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Lawyer-turned-entrepreneur Herb Kelleher and Texas businessman Rollin King launched Air Southwest in 1967, later renaming it Southwest Airlines. The low-cost carrier now operates a fleet of more than 800 planes, exclusively Boeing 737s, and serves destinations in 42 U.S. states. Its international routes focus on nearby countries such as Mexico, Jamaica, and Costa Rica, though the airline has applied for approval to expand into Europe. In 2026, Southwest plans to end its long-standing open-seating policy—one of several changes proposed in response to pressure from activist investor Elliott Investment Management.

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Southwest Airlines (LUV): Company Profile, Stock Price, News, Rankings

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Southwest Airlines

southwest airlines

Hello, everyone, and welcome to the Southwest Airlines Second Quarter twenty twenty five Conference Call. I'm Gary, and I'll be moderating today's call, which is being recorded. A replay will be available on southwest.com in the Investor Relations section. After today's remarks, there is an opportunity to ask questions. Now, Lauren Yett from Investor Relations will begin the discussion. Please go ahead, Lauren.

Thank you. Hello, everyone, and welcome to Southwest Airlines' second quarter twenty twenty five earnings call. In just a moment, will share our prepared remarks, after which we will move into Q and A. I'm joined today by our President, CEO and Vice Chairman of the Board, Bob Jordan Chief Operating Officer, Andrew Waterson and Executive Vice President and CFO, Tom Doxy. A quick reminder that we will make forward looking statements, which are based on our current expectation 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. Our press release with second quarter twenty twenty five results and supplemental information were both issued yesterday afternoon and are available on our Investor Relations website. And now I am pleased to turn the call over to you, Bob.

Thank you, Lauren, and thanks to everyone for joining us today. Southwest is on a transformational journey, the largest in our history as we work to evolve our product and deliver increased value for shareholders and more choice for our customers. Our plan remains on track and I have high confidence in our transformational journey and the significant value it brings. And that value accelerates this year and then more meaningfully in 2026. Additionally, I'm happy to report that we are seeing signs of improvement in industry demand.

Changes and enhancements are being implemented very rapidly. In first quarter, we amended our agreement with Chase. We implemented enhancements to our Rapid Rewards program and launched Expedia, which continues to exceed our expectations. We began twenty four hour operations with our first Redeye flights and we launched our partnership with Icelandair. We accelerated our cost reduction plan and continued to execute very well on cost with broad based cost discipline across the company.

Moving to the second quarter, the pace and the quality of execution continued. We began charging check bag fees. We reintroduced the expiration of flight credits and implemented our basic economy product and enhanced fare structure, which lays the foundation for meaningful product differentiation when assigned in premium seating become available. Those changes were announced in March and successfully launched in less than 100. I'm just extremely proud of our operations, commercial and technology teams for their work to support an exceptional operational rollout.

The revenue contribution from bag fees has exceeded our expectations so far and we've experienced no negative impact to the operation. Additionally, during the quarter, we began retrofitting aircraft for extra legroom seating with about a quarter of our fleet now modified. Moving on to the third quarter, earlier this week, we announced that we will begin selling a signed and premium seating on July 29 for flights beginning on January 27. We announced service at St. Thomas, will begin operation early next year.

And just this morning, we announced new and enhanced benefits to our co brand credit cards offered through Chase. These benefits line with our new product offering and are designed to incentivize increased spending with perks like MorePoints for everyday spending on things like groceries, gas and dining purchases. And I'm pleased with the pace of the execution and we are not slowing down. Our initiatives will continue to roll up and to ramp and we expect them to deliver a more meaningful contribution in the fourth quarter of this year and a much greater contribution in 2026 once we began operating assigned and premium seating along with this year's enhancements. And I want to reiterate that our current initiatives are not the endpoint in our product strategy and evolution.

