Southwest Airlines Co. ($LUV)

I think this is our final presentation before an amazing box of lunch and I'm sure everybody is excited for. So very happy to welcome Southwest Airlines back to the stage. Obviously, an anchor tenant of this conference for the last couple of decades. We've got Bob Jordan, obviously, the CEO at the end. Andrew Watterson, thank you for joining us, Chief Commercial Officer. Tom Doxey, certainly no stranger to this event. And where did Daniel -- okay sitting in the front, but I still want people to become more familiar with you since you're also somewhat new to the bench. So Bob, let me turn it over to you for any sort of prepared remarks. And we'll have a nice healthy chat.

All right, Jamie. Hey, thanks so much. And yes, we're bringing up near the rear here. So that's all right. But yes, we're no stranger. Thanks for having us. We appreciate it. I like to be here every year. I've got just a couple of remarks. We don't have a formal presentation. We really want to have a conversation. And I talk to you about what's going on in Southwest I'd give you just a couple of points. As you know, last year 2025 was the most transformational year in the history of Southwest Airlines, we changed our product. We added different revenue streams, we went into different distribution channels. So a huge year of transformation. It all went very, very well, and I'm very proud to say that we ran a terrific operation at the same time and won the Wall Street Journal #1 airline ranking for 2025. So very proud of our people and that execution. We're seeing strong proof point that the initiatives are working and that is in 2 categories. Number one, customers are buying the products. They want the new products that we are selling. And then it is showing up in the revenue performance. So the revenue, we'll talk a lot about that today. You've heard that from the carriers, there's broad-based revenue strength, but we are seeing specific revenue strength in the products, the new initiatives and products that we're selling at Southwest. And I think basically, the headline there is everything that we told you about the initiatives and the program, what they would deliver and everything we told you at fourth quarter earnings in January is fully on track. Of course, the only wildcard is fuel that faces all of us. And again, we've got no presentation, we've got some questions from Jamie. We want to have a conversation about what's going on at Southwest. You also saw that we had no 8-K out this morning. As we described, especially in our fourth quarter results, we're simplifying our approach to guiding and really moving to leaning heavily on EPS guidance as the strategy. At the end of the day, earnings what we produce for our shareholders is what matters. And so that's part of the reason there. And again, a big piece of that, too, is that our earnings -- our EPS guide that we gave you in January stands. Another reason that we didn't have an 8-K out this morning. Again, like you've heard from others, we're seeing broad-based demand strength. That strength is in all geographies. It's across all fare structures, it's across business, it's leisure, and as far as we have visibility, that demand strength is across all forward months. And again, unique to Southwest Airlines, we're seeing a lot of strength in the demand for our new products the seat ancillaries. And I would just point out, we talked a lot about this earlier in the year. The broad-based demand is something we all see, the strength that is coming from the initiatives is unique to Southwest Airlines. So $1 billion in bag fees a year, the over $1 billion in the assigned seating product upsell and seat ancillaries, those things are very unique to Southwest and only Southwest because only Southwest Airlines has those initiatives. And while we all wish fuel that wasn't at the point that it is, I am incredibly glad to have that extra revenue source coming online and being optimized at a point where we are seeing high fuel, and it certainly acts as a hedge for us. And then last, given what we know standing here today, if you look at the forward fuel and you run the fuel curves out, we continue to expect significant margin expansion and earnings growth in 2026. So with that brief introduction to the business, I'd love to just spend the balance of our time on what's on your minds. Jamie, you've got questions. So let's get to that.

Grab a seat. Strap in. So I do want to talk about the evolution at Southwest. I think I joked with you once or twice, but primarily with Gary Kelly, as the industry was evolving, I felt -- so this goes back over a decade, I felt that Southwest was failing to evolve, failing to keep pace with the industry. And I used to joke with Gary in middle age kind of sucks, but there comes a point where you can't fit in your college jeans anymore, and you just kind of you have to embrace change. I never thought I would see so much evolution at Southwest as what we've seen in the last year, and it was a year ago today or a year ago at our conference that you really blew the doors off and brought the new plan to the market. So kind of a 2-part question. One, in terms of the execution of evolution over the last year. I'm curious what grade you would give yourself and second, have we put the lion's share of Southwest evolution behind us? If not, what inning are we in?

