Q2 2026 Southwest Airlines Co Earnings Call

July 23, 2026

Speaker #1: Moderating today's call. Please note that this call is being recorded. A replay of today's call will be available in the investor relations section of SOUTHWEST DOT COM.

Speaker #1: Following the prepared remarks, we will open the call for questions. To ask a question, please press *1 on your telephone keypad. To withdraw your question, press *2.

Speaker #1: At this time, I would like to turn the call over to Danielle Collins, Managing Director of Investor Relations. Danielle, please go ahead.

Speaker #2: Thank you. Hello everyone, and welcome to SOUTHWEST AIRLINES' second quarter 2026 earnings call. In just a moment, we will share our prepared remarks. After which we'll move into Q&A.

Speaker #2: Joining me today are Bob Jordan, our President and Chief Executive Officer. Andrew Watterson, our Chief Operating Officer. Justin Jones, our Chief Commercial Officer. And Tom Doxy, our Chief Financial Officer.

Speaker #2: Before we begin, a reminder that we will be making forward-looking statements, which are based on our current expectations of future performance and our actual results could differ materially from expectations.

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 release. With that, I'll turn the call over to Bob.

Speaker #3: Thank you, Danielle. And good morning, everyone. I appreciate you joining our call today. Yesterday we reported our second quarter results, marking the first time all of our major initiatives were contributing throughout the entire quarter.

Speaker #3: The results put the earnings power of our business on full display, and demonstrate the benefits of the transformation that we have executed. Our business now benefits from a broader and more diversified set of revenue and commercial levers than at any point in our history.

Speaker #3: The results demonstrate that the transformation is working, with a 9% after-tax return on invested capital, and an adjusted operating margin of 6.7%, or a 3.3-point improvement year-over-year despite nearly 900 million year-over-year increase in second quarter fuel expense.

Speaker #3: We also generated nearly 2 billion in operating cash flow during the first half of the year despite record fuel expense. We reported adjusted earnings per share of 94 cents, up approximately 120% year-over-year, and well above both our initial guidance and analyst consensus.

Speaker #3: Adjusted unit revenues increased 20.1% year-over-year to an all-time quarterly record, exceeding the high end of our prior guidance range. While adjusted operating revenues increased 20.3% on capacity growth of only 0.2%.

Speaker #3: Managed business revenues grew 30% year-over-year to a new all-time quarterly record, surpassing the record established just one quarter ago. Customer response to our enhanced product offering is showing up in strong engagement results.

Speaker #3: Rapid rewards numerical enrollments increased 35% year-over-year, and overall program size is a record with nearly 100 million members. Tier qualification activity also reached a record high in the quarter.

Speaker #3: Chase co-branded credit card account growth was also exceptionally strong, with card acquisitions in the quarter up 28% year-over-year. Cost discipline continued as well, with Kazamax increasing just 3.4% year-over-year on near-flat capacity, below the low end of our prior guidance, and cost discipline remains broad-based across the company.

Speaker #1: Hello, everyone. And welcome to the SOUTHWEST AIRLINES Q2 2026 earnings conference call. My name is Gary, and I'll be moderating today's call. Please note that this call is being recorded.

Speaker #1: A replay of today's call will be available in the Investor Relations section of SOUTHWEST DOT COM. Following the prepared remarks, we will open the call for questions.

Speaker #3: With transformational initiatives now fully in place, our focus has shifted to optimization and unlocking the full potential of the business. network, refining new products and pricing, growing managed business revenues, and expanding co-brand opportunities.

Speaker #1: To ask a question, please press *1 on your telephone keypad. To withdraw your question, press *2. At this time, I would like to turn the call over to Danielle Collins, Managing Director of Investor Relations.

Speaker #3: We have emerged as a stronger, more resilient, and better-positioned Southwest while sustaining a unique set of core strengths that remain firmly intact. The largest domestic network with the most nonstop flights, and the number one position in nearly half of the 50 largest U.S.

Speaker #1: Danielle, please go ahead.

Speaker #2: Thank you. Hello, everyone, and welcome to SOUTHWEST AIRLINES Q2 2026 earnings call. In just a moment, we will share our prepared remarks. After which we'll move into Q&A.

Speaker #3: airports. Operational efficiency, cost discipline, powerful brand loyalty, and importantly, legendary service and hospitality delivered by our incredible people. That creates a differentiated position in the marketplace that no other airline can replicate.

Speaker #3: And that differentiation continues to show in the results. Southwest was named number one in customer satisfaction among economy passengers in the JD Power 2026 North America Airlines satisfaction study, our fifth consecutive year at the top spot.

Speaker #3: Following recognition by the Wall Street Journal, as its best U.S. airline of 2025. These recognitions reinforce that our hospitality, reliability, operational execution, and value remain powerful core competitive advantages.

Speaker #3: And we continue to evolve the product that we offer to our customers. Just a few weeks ago, our first Starlink-equipped aircraft entered service, marking the beginning of a new era of in-flight connectivity at Southwest.

Thank you, Danielle, and good morning, everyone. I appreciate you joining our call today. Yesterday, we reported our second quarter results, marking the first time all of our major initiatives were contributing throughout the entire quarter. The results put the earnings power of our business on full display and demonstrate the benefits of the transformation that we have executed.

Speaker #3: In early July, we expanded our airline partner network to 9 Premia. With the launch of Anchorage in May, we completed the rollout of service to all 5 previously announced new destinations.

Our business. Now benefits from a broader and more Diversified set of Revenue and Commercial lovers than at any point in our history.

Speaker #3: And we aren't stopping here. We will continue to drive enhancements that broaden our product offering and further deepen customer engagement. Now let me turn to our outlook.

Speaker #3: While fuel prices have remained volatile and elevated, industry recapture has been swift and pricing has remained sticky. Forward bookings are robust, and we are optimistic the strong demand and pricing environment will be sustained.

The results demonstrate that the transformation is working, with a 9% after-tax return on invested capital and an adjusted operating margin of 6.7%, or a 3.3-point improvement year over year, despite a nearly $900 million year-over-year increase in second quarter fuel expense. We also generated nearly $2 billion in operating cash flow during the first half of the year, despite record fuel expense.

Speaker #3: Importantly, the revenue strength we are seeing is not solely a fuel recovery story. It also reflects the democratic benefits of our own initiatives, which are improving revenue quality, strengthening customer acquisition and engagement, broadening the earnings power of the business, and creating earnings durability regardless of the macro environment.

We reported adjusted earnings per share of 94 cents up approximately 120% year-over-year and well above both our initial guidance and analysts consensus.

Adjusted unit revenues increased 20.1% year-over-year to an all-time quarterly record, exceeding the high end of our prior guidance range.

While adjusted operating revenues increased 20.3%, capacity grew only 0.2%.

Speaker #3: For full year 2026, we now expect adjusted earnings per share of $3.25 to $4.25. This updated range replaces our prior expectation of at least $4, reflects the forward fuel curve as of July 17, and assumes the current fair environment and demand trends remain broadly intact.

Percent year-over-year to a new all-time quarterly record surpassing their record established just 1 quarter ago.

Speaker #3: Even with an estimated year-to-date fuel headwind of approximately $1.33 per share, Southwest remains positioned to generate earnings that are broadly in line with our guidance at the beginning of the year and represent significant earnings growth and margin expansion.

Customer response to our enhanced product offering is showing up in strong engagement results. Rapid Rewards, new member enrollments increased, 35% year-over-year and overall program size is a record with nearly 100 million members tier qualification activity. Also reached a record high in the quarter Chase co-branded Card credit card account growth was also exceptionally strong with card Acquisitions in the quarter up 28% year-over-year.

Speaker #3: Underscoring the resiliency of our business model. And before I close, I want to recognize our employees, none of what we have accomplished would have been possible without the dedication, resilience, and commitment of our people.

And continued as well with Chasm Max increasing, just 3.4% year-over-year on near flat capacity, below the low end of our prior guidance and cost discipline remains broad-based across the company.

Speaker #3: And we are proud to have accrued over 100 million year-to-date in profit sharing for our employees. Profit sharing reflects our longstanding belief that when the company succeeds, our people should share in that success.

With transformational initiatives. Now fully in place, our Focus has shifted to optimization and unlocking the full potential of the business.

Speaker #3: To our employees across the Southwest system, thank you for everything that you do for our customers and for one another. We set out to transform the company, and today you can see the proof in the earnings.

Specifically, we are focused on optimizing the network, refining new products and pricing, growing managed business revenues, and expanding COBRA and opportunities.

We have emerged as a stronger, more resilient, and better-positioned Southwest, while sustaining a unique set of core strengths that remain firmly intact.

Speaker #3: We have built a more durable and diversified business with greater earnings power, and our focus is now on unlocking Southwest's full potential. Further expanding margins and creating additional long-term value for our customers, our employees, and our shareholders.

The largest domestic network with the most non-stop flights and the number 1 position in nearly half of the 50 largest US airports.

Speaker #3: And with that, I will turn it over to Andrew.

Speaker #1: Thank you, Bob. As Southwest enters the next phase of its evolution, our focus is increasingly on optimization. Across the operation, we are working to improve asset utilization, strengthen operational execution, and drive greater efficiency.

Operational efficiency, cost of supplies, powerful brand loyalty, and, importantly, legendary service and hospitality delivered by our incredible people—that creates a differentiated position in the marketplace that no other airline can replicate.

Speaker #1: While maintaining the reliability and hospitality that customers expect from Southwest. Operational excellence remains a key competitive advantage for our company, and supports both the customer experience and the long-term profitability of the business.

And that differentiation continues to show in the results. Southwest was named number one in customer satisfaction among economy passengers in the JD Power 2026 North America Airlines Satisfaction Study—our fifth consecutive year at the top spot.

Following our recognition by The Wall Street Journal as its Best U.S. Airline of 2025.

Speaker #1: During the second quarter, we ranked first among large domestic carriers in completion factor. And improved mishandled baggage performance year over year. Even with higher volumes of gate checked bags.

These recognitions reinforce that our hospitality, reliability, operational execution, and value remain powerful core competitive advantages.

Speaker #1: Trip net promoter score also improved throughout the quarter, reinforcing that our operational execution and enhanced product offering are resonating with customers. We also maintained the lowest customer complaint rate among the major U.S.

And we continue to evolve the product that we offer to our customers. Just a few weeks ago, our first Starlink-equipped aircraft entered service, marking the beginning of a new era of in-flight connectivity at Southwest.

In early July, we expanded our airline partner network to nine carriers with the addition of our premium.

Speaker #1: airlines. Our priorities remain straightforward. Operate safely. Serve our customers reliably. And continue to improve the efficiency and productivity of the operation. With that, I'll turn it over to Justin.

With the launch of Anchorage, in May we completed the rollout of service to all five previously announced new destinations, and we aren't stopping here. We will continue to drive enhancements that broaden our product offering and further deepen customer engagement.

Speaker #2: Thank you, Andrew. I'm excited to join today's call in my new role as Chief Commercial Officer. And I look forward to engaging with many of you in the months ahead.

Now, let me turn to our Outlook while fuel prices have remained volatile and elevated. Industry recapture has been Swift and pricing has remained sticky.

Speaker #2: My focus is clear. Use Southwest's unique network, powerful brand, loyal customer base, and expanded product offerings to improve revenue quality, strengthen returns, and create durable earnings growth.

Bookings are robust, and we are optimistic that the strong demand and pricing environment will be sustained.

Speaker #2: We are not managing to any one metric. Our focus is on building a more productive, commercial business, one that balances unit revenue growth, discipline capacity, network profitability, and long-term customer engagement.

Importantly, the revenue strength we are seeing is not solely a fuel recovery story. It Al also reflects the idiosyncratic benefits of our own initiatives, which are improving Revenue quality. Strengthening customer acquisition and engagement broadening the earnings power of the business and creating earnings durability, regardless of the macro environment,

Speaker #2: As Bob noted, second quarter adjusted rising increased 20.1% year over year, well above the high end of our prior guidance range of 16.5 to 18.5%.

For full year 2026, we now expect adjusted earnings per share of $3.25 to $4.25.

this updated range replaces, our prior expectation of at least 4 dollars,

Speaker #2: Importantly, this performance was broad-based. Reflecting contributions from our expanded product offerings, bag fees, online travel agencies, Chase-related revenue, and continued strength in our base business.

reflects the forward Fuel Curve as of July 17th and assumes the current fair environment and demand Trends remain broadly intact

Speaker #2: Adjusted operating revenue reached a record 8.7 billion. The highest quarterly revenue in Southwest history, demonstrating the earnings power of a broader and more diversified revenue platform.

Even with an estimated year-to-date fuel headwind of approximately $1.33 per share, Southwest remains positioned to generate earnings that are broadly in line with our guidance at the beginning of the year and represents significant earnings growth and margin expansion.

Underscoring, the resiliency of our business model.

Speaker #2: Looking ahead, we expect third quarter unit revenue growth of 17.5 to 19.5% year over year, with a strong exit rate from Q2. We continue to see healthy demand, a constructive pricing environment, and further opportunity to refine our commercial capabilities.

And before I close, I want to recognize our employees. None of what we have accomplished would have been possible without the dedication, resilience, and commitment of our people. And we are proud to have accrued over $100 million year-to-date in profit sharing for our employees.

Speaker #2: Our third quarter unit revenue outlook includes the year-over-year headwind from lapping the 2025 implementation of bag fees and other initiatives. The network remains one of Southwest's greatest competitive advantages, and we will continue to implement more efficiently, to maximize returns, and support long-term profitable growth.

Province January reflects our long-standing belief that when the company succeeds, our people should share in that success.

To our employees across the Southwest system. Thank you for everything that you do for our customers and for 1, another

We set out to transform the company and today, you can see the proof in the earnings.

Speaker #2: As we move through the remainder of the year, my focus will be on further unlocking the potential of our commercial initiatives, deepening customer engagement, and ensuring that Southwest Commercial strategy continues to support sustainable, margin expansion, and long-term shareholder value.

We are now focused on unlocking Southwest’s full potential, further expanding margins, and creating additional long-term value for our customers, our employees, and our shareholders.

And with that, I will turn it over to Andrew.

Thank you, Bob.

Speaker #2: With that, I'll turn it over to Tom.

As Southwest enters the next phase of evolution, our focus is increasingly on optimization.