As we've stated before, we are committed to evolving further to meet the needs of our current and our future customers. Turning to the macro environment, industry demand stabilized in the second quarter and while it's early our recent bookings show clear signs of improvement. This improving demand environment along with moderated capacity in the industry and accelerating ramp up of the contribution from our Southwest specific initiatives provides a constructive backdrop for the second half of the year and into 2026. We have provided an updated full year EBIT guide of 600,000,000 to 800,000,000 and a reconciliation to our previous guide of 1,700,000,000 This includes nearly $1,000,000,000 drop from the precipitous decline in the macro environment that's being felt by the industry net of some inflection back up the rest of the year and a $100,000,000 decrease from higher fuel costs with our 1,800,000,000 portfolio of initiatives and relative domestic unit revenue outperformance continuing to drive incremental value for the year. Our updated full year EBIT guide still represents meaningful year over year improvement and we continue to expect significant EBIT expansion in 2026 as the value contribution from our slate of initiatives continues to accelerate.

On top of that, given our overweighting to the domestic market, we would expect to be an outsized beneficiary of any recovery in the domestic demand environment. Our strong and efficient investment grade balance sheet continues to provide support and flexibility as well. Underscoring the belief in our transformational plan, strong management execution and the ability to deliver significant value for our shareholders, our Board of Directors has authorized a new $2,000,000,000 share repurchase program expected to be completed over a period of up to two years. Tom will provide insight into our strong capital allocation framework, which balances a strong and durable investment grade balance sheet with the capacity for further share buybacks at what we believe are attractive levels. I'm very excited about the future that we're building here at Southwest and we will continue executing on our plans with urgency and with purpose.

Above all, I want to recognize our incredible employees for their excellence and their one of a kind hospitality as we all work together to deliver on our vision. And with that, Andrew, I will turn it over to you.

Thanks, Bob. I'll start by also recognizing our people for continuing to run an excellent operation. I'm especially proud that we led the industry in on tight performance for the first half of this year.

We continue to have a strong completion factor, canceling fewer flights during regular operations compared with our larger peers and recovering very quickly with little to no hangover in the days that follow. I commend our teams for rising to the challenge during this transformational time. We reached a key milestone with the launch of our basic economy products and check bag fees on May 28. A tremendous amount of work enabled that rollout including training for our people on new policies and tools. The operational rollout was incredibly smooth.

Employees changes in May was designed to set the foundation for our product differentiation ahead of beginning to sell assigned premium seating. Today, the incentives to buy up are primarily flexibility and free check bags. We began selling the sign in premium fee next week, more enhancements and choices will exist allowing for incremental product differentiation for customers. As we've previously shared, we did not see a measurable customer impact in the period between the announcement of these changes back in March and the implementation in late May. The day before the changes were implemented, we did see a modest pull forward in bookings.

In the days following May 28, we experienced a temporary decline in bookings, primarily in basic economy. Starting from day one, the team has worked continuously to optimize our approach to selling basic economy. There has been an ongoing effort to optimize the product descriptions and the basic economy booking flow, which initially included barriers to booking basic economy that resulted in reductions in overall website conversion. We quickly refined the booking flow and product descriptions to reduce friction and bookings have returned to expected levels with promotional activity backfilling gaps from this brief period of lower conversion. This resulted in an impact to second quarter twenty twenty five year over year RASM of nearly 1.5 and we expect an impact to third quarter twenty twenty five year over year RASM of approximately one point.

Moving to checked bags, well over half of our customers are now flying on bookings beginning May 28. We're encouraged to be seeing higher than anticipated take rates for paid bags. At this early stage, we're already trending at the higher end of the bag revenue per passenger rate of our larger peers, which is in excess of our estimates. We've seen a modest increase in gate check bags as expected, but have experienced no negative impact to the operation. We prepared for this change by implementing new systems and processes, which has supported the exceptional operational rollout.

For example, we're using a machine learning tool that predicts the number of gate check bags needed for each flight, which enables our teams to act early and keep the operation running smoothly. Overall, we're pleased with the product changes and look forward to the continued ramp of these initiatives according to our plan. We're excited to begin selling the signed and premium seating on Tuesday and look forward to operating these new products beginning January 27. As Bob mentioned, we've modified about a quarter of our fleet. We've already started to monetize these retrofit aircraft.

