Southwest Airlines at Bernstein Conference: Strategic Initiatives Unveiled

On Thursday, 29 May 2025, at the Bernstein 41st Annual Strategic Decisions Conference 2025, Southwest Airlines (NYSE:LUV) outlined its strategic plan to boost revenue and cut costs. CEO Bob Jordan discussed initiatives aimed at achieving $4.3 billion in incremental EBIT by 2026, including basic economy fares and bag fees. Despite stable but lower-than-expected demand, Jordan expressed optimism about Southwest’s strategic direction and operational excellence.

Key Takeaways

• Southwest aims for $4.3 billion in incremental EBIT by 2026 through various initiatives.
• New offerings include basic economy fares, bag fees, assigned seating, and extra legroom.
• The company plans to cut $370 million in costs this year, with a target of $500 million by 2027.
• Southwest is exploring network expansion and new aircraft types for better market service.
• The airline maintains a strong investment-grade balance sheet.

Financial Results

• Targeting $4.3 billion in incremental EBIT by 2026 from multiple initiatives.
• Cost reduction plan aims to cut $370 million this year, with a $500 million exit rate.
• $1 billion of the $4.3 billion is expected from revenue management system improvements.
• $1.5 billion attributed to assigned seating and extra legroom.
• $1 billion anticipated from cost initiatives.
• $800 million from bag fees, flight credit expiration, and loyalty program changes.
• Completing a $2.5 billion share buyback authorization in July.
• Macro demand is about six points lower than expected in January.

Operational Updates

• Ranked number one or near number one in on-time performance and lowest canceled flights.
• 63 aircraft converted to new configuration with extra legroom; higher NPS scores observed.
• Basic economy and bag fees implemented without issues.
• Assigned seating sales expected in the third quarter for 2026 operation.
• Improvements in aircraft delivery quality and stability from Boeing.
• Counting on 38 deliveries this year, with a potential of 50 or more.
• Joined IATA for easier geographic expansion.

Future Outlook

• Considering network expansion and potential long-haul international routes.
• Exploring a diverse fleet to meet customer needs.
• Committed to maintaining a strong investment-grade balance sheet.
• Modernizing air traffic control system seen as essential for growth.
• Core strengths in network, people, and financial stability remain unchanged.

Q&A Highlights

• $4.3 billion EBIT contribution in 2026 is net of other impacts.
• Changing consumer preferences drive the need for cabin segmentation and varied offerings.
• Southwest’s Wanna Get Away fare previously matched basic economy fares but offered more value.
• Focused on meeting customer needs and increasing network connectivity while maintaining a point-to-point system.

Readers are encouraged to refer to the full transcript for more detailed insights.

Full transcript - Bernstein 41st Annual Strategic Decisions Conference 2025:

David Vernon, Host, Bernstein: We’re gonna get started here. Thank you, everyone, and welcome to, day two of Bernstein’s forty first Annual Strategic Decisions Conference. My name is David Vernon. I cover US airlines and air freight and surface transportation and a whole bunch of other things related to, the movement of goods and people. We are privileged and pleased to have, Southwest Airlines joining us here today.

Bob Jordan, the CEO, is here. Tom Doxy, the CFO, and the IR team, Julia Landrum, and and crew are with us as well. We are gonna do this, you know, pretty much a fireside chat. You guys should be aware by now that there is a mechanism for entering questions in. You should have a QR code.

You can get it into the, Pigeonhole system, which will then filter out the inappropriate questions and get them up to here, and I can work them into the, the the conversation. I’m gonna turn it over to you, Bob. But at first, I wanna say thank you to Southwest, and thank you to you personally for, for coming out to support our conference. Why don’t you kick us off with maybe your views on the state of the industry, state of the business? Any opening remarks or key messages you wanna kick us off with?

Bob Jordan, CEO, Southwest Airlines: Yeah, Dave. You bet. And thank thanks for the invitation. And you said you’re filtering out the the questions we shouldn’t take, like, did you lose my bags? I’m happy to take them, but I have a little experience.

But anyways no. Let me just a couple of minutes. The the really, really, a couple of of things. A lot of interest, obviously, in all of the changes that we are driving at Southwest Airlines. We have a huge plan of initiatives on the revenue and the cost side.

Some of those we announced last fall. Some of those we announced this March. If you if you’re watching, we put in a huge slug of those yesterday. So we added a basic economy fare. If you go on the website on the app, you see that today.

We changed some of our fare families. We we began charging for bags. Obviously, if you’re, if you have status, if you ever all you have to do is have our credit card, you still have a free bag, and we change some of our flight credit expiration. So a lot of the things that are in our revenue and initiative plan were either in or then went in went in, yesterday. And then the remainder, a lot of those come in very quickly.

We’ll be announcing soon the date that we begin selling assigned seating and extra leg room. That’ll come in, on the sell side in the third quarter of this year for operation in the first quarter of twenty twenty six. And our cost plan is is in is, in really good shape. Last fall, we announced a $500,000,000 cost plan by 2027. That’s now been up to more than a billion, and we’ll actually take out 370,000,000 in cost this year.

And the exit rate and cost takeout will be 500,000,000, which was our original 2027 target. So the the real story there is I’m just really proud of the team and the execution of the initiatives. Again, a lot is already in place. A lot went in yesterday. Very proud of our team and the execution of the operation.