Speaker #4: Thanks, Justin, and welcome to the call. I'm incredibly proud of our team for the continued focus on spending smartly. As we've invested in our product, customers, operations, and employees, while expanding margins year over year despite significantly higher fuel costs in the quarter.

Across the operation, we are working to improve asset utilization, strengthen operational execution, and drive greater efficiency while maintaining the reliability and hospitality that customers expect from Southwest.

Speaker #4: We generated quarterly operating cash flow of a half a billion dollars, more than 32% higher year over year. And ended the quarter with liquidity of 5.3 billion dollars, above our target of approximately 4.5 billion dollars.

Operational excellence remains a key competitive advantage for our company and supports both the customer experience and the long-term profitability of the business.

During the second quarter, we ranked first among large domestic carriers in completion factor.

Speaker #4: Our gross leverage ratio was 2.1 times, within our stated range of 1 to 2 and a half times, and improved from the 2.4 times at year-end 2025, despite macro volatility.

And improved mishandled baggage performance year-over-year, even with higher volumes of gate-checked bags.

Tripp net promoter score also, improved throughout the quarter reinforcing that our operational execution and enhanced product offering or resonating with customers,

Speaker #4: Our investment-grade balance sheet remains a key differentiator, providing meaningful financial flexibility. Fuel prices averaged $3.92 per gallon during the quarter, our fuel procurement team effectively managed through dynamic market conditions, and took actions such as moving lower-priced Gulf Coast products to the West Coast to mitigate higher fuel costs in that part of our network.

We also maintain the lowest customer complaint rate among the major US Airlines.

Our priorities remain straight forward.

Operate safely.

Serve our customers reliably and continue to improve the efficiency and productivity of the operation.

With that, I'll turn it over to Justin.

Speaker #4: Looking ahead, we expect third quarter Kazamax to increase 3.5% to 4% year over year, on capacity of flat to down 1%. Consistent with Bob's comments, we continue to see a path toward long-term margin expansion and earnings growth, supported by disciplined execution, improving unit revenues, and contributions from our initiatives.

Thank you, Andrew. I'm excited to join today's call in my new role as Chief Commercial Officer, and I look forward to engaging with many of you in the months ahead.

My focus is clear: use Southwest's unique network, powerful brand loyalty, customer base, and expanded product offerings to improve revenue quality.

Strength and returns, and create durable earnings growth.

We are not managing to any one metric.

Speaker #4: Combined with a strong balance sheet and substantial liquidity, we believe Southwest is well-positioned to create sustainable, long-term value for our shareholders, and with that, I'll turn it back to Danielle for Q&A.

Our focus is on building a more productive Commercial Business. 1 that balances unit Revenue growth, discipline capacity, Network profitability, and long-term customer engagement.

Speaker #5: Thanks, Tom. This now concludes a prepared remarks. We'll open the line for analyst questions. To help us manage time efficiently, please ask your one or two questions back to back at the outset.

As Bob noted, second quarter adjusted RASM increased 20.1% year-over-year, well above the high end of our prior guidance range of 16.5% to 18.5%.

Speaker #5: All right, Operator, we are ready for your first question.

Speaker #6: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1. If you are using a speakerphone, please pick up your handset before pressing the keys.

Importantly, this performance was broad-based, reflecting contributions from our expanded product offerings, bag fees online, travel agencies, Chase-related revenue, and continued strength in our base business.

Speaker #6: To withdraw your question, please press star, then 2. Our first question today is from Conor Cunningham with Milius Research. Please go ahead.

Adjusted operating Revenue. Reached a record, 8.7 billion.

The highest quarterly revenue in Southwest history.

Demonstrating the earnings power of a broader and more Diversified Revenue platform.

Speaker #7: Everyone, thank you. Just I was hoping to start with the comp issue that you raised on unit revenue, and just maybe you could potentially size that impact in 3Q.

Speaker #7: Just so we can understand a little bit more. Just I think what people are trying to get at is just the framing of how it progresses through the first half of 2027.

Looking ahead, we expect third quarter unit revenue growth of 17.5% to 19.5% year-over-year, with a strong exit rate from Q2.

We continue to see healthy demand, a constructive pricing environment, and further opportunity to refine our commercial capabilities.

Speaker #7: And just I would have thought that there would have been more maturation period and more uplift from the initiatives kind of offset just the timing of it.

Speaker #7: And then specifically to Justin, again, congrats on the new role. Just trying to understand your long-term growth, how you view long-term growth at Southwest, and just network development in general.

Our third quarter unit revenue outlook includes the year-over-year headwind from lapping the 2025 implementation of bag fees and other initiatives.

The network remains one of Southwest's greatest competitive advantages.

Speaker #7: Should we be reading anything to the ramp in supply in the fourth quarter and 1Q27 at all? Just like high-level thoughts. Thank you.

And we will continue using it more efficiently to maximize returns and support long-term, profitable growth.

Speaker #2: Hey, you bet, Connor. Thanks for the question. On the first yeah, I think I'd just start just maybe zoom out, back up with the fact that our Q2 unit revenue I mean, was up 20%.

As we move through the remainder of the year, my focus will be on further unlocking the potential of our commercial initiatives.

Deepening customer engagement.

Speaker #2: I mean, an extraordinary number. I mean, just far ahead of the rest of the industry as the transformation really kicked in and performed and showed up in the results.

And ensuring that Southwest's commercial strategy continues to support sustainable margin expansion and long-term shareholder value.

With that, I'll turn it over to Tom.

Thanks, Justin, and welcome to the call.

Speaker #2: The Q3, Rasm guide, is pretty simple to me. It includes the headwind from the initiatives that we put into place about a year ago in 2025, one of which was bag fees, bag fees alone is about a billion dollars a year.

I'm incredibly proud of our team for the continued focus on spending smartly as we've invested in our product, customer operations, and employees, while expanding margins year over year, despite significantly higher fuel costs in the quarter.

We generated quarterly, operating cash flow.

Speaker #2: So we're just starting off at a much higher base. So if you adjust the guide, for lapping those initiatives in Q3, our unit revenue guide would be well ahead.

Of a half a billion dollars, more than 32% higher year-over-year.

And end the quarter with liquidity of $5.3 billion, above our target of approximately $4.5 billion.

Speaker #2: Of the unit revenues that we posted in the second quarter. And either way, we saw strong demand really strong demand and revenues across the second quarter.

Our gross leverage ratio was 2.1 times within our stated range of 1 to 2 and a half times.

Speaker #2: And all of that robust strength is fully in place and continuing here in the third quarter.

And improved from the 2.4 times. At year-end 2025, despite macro volatility, our investment grade balance sheet remains a key. Differentiator, providing meaningful Financial flexibility.

Speaker #6: The next question.

Speaker #2: All right. I was just going to address the long-term growth, as Justin Jones. Thanks for having me on the call. As Bob's talked about in his earlier remarks, we're going to continue to show capacity discipline.

Speaker #2: While we're focusing on building durable earnings, and so you can expect some modest growth from us moving forward. You see a little bit of that in the fourth quarter.

Such as moving lower priced Gulf Coast Products to the West Coast to mitigate higher fuel costs in that part of our Network.

Speaker #2: You see some of that in 2027. We're well below our peers there. But what my focus is going to be is on strengthening our points of strength that we have in the network.

Looking ahead, we expect third quarter CASM to increase 3.5% to 4% year-over-year on capacity that is flat to down 1%.

Consistent with Bob's comments, we continue to see a path toward long-term margin expansion and earnings growth.

Speaker #2: And you're going to see that with our capacity growth, but you're also going to see that with us moving and shifting capacity around, which you can already see.

Supported by disciplined execution, improving unit, revenues and contributions from our initiatives.

Speaker #2: So you'll see capacity growth and our points of strength, and making them more durable long-term, and that'll continue to be the focus as long as I'm in this role.

Combined with a strong balance sheet and substantial liquidity. We Believe Southwest is well positioned to create sustainable long-term value for our shareholders and with that, I'll turn it back to Danielle for Q&A.

Now, concludes

Speaker #7: Great. Thank you.

prepare Remar.

Speaker #6: The next question is from Andrew Didora with Bank of America. Please go ahead.

will open the line for

Speaker #7: Hi, good morning, everyone. Maybe Tom, maybe drilling in on the new 2026 EPS outlook. Can you help us with some of the inputs that under that particularly kind of fuel and Kazam in 4Q?

Please ask your one or two questions back-to-back at the outset.

All right, operator, we are ready for your first question.

Thank you. We will now begin the question and answer session.

Speaker #7: And on that note, in terms of 4Q Kazam, I know you're retiring with 37 aircraft in the back half versus 23 in the first half.

To ask a question, you may press star then 1.

If you are using a speakerphone, please pick up your handset before pressing the keys.

Speaker #7: I would assume you have more plane sales in the back in the back half than what you've done to date. Any color that you can provide on how to think about that gain on sale piece in 3Q and 4Q, and anything that you booked in the second quarter would be helpful.

To withdraw your question. Please. Press star. Then 2

Our first question today is from Connor Cunningham with Melius Research. Please go ahead.

Speaker #7: Thank you.

Speaker #4: Yeah, thanks, Andrew. As far as fuel, we don't guide fuel. I think this is a bit of a nuance here, but we give you a fuel estimate based on a certain day, and we say it's the forward curve as of that day.

Speaker #4: We use July 17th here we give you an estimate for the third quarter. You can run that out for the fourth quarter based on that information.

Speaker #4: Even though we're not guiding it for 4Q. So that's fuel. For the non-fuel side of things. Continue to be really, really pleased with the way that the management team broadly is managing costs.

Speaker #4: We're seeing cost savings happening everywhere in the business to the tune of literally hundreds of millions of dollars of incremental savings as we're working our way through the year.

Everyone, thank you. Um, just I I was hoping to start with the with the comp issue that you raised on unit Revenue a little bit and and just maybe you could potentially size that impact in 3Q. Um, just so we can understand a little bit more. Just I think what people are trying to to get at is just the framing of how it progresses, uh, you know, through through, through the first half of 2027 it just, I would have thought that there would have been more maturation, period and more uplift, uh, from the initiatives kind of offset the, the just the timing of it. And then specifically to Justin again, congrats, on the new role. Just trying to understand your your long-term growth. Uh, uh, you know, how how you view long-term growth at Southwest and just Network development. Uh in general, you know, should we be reading anything to the ramp of in Supply in the fourth quarter and and and and 1 key 27 at all. I just uh, like higher level thoughts. Thank you.

Speaker #4: To your question on fleet transactions in particular, this is something that I think is a unique strength. I think when it comes to divesting of retiring assets, we are one of the best in the world at doing this.

Speaker #4: The team does a fantastic job. And we've got north of 450 NGs that will be retiring for years and years to come, well into the next decade.

Hey, you bet Connor. Thanks for the question. Uh on the first. Yeah I think I just start I just maybe zoom out back up with the fact that you know, that our 22 unit Revenue. I mean, was up 20%. I mean, in an extraordinary number just just I mean as far ahead of the rest of the industry, you know as the transformation really kicked in and performed and showed up in the results, you know, the Q3 um, rasim guide is pretty simple. To me, it it includes the headwind from the initiatives uh that we put in place about a year ago in 2025, you know, 1 of which

Speaker #4: So it might be a little lumpy by quarter, but this is something that will be durable and with us continually. And as far as the timing of some of that, I think 3Q is going to be a little bit elevated versus first quarter and second quarter, and then fourth quarter probably looks a lot like the first quarter and second quarter.

Was bag fees. You know, bag fees alone is about a billion dollars a year. So we're just starting off at a much higher base. So if you adjust the the guide for lapping, those, you know, those initiatives uh, in Q3 our unit Revenue guide would be well ahead.

Speaker #6: The next question is from Mike Lindenberg with Deutsche Bank. Please go ahead.

Speaker #5: Oh, yeah. Hey, good morning, everyone. Two questions here. I guess to Andrew first, really well done on the completion factor. Obviously, credit due for running a good operation on one hand.

Of the unit revenues that we posted in the second quarter. And then either way, you know, we saw strong demand uh, really strong demand in revenues across the second quarter and all of that, robust strength is fully in place and continuing here in the third quarter,

Speaker #5: On the other hand, we have seen the delays go up pretty dramatically, even on what looked like blue-sky days. And I'm just curious, how much of that is just the function of you reducing the turn times, which I know has been a stated objective, combined with the fact that you are also trying to increase connectivity?

The next question.

Speaker #5: And then my second question to Tom and I'll throw Danielle in there as well. Kudos to reintroducing Roek in the release. Certainly important to us and investors.

Speaker #5: And I know management also gets compensated tied to Roek measures. So nice to see that come back. But the fact is, can you detail what was the gain in the quarter on sales for aircraft?

I was just going to address the long-term growth is Justin Jones. Thanks for having me on the call. Um, you know, as Bob talked about it as prepared remarks, you know, we're going to continue to grow to show capacity discipline. Uh while we're focusing on building durable earnings so and so you can expect some modest growth from us moving forward, you you see a little bit of that in the fourth quarter. You see some of that in 2027, we're we're we're well below our peers there. Um, but what my focus is going to be is on strengthening our points of strength that we have in the network and you're going to see that with our capacity growth, um, but you're also going to see that with us moving and shifting capacity around which you can already see. So, you'll see capacity growth in our points of strength and making them more durable long term and, uh, that that'll continue to be the focus as long as I'm in this role.

Speaker #5: And when you talk about capex, the guide for capex coming in at or below the low end, because it is net, is that a function of just the pickup and aircraft sales?

Great. Thank you.

The next question is from Andrew Dora with Bank of America. Please go ahead.

Speaker #5: Is it delayed deliveries from Boeing? What's driving that? Thanks for taking my question.

Speaker #2: Hey, thanks, Mike. Andrew, start with I appreciate the confidence and completion factor. Take a step back. The Wall Street Journal is a great measure of the operating quality of an airline.

Hi, good morning everyone. Um, maybe Tom uh, maybe Drilling in on the new 2026, you know, EPS Outlook. You know, can you help us with some of the inputs that underpin that particularly kind of fuel and Fuel and chasm in 4 q? And you know on that note? Yes in terms of 4 qasm I know you're retiring with 37 aircraft in the back, half versus 23 in the first half.

