Conference Transcript - LUV 2026-05-28

David Vernon, Analyst — Bernstein

All right, awesome. So thank you, guys, everybody, for joining us. My name is David Vernon. I cover the airlines and transports for Bernstein. We are pleased to have Southwest Airlines here. Bob Jordan, the CEO, Ryan Martinez in finance, Daniel Collins, and IR are with us as well. So thank you all for coming out to support the conference. Bob, I'm going to, or actually, before we get started, if you do have questions you want to put through the pigeonhole, I've got the other side of that technology here.

Bob Jordan, CEO

So feel free to put them in there, and I'll see if I can work them into the conversation. um with that i'm gonna let bob kick us off with some prepared remarks and uh we'll get into the q a bob thank you for joining us thank you so much and i was told i have to say look at your screen there's a cautionary statement right that has to be there so please read all those words in detail and uh but anyway thanks thanks for doing this really appreciate it and thanks for the for the time i'll just give you a quick sort of lay of the land of how was the business performing You know, obviously, we put a lot of changes in in the last 18 months. The biggest transformation in the history of Southwest Airlines, it really was a fundamental change to our business. We didn't change our core. So, you know, the best domestic network, the most non-stops, the best people, the best service, the most reliable operation, you know, won the Wall Street Journal rankings. Fifth year in a row, J.D. Power win. so the fundamentals of the company didn't change but we really did change the product to move our product towards what our customers have told us they want it was great to see that come home in terms of our financial performance in the first quarter so which is the first quarter that you have everything in place but our operating margins were up 810 basis points year over year and we led the industry in net margin. And that's without having, you know, first class and long haul international, some of those products that our network carrier friends have said are really performing. But it was good to see the fundamental change in the business show up and a fundamental change in the financial performance of our company, which I think is an enduring change. Our customers are really taken to the products. They want them. They're buying them. We're seeing no drop-off in demand from our customers for the product. We're seeing market share move our way, particularly in our business customers, because now we're offering them things that they want. They want access to extra leg room and different products. Just as an example only, so our March business revenues were up 25 percent year over year. And that trend has sustained itself in April and May, which is a great sign. The biggest question, of course, is, well, what is the consumer doing now? The industry with fuel up has had seven consecutive fare increases since February the 1st. Southwest has participated in all of those. That's the most that I could remember in my 38 years, you know, in the industry. But with fares up, though, that much, there's been no drop-off in demand at all. So no indication that the consumer is elastic in this fare environment. So leisure, business, across geographies, across all points in the booking curve, the consumer remains very strong despite this rise in fares. so i'm becoming increasingly bullish uh that we will be able to cover these fuel increases with with with revenue increases um you know as you look forward i think the last thing maybe the uh you know one of the questions at some point fuel will debate and you'll see fuel prices come down one of the questions of course is well how sticky will these increases be and i think um i think the backdrop is very constructive. I think we, our network, you know, competitors, you can tell, are all focused on routable production of results, steady production of results, sustainable margins, and so I do think that produces a backdrop where we'll certainly not attempt to give some of these fare increases back. Obviously you hate to see somebody go out of business but with spirit out of business I think that helps that environment so I do think the backdrop is constructive when fuel drops to retain the revenue and yield increases that we've seen but bottom line for Southwest Airlines demand is really strong our customers want the products they're booking the products our business customers want the products our our our rapid rewards enrollments were up 37 percent in the first quarter our tier uh qualification was up 60 percent year over year in the first quarter and we're seeing satisfaction scores now with the extra leg room assigned seating the satisfaction scores for our tier customers is over 90 percent so to me it all tells you the product is moving the right way for our customers the business results the financial results are moving the right direction for our shareholders and I think this is a durable and sustainable change in the airline all right so the product changes that you've implemented I think one of the key messages you want us to leave with here is that they're working customers are buying up to these products and it's having the kind of results you want we We can dig in a little bit more to the relative parts of that.

David Vernon, Analyst — Bernstein

But so let's say we've got the business transformed with the new products. As you think about where Southwest fits in the industry landscape going forward, what's your vision for the single reason why a customer would choose Southwest over your competitors?

