Conference Transcript - LUV 2026-09-16

Speaker 2

Great. Let us switch back to airlines content now, and very happy to have at Laguna, again, Southwest Airlines and CFO Tom Doxey. Tom, welcome to Laguna. Thanks. Really good to be here. Absolutely. You guys have been the idiosyncratic story of the industry for the last couple of years now. Obviously, so much going on, A, with macro, B, at Southwest as well. Maybe just start at a high level, kind of how do you spend your time? Kind of what's the split between looking internally, what's the split between refreshing the price chart on JetFuel versus other macro stuff?

Tom Doxey, CFO

Yeah, we'll focus on controlling the things that we can control. And I think we've done a really good job at that. I mean, you mentioned the initiatives. You look at those initiatives that we've rolled in over the last 18 months or so. We actually asked this morning in one of the investor meetings, okay, we'll talk about one of the ones that didn't go like you thought it would. And as we went through them, they all came in on time, and they all have either met or exceeded the financial estimates that we have put out there. And we've done it also with maintaining the things that have been core to Southwest for 50-plus years now around hospitality and the culture and the customer centricity. We're seeing record numbers for people coming to us now. Our business revenues, for example, are up 30%. And I think that has a lot to do with the product. The fact that we now have the assigned seat, we have the extra legroom seats, we've got Starlink that started to roll out. We'll have probably 300 or so aircraft that will have Starlink installed by the end of this year, and we're going to continue on as we go through next year. So the product is getting to a point now where I think it's resonating with people that it didn't resonate with before while building on the base. And so, yeah, things have gone really well from an initiative standpoint.

Speaker 2

That's great. I'll come back to you in a second on that. But maybe let's hit demand trends first. 2Q earnings, you said that 3Q was roughly 65% booked with yields up 24% year over year versus 13% for 2Q. So clearly a lot of momentum there with no deceleration in demands or fares. How have those trends evolved since July? And kind of obviously seasonality is a different thing. But how does that compare to what you saw in 2Q?

Tom Doxey, CFO

Yeah, so we haven't updated those specific numbers since earnings, but what we have seen is as we've seen the quarter even progress into what has historically been more kind of trough periods for the industry, we've seen a lot of strength. And, you know, the month that we're in now, September, tends to be kind of a lower-demand month. September has exceeded our expectations. Okay, that's good. And, you know, as we look at the demand environment, it's very, very strong. It's stayed strong.

Speaker 2

That's awesome. Any color at all on 4Q and the holiday season, kind of how much visibility do you have into that right now, and kind of do you see that continuing through that?

Tom Doxey, CFO

Yeah, the booking curves are relatively short. You know, we're kind of in this 60-day window. So as we move through the next couple of months, that will start to come more into focus. But, of course, we do get, it's more limited, but we do get insight into that, and we aren't seeing any signs as we move into that period of things decelerating. Good.

Speaker 2

And so, obviously, the entire industry has had this kind of nice tailwind on yields here, but you have obviously made it very clear that this is a combination of Southwest Pacific initiatives as well as industry tailwinds, as well as jet fuel recovery across the industry. How would you characterize those three buckets as drivers of that yield?

Tom Doxey, CFO

Yeah, so you think of the big initiatives that we've had that are unique to us. So seat assignments, extra legroom seats will be over a billion dollars of EBIT for 2026. And as we move into 2027, we've talked about that being, you know, a billion five or so in EBIT as we move into next year. We launched that in January. So, of course, you get a full year as you go to 2027. But we're just seeing the project, the product mature. We're getting better at the way that we market it. There's more familiarity with it. And it's resonated really well. So you've got that that's unique to us. bags as well. It's hard to believe that it's been almost 18 months since we've launched those. You may recall that we started operating and selling on the same day. So that was in May of last year. So there was a ramp up period with that. But that will be worth a billion dollars in EBIT for the company this year as well. So just those two initiatives alone, you can see north of $2 billion. Layer that on top of the incremental loyalty revenue that's coming in with our amended deal that we did with Chase, the earn a burn on the frequent flyer, the cost savings, all of those things. All of that is helping to continue to produce EBIT. But yeah, on the revenue side, all of those initiatives are going well and are contributing to that performance. So as I think about us and how we compare to others, you've got all the Southwest specific items, and then you've got all the rest of the, and maybe take two of your categories and put them into one, which is sort of this industry strength slash recovery from the increase in fuel. And I think go back to maybe the first quarter, and we were asked questions in settings like this, well, okay, you've had so much that you've been doing on your own, and hey, that's going well, but now there's all this kind of industry stuff that's layered on top. Can one plus one equal two? And we felt confident that it could, and we've shown that it has. And so we're seeing the magnitude of the improvement that's coming in from the industry-related stuff that's coming to us very much in line with what you're seeing with the other carriers, but the great thing for us is we get to stack that on top of, fully stack that on top of everything that was unique to us that I just described.