Speaker #2: Seven measures on that. We won it last year. We're tracking to win that again this year. If you look at those measures, some of them we've improved upon this year.

Speaker #2: But one that we have come down on is OTP. On-time performance. And I kind of divide those into two categories. Large-scale events, which is like the weather you have in the Northeast earlier this week, where we had Texas rains and storms last week, and Orlando the week before.

Gain on sale piece, um, in Q3 and Q4, and anything that you booked in the second quarter will be helpful. Thank you.

Speaker #2: And those situations, we continue to outperform our peers. You look at the geography where that happens, look at all the big carriers, we have equivalent to better OTP and much better completion rates.

Speaker #2: And so I'm very proud of our control center, our frontline people. They make really good decisions in those moments, and very good execution. And then you have this what I call the small-scale events, just the day-to-day.

Speaker #2: And we've seen that as we've rolled out our new product, we knew that we'd have changes. We organized our management technology teams to kind of continually update that post the rollout January 27th.

Speaker #2: And we see consumers react positively, both satisfaction scores have really inflected strongly, as well as consumer behavior and choice. And you see that in the Rasm results.

Speaker #2: What that leaves us is in the last 10 minutes of the turn, when we have high load factors. And those high load factor volumes, we see that we don't turn as fast.

Speaker #2: And so we have a lot of smaller delays that don't drive consumer dissatisfaction per se, but it's something we need to clean up. So we've focused our ground operations team on how they can re-engineer the last 10 minutes, now that we've pretty much stabilized the changes to our boarding product so we can scrape that back and have that OTP number be a much more flattering as we go forward.

As far as fuel, um, you know, we don't, we don't guide fuel. I think this is a, a bit of a Nuance here, but, um, we give you a fuel estimate based on a certain day and we say, it's the forward curve as of as of that day, uh, we use July 17th here. Um, we give you an estimate for the third quarter, you can run that out for the fourth quarter, you know, based on that information. Um, even though we're not guiding it for for 4 cues, so that's fuel. Um, for for the non-fuel side of things, I continue to be really, really pleased with the way that the management team broadly is managing costs. Um, we're seeing cost savings happening everywhere in the business to the tune of literally hundreds of millions of dollars of incremental, savings as we're working our way through uh through the year uh to your question on, uh, Fleet transactions. In particular, this is something that I think is a unique strengths. I think we. I I, I think when it comes to divesting of retiring assets, we are 1 of the best in the world at doing this. The team does a fantastic job.

Speaker #2: We already see benefits here in July. And there's some schedule changes that come in in October, but mostly we're going to be about this process optimization that will focus on throughout the next couple of months.

And we've got, you know, north of 450 NGS, that will be retiring. Um you know, for years and years to come well into the next decade. So this is it might be a might be a little lumpy by quarter. But um, this is something that will be durable and with us, uh, continually. Um, and as far as the timing of some of that, uh, I think 3Q is going to be a little

Bit elevated, you know, versus first quarter and second quarter. And then fourth quarter, probably looks a lot like the first quarter and second quarter.

Speaker #2: And we think that'll do the trick. By the time we get the next high-volume period in the holidays.

Speaker #6: Hey, and Mike, on your ROIC question, we like that metric a lot as well. And saw in your note from yesterday, the reference to ROIC and your calculation.

The next question is from Mike, linenberg with Deutsche Bank. Please go ahead.

Speaker #6: I weighted average cost of capital. It's an important milestone for us as we have that ROIC. Moving beyond the weighted cost of capital is an important metric.

Oh yeah, hey, um, good morning everyone. Um, 2 questions here, I guess, um, to Andrew first, um, really well done on the completion Factor. Um, obviously credit due for

Speaker #6: As far as the gains on sales of aircraft, we actually in our Q, which will come out later today, are going to provide a bit more detail.

Speaker #6: We thought that would be helpful as we've had some questions during the quarter on the quantum of that and what that looks like. So you'll see a little bit more detail.

Speaker #6: And hopefully that's helpful to you all. It's worth probably just north of maybe a point or so of Kazimeks or so in the quarter.

Speaker #6: And again, we think that that's something really durable that we have that will continue with us for years and years to come. As you think about gains on sales, that really works in tandem with depreciation expense and with maintenance expense.

Running a good operation on 1 hand, on the other hand, um, you know, you we have seen the delays go up pretty dramatically, um, even on what looked like blue sky days and I'm just curious how much of that is just a function of you reducing the turn times, which I know has been stated objective combined with the fact that you are also trying to increase connectivity. And then my, um, my second question to, um, Tom and I'll throw Danielle in there as well. Um, you know, kudos to reintroducing roic in the release. Um, certain certainly important to us and investors and I know management also gets compensated, um, tied to Rolex measures so nice to see that come back. Um, but the fact is, um,

Speaker #6: Of course, the more or less you depreciate, that changes your book value. And then as you spend on maintenance, especially on used assets, that brings a lot of economic value into those assets.

Can you detail? What? What was the gain? You know, in in the quarter on on, on sales for aircraft? And when you talk about capex,

Speaker #6: Of course, we generally expense that as it comes through. And so that can be something that can result in some gains there as well.

Speaker #6: So you see a bit of that coming through.

Speaker #5: Great. Thank you.

the guide for capex coming in at or below the low end is because it is net. Is that a function of just the pickup and aircraft sales is it delayed deliveries from Boeing? What, what? What's driving that? Um, thanks for taking my questions.

Speaker #6: The next question is from Savi Syth with Raymond James. Please go ahead.

Thanks, Mike. Andrew, I'll start with—um, you know, I appreciate the confidence in completion factor.

Speaker #7: Hey, good morning. Just maybe to follow up on kind of Justin's response earlier, just on where the growth is focused on. Are there kind of any common themes in where that capacity growth is happening, especially as you roll out the new schedules, other than just maybe where there are kind of high-margin opportunities?

Speaker #7: And then sort of second question, just breakage accounting changes are always a bit noisy, but it looked like the adjustment you took this quarter was related to kind of the forward credits, which I think you stopped issuing May of last year.

Speaker #7: Just curious if there were any implications from the change in assumption around the forward credits to how you're issuing credits today, which I think expires in like 6 to 12 months.

Speaker #7: And that margin contribution, you had expected from that change.

Speaker #8: Hey, sorry. Hey, it's Bob. Let me take the second one and then Justin will obviously take the first. Yeah, there's been some focus on the breakage adjustment.

You know take a step back to Wall Street Journal uh is a great measure of the operating quality of an airline 7 measures on that. We won it last year. We're tracking to win that again. This year. If you look at those measures, some of them we've improved upon this year. Uh but 1 that we have come down on is OTP, on type of performance and I kind of divide those into 2 categories. A large scale events which is like, uh, the whether you have the Northeast, uh, earlier this week, what we had the Texas, uh, rains and storms uh, last week and Orlando the week before, and those situations we continue to outperform our peers. You look at the geography that happens. Look at the all the big carriers, we have equivalent to better OTP and much better completion rate. And so I'm very proud of our control center our Frontline. People they make really good decisions in those moments and very good execution. And then you have the sway call the small scale events. It's the day-to-day, uh, and we've seen that as we rolled out our new product,

Speaker #8: I think I would try to simplify it. It's a small change I think 3. Change in the estimate on a large pool of unused travel funds.

Speaker #8: They do relate to 2022 to 2025 when we had the policy of never expiring. So that was new to us. And just had trends changed again as we made significant policy changes mid-last year, related to funds expiration.

Speaker #8: So there was a lot of moving parts here. I think the biggest thing is basic, which is none of this: the breakage that was booked or the adjustment relate to 2026.

Speaker #8: 2026 is clean. I think that's the most important thing. And then as we go forward, yeah, I think learnings in the trends, particularly from the policy changes last year, will factor those into breakage on new pools.

Speaker #8: Of travel funds. But again, I think the main thing is this was new. We changed the policy, and again, main point, it does not relate in any way to 2026 financials.

Now that we've pretty much stabilized the changes to our boarding product. So we can scrape that back and have that OTP. Number be a much more flattering as we go forward. We already see benefits here in July and there's some scheduled changes that come in in October, but mostly we're just be about this process optimization, uh, that will focus on, uh, throughout the next couple months and we think that'll do the trick. You know, uh, by the time we get the next high volume period, on the holidays,

Speaker #2: Hey, Savi. And just following up on the growth. So you asked about are there any common themes. And I'd say Southwest is in a position that no other airline is.

Speaker #2: We have a market-leading position in more cities in the top 50 US locations in the US than any other airline. And so the theme that you're going to see is us building on these points of strength.

Speaker #2: And the reason we're focused on those is because we're focused on customer loyalty and building diverse revenue streams. And our network changes are going to go exactly along with that theme.

Speaker #2: The objective there is to build long-term predictable earnings that we can count on for years to come. So when you look at our capacity changes, that's where the focus will be.

And and Mike on your roic question. Uh, we like that metric a lot as well. And, you know, saw in in, in your note, from yesterday, you know, the reference to roic and your calculation, a weighted average cost of capital. Um, you know, it's it's an important milestone for us as we have that roic, uh, moving beyond, the weighted cost of capital is is, um, is is is that's an important metric. Um, as far as the, the gains on sales of aircraft, we actually in our in our queue which will come out later. Today, are going to provide a bit more detail. We thought that would be helpful as we've had some questions. Um, you know, during the quarter on uh, you know, the Quantum of that and what that looks like. So you'll see you'll see a little bit more detail and hopefully that's helpful to you all. Um, it's it's worth probably, you know, just north of maybe a point or so of of cadmaxx or so in the in the quarter. And again we think that that's something really durable that we have that will continue with us for years and years to come. You know as you as you think about uh, games on sales um

Speaker #6: The next question is from Jamie Baker with JP Morgan. Please go ahead.

Speaker #4: Yeah, good morning. First one. So Justin, just a question on corporate recovery. In terms of revenue associated with seating initiatives, as business travelers continue to return to the network, how do their purchase patterns compare to those of consumers?

Speaker #4: The reason I'm asking is that it's still not clear to me what percentage of businesses reimburse corporate flyers for those expenses. JP Morgan does, for example, but another analyst on today's call shared that their firm does not.

That really works in tandem with depreciation expense and with maintenance expense, of course, the more or less, you'd appreciate that changes your book value. Um, and then, as you spend on maintenance, especially on used assets, uh, that brings a lot of economic value into those assets. Of course, we generally expense that as it comes through, um, and so that, that can be something that can result in some gains there as well. So you you see a bit of that coming through

Great. Thank you.

The next question is from Savvi Sith with Raymond James. Please go ahead.

Speaker #4: I'm just trying to figure out how much of a bump the new initiatives are driving as part of the overall corporate demand backdrop and whether it's different from consumer behavior.

Speaker #4: And then for Tom, sorry to come in with a modeling question, but the implication, on fourth quarter rasm, is pretty sizable. I mean, a big number.

Speaker #4: Despite lapping last year's initiatives, there's also some capacity growth to overcome. I can't say that it's unachievable. I guess my question is whether my math is wrong, but if it's directionally correct, it seems like you are building even more demand resilience into your guide than just sort of flatlining the currently strong trend.

Speaker #4: So wanted to give you an opportunity to push back on that. Thanks.

Hey, good morning. Um, just maybe just follow up on kind of Justin's a response earlier just on, you know, where the growth is focused on that. Their kind of any common teams in in where that capacity growth is happening. Especially as you roll out, the new schedules other than just maybe where there are kind of high margin opportunities. Um, and then for a second question, just, you know, breakage accounting changes, all is a bit noisy, uh, but it looked like the adjustment you took uh this quarter was related to kind of the forward credits, which I think you stopped issuing may have last year, just curious, if there were any implications from the change, um, in Assumption around the 4, credits to how your issue and credits today, which I think expires in like 6 to 12 months and that margin contribution, you had expected from that change.

Speaker #2: Yeah, so just following up on the corporate recovery, Bob talked a little bit about our corporate revenue being up 30% on year-over-year basis. And you obviously know what our total revenue is up.

Hey, Savvy. Hey, it's Bob. Let me, let me take the second one, and then Justin.

Speaker #2: And so that difference there probably explains some of that. Obviously, our corporate customers are more likely to book away from the basic economy fares.

Speaker #2: And that's going to be true for anybody out there. But so the gap between that 30% growth and the rest of revenue is probably how you would think about that.

Will obviously take the first. Um, yeah, there's been some focus on the breakage adjustment. I I think I would try to simplify it, you know. It's a it's a small change. I think, 3 point uh change in the estimate on a, on a large pool of unused travel funds. They do relate to 2022 to 2025 when we had the uh, the policy of of of never expiring. So that was new to us.

Speaker #2: But overall, we're super impressed with the adoption of our new products, bar corporate customers. Not only are we seeing substantial fare growth on our year-over-year basis, but nominal load factor points and our total mix of O and Ds is all up.

Speaker #2: And so every metric we're looking at is looking good there.

Speaker #1: And Jamie, on your modeling question, of course, the guidance that we're providing is third-quarter guidance when it comes to the unit metrics. We've given the full-year guide for EPS, which, by the way, putting a guide out that within that guide includes the $4, that we guided at the beginning of the year, I think is a tremendous accomplishment here.

And, uh, just had to, you know, learn about the trends, and then the trends changed again as we made significant policy changes mid last year related to funds expiration. Um, so there were a lot of moving parts here. I think the biggest thing is basic, which is none of this—the breakage that was booked or the adjustment—relates to 2026. 2026 is clean.

Speaker #6: travel funds. But again, I think the main thing is this was new. We changed the policy. And again, main point, it does not relate in any way to 2026 financials.

I think that's the most important thing. And then as we go forward, I—I, yeah, I—I think, you know, any learnings in the trend, particularly from the policy changes last year, we'll factor those into, you know, breakage on new pools of travel funds. But I again,

Speaker #1: And just zooming out a little bit. We're comfortable as you think about kind of the two big parts of the rest of the year.

Speaker #1: You've got the cost side, which I think we feel we have good visibility to the non-fuel cost side of the business between now and the end of the year.

Speaker #3: Hey, Savi. And just following up on the growth. So, you know, you asked about are there any common themes. And I'd say, you know, SOUTHWEST is in a position that no other airline is.

