We're gonna get started here. Thank you, everyone, and welcome to day two of Bernstein's 41st Annual Strategic Decisions Conference. My name is David Vernon. I cover U.S. airlines and air freight and surface transportation and a whole bunch of other things related to the movement of goods and people. We are privileged and pleased to have Southwest Airlines joining us here today. Bob Jordan, the CEO, is here. Tom Doxey, the CFO, and the IR team, Julia Landrum, and crew are with us as well. We are gonna do this, you know, pretty much a fireside chat. You guys should be aware by now that there is a mechanism for entering questions in. You should have a QR code.
You can get it into the pigeonhole system, which will then filter out the inappropriate questions and get them up to here, and I can work them into the conversation. I'm gonna turn it over to you, Bob, but first I wanna say thank you to Southwest and thank you to you personally for coming out to support our conference. Why don't you kick us off with maybe your views on the state of the industry, state of the business, any opening remarks or key messages you wanna kick us off with?
Yeah, Dave, you bet. And thanks for the invitation. You said you were filtering out the questions we shouldn't take, like, "Did you lose my bags?" I'm happy to take them, but I have a little experience, but no. Anyways, let me just a couple of minutes. Really, a couple of things. A lot of interest, obviously, in all of the changes that we are driving at Southwest Airlines. We have a huge plan of initiatives on the revenue and the cost side. Some of those we announced last fall. Some of those we announced this March. If you're watching, we put in a huge slug of those yesterday. We added a basic economy fare. If you go on the website, on the app, you see that today we changed some of our fare families.
We began charging for bags. Obviously, if you have status, if you have all you have to do is have our credit card, you still have a free bag. We changed some of our flight credit expiration. A lot of the things that are in our revenue and initiative plan were either in or then went in yesterday. The remainder, a lot of those come in very quickly. We will be announcing soon the date that we begin selling assigned seating and extra legroom. That will come in on the sell side in the third quarter of this year for operation in the first quarter of 2026. Our cost plan is in really good shape. Last fall, we announced a $500 million cost plan by 2027.
That's now been up to more than a billion, and we'll actually take out $370 million in cost this year. The exit rate in cost takeout will be $500 million, which was our original 2027 target. The real story there is I'm just really proud of the team and the execution of the initiatives. Again, a lot is already in place. A lot went in yesterday. Very proud of our team and the execution of the operation. We're number one or right at number one in on-time performance, lowest canceled flights, longest long delays. We're just crushing it on the operations front. Very, very proud of folks. We are showing very, very strong cost discipline. Our first quarter results, we were well below consensus in terms of our cost execution and CASM -X.
That cost execution is continuing here into the second quarter, and we are still on track to exit 2025 at a low single-digit CASM -X rate. Seeing strong execution on the operation, on the cost front, and of course on our initiatives. We can talk a lot more about the initiatives. $4.3 billion in EBIT value in 2026. A very large set of items. Maybe the one other thing everybody is, I am sure, very interested in is what the heck is going on in the macro economy and macro demand that is on everybody's mind. You have heard a lot of talk of stability. We are seeing stability in demand at Southwest in the last few weeks here, but it is stability at the current levels.
It's cons, you know, it's stable at levels that are obviously lower than what we expected when we set our plan in January. When we reported fourth quarter earnings in January, that compared to today, I've said this before, demand is off kinda roughly six points from what we would've expected in January. It is stable. It's just stable at these lower levels. We all can see industry data, and we don't see an inflection back in the industry data. We see stability, but we don't see an inflection just back. Regardless, you can't control the macro economy, but you can control, we can control what we're doing, which is execution of the operation and execution of our initiatives.
All of our focus is on, on that, and you're seeing very strong performance of the initiatives to drive that $1.8 billion EBIT value in 2025 and $4.3 billion incremental EBIT value in 2026.