We’re number one or right at number one in on time performance, lowest canceled flights, longest long delay delays. We’re just crushing it on the operations front. Very, very proud of folks. And we are showing very, very strong cost discipline. Our our first, quarter results, we were well below consensus in terms of our our cost execution CASM ex.

That cost execution is continuing here into the second quarter, and we, are still on track to exit ’20, ’25 at a low single digit CASM ex rate. So seeing strong execution on the operation, on the cost front, and, of course, on our initiatives. And we can talk a lot more about the initiatives. $4,300,000,000 in EBIT value in 2026, so a very large set of of items. Maybe the one other thing everybody’s, I’m sure, very interested in is what the heck is going on in the macro economy and macro demand that’s on everybody’s mind.

You have heard a lot of talk of stability. We’re seeing stability and demand at Southwest in the last few weeks here, but it’s stability at the current levels. So it’s cons you know, it so it’s stable at levels that are obviously lower than what we expected when we set our plan in January. When we reported fourth quarter earnings in January, that compared to, today, I’ve said this before, demand is off kinda roughly six points from what we would have expected in January. It is stable.

It’s just stable at these at these lower levels. And we all can see industry data, and we don’t see an inflection back in the industry data. We see stability, but we don’t see an inflow an an inflection just back. But regardless, you can’t control the macro economy, but you can control we we can’t control what we’re doing, which is execution of the operation and execution of our initiatives. So all of our focus is on on that, and you’re seeing very strong performance of the initiatives to drive that 1,800,000,000.0 EBIT value in 2025 and four point three incremental EBIT value in 2026.

David Vernon, Host, Bernstein: Okay. So, I definitely wanna get into, the initiatives and some of the changes that happen in Southwest. But, you know, since you’re talking about the macro, you guys do get a very good look at The US consumer in terms of buying behavior, you know, the the days advanced purchase. As you think about kinda what you’re seeing in the data, what does it say about that health of the consumer? Is are we still are we still in an okay shape?

Are we, like like, is there anything else that you’re seeing kind of in the the composition of the way people are buying travel right now that gives us any insight?

Bob Jordan, CEO, Southwest Airlines: Yeah. It’s it’s I think it’s tough. The the the data is a little all over the place. There’s no doubt that the consumer has pulled back. That that is for sure.

We are seeing a couple of things that are unusual. We’re seeing the booking curve come in. So it’s a shorter booking curve. So it’s very clear that consumers are waiting to make decisions, including for the summer. So our visibility through the summer is far less than it would be typically simply because the booking curve has moved in.

The, and consumers can make their decisions quickly. They can they can turn off, you know, buying a trip very, very fast, so the airline industry tends to be a leading indicator. Business is actually holding up better than that than than the consumers. So we have seen, some fall off in business, but it’s really primarily government travel, which is impacted by, you know, the the executive orders and other things that you’ve seen. But the business seems to be holding up, well.

You know, you get into if if we get into a recession, but you get into a recession and and you you see businesses, travel is one of the first things that they can reduce. You see them lower their CapEx budget. You see them stop hiring, and we’re not seeing a lot of that just yet. So I think the the the indicators that business is really gonna fall off, I don’t see those yet. But you do see the the consumer being, I would just say, very cautious.

Now the consumer can turn right around and turn that back on. When so when I say we don’t see that inflection back yet in the industry data, that doesn’t mean that it that couldn’t happen. We just don’t see that yet. So what it appears to me is while the con while the the economy is still, you know, in relatively good shape, the consumer sees the uncertainty and has just waiting to make some of those purchase decisions. That’s what appears to be happening.

The other thing I think that’s happened is with the tariff announcements, I think consumers pulled forward. There’s evidence that they pulled forward purchases that they were afraid would be affected by tariffs, automobiles, appliances. You you you’ve seen a lot of reports of demand surge, especially on the automotive side. So it could be that over just sort of a week’s period here, consumers have shifted their spending to some of these more durable goods that they are afraid are gonna be affected by by the tariffs.

David Vernon, Host, Bernstein: So you’re saying, like, a reprioritization

Bob Jordan, CEO, Southwest Airlines: as Just a a temporary temporary reprioritization based on the fear of the tariff impact. So so, again, I I I just go back to it it is very choppy, and the data is choppy. You’re seeing these large falls in confidence and things, which again could inflect back, but we can’t control that. What we can’t control at Southwest is what’s the quality of our operation? What’s the quality of our of our of our cost performance?

What’s the quality of executing all these initiatives? And all of our focus is on doing that because at the end of the day, the set of initiatives that we announced last fall and this spring add up to a lot. I mean, we’re a roughly $30,000,000,000 top line company on the revenue side, and the twenty twenty six incremental EBIT from these initiatives is $4,300,000,000. It’s hugely impactful, to the business and to our margins. And the the and and, again, these aren’t crazy things that we’ve dreamed up.

These are things primarily that the rest of the industry is already doing. So it’s and, again, it’s assigned seating, selling extra legroom, bag fees, seat assignment fees, that kind of thing, changes to date. So all very doable. So all of our focus is on driving the execution of the initiatives, the doing that well, driving the financial benefit, and then what that will lead to is a significant boosting of our operating margins and our ROIC and hitting our long term targets.