Speaker #1: And so that comes through into the full-year guide. And then on the revenue side, without giving any sort of guidance around the fourth quarter unit revenues, I don't think that we're making any assumptions that show that escalating unit revenue into the fourth quarter really the way I would see that is it's an assumption that we are comfortable with for revenue in the last three months of the year.

Speaker #3: We have a market-leading position in more cities in the top 50 US locations in the US than any other airline. And so the theme that you're going to see is us building on these points of strength.

Speaker #3: And the reason we're focused on those is because we're focused on customer loyalty and building diverse revenue streams. And our network changes are going to go exactly along with that theme.

Speaker #3: And the objective there is to build long-term predictable earnings that we can count on for years to come. So when you look at our capacity changes, that's where the focus will be.

Speaker #6: The next question is from Dwayne Fennigworth with AeroCore ISI. Please go ahead.

Speaker #6: The next question is from Jamie Baker with JPMorgan. Please go ahead.

Speaker #5: Hey, thank you. And nice job to the team on the relative margin progress. I just wanted to ask you longer-term how you're thinking about free cash flow conversion and the underlying drivers.

Speaker #2: Yeah, good morning. First one. So Justin, just a question on corporate recovery. In terms of revenue associated with seating initiatives, you know, as business travelers continue to return to the network, how do their purchase patterns compare to those of consumers?

Speaker #5: Is free cash flow going to be simply a function of continued margin progress and earnings expansion, or are there other levers that could drive a higher conversion even on, say, maybe a flattish earnings outlook into 2027?

Speaker #2: The reason I'm asking is that it's still not clear to me what percentage of businesses reimburse corporate flyers. You know, for those expensive JPMorgan does, for example.

Speaker #2: But another analyst on today's call shared that their firm does not. I'm just trying to figure out how much of a bump the new initiatives are driving as part of the overall corporate demand backdrop and whether it's, you know, different from consumer behavior.

Speaker #5: Not saying that's what you're calling for, but hypothetically on a flattish earnings outlook, would we see improved free cash flow conversion?

Speaker #1: Hey, Dwayne. I'll take that one as well. You've heard us talk a lot about operating cash flow, and you've seen meaningful improvement there as we've had improvements in the business.

Speaker #2: And then for Tom, sorry to come in with a modeling question, but, you know, the implication on fourth-quarter rasm is pretty sizable. I mean, a big number.

Speaker #1: Moving from operating cash flow to free cash flow is largely going to depend on the timing of fleet transactions. It is a little more backweighted in the year as far as us taking deliveries.

Speaker #2: You know, despite lapping last year's initiatives, there's also some capacity growth to overcome. I can't say that it's unachievable. I guess my question is whether my math is wrong.

Speaker #1: The non-aircraft capex is relatively constant through the year. So yeah, I think you're thinking about it the right way, Dwayne, which is we continue to improve the underlying profitability of the business.

Speaker #2: But if it's directionally correct, it seems like you are building even more demand resilience into your guide than just sort of flatlining the currently strong trend.

Speaker #2: So wanted to give you an opportunity to push back on that. Thanks.

Speaker #1: That generates operating cash flow. And then that translation ultimately to free cash flow will depend largely on the timing of the deliveries and because we largely pay cash and/or unsecured slash some secured financing for the aircraft, generally as we take on those new deliveries, there's no net capex offset that would come with leasing that would bring more free cash flow and reduce net capex.

Speaker #3: Yeah, so just following up on the corporate recovery, you know, Bob talked a little bit about our corporate revenue being up 30% on a year-over-year basis.

Speaker #3: And you obviously know what our total revenue is up. And so that difference there probably explains some of that. Obviously, our corporate customers are more likely to book away from the basic economy fares.

Speaker #3: And that's going to be true for anybody out there. But so the gap between that 30% growth.

Speaker #6: The next question is from Brandon Oglensky with Barclays. Please go ahead.

Speaker #7: Hey, good morning. And thanks for taking my question. Bob, in your prepared remarks, I think one of the two or three things you said about objectives looking forward is refining the pricing of your products, and the new suite of fares that you guys have out there.

Speaker #7: So I don't know if you or Justin want to comment on that, but does that help an environment where fuel is so volatile and maybe compare and contrast with how you did things in the past?

Speaker #7: Thank you.

Speaker #2: Yeah, I think the point is really that I mean, the changes in the business have been tremendous. I mean, we have a much more diverse set of revenues, streams more than any at any point in our history.

Speaker #2: The customer reaction to the products has been really strong. The engagement is really strong. We mentioned this, but 35% increase in new member record tiering qualification, 28% increase in co-brand card acquisition.

Speaker #2: So everything about the promise of the transformation is showing up in the business. And it fundamentally changes the model and it fundamentally changes the earnings ability to and production and it changes the durability of the earnings stream, in my mind.

And Jamie on on your modeling question. Uh, you know, of course the guidance that we're providing is is third quarter guidance when it comes to the to the unit metrics. We've given the full year guide uh, for EPS which which by the way, putting a guide out that within that guide includes the 4 dollars that we guided at the beginning of the year, I think is a tremendous accomplishment here and you just you know, zooming out a little bit. Um we're comfortable, did you think about kind of the 2 big parts of the rest of the year? You've got the cost side which I think we we feel we have uh good visibility to the non-fuel cost side of the business between now and the end of the year and so that, uh, comes through into the full year guide and then on the revenue side without giving any sort of guidance around the fourth quarter unit revenues, uh, I don't think that we're making any assumptions uh, that uh

Speaker #2: Now you've got an opportunity to really continue to push in all those areas. So as Justin has mentioned a lot, we have a lot of opportunity to continue to optimize the network, to optimize our pricing around the new products, whether that's ancillary or fair buy-up.

Show that that escalating, uh, unit Revenue into the fourth quarter. Um, you know, really the way I would see that is, it's, it's, it's, um, it's a, it's an assumption that we are comfortable with, for Revenue, uh, in in the last 3 months of the, of the year.

Speaker #2: We have opportunities to continue to optimize the products themselves I also see these customer engagement metrics that are super strong. I would say is leading indicators of the opportunity in co-brands.

The next question is from Dwayne fenworth with evercore isi, please go ahead.

Hey, thank you, and nice job. Uh, to the team on the on the relative margin progress. Um, I just wanted to ask you longer term how you're thinking about free cash flow conversion and and the underlying drivers.

Speaker #2: So we have the opportunity to continue to drive the co-brand contribution to the business and then continue to expand the co-brand opportunities. New cards, those kinds of things.

Is free cash flow. Going going to be simply a function of continued, margin, progress and earnings expansion.

Speaker #2: So the point is the transformation has fundamentally changed the earnings power of this company. You see that in the year-over-year margin change. The only airline to actually strengthen margins over three points year over year despite multi-million dollars in fuel increase.

Or are there other levers that could drive a higher conversion, even on, say, maybe a flattish earnings outlook into 2027? Not saying that's what you're calling for, but hypothetically, on a flattish earnings outlook, would we see improved free cash flow conversion?

Speaker #2: And we have more to come out of the products that we have, and then we'll continue to expand on the products that. So I'm incredibly bullish about where we are and I'm incredibly bullish about where we are going.

Speaker #2: On top of that, the backdrop remains really strong. And some of that is the reaction to our new products. Some of that is the reaction, obviously, just generally the industry is saying demand in the third quarter in the second quarter was very robust.

Speaker #2: Revenue was very robust. And we saw that accelerate managed business being up 30% year over year on basically flat capacity to me is just incredible.

Speaker #2: And we're seeing that same strength continue directly into the third quarter here. We're not seeing the strength we exited the second quarter very strong and we're seeing that same strength here in the third.

Speaker #2: I mean, it's just as one example the third quarter, I think, right now is booked about 65% in place. And yields are running up 24% year over year compared to 13% for Q2 at this point.

Speaker #2: So there's no deceleration in the strength in the demand, no deceleration in the strength in the revenues and the fares.

Speaker #6: The next question is from Catherine O'Brien with Goldman Sachs. Please go ahead.

Speaker #8: Hey, good morning, guys. Thanks for the time. On the revenue side, now that we're in the first full quarter of all the new product niches, I'm just wondering if there's any stats you can maybe share on how buy-up from basic or baggage take rates are trending versus your initial expectations and how that factored into the revenue beat if it did.

Speaker #8: And then Tom, another beat on the cost side in the quarter. Would be great to hear what the main driver of that was and how we should think about the puts and takes on Kasman to 4Q from here and then can you just remind us if aircraft sales are included when you give the initial quarterly guide?

Speaker #8: Thanks for the time, guys.

Speaker #2: Yeah, I'll take the first one. We're not going to break out the value of the individual initiatives, but I can talk a little bit about the trends of what they are versus our expectations.

Speaker #2: So we are outperforming when we think about what we've done with basic economy. We are selling more basic economy fares, but that's because we've expanded the basic economy product into more of our fare structure overall.

Speaker #5: Now you've got an opportunity to really continue to push in all of those areas. So as Justin has mentioned a lot, we have a lot of opportunity to continue to optimize the network, to optimize our pricing around the new products, whether that's ancillary or fair buy-up.

Speaker #2: We are also seeing incremental sell-up. So meaning that when people have options to trade up or providing those options more often and we're seeing more of that trade-up.

Speaker #2: And so both of those are outperforming what our initial expectations are. And as Bob noticed, there is a clear expectation that we'll continue to tweak the models and work with Tony Roach's team to make the product better moving forward.

Speaker #5: We have opportunities to continue to optimize the products themselves I also see the customer engagement metrics that are super strong. I would say is leading indicators of the opportunity in co-brands.

Speaker #3: And Katie, to your question on drivers for Kasman, it's really happening throughout the business, as I mentioned before. And this is everything from getting more efficient on the technology side we've been, I think, really efficient on the supply chain and on the maintenance side of things.

Speaker #5: So we have the opportunity to continue to drive the co-brand contribution to the business and then continue to expand the co-brand opportunities. New cards, those kinds of things.

Speaker #3: You've heard us talk in the past about non-frontline headcount dollars staying flat to 2025. We've had really good efficiency from our frontline teams as well, which that's a large part of our cost structure.

Speaker #5: So the point is the transformation has fundamentally changed the earnings power of this company. You see that in the year-over-year margin change. The only airline to actually strengthen margins over 3 points year-over-year despite 900 million dollars and fuel increase.

Speaker #3: So it's very broad-based. And then separately to your question on aircraft sales, yeah, you are right. As we move to a simplified EPS structure in the guide there, that is inclusive of any gains that would come as we are disposing of these assets.

Speaker #5: And we have more to come out of the products that we have, and then we'll continue to expand on the products that. So I'm incredibly bullish about where we are, and I'm incredibly bullish about where we are going.

Speaker #3: So yes.

Speaker #6: The next question is from Sheila Kahyaoglu with Jefferies. Please go ahead.

Speaker #5: On top of that, the backdrop remains really strong. And some of that is the reaction to our new products. Some of that is the reaction, obviously, just generally that the industry is seeing.

Speaker #7: Good morning, guys. And thank you again. Maybe just a lot of questioning on this, but just putting a finer point on how we think about the Q2.

Speaker #5: Demand in the third quarter in the second quarter was very robust. Revenue was very robust. And we saw that accelerate. You know, managed business being up 30% year-over-year on basically flat capacity to me is just incredible.

Speaker #7: The guidance in terms of the deceleration at the midpoint for Q3 while legacy peers are guiding to Erasm acceleration. Maybe can you just parse out the tailwinds and headwinds if possible on the sequential deceleration across initiatives, the comp, and the macro demand?

Speaker #5: And we're seeing that same strength continue directly into the third quarter here. We're not seeing the strength that we exited the second quarter very strong and we're seeing that same strength here in the third.

Speaker #7: Is that possible?

Speaker #2: Yeah. Sheila, let me just talk and I don't yeah, we're not going to break it out. Into components, but the change sequentially Q2 to Q3 is completely and simply the headwinds created by the initiatives that we put into place about this time last year in 2025 that contributed.

Speaker #5: I mean, it's just as one example the third quarter, I think, right now is booked about 65% in place. And yields are running up, you know, 24% year-over-year compared to 13% for Q2 at this point.

Speaker #5: So there is no deceleration in the strength in the demand, no deceleration in the strength in the revenues and the fares.

Speaker #2: So our basis as a comparator is just higher. It was bag fees. A number of things. As I mentioned, bag fees on their own.

Speaker #3: The next question is from Catherine O'Brien with Goldman Sachs. Please go ahead.

Speaker #2: It's about a billion dollars a year. So call it maybe two and a half points. And then on top of that, you have obviously other initiatives that we implemented that are in that headwind.

Speaker #6: Hey, good morning, guys. Thanks for the time. On the revenue side, now that we're in the first full quarter of all the new product niches, I was just wondering if there's any stats you could maybe share on, you know, how buy-up from basic or baggage take rates are trending versus your initial expectations and how that factored into the revenue beat if it did.

Speaker #2: So you take even the bag fees, let alone the rest, and you add that to the third quarter guide and you are sequentially ahead of our second quarter 20.1.

Speaker #6: And then Tom, another beat on the cost side in the quarter. Would be great to hear what the main driver of that was and how we should think about the puts and takes on Kasman to 4Q from here and then can you just remind us if aircraft sales are included when you give the initial quarterly guide?

Speaker #2: And it's on a number, obviously, that is substantially higher than the rest of the industry. So there's no there is no deceleration in demand.

Speaker #2: There's no deceleration in the fares. There's no deceleration in managed business. There's no deceleration in the strength of the product performance. None of that.

Speaker #6: Thanks for the time, guys.

Speaker #1: Yeah, I'll take the first one. We're not going to break out the value of the individual initiatives, but I can talk a little bit about the trends of what they are versus our expectations.

Speaker #2: This is simply a factor of the base stepping up because of the products that we implemented this time last year.

Speaker #1: So we are outperforming you know, when we think about what we've done with basic economy, we are selling more basic economy fares, but that's because we've expanded the basic economy product overall.

Speaker #6: The next question is from John Godden with City. Please go ahead.

Speaker #4: Hey, thanks for taking my question. Bob, in the prepared remarks, you mentioned a bunch of reasons impossible to replicate Southwest assets. Of course, other airlines would argue it's impossible to replicate theirs too.

