from other carriers when they have poor reliability. We have that consistently over the last couple of years. So that is a tailwind doesn't happen every single day, but does happen quite frequently is a benefit and those people now come over and buy a stand-alone seed or higher fare. So that's very helpful to have that extra book away.

And then the ancillary we find that what people do when they get to the games are crowded flight, they have a higher propensity to buy up. So you get to the gate, it's crowded and you're like, well, [indiscernible], oh, I want to change my seat, I will pay more and so that we see the full of the flight, the higher the ancillary benefit.

Our next question comes from Sheila Kahyaoglu from Jefferies.

My first question, and congrats on the entire undertaking and the progress you've made I'd love to hear what feedback you're getting on the product segmentation. Are customers even aware? How does that change your promotional activity. And in cities like Chicago, where become a hot city of lake, what really differentiates Southwest versus a network carrier? And maybe my follow-up on the $4 of EPS, what is assumed paid load factor in total ancillary lift and Baxter leg room seats relative to the '25 base?

Let me take a piece of the first one, and I think Andrew will take the second. What is different about Southwest Airlines now obviously has been common a common question since we implemented a science seating. And I've been here 38 years, and we have changed constantly over those 38 years. And every single one was well, you're just not the same Southwest in every single time. that person or those folks were wrong. So I just want to clear this up. I mean our people and their heart for serving our customers. I mean that is and always will be the greatest competitive advantage at Southwest has. That's the difference.

That was true on Monday, what was seating and it was true on Tuesday with the same seating and nobody, no other airline can [indiscernible] the heart and the soul and the service of our people. So that's what makes Southwest airlines different.

And I would say, in a place like Chicago Midway, we have a very strong network. And so that our offering to customers where you want to go, we have the strong network there, price. We have lower costs than our competitors, and so we can offer great deals. Conscious we're still pushing RASM with lower cost, we pushed great deals, reliability. Now airlines talk about reliability, but it's extraordinarily difficult to copy. And the fact that we have much higher reliability than in airline in Chicago, customers can count on coming to midway and having a much better reliability than over here. And then hospitality.

Once again, one says our employees are the best. But guess what, look at MPS scores. Our employees really deliver a great hospitality and a high score. And it's extraordinarily difficult to copy. You can -- your people to treat customers better but if they don't what do you do? For us, our customers, our employees want to treat customers well and so these are durable advantages of having great hospitality, great reliability.

Our next question comes from Brandon Oglenski from Barclays.

Congrats as well. I think I'll just keep it to one here. But Bob, I mean, I think just judging by some of these questions and definitely like the bloggers and the airline observer in the ecosystem. There's this view, and I think you've hit on it in the answer to a couple of these questions, but like Southwest is losing its uniqueness. No more free bags and now it's -- or maybe less [indiscernible]. But the reality is, I think if we listen to all your competitors, things have moved much more towards a premium focus with consumers. So I don't know, can you just maybe wrap this up a little bit? Like isn't it just offering the market what they wanted. And incrementally, I think you hit on the culture, too, but has the employee base really fully embrace those too?

Thank you. And yes, this is about one thing, and that is chasing our customer. We are committed to following the customer, providing what they want today, which is different than what they wanted 5 and 10 years ago and what they want in the future because we know if Southwest Airlines doesn't provide it, they're going to go to a competitor, and we are not going to let that happen over time.

So this is completely -- this has nothing to do with copying anybody. This has to do with offering our customers what they want. And then as Andrew said, doing it even better because we've got the employees and the service delivery and the reliability that they cannot match. I mean just look -- I'm not meaning the break, maybe I am, but we won the #1 ranking in the Wall Street Journal best U.S. airline for 2025 for a reason. That's because our service was better, our operation was better and customers see it. And again, at the high level, we are on track. I mean, you see the numbers that we're guiding for 2026. So we're seeing customers embrace the changes, book the product. We are not seeing book away from Southwest Airlines. If anything, we're encouraged that we'll see share shift to Southwestern because the product is a stronger offering now, especially with corporate. So again, this is all about following the customer.

Our next question comes from David Vernon from Bernstein.

Maybe Bob, just to kind of build on that idea, right, you're going to be taking share, raising fares by something in the double digits, like normally, you would think there'd be some sort of demand elasticity from in that math. Why isn't that the right way to think about this? Why isn't the big risk here that you put all these changes in customers get used to them and then eventually they can just look across other airlines and maybe you're more expensive, and you see some of the expectations for what you're going to get in the unit revenue growth competed away because it is still a pretty competitive market as we look at it anyway. Any thoughts on the...

And thank you again, it's not -- this is not about raising fares. This is about offering our customers choice that we know that they want. So offering them a very basic fare if that's what they want. Offering them a fare that comes with extra legroom and a drink and a different level of service and boarding if that's what they want and a lot of products in between. So it's the customer's choice to buy which is very different than sort of across the board raising fares.

Same thing on the ancillary side, just like we sold early bird and upgraded boarding. We're offering our customers a choice around priority boarding and obviously, a choice around seat selection so this has nothing to do with raising the fares. This has to do with offering customers choice that they can then choose to buy or not buy. And what we are seeing is that they are choosing to buy those new options.

Our next question comes from Dan McKenzie from Seaport Global.

First, huge congrats to the entire company for pulling off, I think, what most couldn't be done. But a couple of questions here. First, the 50% of the tickets that are sold with the buy-up feature, my question really is what percent of revenue does this account for? Or what would you expect it to account for once you're at maturity? And then secondly here, if corporate bookings are up high single digits or double digits, what fares are they replacing? My guess is they're displacing the $39 fare? And then just related to that corporate, I'm just curious if the CapEx guide embeds new lounges.

So on the buy up, that's the type of stuff that we are working out that Bob's bugging before all the time. And so we're not going to give those right now. It will become clear over time as we give the high end of our guide, and we start to report. But right now, we're just focused on delivering the current guide. In corporate bookings, we found that the kind of segmentation when we introduced the basic fare, the corporates found that they did not want that in their ecosystem. So our sales force did a great team of helping configure selling tools so that, that was not featured and that was beneficial to our corporate revenues. And as we offer these ancillaries, we'll be doing the same thing. We anticipate additional benefit once the tools and expense policies calibrate to our new offerings, but we'll see additional benefits from that.

And then, just quickly on the lounge question. I think I mentioned before there obviously, we're looking at, again, things that our customers want. There's nothing specific to report there today. but just know that the assumptions that we have internally around what that could look like are built into our guide. So they're not incremental to the guidance that we've given you for the quarter, for the year. And I want to go back to your first [indiscernible]. I just can't help myself about the congrats on the implementation.

I just want to say thank you. And I got to thank our people, again, the level of execution last year was so many things -- it was just done so flawlessly on time with quality and to be able to win the Wall Street Journal #1 ranking. At the same time you're changing the company then to have a winter storm that's historic and manage it incredibly well, come out of that with no hangover at all. And by the way, the next day to the largest changeover in the history of the company with a science seating and to have excellent operating metrics on that day. I just don't know how to say anything, but we just stunned by what our people have done.

And our next question comes from Chris Wetherbee from Wells Fargo.

I guess I wanted to talk a little bit about the business commentary. And I guess what you're looking to see over the course of the next couple of weeks, Presumably, there's been some conversations there, and you seem optimistic about upside. So any insight there would be helpful and maybe where some of the share might be coming from? And then the second question would just be sort of understanding what's embedded in the fillers plus guidance around buybacks.

On the first one, I would separate out the 2 things between: one, the -- what we see as the upside from the ancillary sales and the buy up those are the normal booking curve management and what we expect to see there through the low season of February and the high season of March, that will help us understand better what the upside potential in the short term. What's not our guide is this kind of medium term benefit from increased corporate share or increased corporate revenue as people buy our ancillaries on the company dime. And so that is something that will unfold over a medium term, and it is not your guide.

On the buyback question, we continue to believe that the shares are undervalued relative to the long-term fundamentals of the business. And so we'll continue to be opportunistic there, and we'll make sure that we stay in the guardrails that keep us with our investment grade rating. One other thing I'll add to that, too, is we've invested a tremendous amount of capital into our people and into our business as well and into our customers. And we've talked about the investments we made in the [indiscernible] like the bigger bins and the new lighting and the new seats and the in-seat power, free WiFi and all of these things are part of that capital allocation as well. And so we stay within the guardrails. We invest in the business. We invest in our people, and we invest in our customers. and ensure that we stay in those investment regard rails.

Our next question comes from Jamie Baker from JPMorgan.

Yes. So squeeze me in the last minute. So the earlier comment about passengers making decisions at the gate. Have you padded your turn times to account for that? Is there any sort of operational impact from that phenomenon?

Actually, we took turn time out, Jamie, and yes. So all this is -- we've scripted out what we sell when and what happens when an our boarding. We have standards and those allow us to handle both employees travel for nonrevenue as well as upselling in the gate area. And so all of that, I think, works well for cost efficiency and optimization.

And I've got to just add again. I mean, we took time out of the turn, managing all these changes, which include changes to boarding and Wall Street Journal ranking as the best U.S. airline, most of which are operational metrics. I mean, not bad.

And on that note, we'll conclude today's call. As always, if you have any follow-up questions, please reach out to Investor Relations, and we appreciate everyone for joining.

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.

Hello, everyone, and welcome to the Southwest Airlines Third Quarter 2025 Conference Call. I'm Gary, and I'll be moderating today's call, which is being recorded. A replay will be available on southwest.com in the Investor Relations section. [Operator Instructions]

Now Lauren Yett from Investor Relations, will begin the discussion. Please go ahead, Lauren.

Thank you. Hello, everyone, and welcome to Southwest Airlines Third Quarter 2025 Earnings Call. In just a moment, we will share our prepared remarks, after which we will move into Q&A. I am joined today by our President, CEO and Vice Chairman of the Board, Bob Jordan; Chief Operating Officer, Andrew Watterson; and Chief Financial Officer, Tom Doxey.

A quick reminder that we will make forward-looking statements, which are based on our current expectations of future performance, and our actual results could differ materially from expectations. Also, we will reference our non-GAAP results which excludes special items that are called out and reconciled to GAAP results in our earnings press release. Our press release for the third quarter 2025 results and supplemental information, including our initiative highlights, were both issued yesterday afternoon and are available on our Investor Relations website.

And now I am pleased to turn the call over to you, Bob.

Thank you, Lauren, and thanks, everyone, for joining us today. Third quarter was another story of continued strong execution across the board. Operational reliability, cost discipline and the delivery of initiatives against our transformational plan. Southwest continues to transform at a faster pace than ever before, and I'm pleased with the results of our strategic transformation that we saw during the third quarter and the quality of the initiatives delivered.

Both costs and revenue finished meaningfully ahead of expectations and the rollout and impact of our initiatives remain firmly on track. We began selling assigned an extra legroom seating in July, a major milestone for our customer experience and product changes. The rollout was smooth and while still early, we're right on track with our expectations and we're already seeing a 4-point improvement in customer Net Promoter Score on aircraft with this new configuration.

Additionally, we have continued to launch new products and services showing our commitment to meeting the needs of our customers, and our ability to execute quickly. Starting tomorrow, we will be offering free WiFi sponsored by our partner, T-Mobile, for our Rapid Rewards members. We continue to roll out our updated cabins with larger overhead bands [indiscernible] upgraded lighting and more. We expanded our distribution channels, launching a partnership with Priceline. We launched our new in-house vacation product, Getaways by Southwest. We announced a new partnership with EVA Air to provide customers more connection opportunities. We announced new markets, including the additions of Knoxville, Tennessee, St. Martin, Santa Rosa, California and our first ever flights to Alaska, servicing anchorage all to start in 2026 and we aren't done.

While we don't have specifics to share today, we're actively looking at continued changes to widen our product offering for our customers, provide additional premium revenue opportunities and further enhance our Rapid Rewards loyalty program and co-brand economics, including things like premium seating, airport lounges and long-haul international destinations served by Southwest Airlines.

And our customers are responding to these enhancements. Our brand Net Promoter Score has returned to the level seen prior to our policy changes announced in March and we are excited to deliver further enhancements as we improve the customer experience.

Our strategic plan continues to progress well, and we're encouraged by the sustained outperformance of [indiscernible] revenue and the momentum across other key revenue and cost initiatives. We saw a clear positive inflection in the demand environment beginning in early July, which continued throughout the quarter, and we are proud to report record third quarter revenue performance. Looking to fourth quarter, we expect to deliver an all-time quarterly record revenue performance.

We maintained strong cost discipline across the organization, significantly beating our CASM-X guide for the quarter. We have identified additional cost-saving opportunities in the back half of the year and remain confident in our full year EBIT guidance range of $600 million to $800 million. We are entering the fourth quarter with confidence and anticipate meaningful margin expansion as the benefit from our initiatives continues to mature as we execute our transformational plan.

Our people delivered a strong operational performance throughout the quarter. Their dedication, their resilience and the world-class hospitality continue to set Southwest apart. We've made measurable progress across nearly every key operational metrics since January, and we continue to lead the industry as we track our performance against the Wall Street Journal Airline scorecard.

These results stand out even more given the hurdles that we faced, including summer weather, ongoing ATC constraints and the full rollout of reduced turn times across many of our stations, and it's a testament to our operational excellence and the heart of our company.

While we're not providing 2026 guidance today, we're excited about the opportunities ahead and confident in our strategy. In 2026, we expect to recognize even greater benefits from our portfolio of Southwest specific initiatives, including a full year of revenue from bank fees. We expect to deliver more than $1 billion of incremental EBIT from assigned an extra legroom seating in 2026 and hit full run rate of approximately $1.5 billion in 2027.

We will continue to be disciplined in our cost execution across the organization and expect that momentum to continue into 2026. It's just an exciting time at Southwest Airlines. We're transforming faster than ever before and the momentum is real.

And with that, I'll turn it over to Andrew to share more on our revenue and operational performance.

Thanks, Bob. I want to echo Bob's appreciation for our people. Their hard work and commitment enabled us to deliver an outstanding operation this quarter even in the face of early July weather challenges. We've come a long way over the past couple of years, working to enhance processes and technology and improve daily operations and better managed disruptions. A great example of this was in September when an external telecommunications issue in Dallas, impacted radar, radio and computer systems, triggering FAA ground stops at local airports. Despite our significant presence at Dallas Love Field Airport, we had just one cancellation, finishing second among all U.S. airlines for the day, including many that weren't directly affected by the issue.

Our teams particularly those in the NOC and at the station, responded quickly and effectively, keeping our operations running smoothly and reliably. We know reliability is one of the biggest drivers of customer Net Promoter Scores and a primary driver of loyalty so it's critical that we continue to innovate and invest in both our operations and our people.

The demand environment inflected up in early July and sustained momentum throughout the quarter. The improved demand environment and our execution of our initiatives contributed to our record third quarter revenue and to be in the midpoint of our third quarter guide with RASM coming in at up 0.4%. Even with increased capacity from our strong operational results and our ability to prolong the selling of the 6 2-be-removed seats on our 737-700 aircraft.

