Earnings Call Transcript - LUV Q1 2026

Operator, Operator

Hello, everyone, and welcome to the Southwest Airlines First Quarter 2026 Conference Call. I'm Nick and I will be monitoring today's call, which is being recorded. A replay will be available on southwest.com in the Investor Relations section. Operator Instructions. Now Danielle Collins, Managing Director of Investor Relations will begin the discussion. Please go ahead, Danielle.

Danielle Collins, Managing Director, Investor Relations

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.

Robert Jordan, President and Chief Executive Officer

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 $0.45 was in line with our guidance in January and represents a significant year-over-year improvement from a loss of $0.26 per share, or an adjusted loss per share of $0.13, and these results were delivered against the backdrop of significantly higher fuel costs, which represented a $0.22 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% from the first quarter of 2025. Now that the contributions from 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 like 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 strengths: the largest domestic network, the most nonstop flights, and a #1 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 is producing top-tier industry financial results. Looking deeper at the results, demand remained 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 nonfuel costs, and driving efficiency across the business. And you saw a portion of that come through in our first quarter CASM-X 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 O'Hare and Dulles, where we had a handful of flights at both airports that were underperforming. We entered 2026 with a disciplined capacity plan, and now expect full 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 $0.35 to $0.65 using an average fuel price range of $4.10 to $4.15 based on the forward curve as of April 16. The EPS guide represents significant expected earnings and margin expansion year-over-year. In closing, while fuel is an external factor, and we are 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.

Andrew Watterson, Chief Operating Officer

Thanks, Bob. The first quarter was an important one for our operations 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 27, 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 at least 9.5%, reflecting the contribution from our new product offering, as well as broad strength across the network. Operating 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 operation in Chicago Midway, Reagan National and Baltimore, and redeploying 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, 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 the existing base. We 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 their continued dedication. With that, I'll turn it over to Tom.

Tom Doxey, Chief Financial Officer

Thanks, Andrew. We continue to demonstrate strong cost discipline to start the year with first quarter CASM-X 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 had 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 U.S. airlines during the first quarter. With our cost discipline, initiative contribution, revenue strength and operational excellence, we were able to deliver the margin expansion that Bob outlined earlier. We ended the quarter with $4.8 billion in liquidity and a leverage ratio of 2.2x. 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 that 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 CASM-X 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 will 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.

Danielle Collins, Managing Director, Investor Relations

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 one or two questions back to back at the onset.

Operator, Operator

Operator Instructions. And the first question will come from Mike Linenberg with Deutsche Bank.

Michael Linenberg, Analyst

My 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%? And then just my second question to Bob. Just thoughts about potentially competing against the government controlled or a government-owned carrier. I mean, whether it's sound industrial policy or not? So I'll let you roll that one over.

Andrew Watterson, Chief Operating Officer

Yes. Thanks. It's Andrew. So I'll start with the first one. I'm not going to break down the new product by fare bucket, but I will say that, obviously, we had an 11.6% yield increase year-over-year. And at least half of that came from people who 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.

Robert Jordan, President and Chief Executive Officer

Mike it's Bob, and on the second — 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 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 got an 8-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 product, and that is where all of our focus is.

Operator, Operator

The next question will come from Jamie Baker with JPMorgan.

Jamie Baker, Analyst

A couple for Tom. So the first question has to do with the second quarter RASM guide. I realize you hadn't previously given us the second quarter 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 start, we've seen several points in second quarter RASM improvement on your competitors, but your second quarter guide seems, kind of, in line with what we were thinking before the war. Maybe 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 your traffic liability. It's flat year-on-year. I know there was some language in last night's 10-Q. Maybe the way to clear this up would be — and I don't know if you have it 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 squaring a flat ATL out with such strong revenue growth is — well, it's difficult for me, and we continue to take a lot of questions on it.

Andrew Watterson, Chief Operating Officer

Jamie, it's Andrew. Tom — give me the first one, he'll take the second. 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 RASM guide.

Tom Doxey, Chief Financial Officer

Yes. 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 moved toward, as we have this new agreement with Chase, 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.

Operator, Operator

The next question will come from Conor Cunningham with Melius Research.

Conor Cunningham, Analyst

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 how straightforward recapture is in general. So if you could just talk about that. And then, Tom, the capital allocation strategy has clearly changed a fair bit. Your free cash flow profile probably took a step back with the rise in fuel. So just trying to understand 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 frame up the changes in how you think about capital allocation?

