Southwest Airlines Stock

Hello, everyone, and welcome to the Southwest Airlines Third Quarter 2026 Earnings Conference Call. My name is Gary, and I'll be moderating today's call. Please note that this call is being recorded. A replay of today's call will be available in the Investor Relations section of southwest.com. Following the prepared remarks, we will open the call for questions. [Operator Instructions] At this time, I would like to turn the call over to Danielle Collins, Managing Director of Investor Relations. Danielle, please go ahead.

Thank you. Hello, everyone, and welcome to Southwest Airlines Third Quarter 2026 Earnings Call. In just a moment, we'll share our prepared remarks, after which we'll move into Q&A. Joining me today are Bob Jordan, our President and Chief Executive Officer; Justin Jones, our Chief Commercial Officer; and rounding that out, Tom Doxey, our Chief Financial Officer. Before we begin, a reminder that we'll 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 release. With that, I'll turn the call over to Bob.

Thank you, Danielle, and good morning, everybody. Last quarter, we talked about the transformation reaching an important milestone with all of our major initiatives contributing throughout the entire quarter for the first time. Our third quarter performance and fourth quarter outlook both demonstrate that the earnings power we have built is durable. In the third quarter, we delivered an adjusted operating margin of 5.4%, up 4.8 points year-over-year, and that's despite an $820 million year-over-year headwind from higher fuel prices. We expect to be the only major U.S. carrier to deliver year-over-year margin expansion here in the third quarter. After-tax return on invested capital was 11.3%, and we generated a third quarter record of $8.4 billion of operating revenue. Adjusted earnings per share were $0.66, representing a 500% increase year-over-year and above the midpoint of our guidance range despite a less favorable fuel environment than we anticipated at the time of our last earnings call.

Demand for the Southwest product remained strong throughout the quarter. Broad-based demand strength was evident across all geographies and products including managed business, leisure loyalty and co-brand. We generated record third quarter passenger revenue and achieved the highest passenger yield in our history, providing further evidence that our strategy is resonating with customers. We also delivered an all-time record RASM performance, exceeding the high end of our guidance range and costs that came in within expectations. Justin and Tom will take you through the underlying revenue and cost drivers in more detail in a moment. With the transformation complete, our work has shifted from building to optimizing the business and delivering the next set of customer experience improvements. Both are focused on unlocking the next phase of value creation through stronger earnings, higher returns and continued margin expansion.

We are already making meaningful progress, and I'm particularly excited about the investments we continue to introduce across our product offering as well as our recently announced loyalty program enhancements that will further strengthen the value proposition of Rapid Rewards. As we announced at Media Day last week, we're evolving Rapid awards from a program that primarily rewards customers for flying with Southwest and the 1 that delivers value throughout the travel journey. Beginning January 1, we'll introduce new ways for members to earn recognition and rewards, including a new platinum tier, enhanced benefits along the path of status and additional opportunities to engage through our co-brand credit card.

We're expanding how members can use their points with international loyalty partnerships and partner redemption launching next spring and the ability to redeem points for ancillary purchases, including seat selection, to file later in 2027. Together, these enhancements make Rapid awards more engaging, more flexible and more valuable for our members while strengthening the role that loyalty plays across the Southwest experience. In addition, we continue the installation of Starlink Ultrafast WiFi on all of our aircraft available free to rapid rewards members with the fleet-wide rollout expected to be complete by this time next year. Additionally, we recently introduced the Southwest Icon lounge network. The name Icon celebrate Southwest's 55-year legacy in the people, moments and ideas that have made the airline what it is today from Herkelehers, Maverick people first hospitality to the customers and employees who continue to shape our story.

Lounges are already under construction in Austin, Baltimore, Honolulu and Nashville with at least 7 additional locations planned as we expect to welcome our first lounge guests in fourth quarter next year. The Southwest Icon lounge network will serve as the foundation for a new premium credit card launching in 2027. Premium cards have been among the strongest performing products in the co-brand market, and this gives Southwest an opportunity to participate in that segment for the first time. On the digital front, we recently became the first U.S. airline to make flight shopping available through ChatGPT as more customers use AI tools to research, plan and ultimately book their travel -- this allows Southwest to engage earlier in the decision-making process and creating a more seamless path from trip planning the booking.

Collectively, we continue to make a huge investment in our customer experience. And less than a year from now, we expect to complete our fleet-wide Starlink rollout, finish key cabin retrofit initiatives, including inseaPower, opened our first premium Icon lounges, launch a new premium co-brand credit card expand rapid awards with a new platinum tier and introduce new airline loyalty partnerships and redemption opportunities. We don't view these as stand-alone products. They are designed to work together as a connected loyalty ecosystem that expands the value of Rapid Rewards, strengthens customer engagement and creates additional opportunities to grow both loyalty and the economics of the program over time. While our efforts to optimize the business and invest in the customer experience are already producing encouraging results, they represent only a fraction of the opportunity we see ahead.

I am pleased to announce that we will host a Capital Markets Day in New York on March 2, 2027. We look forward to sharing our multiyear financial framework, the targets we are managing towards and the actions we are taking to achieve them. We will also discuss plans to further strengthen Southwest's competitive position and unlock additional long-term value for our employees, customers and shareholders. Finally, none of what we have accomplished would be possible without our people. They are and always will be the heart of the Southwest brand. We have accrued approximately $165 million in profit sharing year-to-date, reflecting our long-standing belief that when Southwest succeeds, our people share in that success. To our employees across the system, thank you for everything that you do for our customers and for each other. And with that, I will turn it over to Justin.

Thank you, Bob. To build on Bob's comments, RASM increased 21.6% year-over-year, exceeding the high end of our 17.5% to 19.5% guidance range and setting an all-time record. Notably, this performance was achieved while lapping the 2025 implementation of Bagbees and other initiatives, a headwind we flagged last quarter. Passenger yields and volumes both exceeded our expectations during the quarter. September produced record RASMs in passenger yield, reflecting strong customer demand, sustained travel activity beyond the traditional summer travel season. Our performance provides tangible evidence that the actions we've taken to strengthen our network and product offering are working.

On the network, we're concentrating capacity in our strongest markets. including Nashville, Las Vegas, Orlando, Austin and San Diego, while reallocating capacity from lower performing markets. These changes are further supported from improved connectivity through redesigned banks in all our major airports, expanded Red Dog flying and partnerships that bring more customers into the Southwest network. At the same time, a science heating extra legroom offerings, more tailored offers and dynamic pricing are helping us serve a broader range of customers while better capturing the value of the network we have built. Importantly, these initiatives work together. By concentrating our network where we can win and giving customers more choice in how they travel with us, we're attracting more customers, increasing engagement and improving the economics of those markets. The progress we're making is also evident among business customers. This quarter included 20 of the top 50 corporate booking days in company history. And 2 of the quarters, 3 months set records for unique managed business travelers flown.

Year-over-year managed business passenger revenue growth improved sequentially in every quarter of 2026, and we've seen double-digit growth in both new and reactivated travelers, reflecting strong adoption of our enhanced offerings. Turning to our outlook. The strength we saw in the third quarter continues to support our expectations for the fourth quarter. We expect fourth quarter RASM to increase 19% to 21% year-over-year. As in the third quarter, our outlook reflects lapping bag fees and other initiatives with approximately 65% of fourth quarter revenue already booked, demand remains healthy and broad-based. Corporate demand continues to perform well, and the pricing environment remains constructive. With that, I'll turn it over to Tom.

Thanks, Justin. Our cost performance continues to be a key differentiator Third quarter CASM ex increased 3.8% year-over-year on capacity down 0.4% within the guidance range that we provided in July. As Bob noted, we delivered a 5.4% adjusted operating margin and adjusted earnings per share of $0.66, above the midpoint of our guidance. Those results came despite fuel costs that were $109 million or $0.14 of EPS higher than the assumptions underlying our guidance 3 months ago. To me, that is a clear signal of how much our business has changed and the strength of Southwest's positioning within the industry. Even with a significant fuel headwind, strong revenue execution and disciplined cost performance allowed us to expand adjusted operating margin by 4.8 points year-over-year and deliver earnings growth. The initiatives we've implemented across the business are creating a more resilient earnings profile and helping us perform through a wider range of operating environments. We ended the quarter with liquidity of $5.6 billion and a gross leverage ratio of 1.9x, within our stated range of 1 to 2.5x.

We also entered into a new $2 billion revolving credit facility maturing in 2031, replacing our previous $1.5 billion facility. Our investment-grade balance sheet remains a key strength particularly during periods of volatility. The management of the fleet is also a strategic competency and a differentiator for Southwest Airlines. We generated $285 million in cash proceeds and recognized $96 million of gains on the sale of retiring aircraft and engines in the third quarter. With a large fleet and an ongoing retirement schedule, aircraft sales are a recurring part of our business. These assets are generally unencumbered and generate cash that allows us to reinvest in the business, such as purchasing new and more efficient aircraft, which is a highly accretive use of capital.

As part of our annual review process, we have updated salvage value assumptions for portions of the fleet to better reflect anticipated values at the end of their respective useful lives, which will reduce depreciation expense by a bit more than 10%. More detail on this topic is included in our third quarter 10-Q. We completed sale-leaseback transactions in the third quarter, which resulted in cash proceeds of $212 million and $118 million in gains, while we expect the majority of our future financing needs will be covered with unsecured or secured debt, maintaining a small portion of leased aircraft provides us additional flexibility and allows us to monetize aircraft in a strong market. We continue to anticipate total gains on sale from retiring assets and sale leasebacks in the fourth quarter to be broadly similar to those in the first and second quarters of this year.

We expect fourth quarter CASM ex to increase 4% to 4.5% year-over-year on capacity of 3% to 4%. Unique cost drivers in the fourth quarter include the timing of 737-800 heavy maintenance events, costs relating to frontline labor, including health care, costs relating to on-time performance being lower than our targets, and a strategic decision to overweight advertising expense to the fourth quarter. Gains from sale are also forecast to be lower sequentially in the fourth quarter. We are anticipating year-over-year unit cost growth to moderate from fourth quarter levels as we move into Q1 and next year. We expect fourth quarter adjusted earnings per share of $0.55 to $0.80 based on an average fuel price of approximately $4.55 per gallon using the forward curve as of October 15. Full year 2026 adjusted earnings per share is now projected to be $2.60 to $2.85.

For the year, we are planning for approximately 67 new aircraft deliveries and 60 retirements with net capital spending of $2.5 billion to $2.75 billion. The underlying trends in the business remain strong, and we continue to expect earnings growth as we move into 2027 and with that, I will turn it back to Danielle for Q&A.

Thanks so much, Tom. This concludes our prepared remarks. We'll now open the line for analyst questions. Joining us today are numerous Southwest executives, including Tony Roche, our Executive Vice President and Chief Customer and Brand Officer, who will be available to address questions on our customer offering, product enhancements and Rapid Rewards initiatives. To help us manage time efficiently, well, please ask your 1 and 2 questions back to back at the outset. All right, Gary, we're ready for the first question.

[Operator Instructions] Our first question today is from Jamie Baker with JPMorgan.

I didn't realize Tony was there. So I think I'll ask a loyalty question. So -- or 2 loyalty questions. Obviously, there's speculation about international expansion and a potential wide-body order that sort of thing. I'm curious had a frame at from loyalties perspective. And we can keep this in the hypothetical. But is there any data that you've seen in terms of how loyalty economics improve when long-haul awards become part of the consumer equation, right? I suppose the other way to ask it is when you compare your current loyalty economics against those are the big 3, do you think you take a hit based on the fact that you don't currently offer the same type of long-haul destinations.

And then as a follow-up and maybe others will want to jump in, question that's being asked on every call this season so far if we look at Aeroplan valuation and what Air Canada is doing we can easily argue that your loyalty program is worth a figure that would at least rival, if not modestly exceed your current enterprise value. Bob has said nothing is sacred. Actually, maybe he hasn't used those words. But clearly, Southwest is turning over certain rocks that we thought you'd never touch. Am I wasting time and at least pondering the idea that you could do something creative or Air Canada is or ask with loyalty?

Jamie, it's Bob. Yes, Tony has led all of our work on the wrapped awards, the changes we've had in loyalty and take that, and then I'll take the second one about the -- just the value of the program. .

Jamie, and thanks for the question. I think in short, -- we see a tremendous amount of upside to loyalty based on the initiatives and products that we've already announced and we see coming online. So if you think about them all individually, they have value, but collectively, is really where you see that accelerate. And so the improvements to the day of travel experience that we're making, those are huge retention and acquisition levers for us. And then the hooks that we just made into the Rapid Rewards program really engage members on the more infrequent side of the scale all the way up to our most engaged customers. And so we're really attacking the Lloyd's equation on both sides of the spectrum there and have confidence that is going to drive meaningful upside. And we know there's an opportunity for us with co-brand spend before us.

The way that I think about them is you really see an acceleration as they all kind of come online and kind of form a puzzle together. And these program changes are happening between now through the end of next year with our kind of initial set of lounge openings happening at the back of next year. So the way we see that is we think there's certainly traction as you get into that territory and beyond in terms of upside. Your question on do our opportunity to extract value from members who are wanting to go international beyond where our network takes us today is exactly the thesis behind the recent partnerships that we've announced. It's giving those members the opportunity to take those aspirational trips, and we're just getting started from a partnership standpoint there. So again, I kind of take your question as the things we're talking about and some of the things that will be coming online, in particular with international options related to our partnerships, we see it as all upside. And I think you'll see that reflected in the time to come.

