Southwest Airlines at J.P. Morgan Conference: Strategic Shift to Boost Revenue

On Tuesday, 11 March 2025, Southwest Airlines (NYSE: LUV) presented at the J.P. Morgan Industrials Conference 2025, unveiling a strategic shift aimed at enhancing revenue and efficiency amid a challenging macroeconomic environment. While the airline lowered its revenue guidance due to softer bookings, it introduced several initiatives to cut costs and drive profitability.

Key Takeaways

• Southwest Airlines reduced its RASM guidance by 3 points, now forecasting a 2-4% increase year-over-year.
• New initiatives are expected to contribute $800 million to EBIT in 2025 and $1.7 billion in 2026.
• The company plans to complete a $1.5 billion share repurchase by July 2025.
• Cost-saving measures include a 15% reduction in corporate overhead and discontinuation of the fuel hedging program.
• Southwest aims for an after-tax ROIC greater than or equal to 15% by 2026.

Financial Results

• Southwest lowered its RASM guidance by 3 points, attributing this to a softer booking environment and one-time impacts.
• The fuel outlook for Q1 is reduced by $0.15 per gallon.
• Non-fuel CASM ex is expected to rise approximately 6% year-over-year, below the previous forecast of 7-9%.
• The company anticipates $370 million in cost reductions in 2025.
• Total EBIT contribution from new initiatives is projected at $1.8 billion in 2025 and $4.3 billion in 2026.
• Expected EBIT for 2025 is approximately $1.7 billion, increasing to $3.8 billion in 2026.

Operational Updates

• Southwest plans to implement assigned seating and premium extra legroom by Q1 2026, with sales starting in Q3 2025.
• A new co-brand agreement with Chase has been amended, and an agreement with Icelandair launched in February.
• The company has introduced bag fees for most fare products, with the first bag free for tier customers and Chase Rapid Rewards Visa holders.
• The Rapid Rewards program has been optimized, and new flight credits will expire within a year.
• A basic economy fare is being introduced, and a new distribution channel with Expedia was implemented on 26 February.

Future Outlook

• Southwest targets an after-tax ROIC in excess of its cost of capital in 2025.
• The airline aims to achieve a North Star goal of an after-tax ROIC of at least 15% by 2026.
• Despite a moderate level of softness in revenue trends, the company remains focused on diversifying aircraft sourcing.

Q&A Highlights

• No significant increase in business was observed from a competitor’s temporary shutdown.
• The basic economy fare is designed more for buy-up opportunities than as a defensive strategy.
• Employee enthusiasm remains high despite rapid changes.
• The company is evaluating its balance sheet strategy, focusing on shareholder returns and debt levels.
• The MAX 7 aircraft remains necessary for certain markets, such as short airfield locations.

In conclusion, Southwest Airlines is undergoing a strategic transformation to enhance profitability and efficiency. For more details, please refer to the full transcript below.

Full transcript - J.P. Morgan Industrials Conference 2025:

Jamie Baker, Analyst: So thanks, everybody. We’ll keep on schedule with Southwest Airlines. So I had a very bad sleep last night. I woke up. I stayed in a hotel in the city, woke up around two, and I was like, yeah, I’m really excited to see Tom, you know, new role.

And I was like, oh, man, maybe I’ll ask him about fuel hedging because he’d never worked, to the best of my knowledge, never worked for an airline that had fuel hedging. And I was like, yeah, that would be a good question. Then I see the release. And I was like, well, if layoffs, if that represents sort of the unthinkable, as some have described it, maybe we should revisit some of the other unthinkables, like charging for VAT. Nope.

Saw the release this morning. So I’m going to use this time to figure out some questions to ask because those were two of them that are gone. So in any event, Bob Jordan is going to take over the cockpit here, Andrew Watterson, and reintroducing Tom Doxey. A lot of people here probably have met you in the background, and I don’t know if we have to start out with some safe harbor statistics, but I’ll leave that to you. Thanks, Lana.