Okay. I definitely wanna get into the initiatives and some of the changes that are happening at Southwest. But, you know, since you're talking about the macro, you guys do get a very good look at the U.S. consumer in terms of buying behavior. You know, the days advance purchase, as you think about kinda what you're seeing in the data, what does it say about that health of the consumer? Are we still in an okay shape, or are we, like, is there anything else that you're seeing kind of in the composition of the way people are buying travel right now that gives us any insight?
Yeah. It's, it's, I think it's tough. The data is a little all over the place. There's no doubt that the consumer has pulled back. That is for sure. We are seeing a couple of things that are unusual. We're seeing the booking curve come in. It's a shorter booking curve. It's very clear that consumers are waiting to make decisions, including for the summer. Our visibility through the summer is far less than it would be typically, simply because the booking curve has moved in. Consumers can make their decisions quickly. They can turn off, you know, buying a trip very, very fast. The airline industry tends to be a leading indicator. Business is actually holding up better than the consumers.
We have seen some fall off in business, but it's really primarily government travel, which is impacted by, you know, the executive orders and other things that you've seen. The business seems to be holding up well. You know, if we get into a recession, you see business travel is one of the first things that they can reduce. You see them lower their CapEx budgets. You see them stop hiring. We're not seeing a lot of that just yet. I think the indicators that business is really gonna fall off, I don't see those yet. You do see the consumer being, I would just say, very cautious. The consumer can turn right around and turn that back on.
When I say we don't see that inflection back yet in the industry data, that doesn't mean that it couldn't happen. We just don't see that yet. What it appears to me is while the economy is still, you know, in relatively good shape, the consumer sees the uncertainty, and it has just been waiting to make some of those purchase decisions. That's what it appears to be happening. The other thing I think that's happened is with the tariff announcements, I think consumers pulled forward. There's evidence that they pulled forward purchases that they were afraid would be affected by tariffs: automobiles, appliances. You've seen a lot of reports of demand surge, especially on the automotive side.
It could be that over just sort of a week's period here, consumers have shifted their spending to some of these more durable goods that they are afraid are gonna be affected by the tariffs.
You're saying like a reprioritization of.
Just a temporary reprioritization based on the fear of the tariff impact. Again, I just go back to why it is very choppy, and the data is choppy. You're seeing these large falls in confidence and things, which again could inflect back. We can't control that. What we can control at Southwest is what's the quality of our operation? What's the quality of our cost performance? What's the quality of executing all these initiatives? All of our focus is on doing that because at the end of the day, the set of initiatives that we announced last fall and this spring add up to a lot. I mean, we're a roughly $30 billion top-line company on the revenue side. The 2026 incremental EBIT from these initiatives is $4.3 billion.
It's hugely impactful to the business and to our margins. And again, these aren't crazy things that we've dreamed up. These are things primarily that the rest of the industry is already doing. It again, it's assigned seating, selling extra leg room, bag fees, seat assignment fees, that kinda thing, changes to the expiration date. All very doable. All of our focus is on driving the execution of the initiatives, doing that well, driving the financial benefit. What that will lead to is a significant boosting of our operating margins and our ROIC and hitting our long-term targets.
Okay. Since we're talking about initiatives and the high-level number, the $4.3 billion you mentioned, that would work out to roughly a 10-11% margin. Are you, when we think about hearing that number, right, are you telling us that that's the number you're actually expecting to show up in EBIT, or is that the value of the initiatives that then will offset whatever's gonna happen in the underlying base business? 'Cause sometimes it gets, it gets a little bit confusing in terms of what we should be taking as a number to put into, to a guidance framework versus a net realization number, if you will, when you've actually implemented the initiatives and then, you know, the business changes and everything else happens that maybe offsets some of that.
No, good, good, good question. The numbers that we gave you, those were net. That was net of any other impact that that initiative could drive. No, think of that as a straight-up contribution to the business. A $4.3 billion incremental contribution, EBIT incremental contribution to the business in 2026. Just to give you a little detail, again, these are all things that are, you know, what the industry is doing, cabin segmentation. They are just things that Southwest has not done. They were not part of our model till now. Just to break real quickly the $4.3 billion to make it real, the $4.3 billion breaks roughly into about a billion in base business changes. That is improvements to the revenue management system. We had some hiccups when we implemented that last year.
