Q3 2025 Southwest Airlines Co Earnings Call

Speaker #1: Hello everyone , and welcome to the Southwest Airlines third Quarter 2025 conference call . I'm Gary , and I'll be moderating today's today's call , which is being recorded .

Bob Jordan: Hello, everyone, and welcome to the Southwest Airlines Co. Third Quarter 2025 Conference Call. I'm Gary, and I'll be moderating today's call, which is being recorded. A replay will be available on southwest.com in the Investor Relations section. After today's remarks, there's an opportunity to ask questions. To queue up for an opportunity to ask a question, press star, then one. To withdraw your question, the command is star, then two. Now, Lauren Yet from Investor Relations will begin the discussion. Please go ahead, Lauren.

Speaker #1: A replay will be available on Southwest.com in the Investor Relations section . After today's remarks , there is an opportunity to ask questions to queue up for an opportunity to ask a question , press star , then one .

Speaker #1: To withdraw your question . The command is star , then two . Now Lauren . Yet from Investor relations will begin the discussion .

Speaker #1: Please go ahead, Lauren.

Speaker #2: Thank you . Hello everyone , and welcome to Southwest Airlines third quarter 2020 five earnings call . In just a moment , we will share our prepared remarks , after which we will move into Q&A .

Lauren Yet: Thank you. Hello, everyone, and welcome to Southwest Airlines Co. Third Quarter 2025 Earnings Call. In just a moment, we will share our prepared remarks, after which we will move into Q&A. I am joined today by our President, CEO, and Vice Chairman of the Board, Bob Jordan, Chief Operating Officer, Andrew Watterson, and Chief Financial Officer, Tom Doxey. A quick reminder that we will make forward-looking statements, which are based on our current expectation of future performance, and our actual results could differ materially from expectations. Also, we will reference our non-GAAP results, which exclude special items that are called out and reconciled to GAAP results in our earnings press release. Our press release with Third Quarter 2025 results and supplemental information, including our initiative highlights, were both issued yesterday afternoon and are available on our Investor Relations website.

Speaker #2: I am joined today by our President, CEO, and Vice Chairman of the Board, Robert Jordan; Chief Operating Officer Andrew Watterson; and Chief Financial Officer Tom Doxey.

Speaker #2: 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 .

Speaker #2: 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 .

Speaker #2: Our press release with third quarter 2025 results and supplemental information , including our initiative highlights for both issued yesterday afternoon and are available on our Investor Relations website .

Speaker #2: And now I am pleased to turn the call over to you , Bob .

Lauren Yet: I am pleased to turn the call over to you, Bob.

Speaker #3: Thank you , Lauren , and thanks , everyone for joining us today . The third quarter was another story of continued strong execution across the board .

Bob Jordan: Thank you, Lauren, and thanks, everyone, for joining us today. The third quarter was another story of continued strong execution across the board: operational reliability, cost discipline, and the delivery of initiatives against our transformational plan. Southwest Airlines Co. continues to transform at a faster pace than ever before, and I'm pleased with the results of our strategic transformation that we saw during the third quarter and the quality of the initiatives delivered. Both costs and revenue finished meaningfully ahead of expectations, and the rollout and impact of our initiatives remain firmly on track. We began selling assigned and extra legroom seating in July, a major milestone for our customer experience and product changes. The rollout was smooth, and while still early, we're right on track with our expectations, and we're already seeing a 4% improvement in customer net promoter score on aircraft with this new configuration.

Speaker #3: Operational reliability , cost discipline and the delivery of initiatives against our transformational plan . Southwest continues to transform at a faster pace than ever before , and I'm pleased with the results of our strategic transformation that we saw during the third quarter and the quality of the initiatives delivered both costs and revenue finished meaningfully ahead of expectations and the rollout and impact of our initiatives remain firmly on track .

Speaker #3: We began selling assigned and extra legroom seating in July , a major milestone for our customer experience and product changes . The rollout was smooth , and while still early , we're right on track with our expectations and we're already seeing a four point improvement in customer net Promoter Score on aircraft .

Speaker #3: With its new configuration . Additionally , we have continued to launch new products and services , showing our commitment to meeting the needs of our customers and our ability to execute quickly .

Bob Jordan: Additionally, we have continued to launch new products and services, showing our commitment to meeting the needs of our customers and our ability to execute quickly. Starting tomorrow, we will be offering free Wi-Fi, sponsored by our partner, T-Mobile, for our Rapid Rewards members. We continue to roll out our updated cabins with larger overhead bins, in-seat power, upgraded lighting, and more. We expanded our distribution channels, launching a partnership with Priceline. We launched our new in-house vacation product, Getaways by Southwest. We announced a new partnership with EVA Air to provide customers more connection opportunities. We announced new markets, including the additions of Knoxville, Tennessee, St. Martin, Santa Rosa, California, and our first-ever flights to Alaska, servicing Anchorage, all to start in 2026. We aren't done.

Speaker #3: Starting tomorrow , we will be offering free Wi-Fi sponsored by our partner T-Mobile , for our Rapid Rewards members . We continue to roll out our updated cabins with larger overhead bins .

Speaker #3: In-seat power , upgraded lighting , and more . We expanded our distribution channels , launching a partnership with Priceline . We launched our new in-house vacation product , getaways by Southwest .

Speaker #3: We announced a new partnership with Eva air to provide customers more connection opportunities . We announced new markets , including the additions of Knoxville , Tennessee , Saint Martin , Santa Rosa , California , and our first ever flights to Alaska servicing Anchorage , all to start in 2026 .

Speaker #3: And we aren't done . While we don't have specifics to share today , we're actively looking at continued changes to widen our product offering for our customers , provide additional premium revenue opportunities , and further enhance our rapid rewards loyalty program and Co-brand economics , including things like premium seating , airport lounges , and long haul international destinations served by Southwest Airlines and our customers are responding to these enhancements .

Bob Jordan: While we don't have specifics to share today, we're actively looking at continued changes to widen our product offering for our customers, provide additional premium revenue opportunities, and further enhance our Rapid Rewards loyalty program and co-brand economics, including things like premium seating, airport lounges, and long-haul international destinations served by Southwest Airlines Co. Our customers are responding to these enhancements. Our brand net promoter score has returned to the levels seen prior to our policy changes announced in March, and we are excited to deliver further enhancements as we improve the customer experience. Our strategic plan continues to progress well, and we're encouraged by the sustained outperformance of bag fee revenue and the momentum across other key revenue and cost initiatives.

Speaker #3: Our brand Net Promoter Score has returned to the levels seen prior to our policy changes announced in March, and we are excited to deliver further enhancements as we improve the customer experience.

Speaker #3: Our strategic plan continues to progress well , and we're encouraged by the sustained outperformance of bag fee revenue and the momentum across other key revenue and cost initiatives .

Speaker #3: We saw a clear positive inflection in the demand environment beginning in early July , which continued throughout the quarter , and we are proud to report record third quarter revenue performance .

Bob Jordan: We saw a clear, positive inflection in the demand environment beginning in early July, which continued throughout the quarter, and we are proud to report record third-quarter revenue performance. Looking to the fourth quarter, we expect to deliver an all-time quarterly record revenue performance. We maintain strong cost discipline across the organization, significantly beating our CASM ex guide for the quarter. We have identified additional cost-saving opportunities in the back half of the year and remain confident in our full-year EBIT guidance range of $600 to $800 million. We are entering the fourth quarter with confidence and anticipate meaningful margin expansion as the benefit from our initiatives continues to mature as we execute our transformational plan. Our people delivered a strong operational performance throughout the quarter. Their dedication, their resilience, and the world-class hospitality continue to set Southwest Airlines Co. apart.

Speaker #3: Looking to fourth quarter , we expect to deliver an all time quarterly record revenue performance . We maintain strong cost discipline across the organization , significantly beating our guide for the quarter .

Speaker #3: We have identified additional cost saving opportunities in the back half of the year , and remain confident in our full year Ebit guidance .

Speaker #3: Range of 600 to 800 million . We are entering the fourth quarter with confidence and anticipate meaningful margin expansion as the benefit from our initiatives continues to mature as we execute our transformational plan , our people delivered a strong operational performance throughout the quarter .

Speaker #3: There dedication , their resilience and the world class hospitality continue to set southwest apart . We've made measurable progress across nearly every key operational metric since January , and we continue to lead the industry as we track our performance against the Wall Street Journal .

Bob Jordan: We've made measurable progress across nearly every key operational metric since January, and we continue to lead the industry as we track our performance against the Wall Street Journal Airline Scorecard. These results stand out even more given the hurdles that we faced, including summer weather, ongoing ATC constraints, and the full rollout of reduced turn times across many of our stations, and it's a testament to our operational excellence and the heart of our company. While we're not providing 2026 guidance today, we're excited about the opportunities ahead and confident in our strategy. In 2026, we expect to recognize even greater benefits from our portfolio of Southwest Airlines Co.-specific initiatives, including a full year of revenue from bag fees.

Speaker #3: Airline Scorecard . These results stand out even more given the hurdles that we've faced , including summer weather , ongoing ATC constraints , and the full rollout of reduced turn times across many of our stations .

Speaker #3: And it's a testament to our operational excellence and the heart of our company . While we're not providing 2026 guidance today , we're excited about the opportunities ahead and confident in our strategy in 2026 .

Speaker #3: We expect to recognize even greater benefits from our portfolio of southwest specific initiatives , including a full year of revenue from bag fees .

Speaker #3: We expect to deliver more than 1 billion of incremental Ebit from assigned and extra legroom seating in 2026 , and hit full run rate of approximately 1.5 billion in 2027 .

Bob Jordan: We expect to deliver more than $1 billion of incremental EBIT from assigned and extra legroom seating in 2026 and hit a full run rate of approximately $1.5 billion in 2027. We will continue to be disciplined in our cost execution across the organization and expect that momentum to continue into 2026. It's just an exciting time at Southwest Airlines Co. We're transforming faster than ever before, and the momentum is real. With that, I'll turn it over to Andrew to share more on our revenue and operational performance.

Speaker #3: We will continue to be disciplined in our cost execution across the organization and expect that momentum to continue into 2026 , you know , it's just an exciting time at Southwest Airlines .

Speaker #3: We're transforming faster than ever before , and the momentum is real . And with that , I'll turn it over to Andrew to share more on our revenue and operational performance .

Speaker #4: Thanks , Bob . I want to echo Bob's appreciation for our people , their hard work and commitment enabled us to deliver an outstanding operation this quarter , even in the face of early July weather challenges .

Andrew Watterson: Thanks, Bob. I want to echo Bob's appreciation for our people. Their hard work and commitment enabled us to deliver an outstanding operation this quarter, even in the face of early July weather challenges. We've come a long way over the past couple of years, working to enhance processes and technology to improve daily operations and better manage disruptions. A great example of this was in September, when an external telecommunications issue in Dallas impacted radar, radio, and computer systems, triggering FAA ground stops at local airports. Despite our significant presence at Dallas Love Field Airport, we had just one cancellation, finishing second among all U.S. airlines for the day, including many that weren't directly affected by the issue. Our teams, particularly those in the NOC and at the station, responded quickly and effectively, keeping our operation running smoothly and reliably.

Speaker #4: We've come a long way over the past couple of years , working to enhance processes and technology to improve daily operations and better manage disruptions .

Speaker #4: A great example of this was in September , when an external telecommunications issue in Dallas impacted Radar , radio and computer systems , triggering FAA ground stops at local airports .

Speaker #4: Despite our significant presence at Dallas Love Field Airport, we have just one cancellation, finishing second among all U.S. airlines for the day, including many that weren't directly affected by the issue.

Speaker #4: Our teams, particularly those in the NOC and at the station, responded quickly and effectively, keeping our operations running smoothly and reliably.

Speaker #4: We know reliability is one of the biggest drivers of customer net promoter scores and a primary driver of loyalty, so it's critical that we continue to innovate and invest in both our operations and our people.

Andrew Watterson: We know reliability is one of the biggest drivers of customer net promoter scores and a primary driver of loyalty, so it's critical that we continue to innovate and invest in both our operation and our people. The demand environment inflected up in early July and sustained momentum throughout the quarter. The improved demand environment and our execution of our initiatives contributed to our record third-quarter revenue and to being the midpoint of our third-quarter guide, with RADM coming in at up 0.4%. Even with increased capacity from our strong operational results and our ability to prolong the selling of the six to-be-removed seats on our 737-700 aircraft, we were pleased to see load factor up year over year in August, September, and so far in October. Corporate travel demand improved sequentially, with a particularly strong September where we saw multi-point passenger growth.