Bob Jordan, CEO

Well, the core reasons, I mean, we carry 500,000 customers a day. The core reason that customers, the core reasons that customers have always picked us, the best domestic network, the most non-stops, which means the most convenient flights, the number one operator, the best service provided by those best people, the best hospitality, those core reasons that customers have always selected at Southwest Airlines have not changed. So those continue. We are America's choice in terms of an airline. Now, you tack on to that the products that they want and the commitment by the company to continue to pursue the consumer and pursue the products that they want. It just provides a very strong base for an airline that is more attractive to the consumer than any other airline. So we're not going to become Delta and United and American in terms of serving 120, you know, far international destinations. It took them decades to build that. But we're going to remain the carrier that has the best flight schedule, the best operator, the best hospitality, the best people, and over time connect that to more and more and more products that our customers and our non-customers want, and that allows us to provide more choice and better service and a better option for all Americans.

David Vernon, Analyst — Bernstein

And as you think about the places where you think the business will be different, say, five years from now, right? If we've reset the product landscape, we've segmented the cabin, we've added fees and buy-ups, which has sort of kind of been where the industry's been. You're there. Where do you take it next? Like, what's the next sort of three- to five-year path? Obviously, the upgrades on the Wi-Fi. And how do you want to think about, like, what's going to be most different about, if we're sitting here again in three or four years, which I hope we are, and we look back and we say, okay, what's different? What do you think is going to be most different about the airline?

Bob Jordan, CEO

Well, and again, you're talking about fees and all. That's all done. It is, but I just want to point out, again, that we added things that our customers wanted. So it wasn't that we're just charging you fees now. We are providing you options all the way from basic, all the way to extra leg room to pay for things that you want, which is very different than I'm just slapping a fee on top of a project we already had. So I just want to make sure. Acknowledge that. Yeah, we're meeting the consumer where they are, where I think we'll be, if we're sitting here talking five years from now, as we will have continued to greatly expand the product offering and not just to expand it for, you know, ego's sake, as an example, but expanding it because I want to give you fewer and fewer reasons to book another airline or feel like you need to travel on another airline. So, again, all speculation, but we'll have more optionality within the cabin, could include true first class. We'll have far more domestic destinations that we can provide for you. We just opened Anchorage a couple of weeks ago. The Caribbean, we're continuing to add destinations at a very swift pace here in 2026. but we'll also offer you access to destinations that we don't serve today. I think it's likely that we'll, over that period of time, delve into long-haul international. Again, these are all ideas. But we know these are things that our customers want. If you dial back just a couple of years, we now have seven partnerships with other airlines, and we can get you to nearly any place in the world connecting with those partners. none of that existed even 24 months ago but the desire is to meet our consumers needs offer them the things that we can't offer you today and it just like it just logically means that things like lounges and a credit card that goes with that and more premium and more destinations including more long-haul destinations and if you take long haul as an example again it's out there. It is something that we're thinking about. But, you know, I said we don't have to become Delta United American. But a handful of destinations, you know, 8 to 10 to 12, pick off the vast majority of the traffic, the vast majority of the places that our customers want to go.

David Vernon, Analyst — Bernstein

So we don't have to be, you know, Delta American United in terms of that huge, wide long haul network but through the right destinations we can be we can be highly relevant in our customer base in terms of where they want to go okay and as you think about that that again that three to five year path um not not trying to get to some sort of specific guidance i think you are you keep asking me well i try to get there without getting you know but does you think about the that three to five year path when you're looking at you know whether it's margins returns free cash flow conversion how would you package that for an investor who is not on the weeds on RASM and CASM and is not digging into the flight segment performance by route if you're trying to package this for a generalist investor and you're saying to yourself hey look Southwest used to be this business that led the industry in margins and returns we've gone through some transition now we're going a path where is the end state I think if you're asking if I took my Southwest Airlines had often just said, well, why would I invest in Southwest?