It's changes to the continuing changes to the network, continuing to boost load factor driving connectivity. So base business improvement's about $1 billion. It's about $1.5 billion in the value of, of assigned seating and the extra legroom product and sell ops, those kinds of things. So there you're at $2.5 billion. It's $1 billion in the cost initiative, which is well underway, and we'll exit this year with half of that already in place. So there you're, you're at $3.5 billion. And then the other $800 million is the revenue contribution from things that are coming into place, right now that are already in place as of yesterday. So bag fees, flight credit expiration, changes to the, to the loyalty program on earn and burn. So the $4.3 billion is not complex in terms of the, of what makes it up.
It isn't a set of initiatives that are sort of crazy things that Southwest's doing that are unique to the industry. These are really things that the industry is doing. I look at that and I see, number one, low risk of implementation. You saw terrific implementation yesterday of what we put into place. Low risk of getting it done. Number two, low risk of hitting the financial numbers because these are things that nearly every other airline does, and it's easy to see the values that they pick up off of those initiatives.
I guess, when you think about that $4.3 billion hitting the, the being an incremental contribution to the business relative to the baseline, like, what needs to happen to the base business in order to retain the full value of that $4.3 billion? Are we, does it just need to be stable? Does it need to improve? Like, I'm just trying to, again, kind of when we look back at the history of, of calculating the overlay and initiatives and what actually shows up in the P&L, there's usually a delta. I'm trying to, like, help you explain to me what that delta is.
Yeah.
'Cause I keep getting asked that question. Like, hey, they come up with these initiatives. It's a big number. You add it up, and then the number comes in below that, but we still hit the initiatives. Like.
Yeah. There's probably.
What do I think about?
There's probably two aspects to that. One is if the economic backdrop is affecting overall demand, what is that doing to your initiatives? The way I would think about that is pretty simple, which is if you're adding bag fees or seat fees or giving customers choice around buying the extra legroom section, while, you know, if demand has fallen six points, six points of that demand could come off, but the rest is all incremental because these are folks that are buying. They're now just choosing to say, "Hey, you know what? I really wanna buy the extra legroom section." A small part of that $4.3 billion in revenue in total is at risk due to demand changes simply because these are revenues on top of making the decision to fly Southwest Airlines.
Again, the billion dollars it's cost, half that's already in place. I see very low risk there. Maybe what you're asking me is, you know, how do you ensure that when you count, you know, a bag fee and the value of extra leg room and the value of assigned seating, how do you know you're not double counting and do all these things stack? We were very careful to separate and segregate the analysis based on traffic and based on customers that will have a bag that's free through the credit card or free through their status and looking at what other carriers make off of bag fees. What is that value to Southwest Airlines? The same thing with the assigned seating value.
As an example, what you would be careful, what I would worry about is if we said, we're gonna put in assigned seating and we're gonna see this huge market share shift to Southwest because every, you know, all these people will suddenly wanna fly us because we now offer assigned seating. That is not the way we calculated or the numbers that we provided you. It's really the value of the seating aspect and someone buying a, basically making a seat reservation or somebody choosing to pay a little more to be in the extra leg room section. I'm very comfortable, number one, that the revenue portion of the initiatives are not, don't overlap and aren't counted improperly. Number two, they're a net of any loss that you could experience in some other area.
Number three, we work and serve it even in terms of how we created those values.
You know, Southwest historically, just as we've kinda looked at bag fees, assigned seating, those have not been things that you wanted to do. You guys made a pretty good case a couple years ago to not do those things. Now we've changed. Can you help us understand what shifted in terms of your thinking? I mean, I remember your last analyst day. You guys made a pretty impassioned case that said, you know, "Look, if we charge for bags, it's actually gonna be that negative because we're gonna lose out on the added premium that's already in the base ticket price because customers are coming to us without the friction." What did it change in the spreadsheet? Did it change in a prioritization?
