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.

The first quarter was an important one for our operation, 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 27th. with the operation ranking first among our peers in on-time performance and completion factor on launch day. Q1 RASM was up 11.2% year-over-year, well above our guidance of up at least 9.5%, reflecting the contribution from our new product offering as well as broad demand strength across the network. Offering 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 operations in Chicago Midway, Reagan National, and Baltimore, and relocating 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% in 2025 to roughly 60% in the first quarter of 2026, with ancillary upsell performance also meeting 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 rapid rewards 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 our existing base. We'll 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 the 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 CASMX 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 six seats on our 737-700 fleet to accommodate new extra legroom 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 US 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 2.2 times. 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, which 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 CASIMACs 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 we'll 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 your one or two questions back-to-back Thank you, Danielle.

Again, to ask a question, press star, then one. To withdraw your interest, press star, and then two. If you are on a speakerphone today, please pick up your handset before pressing any keys. And the first question will come from Mike Lindenberg with Deutsche Bank. Please go ahead.

Yeah, hey, Mike, 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 percent? And then just my second question to Bob, you know, just thoughts about potentially competing against the government controlled or government owned carrier. I mean, whether it's sound industrial policy or not. So I'll let you mull that one over. Thanks for taking my question.

Yeah, thanks. It's Andrew. So I'll start with the first one. I'm not going to break down it kind of fair product by fair product. But I will say that, you know, 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.

In my case, Bob, and on the second, you know, 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 wars. You have fuel spikes. You have economic issues, recessions, and you've 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've got an eight-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 J.P. Morgan. Please go ahead.

Oh, good morning, everybody. Couple for Tom. So the first question has to do with the second quarter RASM guide. I realize you hadn't previously given a succinct 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's start, we've seen several points of second quarter RASM improvement at your competitors, but your second quarter guide doesn't Seems kind of in line with what we were thinking before the war. Maybe, you know, 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 the traffic liability. It's flat year on year. I know there was some language in last night's 10Q. Maybe the way to clear this up would be, and I don't know if you have this at your fingertips, but under the old methodology, what would the ATL have been at the end of the first quarter? I'm asking because, you know, squaring a flat ATL with such strong revenue, you know, growth is, well, it's difficult.

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 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 rather than guide.

Yeah, 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. What we've talked about is that what we've moved toward as we have this new agreement with Chase is 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 Connor Cunningham with Mellius Research. Please go ahead.

Thank you, guys. 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 destruction? I think there's a big debate on just on how straightforward like recapture is in general. So if you could just talk about that. And then Tom, The capital allocation decision, you know, clearly things are changing a fair bit. You know, your free cash flow profile probably took a step back with the rise in fuel. So just trying to understand, you know, 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, you know, frame up the changes and how you think about capital allocation. Thank you.

Hey, thanks, Bob. I'll take the first and then Tom will take the second. just on the fare environment generally. Certainly, you know, we've seen a willingness to move fares along. There's been constructive pricing behavior. But at the end of the day, this, quote, 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, you know, 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 upsides to that, then that's upside to our guide. And, you know, bottom line, we're focused on what we can control We're taking actions against pricing, like the bank fee 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 fair environment will ultimately play out based on market conditions.

And, Connor, on capital allocation, As we mentioned in the prepared remarks, having a strong and efficient investment-grade balance sheet is a key differentiator. You hear others talk about their desire to get there. The fact that we're there gives us the ability, of course, to borrow at lower rates. And as we think about how we move forward and just how we navigate, it's all about staying within the guardrails. that keep us there. And we've been very consistent about what those guardrails are about liquidity. You see where we are relative to that this quarter. And then we've actually floated down on the debt ratio in spite of being in, I think, a more challenging environment as the business in the EBITDA generation that has occurred in the business has improved. We've actually floated down on that debt ratio. And maybe just as a side note, that debt ratio is a gross debt EBITDA ratio. And so it's I think even compared to some of the others out there, you know, 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, you know, 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, you know, we'll just follow that and stay within our guardrails.

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

Catherine O' Hey, good morning, everyone. Thanks so much for the time. So my first question, really it's hard to tease apart the macro from the initiative, 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 and buy-up in OneCube with the launch of your new seating products. Can you just break down how much of that is cash sales, loyalty points being redeemed, and credit card perks? Thanks so much for the time.