Speaker #1: We are also seeing incremental sell-up. So meaning that when people have options to trade up or providing those options more often and we're seeing more of that trade-up.

Speaker #1: And so both of those are outperforming what our initial expectations are. And as Bob noticed, there is a clear expectation that we'll continue to tweak the models and work with Tony Rocha's team to make the product better moving forward.

Speaker #4: But some of them have been spending billions of dollars a year on CapEx product, IT, other improvements, and they've been doing it for years.

Speaker #4: So my question is just to think through this, not a specific number, but just to sort of discuss and think through how much incremental investment it takes to replicate assets that are thought to be impossible to replicate.

Speaker #4: And Katie, to your question on drivers for Kasman, it's really happening throughout the business, as I mentioned before. And, you know, this is everything from getting more efficient on the technology side.

Speaker #4: We've been, I think, really efficient on the supply chain and on the maintenance side of things. You've heard us talk in the past about non-frontline headcount dollars staying flat to 2025.

Speaker #2: Hey, John, that's a wide-ranging question, but I think I would just start with the point is not what would it take to for us to take ourselves to an equivalent product to pick another airline.

Speaker #4: We've had really good efficiency from our frontline teams as well, which that's a large part of our cost structure. So it's very broad-based. And then separately to your question on aircraft sales, yeah, you are right.

Speaker #2: The point is that we've changed the business model of Southwest Airlines to meet customers' needs and expectations to broadly diversify the revenue streams to create a durability in the and stability in the earnings and you combine that with, I think, without question, historic core strengths that Southwest Airlines has always had.

Speaker #4: As we move to a simplified EPS structure in the guide there, that is inclusive of any gains that would come as we are disposing of these assets.

Speaker #4: So yes.

Speaker #3: The next question is from Sheila Kayaglu with Jefferies. Please go ahead.

Speaker #6: Good morning, guys. And thank you again. Maybe just a line of questioning on this, but just putting a finer point on how we think about the Q2 the guidance in terms of the deceleration at the midpoint for Q3 while legacy peers are guiding to Erasm acceleration.

Speaker #2: And no carrier can replicate or is even close. We have the largest domestic network, period. We have the most nonstop flights, which are incredibly important to customers period.

Speaker #2: As Justin said, we have the number one position in not a few hubs. But in nearly half of the 50 largest US states. Cities.

Speaker #6: Maybe can you just parse out the tailwinds and headwinds if possible on the sequential deceleration across initiatives, the comp, and the macro demand? Is that possible?

Speaker #2: We have incredible cost discipline and efficiency. And our efficiency has always been very hard to replicate because it's a matter of how we manage the aircraft and aircraft utilization and the network.

Speaker #5: Yeah. Sheila, let me just talk and the and I don't yeah, we're not going to break it out. You know, into components. But the change sequentially Q2 to Q3 is completely and simply the headwinds created by the initiatives that we put into place about this time last year in 2025 that contributed.

Speaker #2: And you're seeing the discipline come through in cost quarter after quarter now. Cost in the low to mid-3s on flat capacity here. And then we have without a doubt the best service the best hospitality from the best people.

Speaker #2: And that shows up in whether it's JD Power or the Wall Street Journal rankings or others shows up time and time again that that is a huge differentiator for Southwest.

Speaker #5: So our bases as a comparator is just higher. It was bag fees. You know, a number of things. You know, as I mentioned, bag fees on their own.

Speaker #2: Any one of those is tough to replicate. Like the network. Those in combination are incredibly tough to replicate. And you take all of those strengths and combine them with the fact that we've now dramatically improved our product.

Speaker #5: It's about a billion dollars a year. So, you know, call it maybe two and a half points. And then on top of that, you have obviously other initiatives that we implemented that are in that headwind.

Speaker #2: Diversified streams. And we're going to do more. I think it's a combination that is incredibly tough to match. We may choose to continue to invest in products.

Speaker #5: So you take even the bag fees, let alone the rest, and you add that to the third quarter guide and you are sequentially ahead of our second quarter 20.1.

Speaker #2: We will without a doubt. But the real point is the combination of core strengths that no other airline can replicate.

Speaker #5: And it's on a number, obviously, that is substantially higher than the rest of the industry. So there's no you know, there is no deceleration in demand.

Speaker #5: There's no deceleration in the fares. There's no deceleration in managed business. There's no deceleration in the strength of the product performance. None of that.

Speaker #6: The next question is from Ravi Shanker with Morgan Stanley. Please go ahead.

Speaker #5: Oh, great. Thanks. Just a couple of follow-ups here. Maybe on corporate, now that the revenue initiative has some time to bed in, can you just talk about how share may have shifted particularly in corporate and how much room do you think there is to get up to your due level there for corporate share?

Speaker #5: This is simply a factor of the base stepping up because of the products that we implemented this time last year.

Speaker #3: The next question is from John Gottin with Citi. Please go ahead.

Speaker #5: And maybe as a follow-up, I thought I heard you guys mentioned hundreds of millions of dollars in incremental cost saves I don't know if I misheard.

Operator: Hello everyone, welcome to the Southwest Airlines Q2 2026 Earnings Conference Call. My name is Gary, I'll be moderating today's call. Please note that this call is being recorded. A replay of today's call will be available in the investor relations section of southwest.com. Following the prepared remarks, we will open the call for questions. To ask a question, please press star one on your telephone keypad. To withdraw your question, press star two. At this time, I would like to turn the call over to Danielle Collins, Managing Director of Investor Relations. Danielle, please go ahead.

Speaker #7: Hey, thanks for taking my question. Bob, in the prepared remarks, you mentioned a bunch of reasons impossible to replicate Southwest's assets. Of course, other airlines would argue it's impossible to replicate theirs too.

Speaker #5: But that sounds pretty exciting. Can you just talk about how much of that is already in the guide and what is the long-term runway on that, please?

Speaker #5: Thank you.

Speaker #2: Yes. I'm happy to take the corporate share one. So as we talked about the significant nominal increase in revenue on a year-over-year basis and we also talked about seeing improvements not only in fare but also in nominal load factor points as well as a mix of total O&Ds.

Speaker #7: But some of them have been spending billions of dollars a year on CapEx product, IT, other improvements, and they've been doing it for years.

Speaker #7: So my question is just to think through this, not a specific number, but just to sort of discuss and think through how much incremental investment it takes to replicate assets that are thought to be impossible to replicate.

Speaker #2: So I think the way I look at it is we still actually have some pretty significant disadvantages relative to our peers whether it's buying ancillary products through different channels that our corporate passengers book through.

Speaker #5: Hey, John, that's a wide-ranging question, but I think I would just start with the point is not it's not what would it take to for us to take ourselves to an equivalent product to, you know, pick another airline.

Speaker #2: So a lot of tactical things that the teams can go out and do to push that. But it's also going to ride right on the coattails of what we're going to be doing with the network.

Danielle Collins: Thank you. Hello, everyone, welcome to Southwest Airlines' Q2 2026 earnings call. In just a moment, we will share our prepared remarks. After which, we'll move into Q&A. Joining me today are Bob Jordan, our President and Chief Executive Officer, Andrew Watterson, our Chief Operating Officer, Justin Jones, our Chief Commercial Officer, and Tom Doxey, our Chief Financial Officer. Before we begin, a reminder that we will be making forward-looking statements which are based on our current expectations of future performance, our actual results could differ materially from expectations. We will reference our non-GAAP results, which exclude special items that are called out and reconciled to GAAP results in our earnings release. With that, I'll turn the call over to Bob.

Speaker #2: As you build these points of strength, as we move our capacity around to offer a much better network product to our customers, you're going to see that customer share increase.

Speaker #5: The point is that we've changed the business model of Southwest Airlines to meet customers' needs and expectations to broadly diversify the revenue streams to create you know, more durability in the and stability in the earnings and you combine that with, I think, without question, historic core strengths that Southwest Airlines has always had.

Speaker #2: And that's exactly what we see already as we made these changes. As we improve the network, our corporate load factors are going up.

Speaker #3: And Ravi, to your cost question, yes, the hundreds of millions of dollars of savings are in the guide. And this is just disciplined work by all of the leaders here and what I've loved is you've heard me say this before.

Speaker #3: This is not finance going around and having conversations about how we save money. This is every leader at the company figuring out ways to make their areas more efficient and collectively partnering with us to find savings throughout the entire business.

Speaker #5: And no carrier can replicate or is even close. We have the largest domestic network, period. We have the most nonstop flights, which are incredibly important to customers you know, period.

Bob Jordan: Thank you, Danielle, good morning, everyone. I appreciate you joining our call today. Yesterday, we reported our Q2 results, marking the first time all of our major initiatives were contributing throughout the entire quarter. The results put the earnings power of our business on full display and demonstrate the benefits of the transformation that we have executed. Our business now benefits from a broader and more diversified set of revenue and commercial levers than at any point in our history. The results demonstrate that the transformation is working with a 9% after-tax return on invested capital, an adjusted operating margin of 6.7% or a 3.3-point improvement year over year, despite nearly a $900 million year over year increase in Q2 fuel expense. We also generated nearly $2 billion in operating cash flow during the H1 of the year, despite record fuel expense.

Speaker #3: So that comment of hundreds of millions of dollars of savings is incremental savings that we've found since the beginning of the year as we've been working together and yes, it is incorporated into the full-year guide we gave you.

Speaker #5: It's just instead we have the number one position in not a few hubs. But in nearly half of the 50 largest US states. Cities.

Speaker #5: We have incredible cost discipline and efficiency. And our efficiency has always been very hard to replicate because it's a matter of how we manage the aircraft.

Speaker #6: The next question is from Tom Fitzgerald with TD Cowen. Please go ahead.

Speaker #5: And aircraft utilization and the network. And you're seeing the discipline come through in cost quarter after quarter now. You know, cost in the low to mid-threes, you know, on flat capacity here.

Speaker #7: Hi everyone. Thanks so much for the time. I was curious off on the fleet side if you could talk a little bit about your long-term maintenance agreements and how that could be an advantage just as there's this transition to the new technology engines.

Speaker #7: And then just as a follow-up, should we expect that airline benefit revenue component of loyalty should that grow with the overall business in 2027 or is that more kind of flat based on cardholder spend?

Speaker #5: And then we have without a doubt the best service the best hospitality from the best people. And that shows up in whether it's JD Power or the Wall Street Journal rankings or others shows up time and time again that that is a huge differentiator for Southwest.

Speaker #7: Any color on that would be really helpful. Thanks again for the time.

Speaker #5: Hey, Tom. I'll take the first one on the fleet side. My comment before was around having maintenance value in the assets that we are selling.

Bob Jordan: We reported adjusted EPS of $0.94, up approximately 120% year over year, well above both our initial guidance and analyst consensus. Adjusted unit revenues increased 20.1% year over year to an all-time quarterly record, exceeding the high end of our prior guidance range. Adjusted operating revenues increased 20.3% on capacity growth of only 0.2%. Managed business revenues grew 30% year over year to a new all-time quarterly record, surpassing the record established just Q1 ago. Customer response to our enhanced product offering is showing up in strong engagement results. Rapid Rewards new member enrollments increased 35% year over year, overall program size is a record with nearly 100 million members. Tier qualification activity reached a record high in the quarter. Chase co-branded card credit card account growth was exceptionally strong, with card acquisitions in the quarter up 28% year over year.

Speaker #5: Any one of those is tough to replicate. Like the network. Those in combination are incredibly tough to replicate. And you take all of those strengths and combine them with the fact that we've now dramatically improved our product.

Speaker #5: And that value is trading strongly in the market now. The underlying assets aircraft and engines and other assets are that market is strong and we think it'll be strong for the foreseeable future.

Speaker #5: Diversified our revenue streams. And we're going to do more I think it's a combination that is incredibly tough to match. We may choose to continue to invest in products.

Speaker #5: But then the actual value of the maintenance itself is also trading at higher amounts as well. And so as we sell assets into the market, we benefit from that strength.

Speaker #5: We will without a doubt. But the real point is the combination of core strengths that no other airline can replicate.

Speaker #5: And I think that's pretty widely known that there's strength in those markets.

Speaker #3: The next question is from Ravi Shankar with Morgan Stanley. Please go ahead.

Speaker #2: And then Tom, as Bob will take a second on the I think you're talking about the co-brand benefit. I think the answer is yes.

Speaker #8: Oh, great. Thanks. Just a couple of follow-ups here. Maybe on corporate, now that the revenue initiatives have some time to bed in, can you just talk about how share may have shifted particularly in corporate and how much room do you think there is to get up to your due level there for corporate share?

Speaker #2: You should expect over time as products mature, customer engagement with the new products mature, I would expect that to show in the co-brand remuneration.

Speaker #8: And maybe as a follow-up, I thought I heard you guys mentioned hundreds of millions of dollars in incremental cost saves. I don't know if I misheard.

Bob Jordan: Cost discipline continued as well, with CASM ex-fuel increasing just 3.4% year-over-year on near flat capacity below the low end of our prior guidance. Cost discipline remains broad-based across the company. With transformational initiatives now fully in place, our focus has shifted to optimization and unlocking the full potential of the business. Specifically, we are focused on optimizing the network, refining new products and pricing, growing managed business revenues, and expanding co-brand opportunities. We have emerged as a stronger, more resilient, and better-positioned Southwest while sustaining a unique set of core strengths that remain firmly intact. The largest domestic network with the most non-stop flights and the number 1 position in nearly half of the 50 largest US airports. Operational efficiency, cost discipline, powerful brand loyalty, importantly, legendary service and hospitality delivered by our incredible people.

Speaker #2: The I mentioned this before. We have strong to me leading indicators of not only the fact that customers, business and leisure are strongly engaging in our new products, but it's causing them to strongly engage from a loyalty perspective.

Speaker #8: But that sounds pretty exciting. Can you just talk about how much of that is already in the guide and what is the long-term runway on that, please?

Speaker #8: Thank you.

Speaker #4: Yes. I'm happy to take the corporate share one. So, you know, as we talked about the significant nominal increase in revenue on a year-over-year basis and we also talked about seeing improvements not only in fare but also in nominal load factor points as well as a mix of total O&Ds.

Speaker #2: Again, the growth in new membership, the growth in tier, the growth in card acquisition, etc. So I see those as leading indicators that will over time turn into a continued card spend growth and then co-brand.