By notifying customers that we'll be on a flight with extra legroom seats and inviting them to take advantage of our existing upgraded boarding product. We've been very pleased with our co brand agreement with Chase and we're excited about the new and enhanced benefits on our credit cards announced this morning, which align with our new product offering. New benefits include one free checked bag, pre flight seat selection and upgrades to extra legroom with any fare bundle as well as earlier boarding. Even before these new products and card enhancements, we've seen increased sign ups with our existing card. Beginning in our August schedule, we're providing more connecting opportunities to drive load factors.

We will still have the largest point to point network in the industry, but with additional connection options layered in, driving improved network utility and more options for our customers. The connection opportunities will vary by season, day of week and time of day, with less structured connectivity and peak times. We're expanding our network and look forward to launching service at St. Thomas early next year. This is our first new destination to launch since 2021 and we expect to announce at least two more new destinations later this summer.

We recently announced our second airline partner, China Airlines and plan to launch operations with them early next year. We also announced three new gateways for our Icelandair partnership, Pittsburgh, Orlando and Raleigh Durham, bringing us to a total of six gateways. We've made progress with our Getaways by Southwest product, which is planned to launch this quarter. And through the combination of TURN and Redeye initiatives, we have exceeded twenty nineteen aircraft utilization levels, while at the same time improving the quality of our operation. After a steady trend of deteriorating demand starting in the first quarter, the macro environment stabilized at lower levels during the second quarter and resulted in 2Q RASM down 3.1% year over year, including the nearly half point impact from the decline in bookings on our May 28 policy changes.

I'm pleased that we again outperformed our large industry peers on domestic unit revenue. Our 3Q RASM guide of down 2% to up 2% year over year assumes a modest sequential improvement demand, includes roughly a point impact from the decline in bookings following our May 28 policy change, a one point headwind from lapping last year's CrowdStrike incident and is partially mitigated by our initiatives continuing to ramp. Looking to 4Q RASM, we assume further sequential improvement from third quarter both from anticipated improvement in domestic leisure travel trends and accelerating incremental revenue from our initiatives continuing to ramp. We'll provide more specific RASM guidance for the fourth quarter during our next earnings call. We remain committed to our reduced capacity plan for this year with full year capacity up just 1% year over year with trips down roughly 2% this year and the modest growth driven by our turn in Redeye efficiency initiatives.

We've made tremendous progress and we're not slowing down. With that, I'll turn it over to Tom.

Thanks, Andrew, and hello everyone. As you've heard from both Bob and Andrew, we remain on track for our slate of initiatives. We are reiterating our incremental initiative EBIT contribution targets of $1,800,000,000 in 2025 and $4,300,000,000 in 2026. Of the $1,800,000,000 initiative even in 2025, we have successfully executed and met our plan expectations in both the first and second quarter of the year already realizing roughly one third of this year's expected value. We continue to expect the remaining two thirds of this year's EBIT contribution to be achieved in the back half of this year as the ramp of the initiatives continues to accelerate according to our product rollout and plan.

We feel confident in our ability to deliver against these targets and the Southwest specific levers we have to mitigate the current industry demand environment. We'd like to provide more detail into some of the early successes that we are seeing from several of our initiatives. First, checked bags. As Andrew mentioned, we are already trending at the higher end of the bag revenue per passenger rate of our legacy peers. We currently estimate the checked bag fees will result in more than $350,000,000 of EBIT for the full year 2025, which compares favorably to our initial estimates and has a run rate of approximately $1,000,000,000 of EBIT had it been in place for the full year.

Second, we remain on track with our cost savings target of $370,000,000 for 2025 based on actions we have taken to date. Most notably, the headcount reductions in the first half of this year and the related salaries, wages and benefit savings and additional cost savings that have been identified. Leaders across our organization are highly engaged in our cost reduction plan and we are seeing cost discipline across the company. Third, the evolution of our marketing and distribution strategy. As Bob mentioned, bookings through our new channels have exceeded our expectations in particular with Expedia, which now represents roughly 5% of our passenger volume and more than half of that 5% being customers that are net new to Southwest.

