Southwest Airlines Co. ($LUV)

All right. Awesome. So thank you, guys, everyone, for joining us. My name is David Vernon. I cover the airlines and transports for Bernstein. We are pleased to have Southwest Airlines here, Bob Jordan, the CEO; Ryan Martinez in Finance; Danielle Collins in IR with us as well. So thank you all for coming out to support the conference. Bob, I'm going to -- or actually, before we get started, if you do have questions, you want to put through the pigeon hole. I've got the other side of that technology here. So feel free to put them in there, and I'll see if I can work them into the conversation. With that, I'm going to let Bob kick us off with some prepared remarks, and we'll get into the Q&A. Bob, thank you for joining us.

Thank you so much. And I was told I have to say, look at your screen, there's a cautionary statement that has to be there. So please read all those words in detail. And -- but anyway, thanks for doing this. Really appreciate it, and thanks for the time. I'll just give you a quick sort of lay of the land of how is the business performing. Obviously, we put a lot of changes in the last 18 months. The biggest transformation in the history of Southwest Airlines, it really was a fundamental change to our business. We didn't change our core. So the best domestic network, the most nonstops, the best people, the best service, the most reliable operation, one of the Wall Street Journal ranking is fifth year in a row, JD Power win. So the fundamentals of the company didn't change, but we really did change the product to move our product towards what our customers have told us they want. It was great to see that come home in terms of our financial performance in the first quarter so -- which is the first quarter that you have everything in place, but our operating margins were up 810 basis points year-over-year and we led the industry in net margin. And that's without having first class and long-haul international, some of those products that our network carrier friends have said are really performing. But it was good to see the fundamental change in the business show up any fundamental change in the financial performance of the -- of our company, which I think is an enduring change. Our customers are really taking to the products. They want them, they're buying them. We're seeing no drop off in demand for our -- from our customers for the products. We're seeing market share move away, particularly in our business customers because now we're offering them things that they want. They want access to extra legroom and different products. Just as an example only, so our March business revenues were up 25% year-over-year, and that trend has sustained itself in April and May, which is a great sign. The biggest question, of course, is what is the consumer doing now, the industry with Fuel Up has had 7 consecutive fare increases since February 1. Southwest has participated in all of those. That's the most that I could remember in my 38 years in the industry, but with fares up though that much, there's been no drop off in at all. So no indication that the consumer is elastic in the spare environment. So leisure business across geographies, across all points in the booking curve, the consumer remains very strong despite this rise in fares. So I'm becoming increasingly bullish that we will be able to cover these fuel increases with revenue increases. As you look forward, I think the last thing maybe the -- one of the questions at some point, fuel will abate, and you'll see fuel prices come down. One of the questions, of course, is, well, how sticky will these increases be. And I think the backdrop is very constructive. I think we -- our network competitors, you can tell, we're all focused on ratable production of results, steady production of results, sustainable margins. And so I do think that produces a backdrop where we'll -- there'll be -- we'll certainly not attempt to give some of these fare increases back. Obviously, you hate to see somebody go out of business, but with Spirit out of business, I think that helps that environment. So I do think the backdrop is constructive when fuel drops to retain the revenue and yield increases that we've seen. But bottom line for Southwest Airlines, demand is really strong. Our customers want the products, they're booking the products. Our business customers want the products. Our Rapid Rewards enrollments were up 37% in the first quarter. Our tier qualification was up 60% year-over-year in the first quarter. And we're seeing satisfaction scores now with the extra leg room, assign seating, the satisfaction scores for our tier customers is over 90%. So to me, it all tells you, the product is moving the right way for our customers, the business results, the financial results are moving in the right direction for our shareholders, and I think this is a durable and sustainable change in the airline.

All right. So the product changes that you've implemented. I think one of the keys users you want us to leave with here is that they're working. Customers are buying up to these products, and it's having the kind of results you want. We can dig in a little bit more to the relative part of that. But so let's say we've got the business transformed with the new products. As you think about where Southwest fits in the industry landscape going forward, what's your vision for the single reason why a customer would choose Southwest over your competitors?