Speaker 2

Got it. And speaking of that industry one, if you will, obviously Jet Fuel is creeping back up to its high watermark that it hit kind of earlier this year. Again, you guys and the industry kind of responded by saying, hey, kind of we need to recover for this and pass through several rounds of price increases.

Tom Doxey, CFO

Do you feel like there's more opportunity to do that kind of if you hit new watermarks or even right now kind of how do you think about the current jet fuel environment and pricing for that i do i mean it's been it's been volatile what we've seen there's a lag of course right so you you see the volatility if it tends to be really steep and and the price of fuels moving up quickly both from the booking curve and just kind of a natural lag it takes a while for that to come but yeah what what we have seen is the ability to to recover a good portion of that i would expect that that would continue that If fuel remains high and it remains higher for longer, there will need to be more recovery that would occur there on the revenue side as well. And we're still, and these stats, you likely have heard this from others as well, but you still, you go back to 2019 and you look at where we are today, and on an inflation-adjusted basis, even after the increases that we've seen in unit revenues during this year, We're still not where most of the other products are on an inflation-adjusted basis. So I think there's still room to go.

Speaker 2

We met at our headquarters in June, and at that meeting, you noted that the percentage of passengers paying for ancillary products had increased from less than 20% historically to roughly 60% today. That stat kind of really resonated with me. And you said that 60% was not a ceiling. So how are you thinking about what that runway looks like in the coming years?

Tom Doxey, CFO

Yeah, in the end, so I don't know that we have a target. Sometimes we're asked, hey, do you have a target? Do you want to get to this percentage or that percentage? In the end, we're looking to maximize revenue and, of course, maximize earnings with it. Yeah, for sure. Yeah, great, 100%. So, yeah, I don't know that we have, like, a specific number that we're going to. But what I can say is what we're looking to do is to put – We're layering into the business product elements that will incent that buy-up. And we've done some of that already. We've talked about other things that could potentially be in the future. We've actually just announced lounges now officially. We've been kind of unofficially, worst-kept-secret, been talking about that for a long time now. But those are the types of things that as we continue to layer those elements into the product, we do it in our way and in a way that has and I think will continue to resonate really strongly with our customers and with people who have been choosing not to be our customers who are now choosing. I mean, I mentioned the 30% increase in corporate. Those are the type of stats that are showing that these things are resonating. And like I said, we're not done. So we just announced lounges. We'll continue to look forward to things that we think will resonate, whether it's the buy-up or whether it's just a product element in and of itself that will continue to bring people to us. Sometimes, you know, you go back like 18 months, and some of the conversations that we would have were around, they'd say, well, what about the share shift? The share shift, yeah. And I love the way that one of my peers, Andrew Watterson, answers this. He goes, oh, yeah, I'm glad you brought up the share shift. Let me tell you about all the share shift coming to Southwest because of all the things that we've done. And that's what we're seeing. It's exciting because there was this pent-up demand for things that the customers were wanting. And they're buying those things that there was a pent-up demand for. And like I said, we're not done. We've just announced lounges, and there's more to come.

Speaker 2

That was literally my next question on the share. How, is that share mostly coming in corporate, or is that coming on the leisure side as well? It's coming in both. It's coming in both.

