Southwest Airlines Q1 2026 Earnings Report

Southwest Airlines EPS Results

• Actual EPS: $0.45
• Consensus EPS: $0.45
• Beat/Miss: Met Expectations
• One Year Ago EPS: -$0.13

Southwest Airlines Revenue Results

• Actual Revenue: $7.25 billion
• Expected Revenue: $8.46 billion
• Beat/Miss: Missed by -$1.21 billion
• YoY Revenue Growth: +12.80%

Southwest Airlines Announcement Details

• Quarter: Q1 2026
• Date: 4/22/2026
• Time: After Market Closes
• Conference Call Date: Thursday, April 23, 2026
• Conference Call Time: 10:00AM ET

Southwest Airlines (NYSE:LUV) Co. is a major U.S. passenger airline headquartered in Dallas, Texas. Operating under the Southwest Airlines brand, the company provides scheduled air transportation for domestic and international travelers and also offers air cargo services.

Southwest was founded in 1967 and began commercial service in 1971, initially connecting Dallas, Houston and San Antonio. The airline expanded its network across the United States and now serves numerous destinations in the United States, Mexico, the Caribbean, Central America and other nearby international markets. Its operations have historically emphasized frequent service, a broad domestic network and a point-to-point route structure.

The company was co-founded by Herb Kelleher, who helped shape Southwest’s low-cost airline model and corporate culture. Bob Jordan has served as president and chief executive officer since 2022. Southwest’s services include ticketed passenger flights, optional travel-related offerings and transportation of freight through its cargo operations.

Southwest Airlines Q1 2026 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Transformation initiatives are driving meaningful top‑line and margin improvement — Q1 EPS was $0.45 (vs. a loss last year), operating margin rose to 4.6% (+8.1 pts YoY), RASM was up 11.2%, and management expects Q2 unit revenue growth of 16.5%–18.5%.
• Negative Sentiment: Fuel volatility is a material headwind — Q1 fuel costs increased ~ $164M (≈$0.22 EPS headwind), the company paused updating its full‑year $4 adjusted EPS target due to fuel uncertainty, and guided Q2 EPS of $0.35–$0.65 assuming $4.10–$4.15/gal.
• Positive Sentiment: Strong cost and balance‑sheet position — CASM‑ex rose just 2.3% (below prior guide), operating cash flow was $1.4B (+65% YoY), liquidity stood at $4.8B with ~2.2x leverage, and the company returned capital via $1.25B repurchases and dividends.
• Neutral Sentiment: Network and capacity actions are being used to improve returns — Southwest is suspending service at O'Hare and Dulles, trimming full‑year capacity to ~2%, and redeploying flying to higher‑margin markets while continuing fleet renewals and optimization.

Presentation

[Operator]

Now Danielle Collins, Managing Director of Investor Relations, will begin the discussion. Please go ahead, Danielle.

[Danielle Collins, Managing Director of Investor Relations at Southwest Airlines]

Hello, everyone, and welcome to Southwest Airlines' first quarter 2026 earnings call. In just a moment, we will share our prepared remarks, after which we will move into Q&A. Joining me today are Bob Jordan, our President and Chief Executive Officer, Andrew Watterson, our Chief Operating Officer, and Tom Doxey, our Chief Financial Officer. Before we begin, a quick reminder that in today's session, we will be making forward-looking statements, which are based on our current expectations of future performance, and our actual results could differ materially from expectations. Also, we will reference our non-GAAP results, which exclude special items that are called out and reconciled to GAAP results in our earnings press release. With that, I'll turn the call over to Bob.

[Bob Jordan, President and CEO at Southwest Airlines]

Thank you, Danielle, and good morning, everyone. We appreciate you joining us today. First quarter 2026 represents an important milestone for Southwest, as all our previously announced initiatives are now in place and contributing to our results. What a difference a year makes. That broad set of commercial, operational, and cost and efficiency actions represent a fundamental transformation of our business model and is translating into strong customer demand for our new product, strong financial results, and strong margin expansion. The financial tailwind provided by these initiatives is meaningful, as indicated by our results.

[Bob Jordan, President and CEO at Southwest Airlines]

Our first quarter EPS of $0.45 was in line with our guidance in January and represents a significant year-over-year improvement from a loss of $0.26 per share or an adjusted loss per share of $0.13, and these results were delivered against a backdrop of significantly higher fuel costs, which represented a $0.22 EPS headwind in the quarter, further illustrating the underlying momentum that we're seeing across the business. First quarter operating margin of 4.6% was an 8.1-point improvement year-over-year or 6.6 points on an adjusted basis, a powerful change in how the company generates earnings. We also generated $1.4 billion in operating cash flow in the quarter, an increase of 65% from the first quarter of 2025. Now that the contributions from our initiatives have kicked in, I want to reflect on two potential narratives that have been brought up occasionally regarding Southwest Airlines.

[Bob Jordan, President and CEO at Southwest Airlines]

The first being because we don't serve long-haul international markets and lack material exposure to premium segments, we would be unable to generate margins that are in line with carriers that do have those attributes. Second, that our customer base is somehow different and would therefore be unwilling to respond to our product changes and pay more for segmented products and seat ancillaries. As evidenced by our first quarter results, we are proving those arguments wrong. Southwest has significant fundamental and enduring core strengths, the largest domestic network, the most non-stop flights at a number one position in nearly half of the 50 largest U.S. airports. Operational excellence that resulted in Southwest being named The Wall Street Journal's best U.S. airline of 2025, cost discipline and operational efficiency, and importantly, legendary service and hospitality provided by our incredible people.

[Bob Jordan, President and CEO at Southwest Airlines]

Those core strengths, coupled with our new product offering, are fundamentally changing the financial margins that we produce. Our transformed business model is being stress tested in this unique environment of geopolitical upheaval and much higher fuel prices. Against this challenging backdrop, our first quarter operating margin of 4.6% and our year-over-year unit revenue growth of 11.2% demonstrate the strength of our new model. Moreover, in the second quarter, we expect unit revenue growth between 16.5% and 18.5%, which I expect to be industry-leading by a wide margin. That's all proof that our existing customer base and the new customers we are attracting want and are willing to pay for our new products and our product attributes. In other words, they love the Southwest product. While the external environment remains uncertain, we are confident about how we are positioned.