Bob Jordan, CEO

What's the argument? You've got a terrific company with terrific fundamentals that had stood still on the product front for a long time and had a huge base of loyal customers, but just didn't offer them the many products and product choices that they want to buy, and we've changed that. Sure. And and dispelled a couple of, you know, sort of these inane theories about Southwest. Number one, that our customers either wouldn't want to buy those things or couldn't or couldn't buy those things because somehow we have a less affluent customer, which is hogwash. if you look at the results and second that we couldn't get to industry returns top of industry returns without having first-class premium long-haul international because of the growth there our first quarter results dispel that we have been able to be to meet you know the top end of the industry margins and and not have those products so and and our customers are buying them So you've got a company that has incredible strengths, that now has in place a much more durable return for and margins for our shareholders, and that's durable and sustained. On top of that, we have a lot that we can add. We can add, we're going to continue to optimize the things that we put in place. We've just begun to optimize the product buy-ups and the way we think about seat ancillaries and the way we think about the number of seats on the aircraft that are available to monetize. So there's more to come in terms of optimizing what we put in place without adding new things like, you know, lounges and long haul. So there's more from a returns perspective. Steve. So I look at the company and say, I think the market has substantially undervalued the change in our earnings power and the sustainability and durability of that earnings power with the products we've put in place today. Number two, has not even begun to thought about the value of optimizing those products beyond what we implemented on January 27th. And third, not begun to give us credit for the things that we can continue to do to add to the products to make them even more attractive and put more earnings, you know, on the table for our shareholders. So there's a very long and sustainable shareholder return story here. The number one, the marketplace is not given its full credit for.

David Vernon, Analyst — Bernstein

Number two, is sustainable for a very long period of time and if i'm a long-term investor that's exactly the play i want okay um so maybe let's uh change gears for a second and talk about the the transition that you've just gone through because it has been pretty pretty massive in a very concentrated period very massive right as you look at the the initiatives and i'm not sure how you want to bucket it but if you can help us kind of understand the the things that you've implemented you know which of those uh changes has outperformed your internal models and where has maybe the customer reaction surprised you one way or the other, right? You've been around the business a long time. For a long time, you were of the view that the product didn't need to change and then to your credit, you pivoted and you led the team through the change. But as you think about what you implemented, what's overperformed? Where's the customer reaction been most surprising to you?

Bob Jordan, CEO

Yeah, and I don't know if I was of the opinion that the product didn't need to change. I think I felt like we needed to move to assign seating as an example for a long time okay we did a lot of research and so we knew that 80% of our customers wanted to move to assign seating 88% of customers who would not fly Southwest that was the reason they would not fly us they wanted to sign seating the number one reason families would not fly Southwest Airlines was because in open seating we could not guarantee that you would sit next to your kids so I had high confidence that those things would work. So I had very high confidence in the product changes and high confidence in the company's ability to execute that. We also made some changes that were tougher, like the implementation of bag fees. Now, a lot of ways not to have to pay bag fees. All you have to do is have that Southwest Airlines Chase Rapid Awards visa in your wallet or have tier. But I don't know that I was surprised at all. Number one, the products are performing or outperforming our expectations and again that's without continuing to optimize so i think if anything the surprises anytime you make fundamental changes you always have a nagging worry about what could go wrong um i wasn't surprised but i'm incredibly pleased with number one the company's flawless implementation of all this stuff these are huge massive changes with lots of technology behind them. We did the assigned seating, boarding, all those changes were done overnight on January 27th. And the first day of operation, we led the industry in on-time performance, and we led the industry in the lowest number of cancels. So we beat the industry on the day we changed everything about how the company operates. So while I knew we could do that, I was pleasantly surprised at the quality of that implementation. And then second, I've been pleasantly surprised at our customers' response to these products. They're taking to the products as or even better than I expected. And our business customers in particular are really taking to the products. So, I mean, we're seeing satisfaction scores that are higher than in the open seating world, as an example. So I've been pleasantly surprised to the upside more than anything.