Speaker #4: The demand environment inflected up in early July and sustained momentum throughout the quarter . The improved demand environment and our execution of our initiatives contributed to our record third quarter revenue and to beating the midpoint of our third quarter guide , with rasam coming in at up 0.4% .

Speaker #4: Even with increased capacity from our strong operational results and our ability to prolong the selling of the six to be removed seats on our 737 700 aircraft , we were pleased to see load factor up year over year .

Speaker #4: In August , September and so far in October . And corporate travel demand improved sequentially with a particularly strong September where we saw multi-point passenger growth .

Speaker #4: We're also seeing great traction with our loyalty program in Co-brand credit card enhancements , which align with our new product offerings and incentivize everyday spending .

Andrew Watterson: We're also seeing great traction with our loyalty program and co-brand credit card enhancements, which align with our new product offerings and incentivize everyday spending. Third-quarter loyalty revenue was up 7%, and we saw double-digit growth in co-brand card acquisitions year over year. Our recent 100K point promotion saw the highest acquisition activity in over five years, signaling that these enhancements are resonating with customers and driving increased engagement. Looking ahead to the fourth quarter, we expect RADM to be in the range of up 1% to 3%. This outlook assumes the positive inflection in demand we've seen across the industry since early July remains at current levels through the end of the quarter. It also reflects the planned acceleration from our initiatives, the approximate two-point year-over-year increase in fourth-quarter capacity since July, and the recent observed impact of the government shutdown.

Speaker #4: Third quarter loyalty revenue was up 7% , and we saw double digit growth in Co-brand card acquisitions year over year . Our recent 100 K point promotion saw the highest acquisition activity in over five years , signaling that these enhancements are resonating with customers and driving increased engagement .

Speaker #4: Looking ahead to the fourth quarter , we expect to be in the range of up 1 to 3% . This outlook assumes a positive inflection in demand .

Speaker #4: We've seen across the industry since early July remain at current levels through the end of the quarter. It also reflects the planned acceleration from our initiatives.

Speaker #4: The approximate two point year over year increase in fourth quarter capacity since July , and the recent observed impact of the government shutdown .

Speaker #4: To the extent that demand strengthens beyond current levels , it would provide upside potential to our full year Ebit guide of 600 to 800 million .

Andrew Watterson: To the extent that demand strengthens beyond current levels, it would provide upside potential to our full-year EBIT guide of $600 to $800 million. We're planning for fourth quarter year-over-year capacity growth of approximately 6%, which compares to a relatively low base in fourth quarter 2024. Compared with fourth quarter 2023, planned capacity is up about 1%. This capacity level now contemplates further pushing out the retrofit timing of our entire 737-700 fleet to be completed in January without any impact to the planned operate date for seat assignments and extra legroom seating on January 27th. A big shout-out goes to our Tech Ops team for streamlining the timeline to complete this work, allowing us to capture additional revenue on those six seats during the entire holiday period at almost no incremental cost. On the product side, we launched the sale of assigned and extra legroom seating on July 29th.

Speaker #4: We're planning for fourth quarter year over year capacity growth of approximately 6% , which compares to a relatively low fourth base in fourth quarter of 2020 .

Speaker #4: For compared with fourth quarter of 2023 . Plant capacity is up about 1% . This capacity level now contemplates further pushing out the retrofit timing of our entire 737 700 fleet to be completed in January without any impact to the plan .

Speaker #4: Operate date for seat assignments and extra legroom seating on January 27th , a big shout out goes to our Techops team for streamlining the timeline to complete this work , allowing us to capture additional revenue in those six seats during the entire holiday period .

Speaker #4: It almost no incremental cost on the product side , we launched the sale of assigned and extra legroom seating on July 29th , while early bookings are in line with our expectations , we're seeing strong interest from customers and the trends are encouraging , including demand for our new products , fair product by up and ancillary seat sales .

Andrew Watterson: While early, bookings are in line with our expectations. We're seeing strong interest from customers, and the trends are encouraging, including demand for our new products, fare product buy-up, and ancillary seat sales. These offerings are helping us differentiate and enhance our product and drive incremental revenue. We feel confident in our ability to deliver more than $1 billion of incremental EBIT from assigned and extra legroom seating in 2026 and hit a full run rate of $1.5 billion in 2027. We're proud of the progress we've made and excited about what's ahead. With that, I'll turn it over to Tom.

Speaker #4: These offerings are helping us differentiate , enhance our product and drive incremental revenue . We feel confident in our ability to deliver more than $1 billion of incremental Ebit from assigned and extra legroom seating in 2026 .

Speaker #4: And hit full run rate of $1.5 billion in 2027 . We're proud of the progress we've made and excited about what's ahead . With that , I'll turn it over to Tom .

Speaker #3: Thanks , Andrew and .

Tom Doxey: Thanks, Andrew, and hello, everyone. As you've heard from both Bob and Andrew, our initiatives are on track for this year, and we expect further acceleration and contribution from these initiatives into the fourth quarter and into next year, according to our plan. As you know, our continued performance on costs is a key element of our transformation, and I am pleased to once again report that we delivered strong cost performance this quarter, with CASM ex coming in at up 2.5%, beating the midpoint of our guide by two points, a strong beat with or without the capacity increase we saw in the quarter. We continue to see broad-based cost discipline across the entire business.

Speaker #5: Hello everyone. As you've heard from both Bob and Andrew, our initiatives are on track for this year, and we expect further acceleration in contribution from these initiatives into the fourth quarter and into next year, according to our plan.

Speaker #5: As you know , our continued performance and costs is a key element of our transformation . And I am pleased to once again report that we delivered strong cost performance this quarter with Casm X coming in at up 2.5% , beating the midpoint of our guide by two points .

Speaker #5: A strong beat, with or without the capacity increase we saw in the quarter. We continue to see broad-based cost discipline across the entire business.

Speaker #5: I should also emphasize that this is more about spending smartly than it is about simply cutting costs , or simply pushing costs forward , as evidenced by the customer technology and operational investments being made across Southwest Airlines .

Tom Doxey: I should also emphasize that this is more about spending smartly than it is about simply cutting costs or simply pushing costs forward, as evidenced by the customer, technology, and operational investments being made across Southwest Airlines Co. This was a company-wide effort, and I want to thank our teams for their focus and execution. Looking to the fourth quarter, we are expecting strong continued cost execution, with CASM ex up in the range of 1.5% to 2.5%, on capacity up approximately 6%, both on a year-over-year basis. Excluding the impact of expected book gains from fleet transactions in the fourth quarter of both years, which gives a more accurate view of the cost performance of the underlying base business, we expect CASM ex to be in the range of flat to up 1% year over year.

Speaker #5: This was a company wide effort , and I want to thank our teams for their focus and execution . Looking to the fourth quarter , we are expecting strong continued cost execution with Casm X up in the range of 1.5 to 2.5% on capacity , up approximately 6% , both on a year over year basis .

Speaker #5: Excluding the impact of expected book gains from fleet transactions in the fourth quarter of both years , which gives a more accurate view of the cost , performance of the underlying base business , we expect to be in the range of flat to up 1% year over year .

Speaker #5: Turning to fleet . Boeing continues to hit their delivery plan , and we've increased our 2025 delivery assumptions from 47 to 53 . Boeing 737 eight aircraft .

Tom Doxey: Turning to fleet, Boeing continues to hit their delivery plan, and we've increased our 2025 delivery assumptions from 47 to 53 Boeing 737-8 aircraft. We received eight aircraft deliveries in the third quarter and retired 16 aircraft from our fleet, including the sale of one 737-800 aircraft and plan to sell four additional 737-800 aircraft in the fourth quarter. We will continue to be opportunistic as we evaluate potential sale transactions from our existing fleet. We continue to expect full-year 2025 capital spending to be in the range of $2.5 billion to $3 billion, which includes the additional aircraft deliveries expected this year, as well as the expected proceeds from aircraft sales.

Speaker #5: We received eight aircraft deliveries in the third quarter and retired 16 aircraft from our fleet , including the sale of one 737 800 aircraft , and planned to sell four additional 737 800 aircraft in the fourth quarter .

Speaker #5: We will continue to be opportunistic as we evaluate potential sale transactions from our existing fleet . We continue to expect full year 2025 capital spending to be in the range of 2.5 to $3 billion , which includes the additional aircraft deliveries expected this year , as well as the expected proceeds from aircraft sales .

Speaker #5: We finished the quarter with $3 billion in cash , in line with our liquidity target of 4.5 billion , including our revolver and with a gross leverage ratio of 2.1 times within our target range of 1 to 2 and a half times .

Tom Doxey: We finished the quarter with $3 billion in cash, in line with our liquidity target of $4.5 billion, including our revolver, and with a gross leverage ratio of 2.1 times, within our target range of 1 to 2.5 times. We also executed an accelerated share repurchase program in the amount of $250 million under the previously announced $2 billion authorization. We intend to continue opportunistically repurchasing shares based on market conditions. This reflects our continued confidence in our strategy and our commitment to returning value to shareholders. Overall, our third-quarter performance was ahead of our expectations for cost, revenue, and net income, which is another key milestone as we execute our transformational plan.

Speaker #5: We also executed an accelerated share repurchase program in the amount of $250 million under the previously announced $2 billion authorization . We intend to continue opportunistically repurchasing shares based on market conditions .

Speaker #5: This reflects our continued confidence in our strategy and our commitment to returning value to shareholders . Overall , our third quarter performance was ahead of our expectations for cost , revenue and net income , which is another key milestone as we execute our transformational plan , we're managing costs well , executing our initiatives , investing in our product and customer experience , running an industry leading operation , maintaining a strong and efficient investment grade balance sheet .

Tom Doxey: We're managing costs well, executing our initiatives, investing in our product and customer experience, running an industry-leading operation, maintaining a strong and efficient investment-grade balance sheet, and we remain confident in our ability to achieve our full-year EBIT guide of $600 to $800 million. With that, I'll hand it back to Bob.

Speaker #5: And we remain confident in our ability to achieve our full year Ebit guide of 600 to $800 million . And with that , I'll hand it back to Bob .

Speaker #3: Thanks , Tom . As we wrap up , I want to leave you with a few key thoughts . First , the pace of change at southwest is accelerating , and at the same time , our execution has never been stronger .

Bob Jordan: Thanks, Tom. As we wrap up, I want to leave you with a few key thoughts. First, the pace of change at Southwest Airlines Co. is accelerating, and at the same time, our execution has never been stronger. We're transforming our product, enhancing the customer experience, and delivering meaningful financial improvement, all thanks to the incredible work of our people. Second, we're confident in our ability to hit our fourth quarter and our full-year guides. We built a strong foundation, and our initiatives are ramping as planned. The operational rollout of assigned and extra legroom seating has been smooth, and we're seeing encouraging early results. Third, we're not stopping here. We've continued to evolve our product, expand our network, and lean into the customer experience. Free Wi-Fi for Rapid Rewards members starts tomorrow. New markets are launching, and we're building momentum across the business.

Speaker #3: We're transforming our product , enhancing the customer experience , and delivering meaningful financial improvement . All thanks to the incredible work of our people .

Speaker #3: Second, we're confident in our ability to hit our fourth quarter and our full-year guidance. We built a strong foundation, and our initiatives are ramping as planned.

Speaker #3: The operational rollout of assigned and extra legroom seating has been smooth , and we're seeing encouraging early results . Third , we're not stopping here .

Speaker #3: We've continued to evolve our product , expand our network and lean into the customer experience . Free Wi-Fi for rapid Rewards members starts tomorrow .

Speaker #3: New markets are launching and we're building momentum across the business . And while we aren't ready to share specifics just yet , work on the longer term strategy to meet evolving customer preferences as well .

Bob Jordan: While we aren't ready to share specifics just yet, work on the longer-term strategy to meet evolving customer preferences is well underway. Finally, I want to thank our employees once again. Their excellence and hospitality are unmatched, and they are the driving force behind our success. It's a very exciting time at Southwest Airlines Co. We're executing with urgency and purpose, and we're confident in the future we're building and the benefit it will provide for our shareholders. Thank you all for joining us today. With that, I'll pass it back to Lauren to start our Q&A.

Speaker #3: Underway . Finally , I want to thank our employees once again . Their excellence and hospitality are unmatched , and they are the driving force behind our success .