[Bob Jordan, President and CEO at Southwest Airlines]

A wholesale change to the business model and product offering that is being battle-tested by higher fuel prices and geopolitical tensions, yet is producing top-tier industry financial results. Looking deeper at the results, demand remains strong across geographies, customer segments in both business and leisure, and the customer take rate for our enhanced product offering and seating ancillaries is strong as well. Passenger revenue growth, operating revenue, and unit revenue each set first quarter records, with March marking our largest operating revenue month in our history. Going forward, we remain squarely focused on continued margin expansion and are taking actions to further improve financial results, including aggressively optimizing our product and revenue initiatives, such as the recent increase in bag fees, taking target actions to further reduce non-fuel costs and drive efficiency across the business.

[Bob Jordan, President and CEO at Southwest Airlines]

You saw a portion of that come through in our first quarter CASM-ex increase of 2.3%, well below our guide of 3.5%. Continuing enhancements to our product offering, such as our new partnership with Starlink. By the end of the year, Starlink will be available on at least 300 aircraft, and roughly two-thirds of our fleet will be equipped with in-seat power and larger overhead bins. We expect these changes, combined with recent product enhancements, to continue to drive growth in corporate business travel. We are aggressively managing our network, reducing lower return flying and redeploying that capacity to higher margin opportunities, such as the recently announced suspension of operations at Chicago O'Hare and Washington Dulles, and we had a handful of flights at both airports which were underperforming.

[Bob Jordan, President and CEO at Southwest Airlines]

We entered 2026 with a disciplined capacity plan and now expect full-year capacity growth of approximately 2% at the low end of our prior 2%-3% range, driven by ongoing schedule optimization and network refinement. Turning to the outlook, there is significant economic and geopolitical uncertainty, and it's not possible to know with confidence all the ways the industry could be impacted. That said, we do know two things. Fuel prices are much higher, and if that is sustained, it will require higher ticket prices to offset that increase in fuel. Given the ongoing macroeconomic uncertainty, updating our full-year adjusted EPS guide of $4 would not be productive at this time. Achieving this outcome would require lower fuel prices and/or stronger revenue performance to offset higher fuel expense. We will continue to monitor conditions closely and provide updates to our guidance as appropriate.

[Bob Jordan, President and CEO at Southwest Airlines]

For the second quarter, we expect EPS in the range of $0.35-$0.65, using an average fuel price range of $4.10-$4.15 based on the forward curve as of April 16. The EPS guide represents significant expected earnings and margin expansion year-over-year. In closing, while fuel is an external factor and we were operating in a volatile macro environment, our first quarter results are proof there is strong customer demand for our new products. Our initiatives are working. Our significant core strengths remain, and that combination is producing top of industry margins. I want to say how proud I am of our people. The progress we are seeing across the business is the direct result of the work they do every day, delivering for each other, our customers, and our shareholders.

[Bob Jordan, President and CEO at Southwest Airlines]

We are just 18 months removed from announcing our initial transformational initiatives, and I could not be prouder of our teams for the discipline and excellence which they continue to deliver. With that, I will turn it over to Andrew to cover revenues and operational performance.

[Andrew Watterson, COO at Southwest Airlines]

Thanks, Bob. The first quarter was an important one for our operation as our teams delivered industry-leading reliability while executing a significant amount of change across the airline. This included the successful implementation of assigned seating and extra legroom on January 27th, with the operation ranking first among our peers in on-time performance and completion factor on launch day. Q1 RASM was up 11.2% year-over-year, well above our guidance of up at least 9.5%, reflecting the contribution from our new product offering, as well as broad demand strength across the network. Operating revenue of $7.2 billion was an all-time record for first quarter. We also announced adjustments to our network. As Bob mentioned, we announced the suspension of operations at O'Hare and Dulles, where we'll be consolidating our operation in Chicago Midway, Reagan National, and Baltimore, and reallocating capacity to high-performing opportunities.

[Andrew Watterson, COO at Southwest Airlines]

At the same time, we are seeing strong performance in markets where we've added capacity, including San Diego, Orlando, and Nashville. We will continue to evaluate future network and capacity adjustments that we feel will be accretive to our performance. Separately, we are seeing our initiatives resonate with customers, as demonstrated by several examples. We are seeing a meaningful shift in customer purchasing behavior. The mix of customers buying up from our base product increased from approximately 20% in 2025 to roughly 60% in the first quarter of 2026, with ancillary upsell performance also meeting expectations. We're also seeing clear traction with business travelers. Managed corporate revenue increased 16% in the first quarter and 25% in March, marking the largest quarter and month in our history and reinforcing that our enhanced product is resonating with higher-yield customers. At the same time, engagement across our Rapid Rewards program continues to strengthen.

[Andrew Watterson, COO at Southwest Airlines]

Enrollments increased 37% year-over-year, and the number of customers earning tier status rose 62%, demonstrating both strong acquisition of new customers and deeper loyalty from our existing base. We continue to deliver a safe and reliable operation, improve efficiency across the system, and support the continued evolution of our product offering. Our people have done an outstanding job navigating a period of significant change. I want to thank them for their continued dedication. With that, I'll turn it over to Tom.

[Tom Doxey, CFO at Southwest Airlines]

Thanks, Andrew. We continue to demonstrate strong cost discipline to start the year, with first quarter CASM ex up 2.3% year-over-year on a capacity increase of 1.5%, and in spite of a 1.2-point headwind from the removal of six seats on our 737-700 fleet to accommodate new extra legroom seating. Fuel prices increased meaningfully during the quarter. We had forecasted a first quarter price per gallon of $2.40 and ended up at $2.73 per gallon, increasing fuel expense by approximately $164 million. In spite of the dramatic increase in fuel cost and other operational headwinds experienced during the quarter, we hit our EPS guide. We also delivered the highest adjusted net margin of the large U.S. airlines during the first quarter. With our cost discipline, initiative contribution, revenue strength, and operational excellence allowing us to deliver the margin expansion that Bob outlined earlier.