Well, the core reasons, I mean we carry 500,000 customers a day. The core reason that customers -- the core reasons that customers have always picked us. the best domestic network, the most nonstops, which means the most convenient flights, the #1 operator, the best service provided by those best people, the best hospitality, those core reasons that customers have always selected it Southwest Airlines have not changed. So those continue. We are America's choice in terms of an airline. Now you tack on to that, the products that they want and the commitment by the company to continue to pursue the consumer and pursue the products that they want. It just provides a very strong base for an airline that is a more attractive to consumer than any other airline. So we're not going to become Delta and United and American in terms of serving 120 for international destinations. It took them decades to build that. But we're going to remain the carrier that has the best flight schedule, the best operator, the best hospitality, the best people and over time, connect that to more and more and more products that our customers and our noncustomers want and that allows us to provide more choice and better service and a better option for all Americans.

And as you think about the places where you think the business will be different, say, 5 years from now, right? If we've reset the product landscape, we've segmented the cabin, we've added fees and buy ups, which has sort of kind of been the where the industry has been, you're there. Where do you take it next? Like what's the next sort of 3- to 5-year path. Obviously, the upgrades on the WiFi, how do you want to think about like what's going to be most different about if we're sitting here again 3 or 4 years, which I hope we are. And we look back and we say, okay, what's different? What do you think is going to be most different about the airline?

Well, and again, you're talking about fees and all, again, all done. It is, but I just want to point out, again, that we added things that our customers wanted. So it wasn't that we're just charging new fees now. We are providing you options all the way from basic all the way to extra legroom to pay for things that you want is very different than I'm just slapping the fee on top of a project we already had. So I just want to make sure...

Acknowledge that. 100%.

Yes. We're meeting the consumer where they are, where I think we'll be, if we're sitting here talking 5 years from now as we will have continued to greatly expand the product offering and not just to expand it for egos sake, as an example, but expanding it because I want to give you fewer and fewer reasons to book another airline. They feel like you need to travel on another airline. So Again, all speculation. But we think we'll have more optionality within the cabin. It could include true first class. We'll have far more domestic destinations that we can provide for you. We just opened acreage a couple of weeks ago, the Caribbean. We're continuing to add destinations at a very swift pace here in 2026. And but we'll also offer you access to destinations that we don't serve today. I think it's likely that we'll over that period of time, delve into long-haul international. Again, these are all ideas. But we know these are things that our customers want. If you dial back just a couple of years, we now have 7 partnerships with other airlines, and we can get you to nearly any place in the world connecting with those partners, none of that existed even 24 months ago, but the desire is to meet our consumers' needs offer them the things that we can't offer you today. And it just logically means that things like lounges and a credit card that goes with that and more premium and more destinations, including more long-haul destinations. And if you take long haul as an example, again, it's out there. It is something that we're thinking about. But I say we don't have to become Delta United American, but a handful of destinations, 8 to 10 to 12 pick off the vast majority of the traffic, the vast majority of the places that our customers want to go. So we don't have to be Delta America and United in terms of that huge wide long-haul network. But through the right destinations, we can be highly relevant in our customer base in terms of where they want to go.

Okay. And as you think about that again, that 3- to 5-year path, not trying to get to some sort of specific guidance.

I think you are. You keep asking.

Well, I try to get there without getting it. But as you think about that 3- to 5-year path, when you're looking at whether it's margins, returns, free cash flow conversion, how do you -- how would you package that for an investor who is not in the weeds on RASM and CASM and is not digging into the flight segment performance by route. If you're trying to package this for a generalist investor, and you're saying to yourself, hey, look, Southwest used to be this business that led the industry in margins and returns. We've gone through some transition. Now we're going on a path. Look, where is the end state.

