Southwest Airlines Company

Hello, everyone, and welcome to the Southwest Airlines second quarter 2025 conference call. I'm Gary, and I'll be moderating today's call, which is being recorded. A replay will be available on southwest.com in the investor relations section. After today's remarks, there's an opportunity to ask questions. To queue up for an opportunity to ask a question, press star, then one. To withdraw your question, the command is star, then two. Now, Lauren Yett from Investor Relations will begin the discussion. Please go ahead, Lauren.

Thank you. Hello, everyone, and welcome to Southwest Airlines' second quarter 2025 earnings call. In just a moment, we will share our prepared remarks, after which we will move into Q&A. I'm joined today by our President, CEO, and Vice Chairman of the Board, Bob Jordan, Chief Operating Officer, Andrew Watterson, and Executive Vice President and CFO, Tom Doxey. A quick reminder that we will make forward-looking statements, which are based on our current expectation of future performance, and our actual results could differ materially from expectations. Also, we will reference our non-GAAP results, which exclude special items that are called out and reconciled to GAAP results in our earnings press release. Our press release with second quarter 2025 results and supplemental information were both issued yesterday afternoon and are available on our investor relations website. And now I am pleased to turn the call over to you, Bob.

Thank you, Lauren, and thanks to everyone for joining us today. Southwest is on a transformational journey, the largest in our history, as we work to evolve our product and deliver increased value for shareholders and more choice for our customers. Our plan remains on track and I have high confidence in our transformational journey and the significant value it brings. And that value accelerates this year and then more meaningfully in 2026. Additionally, I'm happy to report that we are seeing signs of improvement in industry demand. Changes and enhancements are being implemented very rapidly. In first quarter, we amended our agreement with Chase. We implemented enhancements to our rapid rewards program and launched Expedia, which continues to exceed our expectations. We began 24-hour operations with our first red-eye flights, and we launched our partnership with Iceland Air. We accelerated our cost reduction plan and continued to execute very well on cost with broad-based cost discipline across the company. Moving to the second quarter, the pace and the quality of execution continued. We began charging checked bag fees. We reintroduced the expiration of flight credits and implemented our basic economy product and enhanced fare structure, which lays the foundation for meaningful product differentiation when assigned and premium seating become available. Those changes were announced in March and successfully launched in less than 100 days. I'm just extremely proud of our operations, commercial and technology teams, for their work to support an exceptional operational rollout. The revenue contribution from bag fees has exceeded our expectations so far, and we've experienced no negative impact to the operation. Additionally, during the quarter, we began retrofitting aircraft for extra legroom seating with about a quarter of our fleet now modified. Moving on to the third quarter, earlier this week, we announced that we will begin selling assigned and premium seating on July 29th for flights beginning on January the 27th We announced service to St. Thomas, which will begin operation early next year. And just this morning, we announced new and enhanced benefits to our co-brand credit cards offered through Chase. These benefits align with our new product offering and are designed to incentivize increased spending with perks like more points for everyday spending on things like groceries, gas, and dining purchases. And I'm pleased with the pace of the execution, and we are not slowing down. Our initiatives will continue to roll up and to ramp, and we expect them to deliver a more meaningful contribution in the fourth quarter of this year and a much greater contribution in 2026 once we begin operating assigned and premium seating along with this year's enhancements. And I want to reiterate that our current initiatives are not the endpoint in our product strategy and evolution. As we've stated before, we are committed to evolving further to meet the needs of our current and our future customers. Turning to the macro environment, industry demand stabilized in the second quarter, and while it's early, our recent bookings show clear signs of improvement. This improving demand environment, along with moderated capacity in the industry and the accelerating ramp-up of the contribution from our Southwest-specific initiatives, provides a constructive backdrop for the second half of the year and into 2026. We have provided an updated four-year EBIT guide of $600 to $800 million and a reconciliation to our previous guide of $1.7 billion. This includes nearly a billion-dollar drop from the precipitous decline in the macro environment that's being felt by the industry, net of some inflection back up for the rest of the year, and a $100 million decrease from higher fuel costs with our $1.8 billion portfolio of initiatives and relative domestic unit revenue outperformance continuing to drive incremental value for the year. Our updated four-year EBIT guide still represents meaningful year-over-year improvement, and we continue to expect significant EBIT expansion in 2026 as the value contribution from our slate of initiatives continues to accelerate. On top of that, given our overweighting to the domestic market, we would expect to be an outsized beneficiary of any recovery in the domestic demand environment. Our strong and efficient investment-grade balance sheet continues to provide support and flexibility as well. Underscoring the belief in our transformational plan, strong management execution, and the ability to deliver significant value for our shareholders, Our board of directors has authorized a new $2 billion share repurchase program expected to be completed over a period of up to two years. Tom will provide insight into our strong capital allocation framework, which balances a strong and durable investment grade balance sheet with the capacity for further share buybacks at what we believe are attractive levels. I'm very excited about the future that we're building here at Southwest, and we will continue executing on our plans with urgency. and with purpose. Above all, I want to recognize our incredible employees for their excellence and their one-of-a-kind hospitality as we all work together to deliver on our vision. And with that, Andrew, I will turn it over to you.