And Jamie, on the second piece, I just want to say, maybe a congrats to Air Canada on their deal. And then I like the fact that it does illustrate the value of these programs, which everybody already knew we're focused on creating value period. We have -- as you've seen us continue to pursue the customer. We have a long list of things that will be in place this time next year between full fleet -- first airline with Full fleet StarLink to a first icon, Southwest icon lounges to full fleet retrofits and power on and on and on. We have a lot of customer enhancements in place in addition to continuing to optimize all of the things that we put in place, all tended to drive value -- and we have more beyond that.

So the way I would look at this is we've got a lot of opportunity to drive value with what we have and the things that are on the table today. and continue to expand margins even in an environment of high fuel. We have, obviously, plenty of liquidity here at Southwest. So it's not something that we need to look at. But -- so it's not on the radar for us at all, but I do like the fact that it illustrates what we all know, which is these programs are extremely valuable.

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

Good morning, everyone. Thanks for the time. So my first question, I think, probably goes to Tom. Gains on aircraft sales have been a notable unit cost tailwind this year on top of solid cost control. Going forward, what's your view on secondary market aircraft values and how that will impact cost performance? And just to be sure, gains have been included and will keep being including guidance? And then second question, maybe to Justin, you beat the high end of your 3Q RASM guide. Can you talk through what maybe some of the key drivers of this better-than-expected guidance is -- was there some level of conservatism just given kind of unprecedented pushes on fares here? Or were there markets or trends that we just really accelerated versus what you were seeing back in July. I'll stop there.

Thanks, Katy. Yes, I appreciate the recognition on cost. I do think the team has done a really good job there. And then as you pointed out, the aircraft sales are a nice supplement to that. And I think the management of the fleet continues really to be a strategic differentiator for us here at Southwest. Maybe first and foremost, I think aircraft sales are a cash story. So you've got a ton of embedded value in the existing fleet in the order book, most of the assets are fully paid for as well. So what that means is that really the entirety of the purchase price is flowing through as an offset to CapEx and then that gives us the ability to offset the purchase of new airplanes, which creates a pretty short payback really for buying those long-term assets as we go from 137 to either 175 or soon to be 150 seats. The fuel burn reduction and those sorts of things, it becomes a really quick payback when you take all that into account.

And as you know, we've got north of 400 737 NGs that are still in the fleet that will ultimately replace with MAXs. So this is something -- this fleet-related cash flow is something that will be with us for a lot of years to come. You'd asked about secondary values. So my view is that those will remain strong, barring some sort of significant macro change. Whether it's supply chain constraints, related engines or parts, new aircraft production, those sorts of things, I think those will keep the market strong there, and those issues are likely to be fully resolved for a little while. And maybe just to finish up on the accounting side. So we mentioned in our last call that we anticipated that the gains from sales would be higher in third quarter and that in fourth quarter, it would look more like the first and second. We're still, as you heard in my prepared remarks, still anticipating that to be the case.

And then maybe finally on the depreciation side, just to kind of round out accounting -- you also heard us say that we've made some adjustments as we went through our annual salvage value review and really, the thinking there is just to try to match those up as best we can with where we think the anticipated values will be at the end of those respective useful lives. And you've heard me talk about depreciation, maintenance expense and gain/loss that all those 3 things work together. Ideally, you want to have that in the depreciation line. So what this will do is ultimately reduce gains as we move into the future.

Yes, I'll take the second one. I always appreciate being able to speak to the outperformance of the RASM guide for sure. So thank you for the question. Largely, I'd say the upside is pretty broad-based passenger fares came in about $3 above what our forecast was. And -- but the more important thing is that passenger volumes also exceeded our expectations. September was particularly strong rather than seeing kind of that post summer slowdown that you would normally experience, we delivered record RASM in passenger year in the month of September. We continue to see strength and manage business travel -- and it was not the result of 1 isolated item. It was basically a combination of a very constructive price environment, super strong demand and then stronger business travel. And we saw really good customer adoption of our new products. .

And so I'd say that the beat was not because we misunderstood the comparison. It was because the underlying business performed better than we anticipated, and we continue to see that strengthen in the fourth quarter.

The next question is from Duane Pfennigwerth with Evercore ISI.

I wonder if you could provide some early thoughts on 2027 total deliveries and retirements, I guess, this year, you've been pretty consistent on like the net fleet growth messaging I wonder how that looks for next year. And then, Tom, just on the depreciation expense that you flagged, when does that? Or when did that start?

Thanks, Duane. Yes. So well, 3 months from now when we guide the year, we'll give more specifics. But we've just had the MAX 7 certified. And so I think the way you can think of 2027 is that we're likely to have more deliveries coming out of the factory than we had in 2026. And then we've also talked -- you've heard us talk in the past that there are 27 MAX that were previously built that we'll start to deliver at the tail end of this year, we'll put them into service next year. So yes, you should think of 2027 total deliveries to be higher than 2026 and we'll give you more specifics in 3 months. And then on depreciation, there was a bit of an impact this quarter, but really it starts for the full quarter in the fourth quarter.

And you'll see more details. We'll have our 10-Q out tonight you'll see more details about the depreciation in the 10-Q.

The next question is from Conor Cunningham with Melius Research.

Maybe Justin, jumping back to kind of Katy's question or piggybacking on that. Just on 4Q, you're obviously lapping a lot of the initiatives and you're moving more towards optimization. I was hoping you'd be able to split out what you view as actual core blocking and tackling versus your optimization efforts that you're doing as well? And then maybe on the cadence of product enhancements, I mean you're obviously -- maybe I'll ask you like this. The -- how important are the lounges to further product segmentation in the years to come? Like do you need those in place before you maybe push more into first class or something like that. That has been talked about a fair bit. So just -- I know everything is on the table. So just any thoughts around the importance of the investment in the infrastructure to product enhancements.

Yes, Connor, I think Justin maybe take the first one, Tony, take the second piece on just thinking about lounges and co-brand, the new premium card.

Yes. happy to. Yes, fourth quarter, just kind of talk a little bit about the trends from Q3 into Q4. And the fourth quarter outlook remains exceptionally strong. from a unit revenue growth basically, we have about 65% of the fourth quarter revenue booked and demand remains healthy across the board. Corporate demand continues to perform well, and the pricing environment remains very constructive. And so when we think about our guide, it's continued strength against kind of the different capacity and year-over-year comparison. You asked specifically about kind of how much of it is coming from the core business versus optimization. And I would say it's probably around 2/3 core business and then 1/3 of it on the optimization side of things. .

And to take your second question on the role of the Southwest Icon lounge network. The way we think about that is, obviously, we're going to be launching a new premium credit card that provides access into those lounges. And what the premium car does for our co-brand portfolio is kind of twofold. One, we have existing members and our card member base today that have a heavy amount of spend that this is just going to be a better product for them that will continue to consolidate their spend with our Southwest card. And so it's extends extracting more value out of the customers who are already that deeply engaged. -- it also just helps us be more relevant for customers that are looking for that type of experience on trips that they can't get from Southwest today. And so we see that the lounge network provides that halo benefit is certainly there, but really benefits and drives the co-brand portfolio as it stands today, separate or apart from any additional changes to the product that we can make.

And I think the only thing I would add to is that the majority of folks who are in have the card and are in the lounges, they're not flying first class. They're in the lounge with the card because they want to be in the lounge. And each of the things that we're doing, while they stack on top of each other to build a better and better experience and offering for our customer. Each 1 is additive. So you add full fleet Starlink installation. Again, by this time next year, we expect a tailwind from that from all customers, certainly business customers, the retrofits, every seat having power, the larger bins the ability to have the beginnings of the lounge network. And as a reminder, we have lounges under construction in Austin, Baltimore, Nashville, Honolulu with more to come. So they're under construction right now. and the loyalty enhancements changes that we put into place, a new platinum tier that comes with a companion patch, which is super popular, new reward and redemption opportunities, the ability to redeem on loyalty airline partners to long-haul international spots in the world.

They all -- every time we add something, they stack together to build an overall better product offering and loyalty ecosystem for our customers. So we're not building to any 1 thing like first class. So the way we look at that is -- is that something that makes sense for Southwest Airlines and our customers, is that the next best way to ensure that we can offer our customers something that they want and give them another reason not to travel on a competitor simply because we don't offer it. So while these things all stack together to build a better ecosystem for our customers. I don't see them as all building necessarily towards 1 thing.

The next question is from Sheila Kahyaoglu with Jefferies.

I wanted to ask about just what's going on with your initiatives. It's resulted in average fares up 27% in Q3 with load factors flat implying pretty strong demand for your product, load factors as a contrast to some other people who reported this morning. I guess what do you attribute that strong performance to? Is it Southwest attracting new customers following the introduction of extra legroom assigned? And maybe as a quick follow-up to that, could you talk about the buy-up trends been basic to Choice products and choice to extra leg room.

Yes, I'll start with the first, and then Justin, if you want to take the second piece there, I really think it is all of that. So while fares have accelerated, certainly a lot herein -- and you've got to remember that while they're up, they remain below 2019 in real terms. Our customers are continuing to respond. And we're seeing -- Justin said this, we're seeing that both in higher passenger volumes and in yield. So it's not -- those higher fares are not causing an erosion of volumes. -- certainly, a piece of that is just broad-based demand strength. Again, we're seeing demand strong across every geography, every product across the board, business leisure. But without a doubt, a piece of the demand that we're seeing is incremental and unique to Southwest Airlines because of the product set that we've introduced and this continuation of additional products that we've announced. Certainly, I'm convinced we are seeing outsized demand because of that. And we will continue to see outsized demand in 2027 as we implement the list that I just went through.

So we don't see any signed at this point that fares coming up are eroding customer demand in any way, shape or form.

Yes. To the buy-up question, obviously, bias is dramatically above our historical levels. But overall, the way we look at it is we're optimizing the total customer revenue, just not a single buy percentage. Fair upsells plus danalone seating is a better way to think about the opportunity. And what matters to us is the total revenue production across fares and Cadia. I'll give you a few examples. You might have some holiday dates where we've -- we've added more basic fares on there. So you might see a basic fare mix go up. But also on those days, you'll have more upsell because you're pushing higher into your fare structure. So it's really about just optimizing the entire customer value not just optimizing the basic fares. .

The next question is from Michael Linenberg with Deutsche Bank.

Just in the context of some of the press reports about potentially bringing on wide-body airplanes, presumably that would need a reopening of a pilot contract. But maybe more specifically, would that also be required to bring on the MAX 10. And I'm highlighting the MAX 10 because you're obviously very proficient in flying the MAX 8. You're bringing on the MAX 7s. The fact that there's been a focus to increase connectivity, maybe the MAX 10 would make sense in the Southwest fleet. So -- number one, do you have to go back and reopen -- or would that be -- could that be added by nearly through an amendment of the contracts?

And then my second question is actually with respect to connectivity, the fact that your load factors were flat. We've been hearing from other carriers this willingness to trade yield for volume. I realize that your capacity growth was somewhat flat, so that may have helped it, but then we may have seen an increase in connections. So maybe, Justin, if you can talk about your success on the connection front because I know that's been a real initiative for the company.

Yes. And I'll take the first 1 and Justin take the second. Just -- I just want to make sure that draw distinction between I've been very, very specific and direct that we are going to continue to follow the customer and the customer's choice in demand and give our customers more reasons to buy Southwest Airlines and fewer reasons to not buy Southwest Airlines when they would actually prefer us. We just don't offer the product. So that's the guiding light here is the customer, not a fascination with any 1 thing. So the recent reports about Southwest is close to ordering wide-body aircraft. There's no credibility to those -- we -- again, we just continue to evaluate products to add to the mix to attract and retain more customers. But there's -- but that report was not correct. On the -- and Andrew, you check me here, on the other variance of the 737, specifically, it's really more of a seat -- I believe it's a seat count cap than it is a different fleet type.

Correct. And in fact, if we want to operate more than 175 seats, we'd go back to the pilot. The contract does open up next year likely. And so there's an opportunity there for the cycle.

Yes. So it's really about the seats on the aircraft. It's not about the different variant of the 737. Obviously, we would have a big negotiation around a wide-body. But I suspect that adding another variant of the 737 is significantly easier. And then Justin, you've got a lot of -- as we think about our capacity, a lot of great examples of how we're strategically thinking about capacity investments. So.

Yes. Yes. Well, again, just like outperforming the quarter, I love also answering this question about connectivity. Because as you noted, we have increased there significantly and we've also increased load factor. And September is a great example of that yield was up more than 20% year-over-year, and load factor also increased. And now the composition of that has changed a little bit. We will see some load factor decline, but that's offset by connecting traffic growth, which actually highlights a pretty distinctive advantage for Southwest Airlines. So to talk often, you hear people talk about a point-to-point model versus a hub and spoke. We're really unique in that we operate a point-to-point, which gives us incredible utilization and operational efficiency advantage -- but commercially, we build more like a hub-and-spoke model, which gives us all the value coming in from being able to take advantage of connecting traffic on top of and an extremely efficient operating model -- and when you combine those 2, you see the exact trends we had, yield up, boat factors up, really good RASM results.

The next question is from Tom Fitzgerald with TD Cowen.

First question, just curious if you could level set and remind us on the incremental EBIT expected in 2017 from the current initiative that I announced at the last Investor Day, and then just a follow-up on loyalty, specifically as it relates to other revenue. I think that line item is up around 7.5%, call it, year-to-date. And it seems like you're going to have a lot of momentum next year with the new credit card product presumably a big upgrade cycle. Is it fair to think that other revenue could accelerate further next year, maybe into the high-single digits or low-double digits? Any color on that would be really helpful. .