I think if you're asking me, so I took my Southwest Airlines had often just say, well, why would I invest in Southwest? What's the argument? You've got a terrific company with terrific fundamentals that had stood still on the product front for a long time and had a huge base of loyal customers, but just didn't offer them the many products and product choices that they want to buy, and we've changed that. And dispelled a couple of sort of these in named theories about Southwest, number one, that our customers either wouldn't want to buy those things or couldn't buy those things because somehow we have a less affluent customer which is hogwash, if you look at the results. And second, that we couldn't get to industry returns, top of industry returns without having first-class premium long-haul international because of the growth there. Our first quarter results dispel that. We have been able to be to meet the top end of the industry margins and not have those products. So -- and our customers are buying them. So you've got a company that has incredible strengths that now has in place a much more durable return for and margins for our shareholders. and that's durable and sustained. On top of that, we have a lot that we can add. We can add -- we're going to continue to optimize the things that we put in place. We've just begun to optimize the product buy ups and the way we think about seat ancillaries and the way we think about the number of seats on the aircraft that are available to monetize. So there's more to come in terms of optimizing what we put in place without adding new things like lounges and long haul. So there's more from a returns perspective. So I look at the company and say, I think the market has substantially undervalued the change in our earnings power and the sustainability and durability of that earnings power with the products we put in place today; number two, has not even begun to thought about the value of optimizing those products beyond what we implemented in January '27. And third, not begun to give us credit for the things that we can continue to do to add to the products to make them even more attractive, even put more earnings on the table for our shareholders. So there's a very long and sustainable shareholder return story here, the number one, the marketplace is not given us full credit for. Number two is sustainable for a very long period of time. And if I'm a long-term investor, that's exactly the play I want.

Okay. So maybe let's change gears for a second and talk about the transition that you've just gone through because it has been pretty massive in a very concentrated period very massive right? As you look at the initiatives, and I'm not sure how you want to bucket it, but if you can help us kind of understand the things that you've implemented which of those changes has outperformed your internal models? And where has maybe the customer reaction surprised you one way or the other, right? You've been around the business a long time for a long time. You're of the view that the product didn't need to change and then to your credit, you pivoted and you led the team through the change. But as you think about what you implemented, what's overperformed, where is the customer action been most surprising to you?

Yes. And I don't know if I was of the opinion that the product didn't need to change. I think I felt like we needed to move to a science heating as an example for a long time. We did a lot of research. And so we knew that of our customers wanted to move to a science. 88% of customers who would not fly Southwest, that was the reason. They would not fly us. They wanted a sign seating. The #1 reason families would not fly Southwest Airlines was because in open seating, we could not guarantee that you would sit next to your kids. So I had high confidence that those things would work. So I have very high confidence in and the product changes and high confidence in the company's ability to execute that. We also made some changes that were tougher like the implementation of bag fees. Now a lot of ways not to have to bag fees. All you have to do is have that Southwest Airlines, Chase Rapid awards Visa in your wallet or have tier. But I don't know that I was surprised at all. Number one, the products are performing or outperforming our expectations. And again, that's without continuing to optimize. So I think if anything that surprises in time you make fundamental changes, you always have a nagging worry about what could go wrong. I wasn't surprised, but I'm incredibly pleased with, number one, the companies flawless implementation of all this stuff. These are huge massive changes with lots of technology behind them. We did the site seating boarding, all those changes were done overnight on January '27. And the first day of operation, we led the industry in on-time performance, and we led the industry in the lowest number of cancels. So we beat the industry on the day we changed everything about how the company operates. So while I knew we could do that, I was pleasantly surprised at the quality of that implementation. And then second, I've been pleasantly surprised at our customers' response to these products. they're taking to the products as -- or even better than I expected. And our business customers, in particular, are really taken to the products. So I mean, we're seeing satisfaction scores that are higher than in the open seating world as an example. So I've been pleasantly surprised to the upside more than anything.