These items together with other initiatives such as our loyalty program earn and burn changes, our amended chase deal, new credit card sign ups, flight credit expiration, network changes, the creation of additional connection opportunities, Redeye flying and more give us high confidence in our ability to achieve our target this year. And finally, our new basic economy product is now in place and sets the stage for the additional product differentiation that will come from the operation of seat assignments and extra legroom seats that will start in January. We expect EBIT contribution to continue to increase into 2026 as our current year initiatives mature and as we launch new initiatives. We're pleased to have provided the full year 2025 EBIT guidance that Bob walked you through and we'll remain focused on strong execution to drive meaningful EBIT expansion in 2026. Turning to non fuel costs, second quarter CASM Ex came in at up 4.7% near the midpoint of our guidance range and included a headwind of roughly zero five point from a non cash mark to market adjustment for non qualified deferred compensation plans, which was driven solely by the recent strong stock market performance.

I am pleased with our management of controllable cost items in second quarter. We expect third quarter CASM Ex to be in the range of up 3.5% to 5.5% sequentially in line with the second quarter but on a lower capacity base and includes roughly half a point from aircraft retrofit costs to support our extra legroom seating which launches in 2026 and roughly a point of year over year pressure from the timing of engine overhaul expenses in the quarter. Fourth quarter CASM ex excluding the impact of book gains from fleet transactions in the fourth quarter of both years is expected to be in the low single digits. As a reminder, we had a large sale leaseback transaction that resulted in a $92,000,000 book gain in the fourth quarter of twenty twenty four. We also expect aircraft retrofit cost to drive up to a point of 4Q CASM ex pressure.

We will provide more specific cost detail for the fourth quarter during our next earnings call. Overall, we are managing costs very well and again I am very pleased with our overall cost management and cost reduction efforts which create good momentum as we head into 2026. Moving to fuel, we recently terminated our remaining hedge portfolio for cash proceeds of $40,000,000 which reduces our future premium expense through 2027. Further detail is included in yesterday's press release. We now have no active fuel derivative contracts and currently estimate third quarter fuel cost per gallon to be in the $2.4 to $2.5 range.

Turning to fleet, we've updated our 2025 aircraft delivery assumption from 38 to 47 deliveries this year as Boeing continues to ramp up production. We continue to be encouraged by the progress being made by Boeing and are pleased to have received 17 aircraft deliveries in second quarter. As we have previously communicated, additional deliveries of new aircraft give us increased fleet flexibility. As Bob and Andrew stated, we're committed to keeping our full year capacity growth at up about 1% this year. With these incremental deliveries, we now expect to retire roughly 55 aircraft in 2025, an increase of about five from the previous estimate.

And this also includes five seven thirty seven-eight 100 aircraft that we expect to sell this year. And just recently, we also executed agreements for the sale of eight seven thirty seven-eight 100 aircraft that will occur in the 2026 and we're in the process of negotiating additional sales transactions. We continue to expect 2025 capital spending to be in the range of $2,500,000,000 to $3,000,000,000 which includes the additional aircraft deliveries expected this year as well as the expected proceeds from aircraft sales. Moving to the balance sheet, we repurchased the remaining $1,500,000,000 under the previously announced $2,500,000,000 buyback and expect final settlement of shares to complete by the end of this month. We're pleased with the expected outcome of this program having purchased shares at prices well below current levels. Completion of this share repurchase authorization effectively offsets the dilution from our common stock offering in May 2020. And yesterday, we announced that our Board of Directors has approved a new $2,000,000,000 share repurchase authorization, which we expect to be completed over a period of up to two years demonstrating our continued optimism around our plan. I'd also like to provide more detail on the capital allocation framework that we will use as a guide as we move forward, which will support our continued commitment to a strong and efficient investment grade balance sheet. We will be shifting from a cash target to a liquidity target, which will be $4,500,000,000 comprised of $3,000,000,000 in cash and an upsized revolver of $1,500,000,000 which is an increase of $500,000,000 from the previous revolver size. We completed the upsizing of the revolver earlier this week.

This target provides appropriate liquidity levels to cover near term business needs with access to additional liquidity available through a significant amount of unencumbered assets. We will target a gross leverage range of one to 2.5 times adjusted debt meaning gross debt plus operating leases to adjusted EBITDAR. After paying off $2,600,000,000 of debt for the prepayment of the first tranche of the payroll support program notes and the payoff of our convertible notes, we ended the quarter with leverage of 2.1 times. We will prioritize our use of capital to one, continue to invest in the business two, reduce leverage and maintain balance sheet strength and three, provide returns to shareholders through repurchases or dividends through free cash flow, surplus cash or surplus debt capacity. And with that, I'll hand it back to Bob.