Robert Jordan, President and Chief Executive Officer

Conor, thanks. It's Bob. I'll take the first, and then Tom will take the second. Just on the fare environment generally. Certainly, we've seen a willingness to move fares along. There's been constructive pricing behavior. But at the end of the day, this 'percent of fuel recovery', which is really what you would put on top of your trend, is going to be dictated by market conditions, not by some academic formula, or target of calculated recovery. 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 upside to that, then that's upside to our guide. And bottom line, we're focused on what we can control. We're taking actions against pricing like bag fee increases. 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 fare environment will ultimately play out based on market conditions.

Tom Doxey, Chief Financial Officer

And Conor on capital allocation, as we mentioned in the prepared remarks, having a strong and efficient investment-grade balance sheet is a key strategic advantage. 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 guardrails that keep us there. We've been very consistent about what those guardrails are around liquidity and where we are relative to that this quarter. And then we've actually floated down on the debt ratio despite being in, I think, a more challenging environment as the business and the EBITDA generation that has occurred in business has improved, we've actually floated down on that debt ratio. Maybe as a side note, that ratio is a gross debt-to-EBITDA ratio. And so it's, I think even compared to some of the others out there, 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. 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 we'll just follow that and stay within our guardrails.

Operator, Operator

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

Catherine O'Brien, Analyst

So my first question, really, it's hard to tease apart the macro from the initiatives, 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 in buy-up in 1Q puts the launch of your new seating products. Can you just break down how much of that is cash sales, versus loyalty points being redeemed or credit card perks?

Andrew Watterson, Chief Operating Officer

The trends 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 and new customers. We're seeing an acceleration of new unique customers in our corporate channels which indicates a desire to fly Southwest Airlines. Within the same existing network of accounts we've seen buy-ups to the higher fares as corporate policy allows them to buy up. So those numbers we quoted are indicative of consumers behaving like we anticipated. And as far as the redemptions, I think cash has accelerated more than redemptions on the fare products, which is consistent with what we wanted to do. We moved to more variable burn on our reward awards last year. That tends to push the redemption mix down and the cash mix up.

Operator, Operator

The next question will come from Ravi Shanker with Morgan Stanley.

Ravi Shanker, Analyst

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 EPS for the full year? And I think you have pointed to upside to that? And maybe as a follow-up, what inning do you think you're in when it comes to monetizing some of these internal initiatives and kind of how much do you have left in the tank?

Robert Jordan, President and Chief Executive Officer

Yes, Ravi, thanks so much. The short story is, but for fuel, everything is on track and performing at or maybe slightly better than we expected. It's really just a story of fuel. It's a $0.22 headwind in the first quarter. It's about a $1 billion headwind in the second quarter or roughly 10 points of margin. So it's very material. But yes, the only change to how we were thinking about the full year right now is fuel. I do 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 could still hit the $4. It depends on 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 day to day. On your second question of what inning we are in with respect to optimizing the current initiatives: I do believe we have a ways to run. Our original forecast or plan was to get to full run rate as these things bake in over time based on the booking curve, to get to run rate here in the third quarter. And then we have opportunities to optimize fare product buy-ups, optimize the way we think about seat ancillaries. On top of that, we're going to continue to enhance the product. You saw the Starlink announcement; we will continue to make a push into business who love the new product. The fact that March revenues on the business side were up 25% is a huge indicator of that. Our run rate was expected in the third quarter on the initiative performance, and then we have room from there.

Operator, Operator

The next question will come from Scott Group with Wolfe Research.

Scott Group, Analyst

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

Robert Jordan, President and Chief Executive Officer

Yes. The first question is hypothetical in nature. With the rise of fuel, no doubt, it's a more constructive backdrop in terms of pricing. So yes, it's fair to say that the pricing environment is stronger, and we didn't give you a range beyond at least $4. It's a more constructive fare 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 unit costs come in at 2.3% increase, and then you had a 1.2 point headwind in that from seat removal. So the cost discipline is structural and is helping here at Southwest as well. Which is the whole point: revenue trends will have to address fuel, but our $4 is absolutely not off the table. 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 over a period of time, it just made no sense to hedge. You can't predict an extraordinary circumstance like a war. If we could, you'd hedge and then you wouldn't. It's unreasonable to think you could time that. The fact that many of us are relatively unhedged does put the industry in a position where we're all taking actions to deal with rising fuel, which is why you're seeing a constructive pricing environment right now.

Operator, Operator

The next question will come from Duane Pfennigwerth with Evercore ISI.