Yes. I think, first off, I don't have any of my college jeans, they'd be 45 years old at this point. So I have no idea whether I'd fit into them or not. But I think it is -- I understand your question. I think it's -- I don't spend any time thinking about what could have been 10 years ago or 5 years ago. The whole point is adapting to what we need to do today. This whole thing obviously, it creates value for our shareholders. But this whole thing is about driving to meet the needs of the customer in 2026 and beyond. Our customers want product choice. Our customers want an evolution of our product, power at every seat back, the larger bins, extra legroom options. And so it is all about meeting the customers' needs. What we know is that customers love Southwest Airlines, highest NPS scores, best operation. But if we don't offer the product, they -- if we don't offer it and they want it, they cannot fly Southwest, so we're committed -- so this 18-month journey has been about evolving to meet the needs of our customers. 88% of folks that would not fly Southwest Airlines, it was because we had open seating and not assigned seating. And about 80% of customers that do fly Southwest wanted assigned seating rather than open seating. So time line aside, you must adapt. I'm very proud of the fact that the company adapted very quickly. And all of this change has been done in 18 months and done while at the same time, we ran a terrific operation and won The Wall Street Journal Award. The next point of your question in terms of -- so I'd give not me, I'd give the company a high grade for that execution, both pace, quality and hitting the mark. What comes next is the same thing. It is what do we need to continue to do to meet the needs of our customers and evolve. I'll tell you right now, we're focused on optimizing the products we've just put in. They're performing extremely well, and that's customer demand, and that's revenue. But there's room to continue to optimize and produce even better financial results for our shareholders. So what comes next is going to be on the product side. It's going to be continued network evolution. We know we have -- the products are much more favorable to our business customers, but there's work to do to gain more business share so again, nothing to report today specifically, but this is all about meeting the needs and the demands of your customers.

And I guess building on that, and you're not going to hurt my feelings if you don't remember this, but I think about 6 or 7 quarters ago, I have seen what the value proposition of Southwest really was. And just to give you the background, I think there's a perception that Wall Street analysts tend to map out their questions long before the conference calls start. And maybe my competitors do that, but just indulge me for a second. I asked a question that -- I was already in the queue. I didn't know what I was going to ask in my son who would just move to Seattle texted me and he's like, Dad, should I get the Delta credit card or the Alaska credit card. I said, I don't know. I'm busy what about the Southwest card. He said, well, Southwest doesn't really appeal to me. That happened about 10 seconds before I had to come up with a question. So the question I asked was, how would you describe the value proposition of Southwest Airlines to somebody who is just kind of entering the workforce and looking to start from scratch. And quite honestly, I think the team stumbled a little bit. It bounced around. I did not think it was an A-plus answer. So I'm going to give you a second chance. I hope that's not too obnoxious. There's been a lot of evolution...

Not any more obnoxious than normal. It's true.

No, just pushing this bank's credit cards you got to give them that.

Your value proposition is things like price. And for a long time, we really -- we laid our value proposition at the feet of one thing, policies. Bags fly free as a policy, credit -- flight credits that never expires a policy. But customers are going to choose you in part for that, but in a large part for, do you offer the product that I want. There's more demand for product differentiation than ever. Do you fly and have a nonstop where I want to go. And the evolution of the product is really meant to attack that and make the product more relevant to our customers, which means they're going to want to get the credit card. The credit card comes with amazing benefits like free bags and higher seat choice, those kinds of things. And then we are looking to continue to enhance. Nothing to report today. You've heard me talk many times about the potential for lounges. That's an active discussion. We would only do that if it makes sense from a financial threshold perspective, but it's very clear that customers have that high on their value proposition list. And then second, for us, for Southwest Airlines, it is the feature that allows you to have an even more premium credit card, which makes the Rapid Rewards and the co-brand program even more financially -- improves the returns and makes it more viable. It's another example of if you can't offer it, they can't buy it. But ultimately, one of the largest advantages that we have, if not the largest, is service and our people. We have the highest NPS scores for a reason, and it's because our folks go out of the way to produce what we call golden rule service, understand the need of the person in front of them, take action, a lot of times heroic action and fix the problem, be fun. And while that's maybe a bit on the margin, as we have products that are similar to other carriers, the one completely outstanding difference is our people, the way they make you feel and the service that they provide, in particular on aircraft.