David Vernon, Analyst — Bernstein

Okay. And I guess one question that I get asked sometimes, and I'd love to get your view on this, right? Like, you've implemented these changes, everything's going well, then we hit this massive fuel price spike. And obviously there's the bankruptcy of spirit and capacity coming out, fares are better. You know, what gives you confidence that the behaviors that you're seeing in the early results will endure? And maybe more importantly, how are you keeping on top of that issue in terms of saying, okay, look, we have a little bit of these changes, and everybody kind of accepted it, but now over time maybe things are changing. How do you think about the durability, and how do you think about managing that? Because it's got to be, you don't really have a good track record to go against, right?

Bob Jordan, CEO

Yeah, but we know a lot about booking curves and how our customers perform. So, yeah, you're looking for is this a blip or is this sustained? and uh you know back to the strength of of the demand right now it's across again all geographies all customer sets and all points in the booking curve so if this was somehow just a reaction you know to the january changes you'd see a blip and a fallback and we're not seeing that if anything we're seeing you know we're seeing a an acceleration in our customer scores as we move away from January 27th and continue to make improvements. We're seeing these really large, and I'm not updating today, so just the guide, really large guides in terms of the performance. So, I mean, when was the last time, if ever, you heard somebody guide high double-digit RASM performance, unit revenue performance? I've been with the airline industry for 38 years. No one has ever produced high double digit uh uh rather than performance in a quarter it just doesn't happen it's a testimony to the fact that the revenue production of the products is working and it's a testimony to the fact that our customers want it so if anything i see acceleration in the take rate of the products uh rather than some worry that this was somehow a blip you know and temporary, which tells me that the product changes were the right things to do. Our customers go back to the open seating world. We always have had and still have off-the-charge enviable NPS scores because our customers love the product, they loved the network, and the fact that we have more point-to-point, non-stop flights but above all they love our service and our people our people are the brand differentiator they do things for their customers that no other airline would do and you take all of that that is still intact and you stack on top of it the products that and the choice that our customers have wanted for a very long time and it's an unstoppable combination okay well on the network side um you have also been making some changes right obviously the the move uh into

David Vernon, Analyst — Bernstein

O'Hare has been gone back to Midway, Dulles back. You've seen some changes around Reagan and where you're flying in and out of. I remember one of the first times we had a chance to sit down like this, I asked this question around, or maybe it was one of your investor days, right? Where are you going with the network? Is it dots on the map or thickness of the lines? And it does feel like some of the really high utilization routes in the network have come off a bit. Is that something you're also seeing? And how are you thinking about where you want to put assets into the market going forward?

Bob Jordan, CEO

Well, you have to be willing to be, you have to be willing to adapt. The network is an ever-changing beast, right? It is constantly moving around as you see demand move. So you've got to be willing to make changes. And I wouldn't read, you know, any more into the Dulles and O'Hare changes, then those just were not producing the returns that we wanted, and that capacity can be better used in markets like San Diego, Austin, Nashville, places where we have a super high demand, and we're continuing to grow. So you've got to constantly be looking at the network and being willing to make changes, and we're doing, you have to be aggressive, and we're willing to do that. On the thin lines, thick lines kind of thing, there have been fundamental change over the last five years to a decade where you have a much higher difference between peak and off-peak performance. And so you have times of the day that used to make sense to be profitable, like late, late night, deep off-peak, and they just don't make sense any longer. You have days of the week that perform very differently than they used to. So you have to, again, be willing to deploy capacity and be variable with your capacity deployment to the right times of the day, day of week, and routes. And so what you're seeing from Southwest is actually, number one, a higher degree of willingness to be adaptable with the network, and then number two, a higher degree of capabilities, technology and otherwise, that allow us to do that.

David Vernon, Analyst — Bernstein

And so the utilization component being maybe a little bit less in some parts of the market, does that change the return profile of the business?