We were pleased to see load factor up year-over-year in August, September and so far in October. And corporate travel demand improved sequentially with a particularly strong September where we saw multipoint passenger growth. We're also seeing great traction with our loyalty program and co-brand credit card enhancements, which align with our new product offerings and incentivize everyday spending. Third quarter royalty revenue was up 7% and we saw double-digit growth in co-brand card acquisitions year-over-year. Our recent 100,000 point promotion saw the highest acquisition activity in over 5 years, signaling that these enhancements are resonating with customers and driving increased engagement.

Looking ahead to the fourth quarter, we expect RASM to be in the range of up 1% to 3%. This outlook assumes the positive inflection in demand we've seen across the industry since early July remains at current levels through the end of the quarter. It also reflects the planned acceleration from our initiatives, the approximate 2-point year-over-year increase in fourth quarter capacity since July and the recent observed impact of the government shutdown.

To the extent the demand strengthens beyond current levels, it will provide upside potential to our full year EBIT guide of $600 million to $800 million. We're planning for fourth quarter year-over-year capacity growth of approximately 6% which compares to a relatively [indiscernible] base in fourth quarter 2024 compared with fourth quarter 2023, plant capacity is up about 1%. This capacity level now contemplates further pushing out the retrofit timing of our entire 737-700 fleet to be completed in January without any impact to the planned operate date for seat assignments and extra legroom seating on January 27.

A big shout out goes to our tech ops team for streamlining the time line to complete this work. allowing us to capture additional revenue in those 6 seats during the entire holiday period at almost no incremental cost.

On the product side, we launched the sale of assigned an extra legroom seating on July 29. While early bookings are in line with our expectations. We're seeing strong interest from customers and the trends are encouraging, including demand for our new products, fair product buy-up and ancillary seat sales. These offerings are helping us differentiate and enhance our products and drive incremental revenue. We feel confident in our ability to deliver more than $1 billion of incremental EBIT from assigned and extra legroom seating in 2026 and hit full run rate of $1.5 billion in 2027. We're proud of the progress we've made and excited about what's ahead.

With that, I'll turn it over to Tom.

Thanks, Andrew, and hello, everyone. As you've heard from both Bob and Andrew, our initiatives are on track for this year, and we expect further acceleration in contribution from these initiatives into the fourth quarter and into next year according to our plan. As you know, our continued performance on costs is a key element of our transformation, and I am pleased to once again report that we delivered strong cost performance this quarter, with CASM-X coming in at up 2.5%, beating the midpoint of our guide by 2 points, a strong beat with or without the capacity increase we saw in the quarter.

We continue to see broad-based cost discipline across the entire business. I should also emphasize that this is more about spending smartly than it is about simply cutting costs. We're simply pushing costs forward as evidenced by the customer, technology and operational investments being made across Southwest Airlines. This was a company-wide effort, and I want to thank our teams for their focus and execution.

Looking to the fourth quarter, we are expecting strong continued cost execution with CASM-X up in the range of 1.5% to 2.5% on capacity of approximately 6%, both on a year-over-year basis. Excluding the impact of expected book gains from fleet transactions in the fourth quarter of both years, which gives a more accurate view of the cost performance of the underlying base business, we expect CASM-X to be in the range of flat to up 1% year-over-year.

Turning to fleet. Boeing continues to hit their delivery plan, and we've increased our 2025 delivery assumptions from 47 to 53 Boeing 737-8 aircraft. We received 8 aircraft deliveries in the third quarter and retired 16 aircraft from our fleet, including the sale of one 737-800 aircraft and plan to sell 4 additional 737-800 aircraft in the fourth quarter. We will continue to be opportunistic as we evaluate potential sale transactions from our existing fleet.

We continue to expect full year 2025 capital spending to be in the range of $2.5 billion to $3 billion, which includes the additional aircraft deliveries expected this year as well as the expected proceeds from aircraft sales. We finished the quarter with $3 billion in cash, in line with our liquidity target of $4.5 billion, including our revolver and with a gross leverage ratio of 2.1x within our target range of 1 to 2.5x.

We also executed an accelerated share repurchase program in the amount of $250 million under the previously announced $2 billion authorization. We intend to continue opportunistically repurchasing shares based on market conditions. This reflects our continued confidence in our strategy and our commitment to returning value to shareholders.

Overall, our third quarter performance was ahead of our expectations for cost, revenue and net income which is another key milestone as we execute our transformational plan. We're managing costs well, executing our initiatives, investing in our product and customer experience, running an industry-leading operation, maintaining a strong and efficient investment-grade balance sheet, and we remain confident in our ability to achieve our full year EBIT guide of $600 million to $800 million.

And with that, I'll hand it back to Bob.

Thanks, Tom. As we wrap up, I want to leave you with a few key thoughts. First, the pace of change at Southwest is accelerating and at the same time, our execution has never been stronger. We're transforming our product, enhancing the customer experience and delivering meaningful financial improvement, all thanks to the incredible work of our people.

Second, we're confident in our ability to hit our fourth quarter and our full year guide. We built a strong foundation, and our initiatives are ramping as planned. The operational rollout of assigned an extra legroom seating has been smooth, and we're seeing encouraging early results.

Third, we're not stopping here. We've continued to evolve our product, expand our network and lean into the customer experience. Free WiFi for Rapid Rewards member starts tomorrow. New markets are launching, and we're building momentum across the business. And while we aren't ready to share specifics just yet, work on the longer-term strategy to meet evolving customer preferences is well underway.

Finally, I want to thank our employees once again. Their excellence and hospitality are unmatched, and they are the driving force behind our success. It's a very exciting time at Southwest Airlines. We're executing with urgency and purpose, and we're confident in the future we're building and the benefit it will provide for our shareholders. Thank you all for joining us today.

And with that, I'll pass it back to Lauren to start our Q&A.

Thank you, Bob. This completes our prepared remarks. [Operator Instructions]

Thank you, Lauren. [Operator Instructions] Our first question today comes from Conor Cunningham with Melius Research.

I was hoping you could frame up the sequential improvement that you're seeing into the fourth quarter versus what you were messaging in September. I'm just trying to understand the building box there. I realize that capacity is a little bit higher, but I think you knew that, that was going to be happening. And just if you could just talk about specifically around the new initiatives. Is that still 2 points? And does that carry into the first quarter of next year, just thoughts around the moving parts on unit revenue?

Yes, Conor. It's Bob. I'll give it a start. I think it's pretty simple, and it's a couple of things. We have the 2 points of added capacity that you referenced, and that's just delaying the retrofits of the 700s into January that allows us to fly those extra 6 seats through the holidays and just capture extra revenue and peak demand period. Real proud of our tech ops folks because they can get all those retrofits done now in January. So that's the 2 points of capacity.

And then we've got 2 other points and it's -- really, we just chose to not assume that the macro would inflect further from where we are. You heard we had a solid inflection in July that has maintained itself. But we didn't want to assume further macro inflection simply because you've got some uncertainty and in particular, it's uncertainty around the government shutdown its impact and then obviously, it's duration. So we felt it was prudent to guide assuming that things are stable from here, that the demand does not inflect further.

And then yes, you've got, on the RASM front, you've got a tailwind as the initiatives continue to kick in. All of the initiatives are on track. They're on track from a benefit perspective, they are on track from a timing of delivery perspective. But it's really just those 2 points of not assuming that the macro would continue to inflect further.

Yes. I'd say, Bob, the -- we've seen [indiscernible] shutdowns, right? And we know what happens when they go on. First, you see government travel -- goes to 0 very quickly. Then it goes to government adjacent than overall business travel then leisure travel as we saw in 2018, 2019. Obviously, like everyone else, we experienced, the government stopping travel very quickly. But last week, we did see government adjacent. This is state and local governments, depending upon government reimbursement. These are defense contractors. These are companies that kind of do business with the government and they held up until last week, and they went down sequentially. So through that more as a canary in coal mine, it's not material numbers that we're talking about between those 2 categories that we observed but we know what happens in the future. So if you're uncertain about when the government shut down ends, that makes you less able to assume an economic inflection. And so it all is tied up, I think, when the government shutdown ends.

And Conor, just the last kind of maybe connect your tangent to that is either way, whatever happens to the macro or whatever happens with the shutdown, we're committed to hitting our 2025 reaffirmed EBIT guide. We're not sitting around waiting for the macro to show up as an example. We're going to continue to press on other areas, in particular, costs like you saw with press and [indiscernible] on CASM-X in Q3 that just add more assurance around meeting that full year guide. So don't -- I wouldn't take that as we're just waiting to see.

We're absolutely working proactively put some insurance around the guide irrespective of what the macro does, what the government shutdown does.

Am I allowed to follow up? Can I just follow up to that? Just on -- so I guess the pushback that I've heard is that basically, you've added 2 points to incremental capacity. And it's basically -- it's almost like that's almost a 0 revenue contribution. I mean, you're going to get a natural uplift in overall growth. I just like -- maybe you -- could you just frame up like why was it the right decision to add that incremental growth? I understand that there's a cost benefit. I would have thought costs would have moved down a little bit more. Just how you're balancing that in general on that decision?

Sure. I mean, first of all, it's an EBIT guide, not a RASM guide. It did imply a RASM, what you're asking about but the decision, because the tech ops team has been much more productive, we will be doing them faster. So when you do it faster, it overall costs less money and then also that lower number shifts into Q1. And then for the seats, there is incremental and the high periods during the holidays. Now we did this late in the curve, so you won't -- the non-holiday portion won't benefit that much. Sot it is very RASM-dilutive, but it's very EBIT accretive because that little bit of revenue plus the cost going down, make it EBIT positive to do that, which is what our guidance is about and what our objective is about is EBIT even though will make RASM look on flattering in Q4. And so that was the decision making behind it.

The next question is from Mike Linenberg with Deutsche Bank.

Just some questions maybe, Andrew or Tom, just some stats on some of the initiatives, even rough numbers. What we could see in the quarter we did see an inflection on at least connections. It looked like your enplanements outpaced passengers. And presumably, that helped your load factor, which was much better this quarter than where we were in the beginning of the year. And how -- and also on the basic economy rollout, what are you seeing on the buy up? I think there was a point where maybe the majority of Southwest tickets were sold in the bottom fair bucket. I suspect that that's been moving up. Any color or stats that you can provide on some of the initiatives that you put in with respect to those?

Yes, I'd be happy to. So yes, as I mentioned in my prepared remarks, we did see, as we had predicted, that load factor would inflect positive post summer. So August, September, October had year-over-year increases in a load factor that came from the enhanced connectivity we talked about. It came from the third-party channels and also I think some of the basic rollout, which allows you to kind of have a more segmented offering, which means your highs get higher and your lows get lower. So that allows for good targeted volume.

So we're on track as far as that goes. So switching from yield driving our RASM to load factor driving our RASM, which is kind of what we indicated earlier in the year. As far as the buy-up, the buy up out of the bottom basic, we need that to inflect really positively with seats. In the interim, we have improvements that go about mid-single-digit points of increase in optional buyout, those who decide to buy up to the second, third or fourth, we did see a good traction with that. The big step-up will come in Q1. But in the interim, it is a positive move.

And from a financial standpoint, everything is on track for the initiatives. And so everything that we're seeing for assigned seats and extra legroom is very much on track to -- still relatively early for the late January start for operating that. But all the data that we have so far shows that, that's still on track. And the other suite of initiatives, as Bob said, is also on track.

And if you look sort of getting into maybe granular, what Tom was saying, again, it's early, there are limited bookings in place post January '26 when the -- when bookings started for travel for the new assigned seating extra legroom. But both volume -- the mix of fair products is what Andrew was referencing -- basic, [indiscernible] fall further as an example. And then what we're seeing in terms of ancillary seat buy up, all of those things are encouraging and on track. Again, it's early, but I'm really pleased with that.

And then again, while we're not literally selling extra legroom for assigned seating. We're selling it for after January, but we have aircraft out there that have the extra-legroom configuration and folks flying on those aircraft, we have more than 400 converted, are giving us a 4-point higher NPS score than those without and that's without being able to book yourself into extra leg room. That's just they're flying on an aircraft that has that section reconfigured. So that's very encouraging as well from a customer experience perspective.

And I guess to put an exclamation point to that, Bob, we see literally a knife edge on January 27 in our bookings of pre and post assigned seating, we see a knife edge yield improvement. So clearly, customers are voting with their wallet as well as the surveys that they like assigned seating extra legroom.

And what's great this time around versus bags where we started selling and operating on the same day, and then you were ramping up from then we've been selling the assigned extra legroom since July. So when we hit end of January will effectively be at that run rate.

The next question is from Savi Syth with Raymond James.

If I might, just on the initiatives and kind of the unit revenue trends ask a little bit of a question on how we should think about as you head into 1Q. Just not assuming any kind of demand environment change just based on that initiative ramp-up and capacity plans. Like how should we think about the progression of year-over-year RASM? I'm not looking for a guide, but just trying to understand kind of the magnitude of how that moves from 4Q to 1Q?

Yes. So what we have talked about is a $1 billion number for the extra legroom and the seat assignments. And as you think about the other initiatives, by and large, by the time you get to 1Q, those will be approaching run rate. There's some of them that still have some ramp that occurs during the first half of the year. The loyalty program, for example, continues to ramp along with the benefits that come with seating. But I think you can think about it in those terms. We're not guiding 2026 yet, but that $1 billion number that we've talked about for next year and the ability for that to then grow to $1.5 billion as we move to the following year is still very much intact.

And if you look at Q1 capacity, that's already published, now we're not saying it's final, but we know that when we published, we don't move it that much. It's a modest year-over-year increase. We have not -- we will still be lapping our load factor initiatives that started really in August and beyond. So that will be -- benefit should still carry on into Q1. And as I mentioned, the knife edge improvement yield starting 127 coming from seat fees and buy up to extra higher fare products, those, I think, 3 combinations of low capacity growth, load factor improvements going and still tracking and extra yield mix for interest in Q1.

[indiscernible] for full year. I know we're going on a long time about this kind of a combination of what both we're talking about. If you just take the midpoint of our guide that was reaffirmed for EBIT for the year, $600 million to $800 million and then you stack on top of that the $1 billion that Tom referenced around the benefit of assigned seating and extra leg room and then you stack on top of that, the incremental value of a full annualized year of bag fees, which I think is roughly $700 million. And then we have obviously [indiscernible] improvements in a number of other initiatives that are all maturing -- just gives you an idea of kind of the EBIT stack for the -- just sort of the EBIT stack for the year, not trying -- certainly, we're not guiding 2026 today, but it just gives you an idea of how to think basically about that EBIT stack.

The next question is from Sheila Kahyaoglu with Jefferies.

Maybe if I could ask on -- just if you could fill in the details on the corporate growth, how you're thinking about that filtering into your sales numbers and changes on that growth formula going forward given the set given you're selling forward into January, and you're seeing a knife edge in that yield premium coming through?

Yes. The corporate for the new year is extraordinarily low right now. So I wouldn't give a read into that, I will say, for Q3 corporate sales for future travel kind of excluding the government and inflect it up to plus 5% year-over-year. So we're seeing corporates improving. Our trip growth was down, as I said, we shrink trips where our competitors increased. So normally, since corporate is schedule-sensitive, not price sensitive, that should have led to kind of a reduction in share and we didn't necessarily see that. And so we see good solid trends with demand for Southwest business.