Excellent. Very good answer. Thank you. This came up at a breakfast that we had together this morning, but I think there's a perception, and maybe this is a question for Andrew, but I think there's a perception that Southwest really skews to a more price elastic demographic. And I've always pushed back on that, but I'd be very interested to hear any sort of facts and figures that you can throw out that would address that because I don't think of you as uniquely targeting the lowest end of the demand curve.

Yes. So it's true that we have a full range of customers. Our higher-end customers, the over $200,000 household income, we have a fairly high proportion slightly less than the big 3, but far more than the ULCCs or the LCCs. I think it really depends on where you live in the United States, how you think about that because one of the tenets of like your appeal is your schedule and a place like New York where Wall Street analysts maybe located, we're not terribly relevant. We bring people to New York. We're not really a New York's carrier. There's at least 4 that I think they're our New York's carrier. We're not one of them. We are the carrier in Nashville. We are the carrier in SoCal. We all have the carrier in many places, Phoenix, Denver, lots of places around the country.

I would think Laguna conference, everybody flies you in.

Exactly. Yes. And so in those places our predicament was we would have a whole these people would travel us short haul, right? If somebody need to go for Orange County up to The Bay, maybe they would fly us because we have lots of options around The Bay, not just SFO. But if you're flying longer haul, frankly, our product did not appeal to you. So our customer set shared their wallet with their competitors when they were flying further field. Intrawest, we had them, they can go east of Denver, we didn't. And so having a product now that appeals to these people so they can share their wall back us is really dynamic we're after here, and it's really starting to pay dividends because people found that willingly will give us more money for when they could select their own seat when they really tailor their offering rather than this kind of one-size-fits-all offering we had before that works well if you're going in San Diego, Sacramento, but didn't work well if you're going to East Coast.

And so this is obviously the first time in your history that you've really made a conscious decision to lean into premium demand and you're kind of starting from scratch and you don't have lay-flat international. So I'm not going in that direction. I'm just -- I'm trying to think Delta's at 49% of revenue coming through premium channels or for premium products, I should say. I assume United is in that ballpark or Canada just got off the stage, 25 to 30, but they're moving north. How high can you -- one, how are you going to define that number? And given what you currently have on the drawing board where can you take that -- I don't see you're going to 49%. I mean it's just not that much of the LOPAs allocated to better products. But how do we think about the road map for further leaning into premium. That's the question.

Yes. I'd say, number one, we are focused on optimizing the products that we have just put in place and seeing the optimal benefit. There's work to optimize the fair buy-ups between product choices. There's work to optimize and dynamically price things like seat ancillaries. So we have a lot of opportunity I mean the product or for forming a terrific both from a demand and a pricing perspective. But we have an opportunity to continue to optimize that. And based on those learnings and share and where we might need to look. We'll continue to look at other more premium. It really leaves 2 things. It leaves sort of true first class and then long-haul international, which would drag something else. So but we're focused on optimizing the products in place. I would also say that if you look at our -- all of our guides for the first quarter, it would imply that Southwest operating margins would be back in the hunt being top of industry. And I think that's material in that what we've been -- what you've been told over and over and over is you could only be there if you have premium and you have long-haul international because that is where the revenues and drivers are coming from. So it tells you something about our underlying product strength, which is the best domestic network, the best people in best service, the best operation is backed up by the Wall Street Journal rankings and now a much more appealing product to our customers without having long-haul international and 2 x 2 first class. And we're going to be and we're in the hunt to have top of industry margins. It tells you something about the strength of the underlying product even absent those 2 things.