Speaker #3: It's a very exciting time as Southwest Airlines , we're executing with urgency and purpose , and we're confident in the future . We're building and the benefit it will provide for our shareholders .

Speaker #3: Thank you all for joining us today . And with that , I'll pass it back to Lauren to start our Q&A .

Speaker #2: Thank you Bob . This completes our prepared remarks . We will now open the line for analyst questions . We would like to get to as many of you as possible .

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

Speaker #2: So we ask that you please limit yourself to one question . We will now take the first question .

Speaker #1: Thank you . Lauren , again to ask a question , press star . Then one to withdraw your interest . Press star , then two .

Bob Jordan: Thank you, Lauren. Again, to ask a question, press star, then one. To withdraw your interest, press star, then two. If you are on a speakerphone today, please pick up your handset before pressing the keys. Our first question today comes from Connor Cunningham with Melius Research. Please go ahead.

Speaker #1: If you are on a speakerphone today, please pick up your handset before pressing the keys. Our first question today comes from Connor Cunningham with Melius Research.

Speaker #1: Please go ahead .

Speaker #6: Hi , everyone . Thank you . I was hoping you could frame up the sequential improvement that you that you're seeing into the fourth quarter versus what you were messaging in September .

[Analyst 1]: Hi, everyone. Thank you. I was hoping you could frame up this sequential improvement that you're seeing into the fourth quarter versus what you were messaging in September. I'm just trying to understand the building blocks there. I realize that capacity is a little bit higher, but I think you knew that that was going to be happening. If you could just talk about specifically around the new initiatives, is that still two points, and does that carry into the first quarter of next year? Thoughts around the moving parts on unit revenue. Thank you.

Speaker #6: I'm just trying to understand the building blocks there . I realize that capacity is a little bit higher , but I think you knew that that was going to be happening and just if you could just talk about specifically around the the new initiatives , is that still two points ?

Speaker #6: And does that carry into the first quarter of next year ? Just just thoughts around the moving parts on unit revenue . Thank you .

Speaker #3: Yeah . Connor . Hey , Bob . I'll give it a start . You know , I think it's pretty simple . And it's it's a couple of things .

Bob Jordan: Yeah, Connor. Hey, Bob. I'll give you a start. I think it's pretty simple, and it's a couple of things. We have the two points of added capacity that you referenced, and that's just delaying the retrofits of the 700s into January. That allows us to fly those extra six seats through the holidays and just capture extra revenue in peak demand periods. Real proud of our Tech Ops folks because they can get all those retrofits done now in January. That's the two points of capacity. We've got two other points, and it's really, we just chose to not assume that the macro would inflect further from where we are. You heard we had a solid inflection in July.

Speaker #3: We have the two points of added capacity that you that you referenced . And that's just delaying the retrofits of the 700 seconds into January .

Speaker #3: That allows us to fly those extra six seats through the holidays and just capture , you know , extra revenue in peak demand periods .

Speaker #3: Real proud of our tech ops folks , because they can get all those retrofits done now in January . So that's the two points of capacity .

Speaker #3: And then we've got two other points up, and really, we just chose to not assume that the macro would inflect further from where we are.

Speaker #3: You heard you know , we had a solid inflection in July that has maintained itself . But we but we didnt want to assume further macro inflection .

Bob Jordan: That has maintained itself, but we didn't want to assume further macro inflection simply because you've got some uncertainty, and in particular, it's the uncertainty around the government shutdown, its impact, and obviously its duration. We felt it was prudent to guide assuming that things are stable from here, but that the demand does not inflect further. You've got on the RADM front, you've got a tailwind as the initiatives continue to kick in. All of the initiatives are on track. They're on track from a benefit perspective. They're on track from a timing of delivery perspective. It's really just those two points of not assuming that the macro would continue to inflect further.

Speaker #3: Simply because you've got some uncertainty . And in particular , it's the uncertainty around the government shutdown . Its impact . And then obviously its duration .

Speaker #3: So, we felt it was prudent to guide, assuming that things are stable from here, but that the demand does not inflect further.

Speaker #3: And then , yeah , you've got on the front , you've got a tailwind as the initiatives continue to , to kick in all of the initiatives are on track .

Speaker #3: They're on track from a benefit perspective . They're on track from a timing of delivery perspective . But it's really just those two points of not assuming that the macro would continue to inflect further .

Speaker #4: Yeah , I'd say , Bob , the we've seen past government shutdowns , right . And we know what happens when they go on .

Andrew Watterson: Yeah, I'd say, Bob, we've seen past government shutdowns, right? We know what happens when they go on. First, you see government travel goes to zero very quickly. It goes to government adjacent, then overall business travel, then leisure travel, as we saw in 2018, 2019. Obviously, like everyone else, we experienced the government stopping travel very quickly. Last week, we did see government adjacent. This is state and local governments depending upon government reimbursement. These are defense contractors. These are companies that kind of do business with the government, and they held up until last week, and they went down sequentially. View that more as a canary in a coal mine. It's not material numbers that we're talking about between those two categories of observed, but we know what happens in the future.

Speaker #4: First , you see government travel goes to zero very quickly . Then it goes to government adjacent . Then overall business travel , then leisure travel .

Speaker #4: As we saw in 2018 and 2019, we obviously experienced the government stopping travel very quickly, like everyone else. But last week, we did see government activity adjacent to our operations.

Speaker #4: This is state and local governments dependent government reimbursement . These are defense contractors . These are companies that do business with the government .

Speaker #4: And they held up until last week . And they went down sequentially . So through that , more as a canary in a coal mine .

Speaker #4: It's not material numbers . We're talking about between those two categories of observed . But we know what happens in the future . So if you're uncertain about when the government shutdown ends , that makes you less , you know , able to assume a economic inflection .

Andrew Watterson: If you're uncertain about when the government shutdown ends, that makes you less able to assume an economic inflection. It all is tied up, I think, in when the government shutdown ends.

Speaker #4: And so it all is tied up , I think , in when the government shutdown ends .

Speaker #3: And Connor , just the last , you know , kind of kind of maybe connector tangent to that is , you know , I either way , whatever happens to the macro , whatever happens with the shutdown , we're committed to hitting our 2025 reaffirmed Ebit guide .

Bob Jordan: Connor, just to last, you know, kind of maybe connect your tangent to that is, you know, either way, whatever happens to the macro, whatever happens with the shutdown, we're committed to hitting our 2025 reaffirmed EBIT guide. We're not sitting around waiting for the macro to show up as an example. We're going to continue to press on other areas, in particular cost, like you saw us press and beat on CASM ex in Q3 to just, you know, add more assurance around meeting that full-year guide. I wouldn't take that as we're just waiting to see. We're absolutely working proactively to put some insurance around the guide, irrespective of what the macro does, what the government shutdown does.

Speaker #3: We're not sitting around waiting for the macro to show up. As an example, we're going to continue to press on other areas, in particular costs, like you saw us press and beat on CASM in Q3.

Speaker #3: That just , you know , add more assurance around meeting that full year guide . So don't I wouldn't take that as we're just waiting to see we're absolutely working proactively to put some insurance around the guide , irrespective of what what the macro does , what the government shutdown does .

Speaker #6: Am I allowed to follow ? Can I just follow up to that ? Just on on . So I guess the pushback that I've heard is that basically you've added two points in incremental capacity and it's basically it's almost like that's almost at zero revenue contribution .

[Analyst 1]: Am I allowed to follow? Can I just follow up to that? Just on, I guess the pushback that I've heard is that basically you've added two points to incremental capacity, and it's basically, it's almost like that's almost a zero revenue contribution. I mean, you're going to get natural uplift in overall growth. I just, maybe you could, you just frame up why was it the right decision to add that incremental growth? I understand that there's a cost benefit. I would have thought cost would have moved down a little bit more. Just how you're balancing that in general on that decision. Thank you.

Speaker #6: I mean , I

Speaker #6: you're going to get natural uplift in overall growth . I just like maybe , maybe you could you just frame up like , why was it the right decision to to add that incremental growth ?

Andrew Watterson: Sure. First of all, it's an EBIT guide, not a RADM guide. It did imply a RADM, what you're asking about, but the decision, because the tech ops team has been much more productive, we will be doing them faster. When you do it faster, it overall costs less money, and it also is that lower number shifts into Q1. For the seats, there is incremental in the high periods during the holidays. We did this late in the curve, so the non-holiday portion won't benefit that much. It is very RADM dilutive, but it's very EBIT accretive because that little bit of revenue plus the cost going down make it EBIT positive to do that, which is what our guide was about and what our objective is about, is EBIT, even though it will make RADM look unflattering in Q4. That was the decision-making behind it.

Speaker #4: first of all , it's an Ebit guide , not a guide . It did imply erasme , which you're asking about , but the decision .

Speaker #4: Because the tech ops team has been much more productive . We will be do them faster . So when you do it faster , it overall costs less money .

Speaker #4: And then it also that lower number shifts into Q1 . And then for the the the seats there is incremental and the high periods during the holidays .

Speaker #4: Now, we did this late in the curve, so you won't see the non-holiday portion benefit that much. So, it is very dilutive.

Speaker #4: But it's very EBIT accretive because that little bit of revenue plus the cost going down makes it EBIT positive to do that, which is what our guide was about and what our objective is about is EBIT, even though it will make ASM look unflattering in Q4.

Speaker #4: And so that was the decision making behind it .

Speaker #6: Okay . Thank you .

[Analyst 1]: Okay, thank you.

Speaker #3: All right. Connor, thanks.

Bob Jordan: All right, Connor, thanks.

Speaker #1: The next question is from Mike Lindenberg with Deutsche Bank . Please go ahead .

Operator: The next question is from Mike Lindenberg with Deutsche Bank. Please go ahead.

Speaker #7: Yeah . Hey good morning . Just some questions . Maybe Andrew or Tom . Just some stats on some of the initiatives . Even rough numbers .

Whitney Eichinger: Yeah. Hey, good morning. Just some questions, maybe Andrew or Tom, just some stats on some of the initiatives, even rough numbers. You know, what we could see in the quarter, we did see an inflection on at least connections. It looked like your entertainment outpaced passengers, and you know, presumably that helped your load factor, which was much better this quarter than where we were in the beginning of the year. Also, on the basic economy rollout, what are you seeing on the buy-up? You know, I think there was a point where maybe the majority of Southwest Airlines Co. tickets were sold in the bottom fare bucket. I suspect that that's been moving up. Any color stats that you can provide on some of the initiatives that you put in with respect to those? Thank you.

Speaker #7: You know what we could see in the quarter . We did see an inflection on at least connections . It looked like you're enplanements outpaced passengers and you know , presumably that helped your load factor , which was much better .

Speaker #7: This quarter than where we were in the beginning of the year . And how and also on , on on the basic economy rollout , what are you seeing on the buy up ?

Speaker #7: You know , I think there was a point where maybe the majority of southwest tickets were sold in the bottom fair bucket . I suspect that that's been moving up any color or stats that you can provide on , on some of the initiatives that you've put in with respect to those .

Speaker #7: Thank you .

Speaker #4: Yeah , I'd be happy to . So yes , as I mentioned in my prepared remarks , we did see as we had predicted , that load factor would inflict positive post-summer .

Andrew Watterson: Yeah, I'd be happy to. Yes, as I mentioned in my prepared remarks, we did see, as we had predicted, that load factor would inflect positive post-summer. August, September, October had year-over-year increases in load factor. That came from the enhanced connectivity we talked about. It came from the third-party channels, and also, I think, some of the basic rollout, which allows you to kind of have a more segmented offering, which means your highs get higher and your lows get lower. That allows for good targeted volume. We're on track as far as that goes of switching from yield driving our RADM to load factor driving our RADM, which is kind of what we indicated earlier in the year. As far as the buy-up, the buy-up out of the bottom basic, we need that to inflect really positively with seats.

Speaker #4: So August , September , October had year over year increases in load factor that came from the enhanced connectivity . We talked about .

Speaker #4: It came from the third party channels . And also I think some of the basic rollout , which allows you to kind of have a more segmented offering , which means your your highs get higher and your lows get lower .

Speaker #4: So that allows for , you know , good targeted volume . So , you know , we're on track as far as that goes of switching from yield driving our ASM to load factor , driving our ASM , which is kind of what we indicated earlier in the year .

Speaker #4: And as far as the buy up , the buy up out of out of the bottom basic , we need that to , you know , inflect really positively with seats and the interim we have improvements that go , you know , about , you know , you know , mid-single digit points of increase in optional buyout .