So the corporate, as 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 extra legroom 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, you know, 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 fair products, which is consistent with what we wanted to do. We went to more variable burn in our earning, excuse me, on our rep rewards last year. And so that tends to, on the best flights, push your redemption mix down and your cash mix up.

The next question will come from Ravi Shankar with Morgan Stanley. Please go ahead.

Great. Thanks morning, everyone. 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 VPS for the full year? And I think you pointed outside of that. And maybe as a follow-up, What innings do you think you're in when it comes to monetizing some of these internal initiatives and kind of how much you have left in the tank?

Yeah, Ari, thanks so much. 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 22-cent headwind in the first quarter. It's a billion-dollar story. headwind in the second quarter or 10 points of margin. So it's very material. But no, yeah, 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 can still hit the $4. It depends on, you know, 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, you know, 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 the 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 seed 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 yeah, we're, you know, 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 Wolf Research. Please go ahead. Hey, thanks.

So I just wanted to follow up on that sort of last answer, Bob, like your comment that, you know, the only change really is fuel and you know, everything else is sort of in line, maybe slightly better. I mean, I, I guess it feels like everyone else is saying, yeah, fuel is a lot higher, but now our revenue assumptions are a lot higher too, is where the whole industry is sort of working to pass through fuel. Um, would you not agree with that sort of comment? And then maybe just along those lines with, with fuel, like I, there's certainly a sense of, Hey, the, the industry, Um, this is the first sort of like big fuel spike where, where, where you guys aren't hedged and, and, and that's sort of helping the industry, um, you know, pass through fuel quicker. Like, are you approaching fuel pass through differently than maybe you have in the past? Or do you, and maybe do you think you're approaching it differently than the industry?

Yeah. The first question, you know, where, where are, where would we be? But for is, 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 in fuel, no doubt, there is a more constructive backdrop, I believe, in terms of pricing. So, yeah, I think it's fair to say that the pricing environment is stronger, and we didn't give you a range. We gave you an at least $4, so we did not give you what that upper range would No, it's a more constructive, 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, you know, costs come in, unit costs come in at 2.3, and you had a 1.1, 1.2 headwind in that from seat removal. So the cost discipline, which is structural, It's not timing. It's not odd transactions. It's structural improvements in cost. It's certainly helping here at Southwest as well, which is my whole point about the fact that looking at revenue trends, it's going to take revenues. It's 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 if you look back over a period of time, it just made no sense to hedge. And of course, you can't predict an extraordinary circumstance like a war. If we all could, you'd hedge and then you wouldn't. And it's unreasonable to think you could do something like that. I do think the fact that we're 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 Fenningworth with Evercore ISI. Please go ahead.

Hey, 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, you know, cash flow one and two 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? Thanks for taking the questions.

Hey, Dwayne. I'll take your first one on the fleet side. You've seen the numbers that we've talked about for this year in the 60s for aircraft coming in new from Boeing. No change there. We're feeling confident about what we're seeing out of Boeing. You know, 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, you know, both for this year and kind of high-level commentary that we've given for the next several years around capacity. You know, no major changes there. And so the quantity of retirements really will just depend on on the timing with which those new aircraft deliver, which again are becoming more and more predictable by the week.

To weigh in on your second, the organizationally, I think there's been a lot of organizational efficiency that's been put into place here at Southwest 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 that our customer wants. 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, you know, a year or two ago, period. We don't comment on, you know, 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, you know, things change, and if some of that were to become real, then obviously we would take a look and then decide what our response to that would be, but we don't comment on those things.

The next question will come from Atul Malaswari with UBS. Please go ahead.

Good morning. Thanks a lot for taking my question. Based on the full year guide on capacity, it implies that the back half capacity growth is 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 would be helpful. And then as my second question on the cost outperformance, 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 should we think about the CASMX in the back half on the 3% dish capacity growth? Thank you.