So expand on that. Do you think that's largely a function just at the network, the momentum that you have, the cost structure, I think it's a very valid point. If you were to just transcribe everybody's EPS guide into a margin number, put them in front of us without identifying the airline. I'm not sure I would be able to pick out deltas versus Southwest.

I think it's all. So it's a combination of all of those things that make Southwest attractive. Again, the most nonstops, the best network, the best people, the best frequent flyer program, high NPS scores, this terrific -- it all comes together and now with a product offering that appeals to folks that want to fly longer haul to business, the folks that want some level of premium and it's very hard to tear it apart, but you put all that together and that says that we -- even without having those other attributes, we have a very appealing product because we're attracting customers that even without that allow us to be at or near top of the industry in terms of operating margins. It also shows you where we can go as we continue to add -- think about adding not just optimizing what we have continuing to optimize the network, continuing to pull in more business passengers, but then more products and services. It just shows you the upside for Southwest Airlines.

Okay. Since you mentioned corporate, any update on corporate momentum here in the quarter, how you track that?

Andrew, do you want to take that?

Yes. Yes. We've seen strong both on price because corporates are buying up. The product-based segmentation that we've kind of embraced now along with the rest of the industry of basic, but also product-based sell-up. The corporate is responding well on the price side and the volume side. And in fact, for March, if we didn't sell $1 more of corporate travel, March would be our biggest corporate travel month in our history. As of last Friday, and we still have half a month ago and corporate books close in, as you know.

I reiterate that in this room today, even though you weren't here, that's a cool sound bite.

Yes. Corporate is really working for us. We kind of professionalized that, stood it up a couple of years ago. So we have the infrastructure. We have a sales force from the distribution channels, and we just have the product to go with it. So now our sales force arm with a better product is winning more business for us.

So on corporate, and I don't know how you would gather this, but do you have any feel for the percentage of corporate revenue, where policy will pay for the upsell. So for example, at JPMorgan, as long as I don't move cabins, I can basically spend with impunity anything I want, intra cabin. I think it's that way at other investment banks who got friends around the industry. But for other businesses, are companies reimbursing business travelers for that? Or is that coming out of pocket?

It's broadly a reimbursement. Each company, each industry is a little bit different and that moves with the economy. But broadly speaking, block basic, number one. Number two, allow you to add on a bag or a reasonable seat this within the coach cabin very easily. The very high end of consultants and banks may offer by first-class domestic. But for the large majority of the corporate warriors, they are flying coach and they can expense seats, and that kind of stuff within that coach cabin.

Including allowing you to expense the extra legroom.

Yes. Yes. That was the point. So the evolution seems to be successfully embraced by passengers on an increasing basis. What's been the internal embrace of all of this change particularly in the cabin because I do see social media post, so they wouldn't let me move one seat over, flight attendant, they're having to police things. I mean how much of a strain is this putting on a culture that had developed sort of decades of muscle memory?

Yes. I think I separate it because there were actually 2 things going on. It was an incredibly successful implementation of all of these things. But with anything that is huge changed overnight, we changed our seating and our boarding completely. . Flip a switch overnight. And by the way, that next day, when we operated in that new environment, we beat Delta, American, United and on-time performance and cancel rate.

And you have a large storm, right?

That's exactly right. So I'm very -- I use that a lot because I'm very proud of, we put all this stuff in and still be the network carriers in terms of performance. But any huge change, you're going to have things that you discover. So we have discovered the way some of the seat assignment algorithms work. It was clumping folks, and that's been fixed. And in some cases, somebody that is A-List, so their tier. They ended up in a lower boarding group than we intended. So those -- this is all designed to be configurable so we can literally change it on the fly. So those are being worked and so I would put that in a very small but sometimes noisy category, but it is a very small percent of all folks that are flying and as you know, social media has a tendency to amplify things. So I would put that all in the category of expected tweaking of the product after it was implemented. And that's moving very quickly. Where our employees on board with this evolution of Southwest Airlines, absolutely. I have been at Southwest 38 years. I've never seen, especially the frontline embrace change because they saw many things. Number one, they're going to be able to serve their customers better. If you're a flight attendant, you now know the name of the person sitting in a seat, and you can serve them better. You know their history with us and you can provide very personalized service, which is what they want to do. It helps clean up the way we board now helps clean up some of the preboarding issues that we were known for. And so our employees saw operational improvements coming from this. But most of all, they saw, I love serving my customer, and now I can serve them better. So I've never seen a set of changes that were more embraced by our 60,000 frontline employees than this.