Bob Jordan, CEO

No, the aircraft. You compensate that for more. Yeah, we still have, because of the way the network flows, we still have the highest aircraft utilization in the business. The, you know, everybody's cost structures have floated up, especially with labor costs coming up, you know that. But our gap to our network carrier competitors, as an example, is still about 20 percent on a unit cost basis and and that's really driven by the fact that we utilize our aircraft much more efficiently than others do a good example over the last few years is we actually rather than pad the turns pad the block we actually took five minutes out of every turn and created 18 free aircraft by doing that we built the capability and began flying red-eye red-eye flights and the combination of those two is uh is roughly 40 free aircraft because we're basically just utilizing the existing aircraft uh more so uh no one can touch us in terms of aircraft utilization and productivity and and so the vision then is to continue to be more point to point less sort of hub because you have you have you've built started to build some connecting in the schedules it seems to me like a little bit when i look at it say relative to pre-covid to now you've got a little bit more emphasis on connectivity and bwi and and some of your bigger markets yeah i i would say we're a hybrid so we have very large cities that we do more connecting in but uh but again one of the one of the core strengths of this company is that we have the best domestic network and we have the most non-stop flights and consumers choose non-stop flights. And that offering is key in terms of our, is a key part of our core capabilities as an airline. Again, you're always going to adapt. I mean, as you grow, a fundamental part of growth and becoming larger, we're now, you know, roughly 4,000 flights a day, is, and you have more dots on the map, you can't escape having more connectivity as you add more dots. And that's That is really what's happening there versus a desire to become more hub-like.

David Vernon, Analyst — Bernstein

And as you think about that idea of getting to international long haul, where does that fit in your network? As you think about gateways, is that most naturally going to be Baltimore? How do you think about where you're going to be?

Bob Jordan, CEO

Yeah, we're just not far enough along with that. These are really ideas. I think you start with, again, you go back to what is it? What is it our customers want? from Southwest Airlines that we cannot provide today. I want to give our customers fewer and fewer and fewer reasons to have to choose United, Delta, America, and others because they don't want to. They love Southwest Airlines. We are the brand that they love. They want to choose us, and they simply can't because we don't offer them the thing that they want, like flying long haul. so it really comes out of what is it our customers want and then second this is a huge tie to the rapid awards program so the loyalty programs and co-brand are a huge part of the financials of an airline and having long-haul aspirational destination kind of routes really really enhances the co-brand program as well so it's as much a part of that that's as much the reason is it is even destinations that our customers want but we're we're just in the

David Vernon, Analyst — Bernstein

really early stages of that so i have a very smart question but yes baltimore would be a natural natural hopping off point so i have a very smart question here that that kind of feeds into this idea around choice so you said that that assigned seating was the number one reason yeah why people would not use southwest that's no longer there what's the number one reason now that customers wouldn't use Southwest?

Bob Jordan, CEO

You know, I think I would flip it around and say, what are the next set of things that our customers want? Sure. And the next two are, number one, highly reliable fast Wi-Fi is incredibly important. So you saw, you know, we signed a deal with Starlink. Very smart. And we've, you know, we got our first aircraft outfitted for test and we'll have roughly 300 aircraft in the fleet converted by the end of the year and it's going to be neck and neck but i think we'll be the first to have our full fleet converted to leo and and these are incredibly fast like sitting at your home gaming kind of speeds and so the move with starlink will solve that i'm really happy about that and then second the next thing that we see our customers want are a lounge network and it's not just uh business customers it is uh leisure and business and um i've been very public that we're working on that and not ready to announce or say anything today but just

David Vernon, Analyst — Bernstein

it is public that we're out there leasing space so those are the top two things and as you can tell we're tackling both of those all right um so uh with the you you talked you haven't seen any sort of demanding response to the higher fares that i'm going through you mentioned seven consecutive fare increases that have all been widely supported by the industry um if you sold the whole cabin at the latest round of fare increases does that cover four dollar and change jet fuel or does there still more room the industry has to to to to to kind of work to push forward to get to full recovery yeah no if you if you just took today's revenue environment

Bob Jordan, CEO

or yield environment, and you took fuel prices as they are today, no, no, it's not close. So you need further increases to fully cover the rise in fuel.

David Vernon, Analyst — Bernstein

This far?