Tom Doxey, CFO

Yeah, it's coming in both. But again, it's a combination of the pent-up demand that existed with the existing customer base. So there was that. It's people coming to us both on the corporate and on the leisure side. And in particular, the wallet splitting that could sometimes happen. You know, we're in Southern California today. Prior to assigned seating, there were more instances of somebody saying, look, I'll fly you from John Wayne here in Southern California up to the Bay Area or Sacramento all day long. I'll fly you to Texas. But if I've got to go to Baltimore, I don't know, I might fly on somebody else because I want to make sure that even if I'm a little bit late to the flight, that I'm going to get the seat that I wanted. And, of course, our boarding was based on when you got on the plane. And so the product is resonating a lot more, and what that should result in, and what it has been resulting in, is less wallet splitting that's happening as well.

Speaker 2

Got it. Maybe just a little bit of a sidebar here. Just take us behind the scenes, like 18 months ago, when you guys were like, hey, we're going to do all of these things, kind of entirely my personal view, but I think each of these initiatives would have been considered unthinkable for Southwest a few years ago. So the fact that you are doing all of them, have executed all of them, I think is pretty remarkable. But what was the thinking of the management team at the time? Were you guys just super confident that you had just this money left on the table and it would be, I don't want to say easy to do, but you had extreme confidence where you're like, let's take it as it goes? Or just give us a sense of the behind the scenes there.

Tom Doxey, CFO

Yeah, these things aren't easy to do. We have Lauren with us today, actually, who's our head of technology, our CIO. So she would probably be the first one to tell you about the complications that exist as you're needing to roll things out. But what you saw from the team was a resolve to get things done and get them done quickly, not let perfect get in the way of really, really good, and to get things out quickly, and then to iterate on those things quickly, but to get them out. But then what you also saw was confidence from the team, and that confidence continues, But you saw confidence from the team that we could get these things done as quickly as we can, or as we thought we would. And we did. We met the timetables, and we met the financial estimates as well that came from those things. And so, yeah, I think that's what you saw from the team was confidence and resolve to be able to get things done and not letting perfect get in the way of really good.

Speaker 2

You said in your first response that you did all of this while sticking to the Southwest ethos, which obviously was super important to you. Obviously, all these changes, there'll be a lot of chatter on Twitter and such kind of in the initial days. I think you guys had given us a net number, including some level of book away. Do you have a sense of how much happened versus your expectations? And do you know if the share recapture of yours is some of that book away coming back?

Tom Doxey, CFO

Yeah. Ultimately, what we saw was a net positive. And anything that occurred during that period was very, very short-lived. And the response that we've seen when you look at the numbers, again, I referenced the 30% year-over-year increase in corporate revenues. Stats like that, the net promoter score numbers that we look at to see where people are, what we're seeing is an engaged group that didn't go. So it's not as if they left and then they've decided a year later to join us again. They were there. What we're seeing is, and maybe, you know, one thing I do hear from some of our kind of highest tier folks is initially when you announced that you were going to do some of these things, I didn't quite know what to think. You know, this is the Southwest that I've loved for so many years. And I hear this all the time. I tend to try to sit right in front or right behind the exit rows. And not in the extra, I want our customers to pay for the extra legroom seats, so I'll sit kind of right. But I hear a lot of the discussion, and they'll talk to me about it, and they'll say that. They'll say, I was a little, and I didn't know quite what to think, but I loved it.

Speaker 2

Do you identify yourself on a plane?

Tom Doxey, CFO

Oh, I do, yeah. I introduce myself to the crew, and there's crew all along the way. So as I'm boarding airplanes, yeah, basically as I go through the plane, I'm not just telling the crew what my job is, but I'm generally telling all the passengers. But, yeah, so people will talk to me, and that's what they say, but I love this. Now that I've actually been able to see it and experience it, I love it. And so, yeah, I get the seat. I get the seat every time, you know, and I love what you're doing. Hey, I'm so excited. I can't wait to get a Starlink airplane. And more and more are coming in every week. So it's, yeah, I don't know that they ever left. But I do think that they were hopeful that the changes that we were making would still be something that would allow them to love the product. And I think that what we've been seeing is that that is exactly what's happening.

Speaker 2

But talking about new initiatives that customers will be enthusiastic for, give us a little more color behind the lounge decision. On the one hand, it seems like a little bit of a no-brainer. On the other hand, I'm sure it was a very considered decision involving a lot of data. Have your customers been asking you for this? How did you choose the first network of lounges? I don't think LaField is getting one initially. What's that pipeline going to look like over time?