Excellent. I think we got a question from Mark Streeter.

We've got a couple. So Bob thank you for the quote not more obnoxious than normal. I think I'm going to use that again t to describe Jamie.

I was just responding.

So I love that. That's a keeper. We'll be remembering that. Okay. So on the lounge strategy, you said you're tying it, of course, to how you're thinking about cards. And so when you look at the American Express Delta relationship, they both built up lounge networks kind of independently. American Express came maybe a little bit later, obviously, after the Delta lounge network. But Delta was already fully established. So when I think about Southwest maybe pursuing a lounge strategy, well, and I haven't talked to my internal colleagues on this, but Chase has a lounge network right now. So is there an opportunity for Southwest and Chase for you to maybe piggyback off of some of that? Is there a way to maybe sort of co-brand allowance together or get your premium card customers access to the Sapphire lounge network. Is that on the table?

In fairness, as Etihad already has in some of our facilities.

Yes, I think I would say nothing to report. Today, we've been frank that it's something we are considering, given customer demand and the value that it would create with this more premium card that would provide lounge excess. Obviously, yes, we have a terrific and strong partner with Chase. So to the extent that our wants and needs intersected, that would be wonderful. But again, nothing to report. I would just tell you that we're the way we think about something like this is it is, again, in the context of pursuing what customers want from Southwest because we want to give you fewer and fewer reasons to fly somebody else. And then number two, we're a low-cost, high-efficiency carrier. So the construct of adding something, an attribute like lounges has to fit in the financial thresholds that maintain our goal of returns and financial efficiency, all those things. So it's got to fit both. So we aren't -- we wouldn't do something that violates that tenets simply because it is highly favorable to our customers. So just know that as we think about things like this, we will do it in the Southwest way in terms of making sure that it fits our financial structure, especially.

Great. And Tom, last year at our conference, I think it might have been day #2 or something like that for you?

Yes. I do remember when you asked me a very specific question on day 2.

And I'm the obnoxious one?

I owe you an apology for that.

I don't know, did Jamie grade your answer?

Jamie said, And I'm the obnoxious one?

Yes. Exactly. Because it was a little unfair for me and in the room or on the webcast, what I asked Tom a year ago was how do you think about the balance sheet and leverage targets and so forth. And to be fair, right, you were dealing with Elliott as a very large shareholder, you were turning over all rocks as we've talked about going through all the changes we talked about. Can you maybe just eventually, as last year progressed, you did land on some balance sheet targets. And can you maybe just talk about sort of that dynamic between the boardroom, I know you're not going to talk about what your large shareholder wanted, but as you try to balance shareholder returns and the sort of lines that you've drawn in the sand with how far you'll take leverage on the balance sheet and liquidity down. Maybe just sort of talk about that interplay and why you landed where you landed?

Yes. Maintaining a strong and efficient investment-grade balance sheet is really important to us. It's a strategic differentiator for us. You've seen us go out with some great terms on financing here in the past 12 months. We have the lowest debt balance in the industry. And we need to make sure that we're maintaining that. And so we put guardrails in place gross debt to EBITDAR between 1x and 2.5x. And the idea there is everybody can see where our ratings are. And you also know the components that make up those ratings. And so we were very deliberate about putting guardrails in place so it allow us to stay where we are, given how important that is. We also have a liquidity target of $4.5 billion that includes $1.5 billion of undrawn revolver that's there. It's nice when the banks take part -- we pay them in other ways. So it's nice when they take part of that liquidity cost for us. And so there -- to give you some of the behind the scenes, there is a lot of broad support as we talked through maintaining that and the guardrails that would ultimately keep that in place.

And then just one quick follow-up on the balance sheet, you recently raised some secured debt. I know it was at attractive rates, but did you really say versus where you could have raised unsecured debt? Why the pivot? Was it just to keep some secured lenders happy? Or -- why did you do that?

