Southwest Airlines Company

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. After today's remarks, there's an opportunity to ask questions. To queue up for an opportunity to ask a question, please press star and one. To withdraw your question, the command is star and then two. 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 guide 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 number one 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 getting this done every single day, day in and day out. Before moving to 2026 and 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 a 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 non-contract and management employees. Added six 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. This continued the fuel hedging program, completed $2.6 billion in share buybacks in 2025, representing about 14% of shares outstanding while maintaining our investment grade rating. And on Tuesday, we implemented a signed and extra legroom 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 two categories, one 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 93 cents. Let me share our reasoning why we are not yet providing an upper range for 2026 earnings. Assigned and extra legroom seating became operational just two 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 two and will 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 piece, 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. and issues 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.