Thank you, Tom. Before we move on to Q and A, I want to leave you with a few key points. First, we are performing well on a relative basis and are encouraged with the recent signs of improvement in the demand environment. We continue to execute on our initiatives. We had an exceptional operational rollout of Bags and Basic and we are making rapid progress to sell and operate Assign in premium seating, which will bring many of our initiatives together.

Second, we are confident we have an appropriate capital allocation framework and guardrails in place to operate as efficiently as possible and maintain our relative balance sheet strength and position, which we view as a significant strategic advantage. Finally, we remain committed to the plan we have in place including successful execution and implementation of our transformational initiatives. All of this is focused on controlling what we can control to not only deliver exceptional customer value and continued loyalty, but also restore the financial returns we are known for while maintaining our unique and differentiated culture with much more to come as we roll out further enhancements to our product offering. And with that, I'll pass it back to Lauren to start our Q and A.

Thank you, Bob. This completes our prepared remarks. We will now open the line for analyst questions. We would like to get to as many of you as possible, so we ask that you please limit yourself to one question. We will now take the first question.

Thank you, Lauren. Our first question comes from Catherine O'Brien with Goldman Sachs. Please go ahead.

Hey, good morning team. Thanks so much for the time. I just had a question on how we should think about the EBITDA initiatives ramping up over 3Q and 4Q. I realize two thirds of the initiatives are coming back half of the year, but on my math, your guide implies an EBIT loss in the third quarter, which taken in conjunction with the first half means the majority of this year's expected EBIT will be produced in the fourth quarter. What drives that 4Q versus 3Q ramp? I'm just trying to understand how much of it is ramping initiatives versus industry assumptions? Thanks.

Yes. Katie, for the question. I'll give it a start and then pass it over to Andrew. But you've got a combination of obviously initiatives ramping up like bags. We gave you an annualized number on bags $1,000,000,000 in EBIT and with booking curve most of that's in place in the fourth quarter.

You have flight credits and rapid rewards optimization and a long, long list of initiatives that ramp across that period. You also have some assumptions around the continued sequential improvement in the demand environment. And I think split between kind of those two, you've got about four points of improvement between the initiatives ramping and the assumptions around sequential improvement. But it's really that. But Andrew, give you a little more detail.

Yes, sir. So flat RASM in Q3, the guide implies roughly a six points improvement in RASM, so I'll just focus on the revenue side. So of those six points, two or the kind of the lack of a negative. So we have the basic economy headwind in Q3 as well as the CrowdStrike compare in Q3. So that leaves you with the four points that Bob referenced, split between macro and initiatives.

If you decompose the macro, you have the improved environment we see right now. So we like others, see from June to July, we saw improvement in the macro environment. And that means Q4, its booking curve is much less exposed to weakness compared to Q3. So that's a tailwind that will persist even if nothing else improves. And you also have the capacity coming out of the marketplace starting post summer ramping through.

So a combination of already published capacity reductions, the already seen macro improvement gives you tailwinds into Q4. And we see I think strengthening trends, so it could be more than that. And then the initiative side, Tom and Bob both gave you the bag numbers. And so those as you see ramp through the whole booking curve, all of Q3 was not exposed to bag fees, but essentially all of Q4 will be because of the nature of when the bookings take place. And then the few other things that are also initiative bucket that are also previously implemented and still in the booking curve compared to earlier in the year.

The earn burn change will be fully into Q4. Then the flight credit expiration as well will be fully in there. And so those initiatives together provide a sequential 3Q to 4Q improvement as we got fully baked into the booking curve. What's not in there though is a basic economy. We're assuming it will be kind of a flattish impact.

We assume there will be a positive impact in Q1 when we go to assign seats. That's a more compelling buy up of a basic economy to choice. However, should we succeed in making it a positive before then, that's an additional tailwind as we go throughout the second half. Tom, anything to add to that? I think you said it well.