Andrew Watterson: In the interim, we have improvements that go about mid-single-digit points of increase in optional buy-up. Those who decide to buy up to the second, third, or fourth, we did see good traction with that. The big step up will come in Q1, but in the interim, it is a positive move.

Speaker #4: Those who decide to , you know , buy up to the second , third or fourth . We did see good traction with that .

Speaker #4: The big step up will come in Q1 , but in the interim , it is a positive move . .

Speaker #5: And from a financial standpoint , everything's on track for the initiatives . And so everything that we're seeing for assigned seats and extra legroom is very much on track to , you know , still relatively early for the late January start for for operating that .

Tom Doxey: From a financial standpoint, everything's on track for the initiatives. Everything that we're seeing for assigned and extra legroom seating is very much on track. It's still relatively early for the late January start for operating that, but all the data that we have so far shows that that's still on track. The other suite of initiatives, as Bob said, is also on track.

Speaker #5: But all the data that we have so far shows that that's still on track. And the other suite of initiatives, as Bob said, is also on track.

Speaker #3: And if you look , you know , just sort of getting into maybe granular what what Tom was saying , again , it's early .

Bob Jordan: If you look, just sort of getting into maybe granular what Tom was saying, again, it's early. There are limited bookings in place post-January 26 when the bookings started for travel for the new assigned and extra legroom seating. Both volume and the mix of fare products is what Andrew was referencing. Basic should fall further as an example. What we're seeing in terms of ancillary seat buy-up, all of those things are encouraging and on track. It's early, but I'm really pleased with that. While we're not literally selling extra legroom for assigned seating, we're selling it for after January, but we have aircraft out there that have the extra legroom retrofit configuration. Folks flying on those aircraft, we have more than 400 converted, are giving us a four-point higher net promoter score than those without. That's without being able to book yourself into extra legroom.

Speaker #3: There's , you know , they're limited bookings in place post January 26th when the when bookings started for travel for the new assigned seating , extra legroom .

Speaker #3: But both volume the mix of fair products is what Andrew was referencing . You know you know basic should fall further as an example .

Speaker #3: And then what we're seeing in terms of ancillary seat buy up , all of those things are encouraging . And on track . Again , it's early , but I'm really pleased with that .

Speaker #3: And then again , while we're not literally selling extra leg room for assigned seating , we're selling it for after January . But we have aircraft out there that have the extra leg room retrofit configuration and folks flying on those aircraft .

Speaker #3: We have more than 400 converted, giving us an A for a point higher NPS score than those without. And that's without being able to book yourself into extra leg room.

Speaker #3: That's just they're flying on an aircraft that has that section reconfigured. So that's very encouraging as well from the customer experience perspective.

Bob Jordan: That's just they're flying on an aircraft that has that section reconfigured. That's very encouraging as well from the customer experience perspective.

Speaker #4: And I guess to put an exclamation point on that , Bob , we see literally a knife edge on January 27th in our bookings of pre and post assigned seating .

Andrew Watterson: To put an exclamation point on that, Bob, we see literally a knife edge on January 27 in our bookings of pre and post-assigned and extra legroom seating. We see a knife-edge yield improvement. Clearly, customers are voting with their wallet as well as the surveys that they like assigned and extra legroom seating.

Speaker #4: We see a knife edge yield improvement . So clearly customers are voting with their wallet as well as the surveys that they like assigned seating , extra legroom .

Speaker #5: And what's great this time around versus bags where we started selling and operating on the same day . And then you were ramping up from then , we've been selling the assigned seat in extra legroom since July .

Tom Doxey: What's great this time around versus bags where we started selling and operating on the same day, and then you were ramping up from then, we've been selling the assigned and extra legroom seating since July. When we hit the end of January, we'll effectively be at that run rate.

Speaker #5: So when we hit the end of January will effectively be at that run rate .

Speaker #7: Fantastic . Thanks for answering my question .

Whitney Eichinger: Fantastic. Thanks for answering my question.

Bob Jordan: The next question is from Savi Sith with Raymond James. Please go ahead.

Speaker #1: The next question is from Savi Scythe with Raymond James . Please go ahead .

Speaker #8: Hey , good morning everybody . If I might just on the the initiatives and kind of the unit revenue trends . Ask a little bit of a question on on how we should think about as you head into one Q just not assuming any kind of demand environment change just based on that initiative , ramp up and capacity plans , how should we think about the progression of year over year ?

[Analyst 2]: Hey, good morning, everybody. If I might, just on the initiatives and kind of the unit revenue trends, ask a little bit of a question on how we should think about, as you head into Q1, just not assuming any kind of demand environment change, just based on that initiative ramp-up and capacity plans. How should we think about the progression of year-over-year RASM? I'm not looking for a guide, but just trying to understand kind of the magnitude of how that moves from Q4 to Q1.

Speaker #8: Rassam is not looking for a guide, but just trying to understand the kind of magnitude of how that moves from four Q to one Q.

Speaker #5: Yeah , so what we have talked about is a $1 billion number for the extra legroom and the seat assignments . And as you think about the other initiatives , you know , by and large , by the time you get to one Q those will be approaching run rate .

Tom Doxey: Yeah. What we have talked about is a $1 billion number for the extra legroom and the seat assignments. As you think about the other initiatives, by and large, by the time you get to Q1, those will be approaching run rate. There are some of them that still have some ramp that occurs during the first half of the year. The loyalty program, for example, continues to ramp along with the benefits that come with seating. I think you can think about it in those terms. You're right. We're not guiding 2026 yet, but that $1 billion number that we've talked about for next year and the ability for that to then grow to $1.5 billion as we move to the following year is still very much intact.

Speaker #5: You know , there's some of them that still have some some ramp that occurs during the first half of the year . You know , the loyalty program , for example , continues to ramp along with , you know , the benefits that come with with seating .

Speaker #5: But I think you can think about it in those terms . You're right . We're not guiding 2026 yet . But but that billion dollar number that we've talked about for next year and the ability for that to then grow to 1,000,000,005 as we move to the following year , is still very much intact .

Speaker #4: And if you look at Q1 capacity , it's already published now , I'm not saying it's final , but you know that when we publish , we don't lose it that much .

Andrew Watterson: If you look at Q1, capacity is already published. We're not saying it's final, but we know that when we publish, we don't move it that much. It's a modest year-over-year increase. We have not, we will still be lapping our load factor initiatives that started really in August and beyond. That benefit should still carry on into Q1. As I mentioned, the knife-edge improvement yield starting $127, coming from seat fees and buy-up to extra to higher fare products. Those, I think, three combinations of low capacity growth, load factor improvements going still tracking, and extra yield makes for an interesting Q1.

Speaker #4: It's a modest year over year increase . We have not . We will still be laughing . Our load factor initiatives that started really in August and beyond .

Speaker #4: So that'll be that benefit should still carry on into Q1 . And then as I mentioned , the the knife edge improvement yields starting 127 coming from seat fees .

Speaker #4: And by up to extra to higher fare products , those I think three combinations of low capacity growth load factor improvements going still still tracking and extra yield makes for a interesting Q1 .

Speaker #3: Well , yeah . And just for full year , I know we're going on a long time about this kind of combination of what both we're talking about it .

Bob Jordan: Just for full year, I know we're going on a long time about this kind of combination of what both we're talking about. If you just take the midpoint of our guide that was reaffirmed for EBIT for the year, $600 to $800 million, and then you stack on top of that the $1 billion that Tom referenced around the benefit of assigned and extra legroom seating, and then you stack on top of that the incremental value of a full annualized year of bag fees, which I think is roughly $700 million, we have, obviously, the Rapid Rewards improvements and a number of other initiatives that are all maturing. It just gives you an idea of kind of the EBIT stack for the year. Certainly, we're not guiding 2026 today, but it just gives you an idea of how to think basically about that EBIT stack.

Speaker #3: You know , if you just take the midpoint of our guide that was reaffirmed for Ebit for the year , 600 to 800 million , and then you , you know , you stack on top of that the billion that Tom referenced around the benefit of assigned seating , and extra legroom .

Speaker #3: And then you stack on top of that the incremental value of a full annualized year of bag fees , which I think is roughly 700 million .

Speaker #3: And then we have obviously rapid improvements in a number of other initiatives that are all maturing . It just gives you an idea of kind of the Ebit stack for the , you know , just the Ebit stack for the year , not trying .

Speaker #3: Certainly , we're not guiding 2026 today , but it just gives you an idea of how to . Think basically about that Ebit stack .

Speaker #9: That's helpful . Thank you .

[Analyst 2]: That's helpful. Thank you.

Speaker #3: You're welcome .

Bob Jordan: You're welcome.

Speaker #1: The next question is from Sheila Kahyaoglu with Jefferies . Please go ahead .

Operator: The next question is from Sheila Kahyaoglu with Jefferies. Please go ahead.

Speaker #8: Good morning and thank you for the time . Maybe if I could ask on just if you could fill in the details on on the corporate growth , how you're thinking about that filtering into your sales numbers and changes on that growth formula going forward , given the .

[Analyst 2]: Good morning, and thank you for the time. Maybe if I could ask on just if you could fill in the details on the corporate growth, how you're thinking about that filtering into your sales numbers and changes on that growth formula going forward, given you're selling forward into January and you're seeing a knife edge in that yield premium coming through.

Speaker #8: Given your selling forward into January and you're seeing a knife edge in that yield premium coming through .

Speaker #4: Yes . The corporate for the new year is extraordinarily low right now . So I wouldn't give a read into that . I will say for Q3 corporate sales for future travel , kind of excluding the government and up to plus 5% year over year .

Andrew Watterson: Yes. The corporate for the new year is extraordinarily low right now, so I wouldn't give a read into that. I will say for Q3, corporate sales for future travel, kind of excluding the government, inflected up to a plus 5% year over year. We're seeing corporates improving. Our trip growth was down. It was actually, we shrank trips where our competitors increased. Normally, since corporate is schedule-sensitive, not price-sensitive, that should have led to kind of a reduction in share, and we didn't necessarily see that. We see good, solid trends with demand for Southwest business. We expect, as you hint at, in Q1 with assigned seating, that will unlock additional growth. Right now, through various different measures, we think our domestic managed business share is in the mid-teens, which is below our overall capacity share.

Speaker #4: So we're seeing corporates improving our trip growth was down . It was actually we shrank trips where our competitors increased . So normally since corporate is schedule sensitive , not price sensitive , that should have led to kind of a reduction in UN share .

Speaker #4: And we didn't necessarily see that . And so we see good solid trends with demand for southwest business . But we expect , as you hint at in Q1 with a seating that will unlock additional growth right now through various different measures , we think our domestic managed business share is in the mid-teens , which is below our overall capacity share , and we think extra legroom , assigned seating should give us tailwinds in our corporate share .

Andrew Watterson: We think extra legroom assigned seating should give us tailwinds in our corporate share, and that is not quantified to the numbers that we just gave you.

Speaker #4: And that is not quantified in the numbers that we just gave you.

Speaker #9: Great . Thank you .

[Analyst 2]: Great. Thank you.

Speaker #10: My pleasure .

Andrew Watterson: My pleasure.

Speaker #1: The next question is from Jamie Baker with JPMorgan . Please go ahead .

Operator: The next question is from Jamie Baker with JP Morgan. Please go ahead.

Speaker #11: Hey , good morning everybody . So I suppose the definition of sell side insanity is asking the same question over and over and expecting a different response .

[Analyst 1]: Hey, good morning, everybody. I suppose the definition of sell-side insanity is asking the same question over and over and expecting a different response, but here it goes. Fourth quarter RADM guide up 2% at the midpoint, but all of the tactical improvements, the bag fees, loyalty, some flight credit noise, that's what eight points of benefit. That suggests RADM at your core, excluding the good stuff, is down mid-single digits. Why is this not the right way to think about it, that the core is deteriorating, but new initiatives are making up for it for now? Of course, that could prove challenging when you begin to anniversary those initiatives.

Speaker #11: But , you know , here it goes . Fourth quarter guide up 2% at the midpoint . But all of the tactical improvements in the bank fees , loyalties and flight credit noise , you know , that's what eight points of benefit .

Speaker #11: So, you know that suggests Rassam. At your core, you know, so excluding the good stuff is down mid-single digits. Why is this not the right way to think about it?