But we expect, as you hint that in Q1 with assigned seating, that will unlock additional growth. Right now, through various different measures, we think our domestic managed business share is in the mid-teens, which is below our overall capacity share. And we think extra legroom assigned seating should give us tailwinds in our corporate share, and that is not to quantify the numbers that we just gave you.

The next question is from Jamie Baker with JPMorgan.

So I suppose the definition of sell-side and sanity is asking the same question over and over and expecting a different response, but here it goes. Fourth quarter RASM guide, up 2% at the midpoint. But all of the tactical improvements, the bank fees, royalties and flight credit noise, that's what, 8 points of benefit. So that suggests RASM at your core. So excluding the good stuff, is down mid-single digits. Why is this not the right way to think about it that the core is deteriorating, but new initiatives are making up for now. But of course, that could prove challenging when you begin to anniversary those initiatives.

Yes, I don't know where you're getting the [indiscernible] Jamie. I apologize not following your math. You did mention the flight credits. The way the flight credit breakage works is that when customers cancel flight it drops to a residual travel fund than those break prospectively. So the breakage rate changing is not something that you kind of will see changing until next year. So we expect 2026 to have -- to show breakage benefits from the change in policies. So that one is coming.

But the bag fees, obviously, are a, let's call it, a 3-point benefit year-over-year. Sequential, it's less than one because most of the policy was already in place for Q3. We do have on a year-over-year basis, if you're doing that our stages engage is growing year-over-year, whereas our competitors, that's going down as they restore regional. So that's about a 2-point headwind for RASM, if you did normal stage length adjusting. So I'm just not getting your 8 -- kind of walk us on it, maybe we can answer it.

Well, let me ask it differently. In the fourth quarter guide, how much -- what is your initiative RASM then? And if we take -- so whatever your answer is, maybe it's plus 3, maybe plus 11. I mean it's not going to be. But whatever the initiative-related RASM contribution is, shouldn't we think of the difference relative to the 2% midpoint as the core and is that deteriorating?

I think if we look at -- I'm not sure maybe Tom can help with the initiative stuff. But if you look at other domestic main cabin, which is clearly not their strongest, our -- you look at us as a proxy for a pure-play domestic main cabin, we see sequential improvement and theirs doesn't necessarily imply that either. And we see -- as far as the core, if you look at our core customers, as we mentioned, we see our credit card applications have accelerated with the new products and the new features. We're seeing Rapid Reward sign-ups accelerate and we're seeing the kind of our Road Warrior travel also improved.

So our core customers are responding back. Our brand -- our Net Promoter Scores from our customers did dip post your conference and kind of went to the bottom in June and now have returned to where they were pre year conferences. So all the kind of tail, tail signs on the micro level show our customers increasingly engage increasingly using Southwest Airlines, whether it's a credit card or -- are traveling with us. So we see good trends in the core.

And maybe what I'd add there, Jamie, as well, is as far as where you draw the line between an initiative versus the base business is not always a clear line. We knew as we announced actually at your conference, several of these initiatives, there would be an offset. And so as we guided these things, we guided them and we gave estimates for some of them, we guided those or gave those estimates as a net. And so it's not always a clear line on where you drop between base business or the initiatives.

And then a quick second one for Bob. And thank you for all that color, by the way. So in that lounge survey that you sent around, Southwest used the word hub for what I think might be the first time in history and correct me if I'm wrong. What do you consider your hubs to be? I mean, I guess I could just look at some base level of departures, but that doesn't necessarily speak to connectivity.

Yes, I think that -- it's just -- it's more choice rather than intended to imply some kind of strategy change or change the way we think about cities. We have -- depending on how you count them, we have roughly 15 to 17, what we call, mega cities and they do some things that traditional hubs do. They have what we call intentional connections or banking opportunities throughout the day they are not full banks, but they also have a lot of banking of aircraft activity. And again, those additional connections are just to drive connectivity across the network. So I wouldn't confuse that word choice as any change in Southwest Airlines network strategy.

Now back to the survey. Obviously, if we were to choose to go forward with lounges and we've been talking about where do we go next strategically to continue to widen our offering for our customers to continue to widen our offering of things that they desire in particular premium and then how do we do all that to impact the economics of the Rapid Rewards program and the co-brand card, we're looking at what would our customers want in a lounge, where would those lounges be located relative to where we have strong passenger strength and demand. So that's really what it was about.

And we're hopeful to -- and again, this work is not just thinking about it. There's active work in terms of developing the next strategy. And I'm hopeful to be able to lay parts of that out early in 2026.

I think, Bob, to put a point on that. If you -- domestic RASM, if you index that to 2018, we're getting very close to our competitors here in Q3 and Q4 may close the gap. But what we have still a gap is the other revenue -- is our credit card hasn't done as well as others in recent times. Credit cards, these days, you've probably seen from your own bank and from other newspapers that it's driven by high end, high fee credit cards that come with lounge access. So our gap and RASM is turning into now more "other revenue" driven by high-end credit cards that is what drives us to look at it as well as the customer desires that Bob talked about.

The next question is from Catherine O'Brien with Goldman Sachs.

Maybe just a quick first one on a shareholder returns. Can you walk us through how you think about the guardrails to shareholder returns? You're within your 1 to 2.5x leverage target, 2.1x at the end of 3Q. How much headroom do you want to leave yourself on the high end of that leverage target, given there's still some uncertainty out there? I do have one quick follow-up.

Yes. Thanks for the question, Catie. Yes, as we look at that, it is, I think, important to us that we do leave a little bit of headroom there, knowing that there's some uncertainty out there. And so as we look at that range of the 1 to 2 to 2.5, we continue to believe that keeps us squarely in the investment grade and strongly within investment grade. And then we've got the $3 billion plus $1.5 billion revolver liquidity target as well, which we were right on for the quarter.

And so as we think of shareholder returns, it's about ensuring that we're staying within those guardrails. And then as we look at the variability that might be there within the guide that we leave room to stay within that under those different scenarios.

Okay. Great. And then I had to laugh at Jamie's cell site insanity, I'm going to keep going on in the past, so forgive me. But I just -- I think it just may be helpful to understand a little bit more as we think about next year and the initiative ramp this year. And so maybe just a question on the EBIT target rather than RASM super specifically. You reiterated your EBIT target from last quarter, but fuel is down a bit and capacity is a bit higher. Are you able to share the EBIT contribution from the initiatives that you already booked in the third quarter? And then what you're incorporating in fourth quarter? And how much of that fourth quarter figure is already on the books?

Thanks, Catie. Yes, I don't know that we'll go into that level of detail with it. I think Bob laid it out pretty well as far as the initiatives that we have this year and the increment that we expect to see next year.

Yes. I think you can think of the -- I believe the bag -- the largest, of course, right now is bag fees and that sequential incremental improvement from third quarter to the fourth quarter's contribution is about one point or maybe a little bit less than one point. Obviously, as you get into 2026, all of the EBIT associated with assigned seating extra legroom is fully -- there's nothing today. It's a fully 2026 value then wraps to $1.5 billion in 2027 as it matures. You've got some smaller things, as Andrew talked about, the Rapid Rewards optimization, flight credits, which that will come home as they break, which tends to be later. But yes, we'll lay all that out as we stack up the EBIT guide for 2026, we're just not ready to do that today.

And there's, of course, the continued cost savings as well. I think your question was a little more focused on the revenue-related initiatives, but we've got the cost initiative that will continue to ramp up and is also on track for next year. .

The next question is from Brandon Oglenski with Barclays.

And Tom, maybe I'll just follow up there. You guys did reiterate $4.3 billion, I think, in total initiatives next year, but you guys keep talking about the $1 billion from assigned seat and premium. I get that. So maybe can you talk to the totality of the $4.3 billion, is that still valid? And I want to keep it to one question, but I guess 2 parts here. Can you give us a better understanding of how the buyout process is working today in the fourth quarter? And then how that potentially changes from like a basic fare to plus fair just based on seat assignments and premium availability?

Thanks, Brandon. I'll start and then Andrew will take the second part of your question. The $4.3 million is very much still intact. We've talked about $780-or-so million in cost savings. We've talked about $1 billion that would come from bags. We've talked about $1 billion that would come from extra legroom and seat assignments, which will start operating in January. We've got the earn and burn on the frequent flyer. We've got the amendments that we've made and the enhancements that we've made to the Chase program, all of these things stack together.

And what's great is we're seeing these continue to be on track as we're ramping through this year and especially as we get into the fourth quarter and into the first quarter of next year, as you see these continue to ramp. So yes, very much still intact for the $4.3 billion.

And as far as the bio process goes, right now, the buyout process is mostly about flexibility. Going from basic to choice, the primary differences or flexibility and Rapid Rewards accrual that kind of entice customers to buy up the very highest kind of entry fares are no longer basic. So if you think about a $350 fare as an entry point for flight, that's not basic because it's a pretty high fare to be basic. And so all that to say that about 80% of our tickets were Wanna Get Away last year and a little bit less than 50% are buying basic. A portion of the remainder are people who have choices like a stand-alone, that's the first entry point for them.

And then you have, as I mentioned, a mid-single-digit composition increase of those who voluntary who presented with a low fare and can buy up for the additional features, those is a mid-single-digit increase right now. Now we go into next year with seat assignments, that is much bigger. The booking curve is such that people buy early or generally less elastic. As the booking growth go goes along, you have more elastic demand at the end, it's also again inelastic. And so right now, we're seeing strong buy-up and fare products in the kind of Q1 period with seat assignments. We expect, as we get into the [indiscernible] of the booking curve for Q1 that we have more and more seat only sales that people add in as well. So that composition will mix a little bit.

But given the different entry points customers and have into it is all about giving choice as our fair product indicates and that's led to, as I said, a quite strong increase in yields this part of the booking curve.

Well, I think the other thing to note, I know we've said many, many times, is -- there are so many transformational initiatives that are underway. And between what we laid out in September, a little more than a year ago, what we laid out in March, all of that stuff is complete. The only thing that is still to come home is the operation of assigned seats, but we're selling those, and that huge change has been really, really smooth. So number one, everything that we laid out as a contributing initiative is done. Second, they're done as in high-quality, ready to go and on time and is expected to or already showing signs that is contributing the value that was expected or in the case of bags even greater. So you've got initiatives on time, they'll start as planned, and they are in line right now to deliver the value that we expect as we have high confidence in both the -- in both that total value of EBIT to be delivered through initiatives and then our EBIT guide in the fourth quarter of this year and for the full year and then our -- the EBIT guide that we'll put in front of you in 2026. But the -- I mean, the execution of all this has just been stellar.

The next question is from Duane Pfennigwerth with Evercore ISI.

I'm going to keep it to one, I think we're struggling a little bit with that request. So anyway, I assume some of these initiatives have a learning curve associated with them from a revenue management perspective. And I wonder if you have any anecdotes about early learnings or tweaks you have made since the early rollout? Maybe some of these items were disruptive initially but are settling down as we get more fully baked into the booking curve?

Certainly, I think Tom made a good contrast of bags and basic was kind of all at once because you started selling operating right away, whereas assigned seats, we have a long run out to it. So we mentioned last time that we saw a customer reaction to back to basic, which affected the third quarter by one point. That since has been resolved, and that basically comes down to -- you have a much wider set of price points. As an earlier question implied, the number of people who buying just your lowest entry point used to be so high and now it's a lot wider.

And so you did see different reactions from customers in June and July as they've learned it, we saw that stabilize by mid-July, and the customers are kind of buying life normal, if you will, for that. For -- so I consider all the revenue management stuff doing very well on that. And then for Q1, we have a long run up. And so the tweaks are small in nature as you're looking at who buys a seat only, who buys the biops, tweaking those, high-demand, low-demand flights. We have a long runway to do that. So we feel very comfortable about how that's going.

Now there still is an overall ramp-up in that -- in my prepared remarks, I told you that the '26 number, the '27 number, the difference is an implied ramp-up in and the value. So to the extent we go faster, obviously, the number gets bigger next year.

Yes. I think that's a really important point is that the -- Andrew, I don't want to -- sorry to just to say the same thing you just did, but I want to make sure everybody hears that, that the $1 billion contribution from assigned seat extra legroom next year contemplates time to do exactly what you said, which is ramp up the value. Some of these things like seats are dynamically priced, learn, tweak and so the $1 billion contemplates a ramp-up time. versus we've got a guide for EBIT for that initiative and there's risk because there's going to be ramp up. We've actually -- that's contemplated in the value that we've given you.

The next question is from Chris Stathoulopoulos with SIG.

I'm going to be compliant as well here and keep it to one. United gave a CASM-X algo last week over the midterm to help us think about all the moving pieces here as it relates to capacity and their investment here in the product and other areas here. So I realize you're still in your budgeting plan for next year, but any thoughts on how we should frame that, whether you want to describe that as your mid- to long-term algo versus what you've given, I guess, your guide on low single-digit capacity over the midterm.

Just wanted to understand the moving pieces around that, and I think we can all do the math on the EBIT side and what that might mean for unit margins and things like RASM?

You're right that we're still working through the planning process for 2026. So at our next call, we'll have more detail on next year. What you've seen from us is strong cost performance quarter after quarter, a strong beat this last quarter with or without the incremental capacity that came from operating the 700 seats, it was broad-based. There's work that we're doing on small things and discretionary spending. There's things we're doing on large things around supply chain and optimizing our retirement plan and the component maintenance work that goes along with that, the way we're looking at real estate and technology. So we're looking everywhere. And we've talked about being on track this year, next year and to the $1 billion in 2027 for the cost savings initiatives that we have, and that will roll in and again, we'll put that into the context of 2026 at our next call.

The next question is from Scott Group with Wolfe Research.

So when I think about the $1.8 billion of initiatives this year. The guide has $300 million of incremental EBIT. So call it, $1.5 billion gap. Like do you think we should contemplate something similar next year with a sizable gap between the initiatives and the actual EBIT? Or I mean, is there a reason to think the gap widen is there -- could the gap potentially go away? I guess you're not ready to give '26 guidance, but just at a high level, like how do you think about like that gap and how that develops into next year?

Yes, Scott, you're right. We're not ready to guide 2026. The gap is simply the macro and what happens to the macro inflection like we talked in Q2. And we were down sort of from where we thought the beginning of the year, we would be down roughly 6 points. We've seen, obviously, some of that come back. And it's -- I think absent maybe the uncertainty of the shutdown impact, there would be more certainty that continue to macroeconomic inflection would continue.

You've heard some others say that macro inflect back is going to be completely back to pre -- before the issues by the end of this year. You've heard others say close. You just don't know. And so I think that's really what the gap is. It is how much is the macro claw back the gap from where we thought we would start to -- where we thought we would be when we started this year. We got down 6%. We've come back a material piece of that, but we're not all the way back.