Okay, great. And maybe just one follow-up on the bag fees. So, I guess you said that it's tracking ahead of plan. Is that just a volume thing, the rate you're able to charge? How do we think about that?

And then on the other side, how are you tracking any potential book away from bag fees? As customers were used to your fare including a bag fee, has there been any impact to sold fares post bag fee rollout? Like can you talk about book PRASM pre and post bag fee? That is a loaded question. I'm sorry. So please go wherever you want.

Katy. And no, the rollout of bag fees and basic economy, came together along with some other things, I'm just got to stop and just say thank you to our folks. I'm really pleased. I mean from sort of conception and agreement we were going to do that to the implementation on fivetwenty eight was I think ninety one days. So just a terrific execution.

And then the execution in the launch itself, we were well prepared, just saw no operational impact. We're checking about a third less bags, very few of those are turning into gate check bags, so very prepared operationally, so no impact there. And then really no customer impact that we can detect, certainly no book away. We did have a couple of week period where we were tweaking really the digital flows of selling basic economy, That was more about how we were selling it versus customers not buying. So there's no customer reaction to bag fees and what we put in on the twenty eighth.

The outperformance really is because we've not modified our pricing. It really is we're checking more bags per passenger than expected. That's really where the outperformance is. We're sort of middle to above midpoint of the industry in terms of bags that are being checked and paid for. So that's really where the outperformance is.

And it's been incredibly stable from the day we started five twenty eight, just calculating an annualized number through today, it's been sitting right on top of that $1,000,000,000 number the whole time. Andrew?

I'd add to that Bob that if people were displeased with our offering and no longer had an affinity for Southwest Airlines, they wouldn't come to our website. And we actually saw no change in website traffic kind of pre and post fivetwenty eight. We did see, as we went through the booking flow, lower conversion on the basic economy fare. And in particular that was from fivetwenty eight through June 15.

That couple of week period times we saw that reduced conversion rate as people who were booking basic economy, kind of the it was concentrated further out DVDs where people's travel plans are less certain, combined with the kind of increased restrictions on the product that comes from want to get away moving to basic economy. And so the teams were able to modify language, booking flow and such on the website, a combination of digital marketing teams. And so that conversion rate then came back up. So in sixfifteen, we were back to regular business, if you will. Now there was a total period of dislocation, we had to backfill the missed bookings, if you will.

And so we had a heightened promotional activity after that to kind of backfill those missed bookings. And then addition to that, unrelated to our promotional activity, at the June, like simply look to us like June 28, we saw this kind of macro step up that happened. It was a further tailwind to our bookings. So overall, it was kind of a brief period of dislocation related to conversion and related specifically to basic economy conversion really focused on further LTVs.

And the impact that we've talked about the half a point in 2Q and the full point in 3Q, just to be very clear on Andrew's comments, Those are bookings for flights or bookings that occurred during that temporary time period immediately following that Andrew just outlined. Or should

Or would have occurred for flights that would have been flown in second quarter and third quarter. So the one point that is the impact for 3Q is not about a continuation of that dislocation. It's from that period of when the booking should have occurred for flights that would have been flown in 3Q. So that is behind us.

The next question is from Jamie Baker with JPMorgan. Please go ahead.

Hey, good afternoon everybody. So building on this on the EBIT math, you're guiding $1,800,000,000 of incremental EBIT, but $600,000,000 of total EBIT at the low end. So obviously that implies that $1,200,000,000 of your core may have weakened. Bob, I know you cited the macro, you could see the basic economy gotten off to a challenging start, however you want to put it, but does the macro plus basic economy explain the entire $1,200,000,000 decline or apparent decline in your core or should or could there be some other contributing factors?

Hey, Jamie, thank you. No, I think it's fully explained. Yes, the one point and there's a lot of moving parts and math in here, but the one so we reiterated the 1.8 contribution from the initiatives. And those it's like the bags, they're all performing very well. They're on track from a timing perspective.