Speaker #11: That the core is deteriorating , but new initiatives are making up for it for now . But of course , that could prove challenging when you begin to anniversary .

Speaker #11: Those initiatives .

Speaker #4: Yeah , I don't know where you're getting the eight . Jamie , I apologize for not following your math . You did mention the flight credits .

Andrew Watterson: Yeah, I don't know where you're getting the eight, Jamie. I apologize for not following your math. You did mention the flight credits. The way the flight credit breakage works is that when customers, you know, cancel a flight or it drops to a residual travel fund, then those break prospectively. The breakage rate changing is not something that you kind of will see changing until next year. We expect 2026 to have to show breakage benefits from the change in policies. That one's coming. The bag fees obviously are a, let's call it a three-point benefit year over year. Sequential is less than one because most of the policy was already in place for Q3. We do have on a year-over-year basis, if you're doing that, our stages engage is growing year over year, whereas our competitors, that's going down as a restorative regional.

Speaker #4: The way the flight credit breakage works is that when customers , you cancel flight drops to a residual travel fund , then those break prospectively .

Speaker #4: So the breakage rate changing is not something that you kind of will see . The changing until next year . So we expect 2026 to have to show breakage benefits from the change in policies so that when that one's coming up .

Speaker #4: But the you know , the bag fees obviously are let's call it a three point benefit year over year . It's sequential . It's less than one because , you know , most of the policy was already in place for Q3 .

Speaker #4: You know , we do have on a year over year basis , if you're doing that , you know , our stages engages growing year over year , whereas our competitors that's going down as they restore regional .

Speaker #4: So that's about a two point , you know , headwind for rasam . If you did normal stage length adjusting . So I'm just not getting your eight .

Andrew Watterson: That's about a two-point headwind for RADM if you did normal stage length adjusting. I'm just not getting your eight. If you kind of walk us on it, maybe we can answer it.

Speaker #4: But I'll kind of walk us on it . Maybe we can answer it .

Speaker #11: Well let me ask it differently . In in the fourth quarter guide , how much what is your initiative ? Razim then . And if we take so whatever your answer is , maybe it's plus three .

[Analyst 1]: In the fourth quarter guide, how much, what is your initiative RADM then? If we take, so whatever your answer is, maybe it's plus 30, maybe it's plus 11. I mean, it's not going to be, but whatever the initiative-related RADM contribution is, shouldn't we think of the difference relative to the 2% midpoint as the core? Is that deteriorating?

Speaker #11: Maybe it's plus 11 . I mean it's not going to be , but whatever the initiative related Razim contribution is , shouldn't we think of the difference relative to the 2% midpoint as the core ?

Speaker #11: And is that deteriorating ?

Speaker #4: I think if we look , I'm not sure . Maybe Tom can help the initiative stuff , but the you know , if you look at others domestic main cabin , which is clearly not there strongest our domestic and look at us as a proxy for pure play domestic main cabin .

Andrew Watterson: I think if we look at, I'm not sure, maybe Tom can help with the initiative stuff, but if you look at others' domestic main cabin, which is clearly not their strongest, our domestic, you can look at us as a proxy for a pure play domestic main cabin. We see sequential improvement, and theirs doesn't necessarily imply that either. As far as the core, you look at our core customers, as we mentioned, we see our credit card applications have accelerated with the new products and the new features. We're seeing Rapid Awards signups accelerate, and we're seeing kind of our road warrior travel also improve. Our core customers are responding back. Our brand, our net promoter scores from our customers did dip post-year conference and kind of went to the bottom in June and now have returned to where they were pre-year conference.

Speaker #4: We see , you know , sequential improvement and there doesn't necessarily imply that either . And you know we see in as far as the core , you look at our core customers , as we mentioned , we see our credit card applications have accelerated with the new products and the new features .

Speaker #4: We're seeing , you know , rapid rewards signups accelerate , and we're seeing the kind of our road warrior travel also improves . So our core customers are responding back .

Speaker #4: Our brand , our net promoter scores from our customers did dip . Post your conference and kind of went to the bottom in June .

Speaker #4: And now have returned to where they were pre your conference . And so all the kind of telltale signs of the micro level show our customers increasingly engaged , increasingly using Southwest Airlines , whether it's a credit card or a or a traveling with us .

Andrew Watterson: All the kind of telltale signs of the micro level show our customers increasingly engaged, increasingly using Southwest Airlines Co., whether it's a credit card or traveling with us. We see good trends in the core.

Speaker #4: So you know we see good trends in the core.

Speaker #5: Yeah . And maybe what I'd add there , Jamie as well is as far as where you draw the line between an initiative versus the base business is not always a clear line .

Tom Doxey: Yeah. Maybe what I'd add there, Jamie, as well, is as far as where you draw the line between an initiative versus the base business, it's not always a clear line. We knew as we announced, actually, at your conference, several of these initiatives that there would be an offset. As we guided these things, we guided them, and we gave estimates for some of them. We guided those or gave those estimates as a net. It's not always a clear line on where you draw it between base business or the initiatives.

Speaker #5: You know , we we knew as we announced actually , at your conference , several of these initiatives that there would be an offset .

Speaker #5: And so as we guided these things , we guided them and we gave estimates for some of them . We guided those or gave those estimates as a net .

Speaker #5: And so , you know , it's it's not always a clear a clear line on where you draw it between base business or the initiatives .

Speaker #11: And then a quick second one for Bob . And thank you for all that color , by the way . So in that lounge survey that you sent around southwest used the word hub for what I think might be the first time in history .

[Analyst 1]: Thank you for all that color, by the way. In that lounge survey that you sent around, Southwest Airlines Co. used the word hub for what I think might be the first time in history, and correct me if I'm wrong. What do you consider your hubs to be? I guess I could just look at some base level of departures, but that doesn't necessarily speak to connectivity.

Speaker #11: And correct me if I'm wrong , what do you consider your hubs to be ? I mean , I guess I could just look at some base level of departures , but that doesn't necessarily speak to connectivity .

Speaker #3: Yeah , I think that's it's just it's word choice rather than intended to , you know , imply some kind of strategy change or change the way we think about cities .

Bob Jordan: Yeah, I think that's just word choice rather than intended to imply some kind of strategy change or change the way we think about cities. We have, depending on how you count them, roughly 15 to 17 what we call mega cities, and they do some things that traditional hubs do. They have what we call intentional connections or banking opportunities throughout the day. They are not full banks, but they also have a lot of non-banking, banking of aircraft activity. Those intentional connections are just to drive connectivity across the network. I wouldn't confuse that word choice as any change in Southwest Airlines Co.'s network strategy.

Speaker #3: We have , you know , depending on how you count them , we have roughly , you know , 15 to 17 , what we call megacities or and they , they do some things that , that , that traditional hubs do .

Speaker #3: They have what we call intentional connections or banking opportunities throughout the day . They are not full banks , but they also have a lot of non banking , banking of aircraft activity .

Speaker #3: And again , those intentional connections are just to drive connectivity across the network . So I wouldn't confuse that word choice as any .

Speaker #3: You know any change in Southwest Airlines network strategy . Now back to the survey . Obviously you know , if we were to choose to go forward with lounges and , you know , we've been talking about where do we go next strategically to continue to widen our offering for our customers , to continue to widen our offering of things that they desire , in particular , premium .

Bob Jordan: Now, back to the survey, obviously, if we were to choose to go forward with lounges, and we've been talking about where do we go next strategically to continue to widen our offering for our customers, to continue to widen our offering of things that they desire at a particular premium, and then how do we do all that to impact the economics of the Rapid Awards program and the co-brand card? We're looking at what would our customers want in a lounge, where would those lounges be located relative to where we have strong passenger strength and demand. That's really what it was about. We're hopeful to, and this work is not just thinking about it. There's active work in terms of developing the next strategy, and I'm hopeful to be able to lay parts of that out early in 2026.

Speaker #3: And then how do we do all that to impact the economics of the rapid Rewards program and the Co-brand card ? We're we're we're looking at what would our customers want in a lounge ?

Speaker #3: Where would those lounges be located, relative to where we have strong passenger strength and demand? So that's really what it was about.

Speaker #3: And we're hopeful to and again , this work is , you know , not just thinking about it . There's active work in terms of developing the next strategy .

Speaker #3: And I'm hopeful to be able to lay , you know , parts of that out early in 2026 .

Speaker #4: I think , Bob , to put a point on that , if you domestic , if you index that to 2018 , we're getting very close to our competitors here in Q3 and Q4 , maybe close the gap .

Andrew Watterson: Yeah, I think Bob could put a point on that. If you domestic prism, if you index that to 2018, we're getting very close to our competitors here in Q3 and Q4, maybe close the gap. Where we have still a gap is the other revenue. It's our credit card. It hasn't done as well as others in recent times. Credit cards these days, you've probably seen from your own bank and from other newspapers that it's driven by high-end, high-fee credit cards that come with lounge access. Our gap in RADM is turning into now more the quote, "other revenue" driven by high-end credit cards. That's what drives us to look at it, as well as the customer desires that Bob talked about.

Speaker #4: But we're we have still a gap . Is the other revenue is our credit card hasn't done as well as others in recent times .

Speaker #4: Credit cards these days , you've probably seen from your own bank and from other newspapers that it's driven by high end , high end , high fee credit cards that come with lounge access .

Speaker #4: So our gap and rasam is turning into now more. The quote other revenue is driven by high-end credit cards, and that's what drives us to look at it, as well as the customer desires that Bob talked about.

Speaker #4: .

Speaker #1: The next question is from Catherine O'Brien with Goldman Sachs . Please go ahead .

Operator: The next question is from Catherine O'Brien with Goldman Sachs. Please go ahead.

Speaker #12: Hey everyone . Thanks for the time . Maybe just a quick first one on on shareholder returns . Can you walk us through how you think about the guardrails shareholder returns .

[Analyst 2]: Hey, everyone. Thanks for the time. Maybe just a quick first one on shareholder returns. Can you walk us through how you think about the guardrails of shareholder returns? You know, you're within your 1 to 2.5 times leverage target, 2.1 times at the end of Q3. How much headroom do you want to leave yourself on the high end of that leverage target, given there's still some uncertainty out there? I do have one quick follow-up.

Speaker #12: You know , you're within your 1 to 2 and a half times leverage target 2.1 times at the end of three . Q how much headroom do you want to leave yourself on the high end of that leverage target , given there's still some uncertainty out there ?

Speaker #12: I do have one quick follow up .

Speaker #5: Yeah , thanks for the question , Katie . Yeah . As we look at that , it is , I think , important to us that we do leave a little bit of headroom there knowing that there's some uncertainty out there .

Tom Doxey: Yeah, thanks for the question, Katie. As we look at that, it is, I think, important to us that we do leave a little bit of headroom there, knowing that there's some uncertainty out there. As we look at that range of the $1 billion to $2 billion to $2.5 billion, we continue to believe that keeps us squarely in the investment grade and strongly within investment grade. We've got the $3 billion plus $1.5 billion revolver liquidity target as well, which we were right on for the quarter. As we think of shareholder returns, it's about ensuring that we're staying within those guardrails and that as we look at the variability that might be there within the guide, we leave room to stay within that under those different scenarios.

Speaker #5: And so as we look at that range of the one to 2 to 2 and a half , we continue to believe that keeps us squarely in the investment grade and strongly within investment grade .

Speaker #5: And then we've got the 3 billion plus one five revolver liquidity target as well , which we were right on for the quarter .

Speaker #12: Okay , great . And then I , I had to laugh at Jamie's sell side insanity . But I'm gonna I'm gonna keep going down the path .

[Analyst 2]: Okay, great. I had to laugh at Jamie's sell-side insanity, but I'm going to keep going down the path, so forgive me. I think it just may be helpful to understand a little bit more as we think about next year and the initiative ramp this year. Maybe just a question on the EBIT target rather than RADM super specifically. You reiterated your EBIT target from last quarter, but fuel is down a bit and capacity is a bit higher. Are you able to share the EBIT contribution from the initiatives that you already booked in third quarter and then what you're incorporating in fourth quarter? How much of that fourth quarter figure is already on the books? Thanks so much for the time.

Speaker #12: So forgive me , but I just I think it just may be helpful to understand a little bit more as we think about next year and the initiative ramp this year .

Speaker #12: And so maybe just a question on the Ebit target rather than raising super specifically , you reiterated your Ebit target from last quarter .

Speaker #12: But fuel is down a bit . And capacity is a bit higher . You know , are you able to share the Ebit contribution from the initiatives that you already booked in third quarter ?