Okay. And I guess one question that I get asked sometimes, and I'd love to get your view on this, right? Like you've implemented these changes. Everything is going well, then we had this massive fuel price spike. And obviously, there's the bankruptcy of some spirit and pass coming out, fares are better. What gives you confidence that the behaviors that you're seeing in the early results will endure. And maybe more importantly, how are you keeping on top of that issue in terms of like saying, okay, look, we have home to these changes and everybody kind of accepted it, but now over time, maybe things are changing. Like how do you think about the durability? And how do you think about managing that? Because it's got to be -- you don't really have a good track record to go against, right?

Yes, but we know a lot about booking curves and how our customers perform. So yes, you're looking for is this a blip or is this sustained? And back to the strength of of the demand right now. It's across, again, all geographies, all customer sets and all points in the booking curve. So if this was somehow just a reaction to the January changes you'd see a blip in a fall back, and we're not seeing that. If anything, we're seeing a an acceleration in our customer scores as we move away from January '27 and continue to make improvements. We're seeing these really large and I'm not updating today. So just the guide really large guys in terms of the performance. So I mean, when was the last time, if ever, you heard somebody guide high double-digit RASM performance, unit revenue perform I've been with the airline industry for 38 years, no one has ever produced high double-digit RASM performance in a quarter. It just doesn't happen. It's a testimony to the fact that the revenue production of the products is working and is a testimony to the fact that our customers want it. So if anything, I see acceleration in the take rate of the products rather than some worry that this was somehow a blip in temporary, which tells me that the product changes were the right things to do. Our customers go back to the open seating world, we always have had and still have off-the-chart enviable NPS scores because our customers love the product, they loved the network and the fact that we have more point-to-point nonstop flights. But above all, they love our service and our people. Our people are the brand differentiator. They do things for their customers that no other airline would do. And you take all of that, that is still intact and you stack on top of it the products that -- and the choice that our customers have wanted for a very long time, and it's an unstoppable combination.

Okay. Well, on the network side, you have also been making some changes, right? Obviously, the move into hair has been gone back to Midway, Dulles spec. You've seen some changes around Reagan and where you're flying in and out of. I remember like one of the first times we had a chance to sit down like this, I asked this question around or maybe it was one of your Investor Days, right? Where are you going in the network? Is it dots on the map or thickness of the lines. And it does feel like there are some of the really high utilization routes in the network have come off a bit. Is that something you're also seeing? And how are you thinking about where you want to put assets into the market going forward?

Well, you have to be willing to be -- you have to be willing to adapt the network is an ever-changing beast, right? It is constantly moving around as you see demand move. So you've got to be willing to make changes. And I wouldn't read any more into the Dulles on or changes than those just were not producing the returns that we wanted, and that capacity can be better used in markets like San Diego, Austin, Nashville, places where we have a super high demand, and we're continuing to grow. So you've got to constantly be looking at the network and being willing to make changes. And we're doing -- you have to be aggressive and we're willing to do that. On the thin lines, thick lines kind of thing, there have been fundamental change over the last 5 years to a decade. Where you have a much higher difference between peak and off-peak performance. And so you have times of the day that used to make sense to be profitable like late night, deep off peak, and they just don't make since any longer. You have days of the week that performed very differently than they used to. So you have to, again, be willing to deploy capacity and be variable with your capacity deployment to the right times of the day, day of week and routes. And so what you're seeing from Southwest is actually a, number one, a higher degree of willingness to be adaptable with the network. And then number two, a higher degree of capabilities, technology and otherwise that allow us to do that.

And so the utilization component being maybe a little bit less in some parts of the market, does that change the return profile of the business or you compensate that from [indiscernible].