Thanks, Tom. On the initiatives, I mean, the 2 really big ones, of course, were bag fees and then the seat assignments, the extra agra seats. We've talked about going from $1 billion of EBIT in 2026 to about $1.5 billion in EBIT, again, for the seat side of it in 2027. We are still on track for that, if not ahead. On the bag side, that $1 billion that we had talked about for the bags, 1 -- that has tracked. And the 1 change, it's a positive change that we've had this year as bag fees increased a bit. It just stepped that up. So I would say we're tracking ahead for both of those. So those are probably the 2 big ones that we'd want to update on now. The second question will maybe answer just a little more generally. We'll get into the detail of 2027 in about 3 months. But the things that you heard, really all of us talking about today, but specifically, a lot of what you've heard Tony talk about the focus on continuing to build on what is already a very strong loyalty program and a very strong partnership with Chase.

A lot of the initiatives that we are now moving to and are in the process of executing on now relate to improving that loyalty revenue. And so yes, the focus will be there. But for specific numbers, we'll talk a little bit more at the Capital Markets Day and as we guide the year.

The next question is from John Godyn with Citigroup.

Clearly, you guys are making a number of improvements domestically. As you rub up against the network carriers, the lack of international, both for loyalty, confer plan, but is also for corporate travel premium travel, et cetera, is kind of like a point of differentiation and maybe a gap. I see that you're adding alliance members, Air Portugal, Polish Airlines. But maybe we can just take a second to review the international strategy at large and does a more meaningful push of some sort have to happen? What would be the bottlenecks to making that happen?

Yes. Let me just start just with some general comments and then Justin can add specifically around the international. I mean, let's just talk about head-to-head competition here. Yes, we don't have premium. We don't how long haul. We don't have long haul international. But just -- let's just look at performance. I mean, we're on a many, many quarter trend of beating -- outgrowing our peer competitors in unit revenue growth year-over-year, and I expect exactly the same thing in Q4. Despite the fact that fuel prices are up, and we're planning against fuel prices staying up in 2027 despite that backdrop, we see opportunities to significantly expand margins even in that environment. And you look at our demand performance, look at our loyalty program performance.

We're seeing very large increases in new members, record tier qualifications remuneration growth in I think Tony to 12% range -- and this is all without again, this outperforming premium and long-haul international. So our revenue performance and certainly, our overall performance, expanding margins 5 points year-over-year in an environment where we had an $820 million headwind from fuel. It's hard to argue we are somehow underperforming because we don't have those products. I'll see all of that as upside in the future if we decide to pursue that.

The next question is from Savi Syth with Raymond James.

Maybe a first question, just kind of dealing with 1 of the air show podcast, Andrew kind of detailed what has impacted Southwest on-time performance, which I think Tom mentioned hurt CASM ex -- just curious and he had detailed -- Andrew had detailed kind of the plan to address it I know that some of those steps go into kind of 2027, but wondering if you can kind of provide an assessment of how and if the solutions are having kind of the hope for results here. And then just for the second question, just a follow-up from kind of Duane's question. As you think to 2027 and growth, how are you thinking about retirements next year?

Let me just -- I'll just start and pitch to Andrew on the cost question and then thinking about on-time performance. the -- our fourth quarter cost performance is up a little bit. It's really an outlier. We've got some maintenance events. They're really timing -- and to some extent, we've got some pressure from on-time performance that is -- I'll just admit it is lower than what we would like. We're performing well overall. We've got our best baggage numbers ever. We've got terrific completion factor, but OTP is not where we want it to be. And on cost from the fourth quarter those will absolutely step down into the first quarter of '27, and it'll step down into the full year 2027. But we are highly focused on on-time performance. There are improvements built into scheduled next year, beginning with the January schedule, that will improve on time, and that will have an improvement impact on our costs in 2027 as well. But just thinking about the specifics of all that we're doing to improve OTP, Andrew.

Yes. Thanks, Bob. As you mentioned, the Wall Street turn overall, the 7 metrics we're doing well on all of them except for the extreme delays, which is the 45, we're also doing well. So it shows you the difference in our performances in between that kind of 14% to 45%. So it's -- it's a handful of minutes. We need to move back, not any problem with like larger disruptions, large disruptions, we continue to do very well compared to our competitors. And so some of the schedule, as Bob talked about, will be rolled out in January and beyond. But between now and then, we've made some smaller changes like report time for crews and otherwise, we want interior cabin. But 2 of the bigger ones that are actually going live in November is a change to our gate check process and our flight close process. And those are both process changes, and we have some technology changes for our ops agents to help them close the flight with the iPad done the aircraft not at the podium, so to speak because they can problem solve and be able to manage the last part of the turn because we start turn extraordinarily well better than ever, but it's that last a little bit.

So these changes will start going out in November and then also ramp up through when those schedules go live. So we've got a broad range of efforts, we think will bear fruit here November, December and into the first quarter.

Thanks, Andrew. And Savi, on your retirements question, again, we'll give specifics and guide deliveries and retirements in 3 months. But you should anticipate that going along with what I said to Duane earlier about a higher level of deliveries, we will also have an increased level of retirements next year, but we'll give you the specific numbers in 3 months.

The next question is from Chris Wetherbee with Wells Fargo. .

You talked about loyalty, I think, here on the call a couple of times, but maybe you could frame sort of where you think you are relative to peers in the space that there's an opportunity to kind of close the gap or bigger opportunities as you expand your services? And then I guess maybe on the corporate demand side sounds like it's quite strong. You've had a couple of quarters here with a lot of the initiatives. You kind of get a sense maybe expand a little bit on what you're hearing in terms of feedback and what you think it might mean for growth rates going forward.

Yes, I'll take the flat question. We again,as mentioned before, we think that relative to what the opportunity is, there's upside to what we're seeing -- the initiatives that we are rolling out lays out the plan for that. And again, it's really a matter of attracting certainly more customers into the program. Bob talked about the strength that we're seeing in the Rapid Rewards program as a whole. I mean new record growth numbers there. That provides a great base of acquisition into the co-brand portfolio and really, as you get into the Lounge network, the new premium card, we really see that as a way to accelerate the growth as we get towards the back half of next year. So we've -- we're clear and have been clear that there's upside here, and we think the initiatives really gives us a great plan to go and achieve that. .

And on your managed business, I mean yes, we're seeing strong continued demand and managed business customers and that segment has continued to outperform the overall business and essentially flat capacity, business passengers were up roughly 9% in the quarter. Business revenues were up 29%. And it's a combination of a whole series of things. I mean, obviously, it is our product enhancements. Our business customers are responding very, very well to the product options and changes and I expect that to continue, given, again, the fact that we've got full fleet Starlink coming here by this time next year, we've got our lounges opening, so things that are important to all customers, but certainly important to our business customers will continue to come online at a very rapid pace in 2027, and I expect that to continue to fuel the growth and managed business.

The next question is from Scott Group with Wolfe Research.

So Tom, I guess I'd like a very big picture sort of question. Like, obviously, like tons of changes this year, seeds, specs, gains, now depreciation, like it's obviously working like really outperforming RASM, outperforming CHASM, like I know we're not getting guidance today, but like just directionally, as we think about next year, like do you think we can outperform like industry again on these on RASM CHASM? Do you think it's more sort of -- were more in line with sort of whatever the industry is going to do? Or -- do we need to, in any way, be cognizant of, "Oh, we've got tough comps, maybe we underperform, I don't think that's the message. But I don't know, how would you think about like 1 of those 3 sort of outcomes?

I'll reiterate what Bob said a minute ago, we feel that even in a high-fuel environment, given all the things that we're doing with continued discipline on the cost side, all the great initiatives we have that are building revenue yes, we absolutely see a path to expanding margins meaningfully year-over-year even if fuel is high. And yes, I do think we can beat everybody else. .

The next question is from Brandon Oglenski with Barclays. .

So -- and Tom, maybe we can elaborate on that, how optimized do you guys feel you are in offering value for your products, meaning like the walk up from basic to a main fare. I'm sorry if that's not what you call your main fare. But -- and then thinking about like dynamic pricing of seat assignments and extra legroom, has that all been optimized in this environment? Or is there more to go there?

Yes. I mean I would say that there's quite a bit more to go there, and that is exactly what we're focusing on to drive the value for 2027 that Tom just talked about. We've got a pretty unique combination at Southwest that doesn't exist anywhere in the industry. We have the leading position in many of America's largest travel markets, we have an incredible brand that customers know and trust and an incredible culture of hospitality. And now we're adding a much more sophisticated commercial engine around those strengths, whether you think about how do we think about merchandising different for the new products the lounges, -- how do we think about that? How do we think about the loyalty program changes we have, all of those things are going to work in a combination.

So again, going back to some of the things we're not trying to be 1 of the other airlines. We're taking things that have always made Southwest unique, and we're adding capabilities that we've never had before. And so we're just in the very early stages of that. And Tony and I probably have a list of 30 pretty quick hit things that we can do that can drive incremental value. A simple example is you can't even upgrade on some of the products yet using our rewards point. So there's dozens of things like that, that we're going to look at to drive value in '27.

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

I know sitting here in October, it's early to guide for '27, but just looking at 1Q, 2Q schedules currently set kind of like 5.5% growth. You've been cutting about 1 point out of schedules the last few quarters. So is the right way to think about the beginning part of next year in that 4% to 5% range or should we expect more significant changes just given where fuel is right now? And then my second question just for Tom, in terms of capital allocation. Are you still open to share repurchases here in this environment? I know you have $450 million remaining you're within your target leverage range, and it seems like you have a pretty deep pipeline of asset sales. So just some thoughts around capital returns would be helpful.

Yes. I just take -- we're obviously not ready to guide capacity for 2027, but you've seen us be very disciplined here in 2026. Again, our full year is going to come in at about 1.2. And that discipline, and that's well below our peers and that discipline is at least a piece of why we are showing unit revenue and just revenue outperformance. As you look at 2027, though, it's all going to come down to a combination of many factors. Demand is incredibly strong, but what does demand look like? What does compete capacity look like? What's going on with fuel -- so we'll continue to manage in a dynamic way. The 1 thing we are not going to do though, we were not going to chase growth at the expense of returns or profitability. I promise you that. And just it might be helpful if you just give a few examples of where we are -- we're being incredibly intentional about where we are investing capacity -- so just maybe just a minute on that.

Yes. I mean, to your point, we're not just going to grow. If you look at our fourth quarter capacity, and this is true for the vast majority of our capacity that's out in published 95% of our year-over-year seat growth touches the Southwest point of strength, meaning that we're flying into out of airports where we are the #1 carrier. And well over half of that growth is occurring in markets where the rest of the industry is actually reducing seats. So most importantly, we're seeing the economics support our strategy. If you look at our 22 strategic focus markets, 18 of those improved operating margin year-over-year. So 18 of those improved. We had margin growth in those year-over-year. 2 of them were essentially flat and only 2 declines. That's with the higher fuel environment. So for us, this isn't growth for growth's sake, as Bob just said, we're concentrating capacity behind our strongest market position which is improving the economics of those markets overall and it's building leadership positions that we believe can produce more durable earnings over time. So we're very disciplined in our approach to capacity moving forward. .

And on the capital allocation side, we'll always go back to our framework. So we've talked about our liquidity target. That remains unchanged. And the combination of the revolver and cash and then the 1 to 2.5x gross debt-to-EBITDA ratio, the debt ratio, we'll work within those guardrails. And so -- maybe 1 other thing I'll mention is going back to the fleet comments, knowing that we have the MAX 7 that's now been certified, and we feel that will be a great asset for our network. We are anticipating that we will have more deliveries as we are taking both the MAX 8 and the MAX 7 over the next couple of years.

Next question is from Ravi Shanker with Morgan Stanley.

Apologies if I missed this, but are you able to quantify the RASM uplift in 2027, specifically from the Rapid Rewards changes and the Start -- and second question is interesting with the Chad GPT integration, can you share any initial takeaways there in terms of response from consumers -- and Bob, how do you think AI agents will change how you distribute and your market position over time? .

Ravi, I'll start with your first one. No, we haven't given specific numbers for 2027 RASM for those items. You've heard a lot of confidence from us about the benefits that these will bring getting to Starlink by this time next year, all the things that you've heard Tony talk about around lounges and all of that -- all of that we see to be beneficial and accretive, but we have not given specific numbers. .

And I'll just address the question on the chat plug-in that we installed, First of all, it is just fantastic work by our technology teams to really go and explore in this area. We look at this very much as kind of a way to explore how our customers are thinking about travel inspiration in that channel. It's very early. And so the numbers are quite small today to talk about any trends. But where things may go from a distribution standpoint in AI agents, that's exactly why we put a plug-in in place so we can get an early read and early learnings and continue to adapt based off where customers are looking to consume Southwest Airlines and moving forward. So it's been a great expiration so far. .

The next question is from Atul Maheswari with UBS.

Just 1 question in the interest of time. Tom, how are you thinking about free cash conversion and CapEx for 2017 and beyond as earnings hopefully continue to expand from here? We've seen -- on the operating cash flow side, we've seen meaningful improvements there as the overall profitability of the company has improved. And then the flow from operating cash flow to free cash flow will largely maybe state the obvious, but largely depend on the quantity of aircraft that we're taking offset by the proceeds that we have as we're selling assets from our fleet. So again, we haven't given specific guidance around the profitability for next year or any of the cash guidance. But that's the flow.

All right. Well, that was our last question for today. Thank you, everyone, for joining us, and we'll see you next quarter.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Great. Let us switch back to airlines content now and very happy to have at Laguna again, Southwest Airlines and CFO, Tom Doxey. Tom, welcome to Laguna.

Thanks. Really good to be here.