[Tom Doxey, CFO at Southwest Airlines]

We ended the quarter with $4.8 billion in liquidity and a leverage ratio of 2.2 times. Having a strong investment-grade balance sheet and high relative margins within the industry is a key strategic advantage for Southwest, especially during times of industry stress, where our strength creates the opportunity for further separation between Southwest and other airlines. During the quarter, we entered into a $500 million secured term loan facility backed by a small portion of previously unencumbered aircraft, which we used to pay down the final portion of our Payroll Support Program loans, which would have otherwise moved to a higher interest rate in the second quarter. We also returned capital to shareholders through share repurchases of $1.25 billion and $93 million in dividends. We have $450 million remaining in our current share repurchase authorization.

[Tom Doxey, CFO at Southwest Airlines]

Looking ahead, our focus remains on managing what we can control, driving efficiency, maintaining disciplined cost management, and investing smartly in our product and operations. We expect second quarter CASM ex to increase 3.5%-4% year over year on a capacity increase of 0.5% at the midpoint. Consistent with Bob's comments, based on what we see today, we continue to expect margin expansion and earnings growth in 2026, and we'll continue to be nimble and opportunistic in the way that we manage the business. With that, I'll turn it back to Danielle for Q&A.

[Danielle Collins, Managing Director of Investor Relations at Southwest Airlines]

Thank you, Tom. This concludes our prepared remarks. We will now open the line for analyst questions. To help us manage time efficiently, we ask that you please ask your one or two questions back-to-back at the onset.

[Operator]

Thank you, Danielle. The first question will come from Mike Linenberg with Deutsche Bank. Please go ahead.

[Mike Linenberg, Managing Director at Deutsche Bank]

Yeah. Hey, my two questions here. Just, Andrew, the upsell out of the bottom bucket from 20%-60%, do you have a sense of what that average increase in fare is going from that 20%-60%? Then just my second question to Bob, just thoughts about potentially competing against the government-controlled or government-owned carrier. I mean, whether it's sound industrial policy or not. I'll let you mull that one over. Thanks for taking my questions.

[Andrew Watterson, COO at Southwest Airlines]

Yeah, thanks. It's Andrew, so I'll start with the first one. I'm not going to break it down kind of fare product by fare product, but I will say that, obviously, we had an 11.6% yield increase year-over-year, and at least half of that came from people voluntarily deciding to pay more by buying up. We have kind of secular yield trends going on, and then we have people voluntarily buying up, which creates the extra yield boost. Net-net, we're super pleased with it.

[Bob Jordan, President and CEO at Southwest Airlines]

In my case, Bob, and on the second, yeah, with Spirit, I mean, it's a tough situation. We've got a lot of people that are affected, but it's a tough industry. I mean, things come around. I've been here 38 years. You have wars, you have fuel spikes, you have economic issues, recessions, and you've got to be prepared for the long term as a business because the shocks are going to happen.

[Bob Jordan, President and CEO at Southwest Airlines]

That's why we've created a very resilient business here at Southwest Airlines to prepare for those things. On competition, we're focused on improving ourselves and competing with the top of the industry. It's showing in the results. If you look at the first quarter, you've got an 8-point margin expansion year-over-year. Our net margin is going to be the best amongst the large U.S. carriers. If you look at the second quarter guide and the spread between our unit revenues and our unit cost is a 14-point expansion. We're focused on building a resilient business, continuing to optimize from the transformation.

[Bob Jordan, President and CEO at Southwest Airlines]

Our customers love the products, and that is where all of our focus is.

[Operator]

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

[Jamie Baker, Managing Director at JPMorgan]

Well, good morning, everybody. A couple for Tom. The first question has to do with the second quarter RASM guide. I realize you hadn't previously given a succinct guide, nor had your competitors, but there was enough info out there that we all kind of backed into how the second quarter was looking before the start of the war, and that's my question. Since the war's start, we've seen several points of second quarter RASM improvement at your competitors, but your second quarter guide seems kind of in line with what we were thinking before the war. Maybe we just got lucky, but for the sake of investors on the call, can you tell us how many points of RASM improvement went into this second quarter outlook as fares began to rise? Second, still considerable consternation around the Air Traffic Liability. It's flat year-over-year.

[Jamie Baker, Managing Director at JPMorgan]

I know there was some language in last night's 10-Q. Maybe the way to clear this up would be, and I don't know if you have this at your fingertips, but under the old methodology, what would the ATL have been at the end of the first quarter? I'm asking because squaring a flat ATL with such strong revenue growth is, well, it's difficult for me, and we continue to take a lot of questions on it. Thank you.

[Andrew Watterson, COO at Southwest Airlines]

Hey, Jamie. It's Andrew. Tom, give me the first one. He'll take the second one.

[Andrew Watterson, COO at Southwest Airlines]

The RASM guide is us looking at our current trends, which have accelerated, and projecting that forward. I know many airlines were talking about fuel recapture and making assumptions about fuel recapture. I think that's sort of a dangerous game. We are taking our current trends, which are very strong. We have even stronger yield traction than we did in Q1, once again, with stable volumes. We're taking that and pushing it forward. If there were an acceleration in the environment from today, then there would be upside to that. We'd rather just take the current trends and project that forward to get a good center cut RASM guide.

[Tom Doxey, CFO at Southwest Airlines]

Yeah, Jamie, on the ATL's, talking about old versus new methodology, we're not going to get into the detail of exactly what the different percentages are and how they allocate between the different buckets. What we've talked about is that what we've moved toward, as we have this new agreement with Chase, is very much industry standard. It's very much where a lot of our peers are in the way that we either bank into ATL loyalty revenue or recognize it in one of the revenue categories. I think as you look at ATL's just generally, there's nothing unusual to note. You look at the sequential trends, you look how it compares to other carriers. There's nothing unusual to note in what those trends are.