Like, how do we, like, how do I think about that, that pivot?
It was not a spreadsheet error.
I'm not saying it's a.
No, I think it's several things. Number one, we were just looking at that as a narrow bag question. As you back up and you look at it as a combination of really, really thinking about cabin segmentation and, I'm gonna have a different set of fare products with basic.
Yeah.
The value of buying up from basic to the next and that to the next. The bag fee as an example only fits very differently if you think about it just independently as a bag fee versus I'm gonna think about it in the context of changing our fare products and what those buy-ups could look like. Number two, we joined channels that gave us access to understanding how customers were picking us relative to other carriers. So Google Flig ht Search, Expedia, Skyscanner, Kayak, and others where we are matched up to other airlines and we have the bag flight free policy. They do not, but we're matched up on price. Are we seeing literal share shift? We did not see share shift.
Where some of the customer survey data said that we would, when you went into, as we went into channels and you could see customers making their choice, we did not see that share shift show up. I think most importantly, number three, we chose to back up and rather than just answer the bag fee, no bag fee question, let's answer the question of what do customers want? They want segmentation of the cabin. They want a variety of product offerings. They want access to premium. It puts that question in a different context. A lot of things, you know, a lot of things changed. What I'm very proud of is we pivoted quickly.
Yeah.
What you saw, you saw going yesterday, bag fees basically 'cause we also said we don't need basic economy. What became very clear is there is a segment of customers that want basic economy. You may not want basic economy and the restrictions, but we have a segment of customers that do. What we were doing at Southwest is our Wanna Get Away product, which is the lowest fare, was typically matched up to basic economy.
Yeah.
We were giving you everything for that price, and others were giving you very little. Number one, we were giving you far more, which costs Southwest at that low price. Number two, other airlines were booking very few of their seats at that low basic economy price. What they are doing is upselling you to the next fare. We were losing the ability to capture that upsell revenue.
Mm-hmm.
Number one. And then number two, we were giving you far more for that same price. So with basic economy, we can be matched up and take advantage of the ability to upsell. So a lot of things changed.
Yeah.
What I'm proud of is we pivoted.
Yeah.
We worked the technology and the operational changes. As of yesterday, it's in place and it went in flawlessly. Not one single problem.
All right. Maybe that's a good segue into, I'd like to get your perspective on, on maybe how the industry's changed in the last 10 years, right? Southwest, you know, historically has been the share taker, the margin leader, right? And some of the discount airlines would be at the same sort of area. Now that's not necessarily the case, right? You guys are a little under a little bit more margin pressure. The discounters are actually losing, some of the unbundled carriers are losing money, whereas some of the legacy airlines, which have historically been the share owners, are now all of a sudden doing better. You know, you've been around this industry way longer than I have. And I'd love to understand, you know, your perspective on the big picture things that led to that shift.
Like, what, what's changed in the industry profile? I think our investors would like to understand this too. Like, what's really changed maybe from 10 years ago to today that's created this shift in the landscape, which seems to me to be structural.
You said, you said I've been around a lot longer than you, which is a nice way to say I'm older. Is that right?
I don't know. I'm not sure. I age well, so I'm not.
You know, I've been in the industry, coming up on four decades.
Yeah.
One thing you learned is, is things are changing all the time. The last 10 years has been a, a time of huge change, maybe, maybe 15. I think it's, I think several things are fundamental changes that force the industry to change. Number one, costs have come up. Structural costs are, are much higher. A lot of that are these new labor contracts and, and work rules that are embedded in labor contracts. It, it, it fundamentally changes the industry because you've got to produce revenues that can cover those costs or you've, or you're gonna end up with unsustainable margins. That's a huge change. Number two, consumer demand has, and what the consumer wants has changed materially. Some of that we saw coming out of COVID. Some of that we see generationally.
You see younger generations that want aspirational travel. They want premium as an example. It isn't simply a price competition. Number one, fares must come up to cover higher costs, which obviously impacts all layers of the industry, but certainly impacts the ULCCs and the ultra low fare model, because you've pretty much got competitive industry wages and contracts at this point. Number two, the consumer wanting a variety of things from bare bones to premium to kinda super premium has created segmentation of the cabin.