The other piece of it too, Scott, as you think about the initiatives, what we've done is we have put everything into the initiative bucket that we're doing to counter what would be sort of typical increases in cost in the business. As we move into next year, we've talked a lot about moving more to an EPS guided range. Of course, everything nets into that number. We'll still talk about the initiatives and what they are and what they're doing. But as we guide, likely, we move more toward kind of an EPS range where everything is netted. And as we talk about these initiatives, hey, this particular cost savings initiative kind of in a year where we're not so initiative heavy with the transformation that we have, those types of things just find their way into the sort of typical efficiencies that you're -- that you're building into your budget as you're moving forward. And don't confuse my word typical of anything other than just talking about kind of standard budgeting practices. We're going to continue to be really focused on the efficiency coming out on the cost side.

The next question is from David Vernon with Bernstein.

So Andrew, I'd love to kind of narrow in on that comment around the knife edge improvement in yields with bookings for the assigned seating in January. Can you get -- is there a way to dimension it and to talk a little bit about how much of the schedule sold at this point in time whether the sell-through rate is being affected by the higher yields? Or any additional commentary you can give us on what that knife edge comment was would be great?

Yes. Well, I apologize in advance, I'm going to do my best not to because it's early in the curve and so it is our first time doing the assigned seats and stuff like that. So we have studied others. We've scoured for good industry data. We think we have good compares. We have -- our models are trained on how we sell early bird stuff and upgrade boarding. So we think we have good context. And so I'm not going to give you the number because I don't know how long they'll persist in the booking curve. .

But when you do see a knife edge, it's clearly a change in customer reaction. You really see knife edges. And when you do see a knife edge, something happen. In this case, we see a disproportionate customer reaction to the ability to buy an assigned seat or to upgrade to a fair product that includes it. And so that gives us confidence that we will see a revenue positive customer reaction as we go throughout the booking curve. It's just the amount being different than our business case is something where it's just too early for us to hit that.

Okay. And then maybe just as a quick follow-up, Tom. I applaud the desire to get out of initiative jail here because the incremental math from the site is really tough to get to. But if you think about the cadence of what you guys have in your initiative plan, can you tell us kind of what quarter we hit peak initiatives, is it Q1, Q2, Q3? Like where in the way you guys have done the math around the initiatives, do we kind of get the max contribution from the initiatives?

Yes. And of course, the -- and I'm not sure if your question is the quarter where most of the inflection occurs or if it's when you're hitting peak contribution from?

Peak contribution from.

Yes, peak contribution from would be -- tell me your time horizon, it should be the last quarter. We should continue to build and build and build on these. The big inflection that we have as we continue to move forward, of course, is what Andrew just described, as we move into first quarter where you have that big positive inflection where we've had a full booking curve to be able to sell into that again, contrasting that to what we did with bags. But from there, it should continue to build. We have structured the amended Chase agreement around the attributes of this new program. And so as we have bags, as we have seat assignments, these are things that then you have entitlements to as you have the card. And we talked about other -- Andrew and Bob both talked about other things that we're looking at around the potential for clubs and what that might mean for the ability to buy up. And so the short answer to your question is tell me your time period, and it's going to be the last quarter of your time period, we're going to keep building.

I'm going to do exactly what the Andrew and Tom probably don't want me to do. But if you just sort of speculate on that, I think given that -- if you just know how the booking curve works, and where the meat of the booking curve [indiscernible], folks that are now booking the new products at assigned an extra legroom of seating, I think that would tell you somewhere around early third quarter that peak would be my guess. The only -- and I think you'll have annualized the ramp-up of the new voucher exploration policies, those kinds of things would.

The only thing that I can think of that will continue to ramp, obviously, the policy changes -- well, and then especially the changes in values of the card related to assigned seating benefits, boarding benefits, those should continue to ramp all year as that causes customers want to get the card, engaged with the card, the co-branded card, spend on the card. So I would think that initiative continues to ramp throughout the entire year. But the big one, which is assigned an extra legroom seating based on the booking curve, that would tell me at somewhere around early third quarter, you get to peak value.

The next question is from Andrew Didora with Bank of America.

So maybe I'll ask a non initiatives question to close it out here. But your fuel guidance on -- in this environment was a little bit surprising. I know it's been volatile, but also West Coast crack spreads have been high for several weeks now. I guess a quick 2-parter here. I guess one, Tom, just curious if you're able to give us what your exposure is to West Coast crack spreads? And then two, Bob, what levers do you have in your business that you think could help offset potentially higher fuel from your guidance?

Yes. For us, West Coast is probably somewhere around 30 or so. Gulf Coast were probably more like about half or so of the exposure.

And then just on levers, and I think not just fuel [indiscernible] just -- you saw -- was, I think, really good work and have what I think is really good cost discipline in the third quarter. And that cost discipline is not -- it's sustainable. It's not just showing cost out to the future. So we're going to work the same way in the fourth quarter and the first quarter and the second quarter to do exactly the same thing. And that is everything from just managing sort of traditional costs and departments. We have some opportunities to continue to work on fuel efficiency which obviously is material given the amount of fuel. We have efficiency work and a lot of departments that are back office, sort of the everybody is throwing AI around, but it is the ability to automate transactions, that kind of thing, and we're seeing good results there. And then we have large efficiency programs in the operation. Some of those take longer.

But my point is that this cost work is really -- it's across the board. It's every discipline within the company and we'll just keep working there. To me, that's the best insurance around whether it's fuel or whether it is the macro or it's the government shutdown impact or whatever it is, the best insurance around hitting our EBIT guide is to just keep putting manage pressure on cost and efficiency and continue to beat those numbers.

That wraps up the analyst portion of today's call. We appreciate everyone joining.

Ladies and gentlemen, we will now transition to our media portion of today's call. Ms. Whitney Eichinger, Chief Communications Officer, will lead us off. Please go ahead, Whitney.

Thanks, Gary. Welcome to the media on our call today. Before we begin taking your questions, Gary, can you please remind us how to queue up for a question?

[Operator Instructions] Our first question comes from Robert Silk with Travel Weekly.

So what I wanted to ask is, during the last quarter, you talked about your check baggage, you made about 300 -- you were estimating $350 million for this year. Is that number still on course? And in the rate of check bags, how is that weighing in compared to the industry and compared to expectations?

Yes. The financials are right on top of what we have been giving you a little ahead of what we thought. So it's still -- that's right. And then puts the annualized contribution from check bags at right around $1 billion. And the reduction in lobby bags, so check bags is -- Andrew can give you better -- it's about 30%. We are seeing a modest increase in gate check bags. So bags that show up at the gates that have to be handled there. But overall, our bags are down and down materially.

So how does it compares to an industry standard?

It looks like our check bag revenue per passenger is right along the same lines as the big 3. So it seems like it's a very similar rate that we're getting.

This concludes our question-and-answer session for media. So back over to Whitney now for some closing thoughts.

If you have any further questions, our communications group is standing by. Their contact information and along with today's news release are all available at swamedia.com.

The conference has concluded. Thank you all for attending. We'll meet here again next quarter.

Great. So let's pick up the airlines track. Again, I'm very happy to welcome back to Laguna. Southwest Airlines and CEO, Bob Jordan. Bob, thanks so much for being here.

Thank you for having me.

I hope you have been getting some sleep. It's been a ...

Do I look like sleepy?

No. I'm saying you've just had an insanely busy 12 months since the Laguna of last year, obviously launched so many idiosyncratic initiatives, so much going out of the macro. So maybe a great place to start would just be kind of, how are you spending your time? And how have things gone so far? And kind of how does the airline look where you sit right now?

Well, what I'm really pleased, a lot of things. But yes we introduced a whole suite of initiatives at Investor Day last year, led by assigned seating, and the introduction of extra leg room, but a number of things. A $500 million cost takeout plan. And then in March of this year, we introduced another set of bag fees, the introduction of basic economy and a new set of fair products. We introduced changes to maximizing the earn and burn on Rapid Rewards tickets, and changes to flight credit expiration and so many more. And what I'm really happy with, among many things is the execution. So all that stuff, 11 months later, is complete.

So everything that we promised is done. We're waiting on the operation of assigned seating, which starts on January 27. We're selling it now. So I think, number one thing, I'm just really pleased with the organization, the way the company has responded, the way our people have responded, and the -- not just the ability to get all of these initiatives done, but to do it with quality, do it on time. We're seeing really good results. I mean it's early. We're seeing really good results already. If you take this bag fees, for an example, bag fees are actually outperforming. And it will be about $350 million this year. It will be about $1 billion run rate top line.

And we just aren't seeing a lot of customer pushback. We're not seeing any evidence of book away those kinds of things. So I think the main thing is this is the biggest transformation in the history of Southwest Airlines. It's all meant to meet the needs of our customers today and in the future. It's all on track. And I'm just really excited about where we're headed.

Got it. You give us a little bit of a peek behind the scenes? You said biggest transformation in the history of Southwest Airlines. How do you compartmentalize to ensure that the operation remains on track while these bunch of massive changes going on as well? Kind of how do you spend your time? How the executives divide it? Kind of just what's that setup like?

It's all going well. So execution of the initiatives is going very, very well, and execution of the operation on a daily basis is going very, very well. We have invested a lot of technology, infrastructure, procedures, people in the operation in the last 3 years. And we're just -- really have become a stellar operator.

So you look at -- we use something called the Wall Street Journal rankings because it's the best composite of how are you doing. It basically takes your ranking in a bunch of categories. On-time performance, the percent of cancel flights, the percent of long delays, bag mishandling, and it aggregates all that and -- we were #2 last year, I missed it barely and we are sitting at #1 this year. So the operation is running very, very well.

I don't think they're mutually exclusive. So I think a company can be great at running the airline day to day and running the initiatives. I've really seen a change in thinking at Southwest Airlines. A lot of focus on agility, a lot of focus on pace and quality. The -- again, I think I already mentioned it, but the ability to put in bag fees, and basic, and all the things that we mentioned in March. And from the day we decided to the day they were in was 91 days. And I'm just impressed with the agility and pace of the company.

We did go through our first corporate layoff, which was very tough. It was focused on overhead. About 15% of our corporate employees -- we did not do the traditional thing and go in peanut butter and everybody cut 15%. We basically said, hey, if we were starting this airline over would we fund this department? Would we do this thing?

We have things that are -- we have communications in three different departments. And you step up to do the hard things and you stop doing things that are just not something you would fund today. You put like things together. And we also went in and took out leadership that had low spans.

So 38% of leaders had three or fewer direct reports. Today, that is 2%. And that change has produced an incredible level -- and again, the layoff is really tough. It's a very hard decision because it's people. But that change has produced an incredible level of agility because decisions are going through far fewer layers. There's far fewer meetings. It's far fewer PowerPoints. So I think that -- I think while the layoff was very difficult, it's had a huge impact on the agility and pace of the company.

Got it. Let's take a little bit of a step back here. Obviously, Southwest incredible history, incredible brand, incredible loyalty. Customers love you guys. This is a very, very dramatic change for how good everything was, right? And it's one of those, don't fix something that is not broken.

What drove that? Like what structural changes in the industry did you see coming out of the pandemic, that made you think that you need to make these dramatic changes and now is the right time to do it?

Were you -- I think in hindsight is 2020. So I'll just admit for me, I spend 0% of my time thinking about how we got here. It's in the past. I spend 100% of my time about thinking about how we're going to get to where we need to be. And I think we have been successful for a long time and financially successful. And when you're financially successful, I think it just -- there's just far less pressure to think about change because you're doing just fine.

But we clearly had work to do to meet the evolving needs of our customers. The good thing, and the bad thing, of data telling us that 85% of customers wanting assigned seats, that's awesome, tells you that's an easy change. The bad thing is, well, if it's 85% maybe we should have done that 2 years ago, 5 years ago. And -- so I think we had things that we needed to do to meet the needs of our customers even ahead of the pandemic.

And then coming out of the pandemic, it's just different. You've got a -- you've got this rise in premium, which appears to be -- never say never, but it appears to be more permanent than I would have thought. Obviously, a lot of desire for long-haul international. And what we know is our customers love us. But -- and we're big in so many cities. 18, 20 cities were very large. And if you're in Nashville, and you love Southwest Airlines, but you want a lounge, you want premium, you want extra leg room, you want to fly to London, whatever the list is, and we can't provide it, you are going to pick another carrier.

So we're going to force you to split your wallet. We're going to force you to carry another carrier's co-brand card, simply because we can't serve you. And that's the gap that we're closing. If we're going to continue to drive relevance, even as the largest domestic carrier, we've got to continue to meet the needs of our customers.

Got it. Based on that note, we didn't even touch on some of the upcoming initiatives. You just put in place the initial blocks to start long-haul international. So can you talk about what the plan is there and kind of how that might roll out over time?

Well, we've continued to add things like Getaways by Southwest. So that came online in the last 45 days. So packages and groups, and it's a wonderful product. If you haven't tried it. We've added now airline partnerships. So we have a new partnership with Icelandair. We have a partnership with China Airlines, one with EVA and there are -- I can't tell you which ones, but there are many in the pipeline right now. So that's a way to get you to the world served by somebody else.

And -- but at some point, we want to serve those destinations as well. I've been not too coy about the things that we're looking at. What is it customers would want? Well, lounges are certainly on the list. Not just because customers want it, but the lounge access as a card benefit is what allows you to have -- to offer a $4.95, $5.95 a year card because it provides lounge access. So it's a huge potential additive to the Rapid Rewards program.

But we are looking at things like premium lounges, long-haul international served by Southwest Airlines. We're at the very beginning of that. And -- but the main point there is we have done an awful lot in the last 11 months. And you're going to see that contribution in EBIT really come online in 2026.

But we're not stopping here. We're already hard at work on the next strategy. And of course, long haul it brings the need to build a lot of capabilities. It brings the need for a different kind of aircraft because the 737 cannot serve those markets. And we'll have to look at things like, obviously, a wide-body could serve those markets, but that's a lot of seats. It's a lot of cost. So don't be surprised if we go a more risk-tolerant route at first, and choose a narrow-body as an example, to serve those routes. But we're at the very beginning of that. No one -- I feel like every time we talk about this, I end with no announcement today. So [ fair enough ].

Fair enough. A lot of bread crumbs, no loaf just yet. But -- so just to kind of put this in context, right? So Alaska has started to fly kind of the international long-haul. JetBlue started a couple of years ago. Now they are starting their own lounges. So it does appear that there is this cohort of not ultra low cost, but the regional low-cost carriers who are trying to maybe reinvent themselves a little bit and become more like the legacy mainline carriers in terms of the offerings and the customers they're going after, right? Is that a fair characterization? And so I don't know, 10 years from now, 15, 20 -- don't give me a time line. But at some point in the future, does Southwest look more like one of the more mainline carriers?

I think I would separate what do we offer and who are we. We're going to stay true to what Southwest Airlines has always been and has always been good. We have so many core strengths and those are not going to change regardless of the customer experience that we -- or the product that we may offer.

I mean we have the best network. We offer the most non-stops. We have the very best domestic network. We have terrific operational reliability, like I was talking about earlier. We have the most rewarding loyalty program. I mean we have -- I mean, I think the biggest differentiator, we have the best service, offered by the best people on the planet. And not just in aviation, but by the best people on the planet, and we offer terrific fares, and we offer terrific fair sales.