Bob Jordan, CEO

This far? Yeah. Well, it's ever-changing. Fuel's moving every single day. but because we've seen our customers and consumers be very very resilient in the face of fare increases and i think it's the economy but i think for southwest it's because we're offering products i think a big piece of this for us is that we're selling them products that they that they want and so we have an outsized demand that others are not seeing and i also think that consumers are prioritizing uh travel it's it's it's higher on the priority list than it and it was pre-covid um and we're going to see fuel abate as far as you know my guess is at some point we'll have an agreement fuel will come down i do think it's going to take um longer far longer than the fuel forward curves would say so i do think you're going to have higher fuel for longer. But the combination of fuel will abate and customers have been very resilient makes me more and more bullish that we will be able to cover these fuel prices with revenue increases. But we still have a little bit of room to go. We have ways to go. We're not there yet. If I were to ask you to put a little fuel tank indicator on it, it's okay to say no. It's question i get asked so i'm trying to get well you've seen a lot of this you know we're going to cover 40 percent this quarter and 60 percent the next quarter i i've shied away from that because it's i i think it uh it's a it's just a math exercise you can plug any number you want in there sure and the market is going to dictate that it is logical i think to think that it you You know, you've got seven fare increases that as, you know, if you do, if those prices continue to go up, it's logical that that pace might slow down because that's a lot. But again, I'm bullish on the thought that we'll get to the point here where revenues can cover fuel in total.

David Vernon, Analyst — Bernstein

And we get to the other side of this, and fuel starts to come down. The $65,000 question is, how much do you keep, and how much does the industry give away back to the consumer?

Bob Jordan, CEO

Well, first off, you've got to start with, while prices are up, I believe that fares, you look at the last sort of since COVID began, the last six years, even with prices being up, They are up only roughly what broad inflation has been up over that same period of time. So we're not talking about fares are way ahead of what's gone on with other prices. So they're basically just now catching up to inflation. I do think because there's more discipline in the industry now. The network carriers in particular, Southwest Airlines, lines, we are all focused on ratable production of earnings, dependable production of earnings, and so I think there's a desire to behave rationally and operate the business in a way that you can produce the appropriate rate of return for our shareholders. As much as, you know, you hate to see a competitor go out of business because it's people and it's jobs, you know, spirit going out, I think, allows us to be even more rational in how we think about that. Because, you know, typically the airline suffering the most is the one that's going to behave the most irrational in terms of pricing. That's the history of the industry. So I think that adds stability. So I'm actually very bullish that the industry will retain a much higher percent of the fare increases than would be typical historically.

David Vernon, Analyst — Bernstein

And as you think about that structural change with the ULCC model, maybe not dead, but on the ropes with the introduction of basic and segmentation, what do you think about the prospects of future consolidation from where we are today or future, you know, potentially maybe companies that are struggling to make it at today's fuel prices actually kind of maybe following spirit.

Bob Jordan, CEO

Well, and you said ULCC's on the ropes, too. I think if anything, and this has been coming for a long period of time, you know, cost in the industry broadly, especially labor costs, have really come up over the last five years, and you sort of move to an industry rate for labor, and that big rise, I think, in cost, and particularly labor costs, I think was as damaging to a spirit as anything, because they were a spill carrier taking spill, which means lower fares, and that only works if you have a significantly lower cost structure, and with labor rates commoditizing themselves, I think that just became very, very hard for that model. On the M&A front, it's kind of one of those we were talking about this morning, kind of there's sort of both sides of the same coin, which is everybody that I talk to thinks this, you know, historically, this is the kind of environment that's ripe for consolidation and where you typically see M&A. And I do think everybody believes that this is an administration that it would potentially be easier to do some transactions under. But on the flip side of that, I've not talked to anybody that really knows what that might be, because you had a lot of discussion of JetBlue. I can't speak for JetBlue, but given the debt load, I don't see necessarily a lot of interest there. you've got some very small carriers you know the the the breeze folks I don't really know about that so that really leaves the network carriers and Southwest Airlines we're all very large you know a combination of any of those would be you know roughly 40 42 percent which historically would never pass muster in terms of an approval with DOJ or DOT so while I think the in the timing feels right for consolidation uh nobody that i talk to can under can sort of put a thumb

David Vernon, Analyst — Bernstein

you know to put a thumb to what that might be and so from a from a from a southwest perspective you're philosophically open to the idea but but don't necessarily see a the right set of combinations like well no there's really no there's nothing that we're you know never say never, but there's nothing that we're working on.