[Operator]

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

[Conor Cunningham, Director of Airlines and Travel Research at Melius Research]

Thank you, guys. Maybe following up on that response to Jamie's first question, just why is it a dangerous game to assume some sort of fuel recapture throughout the remainder of the year? Is it that you're fearful of demand destruction? I think there's a big debate on just how straightforward recapture is in general. If you could just talk about that. Tom, the capital allocation decision, clearly things are changing a fair bit. Your free cash flow profile probably took a step back with the rise in fuel. Just trying to understand the buyback going forward from here. You bought back a lot in the first quarter. Your leverage has gone up a little bit. You've talked about that. If you could just frame up the changes in how you think about capital allocation. Thank you.

[Bob Jordan, President and CEO at Southwest Airlines]

Conor, hey, thanks, it's Bob. I'll take the first, and then Tom will take the second. Just on the fare environment, generally, certainly, we've seen a willingness to move fares along. There's been constructive pricing behavior. At the end of the day, this "percent of fuel recovery," which is really what you would put on top of your trend, it's going to be dictated by market conditions, not by some academic formula or target of calculated recovery. Based on that, we believe what is most fair is to put current trends in because you cannot predict at what point you're going to begin to see demand destruction based on the pricing environment. We've run current trends through. If we see upside to that, then that's upside to our guide. Bottom line, we're focused on what we can control.

[Bob Jordan, President and CEO at Southwest Airlines]

We're taking actions against pricing, like the bag fee increase. We're taking actions, obviously, along the broader pricing front. We have made some close-in demand shaping reductions to capacity. We already had low capacity in place for the year. We're taking actions against the things that we can control, aggressive cost discipline, and the fare environment will ultimately play out based on market conditions.

[Tom Doxey, CFO at Southwest Airlines]

Conor, on capital allocation, as we mentioned in the prepared remarks, having a strong and efficient investment-grade balance sheet is a key differentiator. You hear others talk about their desire to get there. The fact that we're there gives us the ability, of course, to borrow at lower rates. As we think about how we move forward and just how we navigate, it's all about staying within the guardrails that keep us there. We've been very consistent about what those guardrails are about liquidity. You see where we are relative to that this quarter. Then we've actually floated down on the debt ratio in spite of being in, I think, a more challenging environment as the business and the EBITDA generation that has occurred in the business has improved. We've actually floated down on that debt ratio.

[Tom Doxey, CFO at Southwest Airlines]

Maybe just as a side note, that debt ratio is a gross debt to EBITDA ratio, and so it's, I think, even compared to some of the others out there, a very conservative way to look at it. As it relates to share buybacks, it's always going to come back to staying within those guardrails. We don't know exactly what's ahead, but we've seen incremental cash generation from the business versus where we were before, in spite of today's environment, and we'll just follow that and stay within our guardrails.

[Operator]

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

[Catherine O'Brien, VP at Goldman Sachs]

Hey, good morning, everyone. Thanks so much for the time. My first question, really, it's hard to tease apart the macro from the initiative, hence the move to EPS guidance. There were a couple of things you thought could drive upside to your EPS outlook in January, including a step up in close in extra legroom purchases from corporate travelers and potential market share gains. Can you update us on those efforts specifically, how they've been going versus your initial plan? Second, a related question and a bit of a follow-up to Mike's. Great to see the big step up in buy up in 1Q post the launch of your new seating products. Can you just break down how much of that is cash sales, loyalty points being redeemed, and credit card perks? Thanks so much for the time.

[Andrew Watterson, COO at Southwest Airlines]

The corporate, as we gave in our prepared remarks, the corporate numbers have responded. You saw that they were back weighted to March. Once the assigned seating and extra legroom went in place, we saw an uptick both from current customers, but also new customers. We're seeing an acceleration of new unique customers in our corporate channels, which indicates a kind of desire now to fly Southwest Airlines, and well, also within the same existing network of accounts, we've seen buyups to the higher fares as corporate policy allows them to buy up. Those numbers we quoted are indicative of the consumers behaving like we anticipated. As far as the redemptions, I think cash has accelerated more than redemptions on the fare products, which is consistent with what we wanted to do.

[Andrew Watterson, COO at Southwest Airlines]

We went to more variable burn in our Rapid Rewards last year, and so that tends to, on the best flights, push your redemption mix down and your cash mix up.

[Operator]

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

[Ravi Shanker, Freight Transportation and Airlines Analyst at Morgan Stanley]

Good morning, everyone. Maybe just kind of similar but different on the theme of RASM. To the extent possible, if you looked at your earnings for the year ex fuel on both cost and revenue. Let's say you were to use February 28 assumptions, do you think you're still on track for at least $4 of EPS for the full year? Then I think you're pointing to the upside of that. Maybe as a follow-up, what innings do you think you're in when it comes to monetizing some of these internal initiatives and kind of how much do you have left in the tank?

[Bob Jordan, President and CEO at Southwest Airlines]

Yeah. Ravi, thanks so much. I think the short story is, but for fuel, everything is on track and performing sort of at or maybe slightly better than we expected. It's really just a story of fuel. It's a $0.22 headwind in the first quarter. It's a $1 billion headwind in the second quarter or 10 points of margin, so it's very material. No, the only change to how we were thinking about the whole year right now is fuel. I just did want to address the guide as well. There's been some reporting that we pulled our guide. We did not pull our full-year guide. There are scenarios where absolutely we could still hit the $4. It depends on fuel and revenue trends from here.

[Bob Jordan, President and CEO at Southwest Airlines]

We just felt like it was not productive to introduce a new guide or a range given how volatile fuel is day to day to day. On your second question, what inning are you in terms of optimizing the current initiatives? I do believe we have a ways to run. Our original forecast or the plan would be to get to full run rate because these bake in over time based on the booking curve to get to run rate here in the third quarter. Then, of course, we have opportunities to optimize fare product buy up, optimize the way we think about seat ancillaries. Then on top of that, we're going to continue to enhance the product. You saw the Starlink announcement continue to make a push into business who loves the new product.