Tom Doxey, CFO

Yeah, so we've announced, so every decision that we're making, we're looking at the data, we're looking at doing things that would be accretive to the business, and we want to make sure, like I talked about before, that we're not getting caught up in, you know, analysis paralysis on things either, and when something is clearly the right thing that we want to do, that we move forward and we do it. The lounges fit into that category. Of course, we're doing this in partnership with a great partner of ours in Chase. One of the things that we as an airline bring is a lot of access at the airport. We have a lot of the space, and so as we're looking at where we want to build some of these lounges, that's a key element that we bring. And then, of course, with Chase, we haven't built lounges before, but they have, and they do a great job with it. So there's this great synergistic partnership that we have, and we're building already on what is a great synergistic partnership. This is just one more layer of that. And as you think about the things that our customers are asking for, this has been at the top of the list. And we've announced four of the locations. We've said that it's kind of four plus seven and, you know, and likely more to be considered after that. I think if you, you know, if you looked at a map and while we've only announced the four locations, I'll make sure that I, I'm looking at the team to make sure I don't give away one of the cities that we haven't. But as you look at those four locations and then if you looked at a map and said, well, where would I think Southwest should have a club, it's going to appear very logical as we continue to announce more and more of these locations. And so, well, what does this bring? Well, it brings the ability, we've talked about having a premium credit card that we can have come in. What does that do? Well, that brings in higher FICO score customers, spenders, higher spenders. You tend to be top of wallet more frequently when you have a card that's like that. So all of that's great. But then it brings a halo, more of like an aspirational halo, to your entire loyalty program and to your brand. And so for all of those reasons, again, you've heard me, Bob, others talk about the fact that we're not going to do things unless we feel that they would be accretive to the business. For all of those reasons, we feel this will be accretive to the business. We're really excited about it and excited about who we're partnering with.

Speaker 2

I'll ask you if you want to break some news at the conference here. Southwest obviously has a very, very unique culture, very unique experience in the sky. What can we experience in the lounge? Is it going to be something similar? Do you have surprises for us? Have you seen a prototype? What's that going to be like?

Tom Doxey, CFO

Yeah, it's going to be great. And I have seen them. Yeah, we've had some different internal meetings where we've actually done walkthroughs and seen different things, and we've got mock-ups and designs of things. And construction has started in some of these locations. I think it's part of the reason it was kind of the worst-kept secret, because we were actually starting to do some of the work before we announced it. So these are real designs that are now being implemented. These are going to be great. You know, you look at who we're partnering with and you look at the type of lounges that they're building. This is going to resonate really well with people. Awesome. Great location. I think some people are going to be a little surprised, actually, when they say, oh, this is the Southwest Lounge. Oh, really? Okay. This is great.

Speaker 2

I was going to say, a great location for a future investor day, FYI.

Tom Doxey, CFO

That's a great idea.

Speaker 2

So speaking of poorly kept Southwest secrets, another one is international long haul. I think you guys have been sort of hinting at that for some time now. I think Bob Jordan kind of briefly referenced that at Laguna last year. Is that the last big initiative you guys have and kind of what we're looking at in terms of execution there?

Tom Doxey, CFO

Yeah, we've got a whole set of things that we're looking at. That is one of them. You think about, for that in particular, going back to my comment on aspirational elements of a loyalty program. I think that's the way you can think about those sorts of things. Now, we haven't made decisions on what we're going to do for that particular thing, but what you've heard Bob and me and others talk about is that we want to make sure that we're meeting the customer where they are, that the things that they're wanting and the things that we feel will be accretive for them and for our business that we're offering those things. Again, we haven't decided what we're doing with that particular item, but what we have said is that we're absolutely considering whether that should be part of the offering that we have.

Speaker 2

And in addition to that, the other thing that you briefly mentioned was premium credit card. It feels like that is a real opportunity for you guys. Talk about kind of, I mean, you don't have to give us numbers, but just how much have you sized? What is the opportunity there? And kind of how quickly can you exceed on that?