Speaker #4: So I think the way I look at it is we still actually have some pretty significant disadvantages relative to our peers whether it's buying ancillary products through different channels that our corporate passengers book through.

Speaker #2: The second piece of that, we fully intend to continue to expand the co-brand offering and opportunities for our customers. I know I've teased at lounges that's something obviously that there's work underway.

Speaker #4: So a lot of tactical things that teams can go out and do to push that. But it's also going to ride right on the coattails of what we're going to be doing with the network.

Speaker #4: As you build these points of strength, as we move our capacity around to offer a much better network product to our customers, you're going to see that customer share increase.

Speaker #2: We're not ready to formally announce that yet. But the whole purpose again is to expand co-brand opportunities, expand the card set, and provide to our customers something that they really, really want.

Speaker #4: And that's exactly what we see already as we made these changes. As we improve the network, our corporate load factors are going up.

Bob Jordan: That creates a differentiated position in the marketplace that no other airline can replicate. That differentiation continues to show in the results. Southwest was named number 1 in customer satisfaction among economy passengers in the J.D. Power 2026 North America Airline Satisfaction study, our fifth consecutive year at the top spot, following recognition by The Wall Street Journal as its best US airline of 2025. These recognitions reinforce that our hospitality, reliability, operational execution, and value remain powerful core competitive advantages. We continue to evolve the product that we offer to our customers. Just a few weeks ago, our first Starlink-equipped aircraft entered service, marking the beginning of a new era of in-flight connectivity at Southwest. In early July, we expanded our airline partner network to nine carriers with the addition of Air Premia.

Speaker #2: So I think you see evidence that the our customers are our customer engagement is moving quickly in the right direction and over time that will mature and I think it matures into things like card spend and co-brand remuneration and then we'll continue to expand the offering which will do the same.

Speaker #1: And Ravi, to your cost question, yes, the hundreds of millions of dollars of savings are in the guide. And you know, this is just disciplined work by all of the leaders here and what I've loved is and you've heard me say this before this is not finance going around and having conversations about how, you know, we save money.

Speaker #1: This is every leader at the company figuring out ways to make their areas more efficient and collectively partnering with us to find savings throughout the entire business.

Speaker #6: The next question is from Scott Group with Wolf Research. Please go ahead.

Speaker #8: Hey, thanks. Morning. So I wanted to ask on capacity. If I look at Q4 or up four to five percent year over year, I think it's the biggest sequential Q3 to Q4 increase.

Speaker #1: So that comment of hundreds of millions of dollars of savings is incremental savings that we've found since the beginning of the year as we've been working together and yes, it is incorporated into the full-year guide we gave you.

Speaker #8: Maybe we've ever seen so just want to sort of understand the thought on that. And I don't know if you have any sort of early thoughts about how you're thinking about capacity and 2027.

Speaker #3: The next question is from Tom Fitzgerald with TD Cowan. Please go ahead.

Speaker #6: Hi everyone. Thanks so much for the time. I was curious off on the fleet side if you could talk a little bit about your long-term maintenance agreements and how that could be an advantage just as there's this transition to the new technology engines.

Bob Jordan: With the launch of Anchorage in May, we completed the rollout of service to all five previously announced new destinations. We aren't stopping here. We will continue to drive enhancements that broaden our product offering and further deepen customer engagement. Now let me turn to our outlook. While fuel prices have remained volatile and elevated, industry recapture has been swift and pricing has remained sticky. Forward bookings are robust. We are optimistic the strong demand and pricing environment will be sustained. Importantly, the revenue strength we are seeing is not solely a fuel recovery story. It also reflects the idiosyncratic benefits of our own initiatives, which are improving revenue quality, strengthening customer acquisition and engagement, broadening the earnings power of the business, and creating earnings durability regardless of the macro environment. For full year 2026, we now expect adjusted earnings per share of $3.25 to $4.25.

Speaker #8: Yeah.

Speaker #2: Yeah. So well, looking at our sequential growth that we have going into Q4, it is up four and a half percent. You will probably see us make some slight tweaks to that schedule as we get closer out there.

Speaker #6: And then just as a follow-up, should we expect that airline benefit revenue component of loyalty should that grow with the overall business in 2027 or is that more kind of flat based on cardholder spend?

Speaker #2: And but if you look at where we have that capacity growth, again, it is in our point of strength. And so this is not trying to go and expand into new markets for us that are going to underperform the rest of the network.

Speaker #6: Any color on that would be really helpful. Thanks again for the time.

Speaker #8: Hey, Tom. I'll take the first one on the fleet side. My comment before was around having maintenance value in the assets that we are selling.

Speaker #2: Everywhere where we're putting aircraft, we expect to produce profitable earnings for us here this year. And again, it is you will see us focus on capacity discipline moving forward, not only this year, but also into next.

Speaker #8: And that value is trading strongly in the market now. The underlying assets aircraft and engines and other assets are that market is strong and we think it'll be strong for the foreseeable future.

Speaker #8: To that point, any early thoughts on what 27 capacity could look like?

Speaker #8: But then the actual value of the maintenance itself is also trading at higher amounts as well. And so as we sell assets into the market, you know, we benefit from that strength.

Speaker #2: No, we're not prepared to talk about that yet. You can kind of see what we have out in the first quarter out there and we will probably make some adjustments from that, but we're not ready to talk about what the full-year capacity looks like.

Bob Jordan: This updated range replaces our prior expectation of at least $4, reflects the forward fuel curve as of 17 July, and assumes the current fare environment and demand trends remain broadly intact. Even with an estimated year-to-date fuel headwind of approximately $1.33 per share, Southwest remains positioned to generate earnings that are broadly in line with our guidance at the beginning of the year and represent significant earnings growth and margin expansion, underscoring the resiliency of our business model. Before I close, I want to recognize our employees. None of what we have accomplished would've been possible without the dedication, resilience, and commitment of our people, and we are proud to have accrued over $100 million year-to-date in profit sharing for our employees. Profit sharing reflects our longstanding belief that when the company succeeds, our people should share in that success.

Speaker #8: And I think that's pretty widely known that there's strength in those markets.

Speaker #6: The next question is from David Vernon with Bernstein. Please go ahead.

Speaker #5: And then, Tom, as Bob will take a second on the I think you're talking about, you know, the co-brand benefit. I think the answer is yes.

Speaker #7: Hey, good afternoon or I guess good morning now still. Feels like afternoon. A couple of questions for in the commercial side with the 28% growth in card acquisitions.

Speaker #7: Any sort of geographic commentary or level of card spending activity within the co-brand would be helpful just here as we're all trying to figure out kind of how strong the consumer is.

Speaker #5: You should expect over time as products mature, customer engagement with the new products mature, I would expect that to show in the co-brand remuneration.

Speaker #7: If you're seeing any sort of noticeable trends in terms of where people are setting up and how much they're spending. And then maybe a second question.

Speaker #5: The I mentioned this before. We have strong to me leading indicators of not only the fact that customers, business and leisure are strongly engaging in our new products, but it's causing them to strongly engage from a loyalty perspective.

Speaker #7: I'll tack in there around Starlink. I think you've talked about 300 aircraft. Is that a hard cap? And do you ever intend to get the whole fleet up and running on Starlink?

Speaker #7: And if so, when would that deadline be? Thanks.

Speaker #2: So we expect the so where we're seeing the growth in the card is across the board. There's not any one region. We're seeing really good response not only to our product changes, but also just with our offers that we have out there.

Speaker #5: Again, the growth in new membership, the growth in tier, the growth in card acquisition, et cetera. So I see those as leading indicators that will over time turn into a continued card spend growth and then co-brand.

Bob Jordan: To our employees across the Southwest system, thank you for everything that you do for our customers and for one another. Today you can see the proof in the earnings. We have built a more durable and diversified business with greater earnings power. Our focus is now on unlocking Southwest's full potential, further expanding margins, and creating additional long-term value for our customers, our employees, and our shareholders. With that, I will turn it over to Andrew.

Speaker #2: So that's been across the board. Yeah, for Starlink, we are paced by the output of antennas from Starlink, our tech ops team is prepared to install as many as possible.

Speaker #5: The second piece of that, we fully intend to continue to expand the co-brand offering and opportunities for our customers. I know I've teased at lounges.

Speaker #2: We signed a contract with them and the progression will match the deliveries and then for the long term, we haven't given guidance on that, but obviously we have aircraft that are uncommitted that we could use any supplier for.

Speaker #5: You know, that's something obviously that there's work underway. We're not ready to, you know, formally announce that yet. But the whole purpose again is to expand co-brand opportunities, expand the card set, and provide to our customers something that they really, really want.

Speaker #2: So we will make sure that we kind of get the best deal as we seek to provide high-quality Wi-Fi across our fleet. I think it's really telling that all of our aircraft have free Wi-Fi and so everything's already updated.

Andrew Watterson: Thank you, Bob. As Southwest enters the next phase of its evolution, our focus is increasingly on optimization. Across the operation, we are working to improve asset utilization, strengthen operational execution, and drive greater efficiency while maintaining the reliability and hospitality that customers expect from Southwest. Operational excellence remains a key competitive advantage for our company and supports both the customer experience and the long-term profitability of the business. During Q2, we ranked first among large domestic carriers in completion factor and improved mishandled baggage performance year-over-year, even with higher volumes of gate-checked bags. Trip Net Promoter Score also improved throughout the quarter, reinforcing that our operational execution and enhanced product offering are resonating with customers. We also maintained the lowest customer complaint rate among the major US airlines.

Speaker #5: So I think you see evidence that the our customers are our customer engagement is moving quickly in the right direction. And over time, that will mature and I think it matures into things like card spend and co-brand remuneration and then we'll continue to expand the offering, which will do the same.

Speaker #2: We're going to the next generation. So we conceivably we could be the first to have really super fast Wi-Fi across the fleet and so we're excited about that.

Speaker #6: The next question is from Atul Maheshwari with UBS. Please go ahead.

Speaker #4: Good morning. Thanks a lot for taking my question. Two quick ones. First, on San Diego, one of your competitors talked about gaining several points of share in corporate in that market.

Speaker #3: The next question is from Scott Group with Wolf Research. Please go ahead.

Speaker #2: Hey, thanks, morning. So I wanted to ask on capacity. If I look at Q4 or up four to five percent year-over-year, I think it's the biggest sequential Q3 to Q4 increase.

Speaker #4: So that's really been a market with sizable industry capacity growth. Could you talk about Southwest's strategy in that key market? And then second one, on fuel, the second quarter jet fuel was seemingly below others and also below the Gulf Coast average of $4 or a little over $4 for you.

Speaker #2: Maybe we've ever seen. So just want to sort of understand the thought on that. And I don't know if you have any sort of early thoughts about how you're thinking about capacity and 2027.

Andrew Watterson: Our priorities remain straightforward: operate safely, serve our customers reliably, and continue to improve the efficiency and productivity of the operation. With that, I'll turn it over to Justin.

Speaker #4: So could you remind us of your West Coast exposure and any additional fuel sourcing dynamics in the second quarter that might have driven your fuel per gallon to be below other airlines?

Speaker #2: Yeah.

Speaker #4: Yeah. So well, looking at our sequential growth that we have going into Q4, it is up four and a half percent. You will probably see us make some slight tweaks to that schedule as we get closer out there.

Speaker #2: Just you will take the first and Tom, second.

Justin Jones: Thank you, Andrew. I'm excited to join today's call in my new role as chief commercial officer. I look forward to engaging with many of you in the months ahead. Our focus is clear. Use Southwest's unique network, powerful brand, loyal customer base, and expanded product offerings to improve revenue quality, strengthen returns, and create durable earnings growth. We are not managing to any one metric. Our focus is on building a more productive commercial business, one that balances unit revenue growth, discipline capacity, network profitability, and long-term customer engagement. As Bob noted, Q2 adjusted RASM increased 20.1% year-over-year, well above the high end of our prior guidance range of 16.5% to 18.5%. Importantly, this performance was broad based, reflecting contributions from our expanded product offerings, bag fees, online travel agencies, change-related revenue, and continued strength in our base business.

Speaker #3: Yeah, I can't speak to everything that's going on in San Diego with if you have a smaller basis point and what growth you might see from that.

Speaker #4: And but if you look at where we have that capacity growth, again, it is in our point of strength. And so this is not trying to go and expand into new markets for us that are going to underperform the rest of the network.

Speaker #3: But overall, we're seeing our load factor points coming from corporate grow and as we've grown capacity there, we've seen corporate share come along with that.

Speaker #7: On the fuel side, thank you for the shout out to our fuel team. I love that. I think they're doing an incredible job. They're very strategic in the way that they think about what we do.

Speaker #4: Everywhere where we're putting aircraft, we expect to produce profitable earnings for us here this year. And again, it is you will see us focus on capacity discipline moving forward, not only this year, but also into next.

Speaker #7: We talk about our balance sheet being a differentiator. This is one of the ways that our balance sheet provides cost 50% Gulf. I mentioned in my prepared remarks, we actually shift we actually shipped some Gulf to the West Coast during a time when the pricing differential was most acute.

Speaker #2: To that point, any like early thoughts on what '27 capacity could look like?

Speaker #4: No, we're not prepared to talk about that yet. You can kind of see what we have out in the first quarter out there and we will probably make some adjustments from that, but we're not ready to talk about what the full-year capacity looks like.

Speaker #7: I love that our team did that. And the fact that we are mostly Midwest and Gulf Coast, that we don't have a lot of international.

Speaker #3: The next question is from David Vernon with Bernstein. Please go ahead.

Speaker #6: Hey, good afternoon or I guess good morning now. So it feels like afternoon. A couple of questions for in the commercial side with the 28 percent growth in card acquisitions.

Speaker #7: I mean, there was a time during the quarter where international was a dollar plus greater and that we were taking mitigating actions around the West Coast.

Justin Jones: Adjusted operating revenue reached a record $8.7 billion, the highest quarterly revenue in Southwest history, demonstrating the earnings power of a broader and more diversified revenue platform. Looking ahead, we expect Q3 unit revenue growth of 17.5% to 19.5% year-over-year with a strong exit rate from Q2. We continue to see healthy demand, a constructive pricing environment, and further opportunity to refine our commercial capabilities. Our Q3 unit revenue outlook includes a year-over-year headwind from lapping the 2025 implementation of bag fees and other initiatives. The network remains one of Southwest's greatest competitive advantages, we will continue using it more efficiently to maximize returns and support long-term profitable growth.