[Bob Jordan, President and CEO at Southwest Airlines]

The fact that March revenues on the business side were up 25% is a huge indicator of that. Yeah, our run rate was expected in the third quarter on the initiative performance, and then we have room from there.

[Operator]

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

[Scott Group, Managing Director and Senior Analyst at Wolfe Research]

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

[Bob Jordan, President and CEO at Southwest Airlines]

Yeah. The first question, where would we be but for, is all again hypothetical. You're trying to compare what would the industry have done with pricing and fares as compared to what is happening today. With the rise in fuel, no doubt, it's a more constructive backdrop, I believe, in terms of pricing. Yeah, I think it's fair to say that the pricing environment is stronger, and we didn't give you a range. We gave you an at least $4. We did not give you what that upper range would be. No, it's a more constructive fare environment, certainly, than I would have expected. Then you just look at Southwest performance. We are demonstrating incredible cost discipline.

[Bob Jordan, President and CEO at Southwest Airlines]

In the first quarter, you had unit costs come in at 2.3, and then you had a 1.1.2 headwind in that from seat removal. The cost discipline, which is structural, it's not timing, it's not odd transactions, it's structural improvements in costs is certainly helping here at Southwest as well. Which is my whole point about the fact that looking at revenue trends, it's going to take revenues, it's going to take fuel, but our $4 is absolutely not off the table. On hedging. We've talked about this many times. Hedging had become very expensive, the cost of hedging, because of volatility, we were spending about $150 million a year in hedging. If you look back over a period of time, it just made no sense to hedge. Of course, you can't predict an extraordinary circumstance like a war.

[Bob Jordan, President and CEO at Southwest Airlines]

If we all could, you'd hedge and then you wouldn't. It's unreasonable to think you could do something like that. I do think the fact that we're all basically unhedged puts the industry in a position where you're going to take, and we're all going to take actions to deal with the fact that fuel is rising at an extraordinary rate, which again, is why you're seeing a constructive pricing environment right now.

[Operator]

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

[Duane Pfennigwerth, Senior Managing Director and Equity Research at Evercore ISI]

Hey. Thanks for the time. This might be tricky to answer sequentially here. Just the first was on fleet requirements. How has your plan for retirements or used aircraft sales changed, if at all? If you could walk us through any cash flow or cash flow 1 and 2 P&L impacts from aircraft sales. Bob, my follow-up. Organizationally, Southwest's been very focused on rolling out these initiatives, executing on these initiatives. Are you now in a better place or more prepared to consider potential consolidation scenarios? Thanks for taking the questions.

[Tom Doxey, CFO at Southwest Airlines]

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

[Bob Jordan, President and CEO at Southwest Airlines]

Duane, on your second, organizationally, there's been a lot of organizational efficiency that's been put into place here at Southwest, both on the front line and then especially here in sort of the corporate side of the business in the last year. The business is moving at an incredibly agile pace in terms of change. You're seeing that come through in the execution of the transformation and then continuing to add focus on our customer, add attributes that our customer wants. We're moving at a pace that I've just not seen here at Southwest. Our ability to deal with any issue, I think is better than it was a year or two ago, period. We don't comment on consolidation and what could happen in the industry. There's lots of rumors out there. We're focused on what we can control. There's no value in focusing on rumors.

[Bob Jordan, President and CEO at Southwest Airlines]

There's no value focusing on fuel because you don't have one thing that you can do about it. Things change, and if some of that were to become real, then obviously we would take a look and decide what our response to that would be. We don't comment on those things.

[Operator]

The next question will come from Atul Maheshwari with UBS. Please go ahead.

[Atul Maheshwari, Equity Research Analyst at UBS]

Good morning. Thanks a lot for taking my question. Based on the full year guide on capacity, it implies that the back half capacity growth is going to be closer to 3%. You're accelerating capacity in the back half at a time when others are cutting. Just some rationale for the implied capacity growth acceleration in the back half in this yield backdrop would be helpful. Then, as my second question on the cost outperformance, I know you mentioned those are structural, but if you could provide some key buckets of the cost outperformance or the improvement that you're seeing currently, that would be helpful. Along those lines, if I can add just one quick one, what should we think about the CASM mix in the back half on a 3%-ish capacity growth? Thank you.

[Bob Jordan, President and CEO at Southwest Airlines]

Yeah, Atul. It's Bob. I'll take the first, and then Tom will take the second on cost. We entered the year 2026 with a very disciplined cost plan. Capacity up 2%-3%. We've been modestly trimming that as we move throughout the year. I would call that sort of normal demand shaping where you take a look and there are flights that just don't make sense anymore and you either cut that capacity or you redeploy. We've also been aggressive with moves, like you saw with O'Hare and Dulles to take underperforming markets and deal with those and then move capacity to markets that are performing, the San Diegos and Nashvilles, et cetera, of the network. We've taken our second quarter capacity down, as you saw.

[Bob Jordan, President and CEO at Southwest Airlines]

We're now expected to grow roughly 0.5%, and I just would point to the fact that we'll continue that close-in demand shaping and capacity activity in the third quarter. We'll do that in the fourth quarter. I understand your point, but I wouldn't read that through as the final number. Again, you've heard others talking about cutting capacity. We started there. We started with a well-thought-out, conservative, constructive capacity plan for the year at 2%-3%, and that's now become 2%. You're seeing others come back to us, not others go below our capacity plans.

[Tom Doxey, CFO at Southwest Airlines]

Atul, on the cost question, the cost performance that you're seeing, and Bob referenced this a bit earlier, but this is structural. This is representing great work that's happening across a lot of the teams, not relating to timing or transactions or other things. As you think about some of the bigger buckets that are there, for us, the people expense represents just shy of half of our cost structure. We need to make sure that as we're out operating, that we're doing that in an efficient way. You've heard us talk a lot about how important it is that we continue to run a really high-quality operation. It is a cost-efficient thing to be running as good an operation as we are now. We look to be as efficient as we can be out there.