Tom Doxey, CFO

Yeah, we haven't publicly talked about any of those sorts of goals or estimates. So I think, you know, for this conversation, it's more around, you know, what something like that brings to us. And I'll go back to what I said before. The higher fee card that gives you that access tends to have you spending more, top of wallet, higher FICO score spenders, higher spenders to the airline and on the card as well. You know, we talk a lot about flight profitability as you look at the network. I think more and more you will hear airlines talking about city-level profitability that includes elements around the credit card and other loyalty things. And, you know, you may have parts of your network that are a little more profitable on the flight side, maybe a little less profitable on the card side, you know, some that are profitable on both. But you need to make sure that you're looking at that entire ecosystem there, just with how attractive these cards. I mean, these are the most attractive co-brand cards of any company that's going to be here, are the airline cards. And so the lack of the most premium level of that for us has been a hole for us. And so we're going to fill that.

Speaker 2

Speaking of filling holes, you guys, let's talk about corporate for a second, because you kind of spoke about gaining corporate share with the new initiatives, and kind of that's very clear. But corporate has been a real focus area for you guys long before you announced the initiatives, kind of literally coming out of the pandemic, right? So where are you in terms of corporate capture versus your expectations? What more levers do you need to pull there, especially with large enterprise accounts?

Tom Doxey, CFO

I think we punch above our weight when it comes to corporate. I think sometimes when, you know, an investor or an analyst or somebody will think about us versus somebody else, they think, well, they do more corporate. We do a lot of corporate today, and we haven't publicly talked about exactly where those levels are and what the mixes are, but we're very strong on the corporate side. What we have seen over the last six years or so with the pandemic is that shorter-haul corporate has been impacted more than kind of the longer-haul, multi-day-trip corporate. That quick day trip that I'm going to take from, you know, City A and City B isn't quite as prevalent. And we were a little more overweighted there. And some of the product elements that we lacked, specifically around seats, kept us from having more penetration into that longer-haul corporate. And so I think some of what we're seeing now is the fact that the product is resonating more. It's more relevant to that longer haul and what is the more kind of prominent business traffic that remains post-pandemic. And so that's an adjustment that I think is really helpful to us. And, again, I think the lounges will be helpful there, too. Again, lounges aren't a corporate product, but they will resonate with, you know, the Venn diagram now is different than it used to be. It used to be much more kind of corporate, but now there's a lot more leisure that's there, too. But certainly having that product element in lounges will be helpful to corporate.

Speaker 2

So when you think of your overall corporate position, you look at product, you look at lounges, you look at distribution. Do you feel like you are where you need to be to go toe-to-toe versus your peers on corporate share?

Tom Doxey, CFO

I think we are getting there. I think there's more opportunity that's ahead of us. As these product elements come in, you look at some of the distribution and how we're set up, some of this is pretty recent for us. So, yeah, I think there's maturation still to come for us that maybe we're another carrier will be a little later in that cycle. I think we're on the early side of that one.

Speaker 2

So one of the kind of broad themes out there, maybe to switch gears a little bit and talk about some of the financials specifically, is the fact that, again, you mentioned earlier that you get to stack what's happening in the industry on top of what you're doing. But again, it's no surprise to people that your comps will start getting more difficult kind of as you start lapping some of these initiatives. So how do we think about what that almost net number on yield looks like, what that net number on margin looks like? Obviously, you've given us EBIT targets. But A, how much upside do you have to that in terms of more to come in terms of dry powder, whether it's boundaries or international or whatever? And B, kind of how do we think of how that comp kind of progresses as well?

Tom Doxey, CFO

Yeah, I think it's not just some of these bigger initiatives that would maybe, you know, result in like a media headline, like, you know, like an international or something like that.

Speaker 2

Those are smaller ones as well.

Tom Doxey, CFO

Yeah, I think it's more around the way that we're running the business today, the systems that we have to use it. You know, our revenue management system, for example, is set up to be much more system-driven and a lot less kind of segment-driven. And I think that's helped us to iterate more quickly and to do more within the broader network that can be more accretive. We're on the earlier end of a lot of these sorts of initiatives. And so as you think about the next couple of years, I think back even to an internal meeting that we had just two or three months ago where we're going through, all right, now here's the next list. And the next meeting we'll have, there's the next list and the next list. There's a lot of things relating to the way that we segment the business, the way that we're marketing, the way that we can market individually to customers as well, and to give them offers that will resonate with them individually. Those are things that we are on the early end of. So, yeah, there's some, like, headline, kind of potentially really fun headline media sort of stuff that's out there, and that's great too, but there's a whole bunch of other, I don't even know that I'd call it blocking and tackling, but just sets of initiatives that we're working through that will continue to drive performance in the business.