Absolutely. You guys have been the idiosyncratic story of the industry for the last couple of years now. Obviously, so much going on, a, with macro, b, at Southwest as well. Maybe just to at a high level kind of, how do you spend your time? Kind of what's the split between looking internally? What's the split between refreshing the price chart on the jet fuel versus other macro stuff?

Yes. We'll focus on controlling the things that we can control. And I think we've done really a really good job at that. I mean you mentioned the initiatives. You look at those initiatives that we've rolled in over the last 18 months or so. We were actually asked this morning in one of the investor meetings, okay, we'll talk about one of the ones that didn't go like you thought it would. And as we went through them, they all came in on time, and they all have either met or exceeded the financial estimates that we have put out there. And we've done it also with maintaining the things that have been core to Southwest for 50-plus years now around hospitality and the culture and the customer centricity. We're seeing record numbers for people coming to us now.

Our business revenues, for example, are up 30%. And I think that has a lot to do with the product. The fact that we now have the assigned seat, we have the extra legroom seats. We've got Starlink that started to roll out. We'll have probably 300 or so aircraft that will have Starlink installed by the end of this year, and we're going to continue on as we go through next year. So the product getting to a point now where I think it's resonating with people that it didn't resonate with before, while building on the base. And so yes, it's been -- things have gone really well from an initiative standpoint.

That's great. I'll come back to you in a second on that. But maybe just hit demand trends first. 2Q earnings, you said that 3Q was roughly 65% booked with yields up 24% year-over-year versus 13% for 2Q. So clearly a lot of momentum there with no deceleration in demands or fares. How have those trends evolved since July and kind of obviously, seasonality is a different thing. But how does that compare to what you saw in 2Q?

Yes. So we haven't updated those specific numbers since earnings. But what we have seen is as we've seen the quarter you progress into what has historically been more kind of trough period for the industry. We've seen a lot of strength. And the month that we're in now, September tends to be kind of a lower demand month. September has exceeded our expectations. And as we look at the demand environment it's very, very strong. It stayed strong.

That's awesome. Any color at all on 4Q and the holiday season kind of how much visibility do you have into that right now? And kind of do you see that continuing through that?

Yes. The booking curves are relatively short. We're kind of in this 60-day window. So as we move through the next couple of months, that will start to come more into focus. But of course, we do get -- it's more limited, but we do get insight into that, and we aren't seeing any signs as we move into that period of things decelerating.

Understood. And so obviously, kind of the entire industry has had this kind of nice tailwind on yields here. But you have obviously made it very clear that this is a combination of Southwest specific initiatives as well as industry tailwinds as well as jet fuel recovery across the industry. How would you characterize those 3 buckets as drivers of that yield?

Yes. So you think of the big initiatives that we've had that are unique to us. So seat assignments, extra legroom seats will be over $1 billion of EBIT for 2026. And as we move into 2027, we've talked about that being $1.5 billion or so in EBIT as we move into next year. We launched that in January. So of course, you get a full year as you go to 2027. But we're just seeing the project -- the product mature. We're getting better at the way that we market it. There's more familiarity with it, and it's resonated really well. So you've got that, that's unique to us. Bags as well, it's hard to believe that it's been almost 18 months since we've launched those. You may recall that we started operating and selling on the same day. that was in May of last year. So there was a ramp-up period with that, but that will be worth $1 billion in EBIT for the company this year as well. So just those 2 initiatives alone you can see north of $2 billion.

Layer that on top of the incremental loyalty revenue that's coming in with our amended deal that we did with Chase, the earn and burn, the frequent flyer, the cost savings, all of those things. All of that is helping to continue to produce EBIT. But yes, on the revenue side, all of those initiatives are going well and are contributing to that performance. So as I think about us and how we compare to others. You've got all the Southwest specific items. And then you've got all the rest of them and maybe take 2 of your categories and put them into one, which is sort of this industry strength/recovery from the increase in fuel.

And I think go back to maybe the first quarter and we were asked questions in settings like this, well, okay, you've had so much that you've been doing on your own and hey, that's going well. But now there's all this kind of industry stuff that's layered on top, can 1 plus 1 equal 2? And we felt confident that it could, and we've shown that it has. And so we're seeing the magnitude of the improvement that's coming in from the industry-related stuff that's come to us very much in line with what you're seeing with the other carriers, but great thing for us is we get to stack that on top of -- fully stack that on top of everything that was unique to us that I just described.

Got it. And speaking of that industry one, if you will, Obviously, jet fuel is creeping back up to it's a watermark that it hit kind of earlier this year. Again, you guys and the industry kind of responded by saying, hey, kind of we need to recover for this and pass through several rounds of price increases. Do you feel like there's more opportunity to do that kind of if you hit new watermarks or even right now, kind of how do you think about the current jet fuel environment and pricing that.

I do. I mean it's been volatile. What we've seen, there's a lag, of course, right? So you see the volatility if it tends to be really steep and the price of fuel is moving up quickly. Both from the booking curve and just kind of a natural lag. It takes a while for that to come. But yes, what we have seen is the ability to recover a good portion of that, I would expect that, that would continue that if fuel remains high, and it remains higher for longer, there will need to be more recovery that would occur there on the revenue side as well.

And we're still in the stats you likely have heard this from others as well, but you still -- you go back to 2019 and you look at where we are today and on an inflation-adjusted basis, even after the increases that we've seen in unit revenues during this year, we're still not where most of the other products are on an inflation-adjusted basis. So I think there's still room to go.

Got it. We met at our headquarters in June. And at that meeting, kind of you noted that the percentage of passengers paying for ancillary products had increased from less than 20% historically to roughly 60% today. That kind of really resonated with me. And you said that 60% was not a ceiling. So how are you thinking about what that runway looks like in the coming years?

Yes. In the end, so I don't know that we have a target. Sometimes we're asked, hey, do you have a target? Do you want to get to this percentage or that percentage. In the end, we're looking to maximize revenue and of course, maximize -- yes. So yes, for sure. Yes, great. So yes, I don't know that we have like a specific number that we're going to. But what I can say is what we're looking to do is to put -- we're layering into the business product elements that will incent that buy-up. And we've done some of that already. We've talked about other things that could potentially be in the future. We've actually just announced lounges now officially. We've been kind of officially worst kept secret. We've been talking about that for a long time now. But those are the types of things that as we continue to layer those elements into the product, we do it in our way and in a way that has, and I think we'll continue to resonate really strongly with our customers and with people who have been choosing not to be our customers who are now choosing. I mean I mentioned the 30% increase in corporate.

Those are the type of stats showing that these things are resonating. And like I said, we're not done. So we just announced lounges. We'll continue to look forward to things that we think will resonate and we'll -- whether it's the buy up or whether it's just a product element in and of itself that will continue to bring people to us. Sometimes you go back like 18 months and some of the conversations that we would have were around, they say, well, what about the share shift. I love the way that one of my peers, Andrew Watterson answers, he goes, "Oh yes, I'm glad you brought up the share shift. Let me tell you about all the share shift coming to Southwest because of all the things that we've done." And that's what we're seeing. It's exciting because we're -- there was this pent-up demand for things that the customers were wanting and they're buying those things that there was a pent-up demand for. And like I said, we're not done. We've just announced lounges and there's more to come.

Got it. That was literally my next question on the share. How -- is that share mostly coming in corporate? Or is that coming on the leisure side as well?

It's coming both coming. Yes, it's coming in both. But again, it's a combination of the pent-up demand that existed with the existing customer base. So there was that. It's people coming to us both on the corporate and on the leisure side. And in particular, the wallet splitting that could sometimes happen. We're in Southern California today. Prior to assigned seating, there -- I think were more instances of somebody saying, look, I'll fly you from John Wayne here in Southern California, up to the Bay Area or Sacramento all day long. I'll fly you to Texas. But if I got to go to Baltimore, I don't know. I might fly on somebody else because I want to make sure that even if I'm a little bit late to the flight that I'm going to get the seat that I wanted. And of course, our boarding was based on when you get on the plane. And so the product is resonating a lot more and what that should result in and what it has been resulting in is less wallet splitting that's happening as well.

Got it. Maybe just got a little bit of a side bar here. Just take us behind the scenes like 18 months ago, when you guys are like, "Hey, we're going to do all of these things," and entirely my personal view, but I think each of these initiatives would have been considered unthinkable for Southwest a few years ago. The fact that you are doing all of them, execute on all of them. I think it's pretty remarkable. But what was the thing of the management team at the time kind of were you guys just super confident that you had just this money left on the table and like it would be, I don't know to say easy to do, but you had extreme confidence where like, let's take it as it goes? Or just give us a sense of behind the scenes there.

Yes. These things aren't easy to do. We've had Lauren with us today, actually, who's our Head of Technology, she would probably be the first one to tell you about the complications that exist as you're needing to roll things out. But what you saw from the team was a resolve to get things done and get them done quickly. Not let perfect get in the way of really, really good and to get things out quickly and then iterate on those things quickly. But to get them out, -- and so -- but then what you also saw was confidence from the team, and that confidence continues, but you saw confidence from the team that we could get these things done as quickly as we can or as we thought we would.

And we did. We met the timetables and we met the financial estimates as well, that came from those things. And so yes, I mean I think that's what you saw from the team was confidence and resolve to be able to get things done and not letting perfect get in the way of really good.

Understood. You said in your first response that you did all of this while sticking to the Southwest ethos, which obviously was super important to you. Obviously, all these changes that are a lot of chatter on Twitter and such kind of in the initial days. I think you guys had given us a net number including some level of book away. Do you have a sense of how much happened versus your expectations? And do you have -- do you know if the share recapture of yours is some of that book away coming back?

Yes. Ultimately, what we saw was a net positive. And anything that occurred during that period was very, very short. And the response that we've seen when you look at the numbers. Again, I referenced the 30% year-over-year increase in corporate revenues. Stats like that, the Net Promoter Score numbers that we look at to see where people are we're seeing is an engaged group they didn't. The group didn't go. So it's not as if they left and then they've decided a year later to join us again. They were there. What we're seeing is -- and maybe one thing I do hear from some of our kind of highest tier folks is, initially when you announced that you were going to do some of these things. I didn't quite know what to think. This is the Southwest that I've loved for so many years.

And I hear this all the time. I tend to try to sit right in front or right behind the exit rows. Not in the extra, I want our customers to pay for the extra legroom seat, so I'll sit kind of right. But I get I hear a lot of the discussion and they'll talk to you about it. And they'll say that. They'll say, I was a little -- I didn't know quite what to think.

Do you identify yourself on the plane?

I do. Yes, I introduce myself to the crew and there's crew all along the way. So as I'm boarding airplanes, Yes. Basically, as I go through the plane, I'm not just telling the crew what my job is, but I generally tell that. But yes, so people will talk to me, and that's what they say, but I love this. Now that I've actually been able to see it and experience it, I love it. And so yes, I get the seat, I get the seat every time, and I love what you're doing. I'm so excited I can't wait to get a Starlink airplane and more and more coming in every week. So it's -- yes, I don't know that they ever left -- but I do think that they were hopeful that the changes that we were making would still be something that would allow them to love the product. And I think that what we've been seeing is that, that is exactly what's happening.

Got. It. Talking about new initiatives that customers will be enthusiastic for. Give us a little more color behind the lounge decision. On the one hand, it seems like a little bit of a no-brainer. On the other hand, I'm sure it was a very considered decision involving a lot of data. Have your customers have been asking you for this? How do you choose the first network of lounges? I don't think LUV is getting one initially. What's that pipeline going to look like over time?

Yes. So we've announced -- so every decision that we're making, we're looking at the data, we're looking at doing things that would be accretive to the business -- and we want to make sure, like I talked about before, that we're not getting caught up in analysis paralysis on things either. And when something is clearly the right thing that we want to do that we move forward and we do it. The lounge has fit into that category. Of course, we're doing this in partnership with a great partner of ours in Chase. One of the things that we as an airline bring is a lot of access at the airport. We have a lot of the space. And so as we're looking at where we want to build some of these lounges, that's a key element that we bring. And then, of course, with Chase, we haven't built lounges before, but they have, and they do a great job with it. And -- so there's this great synergistic partnership that we have I mean we're building already on what was a great synergistic partnership. This is just one more layer of that.

And as you think about the things that our customers are asking for, this has been at the top of the list. And we've announced 4 of the locations. We've said that it's kind of 4 plus 7 and likely more to be considered after that. I think if you looked at a map and we've only announced the 4 locations, I'll make sure that I -- I'm looking at the team to make sure I don't give away one of the cities that we haven't. But as you look at those 4 locations and then if you looked at a map, and said, well, where would I think Southwest should have a club, it's going to appear very logical as we continue to announce more and more of these locations.

And so well, what does this bring? Well, it brings the ability we've talked about having a premium credit card that we could have come in. What does that do? Well, that brings in higher FICO score customers, spenders -- higher spenders you tend to have -- you tend to be top of wallet more frequently when you have a card that's like that. So that's great. But then it brings a halo more of like an aspirational halo to your entire loyalty program and to your brand.

And so for all of those reasons, again, you've heard me, Bob, others talk about the fact that we're not going to do things unless we feel that they would be accretive to the business for all of those reasons, we feel this will be accretive to the business. We're really excited about it and excited about who we're partnering with.

Got it. I'll ask you if you want to break some news at the conference here. Southwest obviously, has a very, very unique culture, a very unique experience in the sky. What can we experience in the lounge. Is it going to be something similar? Do you have surprises for us kind of have you seen a prototype, kind of what what's that going to be like?