[Tom Doxey, CFO at Southwest Airlines]

Some of the other big buckets that we have, technology for one, we have come a long way. Lauren and her team are just phenomenal in the tools that they've built. But we did have a bit of catch-up that we were doing, and that gives us the ability to kind of back off a bit while still maintaining the strong trajectory in technology transformation. So you're seeing some savings there. Then maybe the third and final bucket I'll raise is just on the kind of maintenance and fleet side of things. As you're going through a replacement of older, less efficient aircraft and replacing those with brand-new, more efficient 737 MAX, you just want to make sure that you're doing that as far as component maintenance and other things, that you're doing that in the most efficient way that you can.

[Tom Doxey, CFO at Southwest Airlines]

I think we are one of the best in the world at doing that type of optimization work, and you're seeing that showing up in the numbers quarter after quarter after quarter as we do that.

[Operator]

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

[Savanthi Syth, Managing Director at Raymond James]

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

[Tom Doxey, CFO at Southwest Airlines]

Yeah, thanks, Savanthi. We had five aircraft sales that we did. There were 3 737-700s. There were 2 737-800s that we sold. Those five aircraft. And about a $30 million or $40 million book impact there. Not super material to the cost numbers that you saw. Everything you're seeing in the cost numbers is around the structural changes that we're making to the business.

[Operator]

The next question will come from John Godyn with Citigroup. Please go ahead.

[John Godyn, Managing Director at Citigroup]

Hey, guys. Thank you for taking my question. Bob, I wanted to follow up on the topic of consolidation, and it's not about rumors, news, or anything like that. You were pivotal and central to the AirTran deal many years ago. I feel like there must be learnings from that. There must be kind of a philosophy on when consolidation or being involved in it matters and adds value, when it doesn't. I'm hoping for just more historical context and plugging into the company's philosophy today rather than any commentary on what's going out there right now.

[Bob Jordan, President and CEO at Southwest Airlines]

Yeah, John, thanks for the question. It's pretty basic in my mind. Again, as you sort of go back and reflect on AirTran, and yeah, I was involved in that deal heavily. It's number one, got to make sense. In other words, the pieces that get put together have to result in synergies. They have to result in goodness in terms of geography served. You have to be compatible enough, thinking about things like aircraft cultures. At the end of the day, if it doesn't paper out financially, and other, it doesn't make sense to pursue it. Second, you've got to have a chance to pass muster and get it approved.

[Bob Jordan, President and CEO at Southwest Airlines]

No matter how good it might look, if you have too much overlap as an example, and your odds of approval are low, it's too risky, and no matter what you think, it's not something that you can pursue. We've always been pro-competition, pro-consumer here at Southwest. The combo has to be something that's good for your customers. It's got to, in particular, add geographies, add to the network, potentially add products, but serve them in a better way. That's how we thought about AirTran. It met all those. The geographic combination made sense. The synergies were there. The cultures were similar, and at the end of the day, that was a great thing for Southwest Airlines. It can't be simply because, hey, it's a good time to do something or the rest of the industry is doing something. It has to make sense fundamentally.

[Operator]

The next question will come from Tom Fitzgerald with TD Cowen. Please go ahead.

[Tom Fitzgerald, VP at TD Cowen]

Hi. Thanks very much for the time. Just curious on, just within the outlook for 2Q RASM or just even kind of broadly over the balance of the year, do you anticipate load factors getting back up into the 80% range? It's just one concern we hear a lot from investors, as long as it's in the 70% range, there's that risk that there's maybe or concern that there's share loss in some of the more competitive markets. Thanks again for the time.

[Andrew Watterson, COO at Southwest Airlines]

Yeah, I'll take that. If you look at our Q1 RASM and you kind of flip back to Q1 of 2019, you see our RASM on a stage-adjusted basis has outperformed the carriers that report so far, the big three in particular. Obviously that's the metric that matters, whether year-over-year, year-over-six-year, you drive RASM. Bob mentioned we cut O'Hare and I got employee questions about, "Hey, Andrew, the flights were always full." A full flight does not mean a profitable flight. One of the most ruinous things you can do in the airline business is chase market share or chase volume. You have to go after RASM, and our RASM is performing with us on a year-over-year basis, a year-over-six-year basis, year-over-seven-year basis.

[Andrew Watterson, COO at Southwest Airlines]

It is working for us, and so we'll continue to focus on that. If that results in load going up, so be it. In our calculations, we look at the incremental cost to carry as well as the incremental revenue we get, as we price and we accept and reject demand every day. For us, it's working. We'll continue to push RASM as hard as we can, and we're seeing extraordinarily good yield traction right now, and if that's a vehicle for higher RASM, we will pursue it.

[Operator]

The next question will come from Brandon Oglenski with Barclays. Please go ahead.

[Brandon Oglenski, Director and Senior Equity Analyst at Barclays]

Hey, good morning, and thanks for taking the question. Maybe if I can just follow up on that, because there seems to be this fickle market view that a high teens RASM guide is somehow indicative that Southwest is incrementally losing share. I know we've kind of beat around the bush around this, but I don't know, Bob or Andrew, do you want to comment on that? Maybe incrementally for the second part of my question, how dynamic have you gotten to pricing these incremental products that you just haven't had before? Is there more upside to come on figuring out what people's value they put on these products is? Thank you.

[Andrew Watterson, COO at Southwest Airlines]

Sure. I'll start. You're growing slower, as Bob mentioned, so therefore your share will drop, and that should be fine. You look at the number of people on board your aircraft, once again, looking back to pre-pandemic, the number of the people on the aircraft is flat to up. The aircraft have gotten bigger. Our aircraft size is 160. The big three, I think, is about 120, 130. It's a much bigger aircraft size. Other airlines with big aircraft also see this challenge. I don't think it's anything to do with the inherent attractiveness of Southwest Airlines. You see all the metrics we talk about is we have always been attractive, and we got incrementally attractive with these new products, and we were monetizing that mostly in the back of yield in a high fuel environment.