Yeah.
'Cause you got one tube and you're trying to carry folks that want all of those things in this one tube. The only way to do that and drive revenues is to segment the cabin and offer what customers want. Southwest has certainly lagged there. We've been extremely successful for decades, but we've had one product, one model, very egalitarian, you know, open seating for all. That was terrific when that was primarily what customers wanted. Today, when customers want everything from bare bones to, you know, super premium, the only way to answer that is segmentation in the, you know, in the tube itself.
I think consumer expectations and desire for what they want, the rise in cost, and therefore the rise in having to really push revenue production, and then segmentation of the cabin, I think those are the three biggest changes that have really changed the industry.
That's, yeah, 'cause when you were talking about, like, the Wanna Get Away fare at the low end being matched up to basic, like, that seemed to me like almost the key for the unbundlers when they came into the industry, right? They came in with a product with a lower cost structure that was at the low end that was getting benchmarked against better products. Because consumers maybe hadn't evolved in their understanding of the distribution and what they were actually buying, there was an opportunity that almost gave them an advantage. As, you know, Delta and the other airlines have platformed that product, that advantage has fallen away. I think that's sort of what's shifted the pendulum. What do you think about that as a sort of understanding of that concept? Is that in the ballpark?
Yeah. You know, there's been a lot of debate, as basic economy and economy been a fundamental driver of this change that you're talking about? It's hard to know, but what we do know for sure, if you just take Southwest Airlines and so put aside, you know, the original, you know, unbundlers like Spirit.
Mm-hmm.
Just look at Southwest Airlines. Again, we were matched up. Our Wanna Get Away fare gave you everything basically at the price that basic economy on others was giving you very little. We were booking the vast majority, I have not given, we do not give the number, but I will just tell you the vast majority of the aircraft was booked in at that Wanna Get Away fare. Some sell up to the Wanna Get Away Plus, Anytime, and Business Select. What you saw in the other airlines that have developed basic economy was while they offered basic economy, somewhere in the 12-14% of the aircraft was booked in basic economy, a very relatively small slice. The majority was upsell from basic economy.
That's what makes it very difficult as Southwest and others to attack this question is we're selling most of the aircraft at the low fare with a lot of attributes. I mean, most of the aircraft, they're offering it at away and selling a small slice of the aircraft at that rate and then taking that upsell revenue. That's the change that, you know, it's just not tenable if you're going to maximize revenue per square foot in the cabin.
Mm-hmm.
For us, you're gonna get back to industry-leading operating margins and industry-leading return on invested capital. You just can't have that, that, what I described is just incompatible with those financial results.
Yeah. The mix issue. As you think about, you know, the next couple of years here in terms of implementing these changes and getting it rolled out, right? Obviously, you know, you're still doing some additional fleet reconfiguration, right? When do you think you get to full run rate across the entire fleet of being able to offer the currently, the recently launched new Southwest with the premium seating and the assigned seating, all that kinda stuff? When is that across the entire fleet?
I am just one quick tidbit. I'll answer your question, I promise. We have 63 of our aircraft that are converted to the new configuration with extra leg room. We are not selling it, but you get on and you see that extra leg room section. It looks great. We will do some things before we implement assigned seating. We will tell our customers at the last minute that, "Hey, you are flying on one of the aircraft that is in the new configuration." You can do a gate upgrade, make sure you are on early and have access. The main thing is what we are seeing as a proof point is the NPS score on those aircraft that are outfitted already with the new configuration is running six points ahead of other aircraft.
Without customers even knowing it, they're giving us a lot of credit for the fact that this layout is much better because we already have terrific in-cabin NPS scores. Six points is a lot.
Yeah.