Bob Jordan, CEO, Southwest Airlines: It’s good

Jamie Baker, Analyst: to see it.

Bob Jordan, CEO, Southwest Airlines: Thank you. Thank you all for being here. And what I took out that introduction, Jamie, was that you were only happy to see Tom. But no, before we start, yeah, Lauren, you’ve got some disclosures.

Lauren, Disclosures: Yes. Thank you, Tom. Hello, everyone. Just 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. Please refer to our presentation for further disclosures.

Back to you, Bob.

Bob Jordan, CEO, Southwest Airlines: Lauren, thank you, and good morning, everybody. Yes, we do have a lot to talk about this morning. It’s good to be here. We got a lot to cover, but I do want to welcome Andrew Watterson, our EVP, our CFO, I mean our COO at Southwest Airlines and our new EVP, CFO, Tom Doxey. Tom joined Southwest two days ago, literally became our CFO yesterday and brings a wealth of ministry experience from last as President of Breeze and just super thankful to have both Andrew and Tom here today.

Today, I’ll provide an update on current guidance, some context around our recent performance, update you on some progress against previously announced initiatives, but I’m going to focus the majority of the time on new initiatives that we are announcing today. As evidenced by recent actions and what I’ll be covering today, Southwest is evolving very rapidly to meet our current and future customer needs, boost revenues, drive efficiency and reduce cost and accelerate the return targets that we laid out last September. We have tremendous opportunity at Southwest Airlines. And while we’ll build on what has made us strong, our people and our terrific service that they deliver for our customers, we must become more innovative, more agile and efficient in everything that we do. But I’d like to start this morning by providing an update on our first quarter guidance.

We are lowering our RASM guide today by three points to an increase in the 2% to 4% range year over year. Roughly one point of that three point reduction is due to higher than expected completion factor and other onetime impacts, including a reduction in government travel. And the remaining two points are primarily due to softness in bookings and demand, in large part due to the macro environment. The good news is market fuel prices have fallen in tandem with the revenue environment, which has driven a roughly $0.15 per gallon reduction in our first quarter fuel outlook. Our nonfuel cost trends are also very favorable.

We now expect our first quarter CASM ex to increase roughly 6% year over year, significantly below our previous guide of up 7% to 9% year over year. The change in our guide is primarily due to higher than expected completion factor and lower than expected salaries, wages and benefits, maintenance and other expenses, part of which are a shift to later in the year. And of course, we remain very focused on driving efficiencies and offsetting inflationary cost pressures and achieving our cost initiative that I’ll spend a lot of time on this morning. But first, I want to provide some context on the recent performance of Southwest Airlines. Our margin contraction over recent years is in part due to our own cost pressures.

As you know, in the last two years, we ratified all 12 of our labor contracts, which included increased rates and work rule changes. We’ve experienced inflationary pressure in corporate overhead, which has grown faster than the rest of the airline. We’ve also continued to make investments in technology and operational reliability. And lastly, aircraft delivery delays created inefficiencies, especially in staffing and training conducted in anticipation of aircraft deliveries that ultimately did not take place as they were expected. These items were all large contributors to significant cost pressures that we have faced over the last several years.

And on the revenue front, over many years, we also fell behind in revenue generation as our peers introduced a host of things that we did not pursue at Southwest, like bag fees, basic economy, assigned and premium seating monetization, dynamic pricing and redemptions and much more. The cost increases combined with not pursuing these key revenue opportunities resulted in margin contraction at Southwest compared with our better performing peers. And we laid out an initial element of our plan to address this margin contraction at our Investor Day last September and built on those initiatives during our fourth quarter call in January. And we have made excellent progress on all of the things that have been previously announced. The implementation of assigned seating and premium extra legroom is on track, both the technology and the fleet modifications.