[Andrew Watterson, COO at Southwest Airlines]

That is the path to prosperity, getting it on the back of yield.

[Bob Jordan, President and CEO at Southwest Airlines]

I just want to add a little perspective here, because now the narrative is, yeah, 17.5% guided RASM is not enough, and then even low load factor is up, somehow we must be losing share. Our customers love these new products, and there's an incredible demand. If you just go back a bit here over the last 18 months, the narratives about Southwest from the naysayers, I think they're becoming increasingly desperate a bit here. First it was, Southwest won't change, and then it became, well, Southwest can't execute the changes that they've talked about. Then it was, well, they got them done, but their customers aren't going to want to buy the new products. Now there's some wonky argument about accounting and ATL, and then we're losing share.

[Bob Jordan, President and CEO at Southwest Airlines]

If you just step back, ignore all that junk, and look at the results, terrific product demand, best net margin of the large U.S. carriers. A 17.5% unit revenue growth in the second quarter, which is off the charts. Business revenue up 25% in March. The transformation is working. Customers love the product, and it is transforming our financial results. I just would say, too, you've got to always examine the motives of those that are pushing a narrative, especially one that's increasingly irrational.

[Operator]

The next question will come from Sheila Kahyaoglu with Jefferies. Please go ahead.

[Sheila Kahyaoglu, Managing Director of Airlines and Aerospace at Jefferies]

Good morning, guys, and thank you. Maybe just kind of related to all the fuel comments and capacity comments, Bob, I could see why you're frustrated at the same time, too. I guess, at what fuel price do you make further changes to capacity? As a follow-up to that, how do we think about when fuel prices and how fuel prices impact your aircraft sales or deliveries, and how you think about changing them for how long they stay at these elevated levels?

[Bob Jordan, President and CEO at Southwest Airlines]

Yeah. Maybe Tom on the second one. I'll take the first one. It's really hypothetical because fuel is moving around, really day to day. You're seeing 8% and 10% moves day to day. Again, you're not in control of exactly how fast and how much you can raise fares. There's market dynamics at play, but there is a lot of constructive fare movement. We're seeing that. As clearly, revenues and therefore fares are underneath the increase in fuel. We've not caught the increase in fuel by any stretch of the imagination, which is why you're continuing to see fares move in the industry.

[Bob Jordan, President and CEO at Southwest Airlines]

I can't predict exactly where fuel is going, and so therefore can't predict exactly where pricing and fares are going, which is why I indicate we're just using the forward curve. We'll continue to be dynamic. We'll continue to react. We came in again to the year with a very disciplined capacity plan, and we'll continue to be aggressive in redeploying capacity to better performing markets. Yeah, if fuel really moves up from here, obviously, we would take further actions. I think, trying to indicate what those might be is just speculation at this point. Just know that we'll be aggressive, though.

[Tom Doxey, CFO at Southwest Airlines]

The follow-on question on aircraft. Having such a large fleet of mostly unencumbered owned airplanes gives us tons of flexibility. That'll really just be an output of how and where we're looking to grow, and to what levels, and that flexibility is there to retire or retain to adjust to whatever the environment might be.

[Operator]

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

[Daniel McKenzie, Senior Equity Analyst at Seaport Global]

Oh, hey, good morning. My question is similar to a prior one trying to get at M&A philosophically. I guess my question really is, how sacrosanct is the investment grade rating? Is that something you'd ever be willing to put at risk temporarily if a deal checked all the boxes that you talked about, Bob? Secondly, I guess, Andrew, Southwest is doing so much on merchandising. Just going back to that question about how much room is left in the tank. The revenue upsell at the time of sale seems pretty compelling, communicated pretty well. But I'm curious how big the upsell opportunity is after the sale, what you're doing here, and what percent of revenue that could ultimately be.

[Tom Doxey, CFO at Southwest Airlines]

Dan, I'll take the first one. This goes to comments I made earlier. The investment-grade rating for us is a differentiator. There are only three airlines in the world that have an investment-grade rating. As we look at the activities that we do, just know that that along with the guardrails that I referenced earlier, are a filter that we use to evaluate different opportunities or different decisions that we make within the business.

[Andrew Watterson, COO at Southwest Airlines]

On your second question, I think when we originally gave some of our values before for initiatives that you kind of size the extra legroom, we talked about how we expected that to improve as we kind of bake it in from this year into next year. Obviously there's still upside to come from it. The at time of sale, we are seeing very good traction as we indicated in our prepared remarks, but we're also still continuing to optimize that. We're happy with it. The standalone seats, some of that comes at sale, but there's a very kind of sharp inside the week before departure booking curve there, and we have dynamic pricing tools that we've deployed to help us with that, and we expect to have benefits there. All those in the same vein of we expect to improve from this year into next.

[Andrew Watterson, COO at Southwest Airlines]

There's also other opportunities that Bob's talked about that we're looking at to take things to the next level, including getting some more share shift out of this. Overall, as Bob said, it's working better than we expected. There is implied room to come in our business case, and we think there's room on top of that for upside.

[Operator]

The next question will come from Chris Wetherbee with Wells Fargo. Please go ahead.

[Chris Wetherbee, Senior Equity Analyst at Wells Fargo]

Yeah. Hey, thanks. Good morning, guys. I just want to try to make sure I understand this. I'm going to ask this question. It's been asked a bunch of times, but I'm just curious. Since March 1st, how many fare increases have you put through? Just putting initiatives aside, I guess, how many have you participated in the industry just to give a sense of kind of how that's played out?

[Andrew Watterson, COO at Southwest Airlines]

I count five broad industry-wide fare moves, and another one underway today.

[Chris Wetherbee, Senior Equity Analyst at Wells Fargo]

You participated in all of them?

[Andrew Watterson, COO at Southwest Airlines]

Those all stuck, and which means all carriers participated.