If you don't know, we have a 50% off sale going right now. So book your ticket. But the core strengths of Southwest Airlines are not going to change. And what we stand for is not going to change, while the products and the offerings may change. Now there's this discussion out there that those that offer premium are separating themselves, which I kind of find funny. Nobody is going to separate themselves from Southwest Airlines, period.

Understood. Kind of just talking about the success of the initiative so far, you noted in the 2Q call that the bag fee implementation is running higher than expected. I think you said $350 million EBIT contribution by '25. $1 billion run rate. What are the learnings from this that you can apply to future initiatives?

I think the big learning is that even at our -- even at 54 years old Southwest Airlines, we had some things to learn around agility and pace and execution. We -- I've been to 37 years, and we're moving at a pace even at our size and scale, and I have never seen at this company. And you don't need the 99.9% answer a lot of times. You need the 80% answer because you know where you're headed. But I think the biggest learning is that we can do hard things, we can do them quickly. We can do them with quality, and we can move at a much faster pace than we have moved historically.

Got it. Understood. So maybe for now let's shift gears and talk about the macro and what you're seeing out there. Obviously, I think you said on the 2Q call that demand has stabilized at a lower level, but with recent signs of improvement, and you did guide to a pretty robust recovery in the back half. So how are things trending relative to the expectation?

The beginning of the year, obviously, was tough on everyone. We -- I think every carrier has reported at least for domestic, that they saw a roughly 5 to 6-point decline from what they expected at the beginning of the year. You saw a dip down in February, another dip down in April, and maybe another dip down early June. And I think it's just the backdrop of uncertainty caused that. The consumer can tighten their belt pretty quickly.

We saw an inflection begin in late July. So that began to turn and that's continued. I would say that's stable. We are certainly not all the way back, but we've seen that inflection in demand, and we've seen stability, which is terrific. We've also seen that in business sectors. So health care, technology, professional services. We've seen a better trajectory in July than June, August and July. So we're seeing a pickup there.

If you look at the fourth quarter, while it does imply a pretty stout sequential increase in RASM. If you break it down, I think it makes a lot more sense. So two points are just due to the kind of the implementation things that we had to do around basic, cost us about 1 point in the third. CrowdStrike a year ago, about 1 point. So 2 points of the 6 are really those. 2 points are the initiatives. A lot of that is bag fees, which are in place and they're at the -- actually better than the run rate that we expected.

And then this change to the earned burn on our Rapid Reward seats that we book. And then about 2 points a predicted improvement in the macro. So that's really to me where your risk is. We've seen that macro inflection, and we need to see that continue to reflect into the fourth quarter. But sitting here today, I mean, we're not -- there's no 8-K out today because everything is on track. That's the report today. Third quarter on track, fourth quarter on track. The full year EBIT guide on track. So while we do need to see this 2-point inflection in the macro, sitting here today, we're on track.

Got it. So you're saying that the 4Q implied guide does not necessarily need some kind of big hockey stick improvement in the macro to get there?

Yes. What's implied is there's roughly 2 points, and we are seeing an inflection.

Got it.

And I think the other thing, too. If you think about -- the macro isn't just the economy. The macro is the backdrop. So the macro is the economy, but it's also what's going on in the sector. So you're seeing constructive changes to capacity.

If you look at Spirit as an example, and who knows what's going to ultimately happen with Spirit, but they are radically cutting capacity. So -- and my apologies if I already mentioned this. But our overlap with Spirit in the second quarter was about 31%. Our overlap with Spirit in the fourth quarter will be about 21%. So a 1/3 drop in overlap. So that's macro in my mind. So it's not just the economy, it's the sector and other things that are going on.

And at the same time, we've really boosted our external channels that you can buy Southwest with Expedia and Priceline and Google Flight Search and Skyscanner. And right here, sitting here today, Expedia is about 5 points of the business on its own, and about half of that 5 points are customers that we don't think we would have seen, but for Expedia. So I park that into the backdrop as well. So it isn't just an expected inflection in the economy. It's all of these things that come together the 2 points.

Got it. Just a follow-up there, a good segment, next question. There's a lot of focus on the internal initiatives going on right now. But coming out of the pandemic, you guys had your own very radical initiatives, which were the GDS and the corporate launch, right?

So with several years of now some level of normal growth, how has that turned out relative to your initial expectations? Kind of how is that corporate rollout been? I think -- kind of what innings are you in there?

Yes. I think overall, we are -- I would just say we're on track. I'm pleased with the results that we've seen, the tools that we are providing to our corporate partners, we still have work to do. But no, I think that initiative is fully on track, and I'm pleased. There are things that we need to do in maybe the technology area and service area for corporate partners, but we've seen share shift, which I'm pleased with.

Got it. Before you delta, I'd also said that they're seeing an improvement in corporate demand going into the fall. You said the same thing just now.

Can you just elaborate on a little bit kind of which segment is that coming from? And does it feel like it's sustainable into the year end?

It feels like it is broad-based, but then also specific to certain sectors. So again, we're seeing a steady improvement month-to-month in areas like health care, technology, professional services. It's all the areas that tend to perform first and a little bit of geography in there. The Southeast, the Midwest. Cities like Nashville where we're seeing performance. But we are seeing a good inflection back in corporate right now. No reason to believe that, that won't be sustained.

Understood. So maybe switching gears a little bit, but still talking about radical change for Southwest.

That seems to be the full theme.

It's absolutely the theme, right? It's going to be the title of our note. Your capacity growth, right? So you've obviously historically grown very, very quickly. You were one of the first, a couple of years ago, to come out and say, hey, that's not the model going forward. And you have committed to just 1% capacity growth for 2025.

How do you see that evolving over the next maybe 2, 3 years? Is that just a function of aircraft availability and kind of stabilization of the industry? Or is this a new normal for Southwest?

I think it's both. So we're committed to growing modestly, call it, 1% to 2%, until we have the returns back to where we want, our shareholders want, and our investors want and need them to be. So we'll stay roughly in that range. At the same time, we are constrained because of the limited number of Boeing delays -- deliveries as compared to what is in our plan.

Now Boeing is better. Boeing has continued to get better, where we've continued to boost our delivery expectations for this year. But we are absolutely constrained because of that. But that aside, I think we still need to grow modestly until we can demonstrate the appropriate returns.

You're going to see a couple of tenths of capacity here in the fourth quarter from something that we've done. The retrofitting of the aircraft for extra legroom. I am really impressed with our operation. They have already moved through more than half the fleet in terms of getting ready for January 27. And they're doing those on overnight. It's going extremely well.

Because of that, we've been able to push out the retrofit of many of the 700s, now -- because you're going to lose a row. That's the only aircraft where you're going to lose seats. You're going to lose 6 seats. So we can get more of those done later because we have confidence in the operation and the conversions. So delaying those allows us to hold on to those basically free 6 seats to sell as we get into the peak holiday periods.

So it's just -- it's a small revenue play and really cost the company nothing. We'll still be ready for the assigned seating rollout. But it's just on the margin, it's a play for revenue, and I'm really pleased that we can do it. But it will add a couple of tenths to the capacity in the fourth quarter. But again, these are free seats.

Got it. Speaking of tiny bumps to revenue, I wanted to go back to your comment earlier about the partnerships you signed with China Airlines and EVA Air and Icelandair.

Remind us again kind of how those are going to work specifically for Southwest? And kind of are we like to see any kind of revenue benefit for that in the next couple of quarters?

It's -- I think in the grand scheme of things right now, it's modest. It's a modest number of customers. It's as much about for the partner being able to connect their customers from a gateway to our vast network here in the United States. And for us, it's about the ability to tell our -- especially our Rapid Rewards customers, hey, you have the credit card, you have points. Look where we can get you.

Now it's going to come on in steps. Today, it's basically interline. And we're -- I don't have an exact time frame yet, but the next iteration would be the ability to burn your Rapid Rewards points for those itineraries. The ability to go Dallas, Love Field, L.A. to Taipei as an example. But we have three partners today. I'm really pleased, and we are on the verge of announcing more partners. And we're also expanding the network.

You've seen us add a -- over the summer, we added more international destinations ourselves. We added St. Thomas, we added St. Martin. It's not international, but we added Knoxville. And -- and we just announced Santa Rosa and the Hawaiian country. So we're continuing to expand our offerings as well. And I think those are exciting destinations for our Rapid Rewards customers, in particular, that aspire to go in places like St. Martin, St. Thomas.

Got it. Just on the topic of unthinkable things that may no longer be unthinkable, would you consider joining Alliance?

In Alliance?

Yes.

I wasn't sure where you were going when. You said unthinkable. That was worried me for a second. But the -- I think that is a more difficult question given the composition of the Alliances, the dominant carriers in the Alliance. My guess is, in many cases, they would prefer to keep Southwest Airlines out of that Alliance for a lot of reasons. So I think that's just a -- much more complex.

But do you feel like you're going to achieve a lot of the benefits by reaching agreements with...

I don't -- there are a lot of carriers that are unaffiliated. I think we can reach our -- we don't need an Alliance to reach our goals.

Understood. Any questions from the audience?

Lot of changes. Southwest has always been in a net cash position. Recently, you switched to a net debt position to buy back shares. That's quite a change. A lot of risk you're taking?

Keeping with the same?

We have -- we've not always been net cash. We're certainly net cash coming out of the pandemic because of the amount of cash that we raised during the pandemic. And I would say a lot of the -- the share buyback that we just completed in July really was taking out the dilution during the pandemic where we issued shares. I would think about those two as an offset.

We're close to net cash today. We've set strong guardrails. We've always had a strong balance sheet in philosophy, and we always will. We've set strong guardrails around debt-to-EBITDAR between 1 and 2.5. We've got a strong cash target and position at $4.5 billion, including the revolver. So we're going to stay very conservative. We're going to stay within the guardrails.

As you think about UCs, if you think about things like share buyback, or investing in the business. I mean, our goal is to invest in the business as those opportunities present themselves. Certainly to manage debt, take out debt, to maintain a strong balance sheet, to stay within the guardrails. And then third, return cash to our shareholders in the form of dividends and share buybacks. So yes, our philosophy has always been a very strong balance sheet and a very conservative position, and you're not going to see us vary from that.

Now there's been a lot of changes in the last 11 months that you guys already implemented. But maybe more forward-looking thinking. How do you seize a lot of the initiatives on Gen AI and a lot of the changes in AI impacting the business, both from the operational side, but also maybe on the consumer discovery side? More agenetic commerce, how that stuff -- how you see that developing?

There's a lot of opportunities on AI. If you just think about what are we doing today? It is all at the very beginning and forefront. So we're using AI as an example. So obviously, we began charging bag fees and some number of bags have now moved to the gate, and then in the cabin. And we're using AI. We've got a tool that the operations agent and customer service agent before the flight ever begins to board, they have a predictive tool that tells them the number of bags that they think will need to be checked before they get into the cabin. They keep the problem out of the cabin. And that's an AI tool. It learns. It understands loads and history.

And just an example of being able to use data to manage a problem and keep it away from the customer. We are using AI right now, also a tool that understands who is on -- you take an airport like Chicago that often has a congested ramp. Small footprint, lots of aircraft. And we're using an AI predictive tool that knows who is on every aircraft, customers and crews. It knows who is connecting. How tight those connections are? It knows that there's a crew member that's on a flight that needs to get off and connect to another flight that can't leave until they get over there. And it takes all of that data and it chooses the gating order of the aircraft, and it chooses to gate aircraft close to each other that will minimize connect times.

Obviously, generative AI can be used on the customer service front. We're using it there to take in customer information, understand what they're asking us, serve up a suggested response, even serve up a suggested letter as an example, or a response, and then what to do to handle the customer. And then an agent looks at all that and agrees, or disagrees. So there's a ton of opportunity.

And -- now AI is not going to replace our awesome folks that are serving our customers in the airports, and serving our customers on the aircraft. But I think we're at the forefront of the opportunity here. And I gave you just a couple of examples, but we're using it all across the airline.

Any more questions?

Could you just talk about what you're seeing in the Southwest consumer? Delta was here earlier talking about the high-end consumer. We've seen that in our own surveys, too. But just curious like what you're seeing in your consumer segment?

Are you thinking about just buying patterns and -- Yes. Obviously, maybe I'll separate that in two pieces. There is obviously demand for a wider variety of products. Things like extra legroom, maybe even more premium. And again, it's a minimal amount of data for what we have sold after January 27 when extra legroom and assigned seating goes into place. But the data that we have in place would tell you, yes, there is strong demand to buy up and buy into those. Kind of our version of premium today.

If you just look across the broad consumer, I don't see necessarily weak segments. There seems to be demand across the spectrum from -- sort of across all FICO scores as an example. So I don't -- I'm not detecting anything that says there's a worry at this consumer level or this consumer level.

We need the economy to inflect back those couple of points. We had a down draft of about 5 points at the beginning of this year. And I'd love to get those 5 points back broadly in the economy. But I don't see anything within any particular consumer that worries me.

Just kind of finishing up on the topic of radical change. Another big change for you guys that you don't hedge any more, hedge jet fuel. But with fuel where it is right now, any temptation to maybe go back there? And maybe talk about the decision to do that and kind of how you see that going forward?

You bet. And the decision was really just based on data. So we went back and maybe it started with just the cost of hedging. So the volatility in the market across the last, call it, 5 years, has made hedging much more expensive. So our hedging cost was approaching $150 million a year. Where historically, it was just nowhere near that. So just the cost to run the program, it was very expensive.

So then the need for the gain in the hedge program was higher, just to overcome the cost. And so if you look back across the last 10 to 15 years, we've had a couple of good years. Outside of those every year, basically, you're just spending the premium. And so it's just a bet. But the analytics told us that the spend, because of the cost and the -- and that risk level, it just got out of balance, and it just didn't make sense to hedge. So we unwound the hedges and unwound the program.

And you look at the initiatives that are going to come online, and the $4.3 billion in EBIT that we're going to put on the company here next year from these initiatives, the company doing well, having the right margins is really the layer of protection against volatile fuel prices. And we brought up the share buybacks. But if you can't tell -- I mean we completed our $2.5 billion authorization from last fall. We completed that in the third quarter by finishing the last $1.5 billion. We -- the Board has authorized a new plan, $2 billion over 2 years. And it's all because we -- I, the leadership team, the board, we believe in this plan. We believe in the financial success that this plan will drive. We believe in the fact that the customers want the things that we are now selling to them.

So we're confident in the plan, and therefore, we're confident in the fact that Southwest Airlines is undervalued right now. Our stock is undervalued compared to what we see in terms of future earnings generated by this transformational plan. So nothing to report, but we're buyers at this level. That's why we completed the $2.5 billion in the last quarter.

Understood. It's a great place to wrap all. Thanks so much for being here.

Thank you. Appreciate it.

Hello, everyone, and welcome to the Southwest Airlines Second Quarter 2025 Conference Call. I'm Gary, and I'll be moderating today's call, which is being recorded. A replay will be available on southwest.com in the Investor Relations section. [Operator Instructions]

Now Lauren Yett from Investor Relations will begin the discussion. Please go ahead, Lauren.