Speaker 2

Speaking of headline gathering and kind of focusing on some of the other things, lost in the middle of all this initiative talk is the fact that your operational reliability has been excellent for the last couple of years. Obviously, you had the big Christmas thing a couple of years ago, and then people are like, oh, Southwest, or whatever. Four years ago. But literally since then, kind of your operations have been incredible. Your IT performance has been incredibly strong as well. So talk to us about how much effort is going into ensuring the basics, if you will, while you work on this new stuff on top.

Tom Doxey, CFO

Yeah, there's a ton of effort that goes into all of that. And you're right. So the Wall Street Journal rankings, you look at last year, we were number one. We're trending number one so far this year as well. And what I like about that one is it is just a broad – it's great to be in a financial setting. It's sort of the portfolio, right? And it has everything from customer complaints to mishandled bags to canceled flights to on-time performing. It goes through kind of the whole portfolio. It's a balanced look at the operation. So to be able to be number one there – now, of course, it's a great customer thing to do. The biggest correlator with our net promoter score is on-time performance. And you get a little bit of grace in there, but once you kind of get past a certain amount of time being late, it falls off pretty quickly. So the best thing you can do for your customer, and financially, really, because the same is true financially. Once you start to have cancels and other things, it starts to become really expensive, and paying extra crew costs and those things, is to run a really good operation. So, yeah, we've modernized so many of the systems that we have within the company. They help us to make better decisions. If you go to our airports today, and in fact, this would be a fun thing for you and I to do one time. We'll bring you to one of our airports and just have you talk with the folks, the leaders on the ground, and say, talk to me about how this is different than how you used to do this three, four, five years ago. And I'll just sit back and let them talk to you. And they will walk through equipment and process and technology and tools that they have there that are helping them. This doesn't just happen by chance. It comes because of investments that we're making and process improvements that we're making. So people like Justin Jones and Andrew Watterson and so many others that are, you know, part of the operational team. You mentioned Lauren and the investments that we make on the technology side. Her team does a fantastic job, and she's here with us now at the conference. Those are the things that we're doing. It's not happening by chance. It's happening because we're being deliberate. You have to do those things. Because if you don't do those things well, then nobody wants to hear about all the other things that you're trying to do to improve the business. The fundamentals have to be fixed first. I feel like we're in a position of strength to be able to continue to move forward.

Speaker 2

So all of this goes down into financial performance. So what does this mean in terms of, again, you can talk about pick a horizon that you want, right? So back half of the year, going from the first half of the year, obviously jet fuel is a big factor to consider. How would you talk to investors and remind us about some of the big booming parts here, about first half and second half, and how you're thinking about 27 at this point as well?

Tom Doxey, CFO

Yeah, so I mentioned before that as we moved into the fall, I would say that revenues have exceeded the expectations that we had, you know, even just a couple of months ago. The fall has held up really, really well to the point where that in spite of the incremental fuel expense that we have, even for this quarter, that we have the ability to still hit the EPS guide that we had for the third quarter. So what that means is that we're seeing, you know, really good strength on the revenue side to be able to offset that as that's coming in. And then as we move throughout the rest of the year, I mean, we'll see what happens ultimately with fuel. I do think, you know, likely, I mean, the obvious thing that you've seen us do this year, you know, we started, you know, kind of the 2% to 3% year-over-year capacity increase for 2026. And you've seen that come down. We've cut that about in half-ish. and we've done that because fuel's been higher and so as fuel's higher, that's the natural response. So if fuel is higher for longer, I think that's a natural response that you see is that you trim some of that capacity up. Sure, makes sense.

Speaker 2

Any questions from the audience? We have one back there. Could you just talk just briefly about the kind of the sequencing, timing, and deployment of the Dash 7 in your fleet kind of through this year or maybe next year?