Speaker #7: Those are all things that led to fuel being where it was. So again, I'll give the same shout out to our team, but I totally appreciate the shout out you just gave them.

Speaker #6: Any sort of geographic commentary or level of card spending activity within the co-brand would be helpful just here as we're all trying to figure out kind of how strong the consumer is.

Speaker #6: If you're seeing any sort of noticeable trends in terms of where people are setting up and how much they're spending. And then maybe a second question I'll tack in there around Starlink.

Speaker #7: Well deserved.

Speaker #6: The next question is from Chris Wetherbee with Wells Fargo. Please go ahead.

Speaker #6: I think you've talked about 300 aircraft. Is that a hard cap? And do you ever intend to get the whole fleet up and running on Starlink?

Speaker #5: Hey guys, good morning. You got Madeline for Chris. Thanks for taking the question. Since the OneQ conference call, how many fair increases have you implemented and then also were there any in the month of July?

Speaker #6: And if so, when would that deadline be? Thanks.

Speaker #4: So we expect the so where we're seeing the growth in the card is across the board. There's not any one region we're seeing really good response not only to our product changes, but also just with our offers that we have out there.

Speaker #5: And then just putting some of the initiatives to the side, we're just trying to get a sense of how that played out and if there's opportunity for more to come in the second half of this year.

Speaker #5: And then second question, was the revenue breakage adjustment contemplated in the Q2 guide? Thank you.

Speaker #4: So that's been across the board.

Speaker #5: Yeah, for Starlink, we are paced by the output of antennas from Starlink, our tech ops team is prepared to install as many as possible.

Speaker #2: Yeah, so just on the fair increase, we're not going to say the exact number that we had because there obviously there's been a few system-wide ones, but then there's been a lot of them that have been different parts and obviously different parts of the network and obviously we've made our own fair adjustments there.

Speaker #5: We signed a contract with them and the progression will match the deliveries and then for the long term, we haven't given guidance on that, but obviously we have aircraft that are uncommitted that we could use any supplier for.

Justin Jones: As we move through the remainder of the year, my focus will be on further unlocking the potential of our commercial initiatives, deepening customer engagement, and ensuring that Southwest commercial strategy continues to support sustainable margin expansion and long-term shareholder value. With that, I'll turn it over to Tom.

Speaker #2: But the only thing I will say is that the fair environment is very robust right now and we're seeing strong response not only in fares but also in actually bookings moving forward.

Speaker #5: So we will make sure that we kind of get the best deal as we seek to provide high-quality Wi-Fi across our fleet I think it's really telling that, you know, all of our aircraft have free Wi-Fi.

Speaker #2: And that continues in the fall and I don't see that changing.

Speaker #3: I think the other thing to point out too is the just look at the 20-point 1% unit revenue increase and then the fact that we significantly outperformed the rest of the industry on unit revenues.

Tom Doxey: Thanks, Justin, welcome to the call. I'm incredibly proud of our team for the continued focus on spending smartly as we've invested in our product, customers, operations, and employees while expanding margins year-over-year despite significantly higher fuel costs in the quarter. We generated quarterly operating cash flow of a half a billion dollars, more than 32% higher year-over-year, and ended the quarter with liquidity of $5.3 billion, above our target of approximately $4.5 billion. Our gross leverage ratio was 2.1x within our stated range of 1x to 2.5x, and improved from the 2.4x at year-end 2025 despite macro volatility. Our investment-grade balance sheet remains a key differentiator, providing meaningful financial flexibility. Fuel prices averaged $3.92 per gallon during the quarter.

Speaker #5: And so everything's already updated. We're going to the next generation. So we conceivably we could be the first to have really you know, super fast Wi-Fi across the fleet.

Speaker #5: And so we're excited about that.

Speaker #3: Yeah, some of that of course was the fair and pricing environment, but a significant the significant portion of that were our own idiosyncratic initiatives and those initiatives performing.

Speaker #3: The next question is from Atul Maheswari with UBS. Please go ahead.

Speaker #6: Good morning. Thanks a lot for taking my question. Two quick ones. First, on San Diego, one of your competitors talked about gaining several points of share in corporate in that market.

Speaker #3: That is the reason we outperformed the rest of the industry and outperformed them substantially.

Speaker #6: So that's really been a market with sizable industry capacity growth. Could you talk about Southwest's strategy in that key market? And then second one, on fuel, the second quarter jet fuel was seemingly below others and also below the Gulf Coast average of $4 or a little over $4 for you.

Speaker #7: And on the accounting question on revenue breakage, as Bob mentioned earlier, the revenue breakage item that we had this quarter didn't relate at all to 2026.

Speaker #7: And so it just wasn't relevant to it. And I guess if you think about it, if the assumption around breakage changed slightly, it actually would have reduced a little bit of the revenue into 2025, which actually would have resulted in even higher year-over-year rasm.

Speaker #6: So could you remind us of your West Coast exposure and any additional fuel sourcing dynamics in the second quarter that might have driven your fuel per gallon to be below other airlines?

Tom Doxey: Our fuel procurement team effectively managed through dynamic market conditions, took actions such as moving lower priced Gulf Coast products to the West Coast to mitigate higher fuel costs in that part of our network. Looking ahead, we expect Q3 CASM ex-fuel to increase 3.5% to 4% year-over-year on capacity of flat to down 1%. Consistent with Bob's comments, we continue to see a path toward long-term margin expansion and earnings growth supported by disciplined execution, improving unit revenues, and contributions from our initiatives. Combined with a strong balance sheet and substantial liquidity, we believe Southwest is well-positioned to create sustainable long-term value for our shareholders. With that, I'll turn it back to Danielle for Q&A.

Speaker #5: Just you will take the first and Tom, second.

Speaker #4: Yeah, you know, I can't speak to everything that's going on in San Diego with, you know, if you have a smaller basis point and what growth you might see from that.

Speaker #7: Had it been accounted for that way. So no, it was not accounted for nor should it have been.

Speaker #4: But overall, we're seeing our load factor points coming from corporate growth. And as we've as we've grown capacity there, we've seen corporate share come along with that.

Speaker #6: We have time for one final question and that will be from Dan McKenzie with C4 Global Securities. Please go ahead.

Speaker #4: Oh, hey, good morning. Thanks for speaking to me in. And congrats to the team on our breakout quarter here. Bob, I hear you loud and clear on the current demand and revenue trends.

Speaker #6: On the fuel side, thank you for the shout out to our fuel team. I love that. I think they're doing an incredible job. They're very strategic in the way that they think about what we do.

Speaker #4: No deceleration. I hear you. So my question really is, and this is for your longer-term holders, the people that take a two to three-year holding period.

Speaker #6: We talk about our balance sheet being a differentiator. This is one of the ways that our balance sheet provides cost savings to us. We're about 50 percent Gulf.

Speaker #4: Is how you're thinking about demand durability longer term? I'm just curious, what are the concrete data points that give you confidence that what we're seeing today is in fact durable?

Danielle Collins: Thanks, Tom. This now concludes the prepared remarks. We'll open the line for analyst questions. To help us manage time efficiently, please ask your one or two questions back to back at the outset. All right, operator, we are ready for your first question.

Speaker #6: You know, I mentioned in my prepared remarks, we actually shift we actually shipped some Gulf to the West Coast during a time when the pricing differential was most acute.

Speaker #4: And I get that fares are 10 to 15 percent pre-COVID levels and maybe it's an AI economy, but I'm just curious, what else gives you confidence?

Speaker #6: I love that our team did that. And, you know, the fact that we are mostly you know, Midwest and Gulf Coast, that we don't have a lot of international, I mean, there was a time during the quarter where international was a dollar plus greater and that we were taking mitigating actions around the West Coast.

Operator: Thank you. We will now begin the question and answer session. To ask a question, you may press star then one. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Our first question today is from Conor Cunningham with Melius Research. Please go ahead.

Speaker #4: That's my first question. And then the second question is just the appetite for returning additional capital to the shareholders from here.

Speaker #3: Yeah, Dan, thank you. And Tom will take the second one. Yeah, you've heard me over and over and over probably more than you wanted on this call talk about the confidence in the performance of this transformation and then the confidence in the demand environment.

Speaker #6: Those are all things that led to fuel being where it was. So again, I'll give the same shout out to our team, but Atul, I appreciate the shout out you just gave them.

Conor Cunningham: Everyone, thank you. I was hoping to start with the comp issue that you raised on unit revenue a little bit. Maybe you could potentially size that impact in Q3, just so we can understand a little bit more. I think what people are trying to get at is just the framing of how it progresses through H1 2027. I would have thought that there would have been more maturation period and more uplift from initiatives to kind of offset just the timing of it. Specifically to Justin, again, congrats on the new role. Just trying to understand your long-term growth, how you view long-term growth at Southwest and just network development, in general. Should we be reading anything to the ramp in supply in Q4 in Q1 2027 at all? Just high-level thoughts. Thank you.

Speaker #6: Well deserved.

Speaker #3: So I think I'd break it into multiple pieces. Number one, the consumer is incredibly resilient. You just sort of put aside everything that we're doing, just look at the industry.

Speaker #3: The next question is from Chris Weatherby with Wells Fargo. Please go ahead.

Speaker #7: Hey guys, good morning. You got Madeline for Chris. Thanks for taking the question. Since the 1Q conference call, how many fare increases have you implemented and then also were there any in the month of July?

Speaker #3: Demand pricing, revenue production, has remained incredibly robust and it's across all sectors, all geographies. This is the strongest I've seen it and the broadest that I've seen strength, period.

Speaker #7: And then just putting some of the initiatives to the side, we're just trying to get a sense of how that played out and if there's opportunity for more to come in the second half of this year.

Speaker #7: And then second question, was the revenue breakage adjustment contemplated in the 2Q guide? Thank you.

Speaker #3: And it does appear that consumers are prioritizing travel and you're seeing that even in the face of higher pricing. So just generally, I'm very bullish on the fact that consumers are going to continue to prioritize travel and drive demand.

Speaker #4: Yeah, so just on the fare increase, we're not going to say the exact number that we had because there obviously there's been a few system-wide ones, but then there's been a lot of them that have been different parts and, you know, obviously different parts of the network and obviously we've made our own fare adjustments there.

Bob Jordan: Hey, you bet, Conor. Thanks for the question. On the first, I think I'd start, maybe zoom out back up with the fact that our Q2 unit revenue was up 20%. An extraordinary number. Just far ahead of the rest of the industry as the transformation really kicked in and performed and showed up in the results. The Q3 RASM guide is pretty simple to me. It includes the headwind from the initiatives that we put into place about a year ago in 2025, one of which was bag fees. Bag fees alone is about $1 billion a year. We're just starting off at a much higher base. If you adjust the guide for lapping those initiatives in Q3, our unit revenue guide would be well ahead of the unit revenues that we posted in Q2.

Speaker #3: Separately for Southwest Airlines, and unique to Southwest Airlines, the product changes that we've put in place are resonating across the board with our customers and with customers that are weird that we are now gaining.

Speaker #4: But the only thing I will say is that the fare environment is very robust right now and we're seeing strong response not only in fares, but also in actually bookings moving forward.

Speaker #4: And that continues in the fall and I don't see that changing.

Speaker #5: I think the other thing to point out too is the if you just look at the 20-point, you know, 1 percent unit revenue increase and then the fact that we significantly outperformed the rest of the industry on unit revenues.

Speaker #3: And that's the reason managed business revenues are up 30%. That's the reason rapid awards new members are up 35 and card acquisitions up 28.

Speaker #3: And across the board, every measure of engagement, every engagement that would point to whether the products are being accepted and we're wanted by our customers are up and they're off the charts up.

Speaker #5: Yeah, some of that, you know, of course was the fare and pricing environment, but a significant the significant portion of that were our own idiosyncratic initiatives and those initiatives performing.

Speaker #3: So it gives you good indicator of the acceptance, but it also gives you a good indicator of future performance of those customers as they mature and they spend more with Southwest Airlines.

Speaker #5: That is the reason we outperformed the rest of the industry and outperformed them substantially.

Speaker #7: And on the accounting

Bob Jordan: Either way, we saw strong demand, really strong demand in revenues across Q2, and all of that robust strength is fully in place and continuing here in Q3.

Speaker #6: question on revenue breakage, as Bob mentioned earlier, the revenue breakage item that we had this quarter didn't relate at all to 2026. And so it just wasn't relevant to it.

Speaker #3: Third, the whole transformation is a demonstration that Southwest is willing to change, able to change and is executing that change in an incredibly strong manner.

Speaker #6: And I guess if you think about it, if the assumption around breakage changed slightly, it actually would have you know, reduced a little bit of the revenue into 2025, which actually would have resulted in even higher year-over-year rasm.

Speaker #3: And we're not done. We're going to continue to pursue the customer whether that is product related, it is co-brand related, it's different things that they want from the company.

Operator: The next question.

Justin Jones: All right. I was just going to address the long-term growth. This is Justin Jones. Thanks for having me on the call. As Bob's talked about in his prepared remarks, we're going to continue to show capacity discipline while we're focusing on building durable earnings. You can expect some modest growth from us moving forward. You see a little bit of that in Q4. You see some of that in 2027. We're well below our peers there. What my focus is going to be is on strengthening our points of strength that we have in a network. You're going to see that with our capacity growth. You're also going to see that with us moving and shifting capacity around, which you can already see. You'll see capacity growth in our points of strength and making them more durable long term.

Speaker #3: And that drives even more future engagement or revenue production demand all those things. And then this is really more about revenues less demand, but we have you've heard all of us talk about the opportunity to really optimize what we have in place beyond these tremendous results in the second quarter.

Speaker #6: You know, had it been accounted for that way. So no, it was not accounted for nor should it have been.

Speaker #3: We have time for one final question and that will be from Dan Mackenzie with Seaport Global Securities. Please go ahead.

Speaker #3: We have a lot of opportunity to continue to optimize the network as Justin discussed and Plater appoints a strength. Lots of opportunity to optimize the products themselves, the pricing of the products, and then continue to grow and enhance our products, whether that's Starlink Wi-Fi, whether it's continued changes in the cabin, whatever.