Thank you. Hello, everyone, and welcome to Southwest Airlines Second Quarter 2025 Earnings Call. In just a moment, we will share our prepared remarks, after which we will move into Q&A.

I'm joined today by our President, CEO and Vice Chairman of the Board, Bob Jordan; Chief Operating Officer, Andrew Watterson; and Executive Vice President and CFO, Tom Doxey. A quick reminder that we will make forward-looking statements, which are based on our current expectation of future performance, and our actual results could differ materially from expectations. Also, we will reference our non-GAAP results, which exclude special items that are called out and reconciled to GAAP results in our earnings press release. Our press release with second quarter 2025 results and supplemental information were both issued yesterday afternoon and are available on our Investor Relations website.

And now I am pleased to turn the call over to you, Bob.

Thank you, Lauren, and thanks to everyone for joining us today. Southwest is on a transformational journey, the largest in our history, as we work to evolve our product and deliver increased value for shareholders and more choice for our customers. Our plan remains on track, and I have high confidence in our transformational journey and the significant value it brings. And that value accelerates this year and then more meaningfully in 2026. Additionally, I'm happy to report that we are seeing signs of improvement in industry demand. Changes and enhancements are being implemented very rapidly. In first quarter, we amended our agreement with Chase. We implemented enhancements to our Rapid Rewards program and launched Expedia, which continues to exceed our expectations.

We began 24-hour operations with our first red-eye flights, and we launched our partnership with Icelandair. We accelerated our cost reduction plan and continue to execute very well on cost with broad-based cost discipline across the company. Moving to the second quarter. The pace and the quality of execution continued. We began charging checked bag fees. We reintroduced the expiration of flight credits and implemented our basic economy product and enhanced fare structure, which lays the foundation for meaningful product differentiation when assigned and premium seating become available. Those changes were announced in March and successfully launched in less than 100 days. I'm just extremely proud of our operations, commercial and technology teams for their work to support an exceptional operational rollout. The revenue contribution from bag fees has exceeded our expectations so far, and we've experienced no negative impact to the operation.

Additionally, during the quarter, we began retrofitting aircraft for extra legroom seating with about 1/4 of our fleet now modified. Moving on to the third quarter. Earlier this week, we announced that we will begin selling assigned and premium seating on July 29 for flights beginning on January 27. We announced service to St. Thomas, which will begin operation early next year. And just this morning, we announced new and enhanced benefits to our co-brand credit cards offered through Chase. These benefits align with our new product offering and are designed to incentivize increased spending with perks like more points for everyday spending on things like groceries, gas and dining purchases. And I'm pleased with the pace of the execution, and we are not slowing down.

Our initiatives will continue to roll up and to ramp, and we expect them to deliver a more meaningful contribution in the fourth quarter of this year and a much greater contribution in 2026 once we begin operating assigned and premium seating along with this year's enhancements. And I want to reiterate that our current initiatives are not the endpoint in our product strategy and evolution. As we've stated before, we are committed to evolving further to meet the needs of our current and our future customers. Turning to the macro environment. Industry demand stabilized in the second quarter. And while it's early, our recent bookings show clear signs of improvement. This improving demand environment, along with moderated capacity in the industry and the accelerating ramp-up of the contribution from our Southwest-specific initiatives provides a constructive backdrop for the second half of the year and into 2026.

We have provided an updated full year EBIT guide of $600 million to $800 million and a reconciliation to our previous guide of $1.7 billion. This includes nearly a $1 billion drop from the precipitous decline in the macro environment that's being felt by the industry, net of some inflection back up for the rest of the year and a $100 million decrease from higher fuel costs with our $1.8 billion portfolio of initiatives and relative domestic unit revenue outperformance continuing to drive incremental value for the year.

Our updated full year EBIT guide still represents meaningful year-over-year improvement and we continue to expect significant EBIT expansion in 2026 as the value contribution from our slate of initiatives continues to accelerate. On top of that, given our overweighting to the domestic market, we would expect to be an outsized beneficiary of any recovery in the domestic demand environment. Our strong and efficient investment-grade balance sheet continues to provide support and flexibility as well. Underscoring the belief in our transformational plan, strong management execution and the ability to deliver significant value for our shareholders, our Board of Directors has authorized a new $2 billion share repurchase program expected to be completed over a period of up to 2 years.

Tom will provide insight into our strong capital allocation framework, which balances a strong and durable investment-grade balance sheet with the capacity for further share buybacks at what we believe are attractive levels. I'm very excited about the future that we're building here at Southwest, and we will continue executing on our plans with urgency and with purpose. Above all, I want to recognize our incredible employees for their excellence and their one-of-a-kind hospitality as we all work together to deliver on our vision.

And with that, Andrew, I will turn it over to you.

Thanks, Bob. I'll start by also recognizing our people for continuing to run an excellent operation. I'm especially proud that we led the industry in on-time performance for the first half of this year. We continue to have a strong completion factor, canceling fewer flights during the regular operations compared with our larger peers and recovering very quickly with little to no hangover in the days that follow. I commend our teams for rising to the challenge during this transformational time.

We reached a key milestone with the launch of our basic economy product and check bag fees on May 28. A tremendous amount of work enabled that rollout, including training for our people on new policies and tools. The operational rollout was incredibly smooth. Implementing these changes in May was designed to set the foundation for our product differentiation ahead of beginning to sell assigned and premium seating. Today, the incentives to buy up are primarily flexibility and free check bags. When we begin selling the assigned and premium seating next week, more enhancements and choices will exist, allowing for incremental product differentiation for customers.

As we've previously shared, we did not see a measurable customer impact in the period between the announcement of these changes back in March and the implementation in late May. The day before the changes were implemented, we did see a modest pull forward in bookings. And in the days following May 28, we experienced a temporary decline in bookings, primarily in basic economy. Starting from day 1, the team has worked continuously to optimize our approach to selling basic economy. There has been an ongoing effort to optimize the product descriptions and the basic economy booking flow, which initially included barriers to booking basic economy that resulted in reductions in overall website conversion.

We quickly refined the booking flow and product descriptions to reduce friction and bookings have returned to expected levels, with promotional activity backfilling gaps from this brief period of lower conversion. This resulted in an impact to second quarter 2025 year-over-year RASM of nearly 0.5 point, and we expect an impact to third quarter 2025 year-over-year RASM of approximately 1 point. Moving to checked bags, while over half of our customers are now flying on bookings made beginning May 28. We are encouraged to be seeing higher-than-anticipated take rates for paid bags. At this early stage, we're already trending at the higher end of the bag revenue per passenger rate of our larger peers, which is in excess of our estimates. We've seen a modest increase in gate check bags as expected, but have experienced no negative impact to the operation.

We prepared for this change by implementing new systems and processes, which have supported the exceptional operational rollout. For example, we're using a machine learning tool that predicts the number of gate check bags needed for each flight, which enables our teams to act early and keep the operation running smoothly. Overall, we're pleased with the product changes and look forward to the continued ramp of these initiatives according to our plan. We're excited to begin selling assigned and premium seating on Tuesday and look forward to operating these new products beginning January 27.

As Bob mentioned, we've modified about 1/4 of our fleet. We've already started to monetize these retrofit aircraft by notifying customers that will be on a flight with extra legroom seats and inviting them to take advantage of our existing upgraded boarding product. We've been very pleased with our co-brand agreement with Chase, and we're excited about the new and enhanced benefits on our credit cards announced this morning, which align with our new product offering.

New benefits include one free check bag, pre-flight seat selection and upgrades to extra legroom with any fare bundle as well as earlier boarding. Even before these new products and card enhancements, we've seen increased sign-ups with our existing card. Beginning in our August schedule, we're providing more connecting opportunities to drive load factors. We will still have the largest point-to-point network in the industry, but with additional connection options layered in, driving improved network utility and more options for our customers. The connection opportunities will vary by season, day of week and time of day with less structure connectivity in peak times.

We're expanding our network and look forward to launching service to St. Thomas early next year. This is our first new destination to launch since 2021, and we expect to announce at least 2 more new destinations later this summer. We recently announced our second airline partner, China Airlines, and plan to launch operations with them early next year. We also announced 3 new gateways for our Icelandair partnership, Pittsburgh, Orlando and Raleigh-Durham, bringing us to a total of 6 gateways. We've made progress with our getaways by Southwest product, which is planned to launch this quarter. And through the combination of [ turn ] and red eye initiatives, we have exceeded 2019 aircraft utilization levels, while at the same time improving the quality of our operation.

After a steady trend of deteriorating demand starting in the first quarter, the macro environment stabilized at lower levels during the second quarter and resulted in 2Q RASM down 3.1% year-over-year, including the nearly 0.5 point impact from the decline in bookings following our May 28 policy changes. I'm pleased that we again outperformed our large industry peers on domestic unit revenue. Our 3Q RASM guide of down 2% to up 2% year-over-year assumes a modest sequential improvement in demand, includes roughly 1 point impact from the decline in bookings following our May 28 policy change, a 1-point headwind from lapping last year's CrowdStrike incident and is partially mitigated by our initiatives continuing to ramp.

Looking to 4Q RASM, we assume further sequential improvement from third quarter, both from anticipated improvement in domestic leisure travel trends and accelerating incremental revenue from our initiatives continuing to ramp. We will provide more specific RASM guidance for the fourth quarter during our next earnings call. We remain committed to our reduced capacity plan for this year with full year capacity up just 1% year-over-year, with trips down roughly 2% this year and the modest growth driven by our [ turn ] and red eye efficiency initiatives. We've made tremendous progress, and we're not slowing down.

With that, I'll turn it over to Tom.

Thanks, Andrew, and hello, everyone. As you've heard from both Bob and Andrew, we remain on track for our slate of initiatives. We are reiterating our incremental initiative EBIT contribution targets of $1.8 billion in 2025 and $4.3 billion in 2026.

Of the $1.8 billion initiative EBIT in 2025, we have successfully executed and met our plan expectations in both the first and second quarter of the year, already realizing roughly 1/3 of this year's expected value. We continue to expect the remaining 2/3 of this year's EBIT contribution to be achieved in the back half of this year as the ramp of the initiatives continues to accelerate according to our product rollout and plan. We feel confident in our ability to deliver against these targets and the Southwest specific levers we have to mitigate the current industry demand environment.

We'd like to provide more detail into some of the early successes that we are seeing from several of our initiatives. First, checked bags. As Andrew mentioned, we are already trending at the higher end of the bag revenue per passenger rate of our legacy peers. We currently estimate that checked bag fees will result in more than $350 million of EBIT for the full year 2025, which compares favorably to our initial estimates and has a run rate of approximately $1 billion of EBIT had it been in place for the full year.

Second, we remain on track with our cost savings target of $370 million for 2025 based on actions we have taken to date, most notably, the headcount reductions in the first half of this year and the related salaries, wages and benefit savings and additional cost savings that have been identified. Leaders across our organization are highly engaged in our cost reduction plan, and we are seeing cost discipline across the company. Third, the evolution of our marketing and distribution strategy. As Bob mentioned, bookings through our new channels have exceeded our expectations, in particular with Expedia, which now represents roughly 5% of our passenger volume and more than half of that 5% being customers that are net new to Southwest. These items, together with other initiatives such as our loyalty program earn and burn changes, our amended Chase deal, new credit card sign-ups, flight credit expiration, network changes, the creation of additional connection opportunities, red-eye flying and more give us high confidence in our ability to achieve our target this year.

And finally, our new basic economy product is now in place and sets the stage for the additional product differentiation that will come from the operation of seat assignments and extra legroom seats that will start in January. We expect EBIT contribution to continue to increase into 2026 as our current year initiatives mature and as we launch new initiatives. We're pleased to have provided the full year 2025 EBIT guidance that Bob walked you through, and we'll remain focused on strong execution to drive meaningful EBIT expansion in 2026.

Turning to nonfuel costs. Second quarter CASM-X came in at up 4.7%, near the midpoint of our guidance range and included a headwind of roughly 0.5 point from a noncash mark-to-market adjustment for nonqualified deferred compensation plans, which was driven solely by the recent strong stock market performance. I am pleased with our management of controllable cost items in the second quarter. We expect third quarter CASM-X to be in the range of up 3.5% to 5.5%, sequentially in line with the second quarter, but on a lower capacity base and includes roughly 0.5 point from aircraft retrofit costs to support our extra leg room seating, which launches in 2026 and roughly 1 point of year-over-year pressure from the timing of engine overhaul expenses in the quarter.

Fourth quarter CASM-X, excluding the impact of book gains from fleet transactions in the fourth quarter of both years, is expected to be in the low single digits. As a reminder, we had a large sale-leaseback transaction that resulted in a $92 million book gain in the fourth quarter of 2024. We also expect aircraft retrofit costs to drive up to 1 point of 4Q CASM-X pressure. We will provide more specific cost detail for the fourth quarter during our next earnings call. Overall, we are managing costs very well. And again, I am very pleased with our overall cost management and cost reduction efforts, which create good momentum as we head into 2026.

Moving to fuel. We recently terminated our remaining hedge portfolio for cash proceeds of $40 million, which reduces our future premium expense through 2027. Further detail is included in yesterday's press release. We now have no active fuel derivative contracts and currently estimate third quarter fuel cost per gallon to be in the $2.40 to $2.50 range. Turning to fleet. We've updated our 2025 aircraft delivery assumption from 38 to 47 deliveries this year as Boeing continues to ramp up production. We continue to be encouraged by the progress being made by Boeing and are pleased to have received 17 aircraft deliveries in the second quarter.

As we have previously communicated, additional deliveries of new aircraft give us increased fleet flexibility. As Bob and Andrew stated, we're committed to keeping our full year capacity growth at up about 1% this year. With these incremental deliveries, we now expect to retire roughly 55 aircraft in 2025, an increase of about 5 from the previous estimate. And this also includes 5 737-800 aircraft that we expect to sell this year. And just recently, we also executed agreements for the sale of 8 737-800 aircraft that will occur in the first half of 2026. And we're in the process of negotiating additional sales transactions.

We continue to expect 2025 capital spending to be in the range of $2.5 billion to $3 billion, which includes the additional aircraft deliveries expected this year as well as the expected proceeds from aircraft sales. Moving to the balance sheet. We repurchased the remaining $1.5 billion under the previously announced $2.5 billion buyback and expect final settlement of shares to complete by the end of this month. We're pleased with the expected outcome of this program, having purchased shares at prices well below current levels. Completion of this share repurchase authorization effectively offsets the dilution from our common stock offering in May 2020. And yesterday, we announced that our Board of Directors has approved a new $2 billion share repurchase authorization, which we expect to be completed over a period of up to 2 years, demonstrating our continued optimism around our plan.