Duane Pfennigwerth, Analyst

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 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?

Tom Doxey, Chief Financial Officer

Duane, I'll take your first one on the fleet side. You've seen the numbers that we've talked about for this year and the 60s for aircraft coming in new from Boeing. No change there. We're feeling confident about what we're seeing out of Boeing every month. Things seem to be getting better and better there in terms of their ability to deliver on time. 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 both for this year and the high-level commentary that we've given for the next several years around capacity. No major changes there. So the quantity of retirements really will just depend on the timing with which those new aircraft deliver, which again are becoming more and more predictable by the week.

Robert Jordan, President and Chief Executive Officer

Duane on your second. Organizationally, I think there's been a lot of organizational efficiency put into place here at Southwest both on the front line and especially on 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 and add attributes to our customer proposition. We're moving at a pace that I've just not seen here at Southwest. Our ability to deal with any issue, I think, is better than it was a year or two ago. We don't comment on what consolidation might or might not 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. But if some of that were to become real, obviously we would take a look and decide what our response would be. We simply don't comment on those things today.

Operator, Operator

The next question will come from Atul Maheswari with UBS.

Atul Maheswari, Analyst

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 some rationale for the implied capacity growth acceleration in the back half in this fuel backdrop? And then as my second question on the cost out performance. 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. And if I can add just one quick one: what should we think about CASM-X in the back half on the 3% growth?

Robert Jordan, President and Chief Executive Officer

Atul, it's 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 and capacity plan of 2 to 3%. We've been modestly trimming that as we move throughout the year. I would call that normal demand shaping where you take a look at flights that don't make sense anymore, and you either cut that capacity, or you cut that capacity and then redeploy. We've also made aggressive moves like you saw with suspending service at O'Hare and Dulles to take underperforming markets and move capacity to markets that are performing, such as San Diego and Nashville. We've taken our second quarter capacity down, as you saw. We're now expected to grow roughly 0.5% in the second quarter. We'll continue that close-in demand shaping and capacity activity in the third and fourth quarters. So I wouldn't read the back half as a final number today. We started with a conservative, well-thought-out capacity plan at 2 to 3%, and that's now become about 2%. You're seeing others come back to that level rather than we going above others.

Tom Doxey, Chief Financial Officer

Atul, on the cost question: the cost performance you're seeing is structural and represents work happening across many teams, not related to timing or one-off transactions. Some of the bigger buckets: people expense represents just shy of half of our cost structure, so it's important we operate efficiently there. Running a high-quality operation is a cost-efficient thing when done well, and we've improved efficiency in the way we operate. Another bucket is technology: we've made significant investments and built tools that allowed some catch-up earlier, and now give us the ability to back off a bit while maintaining a strong technology transformation trajectory. Third is maintenance and fleet: as we replace older, less efficient aircraft with new 737 MAXs, we optimize component maintenance and other activities more efficiently. We are among the best in the world at that type of optimization, and you're seeing that show up quarter after quarter.

Operator, Operator

The next question will come from Savanthi Syth with Raymond James.

Savanthi Syth, Analyst

Maybe, just curious what the aircraft sales benefits were in 1Q and expected in 2Q in the P&L, in terms of understanding what the core cost is? And maybe for the second question, just how are you thinking about aircraft sales going forward? Because it feels like as you catch up to this delayed MAX delivery schedule that we will see this continue for a few years yet. So just kind of curious your thoughts there.

Tom Doxey, Chief Financial Officer

Thanks, Savi. We had five aircraft sales in the quarter: three 737-700s and two 737-800s. Those five aircraft resulted in about a $30 million to $40 million book impact. So not super material to the cost numbers that you saw. Everything you're seeing in the cost numbers is around the structural changes that we're making in the business.

Operator, Operator

The next question will come from John Godyn with Citigroup.

John Godyn, Analyst

Bob, I wanted to follow up on the topic of consolidation. And it's not about 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 think more historical context and plugging into the company's philosophy today rather than any commentary on what's going out there right now?

Robert Jordan, President and Chief Executive Officer

Yes, John, thanks for the question. It's pretty basic to my mind. Going back and reflecting on AirTran, number one, the pieces that get put together have to result in synergies. They have to result in goodness in terms of geographies served. You have to be compatible enough thinking about things like aircraft type. At the end of the day, if it doesn't make sense financially and operationally, it doesn't make sense to pursue. Second, you've got to have a chance to pass regulatory scrutiny and get it approved. If there's too much overlap and your odds of approval are too risky, it's not something you can pursue. We've always been pro-competition and pro-consumer here at Southwest. So the combination has to be something that's good for customers. It has to add geographies, add to the network, potentially add products, and serve customers in a better way. That's how we thought about AirTran. It met those tests. The geographic combination made sense. The synergies were there, and the cultures were similar. At the end of the day, that was a great thing for Southwest Airlines. It can't be simply because it's a good time to do something or because the rest of the industry is doing something. It has to make sense fundamentally.