David Vernon, Host, Bernstein: Okay. Since we’re talking about initiatives in the high level number, the 4,300,000,000 you mentioned, that would be work out to roughly a 11% margin. Are you when you we think about hearing that number, right, are you telling us that that’s the number you’re that you’re actually expecting to show up in EBIT, or is that the value of the initiatives that then will offset whatever’s gonna happen in the underlying base business? Because sometimes it gets it gets a little bit confusing in terms of what we should be taking as a number to put into to to to to a guidance framework versus a a net realization number, if you will, when you’ve actually implemented the initiatives and then, you you know, the business changes and everything else happens that maybe offset some of that?

Bob Jordan, CEO, Southwest Airlines: No. They’ve good question. The numbers that we gave you, those were net. So that was a that was a net of any other impact that that initiative could drive. And so, no, think of that as a straight up, contribution to the business.

So a $4,300,000,000 incremental contribution e EBIT incremental contribution to the business in 2026. And and just to give you a little detail, again, these are all things that are, you know, what the industry is doing, cabin segmentation. They’re just things that Southwest has not done. We’re not part of our model till now. And just to break real quickly the 4.3 to make it real.

The $4,300,000,000 breaks roughly into it’s about a billion in base business changes. So that is improvements to the revenue management system. We had some hiccups when we implemented that last year. It changes to the continuing changes to the network, continuing to boost load factor driving connectivity. So base business improvement’s about a billion.

It’s about a billion and a half in the value of of assigned seating and the extra legroom product and sell ups, those kinds of things. So there, you’re at two and a half. It’s a billion dollars in the cost initiative, which is well underway, and we’ll exit this year with half of that already in place. So there, you’re at you’re at 3.5. And then the other 800,000,000 is the revenue contribution from things that are coming into place, right now that are already in place as of yesterday.

So bag fees, blight credit expiration, changes to the to the loyalty program on earn and burn. So the 4.3 is not complex in terms of the of what makes it up, and it isn’t a set of initiatives that are sort of crazy things that Southwest’s doing that are unique to the industry. These are really things that the industry is doing. So I look at that, and I see, number one, low risk of implementation. And you saw terrific implement implementation yesterday of the of what we put into place.

The low risk of getting it done. And then number two, low risk of hitting the financial numbers because these are things that other, nearly every other airline does, and it’s easy to see the values that they, they pick up off of those initiatives.

David Vernon, Host, Bernstein: So so I guess, when you think about that 4.3 hitting the the the being an incremental contribution to the business relative to the baseline, like, what needs to happen to the base business in order to retain the full value of that 4.3? Are we does it just need to be stable? Does it need to improve? Like, I’m just trying to, again, kind of when we look back at the history of of calculating the overlay and initiatives and what actually shows up in the p and l, there’s usually a delta. And and I’m trying to be, like help help you explain to me what that delta is because I keep I keep getting asked that question.

Like, hey. Well, they come up with these initiatives. It’s a big number. You add it up, and then the number comes in below that, and then but we still hit the initiatives. Yeah.

Bob Jordan, CEO, Southwest Airlines: There there’s probably think about there’s probably two aspects to that. One one is if if the economic backdrop is affecting overall demand, what is that doing to your initiatives? And, the way I would think about that is pretty simple, which is you’re adding bag fees or seat fees or giving customers choice around buying the extra leg room section while, you know, if if, again, if demand has fallen six points, six points of that demand could off, but the rest is all incremental because these are folks that are buying. They’re now just choosing to say, hey. You know what?

I really wanna buy the extra legroom section. And so a small part of that 4,300,000,000.0 in rev, in total is at risk due to demand changes simply because these are revenues on top of making the decision to fly Southwest Airlines. Again, the billion dollars it’s cost, half that’s already in place, and so I see very low risk there. Maybe what you’re asking me is, you know, how do you ensure that when you count, you know, a bag fee and the value of extra leg room and the value of assigned seating, how do you know you’re not double counting? And and do all these things stack?

And we were very careful to separate and segregate the analysis on based on traffic and based on customers that will have a bag that’s free through the credit card or free through their status and looking at what other carriers make off of bag fees, what is that value to Southwest Airlines? The same thing with the assigned, seating value. But as an example, what we didn’t what what what you would be care what what I would worry about is if we said, we’re gonna put in assigned seating, and we’re gonna see this huge market share shift to Southwest because every you know, all these people will suddenly wanna fly us because we now offer assigned seating. That is not the way we calculated or or the numbers that we provided you. It’s really the value of the seating aspect and and and, someone buying a basically making a seat reservation or somebody choosing to pay a little more to be in the extra legroom section.

So I’m very comfortable, number one, that the revenue portion of the initiatives are not, don’t overlap and aren’t aren’t counted improperly. And number two, they’re a net of any loss that you could experience in some other area. And number three, we work conservative in terms of how we created those values.

David Vernon, Host, Bernstein: So so, you know, Southwest, historically, just as we’ve kinda looked at bag fees, diet seating, that those have not been things that you wanted to do. And you guys made a pretty good case a couple years ago to not do those things, and then now we’ve changed. Can you help us understand the the the the the what shifted in terms of your thinking? Because, I mean, I remember your last analyst day, you guys made a pretty impassioned case that said, you know, look. If we charge for bags, it’s actually gonna be that negative because we’re gonna lose out on the added premium that’s already in the base ticket price because customers are coming to us without the friction.

Like, what did it change in the spreadsheet? Did it change in prioritization? Like, how do we like, how do I think about that?

Bob Jordan, CEO, Southwest Airlines: That would good. It it was not a spreadsheet there.