Speaker #12: And then what you're incorporating in fourth quarter , and how much of that fourth quarter figure is already on the books . Thanks so much for the time .

Speaker #5: Thanks , Katie . Yeah , I don't know that we'll go into that level of detail with it . I think Bob laid it out pretty well as far as the initiatives that we have this year and the increment that we expect to see next year .

Tom Doxey: Thanks, Katie. I don't know that we'll go into that level of detail with it. I think Bob laid it out pretty well as far as the initiatives that we have this year and the increment that we expect to see next year.

Speaker #3: Yeah , I think you can think of the I believe the bag , you know , the largest , of course , right now is bag fees .

Bob Jordan: I think you can think of the, I believe the bag, you know, the largest, of course, right now is bag fees. That sequential incremental improvement from third quarter to the fourth quarter's contribution is about a point.

Speaker #3: And that sequential incremental improvement from third quarter to the fourth quarter is a contribution is about a point .

Speaker #4: Or a .

Speaker #3: Little less , maybe a little bit less than a point . Obviously , as you get into 2026 , all of the Ebit associated with assigned seating , extra leg room is fully there's nothing today .

Andrew Watterson: A little bit less.

Bob Jordan: Maybe a little bit less than a point. Obviously, as you get into 2026, all of the EBIT associated with assigned seating, extra legroom is fully, there's nothing today. It's a fully 2026 value that then wraps to $1.5 billion in 2027 as it matures. You've got some smaller things, as Andrew Watterson talked about, you know, the Rapid Rewards optimization, flight credits, which that will come home as they break, which tends to be later. We'll lay all that out as we stack up the EBIT guide for 2026. We're just not ready to do that today.

Speaker #3: It is a fully 2026 value. Then it wraps to $1,000,000,005 in 2027 as it matures. You've got some smaller things, as Andrew talked about.

Speaker #3: You know , the rewards optimization flight credits , which that will come home as they break , which tends to be later . But yeah , we'll lay all that out as we , you know , as , as we stack up the Ebit guide for 2026 , we're just not ready to do that today .

Speaker #5: Yeah . And there's of course , the continued cost savings as well . I think your question was a little more focused on the revenue related initiatives .

Tom Doxey: Yeah, and there's, of course, the continued cost savings as well. I think your question was a little more focused on the revenue-related initiatives, but we've got the cost initiative that will continue to ramp up and is also on track for next year.

Speaker #5: But we've got the cost initiative that will continue to ramp up and is also on track for next year .

Speaker #1: The next question is from Brandon Oglenski with Barclays . Please go ahead .

Operator: The next question is from Brandon Oglinski with Barclays. Please go ahead.

Speaker #13: Hey , good morning and thanks for taking the question . And Tom , maybe I'll just follow up there . Are you guys did reiterate 4.3 billion I think in total initiatives next year .

[Analyst 1]: Hey, good morning, and thanks for taking the question. Tom, maybe I'll just follow up there. You guys did reiterate $4.3 billion, I think, in total initiatives next year, but you guys keep talking about the $1 billion from assigned seating and premium. I get that. Maybe can you talk to the totality of the $4.3 billion? Is that still valid? I want to keep it to one question, but I guess two parts here. Can you give us a better understanding of how the buy-up process is working today in the fourth quarter and then how that potentially changes from like a basic fare to a plus fare just based on seat assignments and premium availability? Thank you.

Speaker #13: But you guys keep talking about the 1 billion from assigned seat and premium . I get that . So maybe can you talk to the totality of the 4.3 .

Speaker #13: Is that still valid . And I want to keep it to one question , but I guess two parts here . Can you give us a better understanding of how the buyout process is working today ?

Speaker #13: In the fourth quarter? And then how that potentially changes from like a basic fare to, you know, a plus fare just based on seat assignments and premium availability?

Speaker #13: Thank you .

Speaker #5: Thanks , Brandon . I'll start . And then Andrew , we'll take the second part of your of your question . The 4.3 is very much still intact .

Tom Doxey: Thanks, Brandon. I'll start, and then Andrew will take the second part of your question. The 4.3 is very much still intact. We've talked about $780 million or so in cost savings. We've talked about $1 billion that would come from bags. We've talked about $1 billion that would come from extra legroom and seat assignments, which we'll start operating in January. We've got the earn and burn on the frequent flyer. We've got the amendments that we've made and the enhancements that we've made to the Chase program. All of these things stack together. What's great is we're seeing these continue to be on track as we're ramping through this year, especially as we get into the fourth quarter and into the first quarter of next year, as you see these continue to ramp. Yes, very much still intact for the 4.3.

Speaker #5: We've talked about 780 or so million dollars in cost savings . We've talked about $1 billion that would come from bags . We've talked about $1 billion that would come from extra legroom and seat assignments , which will start .

Speaker #5: We'll start operating in in January . We've got the earn and burn on the on the frequent flyer . We've got the amendments that we've made and enhancements that we've made to the Chase program .

Speaker #5: You know , all of these things stack together and , you know , what's great is , is we're seeing these continue to be on track as we're ramping through this year .

Speaker #5: And especially as we get into the fourth quarter and into the first quarter of next year , as you see , these continue to ramp .

Speaker #5: So, yes, very much still intact for the 4.3.

Speaker #4: And as far as the bioprocess goes , you know , right now the bioprocess is mostly about flexibility going from basic to choice .

Andrew Watterson: As far as the buy-up process goes, right now, the buy-up process is mostly about flexibility. Going from basic to choice, the primary differences are flexibility and Rapid Awards accrual that kind of entice customers to buy up. The very highest kind of entry fares are no longer basic. If you think about a $350 fare as an entry point for a flight, that's not basic because it's a pretty high fare to be basic. All that to say that about 80% of our tickets were one getaway last year, and a little bit less than 50% are buying basic. A portion of the remainder are people who have choices like a standalone. That's the first entry point for them. Then you have, as I mentioned, a mid-single-digit composition increase of those who voluntarily, who presented with a low fare and can buy up for the additional features.

Speaker #4: The primary differences or flexibility . And rapid rewards accrual that that kind of ties customers to buy up the very highest kind of entry fares are no longer basic .

Speaker #4: So if you think about a $350 fare as an entry point for a flight , that's not basic because it's a pretty high fare to be basic .

Speaker #4: And so all that to say that , you know , about , you know , 80% of our tickets were want to get away last year .

Speaker #4: And a little bit less than 50% are buying basic a portion of the remainder are people who have choices like a standalone . That's the first entry point for them .

Speaker #4: And then you have, as I mentioned, a mid-single digit composition increase of those who voluntarily presented with a low fare and can buy up for the additional features.

Speaker #4: Those is a mid-single digit increase right now . Now , when we go into next year with seat assignments , that is much bigger .

Andrew Watterson: That is a mid-single-digit increase right now. When we go into next year with seat assignments, that is much bigger. The booking curve is such that people who buy early are generally less elastic. As the booking goes along, you have more elastic demand. At the end, it's also, again, inelastic. Right now, we're seeing strong buy-up and fare products in the kind of Q1 period with seat assignments. We expect, as we get into the meat of the booking curve for Q1, that we have more and more seat-only sales that people add in as well. That composition will mix a little bit. Given the different entry points customers have into it, it is all about giving choice, as our fare product indicates. That's led to, as I said, a quite strong increase in yields this far in the booking curve.

Speaker #4: The booking curve indicates that people tend to buy early and are generally less elastic. As the booking period progresses, demand becomes more elastic towards the end.

Speaker #4: It's also again inelastic. And so, right now, we're seeing strong buy-up and fair products in the kind of Q1 period with seat assignments.

Speaker #4: We expect as we get into the meat of the booking curve for Q1 that we have more and more seat only sales that people add in as well , so that composition will mix a little bit .

Speaker #4: But given the different entry points , customers can have into , it is all about giving choice as our fare product indicates . And that's led to , as I said , a quite strong increase in yields this far in the booking curve .

Speaker #3: Well , I think the other thing to note , I know we've said it many , many times is . There are so many transformational initiatives that are underway and between what we laid out , you know , September a little more than a year ago , what we laid out in March , all of that stuff is complete .

Bob Jordan: I think the other thing to note, I know we've said many, many times is there are so many transformational initiatives that are underway. Between what we laid out, you know, in September, a little more than a year ago, what we laid out in March, all of that stuff is complete. The only thing that is still to come home is the operation of assigned seats. We're selling those, and that huge change has been really, really smooth. Number one, everything that we laid out as a contributing initiative is done. Second, they're done as in, you know, high quality, ready to go, and on time, and is expected to or already showing signs that it's contributing the value that was expected, or in the case of bags, even greater. You've got initiatives on time.

Speaker #3: The only thing that is still to come home is the operation of assigned seats . But we're selling those . And that , that , that huge change has been really , really smooth .

Speaker #3: So , so number one , everything that we laid out as a contributing initiative is done . Second , there , done as in , you know , high quality , ready to go .

Speaker #3: And on time and is expected to or already showing signs that it's contributing the value . That was expected . Or in the case of bags , even greater .

Speaker #3: So you've got initiatives on time . They'll start as planned . And they are in line right now to deliver the value that we expect .

Bob Jordan: They'll start as planned, and they are in line right now to deliver the value that we expected. We have high confidence in both that total value of EBIT to be delivered through initiatives, and then our EBIT guide in the fourth quarter of this year and for the full year, and then the EBIT guide that we'll put in front of you in 2026. I mean, the execution of all this has just been stellar.

Speaker #3: And so we have high confidence in both the in both that total value of , of Ebit to be delivered through initiatives . And then our Ebit guide in the in the fourth quarter of this year for the full and for the full year , and then our the Ebit guide that we'll put in front of you in 2026 .

Speaker #3: But the I mean , the the execution of all this has just been stellar .

Speaker #13: Thank you .

Tom Doxey: Thank you.

Speaker #1: The next question is from Dwayne with Evercore ISI . Please go ahead .

Operator: The next question is from Duane Fenigworth with Evercore ISI. Please go ahead.

Speaker #14: Hey thank you . I'm going to I'm going to keep it to one . I think we're struggling a little bit with with that request .

[Analyst 3]: Thank you. I'm going to keep it to one. I think we're struggling a little bit with that request. I assume some of these initiatives have a learning curve associated with them from a revenue management perspective. I wonder if you have any anecdotes about early learnings or tweaks you have made since the early rollout. Maybe some of these items were disruptive initially, but are settling down as we get more fully baked into the booking curve.

Speaker #14: So anyway , I , I assume some of these initiatives have a learning curve associated with them from a revenue management perspective . And I wonder if you have any anecdotes about early learnings or tweaks you have made since the early rollout .

Speaker #14: Maybe some of these items were disruptive initially , but are settling down as we get more fully baked into the booking curve .

Speaker #4: Yeah , it's certainly I think Tom made a good contrast of bags and basic was kind of all at once because you started selling operating right away , whereas assigned seat .

Andrew Watterson: Yeah, certainly. I think Tom made a good contrast of bags and basic was kind of all at once because you started selling and operating right away, whereas assigned seat, we have a long run-up to it. We mentioned last time that we saw a customer reaction to bags and basic, which affected the third quarter by 1%. That since has been resolved, and that basically comes down to, you know, you have a much wider set of price points. As an earlier question implied, the number of people who buy in just your lowest entry point used to be so high, and now it's a lot wider. You did see different reactions from customers in June and July. As they've learned it, we saw that stabilize by mid-July, and the customers are kind of buying like normal, if you will, for that.

Speaker #4: We have a long run up to it . So we mentioned last time that we saw a customer reaction to Bags and Basic , which affected third quarter by one point , that since then has been resolved .

Speaker #4: And that basically comes down to , you know , you have a much wider set of price points . As an earlier question implied , the number of people who buy in just your lowest entry point used to be so high , and now it's a lot wider .

Speaker #4: And so you did see different reactions from customers . In June and July , as they've learned it . We saw that stabilize by mid and and the customers are kind of buying like normal , if you will , for that for you know so I consider all the revenue management stuff doing very well on that .

Andrew Watterson: I consider that all the revenue management stuff doing very well on that. For Q1, we have a long run-up. The tweaks are small in nature. As you're looking at, you know, who buys a seat only, who buys the buy-ups, tweaking those high demand, low demand flights, we have a long runway to do that. We feel very comfortable about how that's going. There still is an overall ramp-up in that. In my prepared remarks, I told you that the 26 number and the 27 number, the difference is an implied ramp-up in the value. To the extent we go faster, obviously the number gets bigger next year.