And we refined our planned sell date for those products to third quarter of this year’s and the operation is now planned to begin in the first quarter of twenty twenty six. We recently reached an amended co brand agreement with Chase that provides enhanced card member benefits and supports our multiyear financial targets. We launched an in line agreement with Icelandair on February, and we expect to announce additional partners in the near future. The turn time reduction initiative is now in place in 14 airports, including Chicago Midway and Houston Hobby, which were implemented just last week. We launched twenty four hour operations with our first Red Eye flights last month, and Red Eye flights are expected to ramp to a total of 33 markets this summer.

And looking ahead, bookings are as expected. As a reminder, the combination of the turn time changes and the red eye flying increases aircraft utilization and is expected to fund the equivalent of 34 incremental aircraft by the end of this year without incremental capital spending and essentially funds all of the growth of the airline between now and 2027. We completed a short term sale leaseback for thirty six seven thirty seven-eight hundred aircraft, taking advantage of a strong market for new and used aircraft, and we have repurchased $1,000,000,000 against our $2,500,000,000 share buyback allocation. All that is great, and we are on track. But today, I’ll be outlining significant additional cost and revenue initiatives that build on that progress, the progress that our team has already made.

I mentioned in January that we are focused on achieving our cost initiative as quickly as possible. Today, we are announcing a significant expansion of our cost saving initiatives that brings our anticipated 2027 cost savings to more than $1,000,000,000 and that is more than double the $500,000,000 target that was announced at Investor Day. Notably, we expect to achieve $370,000,000 of these cost reductions this year in 2025. On February, we announced an approximate 15% reduction in corporate overhead positions, representing $300,000,000 in run rate cost savings. As a part of that leadership, including senior leadership, was reduced significantly.

While the cost savings are important, the headcount reduction eliminates unneeded work, it removes layers and it eliminates low spans, all of which is key to becoming the airline that we want to be faster, leaner and more agile. Additional cost reduction and efficiency efforts include ground operations optimization, rationalization of airport, space and rent and optimization of technology costs, work against sourcing and procurement and the discontinuation of our fuel hedging program, which eliminates additional fuel hedge premiums in the future. We’ll be opportunistic in unwinding our existing positions based on market conditions. But the focus today is on new revenue initiatives that are now underway. And so I’d like to announce those initiatives right now.

First, we will be introducing bag fees for most fair products beginning May. The first bag will be free for our tier customers as well as Chase Rapid Awards Visa holders. Our higher tier and business select customers will continue to have two free bags. And in addition to bag fee revenue, we believe that this move will drive new enrollments in our co brand credit card program. And additionally, we carry nearly two times the bags as compared to the competition, which is costly on many fronts.

So I expect operational benefits there as well. Second, we are optimizing our industry leading rapid awards program to both better align earn rates to the fair paid and dynamically optimize redemption rates on both low and high demand flights. The earn rate change was implemented last week and the redemption rate change will be rolled out later this month. Third, starting May, new flight credits issued will now expire in one year or less from the time of ticketing depending on the flight, on the fare type purchased. Fourth, we are introducing a new basic economy fare in advance of new fare products being added this summer.

Over time, the competition has optimized revenue production in the cabin through more segmented fare products. As we continue to evaluate consumer preference and refine our product offerings, the need to create differentiation and optionality for our customers became very apparent. And fifth, we implemented another new distribution channel with the online travel site Expedia on February 26. Like our entry into metasearch sites last year, this new channel will serve to better capture demand and attract customers that are new to Southwest and to our loyalty program. While the specific terms are confidential, we were able to negotiate a very cost effective transaction rate, and we’ll continue to add other online travel agencies, but only if cost effective.

One obvious question is the switch in our position on bag fees relative to what was presented at Investor Day last fall, and I want to hit that head on. In contrast to our previous analysis, actual customer booking behavior through our new booking channels such as metasearch did not show that we are getting the same benefit from our bundled offering with free bags, which has led us to update the assumptions. We’ve also benefited from the additional experience of leaders that have direct experience implementing bag fees at multiple airlines, and that’s also helped further validate the new assumptions. It’s also important to note that while all of these initiatives are new to Southwest, they are not new to the industry. That adds additional confidence in the ability to execute as planned and in achieving the financial targets that are laid out.