Yes, we still have -- because of the way the network flows, we still have the highest aircraft utilization in the business. The -- everybody's cost structures have floated up, especially with labor costs coming up, you know that. But our gap to our network carrier competitors, as an example, is still about 20% on a unit cost basis. And that's really driven by the fact that we utilize our aircraft much more efficiently than others do. A good example over the last few years is, we actually rather than pad the turns, pad the block, we actually took 5 minutes out of every turn and created 18 free aircraft by doing that. We built the capability and began flying redeye flights. And the combination of those 2 is roughly 40 free aircraft because we're basically just utilizing the existing aircraft more. So no 1 can touch us in terms of aircraft SP-4 Utilization and productivity.

And so the vision that is to continue to be more point less sort of hub because you've built -- started to build some connecting in the schedules. It seems to me like. But when I look at it, so say relative to Pre-COVID to now, you've got a little bit more emphasis on connectivity and BWI in some of your bigger markets.

Yes. I would say we're a hybrid. So we have very large cities that we do more connecting in. But again, one of the core strengths of this company is that we have the best domestic network, and we have the most nonstop flights and consumers choose nonstop flights. And that offering is key in terms of our -- as a key part of our core capabilities as an airline. Again, you're always going to adapt. I mean, as you grow a fundamental part of growth and becoming larger, we're now roughly 4,000 flights a day is -- and you have more dots on the map, you can't escape having more connectivity as you add more dots. And that is really the -- what's happening there versus a desire to become more hub like.

And as you think about that idea of getting to international long haul right? How do you think -- where does that fit in your network? Is that kind of like as you think about gateways, is that most naturally going to be Baltimore? Like how do you think about were.

Yes. We're just not far enough along with that. These are really ideas. I think you start with, again, you go back to what is it two things, what is it our customers want from Southwest Airlines that we cannot provide today? I want to give our customers fewer and fewer and fewer reasons they have to choose United, Delta, American and others because they don't want to. They love Southwest Airlines, we are the brand that they love. They want to choose us and they simply can't because we don't offer them the thing that they want, like flying long haul. So it really comes out of what is that our customers want. And then second, this is a huge tied to the Rapid Rewards program. So the loyalty programs and co-brand are a huge part of the financials of an airline and having long-haul aspirational destination kind of routes really, really enhances the co-brand program as well. So it's much a part of that. That's as much the reason it is even destinations that our customers want. But we're just in the really early stages.

So I have a very smart question here..

Baltimore would be a natural popping off point.

So I have a very smart question here that kind of feeds into this idea around choice. So you said that Assigned Seating was the one reason why people would not use Southwest. That's no longer there. What's the #1 reason now that customers wouldn't use Southwest?

I think I would flip it around and say, what are the next set of things that our customers want. And the next two are number one, highly reliable, fast WiFi is incredibly important. So you saw us -- we signed a deal with Starlink, very smart, and we've got our first aircraft outfitted for test and we'll have roughly 300 aircraft in the fleet converted by the end of the year, and it's going to be neck and neck, but I think we'll be the first to have our full fleet converted to LEO. And these are incredibly fast like sitting at your home gaming kind of speeds. And so the move with Starlink will solve that. I'm really happy about that. And then second, the next thing that we see our customers want or a lounge network. And it's not just business customers. It is leisure and business. And I've been very public that we're working on that and not ready to announce or say anything today, but just -- it is public that we're out there leasing space. So those are the top two things. And as you can tell, we're tackling both.

All right. So with the -- you talked -- you haven't seen any sort of demand response to the higher fares that have gone through. You mentioned 7 consecutive fare increases that have well been widely supported by the industry. If you sold the whole cabin at the latest round of fare increases, does that cover $4 and change jet fuel? Or is there still more room the industry has to kind of work to push forward to get to full recovery at.

Yes. No. If you just took today's revenue environment or yield environment and you -- and you took fuel prices as they are today. No, no, it's not close. So you still -- you need further increases to fully cover the rise in fuel this far. But -- it's, well, it's ever changing. Fuel is moving every single day. But because we've seen our customers and consumers be very, very resilient in the face of fare increases. And I think it's the economy, but I think for Southwest because we're offering the products, I think a big piece of this for us is we're selling them products that they want. And so we have an outsized demand that others are not seeing. And I also think that consumers are prioritizing travel it's higher on the priority list than it was pre-COVID. And we're going to see fuel abate as far as -- my guess is at some point we'll have an agreement, fuel will come down. I do think it's going to take longer -- far longer than the fuel forward curves would say. So I do think you're going to have higher fuel for longer. But the combination of fuel will abate. And customers have been very resilient, makes me more and more bullish that we will be able to cover these fuel prices with revenue increases.