Tom Doxey, CFO

Yeah, so I was up in Seattle maybe a month or so. I actually saw some of the Boeing leadership team here just a few minutes ago. They're here at the conference, too. And we were there for the sign-off for the MAX 7. That was really exciting. Of course, we're the largest customer there. We have 27 of those airplanes that are already built that have been in storage. We've been working with Boeing, actually, for like a year now to be able to bring those to the current spec. And so that work is happening. As we get kind of around the end-of-the-year time frame is where I think some of those airplanes start to deliver, and then early next year is when those start to go into service. We have been replacing, you know, most of our retirements have been 737-700, some of our oldest airplanes, and we've been replacing those with 737 MAX 8. So it's a 137-seat airplane with a 175-seat airplane. This course is a lot more efficient as well, not just the extra seats and the extra revenue. And the MAX 7 will give us an ability kind of in the 150-ish sheet range to be able to have kind of that middle ground. So flying out of places, well, like the closest airport here, John Wayne, short runway, to have more of the range with a larger-gauge airplane and do that with the efficiency that comes with the fuel burn and then the extra seats will be really accretive to the business. So, yeah, you'll see those start to roll out. we'll take both those 27, but also start to layer in new delivery Max 7s off of the line at Boeing that will be intermixed with the Max 8s that we'll continue to take.

Speaker 1

Yeah, one up, yeah. Just wondering here, I know you guys have identified hundreds of million dollars of incremental cost savings since the beginning of the year, all of which is incorporated into the 2026 outlook. Wondering how much additional opportunity is there and how we should be thinking about it for 2027 and then just CHASM in general for 2027.

Tom Doxey, CFO

I love that question. I think we fundamentally changed the way that we are just looking at the day-to-day management of the company. That hundreds of millions that I mentioned, I think this was a response on our last earnings call. I think that was one of my responses. And it's happening throughout the business. It's every leader everywhere. We're working on our 2027 budget now. Two or three weeks ago, I was over in our operations building, and we had the operations leaders who were in there talking to their plans for 2027. And I just love the way that they're talking about their business. They're talking about taking care of their people. They're talking about keeping their people safe, all the things that you would expect an operations leader to talk about. And as they're doing that, they're talking about how they can make sure that they're running their business in a really efficient way. So this isn't, oh, well, let's have the finance teams coming around again to try to pull some more cost savings from us. It's not that. It's leaders threading the entire business looking at ways to be able to manage efficiently. And sometimes we're spending money to ultimately achieve that savings. Like, well, if we can buy this equipment or if we can build this tech tool, let's spend $10 million on that because if we do that, that's going to make it so much more efficient in whatever area of the business. And airlines are so complicated, the operation is so complicated, that little changes like that can make significant differences. And so, yeah, I think it's a mindset shift, really. And as we look to 2027, that's why I brought up the budget discussion. It's happening. That is how we are talking about 2027. And we should anticipate that the view, the way in which that we're looking at costs as we move forward is going to stay how you've seen it.

Speaker 2

I think we've had really good cost performance. Maybe on a related note, can you just address CapEx as well? Because obviously new planes, lounges, et cetera. What is the trajectory of CapEx for the next few years?

Tom Doxey, CFO

Yeah, so it's going to be very aircraft dependent. It's a very NPV positive thing for us to be able to bring a Max 8 or now a Max 7 into the fleet to replace these older aircraft. And so, you know, we're going to think about we have a really great balance sheet. We've got really low debt balances, but as you think about the way in which we would deploy capital, ensuring that the balance sheet is remaining strong, it's very strong already, but assuming that it remains strong, and then we invest in the business, and then we've got returns for shareholders. And so our operating cash flow has increased pretty significantly as we've had these changes that have come in. And then the walk from operating to free will largely be dependent because our non-aircraft CapEx is relatively steady. And so it largely will be dependent on the quantum of the aircraft transactions that we have. That said, maybe one last part of this answer would be, as you think about our debt-to-EBIT-DAR ratios, we've talked about ensuring that we stay between one and two and a half, keeping solidly investment-grade. The more we're building up EBIT-DAR within the business and all these things that we're talking about, the more headroom that that gives us to be able to return capital to shareholders that way, too.

Speaker 2

Tom's going on at Southwest. Very, very exciting story. I'm very excited to see the lounges when they're open. But thank you so much for being here. Yeah, thanks for having us.