[Chris Wetherbee, Senior Equity Analyst at Wells Fargo]

That's very helpful. Thank you very much.

[Operator]

The next question will come from David Vernon with Bernstein. Please go ahead.

[David Vernon, Senior Analyst at Bernstein]

Hey, good morning, and thanks for taking the question. If you look at the Rapid Rewards information that's in the earnings release, they're talking about enrollments up 37%, high-value customers increased 2%. Is there any color you can give us around how the card program is performing as far as total spend or sign-ups for the card? Just trying to figure out how the card program is performing during this period.

[Andrew Watterson, COO at Southwest Airlines]

I would say that we saw improvement with the rollout in the mid-last year of the new card. Our remuneration was up 8% approximately year-over-year. Which is, I think, just shy of the other airlines, and we don't yet have a high-fee credit card, which is a source of much of the gains across the card industry. We're really encouraged that without that key aspect, we're at 8%, and we expect that to accelerate if we can offer that kind of card.

[Operator]

The next question will come from Christopher Stathoulopoulos with SIG. Please go ahead.

[Christopher Stathoulopoulos, Senior Equity Analyst at SIG]

Good morning, everyone. I'll keep it to one call. One question. On demand elasticity, destruction, although I prefer the former term there. If you could contextualize the part of your network that is perhaps more resilient than others. Whether it's some inherent pricing power due to network architecture or otherwise as we consider what is likely going to be, I guess, some weakening at certain parts of this K-shaped recovery, however you want to describe it. Parts of your network that you believe, for whatever reason, are more resilient or have some inherent pricing power around them. Thank you.

[Andrew Watterson, COO at Southwest Airlines]

This is Andrew. We are seeing extraordinarily strong fares and strong demand across the entire network, across all customer segments, across different travel types. The only place seeing weakness are the Mexican beach resorts and Hawaii because of weather and political activities. Even those have seen a sequential improvement in the last couple of weeks. When we say broad-based, we very much mean broad-based.

[Bob Jordan, President and CEO at Southwest Airlines]

The other thing I would add, just with the fundamental change in the financial performance of the business and the fundamental change in our margins, whatever is happening in the customer response, so at some point you do begin to see some pushback on fare increases, which again, as Andrew said, there's absolutely no sign of that. Obviously, with higher margins now, top of the industry margins, and that performance allows us to look at the business and markets in a different way because they're performing. Markets flipping from a performer to an underperformer is very different when you're near breakeven than when you're producing top of the industry margins.

[Danielle Collins, Managing Director of Investor Relations at Southwest Airlines]

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

[Operator]

Thank you. The next question will come from Michael Goldie with BMO Capital Markets. Please go ahead.

[Michael Goldie, VP of Equity Research at BMO Capital Markets]

Morning, and thank you for squeezing me in. Going back to costs for maintenance expense, is the performance that we're seeing driven by delivery of new aircraft and then divesting of older equipment? Or is anything else changing that's driving that maintenance performance? Just to follow up on headcount, we've seen headcount for ASM climb quite a bit since 2019. I get that part of that is investing in network resiliency. Are we at the right levels or are you going to grow into these resources over time? Thank you.

[Tom Doxey, CFO at Southwest Airlines]

Thanks, Michael. On the maintenance side, there's several buckets that are there. What you referenced, which is the ability to be efficient in the way that you are retiring a fleet type, that's certainly part of it. I think we've consistently quarter to quarter to quarter, gotten more and more efficient in the way that we're doing that, especially as it relates to the 737-700, the smaller, less fuel-efficient aircraft, as we're bringing the new MAX 8s into the fleet. That is definitely a contributor, and we have many, many years ahead of that continuing to occur for us as we continue that transition with hundreds of airplanes, newer airplanes on order.

[Tom Doxey, CFO at Southwest Airlines]

Apart from that, though, there is efficiency around the way that we're managing our supply chain and other elements of the program that are also contributing to that maintenance expense being as efficient as it has been. To your second question on headcount, so much of the headcount expense that we have is variable. Yes, we do look at headcount in and of itself as it relates to the front line, but it's really more about having the right number of people so that you have the right folks in the right places, so that you're not having to have more premium pay and other things that would result from not having kind of an efficient setup across our operation.

[Tom Doxey, CFO at Southwest Airlines]

On the indirect side for headcount, you've heard us talk about the fact that we, year-to-year, are keeping headcount or SWIB dollars flat, which as we go through attrition and other things, you probably see that headcount come down just a bit to be able to enable the dollars to stay flat year to year to year.

[Danielle Collins, Managing Director of Investor Relations at Southwest Airlines]

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

Participants

Executives

• Andrew Watterson, COO
• Bob Jordan, President and CEO
• Danielle Collins, Managing Director of Investor Relations
• Tom Doxey, CFO

Analysts

• Atul Maheshwari, Equity Research Analyst at UBS
• Brandon Oglenski, Director and Senior Equity Analyst at Barclays
• Catherine O'Brien, VP at Goldman Sachs
• Chris Wetherbee, Senior Equity Analyst at Wells Fargo
• Christopher Stathoulopoulos, Senior Equity Analyst at SIG
• Conor Cunningham, Director of Airlines and Travel Research at Melius Research
• Daniel McKenzie, Senior Equity Analyst at Seaport Global
• David Vernon, Senior Analyst at Bernstein
• Duane Pfennigwerth, Senior Managing Director and Equity Research at Evercore ISI
• Jamie Baker, Managing Director at JPMorgan
• John Godyn, Managing Director at Citigroup
• Michael Goldie, VP of Equity Research at BMO Capital Markets
• Mike Linenberg, Managing Director at Deutsche Bank
• Ravi Shanker, Freight Transportation and Airlines Analyst at Morgan Stanley
• Savanthi Syth, Managing Director at Raymond James
• Scott Group, Managing Director and Senior Analyst at Wolfe Research
• Sheila Kahyaoglu, Managing Director of Airlines and Aerospace at Jefferies
• Tom Fitzgerald, VP at TD Cowen