Southwest Airlines Company

Hello, everyone, and welcome to the Southwest Airlines first quarter 2026 conference call. I'm Nick and I'll be monitoring 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 will be 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 and then two. Now, Danielle Collins, Managing Director of Investors 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 45 cents was in line with our guidance in January and represents a significant year-over-year improvement from a loss of 26 cents per share or an adjusted loss per share of 13 cents, and these results were delivered against a backdrop of significantly higher fuel costs which represented a 22 cent 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 percent from the first quarter of 2025. Now that the contributions for 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 lack 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 core strengths. The largest domestic network, the most nonstop flights, and a number one 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 transformed business model is being stress-tested in 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 it's producing top-tier industry financial results. Looking deeper at the results, demand remains 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 non-fuel costs and drive efficiency across the business. And you saw a portion of that come through in our first quarter CASMX 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 two-thirds of our fleet will be equipped with in-seat power and larger overhead bins. 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 O'Hare and Washington Dulles. 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 four-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 impacted. 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 35 cents to 65 cents, using an average fuel price range of $4.10 to $4.15 based on the forward curve as of April the 16th. DPS 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.