Yes, it's going to be great. And I have seen them. Yes, we had some different internal meetings where we've actually done walk-throughs and seen different things and we've got mockups and designs of things. And construction has started in some of these locations. And I think it's part of the reason it was kind of the worst kept secret because we're actually starting to do some of the work before we announced it. So these are real designs that are now being implemented. These are going to be great. You look at who we're partnering with and you look at the type of lounges that they're building. This is going to resonate really well with people.

Awesome. Great location.

I think some people are going to be a little surprised actually when they say, "Oh, this is the Southwest lounge. This is great.

I was going to say a great location for a future Investor Day, FYI.

That's a great idea.

So speaking of poorly kept Southwest secrets, another one is international long haul. I think you guys have been sort of hinting at that for some time now. I think Bob Jordan kind of briefly referenced that at Laguna last year. Is that the last big initiative you guys have? And kind of what are we looking at in terms of execution there?

Yes. We've got a whole set of things that we're looking at. That is one of them. You think about -- for that, in particular, going back to my comment on aspirational elements of a loyalty program. I think that's the way you can think about those sorts of things. Now we haven't made decisions on what we're going to do for that particular thing. But what you've heard Bob and me and others talk about is that we want to make sure that we're meeting the customer where they are, that the things that they're wanting and the things that we feel will be accretive for them and for our business that we're offering those things.

Again, we haven't decided what we're doing with that particular item. But what we have said is that we're absolutely considering whether that should be part of the offering that we have.

Got it. And in addition to that, kind of the other thing that you briefly mentioned was premium credit card. It feels like that is a real opportunity for you guys. Talk about kind of now -- I mean, you don't have to give us numbers, but just how much size -- what is the opportunity there? And kind of how quickly can you execute on that?

Yes. We haven't publicly talked about any of those sorts of goals or estimates. So I think for this conversation, it's more around what something like that brings to us. And I'll go back to what I said before. The higher fee card that gives you that access, tends to have you spending more top of wallet, higher FICO score spenders, higher spenders to the airline and on the card as well.

We talk a lot about flight profitability as you look at the network. I think more and more, you will hear airlines talking about city level profitability that includes elements around the credit card and other loyalty things in it. And you may have parts of your network that are a little more profitable on the flight side, maybe a little less profitable on the card side. Some that are profitable on both, some there -- but you need to make sure that you're looking at that entire ecosystem there that just with -- how attractive these cards -- I mean these are the most attractive co-brand cards of any company that's going to be here or the airline cards. And so we -- the lack of the most premium level of that for us has been a hole for us. And so we're going to fill that.

Got it. Speaking of filling holes, you guys -- some corporate for a second because I kind of spoke about gaining corporate share with the new initiatives and kind of that's very clear. But corporate has been a real focus area for you guys long before you announced the initiatives kind of literally coming out of the pandemic, right? So where are you in terms of corporate capture versus your expectations? What more levers do you need to pull there, especially with large enterprise accounts?

I think we punch above our weight when it comes to corporate. I think sometimes when an investor or an analyst or somebody will think about us versus somebody else, I think, well, they do more corporate. We do a lot of corporate today. And we haven't publicly talked about exactly where those levels are and what the mixes are. But we're very strong on the corporate side.

What we have seen over the last 6 years or so with the pandemic is that shorter haul corporate has been impacted more than kind of the longer haul multi-day trip corporate. That quick day trip that I'm going to take from City A and City B isn't quite as prevalent. And we were a little more overweighted there. And some of the product elements that we lacked specifically around seats, kept us from having more penetration into that longer haul corporate.

And so I think some of what we're seeing now is the fact that the product is more -- is resonating more. It's more relevant to that longer haul and what is the more kind of prominent business traffic that remains post pandemic. And so that's an adjustment that I think is really helpful to us. And again, I think the lounges will be helpful there, too. Again, lounges aren't a corporate product, but they will resonate with the -- Venn diagram now is different than it used to be. It used to be much more kind of corporate and -- but now there's a lot more leisure that's there, too. But certainly having that element in lounges will be helpful to corporate.

Got it. So when you think of your overall corporate position, you look at product, you look at lounges, you look at distribution, do you feel like you are where you need to be to go door-to-door versus your peers on corporate share?

I think we are getting there. I think there's more opportunity that's ahead of us. As these product elements come in, -- you look at some of the distribution and how we're set up, some of this is pretty recent for us. So yes, I think there's maturation still to come for us. Maybe where another carrier will be a little later in that cycle. I think we're on the early side of that one.

Understood. So one of the kind of broad themes out there, maybe to switch gears a little bit and talk about some of the financials specifically is the fact that, again, you mentioned earlier that you get to stack what's happening in the industry on top of what you're doing. But again, it's no surprise to people that your comps will start getting more difficult kind of as you start lapping some of these initiatives.

So how do we think about what that almost net number on yield looks like, what that net number on margin looks like. Obviously, you've given us EBIT targets. But, a, how much upside do you have to that in terms of more to come in terms of dry powder, whether it's longer international whatever? And b, kind of how do we think of how that comp kind of progress as well?

Yes. I think it's not just some of these bigger initiatives that would maybe result in like a media headline like an international or something like that. Those are similar ones as well. Yes. I think it's more around the way that we're running the business today, the systems that we have to use it, our revenue management system, for example, is set up to be much more system-driven and a lot less kind of segment driven. And I think that's helped us to iterate more quickly and to do more within the broader network that can be more accretive.

We're on the earlier end of a lot of these sorts of initiatives. And so as you think about the next couple of years, I think back even to an internal meeting that we had just 2 or 3 months ago, where we're going through, all right. Now here's the next list. And the next meeting we'll have. There's a next list, there is a next list. It's -- there's a lot of things relating to the way that we segment the business the way that we're marketing, the way that we can market individually to customers as well. and to give them offers that will resonate with them individually. Those are things that we are in the early -- early end up.

So yes, there's some like headline kind of potentially really fun headline media sort of stuff that's out there, and that's great, too. But there's a whole bunch of other -- I don't even know that I call it blocking and tackling, but just sets of initiatives that we're working through that will continue to drive performance in the business.

Speaking of headline gathering and kind of focusing on some of the other things, lost in the middle of all this initiative talk is the fact that your operational reliability has been excellent for the last couple of years. Obviously, you had the big Christmas thing a couple of years ago, and people are like, Southwest or whatever -- 4 years ago. But literally since then, kind of your operations have been incredible your IT performance has been incredibly strong as well. So talk to us about how much effort is going into like ensuring the basics, if you will, while you work on this new stuff on top?

Yes. There's a ton of effort that goes into all of that. And you're right. So the Wall Street Journal ranking, the last -- if you look at last year, we were #1. We're trending #1 so far this year as well. What I like about that one as it is just a broad -- it's great to be in a financial setting. It's sort of the portfolio, right? I mean it has everything from customer complaints to mishandled bags to canceled flights to on-time performing. It goes through the whole -- kind of the whole portfolio. It's a balanced look at the operation.

So to be able to be #1 there. Now of course, it's a great customer thing to do. The biggest correlator with our Net Promoter Score is on-time performance. And you get a little bit of grace in there. But once you kind of get past a certain amount of time being late, it falls off pretty quickly. So the best thing you can do for your customer and financially really because the same is true financially. Once you start to have cancels and other things, it starts to become really expensive and paying extra crew costs and those things is to run a really good operation.

So yes, we've redone -- we've modernized so many of the systems that we have within the company. They help us to make better decisions. If you go to our airports today and -- in fact, this would be a fun thing for you and I to do one time. We'll bring it at 1 of our airports and just have you talk with the folks at the leaders on the ground and say, talk to me about how this is different than how you used to do this 3, 4, 5 years ago. And I'll just sit back and let them talk to you and they will walk through equipment and process and technology and tools that they have there that are helping them.

This doesn't just happen by chance. It comes because of investments that we're making and process improvements that we're making. So people like Justin Jones and Andrew Watterson and so many others that are part of the operational team. You mentioned Lauren and the investments that we make on the technology side. The team does a fantastic job, and she's here with us now at the conference. Those are the things that we're doing. It's not happening by chance. It's happening because we're being deliberate.

Got it.

You have to do those things. Because if you don't do those things well, nobody wants to hear about all the other things that you're trying to do to improve the business. Yes, the fundamentals have to be fixed first. I feel like we're in a position of strength to be able to continue to move forward.

Absolutely. So all of this distills down to financial performance. So, what does this mean in terms of -- again, you talk about bigger horizon that you want, right? So back half of the year going from the first half of the year, obviously, jet fuel is a big factor to consider. What would you -- how would you like talk to investors and remind us about some of the big moving parts here about first half and second half? And how you thinking about; '27 at this point as well?

Yes. So I mentioned before that as we moved into the fall, I would say that revenues have exceeded the expectations that we had even just a couple of months ago. The fall has held up really, really well. to the point where that in spite of the incremental fuel expense that we have even for this quarter, that we have the ability to still hit the EPS guide that we gave for the third quarter. So what that means is that we're seeing really good strength on the revenue side to be able to offset that as that's coming in.

And then as we move throughout the rest of the year, I mean we'll see what happens ultimately with fuel. I do think likely -- I mean, the obvious thing that you've seen us do this year, we started kind of the 2% to 3% year-over-year capacity increase for 2026, and you've seen that come down. We've cut that about in half is. And we've done that because fuel has been higher, and so if fuel is higher, that's the natural response. If fuel is higher for longer, I think that's a natural response that you see is that you trim some of that capacity.

Sure. Makes sense. Any questions from the audience? We have one back there.

Could you just talk to us briefly about the kind of the sequencing, timing and deployment of the Dash 7 in your fleet kind of through this year or maybe next year?

Yes. So it was up in Seattle, maybe a month or so. We actually saw some of the Boeing leadership team here just a few minutes ago they're here at the conference, too. And we were there for the sign-off for the MAX 7. That was really exciting. Of course, we're the largest customer there. We have 27 of those airplanes that are already built that have been in storage. We've been working with Boeing actually for like a year now to be able to bring those -- bring those to the current spec. And so that work is happening. As we get kind of around the end of the year time frame is where I think some of those airplanes start to deliver and then early next year is when those start to go into service.

We have been replacing -- most of our retirements have been 737, 700, some of our oldest airplanes and we've been replacing those with 737 MAX 8. So it's a 137 seat airplane with 175-seat airplanes, of course, is a lot more efficient as well, not just the extra seats and the extra revenue. The MAX 7 will give us an ability kind of in the 150-ish seat range to be able to have kind of that middle ground. So flying out of places well, like the closest airport here, John Wayne, a short runway to have more of the range with a larger gauge airplane and do that with the efficiency that comes with the fuel burn and then the extra seats will be really accretive to the business.

So yes, you'll see those start to roll out. We'll take both those 27, but also start to layer in new delivery MAX 7s off of the line at Boeing that will be intermixed with the MAX 8 that we'll continue to take.

Just wondering here, I know you guys have identified hundreds of million dollars of incremental cost savings since the beginning of the year, all of which is incorporated into the 2026 outlook. Wondering how much additional opportunity is there and how we should be thinking about it for 2027 and then just CASM in general for 2027?

I love that question. I think we've fundamentally changed the way that we are just looking at the day-to-day management of company. That hundreds of millions that I mentioned. I think this is a response my last -- on our last earnings call. It was one of my responses. And it's happening throughout the business. It's every leader everywhere. We're working on our 2027 budget now, 2 or 3 weeks ago, I was over in our operations building, and we had the operations leaders who are in there talking to their plans for 2027. And I just love the way that they're talking about their business. They're talking about taking care of their people, they're talking about keeping their people safe. All the things that you would expect an operations leader to talk about.

And as they're doing that, they're talking about how they can make sure that they're running their business in a really efficient way. So this isn't -- well, let's have the finance -- the finance team is coming around again to try to get some more -- pull some more cost savings from us. It's not that. It's leaders the entire business, looking at ways to be able to manage efficiently. And sometimes, we're spending money to ultimately achieve that savings, like, well, if we can buy this equipment or if we can build this tech tool. Let's spend $10 million on that? Because if we do that, that's going to make it so much more efficient in whatever area of the business. And airlines are so complicated. The operation is so complicated. That -- little changes like that can make significant differences. And so yes, it's -- I think it's a mindset shift really. And as we look to 2027, that's why I brought up the budget discussion. It's happening.

That is how we are talking about 2027 and we should anticipate the view, the way in which that we're looking at costs as we move forward is going to stay how you've seen it. I think we've had really good cost performance.

Maybe on a related note, can you just address CapEx as well because obviously, new planes, lounges, et cetera. What is the trajectory of CapEx look like the next few years.

Yes. So it's going to be very aircraft dependent. It's a very NPV positive thing for us to be able to bring a MAX 8 or now a MAX 7 into the fleet to replace these older aircraft. And so we're going to think about -- we have a really great balance sheet. So we've got really low debt balances. But as you think about the way in which we would deploy capital, ensuring that the balance sheet remaining strong. It's very strong already, but assuming that continue to -- ensuring that remains strong. And then we invest in the business and then we've got returns for shareholders.

And so our operating cash flow has increased pretty significantly as we've had these changes that have come in. And then the walk from operating to free will largely be dependent because our non-aircraft CapEx is relatively steady. And so it largely will be dependent on the quantum of the aircraft transactions that we have.

That said, maybe one last part of this answer would be, as you think about our debt-to-EBITDA ratios we've talked about ensuring that we stay between 1% and 2.5%, keeping solidly investment grade. The more we're building up EBITDAR within the business and all these things that we're talking about, the more headroom that be able -- that gives us to be able to return capital to shareholders that way too.

Got it. Tom, tons going on at Southwest, a very, very exciting story. I'm very excited to see the lounges when they are open. But thank you so much for being here.

Yes. Thanks for having us.

Thank you.