David Vernon, Host, Bernstein: I’m I’m not thinking it’s a not thinking it’s a No.

Bob Jordan, CEO, Southwest Airlines: I think it’s several things. Number number one, we were just looking at that as a narrow bag question. As you back up and you look at it as a combination of really account really, really thinking about cabin segmentation, and, I’m gonna have a different set of fare products with with with basic. Yep. And the value of buying it from basic to the next and that to the next.

The the the bag fee, as an example, only fits very differently if you think about it just independently as a bag fee versus I’m gonna think about it in the context of changing our fare products and what those buy ups could look like. Number two, we join we joined channels that gave us access to understanding how customers were picking us relative to other carriers. So Google Flight Search, Expedia, Skyscanner, and, Kayak and others where we are we are matched up to to other airlines, and we have the the bags fly free policy, they do not, but we’re matched up on price. Are we seeing literal share shift? And we did not see share shift.

So where some of the customer, survey data said that we would, When you went into we went into channels and you could see customers making their choice, we did not see that share shift show up. And then I think most importantly, number three, we chose to back up. And rather than just answer the bag fee, no bag fee question, let’s answer the question of what do customers want. And they want segmentation of the cabin. They want a variety of product offerings.

They want access to premium, and it puts that question in a different context. So a lot of thing you know, a lot of things changed. And what I’m very proud of is we pivoted quickly. Yeah. And what you saw you saw going yesterday, bag fees, basic because we also said we don’t need basic economy.

And what became very clear is there is a segment of customers that want basic economy. You may not want basic economy and the restrictions, but we have a segment of customers that do. And what we were doing at Southwest is we we our wanna get away product, which is the lowest fare, was typically matched up the basic economy. Yeah. But we were giving you everything for that price, and others were giving you very little.

And so number so number one, we were giving you far more, which costs Southwest at that low price. And then number two, other airlines were booking very few of their seats at that low basic economy price. What they’re doing is upselling you to the next fare. So we were losing the ability to capture that upsell revenue, number one. And then number two, we were giving you far more for that same price.

So with basic economy, we can be matched up and take advantage of the ability to upsell. So a lot of things changed. The what I’m proud of is we pivoted Yep. And we work the technology and the operational changes. And as of yesterday, it’s in place, and it went in flawlessly.

Not one single problem.

David Vernon, Host, Bernstein: Alright. So, maybe it’s a good segue into, I’d like to get your perspective on on on maybe how how the industry’s changed in the last ten years. Right? Southwest, you know, historically has been the share taker, the margin leader. Right?

And some of the discount airlines would be at the same sort of, area. Now that’s not necessarily the case. Right? You guys are a little under a little bit more margin pressure. The discounters are are actually losing some of the unbundled carriers are losing money, whereas some of the legacy airlines, which has historically been the shared owners, are now all of a sudden doing better.

You know, you you’ve been around this industry way longer than I I have, and I’d love to understand, you know, your perspective on the big picture things that led to that shift. Like, what what what’s changed in the in the invest in the industry profile? And I think our investors would like to to understand this too. Like, what’s really changed maybe from ten years ago to today that’s that’s that’s created this shift in the landscape, which seems to me to be structural. But

Bob Jordan, CEO, Southwest Airlines: You said you said I’ve been around a lot longer than you, which is a nice way to say I’m older. Is that right?

David Vernon, Host, Bernstein: I don’t know. I’m not sure. I’m not sure. I age well. So I’m not But

Bob Jordan, CEO, Southwest Airlines: you you do no. I’ve been in the industry coming up on four decades. And one thing you learned is is things are changing all the time. But, no, the last ten years has been a a time of huge change, maybe maybe fifteen. I think it’s I think several things are fundamental changes that force the industry to change.

Number one, costs have come up. Structural costs are are much higher, and a lot of that are these new labor contracts and then work rules that are embedded in labor contracts. And so, it it it fundamentally changes the industry because you’ve got to produce revenues that can cover those costs, or you’ve or you’re gonna end up with unsustainable margins. So that’s a huge change. Number two, consumer demand and what the consumer wants has changed materially.

Some of that we saw coming out of COVID. Some of that we see generationally. You see younger generations that that that that that want aspirational travel. They want premium as an example. So it isn’t simply a price competition.

So number so number one, fares must come up to cover higher costs, which, obviously impacts all layers of the industry, but certainly impacts the ULCCs and their and and the and the the ultra low fare model, because you pretty much got competitive industry wages and contracts at this point. And then number two, the the consumer wanting a variety of things from bare bones to premium to kinda super premium has created segmentation of the cabin. Yep. Because you got one tube, and you’re trying to carry folks that want all of those things in this one tube. And the only way to do that if you’re and and drive revenues is to segment the cabin and offer what customers want.

Southwest has certainly lagged there. We’ve had one we’ve we’ve been extremely successful for decades, but we’ve had one product, one model, very egalitarian, you know, open seating for all. And, that was terrific when that was primarily what customers wanted. But today, when customers want everything from bare bones to, you know, super premium, the only way to answer that is is segmentation in the in in, you know, in the tube itself. So I think consumer consumer expectations and desire for what they want, the rising cost, and therefore the rise in having to really push revenue production, and then segmentation of the cabin, I think those are the three biggest changes that have really changed the industry.