Speaker #4: And then for Q1 we have a long run up . And so the tweaks are small in nature , as you're looking at , you know , who buys a seat only who buys the biopsy .

Speaker #4: Tweaking those high demand , low demand flights . We have a long runway to do that . So we feel very comfortable about how that's going .

Speaker #4: Now . There still is an overall ramp up in that . In my prepared remarks , I told you that the 26 number , the 27 number , the difference is an implied ramp up in and the value .

Speaker #4: So the extent we go faster , the number gets bigger . Next year .

Speaker #3: Yeah , I think that's a really important point is that the Andrew sorry just to say the same thing you just did , but I to make sure everybody hears that that the , the billion dollar contribution from a seat and extra legroom next year contemplates time to do exactly what you said , which is ramp up the value .

Bob Jordan: Yeah, I think that's a really important point is that, Andrew, I don't want, sorry, just to say the same thing you just did, but I want to make sure everybody hears that the $1 billion contribution from assigned and extra legroom seating next year contemplates time to do exactly what you said, which is ramp up the value. Some of these things like seats are dynamically priced, learn, tweak. The billion contemplates a ramp-up time versus we've got a guide for EBIT for that initiative, and there's risk because there's going to be ramp-up. That's contemplated in the value that we've given you.

Speaker #3: You know , some of these things like seat your dynamically priced learn , tweak and so the billion . Contemplates a ramp up time versus we've got a we've got a guide for Ebit for that initiative .

Speaker #3: And there's risk because there's going to be a ramp-up. We've actually contemplated that in the value that we've given you.

Speaker #14: Keep it there . Thank you .

Andrew Watterson: Keep it there. Thank you.

Speaker #3: Thanks , Dwayne .

Bob Jordan: Thanks, Duane.

Speaker #1: The next question is from Chris . Start with sig . Please go ahead .

Operator: The next question is from Chris Staffilopoulos with SIG. Please go ahead.

Speaker #15: Good morning everyone . Thanks for taking my question . I'm going to be compliant as well here and keep it to one . United gave a calcium x algo last week over the midterm to help us think about all the moving pieces here as it relates to the opacity .

Andrew Watterson: Good morning, everyone. Thanks for taking my question. I'm going to be compliant as well here and keep it to one. United gave a CASM ex and MEX algo last week over the midterm to help us think about all the moving pieces here as it relates to capacity and their investment here in the product and other areas here. I realize you're still in your budgeting plan for next year, but any thoughts on how we should frame that, whether you want to describe that as your mid to long-term algo versus what you've given, I guess, your guide on low single-digit capacity over the midterm? I just want to understand the moving pieces around that. I think we can all do the math on the EBIT side and what that might mean for unit margins and things like RASM. Thanks.

Speaker #15: And their investment here in the the product and other areas here . So I realize you're still in your budgeting plan for next year , but any thoughts on how we should frame that ?

Speaker #15: Whether you want to describe that as your mid to long term algo versus what you've given , I guess your guide on low single digit capacity over the mid-term just want to understand the moving pieces around that .

Speaker #15: And I think we can all do the math on the Ebit side . And what that might mean for unit margins and things like Razim .

Speaker #15: Thanks .

Speaker #5: Yeah , you're right that we're we're still working through the planning process for 2026 . So at our next call , we'll have more more detail on on next year .

Tom Doxey: Yeah, you're right that we're still working through the planning process for 2026. At our next call, we'll have more detail on next year. What you've seen from us is strong cost performance, quarter after quarter. We had a strong beat this last quarter with or without the incremental capacity that came from operating the 700 seats. It was broad-based. There's work that we're doing on small things and discretionary spending. There are things we're doing on large things around supply chain and optimizing our retirement plan and the component maintenance work that goes along with that, the way we're looking at real estate and technology. We're looking everywhere. We've talked about being on track this year, next year, and to the billion dollars in 2027 for the cost savings initiatives that we have. That will roll in. We'll put that into the context of 2026 at our next call.

Speaker #5: What you've seen from us is strong cost performance . You know , quarter after quarter we had a strong beat this last quarter with or without the incremental capacity that came from operating the 700 seats .

Speaker #5: It was it was broad based . You know , there's work that we're doing on small things . And discretionary spending . There's things we're doing on large things around supply chain and optimizing our retirement plan .

Speaker #5: And the component maintenance work that goes along with that . The way we're looking at real estate and technology . So we're looking everywhere .

Speaker #5: And we've talked about being on track this year . Next year . And to the billion dollars in 2027 for the cost savings initiatives that we have .

Speaker #5: And that will that will roll in . And again , we'll put that into the context of 2026 at our next call .

Speaker #15: Thank you .

Andrew Watterson: Thank you.

Speaker #1: The next question is from Scott Group, Wolfe Research. Please go ahead.

Operator: The next question is from Scott Group with Wolfe Research. Please go ahead.

Speaker #16: Hey , thanks . Good morning . So when I think about the billion , eight of , you know , initiatives this year , you know , the guide has 300 million of incremental Ebit .

Andrew Watterson: Hey, thanks. Good morning. When I think about the $1 billion aid of initiatives this year, the guide has $300 million of incremental EBIT. Call it a billion and a half gap. Do you think we should contemplate something similar next year with a sizable gap between the initiatives and the actual EBIT? Is there a reason to think the gap widens? Could the gap potentially go away? I guess you're not ready to give 2026 guides, but just at a high level, how do you think about that gap and how that develops into next year?

Speaker #16: So, you know, call it a billion and a half gap. Like, do you think we should contemplate something similar next year with a sizable gap between the initiatives and the actual EBIT?

Speaker #16: Or , I , is there a reason to think the gap widens ? Is or could the gap potentially go away ? You know , and I guess you're not ready to give 26 guidance , but just at a high level , like how do you think about like that gap and how that develops into next year ?

Speaker #3: Yeah , Scott , you're right . We're not ready to guide 2026 . The the gap is simply the macro . And what happens to the macro inflection .

Bob Jordan: Yeah, Scott, you're right. We're not ready to guide 2026. The gap is simply the macro and what happens to the macro inflection, like we talked in Q2. You know, we were down sort of where we thought the beginning of the year we would be. We were down roughly 6%. We've seen, obviously, some of that come back. I think absent maybe the uncertainty of the shutdown impact, there would be more certainty that continued macroeconomic inflection would continue. You've heard some others say that that macro inflect back is going to be completely back to pre, you know, before the issues by the end of this year. You've heard others say close. You just don't know. I think that's really what the gap is.

Speaker #3: Like we talked in Q2 . And you know , we were we were down sort of from where we thought the beginning of the year we would be down roughly six points .

Speaker #3: We've seen obviously some some of that come back and it's , you know , I think absent maybe the uncertainty of the , of the shutdown impact , there would be more certainty that continue to macroeconomic inflation would , you know , would would continue .

Speaker #3: You've heard some others say that that macro inflect back is going to be completely back . Back to pre before the issues by the end of this year .

Speaker #3: You've heard others say close you just you just don't know . And so I think that that's that's really what the gap is .

Speaker #3: It's how much does the macro claw back the gap from where we thought we would start the where we thought we would be when we started this year , we got down six .

Bob Jordan: It's how much does the macro claw back the gap from where we thought we would start the, you know, where we thought we would be when we started this year? We got down 6%. We've come back, you know, a material piece of that, but we're not all the way back.

Speaker #3: We've come back , you know , a material piece of that . But we're not all the way back .

Speaker #5: The other piece of it too , Scott , as you think about the initiatives , you know , what we've done is we have put everything into the initiative bucket that we're doing to counter , you know , what would be sort of typical increases in cost in the business , you know , as we move into next year , we've talked a lot about , you know , moving more to an EPs guided range .

Tom Doxey: The other piece of it too, Scott, as you think about the initiatives, what we've done is we have put everything into the initiative bucket that we're doing to counter what would be sort of typical increases in cost in the business. As we move into next year, we've talked a lot about moving more to an EPS-guided range. Of course, everything's netted into that number. We'll still talk about the initiatives and what they are and what they're doing. As we guide, likely we move more toward kind of an EPS range where everything is netted. As we talk about these initiatives, hey, this particular cost savings initiative, kind of in a year where we're not so initiative-heavy with the transformation that we have, those types of things just find their way into the sort of typical efficiencies that you're building into your budget as you're moving forward.

Speaker #5: Of course , everything nets into that number . And we'll still talk about the initiatives and what they are and what they're doing .

Speaker #5: But but as we guide , you know , likely we move more toward kind of an EPs range where everything is netted and , you know , as we talk about these initiatives , we .

Speaker #5: Hey , this particular cost savings initiative , you know , kind of in a , in a year where we're not so initiative heavy with the transformation that we have , those types of things just find their way into the the sort of typical efficiencies that you that you're , that you're building into your budget as you're moving forward .

Speaker #5: And don't confuse my word . Typical , you know , of anything other than than just talking about kind of standard budgeting practices .

Tom Doxey: Don't confuse my word typical as anything other than just talking about kind of standard budgeting practices. We're going to continue to be really focused on the efficiency. Coming

Speaker #5: We're going to continue to to be really focused on , on the efficiency coming out on the cost side .

Bob Jordan: out on the cost side.

Speaker #16: Thank you, guys. I appreciate it.

Lauren Yet: Thank you, guys. Appreciate it.

Speaker #1: The next question is from David Vernon with Bernstein. Please go ahead.

Andrew Watterson: The next question is from David Vernon with Bernstein. Please go ahead.

Speaker #17: Hey good morning guys , and thanks for taking the questions . So Andrew , I'd love to kind of narrow in on that comment around the knife edge improvement in yields with with bookings for the assigned seating in January .

Lauren Yet: Hey, good morning, guys, and thanks for taking the questions. Andrew, I'd love to kind of narrow in on that comment around the knife-edge improvement in yields with bookings for the assigned seating in January. Can you, is there a way to dimension it and to talk a little bit about how much of the schedule is sold at this point in time, whether the sell-through rate is being affected by the higher yields, or anything, any additional commentary you can give us on what that knife-edge comment was would be great. Thank you.

Speaker #17: Can you kind of is there is there is there a way to dimension it and to talk a little bit about how much of the the , the , the schedule is sold at this point in time , whether the , the , the sell through rate is being affected by the higher yields or any , any additional commentary you can give us on , on what that knife edge comment was would be great .

Speaker #17: Thank you .

Speaker #4: Yeah . Well I apologize in advance . I'm going to do my best not to , but because it's early in it's early in the curve .

Tom Doxey: I apologize in advance. I'm going to do my best not to, because it's early in the curve, and this is our first time doing assigned seats and stuff like that. We have studied others. We've scoured for good industry data. We think we have good compares. Our models are trained on how we sell EarlyBird and upgrade boarding. We think we have good context. I'm not going to give you the number because I don't know how long it'll persist through the booking curve. When you do see a knife-edge, it's clearly a change in customer reaction. You rarely see knife-edges, and when you do see a knife-edge, something happened. In this case, we see a disproportionate customer reaction to the ability to buy an assigned seat or to upgrade to a fare product that includes it.

Speaker #4: And so this is our first time doing assigned seats and stuff like that . So we have studied others . We've you know , scoured for a good industry data .

Speaker #4: We think we have good compares . We have our models are trained on how we sell early bird and stuff and upgrade boarding .

Speaker #4: So we we think we have good context . And so , so I'm not going to give you the number because I don't know how long they'll persist through the booking curve .

Speaker #4: But when you do see a knife edge , it's clearly a change in customer reaction . You you rarely see knife edges . And when you do see a knife edge , something happen .

Speaker #4: And in this case we see a disproportionate customer reaction to the ability to buy and assigned seat or to upgrade to a fair product that includes it .

Speaker #4: And so that gives us confidence that we will see a revenue positive customer reaction as we go throughout the booking curve . It's just the amount of being different than our business case as something where , you know , it's just too early for us to hint at .

Tom Doxey: That gives us confidence that we will see a revenue-positive customer reaction as we go throughout the booking curve. It's just the amount being different than our business case is something where it's just too early for us to hint at.

Speaker #17: Okay , thank you . And then maybe just as a quick follow up , Tom , you know , I applaud the the desire to get out of jail here because the incremental math from this side is really tough to get to .