Yes. There was a bit of savings that we have there. You talked with folks about the level of unsecured assets that we had -- our unencumbered assets that we have upwards of $40 billion of unencumbered assets. And you talk with folks, some of whom are in this room today, and they tell you, you get credit for having assets in that category, but it kind of gets to a lot of diminishing returns. And so we did take a very small portion of that group, and we're going to save a little bit of borrowing costs there as we did that. And ultimately, this will be to help refinance some of the government debt that has rate adjustments that's coming due this year.

I have sort of a consolidation question that I want to ask you. When I think about, gosh, News Air, making a run on frontier in bankruptcy, the ATA involvement -- Midway, AirTran. I think what all of those events have in common was that they were at or near the bottom of an economic cycle. I have long applauded Southwest for putting its balance sheet to good use during periods of industry strain. I hope that we are not on the precipice of a protracted $4 at [ carrier ] environment. If we are or better yet the next downturn that comes along, should we still -- should I still consider Southwest as an entity that uniquely tries to harness the power of the downturn? Or are you just at a certain size and scope now that -- the plan for the next downturn is just kind of hunker in the bunker and make it to the other side, then all will be right with the world. Should we still view you as an opportunistic hunter during times of periods of industry strain.

There is a lot in that question.

And I started with that one.

You almost have to put M&A aside because while there -- it can be more attractive in certain periods, it really comes down to the specific carrier and the reasons network, can this be approved, synergies, all that fleet that really make that attractive, which I think actually drive the transaction more than the downturn and. So I'd almost -- I'd just say that we don't comment on those kinds of things. And this has been part of our history if it makes sense, it's something we'll consider. I think I would flip it around and say when you think about a period of a protracted -- and no of us know what fuel prices are going to do, whether this is a 1-month spike, it's a 9-month spike. What I'd focus on is in either of those conditions, we are well positioned. Number one, as Tom said, we have strong balance sheet discipline and financial discipline overall. Two, we have a strong cost structure a focus on efficiency and costs. And I would say, through what we've been through in the last 24 months and even far more renewed focused on agility, cost discipline, what you're seeing come through the quarters. And then we are local. We have great fares, and we have tended to win in periods of a challenge for consumers. So gas prices go up, consumers pull back a bit. You see things like premium pullback, and that's where Southwest is one. And you've seen us take advantage. I'm not predicting this by putting a little more capacity in when it's a period that even more than normal favors us. It's only been a few weeks -- it's very hard to understand or know what the environment is going to create. But again, I think I would just say that we are the best positioned carrier financially the product, the initiatives that are uniquely helping support and offset fuel for Southwest Airlines, our cost structure and then our appeal to our customers to weather this, whether it is 3 months, 9 months, whatever the period of time, we will be the carrier that weathers this the best.

Excellent. Any questions from the field? We got one.

Hi Bob. My question is, as you kind of look back on the results of the changes so far, really important ones like since seating and the boarding groups. You mentioned a lot about optimizing and is it possible that there's an ability to optimize while also improving in the case that you still are expanding partnerships with ANA. You just recently announced you're pulling out of IAD and O'Hare. Is this more of an effort to double down on your focus cities and kind of get with, I guess, get with the program that the other airlines are doing, focusing on a hub system? And how would you say that's affecting your margins?

Yes. The answer is all. So we -- our initiatives and the reach of the product, reach of the network will continue. So adding partners as you know, we've added distribution. So we'll optimize our products. All that continues. At the same time, we have a lot of opportunity to tune what we put in place but it's really all. We're focused on creating more and more value out of the initiatives that have been successfully implemented at Southwest, focusing on creating value out of our new and expanding partnerships focusing on creating more value out of winning even more business customers because we have a more attractive product, optimizing the network on and on and on. It's all in focus, and we can do all of those things at the same time. The whole purpose is to be more attractive to our customers, number one; and number two, produce more value for our shareholders.

Gentlemen, thank you very much. Look forward to every next year. Thank you.

Thank you, Jamie.