But we still have a little bit room to go.

We have a ways to go. We're not there yet.

If I were to ask you to [indiscernible] fuel tank, tank indicator on it. It's okay to say no. It's a question I get asked, so I'm trying to get...

Well, you've seen a lot of this. We're going to cover 40% this quarter and 60% in the next quarter. I've shied away from that because it's -- I think it's just a math exercise. You can plug any number you want in there. And the market is going to dictate that. it is logical, I think, to think that you've got 7 fare increases that as -- if you do, if those prices continue to go up, it's logical that, that pace might slow down because that's a lot. But again, I'm bullish on the thought that we'll get to the point here where revenues can cover fuel in total.

And we get to the other side of this and filters to come down, the $65,000 question is how much do you keep and how much does the industry give away back to the consumer.

Well, first off, you got to start with, while prices are up, I believe that fares, if you look at the last sort of since COVID began in the last 6 years, even with prices being up, they are up only roughly what broad inflation has been up over the same period of time. So we're not talking about fares are way ahead of what's going on with the prices. So they're basically just now catching up to inflation. I do think because the -- there's more discipline in the industry now. The network carriers, in particular, Southwest Airlines, we are all focused on ratable production of earnings, dependable production of earnings. And so I think there's a desire to behave rationally and operate the business in a way that you can produce the appropriate rate of return for our shareholders. As much as you hate to see a competitor go out of business because it's people, nice jobs, Spirit going out, I think allows us to be even more rational in how we think about that because typically, the airlines suffering the most is the 1 that's going to behave the most irrational in terms of pricing. That's the history of the industry. So I think that adds stability. So I'm actually very bullish that the industry will retain a much higher percent of the fare increases that would be typical historically.

Okay. And as you think about that structural change with the ULCC model maybe not dead but on the ropes with the introduction of basic and segmentation. What do you think about the prospects of future consolidation from where we are today or future potentially maybe companies that are struggling to make it at today's fuel prices actually kind of maybe following Spirit?

Well, and you said you'll see season on the ropes, too. I think, if anything, and this has been coming for a long period of time. Cost in the industry broadly, especially labor costs have really come up over the last 5 years, and you sort of move to an industry rate for labor and that big rise, I think, in cost and particularly labor costs, I think, was as damaging to a spirit as anything because they were a spill carrier, taking spill, which means lower fares. And that only works if you have a significantly lower cost structure and with labor rates commoditizing themselves, I think that just became very, very hard for that model. On the M&A front, it's kind of one of those -- we were talking about this morning kind of they're sort of both sides of the same coin, which is everybody that I talk to thinks this historically, this is the kind of environment that's ripe for consolidation and where you typically see M&A. And I do think everybody believes that this is an administration that it would potentially be easier to do some transactions under. But on the flip side of that, I've not talked to anybody that really knows what that might be because you had a lot of discussion of JetBlue. I can't speak for JetBlue, but I don't -- given the debt load, I don't see I don't see necessarily a lot of interest there. You've got some very small carriers, the bees folks, I don't really know about that. So that really leaves the network carriers and Southwest Airlines. We're all very large. A combination of any of those would be roughly 40%, 42%, which historically would never pass muster in terms of an approval with DOJ or DOT. So while I think the -- the timing feels right for consolidation, nobody that I talked to a sort of thumb to put a thumb to what that might be.