I think what your question though is, is one of the huge misconceptions. I'm very proud of Southwest. I'm proud of our plan. I'm super excited about our future. I think we are undervalued at current levels. I think folks are underestimating the value of these initiatives and how fast this $4.3 billion is gonna come online. I think we have a lot of folks going, "Well, you know, I see the initiatives, but you gotta show me." You know? I'll take a look. You know, this is a 2026- 2027 story. This stuff is coming online right now. Yesterday we implemented the bag fees and basic economy. We're months away from selling assigned seating. We're months after that that we'll be operating assigned seating. We're well ahead of our cost plan.
We'll basically exit this year at a cost run rate, a cost takeout run rate that is what we said we would hit in 2027.
Mm-hmm.
We're not a show me in 2027 kinda story with our plan. This stuff is showing up right now. The vast majority will be in place by the first quarter of 2026, which means you'll see a lot of benefit this fall in the EBIT number. You'll see the majority, if not all of the rest, that gets you to that $4.3 billion in 2026. This isn't wait three years and see if Southwest can do it. This stuff's coming online right now. I think that's the biggest thing that is underappreciated by our plan, that it's happening right now. Number two, that it's low risk because we're putting in things that the industry has done forever. There's low risk implementation. There's low risk in the financial benefit paying off.
Number three, we aren't stopping here.
Mm-hmm.
Putting in the things that I've described isn't the end of the journey for Southwest. We will continue to pursue the consumer. If the consumer wants other types of premium, they want us to fly other long-haul destinations, which could lead to aircraft questions. I'm totally making all this up. This is not a plan. The consumer demand in certain cities for us for a lounge is super high. My point is, rather than say, "No, Southwest Airlines does not do that," you must follow the consumer or you are forever vulnerable to others that can offer that to the consumer. Even in cities that we are very strong and we are the largest in, in roughly half of the 50 largest cities in the United States.
Even there in a Nashville and an Austin and a, you know, as an example, people love us. We also can't, for many of our folks that love Southwest, we can't do things that you, we can't provide products that you want, like a first class. We can't get you to long-haul, international destinations. If a lounge is important to you, we don't have a lounge. I'm not predicting any of those things. What I'm telling you is rather than be forever vulnerable, we're gonna follow the consumer and what the consumer needs.
Isn't part of the premise of the conversation we had before was the idea that the consumer does want some of those things? Are you then by extension saying that this is on the roadmap that you're not ready to talk about? Or, like, how do we think about, you know, things like in-flight entertainment, things like power?
Yeah.
SBC, things like a different, a segmented actual cabin, like interior.
Yeah.
Cabin modifications to kind of reinforce that red velvet rope, right? Which we as humans like to pay to jump over. Like, how do we think about that?
First, the things like power on the aircraft, larger overhead bin, vastly improved Wi-Fi, that's already coming.
Mm-hmm.
It's on a lot of the fleet today. Those things are already being solved. The next set, you know, a lot of things in the industry take a long time to implement. If you're gonna go, you know, if you're gonna make some of the changes that I described as hypothetical, it could require that you think about a different aircraft. And aircraft orders are really tough right now because of the constraint, you know, with the manufacturers and the OEMs. What I'm promising you is that we will never lack a where we head five years from now strategy. You must have those things because many of those things take that long to implement. We're working through that strategy question today.
What is, you know, the biggest focus is on execute what is on the plan, hit the $4.3 billion in EBIT contribution in 2026. That's number one. A quick follow number two is what's next and what's next and what's next is that intermediate to long-term strategy question. We're working through that right now.
Yep.
There's no reveal today. Just know that,
Just wanna know where your head's at. Like.
Just my, where my head is, it's very simple, is we will serve our customers, both the customers we have today and the customers that we aspire to have tomorrow.
As you think about that change, right? I did notice you guys had petitioned the DOT for broader access to international markets under open skies. You know, are you contemplating a more diverse fleet? I think one of the things that we've sort of come to know and understand about Southwest is one of the things that makes it good is it's simple, right? The 737 and the commonality across the fleet types gives you a lot of flexibility. Your union contracts are all geared around that in terms of pay per trip and things like that. Like, are you contemplating, you know, broader strategic shifts around the composition of the fleet?