David Vernon, Host, Bernstein: That’s, yeah. Because when you were talking about, like, the wanna get away fair at the low end being matched to basic, like, that seemed to me, like, almost the key for the unbundlers when they came into the industry. Right? They came in with a product with a lower cost structure that was at the low end that was getting benchmarked against better products. But because consumers maybe hadn’t evolved in their understanding of the distribution and what they were actually buying, there was an opportunity that that that almost gave them an advantage.

And then as, you know, the Delta and the other airlines have platformed that product, that advantage has fallen away, and I think that’s sort of what shifted the pin pendulum. What do you think about that as a as a as a sort of understanding of that concept? Is that in the in the ballpark?

Bob Jordan, CEO, Southwest Airlines: Yeah. You know, there’s been a lot of debate is is is basic economy economy been a fundamental driver of this change that you’re talking about. It’s hard to know, but what what we do know for sure, if you just take Southwest Airlines and so put aside, you know, the the the original, you know, unbundlers like Spirit Mhmm. Just look at Southwest Airlines. Again, we were matched up, so our wanna get away fare gave you everything, basically, at the price that basic economy on others was giving you very little, and we were booking the vast majority I haven’t given we don’t give the number, but I’ll just tell you, the vast majority of the aircraft was booked in at that wanna getaway fare.

So some sell up the wanna getaway plus anytime and and and Biz Select. But what you saw in the other airlines that have developed basic economy was while they offered basic economy, somewhere in the 12 to 14% of the aircraft was booked in basic economy, a very relatively small slice. The majority was upsell from basic economy. So, that’s what makes it very difficult at Southwest and others, to to attack this question is we’re selling most of the aircraft at the low fare with a lot of attributes. And I mean most of the most of the aircraft, they’re offering it at OA and selling a small slice of the aircraft at that rate and then take and then, taking that upsell revenue.

So that that’s the change that, you know, it’s just not tenable if you’re going to maximize revenue per square foot in the cabin. Mhmm. And for us, you’re gonna get back to industry leading operation, operating margins and industry leading returning on invested capital. You just can’t have that that that what I described is just incompatible with those financial results.

David Vernon, Host, Bernstein: Yeah. The the the mix issue. So as you think about, you know, the next couple years here in terms of implementing these changes and getting it rolled out. Right? Obviously, you know, you’re still doing some additional fleet reconfiguration.

Right? When do you think you get to full run rate across the entire fleet of being able to offer the the the currently with the recently launched new Southwest with with with the the premium seating and the the assigned seating, all that kind of stuff. When does that when does that across the entire fleet?

Bob Jordan, CEO, Southwest Airlines: Well and I’ve just one quick tidbit. I’ll I’ll answer your question. I promise. But we’ve got 63 of our aircraft that are converted to the new configuration with extra legroom. So we’re not selling it, but you get on and you see that extra legroom section.

It looks it looks great. And and we and we’ll do some things before we implement assigned seating where where where we will tell our customers at the last minute that, hey. You’re flying on one of the aircraft that’s in the new configuration. And so you can do a you can do a gate upgrade, make sure you’re on early and have access. But main thing is what we’re seeing as a proof point is the NPS score on those aircraft where that are outfitted already with the new configuration is running six points ahead of other aircraft.

So without customers even knowing it, they’re giving us a lot of credit for the fact that this this layout is much better because that that’s a we and we already have terrific in in cabin NPS scores. So six points is a lot. But I think what your question, though, is is one of the huge misconceptions. I’m very proud of Southwest. I’m proud of our plan.

I’m super excited about our future, And I think we are undervalued at current levels, and I think folks are underestimating the, the value of these initiatives and how fast this 4,300,000,000.0 is gonna come online. So if you got some I think we have a lot of folks going, well, you know, I I I see the initiatives, but you gotta show me. You know? So I’ll I’ll take a look. You know?

So this is a 2026, ’20 ’20 ’7 story. This stuff is coming online right now. Yesterday, we implemented the bag fees and basic economy. We’re months away from selling assigned seating. We’re months after that that we’ll be operating assigned seating.

So, we’re we’re well ahead of our cost plan. We’ll hit our we’ll basically exit this year, at a cost run rate a cost takeout run rate that is what we said we would hit in 2027. Mhmm. So we’re we’re not a show me in 2027 kinda story with our plan. This stuff is showing up right now, and the vast majority will be in place by the first quarter twenty twenty six, which means you’ll see a lot of benefit this fall in the EBIT number, and then you’ll see the majority, if not all of the rest that that that gets you to that 4,300,000,000.0 in 2026.

So this isn’t wait three years and see if Southwest can do it. This stuff’s coming online right now, and I think that’s the biggest thing that is underappreciated by our by our plan is is is that it is happening right now that number two, there’s low risk because we’re putting in things that the industry has done forever. So there’s low risk implementation. There’s low risk in the financial benefit paying off. And number three, we aren’t stopping here.

Mhmm. So putting in the things that I’ve described isn’t the end of the journey for Southwest. We will continue to pursue the consumer. And if the consumer wants other types of premium, they want us to fly other long haul destinations, which, which could lead to aircraft questions. I’m totally making all this up.

This is not a plan. But the consumer, demand in certain cities for us for a lounge is super high. My point is rather than say, no. Southwest Airlines does not do that. You must follow the consumer or you are foreverable if you are forever vulnerable, to others that can offer that to the consumer.