And so from a Southwest perspective, you're philosophically open to the idea, but don't necessarily see the right set of combinations like

Well, no, there's really -- no, there's nothing that we're -- I never say never, but there's nothing that we're working on. I mean just like being open to the product changes that forever, we say we have one product, we do it this way. we have on boarding, we do it this way and woke up and said, look, our customers are telling us something different. We can't do that. We've got to provide what our customers want no matter what we think sitting here at the table inside the company. So on the M&A front, I think you apply the same thing and say, you got to be open to things that might make sense. That would be good for the company, good for our shareholders. It's just not -- there's no -- there's nothing obvious. So it's not a no. It's just -- I don't know -- I don't have a clue what that would be because nothing comes to mind.

Okay. And as you think about the topic of cost inflation, which you mentioned a second ago with respect to the industry getting to a set wage. As you think about the product changes you're making and then the potential also for additional enhancements, whether that would be a true first class cabin or a lounge or whatever it is. Those are going to be layering in some costs as well. So how do you think about offsetting that cost of investing in the product? Should investors be expecting you to be basically working revenue against that cost inflation and netting a positive? Or are there additional levers that you can pull from a productivity and a cost standpoint that would allow you to maybe absorb some of that cost of a higher service product?

Yes. Again, I can't -- I'm a little bit in the jam here because I can't talk to you about -- there's not much to add on things that are hypothetical and things that we are working on, they're just confidential, and I can't give you a lot of detail, but I would come back to where is sort of like your capital allocation guardrails, there are guardrails around how we run this airline. And while all costs have come up, on a relative basis, we're a low-cost carrier. So our unit costs are 20% below the network carriers. So as we add amenities, we're going to do that in a way that is consistent with our cost profile and in a way that maintains the cost differential. As we add things like new products, we're only going to do that if it makes sense. And that means makes sense on an accretive margin basis. So if we were to add further premium, Obviously, you're dedensifying the aircraft to do that. We would only do that if it is obvious that the sum total is margin accretive to the carrier. So we're not going to do things just because we desire to do that. We're going to do them because it makes sense of the business. Our customers want it. and it is a good thing for our shareholders. We haven't talked about this, but sort of -- but to me, it kind of ties together. We've talked an awful lot about the product in the last 18 months, the product changes and all that we've done at the carrier at the airline there. What we haven't talked about is what I've seen in terms of what's changed in terms of how this company operates itself. We've been around a long time. I've been there 38 years, and I've seen the biggest change in how we fundamentally run this company that I've seen in my whole career, help West Airlines. There's an incredible focus on discipline, cost discipline, agility efficiency. It was very painful, but we did our first ever corporate layoff about a little more than a year ago, I took out 15%. And that delayering and focus in corporate broad an incredible change in the pace at which we operate, the pace at which we make decisions and that fundamental change to how we operate ourselves is showing up across the company in terms of the pace that we execute. There's a reason we executed all those product changes in 18 months, and they went in flawlessly. And I think it's a change to how we operate this company. There's a reason that you've seen 4 quarters now of incredible cost discipline. Our unit costs in the first quarter were up 2.3% and 1.2 points of that was because of a row of seats that we took out for extra legroom on the 700 aircraft. So otherwise, they would have been up 1.1%. That's not by chance. It's because there is an incredible focus on discipline, cost discipline and managing this company in a way that I've just not seen before and bodes well for the future.

And as you think about artificial intelligence and the use of LMs in the business, either on the revenue-producing side or the cost side or the customer engagement side. Is that -- are you looking at that as a lever of productivity that hasn't been tapped yet? Or how are you thinking about -- or how is the company thinking about incorporating those tools? And what do you see as the potential to see..