They're on track from a financial perspective. And in fact, when you hear us talking about the impact of this temporary conversion of basic period, the half point in Q2 and the full point in Q3, we are capturing that and reiterating the $1,800,000,000 So in other words, making up for that and other initiatives is part of the 1.8 So reiterating the 1,800,000,000.0 it's there. So the offset from the 1,700,000,000.0 guided for the year to the current midpoint 7,000,000,000 so it's $1,000,000,000 It's really fuels up a bit and then it really is it's the macro. We've talked about macro impact of 5% to 6%. Basically all of our competitors have talked about a macro impact in the 5% to 6% range.

And if you just and we all know that started kind of call it February 1 and then step down in March, step down in April. And if you think about booking curves and kind of do the math, you'll come to the $1,000,000,000 And especially as you think about a modest sequential improvement in the third, more sequential into fourth. So not trying to get too wonky on you, but if take that and then you kind of pro form a that impact on first, second, third and fourth, you get the macro impact of $1,000,000,000 So it is completely that 5% to 6% macro impact, not some other thing occurring in the base business.

All right. Got it. And then a quick one for Tom. So cash is down to its targeted level. You've got the new repurchase plan.

You've got CapEx. It looks to us like Southwest might need to raise debt. If that's the case, should we be picking unsecured public bonds or aircraft debt? Thanks in advance.

I think there's an opportunity if we decide to go that route. I think there's an opportunity for us to do either. Again, this is where the balance sheet strength comes in. We saw an issuance from one of our competitors a couple of months back that was really well received in the market. Maybe even just taking a step back from that, we were very deliberate about the time period with which we're rolling out this next round of share repurchases.

We over the next couple of years have a lot of incremental EBIT generation that we're expecting based on these initiatives as they roll in. And as that occurs, that gives us that flexibility that we have or that we would want to use that free cash flow that comes from the business that excess debt or surplus debt capacity that would be there within the framework that we've communicated today. But it's about doing that in conjunction with the improvements in the base business. And if that means that we raise some debt or refinance some debt as it matures, we'll do that.

The next question is from Michael Linenberg with Deutsche Bank. Please go ahead.

Hi, this is Hillary calling in for Mike. I just have a quick question on other revenue. That line was lower despite the start of back season late May. Was there any accounting or non cash revenue recognition changes impacting that line or any impact from royalty changes? Thanks.

Yes. I'd say that our loyalty program hasn't been doing as well as we'd like in recent times. That is also the subject of our card enhanced card portfolio issue today. And so which goes hand in hand with the product changes we've made. So we fully expect that line item to improve starting in Q3 as we come out with a new card portfolio with new benefits.

The benefits include a Citi benefit, which is not common in the industry as well as a Bags benefit, which is common and improved bonus points on dining, gas and groceries, which will increase kind of the debit active rate to how often one uses one's card, aka move to the top of the wallet. And these things are part of the new agreement with Chase and that will drive increased acquisitions as well as increased spending per cardholder. And so we fully expect that then to show up into Q3 and beyond. That's one of the initiatives I referenced earlier in answering Katie's question.

And we made announcements about additional benefits on the Chase card, really ceding benefits. But even before that, when we began to talk about the bag benefit in the card, we've seen a meaningful step up in the an increase in sign ups for the co brand card. And I expect that to accelerate with the announcements today around the seating benefits come with the car.

And it started on 05/28. So people knew about it, after we announced it in March, but really we saw the behavior change the day it went live.

Got it. Got it. That's helpful. Thank you. And then just regarding your fleet planning, you increased your delivery assumptions to 47 aircraft from 38 previously.

Is that number subject to increase again depending on Boeing's ramp up in production, I guess, during the rest of the year? And if you could just talk about what you're seeing from Boeing as it relates to your full planning?

Sure. Probably better questions for Boeing next Tuesday. But no, we're seeing I think we're seeing good stability out of Boeing. They ramped to rate 38 on the seven thirty seven production and they've done a good job holding that. Next step would be I think rate 42.

So and we're seeing good quality. So I think everything that we see out of Boeing is heading the right direction. Now the production and our deliveries are still well behind our contractual plan and what we actually need. But the point is we're seeing them move up not down, which is good. So yes, we changed we moved our assumptions up from 38 to 47.

Our retirements are fixed at roughly 55 this year. So as we get incremental aircraft or deliveries from Boeing beyond what we expected in our plan, we have a lot of flexibility in terms of what we can do with those replacing older aircraft. We've got these sales into the market right now of Dash 800. So, yes, but I think net net the what we're seeing out of Boeing is positive improvement. There's no you didn't ask, but there's no real new news on the -seven certification.