So to talk about that, all these changes are targeted at creating value in 2025. We expect the initiatives announced today to add an incremental $800,000,000 in EBIT contribution in ’twenty five and an incremental $1,700,000,000 in EBIT in 2026. This brings the total estimated EBIT contribution for our portfolio of initiatives to $1,800,000,000 in 2025 and $4,300,000,000 in 2026. Importantly, the initiatives discussed today are targeted at making fundamental improvements to the performance of our core and base business. Therefore, the incremental values that you see that are shown here exclude any potential impact from future fleet transactions.

We remain optimistic with our fleet strategy and will pursue transactions that are accretive to our business, but we want to be transparent about the performance of the core business. Starting today, we are also introducing a guide for nominal EBIT for both 2025 and 2026, excluding fleet transactions, again to focus on the expected improvement to our core business performance. We provided a lot of metrics at Investor Day and our EBIT forecast is intended to provide clarity on not only the expected performance of our initiatives, but also the overall performance of the business. EBIT for 2025 is expected to be approximately $1,700,000,000 and for 2026, approximately $3,800,000,000 Again, we gave you a lot of metrics at Investor Day with and without fleet revenue. And so this new guide is intended to cut all through that and be very clear about the performance of the base business.

But most notably, our plan now supports achieving after tax ROIC in excess of our cost of capital this year in 2025. And we now expect to achieve our North Star goal of after tax ROIC greater than or equal to 15% in 2026 rather than 2027 as outlined at Investor Day. Speaking to our 2025 forecast specifically, while booking trends for the summer currently appear stable, we have assumed a moderate level of softness in revenue trends and that continues throughout the remainder of the year. We’ve also assumed $2.33 per gallon for fuel for both 2025 and 2026. Now turning to the share buyback.

As we shared at Q4 earnings, we launched a $750,000,000 ASR this quarter, which completed $1,000,000,000 of the $2,500,000,000 share repurchase authorization. Today, we are announcing that we intend to accelerate the remaining $1,500,000,000 to complete by the July 2025. This acceleration demonstrates our confidence in executing our plan and in delivering on significantly improved financial results. So that’s a lot. And to wrap up, I just want to say, at Southwest, we are pivoting and we are evolving very quickly, as you can tell.

And we are implementing more initiatives than I have seen across our whole fifty three year history. Changes like enhanced customer segmentation, the addition of a new basic economy product, the addition of assigned seating and premium extra legroom, adding bag fees, continued optimization of the Rapid Awards program and selling on new distribution channels are expected to both improve our commercial offering and improve the bottom line rapidly. We will also continue a relentless focus on efficiency and on cost reduction. As always, we are committed to execution and delivering against our plans, and we will report regularly on the progress against the new initiatives and revised targets, including soon in our first quarter earnings announcement. It is a really exciting time at Southwest Airlines.

And the initiatives announced today are just a start as we continue to grow our relevance to our current and new customers, attract new customer segments that we cannot compete for today and return to the levels of profitability that our shareholders expect and that I expect. And Jamie, with that, I will take questions. We will take questions. I can’t imagine there are any questions.

Jamie Baker, Analyst: First question is, and I’ll try to ask this delicately, it’s related to the first quarter guide.

Andrew Watterson, EVP, COO, Southwest Airlines: Yes.

Jamie Baker, Analyst: So you mentioned obviously the pressure points in the quarter. But you have a lot of overlap with American Airlines, obviously. They went dark after ’53, ’40 ’2, much as you did after thirteen eighty. And I don’t quibble with that decision. I think that’s the right thing to do.

But was there any pickup in your business associated with one of your largest competitors going dark for a three week period?