Bob Jordan, CEO

I mean, it's just like being open to the product changes that, you know, forever we said, we have one product, we do it this way, we have one boarding, we do it this way, and woke up and said, look, our customers are telling us something different. We can't do that. We've got to provide what our customers want, no matter what we think sitting here at the table inside the company um so on the m&a front i think you you apply the same thing and say you got to be open to things that might make sense that would be good for the company good for our shareholders i it's just not there's no there's nothing obvious uh so it's not a no it's just i don't know i don't have a clue what that would be because nothing comes to mind okay does you think about the um the the topic of cost inflation which you mentioned a second second ago with respect to you know the the industry getting to a set wage um you know as you think about the product changes you're making and then the potential also for for additional

David Vernon, Analyst — Bernstein

enhancements whether that would be a true first class cabin or a lounge or whatever it is um those are going to be layering in some cost as well right so how do you think about offsetting that that cost of investing in the product should investors be expecting you to be be basically working revenue against that cost inflation and netting a positive or are there additional levers that you can pull from a productivity and a cost standpoint that would allow you to to maybe absorb some of that um the cost of a higher service product yeah again i i can't a little bit in the jam here because i can't talk to you about things there's not much to add

Bob Jordan, CEO

on things that are hypothetical and on things that we are working on they're just confidential and i I can't give you a lot of detail, but I would come back to where this is sort of like your capital allocation guardrails. There are guardrails around how we run this airline. And while all costs have come up, on a relative basis, we're a low-cost carrier. So our unit costs are 20% below the network carriers. So as we add amenities, we're going to do that in a way that is consistent with our cost profile and in a way that maintains that cost differential. As we add things like new products, we're only going to do that if it makes sense. And that means make sense on an accretive margin basis. So if we were to add further premium, obviously you're de-densifying the aircraft to do that. We would only do that if it is obvious that the sum total is margin accretive to the carrier. So we're not going to do things just because we desire to do them. and we're going to do them because it makes sense to the business, our customers want it, and it is a good thing for our shareholders. We haven't talked about this, but to me it kind of ties together. We've talked an awful lot about the product. In the last 18 months, the product changes and all that we've done at the carrier, at the airline there. What we haven't talked about is what I've seen in terms of what's changed in terms of how this company operates itself mm-hmm we've been around a long time I've been there 38 years and I've seen the biggest change in how we fundamentally run this company that I've seen in my whole career Southwest Airlines there's an incredible focus on discipline cost discipline agility efficiency it was very painful but we did our you know our first ever corporate layoff about a little more than a year ago, took out 15%. And that de-layering and focus in corporate brought an incredible change in the pace at which we operate, the pace at which we make decisions. And that fundamental change to how we operate ourselves is showing up across the company in terms of the pace that we execute. There's a reason we executed all those product changes in 18 months, and they went in flawlessly, and I think it's a change to how we operate this company. There's a reason that you've seen four quarters now of incredible cost discipline. Our unit costs in the first quarter were up 2.3%, and 1.2 points of that was because of a row of seats that we took out for extra legroom on the 700 aircraft, so otherwise they would have been up 1.1 percent that's not by chance it's because there's an incredible focus on discipline cost discipline and managing this company in a way that i've just not seen before and uh bodes well for the future and as you think about um artificial intelligence um and the the use of of of lms in the business either on the revenue producing side or the cost side or the customer engagement side is that are you looking at that as a lever of productivity that hasn't been tapped yet or how are you thinking about and how's the company thinking about incorporating those tools and what do you see as the potentials to see oh yeah we're boy we could go on for a very long time so everybody focuses on the productivity aspect but you've got productivity you have the ability to dissect and ingest titanic amounts of data to understand what's happening in patterns and trends like revenue management or aircraft you have a lot that's going on in terms of the rise of agentic so uh yeah this is a huge topic you just take some examples where we are using ai extensively in the area of customer handling so taking our customer care area and not just improving processes but improving how we respond to customers, the pace at which we respond, how we recommend to predict what we should be doing for the customer, and then kind of human in the loop, you know, handling those. There's a lot of discussion going on around exactly how our agent's going to play in this space. So you've got, you know, every platform is transitioning to using that to selling you. So selling your trip through ChatGPT and then on the back-end basis, making all those bookings and putting your trip together. There's a huge impact to a company like Southwest Airlines in terms of how we position our platforms to deal with those agents more and more productively. because what you can't do is lose the ability to monetize ancillaries and seats and buy up in terms of how the agent works with our platforms and our agents. So I'm going on and on and on, but it's such a huge change. And I think there is a stunning level of capability here.