Hello, everyone, and welcome to the Southwest Airlines Second Quarter 2026 Earnings Conference Call. My name is Gary, and I'll be moderating today's call. Please note that this call is being recorded. A replay of today's call will be available in the Investor Relations section of southwest.com. [Operator Instructions]

At this time, I would like to turn the call over to Danielle Collins, Managing Director of Investor Relations. Danielle, please go ahead.

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

Before we begin, a reminder that 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 release.

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

Thank you, Danielle, and good morning, everyone. I appreciate you joining our call today. Yesterday, we reported our second quarter results, marking the first time all of our major initiatives were contributing throughout the entire quarter. The results put the earnings power of our business on full display and demonstrate the benefits of the transformation that we have executed.

Our business now benefits from a broader and more diversified set of revenue and commercial levers than at any point in our history. The results demonstrate that the transformation is working, with a 9% after-tax return on invested capital and adjusted operating margin of 6.7% or a 3.3-point improvement year-over-year despite nearly $900 million year-over-year increase in second quarter fuel expense. We also generated nearly $2 billion in operating cash flow during the first half of the year despite record fuel expense.

We reported adjusted earnings per share of $0.94, up approximately 120% year-over-year and well above both our initial guidance and analyst consensus. Adjusted unit revenues increased 20.1% year-over-year to an all-time quarterly record, exceeding the high end of our prior guidance range, while adjusted operating revenues increased 20.3% on capacity growth of only 0.2%.

Managed business revenues grew 30% year-over-year to a new all-time quarterly record surpassing the record established just 1 quarter ago. Customer response to our enhanced product offering is showing up in strong engagement results. Rapid Rewards new member enrollments increased 35% year-over-year and overall program size is a record with nearly 100 million members. Tier qualification activity also reached a record high in the quarter. Chase co-branded credit card account growth was also exceptionally strong with card acquisitions in the quarter up 28% year-over-year.

Cost discipline continued as well with CASM-X increasing just 3.4% year-over-year on near flat capacity, below the low end of our prior guidance and cost discipline remains broad-based across the company. With transformational initiatives now fully in place, our focus has shifted to optimization and unlocking the full potential of the business. Specifically, we are focused on optimizing the network, refining new products and pricing, growing managed business revenues and expanding co-brand opportunities.

We have emerged as a stronger, more resilient and better-positioned Southwest while sustaining a unique set of core strengths that remain firmly intact, the largest domestic network with the most nonstop flights and the #1 position in nearly half of the 50 largest U.S. airports, operational efficiency, cost discipline, powerful brand loyalty, and importantly, legendary service and hospitality delivered by our incredible people. That creates a differentiated position in the marketplace that no other airline can replicate. And that differentiation continues to show in the results.

Southwest was named #1 in customer satisfaction among economy passengers in the J.D. Power 2026 North America Airline Satisfaction Study, our fifth consecutive year at the top spot, following recognition by The Wall Street Journal as its best U.S. Airline of 2025. These recognitions reinforce that our hospitality, reliability, operational execution and value remain powerful core competitive advantages.

And we continue to evolve the product that we offer to our customers. Just a few weeks ago, our first Starlink-equipped aircraft entered service, marking the beginning of a new era of in-flight connectivity at Southwest. In early July, we expanded our airline partner network to 9 carriers with the addition of Air Premia. With the launch of Anchorage in May, we completed the rollout of service to all 5 previously announced new destinations, and we aren't stopping here. We will continue to drive enhancements that broaden our product offering and further deepen customer engagement.

Now let me turn to our outlook. While fuel prices have remained volatile and elevated, industry recapture has been swift and pricing has remained sticky. Forward bookings are robust, and we are optimistic the strong demand and pricing environment will be sustained. Importantly, the revenue strength we are seeing is not solely a fuel recovery story. It also reflects the idiosyncratic benefits of our own initiatives, which are improving revenue quality, strengthening customer acquisition and engagement, broadening the earnings power of the business and creating earnings durability regardless of the macro environment.

For full year 2026, we now expect adjusted earnings per share of $3.25 to $4.25. This updated range replaces our prior expectation of at least $4, reflects the forward fuel curve as of July 17 and assumes the current fare environment and demand trends remain broadly intact. Even with an estimated year-to-date fuel headwind of approximately $1.33 per share, Southwest remains positioned to generate earnings that are broadly in line with our guidance at the beginning of the year and represent significant earnings growth and margin expansion, underscoring the resiliency of our business model.

And before I close, I want to recognize our employees. None of what we have accomplished would have been possible without the dedication, resilience and commitment of our people, and we are proud to have accrued over $100 million year-to-date in profit sharing for our employees. Profit sharing reflects our long-standing belief that when the company succeeds, our people should share in that success. To our employees across the Southwest system, thank you for everything that you do for our customers and for one another.

We set out to transform the company. And today, you can see the proof in the earnings. We have built a more durable and diversified business with greater earnings power and our focus is now on unlocking Southwest's full potential, further expanding margins and creating additional long-term value for our customers, our employees and our shareholders.

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

Thank you, Bob. As Southwest enters the next phase of evolution, our focus is increasingly on optimization. Across the operation, we are working to improve asset utilization, strengthen operational execution and drive greater efficiency while maintaining the reliability and hospitality that customers expect from Southwest. Operational excellence remains a key competitive advantage for our company and supports both the customer experience and the long-term profitability of the business.

During the second quarter, we ranked first among large domestic carriers in completion factor and improved mishandled baggage performance year-over-year, even with higher volumes of gate-checked bags. Trip Net Promoter Score also improved throughout the quarter, reinforcing that our operational execution and enhanced product offerings are resonating with customers. We also maintained the lowest customer complaint rate among the major U.S. airlines.

Our priorities remain straightforward: operate safely, serve our customers reliably and continue to improve the efficiency and productivity of the operation.

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

Thank you, Andrew. I'm excited to join today's call in my new role as Chief Commercial Officer, and I look forward to engaging with many of you in the months ahead. Our focus is clear: use Southwest's unique network, powerful brand, loyal customer base and expanded product offerings to improve revenue quality, strengthen returns and create durable earnings growth. We are not managing to any one metric. Our focus is on building a more productive commercial business, one that balances unit revenue growth, disciplined capacity, network profitability and long-term customer engagement.

As Bob noted, second quarter adjusted RASM increased 20.1% year-over-year, well above the high end of our prior guidance range of 16.5% to 18.5%. Importantly, this performance was broad-based, reflecting contributions from our expanded product offerings, bag fees, online travel agencies, change-related revenue and continued strength in our base business. Adjusted operating revenue reached a record $8.7 billion, the highest quarterly revenue in Southwest history, demonstrating the earnings power of a broader and more diversified revenue platform.

Looking ahead, we expect third quarter unit revenue growth of 17.5% to 19.5% year-over-year with a strong exit rate from Q2. We continue to see healthy demand, a constructive pricing environment and further opportunity to refine our commercial capabilities. Our third quarter unit revenue outlook includes a year-over-year headwind from lapping the 2025 implementation of bag fees and other initiatives.

The network remains one of Southwest's greatest competitive advantages, and we will continue using it more efficiently to maximize returns and support long-term profitable growth. As we move through the remainder of the year, my focus will be on further unlocking the potential of our commercial initiatives, deepening customer engagement and ensuring that Southwest's commercial strategy continues to support sustainable margin expansion and long-term shareholder value.

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

Thanks, Justin, and welcome to the call. I'm incredibly proud of our team for the continued focus on spending smartly as we've invested in our product, customers, operations and employees while expanding margins year-over-year despite significantly higher fuel costs in the quarter. We generated quarterly operating cash flow of $0.5 billion, more than 32% higher year-over-year, and ended the quarter with liquidity of $5.3 billion, above our target of approximately $4.5 billion.

Our gross leverage ratio was 2.1x, within our stated range of 1 to 2.5x and improved from the 2.4x at year-end 2025 despite macro volatility. Our investment-grade balance sheet remains a key differentiator, providing meaningful financial flexibility. Fuel prices averaged $3.92 per gallon during the quarter. Our fuel procurement team effectively managed through dynamic market conditions and took actions such as moving lower-priced Gulf Coast products to the West Coast to mitigate higher fuel costs in that part of our network.

Looking ahead, we expect third quarter CASM-X to increase 3.5% to 4% year-over-year on capacity of flat to down 1%. Consistent with Bob's comments, we continue to see a path toward long-term margin expansion and earnings growth, supported by disciplined execution, improving unit revenues and contributions from our initiatives. Combined with a strong balance sheet and substantial liquidity, we believe Southwest is well positioned to create sustainable long-term value for our shareholders.

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

Thanks, Tom. This now concludes our prepared remarks. We'll open the line for analyst questions. To help us manage time efficiently, please ask your 1 or 2 questions back to back at the outset. All right, operator, we are ready for your first question.

[Operator Instructions] Our first question today is from Conor Cunningham with Melius Research.

I was hoping to start with the comp issue that you raised on unit revenue a little bit. And just maybe you could potentially size that impact in 3Q, just so we can understand a little bit more. Just I think what people are trying to get at is just the framing of how it progresses through the first half of 2027. Just I would have thought that there would have been more maturation period and more uplift from initiatives to kind of offset just the timing of it.

And then specifically to Justin, again, congrats on the new role. Just trying to understand your long-term growth, how you view long-term growth at Southwest and just network development in general. Should we be reading anything into the ramp in supply in the fourth quarter in 1Q '27 at all? Just like high level thoughts.

You bet, Conor. Thanks for the question. On the first, yes, I think to just start and just maybe zoom out, back up with the fact that our Q2 unit revenue, I mean, was up 20%. I mean, an extraordinary number. I mean, just far ahead of the rest of the industry, the transformation really kicked in and performed and showed up in the results.

The Q3 RASM guide is pretty simple to me. It includes the headwind from the initiatives that we put in place about a year ago in 2025, one of which was bag fees. Bag fees alone is about $1 billion a year. So we're just starting off at a much higher base. So if you adjust the guide for lapping those initiatives in Q3, our unit revenue guide would be well ahead of the unit revenues that we posted in the second quarter. And either way, we saw strong demand, really strong demand in revenues across the second quarter and all of that robust strength is fully in place and continuing here in the third quarter.

I was just going to address the long-term growth. It's Justin Jones, thanks for having me on the call. As Bob has talked about in his prepared remarks, we're going to continue to show capacity discipline, while we're focusing on building durable earnings. And so you can expect some modest growth from us moving forward. You see a little bit of that in the fourth quarter, you see some of that in 2027. We're well below our peers there.

But what my focus is going to be is on strengthening our points of strength that we have in the network. And you're going to see that with our capacity growth. But you're also going to see that with us moving and shifting capacity around, which you can already see. So you'll see capacity growth in our points of strength and making them more durable long term. And that will continue to be the focus as long as I'm in this role.

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

Maybe Tom, drilling in on the new 2026 EPS outlook. Can you help us with some of the inputs that underpin that, particularly kind of fuel and CASM in 4Q? And on that note, yes, in terms of 4Q CASM, I know you're retiring with 37 aircraft in the back half versus 23 in the first half. I would assume you have more plane sales in the back half than what you've done to date. Any color that you can provide on how to think about that gain on sale piece in 3Q and 4Q? And anything that you booked in the second quarter would be helpful.

Yes. Thanks, Andrew. As far as fuel, we don't guide fuel. I think this is a bit of a nuance here, but we give you a fuel estimate based on a certain day, and we say it's the forward curve as of that day. We used July 17 here. We give you an estimate for the third quarter. You can run that out for the fourth quarter based on that information, even though we're not guiding it for 4Q. So that's fuel.

For the nonfuel side of things, I continue to be really, really pleased with the way that the management team broadly is managing costs. We're seeing cost savings happening everywhere in the business to the tune of literally hundreds of millions of dollars of incremental savings as we're working our way through the year.

To your question on fleet transactions in particular, this is something that I think is a unique strength. I think we -- I think when it comes to divesting of retiring assets, we are one of the best in the world of doing this. The team does a fantastic job. And we've got north of 450 NGs that we'll be retiring for years and years to come well into the next decade. So this is -- it may be a little lumpy by quarter, but this is something that will be durable and with us continually. And as far as the timing of some of that, I think 3Q is going to be a little bit elevated versus first quarter and second quarter, and then fourth quarter probably looks a lot like the first quarter and second quarter.

The next question is from Mike Linenberg with Deutsche Bank.

Two questions here. I guess to Andrew first, really well done on the completion factor, obviously, credit to you for running a good operation on one hand. On the other hand, we have seen the delays go up pretty dramatically even on what looks like blue sky days. And I'm just curious, how much of that is just a function of you reducing the turn times, which I know has been a stated objective, combined with the fact that you're also trying to increase connectivity?

And then my second question to Tom, and I'll throw Danielle in there as well. Kudos to reintroducing ROIC in the release, certainly important to us and investors. And I know management also gets compensated tied to ROIC measures. So nice to see that come back. But the fact is, can you detail, what was the gain in the quarter on sales for aircraft? And when you talk about CapEx, the guide for CapEx coming in at or below the low end because it is net. Is that a function of just a pickup in aircraft sales? Is it delayed deliveries from Boeing? What's driving that?

Thanks, Mike. It's Andrew to start with. I appreciate the confidence on the completion factor. If we take a step back, the Wall Street Journal is a great measure of the operating quality in airline, 7 measures on that. We won it last year. We're tracking to win that again this year. If you look at those measures, some of them we've improved upon this year.