Speaker #8: Oh, hey, good morning. Thanks for squeezing me in. And, you know, congrats to the team on a breakout quarter here. Bob, I hear you loud and clear on the current demand and revenue trends.

Speaker #8: No deceleration. I hear you. So my question really is, you know, this is for your longer-term holders, you know, the people that take a two to three-year holding period.

Justin Jones: That'll continue to be the focus as long as I'm in this role.

Speaker #3: So I'm bullish across the board, bullish about the backdrop for the consumer and how that relates to travel and strength. Incredibly bullish about the changes that we have made driving demand, driving pricing, and then third, the changes that we are going to make further driving a demand for Southwest Airlines.

Speaker #8: Is how you're thinking about demand durability longer term? I'm just curious, what are the concrete data points that give you confidence that, you know, what we're seeing today is in fact durable?

Conor Cunningham: Great. Thank you.

Operator: The next question is from Andrew Didora with Bank of America. Please go ahead.

Andrew Didora: Hi, good morning, everyone. Tom, drilling in on the new 2026 EPS outlook. Can you help us with some of the inputs that underpin that, particularly fuel and CASM in Q4? On that note, in terms of Q4 CASM, I know you're retiring with 37 aircraft in H2 versus 23 in H1. I would assume you have more plane sales in H2 than what you've done to date. Any color that you can provide on how to think about that gain on sale piece in Q3 and Q4 and anything that you booked in Q2 will be helpful. Thank you.

Speaker #8: And I get, you know, that fares are 10 to 15 percent it's an AI economy, but I'm just curious, what else gives you confidence?

Speaker #8: That's my first question. And then the second question is just the appetite for returning additional capital to the shareholders from here.

Speaker #3: So yeah, as you can tell, I'm a strong believer that this is all working and it's incredibly positive for us. It's incredibly positive for our shareholders.

Speaker #5: Yeah, Dan, thank you. The and Tom will take the second one. Yeah, you've heard me over and over and over probably more than you wanted on this call talk about the confidence in the performance of this transformation and then the confidence in the demand environment.

Speaker #3: It's producing a durable product set that in turn produces a durable set of earnings for our shareholders. So yeah, I'm optimistic across the board about this company.

Speaker #5: So I think I'd break it into multiple pieces. Number one, the consumer is incredibly resilient. You just sort of put aside everything that we're doing, just look at the industry.

Tom Doxey: Yeah. Thanks, Andrew. As far as fuel, we don't guide fuel. I think this is a bit of a nuance here, we give you a fuel estimate based on a certain day, and we say it's the forward curve as of that day. We use 17 July here. We give you an estimate for Q3. You can run that out for Q4 based on that information, even though we're not guiding it for Q4. That's fuel. For the non-fuel side of things, I continue to be really, really pleased with the way that the management team broadly is managing costs. We're seeing cost savings happening everywhere in the business to the tune of literally hundreds of millions of dollars of incremental savings as we're working our way through the year.

Speaker #7: And Dan, to your share repurchase question, as you know, we've repurchased a pretty meaningful amount of shares over the last couple of years. Around the $4 4 billion or so mark there.

Speaker #5: Demand pricing, revenue production, has remained incredibly robust and it's across all sectors, all geographies. This is the strongest I've seen it and the broadest that I've seen strength, period.

Speaker #7: Of course, we're not going to speak to specific plans around repurchasing shares here in the future. We've got some communicated guardrails that are out there on capital allocation.

Speaker #7: And so anything that we do with that capital allocation, including share repurchases, is going to fall within those guardrails. And then I mentioned this earlier, but as we think about the uses of cash, reinvesting in the business, including aircraft purchases, that is highly accreted.

Speaker #5: And it does appear that consumers are prioritizing travel. And you're seeing that even in the face of higher pricing. So just generally, I'm very bullish on the fact that consumers are going to continue to prioritize travel and drive demand.

Speaker #7: That's a very NPV positive thing to do as we replace older 737, 700s with brand new 737 Maxes, along with all the other investments that we're making in the business that's driving all of the great outperformance that you've seen here.

Speaker #5: Separately for Southwest Airlines, and unique to Southwest Airlines, the product changes that we've put in place are resonating across the board with our customers and with customers that are weird that we are now gaining.

Tom Doxey: To your question on fleet transactions in particular, this is something that I think is a unique strength. I think when it comes to divesting or retiring assets, we are one of the best in the world at doing this. The team does a fantastic job, and we've got north of 450 NGs that we'll be retiring for years and years to come, well into the next decade. It might be a little lumpy by quarter, but this is something that will be durable and with us continually. As far as the timing of some of that, I think Q3 is going to be a little bit elevated versus Q1 and Q2, then Q4 probably looks a lot like Q1 and Q2.

Speaker #1: Thank you, everyone, for joining us today. And of course, you're continued interest in Southwest Airlines. We'll look forward to speaking to you again next quarter.

Speaker #5: And that's the reason managed business revenues are up 30 percent. That's the reason rapid awards, new members are up 35 and Card acquisitions up 28.

Speaker #5: And across the board, every measure of engagement, every engagement that would point to whether the products are being accepted and we're wanted by our customers are up and they're off the charts up.

Speaker #5: So it gives you good indicator of the acceptance, but it also gives you a good indicator of future performance of those customers as they mature and they spend more with Southwest Airlines.

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

Speaker #5: Third, the whole transformation is a demonstration that Southwest is willing to change, able to change and is executing that change in an incredibly strong manner.

Mike Linenberg: Oh, yeah. Hey, good morning, everyone. Two questions here, I guess, to Andrew first. Really well done on the completion factor. Obviously credit due for running a good operation on one hand. On the other hand, we have seen the delays go up pretty dramatically, even on what look like blue sky days. I'm just curious how much of that is just a function of you reducing the turn times, which I know has been a stated objective, combined with the fact that you are also trying to increase connectivity. Then my second question to Tom, and I'll throw Danielle in there as well. Kudos to reintroducing ROIC in the release. Certainly important to us and investors, and I know management also gets compensated tied to ROIC measures, so nice to see that come back.

Speaker #5: And we're not done. We're going to continue to pursue the customer whether that is product related, it is co-brand related, it's different things that they want from the company.

Speaker #5: And that drives even more future engagement, revenue production demand, all those things. And then this is really more about revenues less demand, but we have you've heard all of us talk about the opportunity to really optimize what we have in place beyond these tremendous results in the second quarter.

Speaker #5: We have a lot of opportunity to continued optimize the network as Justin discussed and Plater appoints a strength. Lots of opportunity to optimize the products themselves, the pricing of the products, and then continue to grow and enhance our products, whether that's Starlink Wi-Fi, whether it's continued changes in the cabin, whatever.

Mike Linenberg: The fact is, can you detail what was the gain in the quarter on sales for aircraft? When you talk about the guide for CapEx coming in at or below the low end is because it is net, is that a function of just the pickup in aircraft sales? Is it delayed deliveries from Boeing? What's driving that? Thanks for taking my question.

Speaker #5: So I'm bullish across the board, bullish about the backdrop for the consumer and how that relates to travel and strength. Incredibly bullish about the changes that we have made driving demand, driving pricing, and then third, the changes that we are going to make, further driving a demand for Southwest Airlines.

Speaker #5: So yeah, as you can tell, I'm a strong believer that this is all working and it's incredibly positive for us. It's incredibly positive for our shareholders.

Andrew Watterson: Hey, thanks, Mike. It's Andrew to start with. I appreciate the confidence in completion factor. Take a step back. The Wall Street Journal is a great measure of the operating quality of an airline. Seven measures on that. We won it last year. We're tracking to win that again this year. If you look at those measures, some of them we've improved upon this year. One that we have come down on is OTP, on-time performance, and I kind of divide those into two categories. Large-scale events, which is like the weather you had in the Northeast earlier this week, or you had the Texas rains and storms last week, and Orlando the week before. In those situations, we continue to outperform our peers. You look at the geography that happens, look at all the big carriers, we have equivalent to better OTP and much better completion rates.

Speaker #5: It's producing a durable product set that in turn produces a durable set of earnings for our shareholders. So yeah. I'm optimistic across the board about this company.

Speaker #6: And Dan, to your share repurchase question, you know, as you know, we've repurchased a pretty meaningful amount of shares over the last couple of years, you know, around the $4 billion or so mark there.

Speaker #6: Of course, we're not going to speak to specific plans around repurchasing shares here in the future. We've got some communicated allocation. And so anything that we do, with that capital allocation, including share repurchases, is going to fall within those guardrails.

Andrew Watterson: I'm very proud of our control center, our frontline people. They make really good decisions in those moments and very good execution. Then you have what I call the small-scale events. It's the day-to-day. We've seen that as we rolled out our new product, we knew that we'd have changes. We organized our management technology teams to kind of continually update that post the rollout 27 January, and we see consumers react positively. Both satisfaction scores have really inflected strongly as well as consumer behavior and choice, and you see that in the RASM results. Where that leaves us is in the last 10 minutes of the turn, when we have high load factors. In those high load factor volumes, we see that we don't turn as fast.

Speaker #6: And then I mentioned this earlier, but as we think about the uses of cash, reinvesting in the business, including aircraft purchases, that is highly accretive.

Speaker #6: That's a very NPV positive thing to do as we replace older 737, 700s with brand new 737 Maxes, along with all the other investments that we're making in the business that's driving all of the great outperformance that you've seen here.

Speaker #1: Thank you, everyone, for joining us today. And of course, you're continued interest in Southwest Airlines. We'll look forward to speaking to you again next quarter.

Andrew Watterson: We have a lot of smaller delays that don't drive consumer dissatisfaction per se, but it's something we need to clean up. We focused our ground operations team on how they can re-engineer the last 10 minutes, now that we've pretty much stabilized the changes to our boarding product, so we can scrape that back and have that OTP number be much more flattering as we go forward. We already see benefits here in July. There's some schedule changes that come in in October, mostly we're just going to be about this process optimization that we'll focus on throughout the next couple of months. We think that'll do the trick by the time we get to the next high volume period on the holidays.

Tom Doxey: Mike, on your ROIC question, we like that metric a lot as well. Saw in your note from yesterday the reference to ROIC and your calculation of weighted average cost of capital. It's an important milestone for us as we have that ROIC moving beyond the weighted cost of capital is that's an important metric. As far as the gains on sales of aircraft, we actually in our Q, which will come out later today, are going to provide a bit more detail. We thought that would be helpful, as we've had some questions during the quarter on the quantum of that and what that looks like. You'll see a little bit more detail and hopefully that's helpful to you all.

Tom Doxey: It's worth probably just north of maybe a point or so of CASM-ex or so in the quarter. Again, we think that that's something really durable that we have that will continue with us for years and years to come. As you think about gains on sales, that really works in tandem with depreciation expense and with maintenance expense. Of course, the more or less you depreciate, that changes your book value. Then as you spend on maintenance, especially on used assets, that brings a lot of economic value into those assets. Of course, we generally expense that as it comes through, so that can be something that can result in some gains there as well. You see a bit of that coming through.

Mike Linenberg: Great. Thank you.

Operator: The next question is from Savanthi Syth with Raymond James. Please go ahead.

Savanthi Syth: Hey, good morning. Just maybe to follow up on kind of Justin's response earlier, just on where the growth is focused on. Are there kind of any common themes in where that capacity growth is happening, especially as you roll out the new schedules other than just maybe where there are kind of high margin opportunities. Then for a second question, just, breakage accounting changes are always a bit noisy. It looked like the adjustment you took this quarter was related to kind of the forward credits, which I think you stopped issuing May 2023. Just curious if there were any implications from the change in assumption around the forward credits to how you're issuing credits today, which I think expires in six to 12 months, and that margin contribution you had expected from that change.

Bob Jordan: Hey, Savi. Hey, it's Bob. Let me take the second one, Justin will obviously take the first. There's been some focus on the breakage adjustment. I think I would try to simplify it. It's a small change, I think 3-point change in the estimate on a large pool of unused travel funds. They do relate to 2022 to 2025 when we had the policy of never expiring. That was new to us, and just had to learn about the trends. The trends changed again as we made significant policy changes mid last year related to funds expiration. There was a lot of moving parts here. I think the biggest thing is basic, which is none of this, the breakage that was booked or the adjustment relate to 2026. 2026 is clean. I think that's the most important thing.

Bob Jordan: As we go forward, I think any learnings in the trend, particularly from the policy changes last year, we'll factor those into breakage on new pools of travel funds. I think the main thing is, this was new, we changed the policy, main point, it does not relate in any way to 2026 financials.

Justin Jones: Hey, Savi, just following up on the growth. You asked about are there any common themes? I'd say, Southwest is in a position that no other airline is. We have a market-leading position in more cities in the top 50 US locations in the US than any other airline. The theme that you're going to see is us building on these points of strength. The reason we're focused on those is because we're focused on customer loyalty and building diverse revenue streams. Our network changes are going to go exactly along with that theme. The objective there is to build long-term predictable earnings that we can count on for years to come. When you look at our capacity changes, that's where the focus will be.

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

Jamie Baker: Yeah, good morning. Justin, just a question on corporate recovery. In terms of revenue associated with seating initiatives, as business travelers continue to return to the network, how do their purchase patterns compare to those of consumers? The reason I'm asking is that it's still not clear to me what % of businesses reimburse corporate flyers for those expenses. JPMorgan does, for example, but another analyst on today's call shared that their firm does not. I'm just trying to figure out how much of a bump the new initiatives are driving as part of the overall corporate demand backdrop and whether it's different from consumer behavior. For Tom, sorry to come in with a modeling question, the implication on Q4 RASM is pretty sizable and a big number, despite wrapping last year's initiatives. There's also some capacity growth to overcome.

Jamie Baker: I can't say that it's unachievable. I guess my question is whether my math is wrong, but if it's directionally correct, it seems like you are building even more demand resilience into your guide than just sort of flat-lining the currently strong trends. Wanted to give you an opportunity to push back on that. Thanks.

Justin Jones: Yes, just following up on the corporate recovery. Bob talked a little bit about our corporate revenue being up 30% on a year-over-year basis. You obviously know what our total revenue is up. That difference there probably explains some of that. Obviously, our corporate customers are more likely to book away from the basic economy fares, and that's going to be true for anybody out there. The gap between that 30% growth

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