Bob Jordan, CEO, Southwest Airlines: Yes. And Andrew can add a lot more color. No, I don’t think that we saw any material. And again, there were things that happened in the quarter, obviously, like the LA fires that were impactful. But what we’re seeing now is kind of a broad softness in the macro economy that it’s hard to attribute to any one thing.

And again, I just want to point out that we have run that trend kind of through the most of the second quarter and then a modest softening through the rest of the year. So the numbers that you see reflect that, but we’ve not run something significantly worse through our plan. But, Andrew?

Andrew Watterson, EVP, COO, Southwest Airlines: Yeah. I think, Robert Isom and David Seymour did a wonderful job responding to that tragic event. Very, very well done. I will say that that tragedy did cause, I think, us and perhaps the industry to have suppressed bookings for a short period of time afterwards, which is understandable. So it wasn’t a positive.

It was a short negative.

Bob Jordan, CEO, Southwest Airlines: Yes. All right.

Jamie Baker, Analyst: Appreciate that. And then so today’s announcements, I mean, I guess that was of the view that back fees might come at some point in my lifetime. I was actually more interested by the basic offering. So what’s the calculus behind that? Is it defensive in nature given that, you know, you would have significant overlap with other low cost carriers?

Admittedly, you know, in Spirit’s case, they pulled down a lot of capacity. But is it more a defensive acknowledgement? Is it more about selling more credit cards and getting people, you know, younger, more frugal travelers into the ecosystem early and then keeping them there? Just what were the underlying assumptions as to why you needed basic now?

Bob Jordan, CEO, Southwest Airlines: Yeah. And maybe a little more on just the bag and basic both. And you have been after us to add a bag fee for at least, is it twelve years? So we’re thinking about putting your face on every bag tag from here forward. But no, all kidding aside, we did a lot of consumer research in the fall that I feel like was well founded.

But as we got into real data with particularly in the metasearch and now Expedia engines and where you can tell our customers giving you value for what you offer in Affair. We just we saw no share shift to Southwest Airlines for the fact that we had better policies. What we did see, and this ties into your basic economy, is that customers are incredibly in those channels sensitive to price and will shift on very small movements in price. So as you think about our offering and others, so we’re they’re offering a basic economy fare at that price, very stripped down, few amenities. We’re matching up with our Wanna Get Away, which is very rich, two bags fly free, flight credits that don’t expire.

So we’re giving you an awful lot for that same fare, and it’s just not affordable in a way. So we need to reward our most loyal customers and then match what you receive to the fare that’s paid. So that’s a piece of it. And then to your last point, yes, we’re going to see buy up from the basic economy fare to the next fare. And the fact that the co brand will come with a free bag is absolutely going to drive card acquisition.

Andrew Watterson, EVP, COO, Southwest Airlines: Yes. I’d add, I guess, first, it’s more about buy up and almost exclusively about buy up. If you’re an engaged Southwest Airlines customer, meaning you’re a tier member, A list is preferred, you have the credit card, you will largely keep the benefits you have today. That won’t change. For the consumer who did not have this as a choice driver and for whom we were over over kind of delivering, we’ll have this kind of bare bones, but then we’ll also have opportunities to buy up.

And so to buy up for, we’ll be able to segment those who really just cared about the price for those who cared about the amenities we previously offered to everybody. And for a modest buy up, they can move from the base economy to the next level up, for good value for money. And so for us, it’s all about the buy up here when we go to base economy.

Bob Jordan, CEO, Southwest Airlines: But, yeah, just to cut the chase, it’s far less about a defensive move than it is we’re offering customers, a segment of customers something that they want to buy.

Mark, Analyst: Bob, I’ve covered Southwest on the sell side for twenty six years. And if anyone asked me name a company that has a definable culture and views culture as a competitive advantage, I would say it’s Southwest. And that culture right now is undergoing the most upheaval it’s ever undergone. You wear your heart on your lapel and so forth. How are you managing that shock and awe with the employee base?

And can culture continue to be a competitive advantage for Southwest given all the changes going on right now?