I'd also like to provide more detail on the capital allocation framework that we will use as a guide as we move forward, which will support our continued commitment to a strong and efficient investment-grade balance sheet. We will be shifting from a cash target to a liquidity target, which will be $4.5 billion, comprised of $3 billion in cash and an upsized revolver of $1.5 billion, which is an increase of $500 million from the previous revolver size. We completed the upsizing of the revolver earlier this week. This target provides appropriate liquidity levels to cover near-term business needs with access to additional liquidity available through a significant amount of unencumbered assets. We will target a gross leverage range of 1 to 2.5x adjusted debt, meaning gross debt plus operating leases to adjusted EBITDAR.

After paying off $2.6 billion of debt for the prepayment of the first tranche of the payroll support program notes and the payoff of our convertible notes, we ended the quarter with leverage of 2.1x. We will prioritize our use of capital to: one, continue to invest in the business; two, reduce leverage and maintain balance sheet strength; and three, provide returns to shareholders through repurchases or dividends through free cash flow, surplus cash or surplus debt capacity.

And with that, I'll hand it back to Bob.

Thank you, Tom. Before we move on to Q&A, I want to leave you with a few key points. First, we are performing well on a relative basis and are encouraged with the recent signs of improvement in the demand environment. We continue to execute on our initiatives. We had an exceptional operational rollout of bags and basic, and we are making rapid progress to sell and operate assigned and premium seating, which will bring many of our initiatives together.

Second, we are confident we have an appropriate capital allocation framework and guardrails in place to operate as efficiently as possible and maintain our relative balance sheet strength and position, which we view as a significant strategic advantage. Finally, we remain committed to the plan we have in place, including successful execution and implementation of our transformational initiatives. All of this is focused on controlling what we can control to not only deliver exceptional customer value and continued loyalty, but also restore the financial returns we are known for while maintaining our unique and differentiated culture with much more to come as we roll out further enhancements to our product offering.

And with that, I'll pass it back to Lauren to start our Q&A.

Thank you, Bob. This completes our prepared remarks. We will now open the line for analyst questions. [Operator Instructions]

[Operator Instructions] Our first question comes from Catherine O'Brien with Goldman Sachs.

I just had a question on how we should think about the EBIT initiatives ramping up over 3Q and 4Q. I realize 2/3 of the initiatives are coming back half of the year. But on my math, your guide implies an EBIT loss in the third quarter, which taken in conjunction with the first half means the majority of this year's expected EBIT will be produced in the fourth quarter. What drives that 4Q versus 3Q ramp? I'm just trying to understand how much of it is ramping initiatives versus industry assumptions.

Yes. Catie, thanks for the question. I'll give it a start and then pass it over to Andrew, but you've got a combination of, obviously, initiatives ramping up like bags. We gave you an annualized number on bags at $1 billion in EBIT. And with the booking curve, most of that's in place in the fourth quarter. You have flight credits and rapid rewards optimization and a long, long list of initiatives that ramp across that period. You also have some assumptions around the continued sequential improvement in the demand environment. And I think split between kind of those 2, you've got about 4 points of improvement between the initiatives ramping and the assumptions around sequential improvement. But it's really that. But Andrew, I take you a little more detail.

Yes, so flat RASM in Q3, the guide implies roughly a 6 point improvement in RASM. So let's focus on the revenue side. So of those 6 points, 2 are the kind of the lack of a negative. So we have the basic economy headwind in Q3 as well as the CrowdStrike compare in Q3. So that leaves you with the 4 points that Bob referenced split between macro and initiatives. If you decompose the macro, you have the improved environment we see right now. So we -- like others, we see from June to July, we saw improvement in the macro environment. And that means Q4, its booking curve is much less exposed to weakness compared to Q3. So that's a tailwind that will persist even if nothing else improves.

And you also have the capacity coming out of the marketplace starting post summer ramping through. So a combination of already published capacity reductions, the already seen macro improvement gives you tailwinds into Q4, and we see, I think, a strengthening trends, so it could be more than that. And then on the initiative side, Tom and Bob both gave you the bag numbers. And so those, as you see, ramp through the whole booking curve, all of Q3 was not exposed to bag fees, but essentially all of Q4 will be because of the nature of when the bookings take place. And then there's a few other things that are also in the initiative bucket that are also previously implemented and still in the booking curve compared to earlier in the year.

The earned burn change will be fully in Q4, then the flight credit expiration as well will be fully in there. And so those initiatives together provide a sequential 3Q to 4Q improvement as we kind of fully bake into the booking curve. What's not in there, though, is basic economy. We're assuming it will be kind of a flattish impact. We assume there will be a positive impact in Q1 when we go to assigned seat, that's a more compelling buy-up from basic economy to choice. However, should we succeed in making it a positive before then, that's an additional tailwind as we go throughout the second half.

Tom, anything to add to that?

I think you said it well.

Okay. Great. And maybe just one follow-up on the bag fees. So I guess you said that it's tracking ahead of plan. Is that just a volume thing, the rate you're able to charge? How do we think about that? And then on the other side, how are you tracking any potential book away from bag fees? As customers were used to your fare, including a bag fee, has there been any impact to sold fares post bag fee rollout? Like can you talk about book PRASM pre and post bag fee? That was a loaded question. I'm sorry. So please go wherever you want.

And no, the rollout of bag fees and basic economy, which came together along with some other things. I've just got to stop and just say thank you to our folks. I'm really pleased. I mean from sort of conception and agreement we were going to do that to the implementation on 528 was, I think, 91 days. So just a terrific execution. And then the execution and the launch itself, we were well prepared, just saw no operational impact. We're checking about 1/3 less bags. Very few of those are turning into gate check bags. So very prepared operationally, so no impact there. And then really no customer impact that we can detect, certainly no book away. We did have a couple of week period where we were tweaking really the digital flows of selling basic economy, but that was more about how we were selling it versus customers not buying.

So there's no customer reaction to bag fees and what we put in on the 28th. The outperformance really is because we've not modified our pricing. It really is -- we're checking more bags per passenger than expected. That's really where the outperformance is. We're sort of middle to above midpoint of the industry in terms of bags that are being checked and paid for. So that's really where the outperformance is. And it's been incredibly stable from the day we started 528, just calculating an annualized number through today, it's been sitting right on top of that $1 billion number the whole time. Andrew?

I'd add to that, Bob, that if people were displeased with our offering and no longer had affinity for Southwest Airlines, they wouldn't come to our website. And we actually saw no change in website traffic kind of pre post 528. We did see, as we went through the booking flow, lower conversion on the basic economy fare. And in particular, that was from 528 through June 15. That couple of week period of time, we saw that reduced conversion rate as people who were booking basic economy kind of the -- it was concentrated further out DVDs where people's travel plans are less certain combined with the kind of increased restrictions on the product that comes from want to get away moving to basic economy.

And so the teams were able to modify language, booking flow and such on the website, a combination of digital and marketing teams. And so that conversion rate then came back up. So in 6/15, we were back to regular business, if you will. Now there was a whole period of dislocation. We had to backfill the missed bookings, if you will. And so we had a heightened promotional activity after that to kind of backfill those missed bookings. And then in addition to that, unrelated to our promotional activity, at the end of June, like specifically look to us like June 28, we saw this kind of macro step-up that happened. There was a further tailwind to our bookings.

So overall, it was kind of a brief period of dislocation related to conversion and related specifically to basic economy conversion really focused on further [ LTVDs ].

And the impact that we've talked about, the 0.5 point in 2Q and the full point in 3Q, just to be very clear on Andrew's comments, those are bookings for flights or bookings that occurred during that temporary time period immediately following that Andrew just outlined or should have occurred or would have occurred for flights that would have been flown in second quarter and third quarter. So the point that is the impact for 3Q is not about a continuation of that dislocation. It's from that period of when the bookings should have occurred for flights that would have been flown in 3Q. So that is behind us.

The next question is from Jamie Baker with JPMorgan.

So building on this -- on the EBIT math, you're guiding $1.8 billion of incremental EBIT, but $600 million of total EBIT at the low end. So obviously, that implies that $1.2 billion of your core may have weakened. And Bob, I know you cited the macro. You could see the basic economy got off to a challenging start, however you want to put it. But does the macro plus basic economy explain the entire $1.2 billion decline or apparent decline in your core? Or should -- or could there be some other contributing factors?

Jamie, thank you. No, I think it's fully explained. So yes, the one point -- and there's a lot of moving parts and math in here. But the one -- so we reiterated the $1.8 billion contribution from the initiatives. And those -- it's like the bags, they're all performing very well. They're on track from a timing perspective. They're on track from a financial perspective. And in fact, when you hear us talking about the impact of this temporary conversion of basic period, the 0.5 point in Q2 and the full point in Q3, we are capturing that in reiterating the $1.8 billion.

So in other words, making up for that in other initiatives is part of the $1.8 billion. So reiterating the $1.8 billion, it's there. So the offset from the $1.7 billion guided for the year to the current midpoint [ 7 ], so it's $1 billion. It's really -- fuel is up a bit and then it really is -- it's the macro. And we've talked about macro impact of 5% to 6%. Basically, all of our competitors have talked about a macro impact in the 5% to 6% range. And if you just -- and we all know that started kind of, call it, February 1 and then step down in March, step down in April. And if you think about booking curves and kind of do the math, you'll come to the $1 billion.

And especially as you think about a modest sequential improvement in the third, more sequential into fourth. So not trying to get too wonky on you, but if you take that and then you kind of pro forma that impact on first, second, third and fourth, you get the macro impact of $1 billion. So it is completely that 5% to 6% macro impact, not some other thing occurring in the base business.

All right. Got it. And then a quick one for Tom. So cash is down to its targeted level. You've got the new repurchase plan. You've got CapEx. It looks to us like Southwest might need to raise debt. If that's the case, should we be thinking unsecured public bonds or aircraft debt?

I think there's an opportunity if we decide to go that route, I think there's an opportunity for us to do either. And again, this is where the balance sheet strength comes in. We saw an issuance from one of our competitors a couple of months back that was really well received in the market. Maybe even just taking a step back from that. We were very deliberate about the time period with which we're rolling out this next round of share repurchases. We, over the next couple of years, have a lot of incremental EBIT generation that we're expecting based on these initiatives as they roll in.

And as that occurs, that gives us that flexibility that we have or that we would want to use that free cash flow that comes from the business that excess debt or surplus debt capacity that would be there within the framework that we've communicated today, but it's about doing that in conjunction with the improvements in the base business. And if that means that we raise some debt or refinance some debt as it matures, we'll do that.

The next question is from Michael Linenberg with Deutsche Bank.

This is Hillary calling in for Mike. I just have a quick question on other revenue. That line was lower despite the start of back season late May. Was there any accounting or noncash revenue recognition changes impacting that line or any impact from royalty changes?

Yes. I'd say that our loyalty program hasn't been doing as well as we'd like in recent times. That is also though the subject of our card -- enhanced card portfolio initiative today, so which goes hand-in-hand with the product changes we've made. So we fully expect that line item to improve starting in Q3 as we come out with a new card portfolio with new benefits.

The benefits include a seating benefit, which is not common in the industry as well as a bag benefit, which is common and improved bonus points on dining, gas and groceries, which will increase kind of the debit active rate, how often one uses one's card, it will move to the top of the wallet. And these things are part of the new agreement with Chase, and that will drive increased acquisitions as well as increased spending per cardholder. And so we fully expect that then to show up into Q3 and beyond. That's one of the initiatives I referenced earlier in answering Catie's question.

And we made announcements today about additional benefits on the Chase card, really seating benefits. And -- but even before that, when we began to talk about the bag benefit in the card, we've seen a meaningful step-up in an increase in sign-ups for the co-brand card. And I expect that to accelerate with the announcements today around the seating benefits that come with the card.

And it started on 528. So people knew about it after we announced it in March, but really, we saw the behavior change the day it went live.

Got it. Got it. That's helpful. And then just regarding your fleet planning, you increased your delivery assumptions to 47 aircraft from 38 previously. Is that number subject to increase again depending on Boeing's ramp-up in production, I guess, during the rest of the year? And if you could just talk about what you're seeing from Boeing as it relates to your planning.

Sure. And probably better questions for Boeing next Tuesday. But no, we're seeing -- I think we're seeing good stability out of Boeing. They ramp to rate 38 on the 737 production, and they've done a good job holding that. Next step would be, I think, rate 42. So -- and we're seeing good quality. So I think everything that we see out of Boeing is heading in the right direction.

Now the production and our deliveries are still well behind our contractual plan and what we actually need. But the point is we're seeing them move up, not down, which is good. So yes, we changed -- we moved our assumptions up from 38 to 47. Our retirements are fixed at roughly 55 this year. So as we get incremental aircraft or deliveries from Boeing beyond what we expected in our plan, we have a lot of flexibility in terms of what we can do with those, replacing older aircraft. We've got these sales into the market right now of -800. So yes, but I think net-net, the -- what we're seeing out of Boeing is a positive improvement. There's no -- you didn't ask, but there's no real new news on the -7 certification. We're still expecting that sometime -- for us sometime maybe first half of 2026, which would put entry into service for us at earliest late in '26. But there's really no new news on that certification at this point.

And with the increase in deliveries coming from Boeing, as you know, we're not changing our capacity plans. And you saw in the release that we talked about an incremental 5 aircraft, which gets to the 55 Bob referenced that we'll be selling later this year and then an additional 8 aircraft that we'll be selling at the beginning of next year. This gives us the confidence to be able to execute those sorts of sales as we start to see these deliveries come in with a higher frequency.

The next question is from Scott Group with Wolfe Research.

I just have one really, really quick one and then just a bigger picture question. So does your -- am I looking at this right that you're implying closer to like 4% capacity growth in the fourth quarter?

Yes. The fourth quarter of last year was kind of abnormally low because of fleet shortages. So it was down lower. If you look at sequentially from Q3 to Q4, we're about 1 point high, but that's because Q2 to Q3 is about 3 points low. We are modulating that capacity versus peak off-peak, which creates kind of like slightly abnormal sequential changes. And particularly, we wanted to reduce exposure to August, September, but keep exposure to the strong parts of Q4, which was in October, November and December. They all have good peak periods in them. And so as we're taking that 1% growth we promised, we're putting that in places where it gives us the most return on our capital.

Right. I mean I guess my bigger picture question is you and others seem to be counting on a much better Q4 this year. And your capacity is accelerating in Q4. We heard from American, they're going to be accelerating a little bit in Q4. Like is that -- are we at risk of capacity is picking up in Q4, but we're counting on RASM to get meaningfully better in Q4?

I think it's a comp issue, not necessarily what the market bears. So right now, what we see in the bookings, we like what we see. We've only modified October, by the way. November, December has not been modified in our promised reduction to get to our 1%. And so October is not 100% firm, but it's the one that had the reduction that we promised at Q1 earnings.

Yes, I was going to say you're not seeing final schedules just yet. And yes, we're going to end the full year capacity up 1 seats, I think roughly down 1% to 5%, trips down 2%. So yes, I mean, it's all a very constructive backdrop in terms of capacity, especially on top of what we all hope is a continued inflection in domestic demand here.

Yes, because our seats in Q4 kind of going to be up like 0.7%. So what we need to sell is not actually a big Herculean lift because we introduced red and some longer haul and utilization, the ASM seems bigger, but the kind of lift to sell our capacity is much more modest than that.