Even in cities that we are very strong, and we are the largest in in roughly half of the 50 largest cities in in The United States, even there in Nashville and in Austin and, you know, as an example, people love us, but we also can’t for many of our folks that love Southwest, we can’t do things that you we can’t provide products that you want, like a We can’t get you to long haul, international destinations. If a lounge is important to you, we don’t have a lounge. I’m not predicting any of those things. What I’m telling you is rather than be forever vulnerable, we’re gonna follow the consumer and what the consumer needs.

David Vernon, Host, Bernstein: But isn’t isn’t part of the the premise of the conversation we had before was the idea that the consumer does want some of those things. So are you then by by extension saying that this is on the road map that you’re not ready to talk about? Or, like, how, like, how do we think about, you know, things like in flight entertainment? Things like, power Yeah. SBC, things like, a different a segmented actual cabin, like, like, interior Yeah.

Cabin modifications to kind of reinforce that that that red red velvet rope, right, which we as humans like to pay to jump over. Like, how do we think about that?

Bob Jordan, CEO, Southwest Airlines: Well, first, the things like power on the aircraft, larger overhead bins, vastly improved Wi Fi, that’s already coming. It it’s on the it’s on a lot of the fleet today. Those things are already being solved. The the next set, you you always a lot of things in the industry take a long time to implement. If you’re gonna go, you know, if you’re if you’re gonna make some of the changes that I described as hypothetical, it could require that you think about a different aircraft.

Aircraft. And aircraft orders are really tough right now because of the constraint, you know, with the manufacturers and the OEMs. So what I’m promising you is that we will never lack a where we head five years from now strategy. You must have those things because many of those things take that long to implement. We’re working through that strategy question today.

What is you know, the mow the biggest focus is on execute what is on the plan, hit the 4,300,000,000.0 in EBIT contribution in 2026. That’s number one. But a but a a a a quick follow-up number two is what’s next and what’s next and what’s next? It’s that intermediate to long term strategy question. We’re working through that right now.

David Vernon, Host, Bernstein: Yep.

Bob Jordan, CEO, Southwest Airlines: There’s no reveal today, but just know that

David Vernon, Host, Bernstein: I just wanna know where your head’s Like like

Bob Jordan, CEO, Southwest Airlines: My where my head is, it’s very simple. As we will serve our con we will serve our customers, both the customers we have today and the customers that we aspire to have tomorrow. And as

David Vernon, Host, Bernstein: you think about that that that that that change, right, I did notice you guys had, petitioned the DOT for for for broader access to international markets under open skies. You know, are you contemplating a a a more diverse fleet? I think one of the things that we’ve sort of, come to know and and and understand about Southwest is one of things that makes it good is it’s simple. Right? The seven three seven and the commonality across the fleet types gives you a lot of flexibility.

Your union contracts are all geared around that in terms of pay per trip and things like that. Like, are you contemplating, you know, broader strategic shifts around the the composition of the fleet?

Bob Jordan, CEO, Southwest Airlines: Yeah. We’ve recently, yeah, we had an Obitsky submission. We joined IATA. And, a lot of that is just to make I mean, we’ve been serving international markets for for for over a decade. Again, closer in, you know, Caribbean, Mexico, that kind of thing.

But the OpenSky’s application is really intended just to make these processes easier. So as we decide that we want we want to move into other geographies, it makes that decision. And then re upping that decision just simplifies everything. IATA is very similar. And at the same time, there are a lot there’s a lot that we can learn, as, by by from our partners by being a member of IATA.

So so I wouldn’t take those as signals of future strategy. Those are really more about being more efficient in terms of how we do apply for new markets. Now that said, as we do think about adding, for example, long haul international, that OpenSky’s application joining IATA certainly helps those decisions. But we’re gonna be thoughtful. We’re we’re gonna we’re gonna step through the strategy question carefully.

The the the next strategy questions drag with them larger implications, things potentially like fleet.

David Vernon, Host, Bernstein: Yep.

Bob Jordan, CEO, Southwest Airlines: So we’ll be thoughtful. Nothing to reveal today. But, but but, again, this we’ll we’ll be ready to talk to you, you know, I think in 2026. This isn’t years away. So there’s work underway to, number one, finish what we have in play, and then number two, lay out that next strategy, which I would I would think about it that as a twenty twenty six, question.

David Vernon, Host, Bernstein: And does that also include maybe looking at at at at narrower gauge aircraft, maybe to serve some of the markets that that are that are harder for you to get

Bob Jordan, CEO, Southwest Airlines: to in a in a in a in a MAX. You’re very persistent. No. I’m kidding. The, you know, I I think we want us again, no no answers today except that we are going to pursue our customer and what they want.

You know, I mentioned Nashville as an example. Here here’s what we want. Here’s what we are doing. We are beloved in Nashville. We have a terrific schedule in Nashville.

We we have great service and great people and great customers. They love Southwest. I hear from them all the time. But because we can’t offer certain products or get you to certain destinations, even customers that love Southwest, we force you to fly on somebody else, and we then force you to carry somebody else’s cobrand card. Either that is something we accept forever and just say, well, you know, that’s part of what comes on that’s that’s part of what comes along with the Southwest model, and we’re vulnerable, or you do something about it.

And my commitment is we’re gonna study that, and increasingly, we want we we want to give you as a consumer fewer and fewer reasons to not have to choose somebody else.