Yeah, two ways, Bob. I'll take the first, and then Tom will take the second on cost. We entered the year, 2026, with a very disciplined cost plan, you know, capacity up two to three. 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, it just don't make sense anymore, and you either cut that capacity or you cut that capacity and then you redeploy. We've also been aggressive. with moves like you saw with O'Hare and Dulles to take underperforming markets and deal with those and then move capacity to markets that are performing, you know, the San Diego's and Nashville's, et cetera, of the network. We've taken our second quarter capacity down, as you saw. We're now expected to grow, you know, roughly half a 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 two to three points, and that's now become two. 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 out 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. So we look to be as efficient as we can be out there. Some of the other big buckets that we have, you know, technology, for one, we have come a long way. Lauren and her team are just phenomenal in the tools that they built. But, you know, we did have a bit of catch-up that we were doing, and that gives us the ability to kind of back off a bit while still maintaining this 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, that 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 numbers quarter after quarter after quarter as we do that.

The next question will come from Sabi Sith with Raymond James. Please go ahead.

Hey, good morning. Maybe I think Dwayne, just to follow up on Dwayne's question there, just curious what the aircraft sale benefits were in one queue and expected in two queue 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.

Yeah, thanks, Sabi. We had five aircraft sales that we did. There were three 737-700s. There were two 737-800s that we sold, so those five aircraft. And about a $30 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 to the business.

The next question will come from John Godden with the Citigroup. Please go ahead.

Hey, guys. Thank you for taking my question. Bob, I wanted to follow up on the topic of consolidation. And it's not about, you know, rumors, news or anything like that. I mean, you were pivotal and central to the AirTran 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'm hoping for just, you know, more historical context and plugging into the company's philosophy today, rather than any commentary on what's going out there right now.

Yeah, John, thanks for the question. And it's pretty basic in my mind. Again, as you sort of go back and reflect on AirTran, and yeah, I was involved in that deal heavily. It's, number one, got to make sense. In other words, the pieces that get put together have to result in synergies. They have to result in goodness in terms of geography served. You have to be compatible enough thinking about things like aircraft cultures. So at the end of the day, if it doesn't paper out financially and other, it doesn't make sense to pursue it. Second, you've got to have a chance to pass muster and get it approved. If it's if no matter how good it might look if you have too much overlap as an example and your odds of approval are low it's too risky and no matter what you think it's not something that you can pursue and uh you know we've always been pro competition pro consumer here at southwest so the 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 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 a 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. Please go ahead.

Hi, thanks very much for the time. Just curious on just within the outlook for 2Q RASM or even 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 as long as it's in the 70% range, there's like that risk that there's maybe or concern that there's share loss in some key or some of the more competitive markets. Thanks again for the time.

Yeah, I'll take that. If you look at our Q1 RASM, and you kind of flip back to Q1 of 2019, you see our RASM on a state-of-the-art basis has outperformed the carriers that report so far, the big three in particular. And so obviously that's the metric that matters. Whether year-over-year, year-over-six-year, you drive RASM. You know, Bob mentioned we cut O'Hare, and I got employee questions about, hey, Andrew, the flights are always full. Well, full flight does not mean a profitable flight. And so one of the most ruinous 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, a year-over-six-year basis, year-over-seven-year basis. It is working for us. And so we'll continue to focus on that. If that results in load going up, so be it. And in our calculations, we look at the incremental cost to carry as well as the incremental answer we get as we price and we accept and 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 traction right now. And if that's a vehicle for higher RASM, we will pursue it.

The next question will come from Brandon Oglenski with Barclays. Please go ahead.

Hey, good morning. And thanks for taking the question. 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 around 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, you know, 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, you know, what people's value they put on these products is? Thank you.

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 pre-pandemic, the number of the people in the aircraft is flat to up. The aircraft have gotten bigger. And so our aircraft size is 160. The big three, I think, is about 120, 130. So it's a much bigger aircraft size. Other airlines with big aircraft also, you know, see this challenge. And so I don't think it's anything to do about inherently attracting us 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 in the back of yield. In a high-fuel environment, that is the path to prosperity is getting it on the back of yield.

And I just want to add a little perspective here because now the narrative is, you know, 17.5% guided RASM is not enough. And then even though load factor is up, somehow we must be losing share. And 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, You know, the narratives about Southwest from the naysayers, I think they're becoming increasingly desperate a bit here. First it was, you know, 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, you know, 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 a narrative product. especially one that's increasingly irrational.

The next question will come from Sheila Chialo with Jefferies. Please go ahead.