Bob Jordan, CEO, Southwest Airlines: Yes. And I wear the heart on my lapel, but it’s deeply embedded in who I am at the time that I’ve been at Southwest for thirty seven years. We love our people. We love each other. We’re a family.

But we’re more than a policy. We’re more than even the way we paint our aircraft or something like that. Southwest is all about very tangible things like the best domestic network, the most point to point. Sitting here today, the best mainline operational reliability. But we’re also about the intangibles, the best people on the business, the best hospitality in the business, and none of that is going to change.

A lot of the policy changes that we’re making, it’s very clear that our employees want them. Our employees wanted to move to assigned seating because it clears up the job in the gate of policing boarding and policing pre boards and those kinds of things. Our employees want to move many of them want to move to a bag fee because they’re dealing with the 2x bag volume as an example. So many of the policies that we’re implementing are exactly what our employees are looking for the company to do. Now you take something that’s difficult like the layoff, obviously very difficult or just the pace of change at Southwest Airlines.

And Tom can opine he’s in day 11 here, can opine on what he’s finding at Southwest. But while there’s change, what I see is a lot of excitement for where we’re headed, excitement about the future and then painting that next. I mean, this isn’t it. We’ve got a set of things we announced in the fall, a set of things that we are announcing today. And then there’s a where is Southwest Airlines going next.

And I see very much excitement for our future. But the core of who we are and what we stand for is not changing.

Tom Doxey, EVP, CFO, Southwest Airlines: Yes. I think I can offer a bit of a unique perspective too, right, having been in other places and had having admired the Southwest culture and having an idea for what the culture is, it might be like on the inside. And then for the last few weeks, having the opportunity to actually be inside the building and see it. And what I’m seeing is and I wondered that too. I thought, okay, with a lot of these changes, will it have changed?

And a lot of the things that I would say I admired before I joined are there, and they are alive and well. And and our people wanna win. Right? We they wanna have a successful business that they can be proud of. And a lot of the things that we’re announcing today are going to help us to to get back to where everybody wants to be as a company.

So, you know, I I’m seeing a senior leadership team led by Bob that is aligned, that wants to win and is moving forward, with alignment from a board that is also aligned and a combined culture that is still very much alive in the Southwest that I was seeing from a distance before I joined.

Mark, Analyst: And Tom, I wanted to ask you my second question, which is especially as new guy on the block here. You have a toolkit that you’ve never had before in terms of the Southwest balance sheet, right? Billion maybe more, the program, etcetera. So when you think about sort of balancing the balance sheet strategy and shareholder returns, you obviously have a very large shareholder who’s pushing for more buybacks and so forth. You are levering up relative to prior targets.

How do you think about that interplay and managing that as the airline undergoes this transition?

Tom Doxey, EVP, CFO, Southwest Airlines: Yes, it’s a great question. And Bob talked a little bit about fleet. And maybe I’ll start off by answering it by saying it was very important to us that what we were showing here today was this is what’s there for the core business, right? Nothing around fleet transactions or other things. These are the changes that are being made to the core business.

We feel like what we’re doing here is really making underlying changes to that core business in a really, really meaningful way. And it’ll produce cash, right? As we have these changes that roll through, it will produce cash. We’ve talked about what our growth targets are. Bob talked about fleet as well on the flexibility that we have on the new aircraft side and on the used aircraft side as well.

So all of that stuff will play into the inputs that’ll get toward how we look at the balance sheet. Specifically, to answer your question on the balance sheet, that is something we’re going to look at. Where should we be, right? How do we balance that as far as whether it’s shareholder returns, what cash levels we want to hold, what does debt look like? All of those things as I’m coming in, all of those things together with our team are things that we’re going to be looking at to determine what do we think the optimal point will be.

Nothing to share other than what we have today here around the acceleration of the share buyback. But absolutely, that’s part of the conversation that we’re having internally.