But one that we have come down on is OTP, on-time performance. And I kind of divide those into 2 categories. Large-scale events, which is like the weather you had in the Northeast earlier this week, when we had Texas rains and storms last week and Orlando a week before. And those situations, we continue to outperform our peers. You look at the geography that happens with all the big carriers, we have equivalent to better OTP and much better completion rate. And so I'm very proud of our control center, our frontline people, they make really good decisions in those moments and very good execution.

And then you have this, what I call, small-scale events, the day-to-day. And we've seen that as we've rolled out our new product, we knew that we'd have changes. We organized our management technology teams to kind of continually update that post the rollout January 27th, and we see consumers react positively, both the satisfaction scores have really inflected strongly as well as consumer behavior and choice. You see that in the RASM results.

What that leaves us is in the last 10 minutes of the turn when we have high load factors, and those high load factor volumes, we see that we don't turn as fast. And so we have a lot of smaller delays that don't drive consumer dissatisfaction per se, but it's something we need to clean up. So we've focused our ground operations team on how they can reengineer the last 10 minutes now that we've pretty much stabilized the changes to our boarding product so we can scrape that back and have that OTP number be much more flattering as we go forward.

We already see benefits here in July, and there's some schedule changes that come in, in October, but mostly it will be about this process optimization that we'll focus on throughout the next couple of months. We think that will do the trick by the time we get to the next high-volume period on the holidays.

And Mike, on your ROIC question, we like that metric a lot as well. And saw in your note from yesterday, the reference to ROIC and your calculation of weighted average cost of capital, it's an important milestone for us as we have that ROIC moving beyond the weighted cost of capital, that's an important metric.

As far as the gains on sales of aircraft, we actually, in our Q, which will come out later today, are going to provide a bit more detail. We thought that would be helpful as we've had some questions during the quarter on the quantum of that and what that looks like. So you'll see a little bit more detail, and hopefully, that's helpful to you all. It's worth probably just north of maybe 1 point or so of CASM-X or so in the quarter. And again, we think that, that's something really durable that we have that will continue with us for years and years to come.

As you think about gains on sales, that really works in tandem with depreciation expense and with maintenance expense. Of course, the more or less you depreciate, that changes your book value. And then as you spend on maintenance, especially on used assets, that brings a lot of economic value into those assets. Of course, we generally expense that as it comes through. And so that can be something that can result in some gains there as well. So you see a bit of that coming through.

The next question is from Savi Syth with Raymond James.

Just maybe to follow up on kind of Justin's response earlier just on where the growth is focused on. Are there kind of any common themes in where that capacity growth is happening, especially as you roll out the new schedules other than just maybe where there are kind of high-margin opportunities?

And then for the second question, just breakage accounting changes always a bit noisy. But it looked like the adjustment you took this quarter was related to kind of the forward credits, which I think you stopped issuing May of last year. Just curious if there were any implications from the change in assumption around the forward credits to how you're issuing credits today, which I think expires in like 6 to 12 months, and that margin contribution you had expected from that change?

Savi, it's Bob. Let me take the second one, and then Justin will obviously take the first. There's been some focus on the breakage adjustment. I think I would try to simplify it. It's a small change, I think, 3-point change in the estimate on a large pool of unused travel funds. They do relate to 2022 to 2025 when we had the policy of never expiring. So that was new to us and just had to learn about the trends. And then the trends changed again as we made significant policy changes mid last year related to funds expiration.

So there was a lot of moving parts here. I think the biggest thing is basic, which is none of this, the breakage that was booked or the adjustment related to 2026. 2026 is clean. I think that's the most important thing. And then as we go forward, yes, I think any learnings in the trend, particularly from the policy changes last year, we'll factor those into breakage on new pools of travel funds. But again, I think the main thing is this was new. We changed the policy. And again, main point, it does not relate in any way to 2026 financials.

Savi, just following up on the growth. So you asked about are there any common themes? And I'd say Southwest is in a position that no other airline is. We have a market-leading position in more cities in the top 50 U.S. locations in the U.S. than any other airline. And so the theme that you're going to see is us building on these points of strength. And the reason we're focused on those is because we're focused on customer loyalty and building diverse revenue streams. And our network changes are going to go exactly along with that theme. And the objective there is to build long-term predictable earnings that we can count on for years to come. So when you look at our capacity changes, that's where the focus will be.

The next question is from Jamie Baker with JPMorgan.

First one, so Justin, just a question on corporate recovery. In terms of revenue associated with seating initiatives, as business travelers continue to return to the network, how do their purchase patterns compare to those of consumers? The reason I'm asking is that it's still not clear to me what percentage of businesses reimburse corporate flyers for those expenses. JPMorgan does, for example, but another analyst on today's call shared that their firm does not. I'm just trying to figure out how much of a bump the new initiatives are driving as part of the overall corporate demand backdrop and whether it's different from consumer behavior.

And then for Tom, sorry to come in with a modeling question. But the implication on fourth quarter RASM is pretty sizable and a big number despite lapping last year's initiatives, there's also some capacity growth to overcome. I can't say that it's unachievable. I guess my question is whether my math is wrong, but if it's directionally correct, it seems like you are building even more demand resilience into your guide than just sort of flat -- well, I mean, the currently strong trend. So I wanted to give you an opportunity to push back on that.

Yes. Just following up on the corporate recovery, Bob talked a little bit about our corporate revenue being up 30% on a year-over-year basis. And you obviously know what our total revenue is up. And so that difference there probably explains some of that. Obviously, our corporate customers are more likely to book away from the basic economy fares, and that's going to be true for anybody out there. So the gap between that 30% growth and the rest of the revenue is probably how you would think about that.

But overall, we're super impressed with the adoption of our new products by our corporate customers, not only are we seeing substantial fair growth on a year-over-year basis, but nominal load factor points and our total mix of O&Ds is all up. And so every metric we're looking at is looking good there.

And Jamie, on your modeling question, of course, the guidance that we're providing is third quarter guidance when it comes to the unit metrics. We've given the full year guide for EPS, which, by the way, putting a guide out that within that guide includes the $4 that we guided at the beginning of the year, I think, is a tremendous accomplishment here and just zooming out a little bit.

We're comfortable -- as you think about kind of the 2 big parts of the rest of the year, you've got the cost side, which I think we feel we have good visibility to the nonfuel cost side of the business between now and the end of the year. And so that comes through into the full year guide. And then on the revenue side, without giving any sort of guidance around the fourth quarter unit revenues, I don't think that we're making any assumptions that show that escalating unit revenue into the fourth quarter. Really, the way I would see that is it's an assumption that we are comfortable with for revenue in the last 3 months of the year.

Your next question is from Duane Pfennigwerth with Evercore ISI.

Nice job to the team on the relative margin progress. I just wanted to ask you longer term how you're thinking about free cash flow conversion and the underlying drivers. Is free cash flow going to be simply a function of continued margin progress and earnings expansion? Or are there other levers that could drive a higher conversion even on, say, maybe a flattish earnings outlook into 2027? Not saying that's what you're calling for, but hypothetically, on a flattish earnings outlook, would we see improved free cash flow conversion?

Duane, I'll take that one as well. You've heard us talk a lot about operating cash flow, and you've seen meaningful improvement there as we've had improvements in the business. Moving from operating cash flow to free cash flow is largely going to depend on the timing of fleet transactions. It is a little more back weighted in the year as far as us taking deliveries. The non-aircraft CapEx is relatively constant through the year.

So yes, I think you're thinking about it the right way, Duane, which is we continue to improve the underlying profitability of the business that generates operating cash flow, and then that translation ultimately to free cash flow will depend largely on the timing of the deliveries. And because we largely pay cash and/or unsecured/some secured financing for the aircraft. Generally, as we take on those new deliveries, there's no net CapEx offset that would come with leasing that would bring more free cash flow and reduce the CapEx.

The next question is from Brandon Oglenski with Barclays.

Bob, in your prepared remarks, I think 1 of the 2 or 3 things you said about the objectives looking for is refining the pricing of your products and the new suite of fares that you guys have out there. So I don't know if you or Justin want to comment on that. But does that help an environment where fuel is so volatile and maybe compare and contrast with how you did things in the past.

Yes. I think the point is really that -- I mean the changes in the business have been tremendous. I mean we have a much more diverse set of revenue streams, more than at any point in our history. The customer reaction to the products has been really strong. The engagement is really strong. We mentioned this, but 35% increase in new member record tiering qualification, 28% increase in co-brand card acquisition. So everything about the promise of the transformation is showing up in the business. And it fundamentally changes the model and it fundamentally changes the earnings ability in production and it changes the durability of the earnings stream in my mind.

Now you've got an opportunity to really continue to push in all of those areas. So as Justin has mentioned a lot, we have a lot of opportunity to continue to optimize the network to optimize our pricing around the new products, whether that's ancillary or fare buy-up. We have opportunities to continue to optimize the products themselves. I also see these customer engagement metrics that are super strong, I would say, leading indicators of the opportunity in co-brands. So we have the opportunity to continue to drive the co-brand contribution to the business and then continue to expand the co-brand opportunities, new cards, those kinds of things.

So the point is the transformation has fundamentally changed the earnings power of this company. You see that in the year-over-year margin change, the only airline to actually strengthen margins over 3 points year-over-year. And despite $900 million in fuel increase, and we have more to come out of the products that we have and then we'll continue to expand on the product set. So I'm incredibly bullish about where we are and I'm incredibly bullish about where we are going.

On top of that, the backdrop remains really strong, and some of that is the reaction to our new products. Some of that is the reaction, obviously, just generally that the industry is seeing. Demand in the third quarter -- in the second quarter was very robust. Revenue was very robust, and we saw that accelerate, managed business being up 30% year-over-year on basically flat capacity to me is just incredible. And we're seeing that same strength continue directly into the third quarter here. We're not seeing the strength. We exited the second quarter very strong, and we're seeing that same strength here in the third. I mean, just as one example. The third quarter, I think, right now is booked about 65% in place and yields are running up 24% year-over-year compared to 13% for Q2 at this point. So there is no deceleration in the strength and the demand, no deceleration in the strength in the revenues and the fares.

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

On the revenue side, now that we're in the first full quarter of all the new product initiatives, I was just wondering if there's any stats you can maybe share on how buy-up from basic or baggage take rates are trending versus your initial expectations and how that factored into the revenue beat, if it did?

And then Tom, another beat on the cost side in the quarter. It would be great to hear what the main driver of that was and how we should think about the puts and takes on CASM to 4Q from here? And then can you just remind us if aircraft sales are included when you give the initial quarterly guide?

Yes, I'll take the first one. We're not going to break out the value of the individual initiatives, but I can talk a little bit about the trends of what they are versus our expectations. So we are outperforming. When we think about what we've done with basic economy, we are selling more basic economy fares, but that's because we've expanded the basic economy product into more of our fare structure overall.

We are also seeing incremental sell-up. So meaning that when people have options to trade up, we're providing those options more often, and we're seeing more of that trade up. And so both of those are outperforming what our initial expectations are. And as Bob noted, there is a clear expectation that we'll continue to tweak the models and work with Tony Roach's team to make the product better moving forward.

And Catie, to your question on drivers for CASM. It's really happening throughout the business, as I mentioned before, and this is everything from getting more efficient on the technology side. We've been, I think, really efficient on the supply chain and on the maintenance side of things. You've heard us talk in the past about nonfrontline head count dollars staying flat to 2025. We've had really good efficiency from our frontline teams as well, which sets a large part of our cost structure. So it's very broad-based.

And then separately to your question on aircraft sales, yes, you are right. As we move to a simplified EPS structure in the guide there, that is inclusive of any gains that would come as we are disposing of these assets. So yes.

The next question is from Sheila Kahyaoglu with Jefferies.

Maybe just a lot of questioning on this, but just putting a finer point on how we think about the Q2, the guidance in terms of the deceleration at the midpoint for Q3, while legacy peers are guiding to RASM acceleration. Maybe can you just parse out the tailwinds and headwinds, if possible, on the sequential deceleration across initiatives, the comp and the macro demand? Is that possible?

Yes, let me just talk in the -- and I don't -- yes, we're not going to break it out into components, but the change sequentially Q2 to Q3 is completely and simply the headwinds created by the initiatives that we put into place about this time last year in 2025 that contributed. So our bases as a comparator is just higher. It was bag fees, a number of things, as I mentioned, bag fees on their own is about $1 billion a year, so call it, maybe 2.5 points. And then on top of that, you have, obviously, other initiatives that we implemented that are in that headwind.

So you take even the bag fees, let alone the rest and you add that to the third quarter guide, and you are sequentially ahead of our second quarter, 20.1% and it's on a number, obviously, that is substantially higher than the rest of the industry. So there is no deceleration in demand. There's no deceleration in the fares. There's no deceleration in managed business. There's no deceleration in the strength of the product performance, none of that. This is simply a factor of the base stepping up because of the products that we implemented this time last year.

The next question is from John Godyn with Citi.

Bob, in the prepared remarks, you mentioned a bunch of reasons it's impossible to replicate Southwest's assets. Of course, other airlines would argue it's impossible to replicate theirs, too. But some of them have been spending billions of dollars a year on CapEx, product, IT, other improvements, and they've been doing it for years.

So my question is just to think through this, not a specific number, but just to sort of discuss and think through how much incremental investment it takes to replicate assets that are thought to be impossible to replicate?

John, that's a wide-ranging question, but I think I would just start with the point is -- it's not what would it take to -- for us to take ourselves to an equivalent product to pick another airline. The point is that we've changed the business model of Southwest Airlines to meet customers' needs and expectations to broadly diversify the revenue streams, to create more durability and stability in the earnings, and you combine that with, I think, without question, historic core strengths at Southwest Airlines has always had. And no carrier can replicate or is even close. We have the largest domestic network, period. We have the most nonstop flights, which are incredibly important to customers, period.