Good morning, guys, and thank you. Maybe just related to all the fuel comments and capacity comments, Bob, I could see why you're frustrated at the same time, too. You know, I guess at what fuel price do you make further changes to capacity? And as a follow-up to that, You know, 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?

Yeah, I'll maybe talk about the second one. I'll take the first one. It's really hypothetical because fuel is moving around, I mean, really day-to-day. You're seeing 8% and 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 fare movement. We're seeing that. Clearly, revenues and therefore fares are underneath the increase in fuel. We've not caught the increase in fuel by any by any stretch of the 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 can't predict exactly where pricing 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 uh capacity plan and will continue to be aggressive in redeploying uh capacity to better performing markets and then yeah you know if if really if you'll really moves up from here uh obviously we would take further actions but i think you know trying to spec try and indicate what those might be is just speculation at this point just know that we'll be aggressive though and then the follow-on question on aircraft having such a large fleet of you know mostly unencumbered owned airplanes

gives us tons of flexibility. So that'll really just be an output of how and where we're looking to grow and to what levels, and that 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. Please go ahead.

Oh, hey, good morning. So my question is similar to a prior one trying to get at M&A philosophically. And I guess my question really is, you know, how sacrosanct is the investment grade rating? And is that something you'd ever be willing to put at risk temporarily if a deal checked all the boxes that you talked about, Bob? And then secondly, I guess, Andrew, you know, 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, 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 three airlines in the world that have an investment-grade rating. And so as we look at the activities that we do, just know that 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 niches, the kind of science seed extra legroom, we talked about how we expected that to improve as we kind of bake it in from this year into next year. So obviously there's still upside to come from it. The app time of sale, we are seeing very good traction as we indicated by our prepared remarks, but we're also still continuing to optimize that. We're happy with it. The standalone seats, some of that comes at sale, but there's a very kind of sharp inside the week before departure booking curve there. And we have dynamic pricing tools that we've deployed to help us with that. And we expect to have benefits there. All those in the same vein of we expect to improve from this year into next. And there's also other opportunities that Bob's talked about that we're looking at to take things to the next level, including getting some more share shift out of 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 Weatherby with Wells Fargo. Please go ahead.

Hey, thanks. Good morning, guys. I just want to try to make sure I understand this. I'm going to ask this question that's been asked a bunch of times, but I'm just curious. Since March 1st, how many fair 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 five broad industry-wide fair moves and another one underway today.

And you participated in all of them?

Those all stuck, which means all carriers participated.

That's very helpful. Thank you very much.

The next question will come from David Vernon with Bernstein. Please go ahead.

Hey, good morning. And thanks for taking the question. So I guess I should say, yeah. So if you look at the rapid rewards information that's in the earnings release, they're talking about enrollments up 37%, high interest status increases 2%. Is there any color you can give us around how the card program is performing as far as you know, total spend or signups for the card. Just trying to figure out like how the card program is performing during this period.

You know, 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 Stephanopoulos with SIG. Please go ahead.

Okay. Good morning, everyone. 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 at certain parts of this K-shaped 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. Thank you.

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 seeing weakness are the Mexican beach resorts and Hawaii because of weather and political activities, and even those have seen a sequential improvement in the last couple weeks. So when we say broad-based, we very much mean broad-based.

And the other thing I would add, just, you know, with the fundamental change in the financial performance of the business and the fundamental change in our margins, you know, whatever is happening in the customer response, so at some point you do begin to see, you know, some pushback on fare increases, which again, as Andrew said, there's absolutely no sign of that. Obviously with higher margins now, you know, 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, you know, markets flipping from a performer to an underperformer is very different when you're near break-even than when you're producing top of the industry margins.

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

Thank you. And the next question will come from Michael Goldie with BMO Capital Markets. Please go ahead.

Good morning and thank you for squeezing me in. 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 to follow up on headcount, we've seen headcount 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? Thank you.

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 gotten more and more efficient in the way that we're doing that, especially as it relates to the 737 700, you know, the smaller, less fuel-efficient aircraft as we're bringing the new MAX 8s 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, newer 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 headcount expense that we have is variable. And so, yes, we do look at headcount 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 setup across our operation. And then on the indirect side for headcount, you've heard us talk about the fact that we, year to year, are keeping headcount or SWIB dollars flat. which as we go through attrition and other things, you probably see that headcount 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.