Mark, Analyst: Can we just put some guardrails around that last comment? I mean, the at the Investor Day previously, the comment was made solidly investment grade. Is that still the guidepost for what you’re looking at? Or are you looking broader?

Tom Doxey, EVP, CFO, Southwest Airlines: Yes. What I would say is, I’ll go back to what I said before, which is that we are talking about it internally. We’re looking at what we think the optimal point is. And we’ll come back to you, I think, with more detail on what that looks like

Bob Jordan, CEO, Southwest Airlines: going forward. Yes. I think the way to look at it would be, we’re not going to become something we are not. We’re not going to abandon our guardrails. But there certainly is, there’s flexibility within guardrails even.

So what the work that’s going on now is to understand what is optimal. We have things that we can do with the fleet. We have obviously target leverage. We, yes, we have unencumbered assets. And so you won’t see Southwest doing radical things.

But the point is to work our way to a point rather than sort of rigid constraints, what’s the optimal intersection of all those things. And we’re not ready to talk about a next set of share buybacks, But obviously returns to shareholders in whatever form they take and driving the business to the absolute right levels of profitability, there is no higher priority.

Jamie Baker, Analyst: Okay. Okay. Back to me. So one thing that I’m not able to do after well, lots of things I’m not able to do, but one of them in particular that I can’t answer for clients having looked at today’s slides is how conservative or aggressive some of the revenue assumptions might be. So can you help me understand that?

Because obviously, conservative is better.

Andrew Watterson, EVP, COO, Southwest Airlines: Yep.

Jamie Baker, Analyst: But for example, do you think you do spill some demand charging for bags? Do you think turn times are effective because you know some number of your passengers are now gonna bring oversized you know, they’re gonna they’re gonna try to monopolize the overhead bins and that slows down. I mean, just what are what are some of the puts and takes that go into this? And as probably the best place to to start is what percentage of your flown passengers do you think will be subjected to bag fees? Incremental bag fees as opposed to bundled or credit card, you know, actually paying up the ticket counter.

Bob Jordan, CEO, Southwest Airlines: Yes. And maybe let me just start with the how conservative are the numbers? So, yes, these are baseline numbers. So we’re not going to be aggressive. They are any initiative, you’ve got an analysis and you decide then how do I want to think about the number that’s outputted in terms of conservatism?

Does it overlap with some other initiatives? So no, these are baseline numbers. So I would describe them as we have a lot of comfort in their execution and we have a lot of comfort in the delivery of the numbers that we’re showing you. Two, these are things that almost everybody in the airline industry has already done. And so that gives you comfort and data around what can be provided both the ability to execute and again the financials.

The numbers that you saw were net. So it’s bag fees and the credit card and the expiration date on flight credits, but net some assumption around things like share shift. So they are net numbers. And then last, the majority of the things that we are certainly adding today are much more certain in my mind, even certain relative to the slowdown. So if you look at a bag fee, we have strong data from other airlines around bag fee revenue.

And while bookings may there may be softness in bookings, I think that’s disaggregated from the bag fee.

Jamie Baker, Analyst: Yes.

Bob Jordan, CEO, Southwest Airlines: If you look at the change in flight credits, with flight credits that don’t expire, there’s a very long tail, which means you have more usage and you have basically lower breakage. It’s very knowable what happens when you change that to one year. So that’s not dependent on softness in the economy and in bookings, and it’s very knowable. If you look at the changes to rapid awards, we’ve already worked through that benefit with Chase, we’ve changed the yearn rate. It’s very knowable what happens there.

So two things, we have been conservative in terms of the numbers used. They are nets, nets of things like some assumption of share shift, And they are revenue streams that, to my mind, are not nearly as subject to an impact from softness as a straight up booking. If you want to add the percentage of bags.

Jamie Baker, Analyst: I don’t

Andrew Watterson, EVP, COO, Southwest Airlines: think we’ll give that number right now.

Bob Jordan, CEO, Southwest Airlines: All right. Got you.