Oh, yes. We're we can go on for a very long time. So everybody focuses on the productivity aspect. But you've got productivity, you have the ability to dissect and ingest titanic amounts of data to understand what's happening in patterns and trends like revenue management or aircraft. You have a lot that's going on in terms of the rise of Agentic. So yes, this is a huge topic. You just take some examples we are using AI extensively in the area of customer handling. So taking our customer care area and not just improving processes, but improving how we respond to customers, the pace at which we respond, how we recommend and predict what we should be doing for the customer and then kind of human in the loop, handling those. There's a lot of discussion going on around exactly how our agent is going to play in this space. So you've got -- every platform is transitioning to using that to selling you. So selling your trip through chat EBT and then on the back end basis, making all those bookings and putting your trip together, there's a huge impact to a company like Southwest Airlines in terms of how we position our platforms to deal with those agents more and more productively. Because what you can't do is lose the ability to monetize ancillaries and seats and buy up in terms of how the agent works with our platforms and our agents. So I'm going on and online, but it's such a huge change. And I think there is a stunning level of capability here.

And so maybe just one last quick question before I'm going to let you land the plane here on refreshing the [indiscernible].

I'm not a pilot. You do not want me to land the plane.

Land the presentation. So the CapEx envelope and a free cash flow conversion profile of the business, how does that look over the next couple of years? Should we be expecting or at least -- should investors should be expecting or penciling in some additional investments. I'm not sure if Starlink is a need to move around that or lounges could be just given the price of real estate on an airport, especially in attractive airport. Like how should we be thinking about the CapEx envelope kind of going forward and free cash conversion?

Yes. I think the -- yes, StarLink. Both Starlink and how we're thinking about lounges, they were not materially impacts. It's really -- and we've been investing a lot in the customer experience, new interiors and WiFi and new seating and but those are already embedded and they are also relatively immaterial. It's really aircraft. We have a couple of years here where we have a bit of a bubble in terms of aircraft just because we over the last 3 or 4 years, we got behind the Boeing deliveries. And so they're going to be a little lumpy potentially in kind of '27, '28, '29, still TBD, but -- but no, over -- and again, this is not huge, but a little higher than expected. So -- but over a longer period of time, we'll have very stable CapEx. And as we continue to improve the margins in the business will drive more free cash flow. We're very disciplined with our guardrails around capital allocation. You saw us buy more shares back in the last 18 months, about 14% of outstanding. That was really returning excess cash that we had put on the balance sheet during COVID back to our shareholders an extraordinary period. So -- we're going to use operating cash flow to fund investments like CapEx and then we'll fund share repurchases as an example, out of free cash flow. I think longer term, in fact, the reason why we are such a good long-term investment in addition to the fundamental margins that are going to be put on the business of the changes. You've got a period of time here where we are -- a lot of the CapEx is just taking 700s that are retiring and putting new MAXs in place. And that's a huge in PV and win every single time that we do that. That's an 18% improvement in operating expenses between those two aircraft. You get to the early 2030s. And we essentially have a very young MAX fleet with very, very few retirements for about a decade. So you're setting up a decade with great operating cost because you have new aircraft, low maintenance and very low CapEx because we have very few retirements, and so it sets up strong free cash flow. It sets up strong cost performance in the business. You couple that with the products that we put in place, and it sets up strong customer demand, all that yields I think, continued margin expansion and a terrific story for a terrific long-term story for our shareholders and our potential shareholders.

All right. Well, we've got about a minute left. That's a pretty good wrap-up of a compelling longer-term story. Anything else you'd like to add for a longer-term investor that might be sort of top of mind or message you want to leave with.

No. I mean as you can tell, I'm not just the CEO. I'm a believer in the story. These are fundamental changes to Southwest, but they're all just to meet the customers' needs. It's working. It's showing up in demand. It's showing up in the financials. There's far more to come, so I see far more potential for ongoing margin expansion. And this is a great company with great fundamentals, above all the best people in the industry, and I am an absolute believer in the story, and I'm an absolute believer in this company.

All right. Well, with that, I think we're going to wrap it up. Thank you all for attending. Thank you for listening in on the webcast. Thank you to the Southwest team for coming. And Bob always, I learned a lot when I speak to you. So thank you for supporting the conference and coming out to join us. Thank you.

All right. Appreciate it.