Lauren Yet: Okay, thank you. Maybe just as a quick follow-up, Tom, I applaud the desire to get out of initiative jail here because the incremental math from the side is really tough to get to. If you think about the cadence of what you guys have in your initiative plan, can you tell us kind of what quarter we hit peak initiative? Is it Q1, Q2, Q3? Where in the way you guys have done the math around the initiatives do we kind of get the max contribution from the initiatives? Thanks.

Speaker #17: But if you think about , you know , the cadence of what you guys have in your initiative , plan , can you can you tell us kind of what quarter we we hit ?

Speaker #17: Peak initiative . Is it is it Q1 , Q2 , Q3 , like where where in the way you guys have done the math around the initiatives , do we kind of get the the max contribution from the initiatives ?

Speaker #17: Thanks .

Speaker #5: Yeah . And , you know , of course , the I'm not sure if your question is , is the quarter where most of the inflection occurs or if it's when you're hitting peak contribution from peak contribution from .

[Analyst 1]: Yeah, of course, I'm not sure if your question is the quarter where most of the inflection occurs or if it's when you're hitting peak contribution from.

Lauren Yet: Peak contribution from.

Speaker #5: Yeah , peak from would be , you know , tell me your time horizon . It should be the last quarter . We should continue to build and build and build .

[Analyst 1]: Yeah, peak from would be, you know, tell me your time horizon. It should be the last quarter. We should continue to build and build and build on these. The big inflection that we have as we continue to move forward, of course, is what Andrew just described as we move into first quarter, where you have that big positive inflection where we've had a full booking curve to be able to sell into that. Again, contrasting that to what we did with bags. From there, it should continue to build. We have structured the amended Chase agreement around the attributes of this new program. As we have bags, as we have seat assignments, these are things that then you have entitlements to as you have the card.

Speaker #5: You know on these the big inflection that we have as we continue to move forward , of course , is what Andrew just described as we move into first quarter , where you have that big positive inflection , where we've had a full booking curve to be able to sell into that again , contrasting that to what we did with bags .

Speaker #5: But from there it should continue to build . We have structured the amended Chase agreement around the attributes of this new program . And so as we have bags , as we have seat assignments , you know , these are things that then you have entitlements to as as you have the card .

Speaker #5: And you know , Bob talked about other Andrew and Bob both talked about , you know , other things that we're looking at around the potential for clubs and what that might mean for the ability to buy up .

[Analyst 1]: We've talked about other, Andrew and Bob both talked about, other things that we're looking at around the potential for clubs and what that might mean for the ability to buy up. The short answer to your question is tell me your time period, and it's going to be the last quarter of your time period. We're going to keep building.

Speaker #5: And so the short answer to your question is , tell me your time period . And it's going to be the last quarter of your time period .

Speaker #5: We're going to keep building.

Speaker #3: Now , I'm going to do exactly what they Andrew and Tom probably don't want me to do . But if you just sort of speculate on that , I think if given that , if you just know how the booking curve works and where the meat of the booking curve is through the meat of the booking curve , for folks that are booking the new products and assign an extra legroom , seating , I think that would tell you somewhere around early third quarter that that peaks would be my guess .

Operator: Now, I'm going to do exactly what Andrew and Tom probably don't want me to do. If you just sort of speculate on that, I think if given that if you just know how the booking curve works and where the meat of the booking curve is, you're through the meat of the booking curve for, you know, folks that are now booking the new products and assigned and extra legroom seating, I think that would tell you somewhere around early third quarter, that peaks would be my guess. I think you'll have annualized the ramp-up of the new voucher expiration policies, those kinds of things. The only thing that I can think of that will continue to ramp, obviously, is the policy changes, and then especially the changes in values of the card related to assigned seating benefits, boarding benefits.

Speaker #3: The only thing that I can think of is that we will continue to ramp up the annualized implementation of the new voucher expiration policies. Those kinds of things are the only areas that I can foresee continuing to ramp.

Speaker #3: Obviously the policy changes and and well and then especially the changes in values of the card related to assigned seating benefits , boarding benefits , those should continue to ramp all year as that causes customers want to get the card , engage with the card .

Operator: Those should continue to ramp all year as that causes customers to want to get the card, engage with the card, the co-brand credit card, spend on the card. I would think that initiative continues to ramp throughout the entire year. The big one, which is assigned and extra legroom seating based on the booking curve, that would tell me that somewhere around early third quarter, you get the peak value.

Speaker #3: The co-branded card spend on the card . So I would think that that initiative continues to ramp throughout the entire year . But but the big one , which is assign an extra legroom , seating based on the booking curve , that would tell me that somewhere around early third quarter , you get you get to peak value .

Speaker #17: Okay. Thank you, guys.

Lauren Yet: Okay, thank you, guys.

Speaker #3: Thank you .

Operator: Thank you.

Speaker #1: The next question is from Andrew Diodora with Bank of America. Please go ahead.

Andrew Watterson: The next question is from Andrew Dedora with Bank of America. Please go ahead.

Speaker #18: Hey , good morning everyone . Thanks for squeezing me in here . So maybe I'll ask a non initiative question to close it out here .

Lauren Yet: Hey, good morning, everyone. Thanks for squeezing me in here. Maybe I'll ask a non-initiatives question here to close it out. I was, your fuel guidance in this environment was, you know, a little bit surprising. I know it's been volatile, but also West Coast crack spreads have been high for several weeks now. I guess, you know, a quick two-parter here. One, Tom, just curious if you're able to give us what your exposure is to West Coast crack spreads. Then two, you know, Bob, what levers do you have in your business that you think could help offset potentially higher fuel from your guidance? Thank you.

Speaker #18: But your fuel guidance in the in this environment was a little bit surprising . I know it's been volatile but also West coast crack spreads have been high for several weeks now .

Speaker #18: I guess quick two parter here . Just one Tom . Just curious if you're able to give us what your exposure is to West Coast crack spreads and then to Bob , what levers do you have in your business that you think could help offset potentially higher fuel from your guidance ?

Speaker #18: Thank you .

Speaker #5: Yeah . For us , West Coast is probably somewhere around 30 or so . You know , Gulf Coast , we're probably more more like about half or so of the exposure .

[Analyst 1]: Yeah, for us, West Coast is probably somewhere around 30 or so. You know, Gulf Coast, we're probably more like about half or so of the exposure.

Speaker #3: And then just on levers and I think not just fuel , I think just just you saw as I think really go to work and have what I think for is really good cost discipline in the third quarter .

Operator: Just on levers, not just fuel, you saw us really go to work and have what I think is really good cost discipline in the third quarter. That cost discipline is sustainable. It's not just shoving cost out to the future. We're going to work the same way in the fourth quarter, the first quarter, and the second quarter to do exactly the same thing. That is everything from just managing traditional costs in departments. We have some opportunities to continue to work on fuel efficiency, which obviously is material given the amount of fuel. We have efficiency work in a lot of departments that are back office. Everybody's throwing AI around, but it is the ability to automate transactions, that kind of thing. We're seeing good results there. We have large efficiency programs in the operation. Some of those take longer.

Speaker #3: And that cost discipline is not it's sustainable . It's not just shoving cost out to the future . So we're going to work the same way in the fourth quarter and the first quarter and the second quarter to do exactly the same thing .

Speaker #3: And that and that is everything from just managing , you know , sort of traditional costs and departments . We have some opportunities to continue to work on fuel efficiency and .

Speaker #3: Which obviously is material given the amount of fuel we have , efficiency work and and a lot of departments that are back office , you know , sort of the everybody's throwing AI around , but it is the ability , you know , to automate transactions , that kind of thing .

Speaker #3: And we're seeing good results there . And then we have large efficiency programs in the operation . Some of those take longer . But my point is that this cost work is really it's across the board .

Operator: My point is that this cost work is really across the board. It's every discipline within the company. We'll just keep working there. To me, that's the best insurance around whether it's fuel or whether it is the macro or it's the government shutdown impact or whatever it is. The best insurance around hitting our EBIT guide is to just keep putting manic pressure on cost and efficiency and continue to beat those numbers.

Speaker #3: It's every discipline within the company . And and we'll just keep working there . That's to me that's the best insurance around . Whether it's whether it's fuel or whether it is the macro or it's the government shutdown impact or whatever it is .

Speaker #3: The best insurance around hitting our EBIT guide is to just keep putting manic pressure on costs and efficiency and continue to beat those numbers.

Speaker #18: Great . Thanks for the thoughts . I'll leave it there .

Lauren Yet: Thanks for the thoughts. I'll leave it there.

Speaker #3: Thank you . Andrew .

Operator: Thank you, Andrew.

Speaker #2: That wraps up the analyst portion of today's call . We appreciate everyone joining .

Whitney Eichinger: That wraps up the analyst portion of today's call. We appreciate everyone joining.

Speaker #1: Ladies and gentlemen . We will now transition to our media portion of today's call . Miss Whitney Eichinger , Chief Communications Officer , will lead us off .

Andrew Watterson: Ladies and gentlemen, we will now transition to our media portion of today's call. Ms. Whitney Eichinger, Chief Communications Officer, will lead us off. Please go ahead, Whitney.

Speaker #1: Please go ahead, Whitney.

Speaker #2: Thanks , Gary . Welcome to the media on our call today . Before we begin taking your questions , Gary , can you .

Whitney Eichinger: Thanks, Gary. Welcome to the media on our call today. Before we begin taking your questions, Gary, can you please remind us how to queue up for a question?

Speaker #19: Please remind us how to queue up for a question ?

Speaker #1: To queue up for an opportunity to ask a question , press star , then one to withdraw your question . The command is star , then two .

Andrew Watterson: To queue up for an opportunity to ask a question, press star, then one. To withdraw your question, the command is star, then two. If you're on a speakerphone, please pick up before pressing the keys. We'll pause for a moment and then start answering your questions. Our first question comes from Robert Silk with Travel Weekly. Please go ahead.

Speaker #1: If you're on a speakerphone , please pick up before pressing the keys . We'll pause for a moment and then start answering your questions .

Speaker #1: Our first question comes from Robert Silk with Travel Weekly . Please go ahead .

Speaker #20: Good morning . So what I wanted to ask is during the last quarter , you talked about your checked baggage you made about 300 .

[Analyst 2]: Good morning. What I wanted to ask is, during the last quarter, you talked about your checked baggage. You made about $300 million, you were estimating $350 million for this year. Is that number still on course? The rate of checked bags, how is that weighing in compared to the industry and compared to expectations?

Speaker #20: You're estimating 350 million for this year . Is that number still on course ? And and the rate of checked bags . How is that weighing in compared to the industry and compared to expectations .

Speaker #3: Yeah . The financials are right on on top of what we have been given you in a little ahead of what we thought .

Operator: Yeah, the financials are right on top of what we have been giving you and a little ahead of what we thought. It's still, you know, that's right. It puts the annualized contribution from checked bags at right around $1 billion. The reduction in lobby bags, so checked bags is, Andrew can give you a better deep, about, it's about 30%. We are seeing a modest increase in gate checked bags, so gate, you know, bags that show up at the gate that have to be handled there. Overall, our bags are down and down materially.

Speaker #3: So it's still , you know , that's right . And then that puts the annualized contribution from checked bags at right around $1 billion .

Speaker #3: And yeah , the reduction in lobby bags . So checked bags is Andrew can give you better about . It's about 30% . We are seeing a modest increase in gate check bags .

Speaker #3: So gate bags that show up at the gate that have to be handled there . But overall our bags are down and and down materially .

Speaker #20: Okay. How is it? How does it compare to the industry standard?

[Analyst 2]: Okay, how does it compare to, you know, industry standard?

Speaker #4: It looks like our checked bag revenue per passenger is right along the same lines as the big three . So it seems like it's a very similar rate that we're getting .

Lauren Yet: It looks like our checked bag revenue per passenger is right along the same lines as the big three. It seems like it's a very similar rate that we're getting.

Speaker #20: Okay . Thank you all .

[Analyst 2]: Okay, thank you all.

Speaker #3: Thank you .

Operator: Thank you.

Speaker #1: This concludes our question-and-answer session for the media. So back over to Whitney. Now for some closing thoughts.

Andrew Watterson: This concludes our question and answer session for media. Back over to Whitney now for some closing thoughts.

Speaker #19: If you have any further questions or communications, the Group is standing by. Their contact information, along with today's news release, is available at media.com.

Whitney Eichinger: If you have any further questions, our Communications group is standing by. Their contact information, along with today's news release, are all available at swamedia.com.

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