As Justin said, we have the #1 position in not a few hubs, but in nearly half of the 50 largest U.S. cities. We have incredible cost discipline and efficiency. And our efficiency has always been very hard to replicate because it's a matter of how we manage the aircraft and aircraft utilization and the network. And you're seeing the discipline come through in cost quarter after quarter now. Cost in the low to mid-3s on flat capacity here.

And then we have without a doubt, the best service, the best hospitality from the best people, and that shows up in whether it's JD Power or the Wall Street Journal rankings or others, it shows up time and time again that, that is a huge differentiator for Southwest. Any one of those is tough to replicate like the network. Those in combination are incredibly tough to replicate. And you take all of those strengths and combine them with the fact that we've now dramatically improved our product, diversified our revenue streams. And we're going to do more. I think it's a combination that is incredibly tough to match. We may choose to continue to invest in products. We will without a doubt. But the real point is the combination of core strengths that no other airline can replicate.

The next question is from Ravi Shanker with Morgan Stanley.

Just a couple of follow-ups here. Maybe on corporate, now that the revenue initiatives has some time to bed in. Can you just talk about how share may have shifted, particularly in corporate? And how much room do you think there is to get up to your ideal level there for corporate share?

And maybe as a follow-up, I thought I heard you guys mentioned hundreds of millions of dollars in incremental cost saves. I don't know if I misheard, but that sounds pretty exciting. Can you just talk about how much of that is already in the guide? And what is the long-term runway on that, please?

Yes. So I'm happy to take the corporate share one. So as we talked about the significant nominal increase in revenue on a year-over-year basis, and we also talked about seeing improvements not only in fare, but also in nominal load factor points as well as the mix of total O&Ds. So I think the way I look at it is we still actually have some pretty significant disadvantages relative to our peers, whether it's buying ancillary products through different channels that our corporate passengers book through.

So a lot of tactical things that the teams can go out and do to push that, but it's also going to ride right on the coattails of what we're going to be doing with the network. As we build these points of strength, as we move our capacity around to offer a much better network product to our customers, you're going to see that customer share increase, and that's exactly what we see already as we made these changes. As we improve the network, our corporate load factors are going up.

And Ravi, to your cost question, yes, the hundreds of millions of dollars of savings are in the guide. And this is just disciplined work by all of the leaders here. And what I've loved is, you've heard me say this before, this is not finance going around and having conversations about how we save money. This is every leader at the company figuring out ways to make their areas more efficient and collectively partnering with us to find savings throughout the entire business. So that comment of hundreds of millions of dollars of savings is incremental savings that we found since the beginning of the year as we've been working together. And yes, it is incorporated into the full year guide we gave you.

The next question is from Tom Fitzgerald with TD Cowen.

I was curious on the fleet side, if you could talk a little bit about your long-term maintenance agreements and how that could be an advantage just because there's this transition to the new technology engines.

And then just as a follow-up, should we expect that airline benefit revenue component of loyalty, should that grow with the overall business in 2027? Or is that more kind of flat based on cardholder spend? Any color on that would be really helpful.

Tom, I'll take the first one on the fleet side. My comment before was around having maintenance value in the assets that we are selling. And that value is trading strongly in the market now. The underlying assets, aircraft and engines and other assets are -- that market is strong, and we think it will be strong for the foreseeable future. But then the actual value of the maintenance itself is also trading at higher amounts as well. And so as we sell assets into the market, we benefit from that strength. And I think that's pretty widely known that there's strength in those markets.

And then, Tom, it's Bob. I'll take the second. I think you're talking about the co-brand benefit. I think the answer is yes. You should expect over time as products mature, customer engagement with the new products mature, I would expect that to show in the co-brand remuneration. I mentioned this before, we have strong, to me, leading indicators of not only the fact that customers, business and leisure are strongly engaging in our new products, but it's causing them to strongly engage from a loyalty perspective. Again, the growth in new membership, the growth in tier, the growth in card acquisition, et cetera. So I see those as leading indicators that will, over time, turn into continued card spending growth and then co-brand.

The second piece of that, we fully intend to continue to expand the co-brand offering and opportunities for our customers. I know I've teased the lounges. That's something obviously that there's work underway. We're not ready to formally announce that yet. But the whole purpose, again, is to expand co-brand opportunities, expand the card set and provide to our customers something that they really, really want.

So I think you see evidence that the -- our customers are -- our customer engagement is moving quickly in the right direction. And over time, that will mature. And I think it matures into things like card spend and co-brand remuneration, and then we'll continue to expand the offering, which will do the same.

The next question is from Scott Group with Wolfe Research.

So I wanted to ask on capacity. If I look at Q4 up 4% to 5% year-over-year, I think it's the biggest sequential Q3, Q4 increase maybe we've ever seen. So I just wanted to sort of understand the thought on that. And I don't know if you have any sort of early thoughts about how you're thinking about capacity in 2027? Yes.

Yes. So well, looking at our sequential growth that we have going into Q4, it is up 4.5%. You'll probably see us make some slight tweaks to that schedule as we get closer out there. But if you look at where we have that capacity growth, again, it is in our point of strength. And so this is not trying to go and expand into new markets for us that are going to underperform the rest of the network. Everywhere where we're putting aircraft, we expect to produce profitable earnings for us here this year. And again, it is -- you will see us focus on capacity discipline moving forward, not only this year but also into next.

To that point, any like early thoughts on what '27 capacity could look like?

No, we're not prepared to talk about that yet. You can kind of see what we have out in the first quarter out there, and we will probably make some adjustments from that, but we're not ready to talk about what the full year capacity looks like.

The next question is from David Vernon with Bernstein.

A couple of questions for you on the commercial side. With the 28% growth in card acquisitions, any sort of geographic commentary or level of card spending activity within the co-brand would be helpful just because we're all trying to figure out kind of how strong the consumer is if you're seeing any sort of noticeable trends in terms of where people are spending and how much they are spending.

And then maybe a second question I'll tack in there around Starlink. And you've talked about 300 aircraft. Is that a hard cap? And do you ever intend to get the whole fleet up and running on Starlink? And if so, when would that deadline be?

So we expect the -- so where we're seeing the growth in the card is across the board. There's not any one region. We're seeing really good response, not only to our product changes, but also just with our offer that we have out there. So that's been across the board.

Yes. For Starlink, we are paced by the output of antennas from Starlink. Our tech ops team is prepared to install as many as possible. We signed a contract with them and the progression will match the deliveries. And then for the long term, we haven't given guidance on that. But obviously, we have aircraft that are uncommitted that we could use any supplier for it. So we will make sure that we kind of get the best deal as we seek to provide high-quality Wi-Fi across our fleet. I think it's really telling that all of our aircraft have free Wi-Fi. And so everything is already updated. We're going to the next generation. So conceivably, we could be the first to have really superfast Wi-Fi across the fleet, and so we're excited about that.

Next question is from Atul Maheswari with UBS.

Two quick ones. First, on San Diego, one of your competitors talked about gaining several points of share in corporate in that market. So that's really been a market with sizable industry capacity growth. Can you talk about Southwest strategy in that key market?

And then second one on fuel. The second quarter, jet fuel was seemingly below others and also below the Gulf Coast average of $4 or a little over $4 for you. So could you remind us of your West Coast exposure and any additional fuel sourcing dynamics in the second quarter that might have driven your fuel per gallon to be below other airlines?

Justin will take the first, and Tom second.

Yes. I can't speak to everything that's going on in San Diego with -- if you have a smaller basis point and what growth you might see from that. But overall, we're seeing our load factor points coming from corporate growth. And as we've grown capacity there, we've seen corporate share come along with that.

On the fuel side, thank you for the shout-out to our fuel team. I love that. I think they're doing an incredible job. They're very strategic in the way that they think about what we do. We talked about our balance sheet being a differentiator. This is one of the ways that our balance sheet provides cost savings to us.

We're about 50% Gulf. I mentioned in my prepared remarks, we actually shipped some Gulf to the West Coast during a time when the pricing differential was most acute. I love that our team did that. And the fact that we are mostly Midwest and Gulf Coast that we don't have a lot of international. I mean there was a time during the quarter where international was $1-plus greater and that we were taking, mitigating actions around the West Coast, those are all things that led to fuel being where it was. So again, I'll give the same shout out to our team, but I totally appreciate the shout-out you just gave them, well deserved.

The next question is from Chris Wetherbee with Wells Fargo.

You got Matt on for Chris. Since the 1Q conference call, how many fare increases have you implemented? And then also, were there any in the month of July? And then just putting some of the initiatives to the side, we're just trying to get a sense of how that played out and if there's opportunity for more to come in the second half of this year?

And then second question, was the revenue breakage adjustment contemplated in the 2Q guide?

Yes. So just on the fare increase, we're not going to say the exact number that we had because there -- obviously, there's been a few system-wide ones, but then there's been a lot of them that have been to different parts and obviously, different parts of the network. And obviously, we've made our own fare adjustments there. But the only thing I will say is that the fare environment is very robust right now, and we're seeing strong response, not only in fares but also in actually bookings moving forward, and that continues into fall, and I don't see that changing.

I think the other thing to point out, too, is the -- if you just look at the 20.1% unit revenue increase and then the fact that we significantly outperformed the rest of the industry on unit revenues. Yes, some of that, of course, was the fare and pricing environment, but a significant -- the significant portion of that were our own idiosyncratic initiatives and those initiatives are performing. That is the reason we outperformed the rest of the industry and outperformed them substantially.

And on the accounting question on revenue breakage, as Bob mentioned earlier, the revenue breakage item that we had this quarter didn't relate at all to 2026. And so it just wasn't relevant to it. And I guess if you think about it, if the assumption around breakage changed slightly, it actually would have reduced a little bit of the revenue into 2025, which actually would have resulted in even higher year-over-year RASM had it been accounted for that way. So no, it was not accounted for nor should it have been.

We have time for one final question, and that will be from Dan McKenzie with Seaport Global Securities.

Congrats to the team on a breakout quarter here. Bob, I hear you loud and clear on the current demand and revenue trends, no deceleration. I hear you. So my question really is, this is for your longer-term holders, people who take a 2- to 3-year holding period, is how you're thinking about demand durability longer term? I'm just curious, what are the concrete data points that give you confidence that what we're seeing today is, in fact, durable. And I get that fares are 10% to 15% pre-COVID levels, and maybe it's an AI economy. But I'm just curious, what else gives you confidence? That's my first question.

And then the second question is just the appetite for returning additional capital to the shareholders from here.

Yes, Dan, thank you. And Tom will take the second one. Yes, you've heard me over and over and over, probably more than you wanted on this call, talk about the confidence in the performance of this transformation and then the confidence in the demand environment. So I think I'd break it into multiple pieces.

Number one, the consumer is incredibly resilient. You just sort of put aside everything that we're doing, just look at the industry, demand, pricing, revenue production has remained incredibly robust, and it's across all sectors, all geographies. This is the strongest I've seen it and the broadest that I've seen strength, period. And it does appear that consumers are prioritizing travel and you're seeing that even in the face of higher pricing. So just generally, I'm very bullish on the fact that consumers are going to continue to prioritize travel and drive demand.

Separately, for Southwest Airlines and unique to Southwest Airlines, the product changes that we put in place are resonating across the board with our customers and with customers that we are now gaining. And that's the reason managed business revenues were up 30%. That's the reason Rapid Rewards new members are up 35% and card acquisitions up 28%. And across the board, every measure of engagement, every engagement that would point to whether the products are being accepted and we're wanted by our customers are up and they're off the charts up. So it gives you a good indicator of the acceptance, but it also gives you a good indicator of future performance of those customers as they mature and they spend more with Southwest Airlines.

Third, the whole transformation is a demonstration that Southwest is willing to change, able to change and is executing that change in an incredibly strong manner, and we're not done. We're going to continue to pursue the customer, whether that is product related, it is co-brand related, it's different things that they want from the company, and that drives even more future engagement, revenue production, demand, all those things. And then this is really more about revenues, less demand, but we have -- you've heard all of us talk about the opportunity to really optimize what we have in place beyond these tremendous results in the second quarter. We have a lot of opportunity to continue to optimize the network, as Justin discussed, and play to our points of strength, lots of opportunity to optimize the products themselves, the pricing of the products and then continue to grow and enhance our products, whether that's Starlink Wi-Fi, whether it's continued changes in the cabin, whatever.

So I'm bullish across the board, bullish about the backdrop for the consumer and how that relates to travel and strength, incredibly bullish about the changes that we have made driving demand, driving pricing. And then third, the changes that we are going to make further driving demand for Southwest Airlines.

So yes, as you can tell, I'm a strong believer that this is all working and it's incredibly positive for us. It's incredibly positive for our shareholders. It's producing durable products that in turn produces a durable set of earnings for our shareholders. So yes, I'm optimistic across the board about this company.

And Dan, to your share repurchase question, as you know, we've repurchased a pretty meaningful amount of shares over the last couple of years, around the $4 billion or so mark there. Of course, we're not going to speak to specific plans around repurchasing shares here in the future. We've got some communicated guardrails that are out there on capital allocation. And so anything that we do with that capital allocation, including share repurchases, is going to fall within those guardrails.

And then I mentioned this earlier that as we think about the uses of cash, reinvesting in the business, including aircraft purchases, that is highly accretive. That's a very NPV positive thing to do as we replace older 737-700s with brand-new 737 MAXs, along with all the other investments that we're making in the business that's driving all of the great outperformance that you've seen here.

Thank you, everyone, for joining us today, and of course, your continued interest in Southwest Airlines. We look forward to speaking to you again next quarter.

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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.