Jamie Baker, Analyst: And then just quickly because Mark has another question. You mentioned unwinding fuel hedges. Do you actually mean unwind? Or was that shorthand for you’ll just let them burn off? I wasn’t clear.

Bob Jordan, CEO, Southwest Airlines: Yes. Just talking about fuel hedging. I mean, we’re known for fuel hedging, right, for decades now. If you look at fuel hedging and you go back over ten to fifteen years, the with the exception of a couple of positive years, it’s not been beneficial to the company. And then on top of that, you have obviously hedge premiums.

And with volatility in the market, hedge premiums have become much more expensive. Our hedge costs were about $150,000,000 last year. So you just basically do an analysis of the program and it just doesn’t make sense over looking backwards over a long period of time to continue the program. So what we spend on fuel hedges because it’s settled with the hedge itself will come on over time as we don’t spend new monies on hedge premium. And then, yes, again, we have a hedge portfolio today.

And if the market presents itself, we’ll look to be opportunistic to unwind those at current prices. It is not, but in case it presents itself, then we will be.

Mark, Analyst: Last topic, and if we go over a minute, it’s okay because the room’s empty after this. I want to talk just about Boeing and fleet. Number one, I want to ask what you’re hearing from Seattle and what you expect this year from Boeing, what the latest is. Number two, the commitment to a smaller gauge. Yes.

Sorry. The commitment to

Tom Doxey, EVP, CFO, Southwest Airlines: a

Mark, Analyst: smaller gauge aircraft, the 700, the seven, whatever we want to call it, is that something that is also being considered, whether or not you need to stick with having that smaller gauge aircraft? And third is, is another thing that might be being considered whether or not you need to diversify where you’re sourcing your aircraft from?

Bob Jordan, CEO, Southwest Airlines: Yes. So I can’t speak for Boeing. I think I said it every time. We were there about a month ago, just to see for ourselves, walk the floor, talk to folks building our aircraft. And I am optimistic about the progress that Boeing is making.

I see them attacking the right problems, approaching those problems conservatively in terms of how they think about deliveries. They are it looks like they’re on track to hit their rate 38 here in April. But again, we’re planning against reasonable numbers and waiting to see the output at Boeing. But just generally, what I’m seeing at Boeing is encouraging. We have a really strong order book at very attractive pricing.

So we need Boeing to get back to delivering the number of aircraft that we need over time. And I’m confident that they’ll do that. It’s just going to take them a while, but I see progress at Boeing. I see them looking at the right questions. On the MAX seven, that’s a certification question with the FAA, so I really can’t opine on the timing.

Andrew can talk about this, but we certainly need the MAX seven in certain markets, short airfield, places like Chicago, Midway, maybe underlying Hawaii. So there is a need for that gauge aircraft. And so if you’re thinking about is there a chance that we don’t need the MAX seven, I see a need for that smaller aircraft. It may be a small number. And then last on diversification, as we think about the future of Southwest, I’m just not ready to talk about this in detail.

I’m just it’s just more pontificating a bit. But as we look to serve everything that our customers want in places that we really dominate, the Nashvilles and the Austins and Kansas City, etcetera. We need to be able to serve more and more of what a customer wants. That can mean more out of the network, more destinations. That could mean more about the product.

Those destinations could require different aircraft in some cases. So not anywhere close to ready to talk about that. But just know that beyond what you saw today, this is a bill to the next thing that we will be talking to you about in the future. And Andrew, on the seven?

Andrew Watterson, EVP, COO, Southwest Airlines: Yes. The MAX seven, as you mentioned, does have very high performance. So certain long, thin routes where we’d like it. Part of the original desire was to have an aircraft suitable for high frequency business markets, which is less a market now than it was pre pandemic. So the percentage of our fleet that would be Max seven is less today than it would have been, when we first ordered it, but it’s not zero.

Mark, Analyst: We look hearing we look forward to hearing more about the future when you’re ready to talk about it. Thanks, Bob and team. We appreciate it.

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

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