Operator, Operator

The next question will come from Thomas Fitzgerald with TD Cowen.

Thomas Fitzgerald, Analyst

Just curious on — within the outlook for 2Q RASM, or even broadly over the balance of the year, do you anticipate load factors getting back up into the 80% range? There's one concern we hear a lot from investors that with load factors longer in the 70% range there's a risk of share loss in some of the more competitive markets?

Andrew Watterson, Chief Operating Officer

So if you look at our Q1 RASM and you put it back to Q1 of 2019, you see our RASM on a comparable basis has outperformed the carriers to report so far, particularly the big three. That's the metric that matters. Full flights do not necessarily equal profitable flights. One of the most dangerous 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 for us on a year-over-year basis and on a multi-year basis. It is working for us. We'll continue to focus on that. If that means load factors move, so be it. In our calculations we look at the incremental cost to carry as well as the incremental revenue we get as we price and accept or reject demand every day. For us, it's working. We're seeing extraordinary yield traction right now and that's driving higher RASM, which we will pursue.

Operator, Operator

The next question will come from Brandon Oglenski with Barclays.

Brandon Oglenski, Analyst

Maybe if I can just follow up on that because there's a view that a high-teens RASM guide is somehow indicative that Southwest is incrementally losing share. Do you want to comment on that? And then how dynamic have you gotten in pricing these incremental products that you just haven't had before? Is there more upside to come as you figure out what value people put on these products?

Andrew Watterson, Chief Operating Officer

I'll start. You're growing slower, as Bob mentioned, so therefore your share will drop and that should be fine. Look at the number of people on board your aircraft compared to pre-pandemic: the number of people on aircraft is flat to up. Our average aircraft size is about 160 seats, while some of the big competitors are in the 120 to 130 seat range, so fleet and aircraft size dynamics matter. I don't think it's anything inherently concerning for Southwest. All the metrics we talk about indicate we're attractive and incrementally more attractive with these new products. We're monetizing mostly on the back of yield in a high-fuel environment, and that is the path to stronger financial results.

Robert Jordan, President and Chief Executive Officer

I want to add perspective. The narratives from some critics over the last 18 months have ranged from 'Southwest won't change' to 'Southwest can't execute changes' to 'customers won't buy the new products' to questions about accounting and market share. If you step back and look at the results: terrific product demand, best net margin among the large U.S. carriers, a 17.5% unit revenue growth guide in the second quarter which is exceptional, and business revenue up 25% in March. The transformation is working. Customers love the product and it is transforming our financial results. I would be skeptical of narratives that ignore these strong outcomes.

Operator, Operator

The next question will come from Sheila Kahyaoglu with Jefferies.

Sheila Kahyaoglu, Analyst

Maybe related to all the fuel comments and capacity comments, Bob. At what fuel price do you make further changes to capacity? And as a follow-up to that: how do we think about when fuel prices impact your aircraft sales or deliveries and how you think about changing them for how long they stay at these elevated levels?

Robert Jordan, President and Chief Executive Officer

It's hypothetical to call an exact fuel price at which we'd make further capacity changes because fuel moves day-to-day sometimes dramatically. We are seeing constructive fare movement and pricing response across the industry, but you can't predict exactly how fast and how much you can raise fares without risking demand destruction. We came into the year with a disciplined capacity plan and we'll continue to be aggressive in redeploying capacity to better-performing markets. If fuel moves up significantly from here, we would take further actions, but trying to specify those actions now would just be speculation. We will be aggressive and nimble.

Tom Doxey, Chief Financial Officer

On aircraft, having such a large fleet of mostly unencumbered, owned airplanes gives us lots of flexibility. That will be an output of how and where we want to grow and at what levels. The flexibility is there to retire or retain aircraft to adjust to whatever the environment might be.

Operator, Operator

The next question will come from Daniel McKenzie with Seaport Global.