The next question is from Savi Syth with Raymond James.

I'm just curious on the aircraft sales, just a follow-up on there. Just how you plan on handling that in terms of kind of cash flow and P&L?

Yes. So the aircraft sales will flow in, and you've got the book side of it, but you've also got the cash proceeds side of it. These are largely aircraft that are fully paid for. And so as we sell these aircraft, of course, the market continues to be very strong for used aircraft. A lot of the values for the aircraft is in the engine value. And so that becomes from a cash flow standpoint, basically flowing through kind of fully accretive to us. And there's book gains that are there as well. And maybe one thing to clarify, we continue to guide without any book gains in any of our guide. So that number that we gave you for the full year does not include any gains from sale. So we'll continue to do that as well. The book gains are less than the cash that will come to the business just with the net book values that are still on the aircraft.

And then maybe I can ask on the recovery side, you're seeing demand. Is that kind of leisure? Is that corporate? And could you give a little bit of color on what you saw corporate do in 2Q and how it's progressing?

Certainly, I'll start with the corporate, which we saw in Q2, May was the worst. And so then June was better than May. July is better than June, and August is off to a strong start, even though it's kind of good for corporate. So good inflection in Q2 for corporate. And then also leisure, it was the same thing. We saw leisure customers really come alive there just before the 4th of July holiday.

And I think just generally, but I was saying, again, it's 4 or 5 weeks of trend. It's always hard to tell. But what I think what feels really different is just overall, is that it was just tough to get volume. I mean you could get yield close in on the flights that we knew were very strong. But even with promotions, it was tough to get volume going back several months. And we're starting to see the volume return. And that -- I think that's a strong sign that it's a broad-based recovery, again, a short period of time. But to me, that's very encouraging.

The next question is from Dan McKenzie with Seaport Global.

A couple of questions here on revenue segmentation. First, what percent of tickets today are clearing at an ultra-low-cost carrier fare? And what would you expect it to look like in 2026 once assigned seats are offered?

I actually don't have that down off the top of my head. I apologize. We are seeing kind of a reduction in basic economy fares sold versus want to get away, you will buy up in a choice. And so we like the momentum of people deciding to voluntarily buy up. We do have bags now with it. So at the margin, it would give you incentive to sell a slightly lower fare if you thought a bag would come with it. But it really doesn't change our pricing strategy at the moment. And really, we want to use this to segment customers into those who are flexible in their travel and those who are not flexible in the travel. And those who are not flexible give them different options to buy up quality enhancements to the fare product.

And I think it's more about giving you a reason to buy up. And especially when we have the seating benefits, and you'll see this again next week when we start selling the new products with the seating benefit, give you a reason to buy up because in addition to other flexibility and other things in there, you've got a seating benefit or seating map and extra leg room access that goes with the product. It's more about letting you buy up to get the thing that's important to you.

Andrew said it, but just to give you a little more color, I mean, we haven't given you exact numbers, but the vast majority of our seats before were sold and want to get away. And there was a limited number of seats sold in that next column want to get away plus. And today -- and again, obviously, it's very early after just weeks, roughly half of seats are being -- half of passengers and seats are being sold in that lowest now called basic economy bucket. So that does give you some indication of the level of mix change we're already seeing and buyup we're seeing. And I expect that to continue because the reasons to buy up with the seating benefits should drive even more. But we're already seeing that vast majority become more like half.

Yes. Second question here, going back to the script that current initiatives are not the endpoint of the strategy evolution. I know the focus is -- on the fleet side, I know the focus is on the MAX 7, but is there any interest in the MAX 10 aircraft once approved and potentially a further segmentation of premium demand?

Yes. I think -- and again, not trying to be coy. I've hinted at things we could be doing. And you know what those could be because there's only a limited number of things you could do. So it's either more that we can do to segment the existing cabins we have, which would be more premium as an example. And things could come along with that. I've even mentioned things like lounges. And then beyond that, you've got network expansion. So being able to fly to places that our customers want to go, we cannot serve with the current aircraft. And so the point rather than to say we've got specific plans to do all those things, the point is to say that we're going to follow the customer and work very hard to give you reasons not to split your wallet.

Today, you have -- today, people love Southwest Airlines. But today, you've got to split your wallet in even cities where we're strong because we can't offer you some of the things that you want, especially long-haul international is just one example. So this is a point on the journey, which we're incredibly focused on, but not the endpoint. And I'll take just one quick 1-minute detour. I'm just really pleased with the execution of this point on the journey. If you go back just over the last even 5 months, I mean, we've got a new Chase agreement. We've got enhancements to Rapid Rewards. We launched Expedia. We started red eyes. We've added partners. We accelerated our cost plan from $170 million to $370 million for the year. We've launched bag fees, basic economy, reintroduced flight credits, and now we're selling assigned in seats and extra legroom next week.

So I mean, just an incredible list in 5 months. And there's a lot more to come this year. And my point is beyond that, we're not stopping. We're going to continue to understand how we keep serving our customers and meeting their needs. And it's one of those more to come. We're focused on the current transition and transformation, but this is not the end point.

The next question is from Andrew Didora with Bank of America.

Most of my questions have been asked and answered already, but just one for Tom and just on the new liquidity and balance sheet targets. When we look at them versus kind of where Southwest was pre-pandemic, they both seem a little bit more aggressive here. I guess how did you get comfortable with these new targets, particularly in a much more difficult macro and at a time when you're going through a pretty significant brand revamp. Just curious how you thought about that.

Yes. Thanks for the question, Andrew. Our balance sheet is a big differentiator for us. To my knowledge, there are 3 investment-grade airlines in the world. And there's a lot of benefits that come along with that. And that's something that we need to protect as we move forward. And as you look at the various metrics, whether it's a debt-to-EBITDA ratio, cash levels, those sorts of things, we want to set a framework that sets us strongly in that investment grade. And we feel like what we're seeing here does that. Now we want to have a strong and efficient balance sheet as well. And so you'll continue to see us work within that framework.

And as we continue to improve the business through all of the things that we've talked about today, I mean, that list that Bob just went through is a really impressive list. And to think that in less than 100 days, we're rolling these different things out and they will ramp up as the year goes on and into next year, they create additional free cash flow for us that gives us the ability to also return capital to shareholders. But we thought it was important that as we are sort of on the front end of this journey that we've been talking about today that we put a framework there so that our investors understand the guardrails that we want to work in as we move forward.

The next question is from Tom Wadewitz with UBS.

I wanted to ask you how you think about load factor. The load factor down, I think, a little over 400 basis points year-over-year, and it's, I think, a relatively low level compared to other industry -- other network players or big players in the industry. Is that something that you say, okay, this is kind of not what we're optimizing on at the moment. We're optimizing on bag fees and other things, and that will come back eventually? Or is that something that -- is that just improving supply-demand driven that it improved? Or does that actually affect how much you grow capacity in the future? Just want to get some thoughts around that because it does -- you have a number of positive things happening, but that seems like that's a meaningful drag in terms of the pressure on load factor.

Yes. Tom, no, there's a lot in there, and I'll let Andrew chime in as well. But the yes, our load factor change year-over-year was sort of roughly what we saw from our competitors, but we started at a base where you're right, we have a gap and it's a gap that we are squarely in our focus to close. We have been -- the first half of the year, we were really focused on targeting yields to get the improvement. You're seeing that. But really targeting load factor is the objective here in the back half of the year.

Beginning next month, we have a whole series of network changes that are intended to drive extra connectivity because especially at the beginning, the early and the later part of the days, that's where you see the load factor gap showing up. And connectivity will really assist that. I think our points, the number of -- if you want to call them, we call them intentional connections, but kind of banking to offer connecting opportunities. Andrew, I think it's up 40% year-over-year beginning in August. And it is solely intended to create itineraries that help fill that load factor gap. But yes, do you want to add anything, Andrew? But no, it is absolutely in focus.

Indeed, the -- and we've been saying for almost a year now that the first half of this year, we would focus on yield, primarily through getting more money off of our best flights where you have the ability to move your yields. And then the second half, we'd be focused on load factor, both with the intentional connecting opportunities Bob talked about, the connectivity as well as the introduction of basic economy, those in our distribution channels that Tom hit on, those are things that give us more volume at the top of the funnel, if you will. And those are working.

So right now, August is only down 0.5 load factor points year-over-year. And last August itself was up, if I'm not mistaken, 1 or 2 points in August before that. So during this period of macro weakness, we focused on not unduly discounting. And I think that our year-over-year RASM performance compared to others showed that was a wise choice to go for yield and not necessarily try to chase a falling knife. But now as we rotate the volumes available, we are pushing that load factor back up.

One thing to kind of keep in mind is the load factor reduction is not a sign of customers moving away. It's as we're taking MAX 8 instead of MAX 7s, our seats per trip is up about 7% pre to post pandemic, the underlying trend. And then -- but our customers per trip is only up 1%. So customers are up slightly, insufficient to use the -- to fill the extra seats, but these efforts we talked about are opportunities to fill those seats, which is a potential tailwind for us and we have been moving capacity peak off-peak because you could say, well, Andrew, your seats per trip are up 7%, do some reductions on your -- thin out your routes. And our trips per nonstop market are actually down 10% kind of through the post pandemic.

So we are moving capacity around to try to address the supply-demand imbalance. But as Bob mentioned, it's mostly time of day, and we have these actions we're taking to try to solve that. And August is a good encouraging first month where we're seeing traction on load factor.

Okay. Just to follow up on that, we -- it sounds like your initiatives are maybe a key in the connecting flights and everything, and that's kind of the key driver. It's not necessarily just kind of improving demand? Or is it maybe both of those together helping you in August?

Well, it is the connections, the connection opportunities. We do have a lot more connecting itineraries. Therefore, our connecting composition is up in August. So that's a check. We do see that basic economy does allow us to have a sharper price points in certain areas, and that was to stimulate without fear of diluting corporate demand. And the distribution agreements that we referenced earlier are giving us additional net new customers. So all those things come together to allow us to make -- take advantage of the additional seats per trip we get from taking MAX 8s instead of MAX 7s.

Well, and you look at the changes, yes, the -- this is all intended to drive financial performance, and that's both yield and it's managing costs and it's bringing new customers to Southwest Airlines. That's the whole basis of the transformational plan is giving our customers what they want, giving them more and more reasons to fly Southwest Airlines. We just took the launch of assigned seating and extra leg room, which will begin flying late January next year. We know that the -- more than 80% of our customers want assigned seating. 85% of those who don't fly us want a signed seating. It's the #1 reason -- open seating is the #1 reason people leave us and open seating is the #1 reason that customers who won't fly Southwest won't fly Southwest.

So all those barriers would tell you it's very logical that you'll have share shift, you'll have customers coming your way because they'll now put Southwest Airlines in the consideration set because we have assigned seating. So I think all these things together, the intentional connections and then the initiatives over time do a lot to restore that load factor gap.

And that's a good reminder, Bob, our initiative value for assigned seat extra legroom did not include a share shift from people all of a sudden being willing to fly Southwest since we have assigned seating. So that's an unquantified upside. We would show up as load factor as well. So lots of opportunity here to get incremental EBIT from those seats.

Thank you. That wraps up the analyst portion of today's call. We appreciate everyone joining.

Ladies and gentlemen, we now transition to our media portion of today's call. Ms. Whitney Eichinger, Chief Communications Officer, leads us off. Please go ahead, Whitney.

Thanks, Gary. Welcome to the media on our call today. Before we begin taking your questions, Gary, would you please share instructions on how to queue up for a question?

[Operator Instructions] The first question comes from Alison Sider with The Wall Street Journal.

I wanted to ask, I know it's not decided or a done deal, but as you think about potential for lounges, what might that look like? Or what sorts of things would have to happen? Or how could that play out? I'm just sort of curious how you're thinking about it at this point.

Ali, it's Bob. I running the risk of getting over with skis, which we are a bit because I've used that premium long haul as examples, not decisions. We've certainly not made any kind of decision. So I can't answer your question because there's just not that work here. The whole point again is that we're just not going to be caught short of what our customers want.

In other words, many things that I've talked about, and again, if you use those examples, they take a long time to implement, decide and implement if you're going to fly long-haul international as an example. So we're going to be careful to understand what our customers want, why they split wallet, what customers that will fly Southwest Airlines want. And then if it makes sense, we'll do it. So my point is I didn't want anybody to perceive that this set of initiatives is the stopping point. The point is that we're going to continue to pursue our customers. And there's a next set of things that I know will come as we finish up this set here. So again, I don't have any specific report on lounges of premium or international or long-haul international. Again, it's just -- I just want to make sure that everyone understands that we're not stopping. We're going to continue to pursue and understand what our customers want from us.

And on long haul, I mean, is there a lot of like technological kind of systems work that would have to get done before you could really consider that or labor agreements? Or is there a lot of stuff like that, that you'd have to work through?

Again, this is all totally hypothetical. So I just really -- yes, I prefer not to answer just because we don't -- we're not doing the work. We're looking at the strategy in terms of what is it our customers want, which is very different than the detail on what would it take. So yes, I'd rather just not answer because I'm afraid it might be viewed as more speculation on what we're doing.

The one thing I'll add to that, Bob, is today, we are taking tickets sold by Icelandair in many different currencies, and we're lifting them and processing them and there's no problem.

I think one -- the only one obvious thing, again, this is not for speculation on what we're doing. It's just -- it's obvious is if you're going to fly a long-haul mission, it requires aircraft that can fly a lot longer. So it would take a different aircraft to be able to do that. I mean that's very, very obvious. But again, that's just to give you an example. It's not to give you any insight into something that we're doing. So -- but I appreciate the question, Ali.

The next question is from Robert Silk with Travel Weekly.

Can you all provide maybe, Andrew, a little bit more detail on the connectivity that you -- where you're talking about connecting itineraries, where that's happening? Is it particular airports or particular type of routes, anything like that?

Sure, Robert. It's kind of across our network. You look at our bigger stations, and those are places where we have a lot of flights and they have the opportunity to have more connectivity. The one I'd highlight that I'm most excited about is we launched red eyes. So we have a number of red eyes now that arrive into Baltimore in the morning. And then those flights connect to flights predominantly northbound, but kind of shorter-haul flights from Baltimore. And so if you're going from the West Coast to a smaller city on the East Coast, this is a very efficient itinerary for you to fly a red eye into Baltimore and connect to the first flight.

Those first flights generally have -- or less full. And so that allows us to get incremental load factor on those flights as well as incremental opportunities for our customers in the West to get to the East or people in the East to return home. And so that's one that I think is -- we really didn't have in past years. There's some we had in past years, we're just bringing back. There will be some of those in Denver and now some in Nashville, now we've built up Nashville. So we've added them kind of all throughout our network since we don't have like 3 really huge airports, we have like maybe 10 big airports. And all those 10 to 12, we've got these connecting banks sprinkled in.

This concludes our question-and-answer session for media. So back over to Whitney now for some closing thoughts.

If you have any further questions, our communications group is standing by. Their contact information along with today's news release are all available at swamedia.com.

The conference has concluded. Thank you all for attending. We'll meet again here next quarter. You may now disconnect.