David Vernon, Analyst — Bernstein

So maybe just one last quick question before I'm going to let you land the plane here on refreshing the pitch. I am not a pilot.

Bob Jordan, CEO

You do not want me to land the plane.

David Vernon, Analyst — Bernstein

Land the presentation. Land the presentation. So the CapEx envelope and free cash flow conversion profile of the business, how does that look over the next couple of years? Should we be expecting or at least penciling in some additional investments?

Bob Jordan, CEO

I'm not sure if Starlink is a needle mover on that or lounges could be, just given the price of real estate on an airport especially an attractive airport like how should we be thinking about the capex envelope kind of going forward and free cash conversion yeah i think the um yeah star starlink both starlink and starlink and how we're thinking about lounges they're they're not material impacts okay it's really and we've been investing a lot in the customer experience uh and you know new interiors and all wi-fi and new seating and but those are already embedded and they are also uh relatively immaterial it's really aircraft we have a couple of years here where we have a bit of a bubble in terms of aircraft just because we you know uh over the last three or four years we got behind the boeing deliveries and so they're going They're going to be a little lumpy potentially in, you know, kind of 27, 28, 29, still TBD. But no, and again, this is not huge, but a little higher than expected. But over a longer period of time, we'll have very stable CapEx. And as we continue to improve, the margins in the business will drive more free cash flow. We're very disciplined with our guardrails around capital allocation. You saw us buy more shares back in the last 18 months, about 14 percent of outstanding. That was really returning excess cash that we had put on the balance sheet during COVID back to our shareholders, an extraordinary period. So we're going to use operating cash flow to fund investments like CapEx, and then we'll fund share repurchases, as an example, out of free cash flow. So I think longer term, and back to the reason why we are such a good long-term investment, in addition to the fundamental margins that are going to be put on the business of the changes, you've got a period of time here where we are, a lot of the CapEx is just taking 700s that are retiring and putting new MAXs in place, and that's a huge NPV and win every single time that we do that. That's an 18% improvement in operating expenses between those two aircraft. You get to the early 2030s, and we essentially have a very young all-MAX fleet with very, very few retirements for about a decade. So you're setting up a decade with great operating costs because you have new aircraft, low maintenance, and very low capex because we have very few retirements. And so it sets up strong free cash flow. It sets up strong cost performance in the business. You couple that with the products that we put in place, and it sets up strong customer demand. And all that yields, I think, continued margin expansion and a terrific long-term story for our shareholders and our potential shareholders.

David Vernon, Analyst — Bernstein

All right. Well, we've got about a minute left. That's a pretty good wrap-up of a compelling longer-term story. Anything else you'd like to add for a longer-term investor that might be sort of top of mind or a message you want to leave them with?

Bob Jordan, CEO

No, I mean, as you can tell, you know, I'm not just the CEO. I'm a believer in the story. these are fundamental change to southwest but they're all just to meet the customer's needs it's working it's showing up in demand it's showing up in the financials there's far more to come so i see far more potential for ongoing margin expansion and this is a great company with great fundamentals above all the best people in the industry and i'm an absolute believer in the story and i'm an absolute believer in this company all right well with that i think we're going to wrap it up thank you all for attending thank you for listening in on the webcast thank you to the southwest team for coming and bob always i learn a lot when i speak to you so thank

David Vernon, Analyst — Bernstein

you for supporting the conference and coming out to join us thank you all right appreciate it