Southwest Airlines Company

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. Following the prepared remarks, we will open the call for questions. To ask a question, please press star 1 on your telephone keypad. To withdraw your question, press star 2. 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 an 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 one 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 Casamax 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 remained firmly intact. The largest domestic network with the most nonstop flights and the number one position in nearly half of the 50 largest US 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 number one in customer satisfaction among economy passengers in the J.D. Power 2026 North America Airlines 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 nine carriers with the addition of AirPremia. With the launch of Anchorage in May, we completed the rollout of service to all five 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 fair 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 longstanding 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.