David Vernon, Host, Bernstein: K. And as you think about sort of evolving the network, I won’t ask you again about different aircraft types. But, as you think about evolving the network, right, one of the things that we’ve talked about in the past is that that balance between the dots on the map, and the thickness of the lines. And, obviously, what I’m talking about there is in terms of, like, the number of markets that you’re serving versus the frequency and the density of the traffic between them. You know, twenty years ago, smaller number of dots, much thicker lines.

Today, you know, I think post COVID pushed out a little bit more. Like, are you thinking about the airline going forward as you’ve made some of the the product changes as still predominantly a point to point system, or are you gonna start also be looking at things like, you know, banking in flights and, again, getting more connecting traffic to try to and, protect that that that that that fair layer a little bit?

Bob Jordan, CEO, Southwest Airlines: Well, a part of the the changes you described was due to nine eleven and then just over years, the decline in short haul markets. So short haul markets are down materially from where they from where they were in the eighties and the nineties, and some of that is pricing. But so I I think that’s a contributor to what you described. But now if you think about what does Southwest what are our core strengths? Put aside bag fees and assigned seating and extra legroom.

Our core strengths are are several. Number one, we have by far the best network in the in The US for the consumer. We can get you to more points from more places nonstop with the best schedule, period. Number two, we have the best people that offer the best service. No.

Whatever that service is gonna look like, we have the best people that offer just terrific service. Number three, we have incredible financial strength. We’ve always had an investment grade balance sheet. We’ve always had financial discipline. Right now, we basically have sort of, we we have just barely net cash, but are very low leverage, and we will always maintain that.

And so the core strengths of Southwest, are not gonna change. But you look be you know, you you you look beyond that, and, again, you’ve gotta consu you you you just gotta serve the consumer. And, naturally, as short haul has come down and we’ve added more dots and we are big and, again, you know, the largest in in almost half of the top 50, that’s not gonna change. We’re more of a hybrid. We have a very strong point to point network.

But as the network widens out, naturally, you’re gonna have to have more connectivity, especially if you wanna drive load factor. So you are gonna see us provide more connecting opportunities that push load factor. A lot of that’s coming actually in August of this year. But, no, you’re never gonna see Southwest Airlines have three hubs and connect you to everywhere else. That’s just not our model.

David Vernon, Host, Bernstein: K. You mentioned before, you know, aircraft delivery constraints. You know, what’s the state of affairs with Boeing in terms of them being able to ramp up production? I know it’s been a little bit of a drag on, you know, where you’d wanna be from a fleet standpoint, pushing you to push some bigger aircraft into smaller markets, that kind of stuff. Can you give us a just, like, an update on where you are how you’re thinking about that that that ability of Boeing to meet the current state of demand and then how that also impacts the cost of cost side of the story over the next two years.

Bob Jordan, CEO, Southwest Airlines: Yeah. Again, I I, you know, I don’t wanna speak for Boeing, but they yeah. But I think Kelly’s done a fantastic job. There are a lot lot of problems to be dealt with in every business unit, you know, with the government, with with each with each customer so complex, labor unions, and he’s a good he’s done an excellent job knocking those down sort of one by one. For us, we we see while we’re not getting aircraft at the rate we would like or at at the contractual rate, what we see is much better quality, much better stability of the deliveries.

We’re we’re see we’re seeing the relationship between the factory floor and management really improve. So I what I see at Boeing, I really like. We’re counting on about, we’re counting on 38 deliveries this year. We think that could be upwards to 50 or slightly more because of the improvements at Boeing. So they’re headed in the right direction, but this is a long play.

So the those issues, issues at at Airbus, the issues in particular with the air with the the gear turbofan and the restrictions there. I there there are are year there are constraints that I think provide a constructive backdrop to the industry for for years and years ahead of us. These are situations that take a long time to improve. But, no, I I I I definitely see the improvements at Boeing. We’re eager to get more aircraft.

The good thing is we have a very, very attractive order book of a lot of aircraft at very attractive pricing. Our growth has been relatively low. And if we, don’t take all those aircraft for our own uses, then we will monetize those into the market. Our pricing compared to what the market pricing in is very strong. And, whether we take the aircraft or we decide to, sell the aircraft into the market, we’re gonna monetize every dime of value that we have in the Boeing order book.

David Vernon, Host, Bernstein: Right. And as you think about other constraints kind of affecting the industry, obviously, FAA and and and the redevelopment of an air traffic control system is is is is very topical. What are your thoughts on the ability to actually get that done? I mean, it’s been lifetimes of trying to fix this. So

Bob Jordan, CEO, Southwest Airlines: Yep. Fix yeah. Fixing modernizing the ATC system has been a four a four decade discussion at this point. I think for the first time, I’m optimistic that we have the ability, the momentum, and the support to actually get something done. I’ve had a lot of conversations with secretary Duffy, and he is fully behind all of this.

The administration is fully behind it. It’s a big number. You know, this is this is tens of billions of dollars. And the work, I think, now is on the hill to secure the funding and secure the funding across, appropriation cycles.

David Vernon, Host, Bernstein: Yeah.

Bob Jordan, CEO, Southwest Airlines: But I’m optimistic that we can get it done, and, I’m optimistic that they’re onto the right problems. And, and I do think that we will get there. The United States needs it. We we must have a functioning air traffic control system, to allow all of us to grow, to inspire consumer confidence. But Yeah.

I think we’ll get there.