Daniel McKenzie, Analyst

So my question is similar to a prior one trying to get at M&A philosophically. How important is the investment-grade rating? Is that something you'd ever be willing to put at risk temporarily if a transaction checked all the boxes you talked about, Bob? And secondly, Andrew, Southwest is doing so much on merchandising. Going back to the question about how much room is left in the tank: the revenue upsell at the time of sale seems compelling and is communicated well. But how big is the upsell opportunity after the sale, what are you doing there, and what percent of revenue could that ultimately be?

Tom Doxey, Chief Financial Officer

Dan, I'll take the first one. The investment-grade rating for us is a differentiator. There are only a few airlines globally with an investment-grade rating. As we evaluate opportunities and decisions, staying within our guardrails that preserve that rating is an important filter for us.

Andrew Watterson, Chief Operating Officer

On your second question, when we originally gave some of our values for initiatives like extra legroom, we expected improvement as we bake things in from this year into next. So there's still upside to come. Time-of-sale upsells are showing very good traction as we indicated. There's also a sharp inside-the-week-before-departure booking curve and we've deployed dynamic pricing tools to capture value there. We expect benefits there and we continue to optimize. Overall, it's working better than we expected and there's implied room for upside beyond our initial business case.

Operator, Operator

The next question will come from Christian Wetherbee with Wells Fargo.

Christian Wetherbee, Analyst

I just want to make sure I understand this. Since March 1, how many fare increases have you put through? Just, how many have you participated in the industry to give a sense of how that's played out?

Andrew Watterson, Chief Operating Officer

I count five broad industry-wide fare moves since March 1 and another one underway today. Those all stuck, which means all carriers have participated.

Operator, Operator

The next question will come from David Vernon with Bernstein.

David Vernon, Analyst

If you look at the Rapid Rewards information in the earnings release, enrollments were up 37%. Is there any color you can give us around how the card program is performing as far as total spend or sign-ups for the card? Just trying to figure out how the card program is performing during this period.

Andrew Watterson, Chief Operating Officer

I would say we saw improvement with the rollout in the middle of last year of the new card. Our co-brand card revenue was up approximately 8% year-over-year, which I think is solid, especially given we don't yet have a high-fee credit card which has been a source of much of the gains across the card industry. We're encouraged that without that element we're at about 8%, and we expect that to accelerate if we can offer that kind of product.

Operator, Operator

The next question will come from Christopher Stathoulopoulos with SIG.

Christopher Stathoulopoulos, Analyst

On demand elasticity and potential demand destruction, could you contextualize parts of your network that are perhaps more resilient than others? Whether inherent pricing power due to network architecture or otherwise, as we consider some weakening in parts of the recovery, which parts of your network are more resilient or have inherent pricing power?

Andrew Watterson, Chief Operating Officer

This is Andrew. We are seeing extraordinarily strong fares and demand across the entire network, across all customer segments and travel types. The only places we've seen localized weakness are in markets like Hawaii due to weather and some political activities, and even those have seen sequential improvement in the last couple of weeks. When we say broad-based, we very much mean broad-based.

Robert Jordan, President and Chief Executive Officer

I would add that the fundamental change in our financial performance and margins gives us greater flexibility to manage markets. When markets flip from performing to underperforming, that has a very different implication for us now that we're producing top-tier industry margins. We're better able to redeploy capacity and make disciplined decisions.

Danielle Collins, Managing Director, Investor Relations

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

Operator, Operator

And the next question will come from Michael Goldie with BMO Capital Markets.

Michael Goldie, Analyst

Going back to costs for maintenance expense, is the performance that we're seeing driven by delivery of new aircraft and then divesting older equipment, or is anything else changing that's driving that maintenance performance? And then just a 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?

Tom Doxey, Chief Financial Officer

Thanks, Michael. On the maintenance side, several buckets contribute. The ability to be efficient in retiring a fleet type is certainly part of it, especially as we transition from the 737-700 to new MAX aircraft. That is a contributor and will continue as we bring in hundreds of new airplanes on order. Apart from that, there is efficiency in how we're managing the supply chain and other elements that contribute to maintenance expense being efficient. On headcount, much of our headcount expense is variable. A lot of the headcount is front-line and tied to flight operations. We want the right number of people in the right places to avoid premium pay and inefficiency. On the indirect side, year-to-year we're keeping headcount dollars flat, and through attrition you might see headcount come down slightly to keep dollars flat over time.

Danielle Collins, Managing Director, Investor Relations

That wraps up today's call. We appreciate everyone for joining us.

Operator, Operator

The conference has concluded. Thank you all for attending. We'll meet again here next quarter.