We're still expecting that sometime for us sometime maybe first half of twenty twenty six, which would put entry into service for us at early to late in twenty twenty six. But there's really no new news on that certification at this point.

And with the increase in deliveries coming from Boeing, as you know, we're not changing our capacity plans. Right. And you saw in the release that we talked about an incremental five aircraft, which gets to the 55, Bob referenced that we'll be selling later this year and then an additional eight aircraft that we'll be selling at the beginning of next year. This gives us the confidence to be able to execute those sorts of sales as we start to see these deliveries come in with a higher frequency.

Got it. Thank you. That's helpful. Thank you very much.

Thank you. The next question is from Scott Group with Wolfe Research. Please go ahead.

Hey, thanks. Good afternoon. I just have one really, really quick one and then just a bigger picture question. Does your am I looking at this right that you're implying closer to like 4% capacity growth in the fourth quarter?

Yes. The fourth quarter of last year was kind of abnormally low because of fleet shortages. So it was down lower. If you look at sequentially from Q3 to Q4, we're about a point high, but that's because Q2 to Q3 is about three points low. We are modulating that capacity versus peak off peak, which creates a kind of like slightly abnormal sequential changes.

And particularly, wanted to reduce exposure to August, September, but keep exposure to the strong parts of Q4, which was in October, November and December. They all have good peak periods in them. And so as we're taking that 1% growth we promised, we're putting that in places where it gives us the most return on our capital.

Right. I mean, I guess my bigger picture question is you and others seem to be counting on a much better Q4 this year and your capacity is accelerating in Q4. We hear from American they're going to be accelerating a little bit in Q4. Like is that are we at risk of where capacity is picking up in Q4, but we're counting on RASM to get meaningfully better in Q4?

I think it's a comp issue, not necessarily what the market will bear. So right now what we see in the bookings, like what we see. We've only modified October by the way. November, December has not been modified in our promised reduction to get to our 1%. And so October is not 100% firm, but it's the one that has a reduction that we promised at Q1 earnings.

Yes. Was going say, you're not seeing final schedules just yet. And yes, we're going to end the full year capacity up 1%. I think I've got roughly down one to five trips down two. So yes, I mean, it's all a very constructive backdrop in terms of capacity, especially on top of what we all hope is a continued inflection in domestic demand here. Yes, because

our seats in Q4 are going to be up like 0.7%. So what we need to sell is not actually a big Herculean lift, because we introduced Redeye in some longer haul and utilization, the ASM seems bigger, but the kind of lift to sell our capacity is much more modest than that.

Next question is from Savi Syth with Raymond James. Please go ahead.

Hey, good afternoon. I'm just curious on the aircraft sales, a follow-up on there. Just how you plan on handling that in terms of kind of cash flow and P and L?

Yes. So the aircraft sales will flow in and you've got the book side of it, but you've also got the cash proceeds side of it. These are largely aircraft that are fully paid for. And so as we sell these aircraft, of course, the market continues to be very strong for used aircraft. A lot of the values in for the aircraft is in the engine value.

And so that becomes from a cash flow standpoint basically flowing through kind of fully accretive to us. And there's book gains that are there as well. And maybe one thing to clarify, we continue to guide without any book gains in any of our guides. So that number that we gave you for the full year does not include any gains from sale. So we'll continue to do that as well.

The bookings are less than the cash that will come to the business just with the net book values that are still on the aircraft.

Thanks. And then maybe I can ask on the recovery side, you're seeing demand. Is that kind of leisure? Is that corporate? And could you give a little bit of color on what you saw corporate do in 2Q and how it's progressing?

Certainly. I'll start with the corporate, which we saw in Q2. May was the worst. And so then June was better than May, July is better than June and August is off to a strong start, even though it's kind of further on the book and good for corporate. So good inflection in Q2 for corporate.

And then also leisure, it was the same thing. We saw leisure customers really come alive there just before the fourth of July holiday.

Southwest Airlines (LUV) Q2 2025 Earnings Call Transcript

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