David Vernon, Host, Bernstein: And and and any thoughts on the governance structure? Right? Because, obviously, you know, Canada went through this and, obviously, it’s the size of California, not necessarily the same same same magnitude of of of population and density and complexity. But, you know, is the is the FAA the right agency to lead this, or do you think some other structural reform would be required to kinda really get the problem solved?

Bob Jordan, CEO, Southwest Airlines: Yeah. These are these are big complex problems. And, you know, there there have been there have been times in the past where there was a run at at privatization. I don’t see that in in myself, I don’t see that on the table. Number one, though, you have to have the will to go do these things.

I see the will to go to go tackle the problems. Number two, you have to have a detailed understanding of how to tackle the problems. We Southwest, we’ve actually been a piece of that. Our we we’ve been through modernization of our own operational systems considerably over the last three years, and we had a team our our that went to, to the FAA to talk to them about how we broke our issues into small problems to solve them. The FAA was very receptive.

The secretary was very receptive, but I do think that you’ll you’ll have to see some level of oversight to put in the proper governance to just oversee this issue because the problems are so complex. There’s so much money. But, again, I’m I’m confident that we have the will, the focus, and can it and can get the funding to get this done.

David Vernon, Host, Bernstein: And you mentioned earlier before, one of the strengths of Southwest is the balance sheet. You guys are taking out a little bit more debt than you have in the past. How should we think about the capital structure, going forward?

Bob Jordan, CEO, Southwest Airlines: You know, we right now, I mean, we we are well, first, we’re we’re not gonna stray from what has made us successful. So we are committed to a strong investment grade balance sheet. We’re committed to being efficient in our capital structure and capital allocation. You’re not gonna see us do something crazy like lever up to do share buybacks as an example. Right now, we sit at kinda roughly we’re we’re slightly net cash, so we have very low debt levels.

We have very low, leverage and and leverage targets. So, you know, we may play on the edges there in terms of being more and more efficient in the balance sheet, but we’re gonna we’re gonna stay investment grade, and, we’re gonna have the appropriate low the degree of leverage. So so, no, I don’t see any fundamental changes coming there.

David Vernon, Host, Bernstein: Okay. And you guys have been have been buying back stock, right, as you have been adding a little bit of leverage. So as you think about the the the the the the the price you’re paying today, obviously, that’s a that’s a statement of confidence, you think, in terms of the earnings inflection. You know, if you were to go ahead maybe twelve, eighteen months and look back and say, we didn’t get close to the 4,300,000,000.0, or we got close to 4.3 what are the things that that make it not happen? Is it all macro related, or is it also possibly, some risk that the consumer reaction to some of these changes is different than you might have expected?

Like, what do you worry about when you think about this? Because it is a monumental set of changes you guys

Bob Jordan, CEO, Southwest Airlines: It is a it is it’s a large set of changes. I I again, I think we we think obviously again, just think about 4 point 300,000,000.0 in EBIT layered on top of where our earnings are today. So we think we are significantly undervalued, which is why we’ve been out there buying stock. We we’re we’re finishing up the $2,500,000,000 share buyback authorization. We’ll finish that up in July.

So we we we don’t think the market has recognized the value of our plan. On the risk, you know, again, these the risk is always going to be acceptance of the changes and implementation and execution of the changes. The execution is going just flawlessly. We’re seeing terrific all just terrific operational execution, cost execution, and then on the initiatives front. Again, all of this stuff went in yesterday, and it went in flawlessly.

And everything for assigned seating and extra leg room is on track, so I don’t see risk there. On the consumer adoption, because the things that we’re doing are things that basically every other airline has done. And number two, these are things our customers want. They want premium. They want extra leg room.

They want 80% of our customers want to say assigned seating. 8085% of the customers who won’t choose us want assigned seating, and they don’t choose us because number one reason, we don’t have assigned seating. The, even on the policy changes, you take bag fees. All you have to do is hold the Southwest Airlines, Chase Rapid Rewards Visa to to get a a a free bag. And so even the policy changes, we’re doing those in a way that are are are better than the competition.

You take our basic economy fare. For others, you have to pay an exorbitant I can’t remember if it’s a change fee or refundability fee to then make it reusable. A lot of times that fee is greater than the value of the funds you’re trying to reuse. At Southwest, we’re giving you six months of reusability even on that basic economy. So I don’t worry about customer defection.

I don’t worry about execution of the initiatives. I don’t worry about the the the consumer not understanding them because they’re industry standard. So, what I what I it’s not a worry. What I focus on is I don’t think, the investment community has fully valued the initiatives. $4,300,000,000, number one, or the fact that this stuff is either already in or it’s coming in over the next six months.

So, I’m I’m super bullish on Southwest Airlines as you can tell. I’m bullish about where we’re taking the company. I’m bullish about the fact that we’re moving to meeting the customers’ needs, and I love the fact that our employees are super excited about the changes.

David Vernon, Host, Bernstein: Alright. Well, I think the the the speed at which you guys have pivoted against some of these things is, is definitely admirable. We wanna thank you for for coming out. Think this is probably a good place to leave it, especially because we’re coming down to the the ten second mark, and we like to be on time here when that is

Bob Jordan, CEO, Southwest Airlines: Hey. Thank you so much.

David Vernon, Host, Bernstein: Appreciate it. Thank you so much. And thanks for joining us.

Bob Jordan, CEO, Southwest Airlines: Thank you all.

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