Yeah. We've recently, yeah, we had an open skies submission. We joined IATA. A lot of that is just to make, I mean, we've been serving international markets for over a decade. Again, closer in, you know, Caribbean, Mexico, that kind of thing. The open skies application is really intended just to make these processes easier. As we decide that we want to move into other geographies, it makes that decision and then re-upping that decision, it just simplifies everything. IATA is very similar. At the same time, there is a lot that we can learn from our partners by being a member of IATA. I wouldn't take those as signals of future strategy. Those are really more about being more efficient in terms of how we do apply for new markets.
Now, that said, as we do think about adding, for example, long-haul international, that open skies application joining IATA certainly helps those decisions. But we're gonna be thoughtful. We're gonna step through the strategy question carefully. The next strategy questions drag with them larger implications, things potentially like fleet.
Yeah.
We'll be thoughtful. Nothing to reveal today.
Okay.
Again, this, we'll be ready to talk to you, you know, I think in 2026. This isn't years away. So there's work underway to, number one, finish what we have in play. And then number two, lay out that next strategy, which I would, I would think about that as a 2026 question.
Does that also include maybe looking at narrower gauge aircraft, maybe to serve some of the markets that are harder for you to get to in a MAX?
You're very persistent.
No.
Kidding. You know, I think we want to, again, no answers today except that we are going to pursue our customer and what they want. You know, I mentioned Nashville as an example. Here is what we want. Here is what we are doing. We are beloved in Nashville. We have a terrific schedule in Nashville. We have great service and great people and great customers. They love Southwest. I hear from them all the time. Because we cannot offer certain products or get you to certain destinations, even customers that love Southwest, we force you to fly on somebody else and we then force you to carry somebody else's co-brand card. Either that is something we accept forever and just say, "You know, that is part of what comes on that, that is part of what comes along with the Southwest model."
We're vulnerable, or you do something about it. My commitment is we're gonna study that. Increasingly, we want to give you as a consumer fewer and fewer reasons to not have to choose somebody else.
Okay. As you think about sort of evolving the network, I will not ask you again about different aircraft types. As you think about evolving the network, one of the things that we have talked about in the past is that balance between the dots on the map and the thickness of the lines. Obviously, what I am talking about there is in terms of the number of markets that you are serving versus the frequency and the density of the traffic between them. You know, 20 years ago, smaller number of dots, much thicker lines. Today, I think post-COVID pushed out a little bit more. Are you thinking about the airline going forward as you have made some of the product changes as still predominantly a point-to-point system?
Are you gonna start also be looking at things like, you know, banking at flights and getting more connecting traffic to try to kind of, again, protect that fair ladder a little bit?
A part of the changes you described was due to 9/11 and then just over years the decline in short-haul markets. Short-haul markets are down materially from where they were in the 1980s and the 1990s. Some of that is pricing. I think that's a contributor to what you described. You know, if you think about what does Southwest, what are our core strengths? Put aside bag fees and assigned seating and extra leg room. Our core strengths are several. Number one, we have by far the best network in the U.S. for the consumer. We can get you to more points from more places nonstop with the best schedule, period. Number two, we have the best people that offer the best service.
Now, whatever that service is gonna look like, we have the best people that offer just terrific service. Number three, we have incredible financial strength. We've always had an investment-grade balance sheet. We've always had financial discipline. Right now, we basically have just barely net cash but are very low leverage. We will always maintain that. The core strengths of Southwest are not gonna change. You look beyond that, and again, you've got to serve the consumer. Naturally, as short-haul has come down and we've added more dots and we are big in, again, almost the largest in almost half of the top 50, that's not gonna change. We're more of a hybrid. We have a very strong point-to-point network.
As the network widens out, naturally, you're gonna have to have more connectivity, especially if you wanna drive load factor. You are gonna see us provide more connecting opportunities that push load factor. A lot of that's coming actually in August of this year. No, you're never gonna see Southwest Airlines have three hubs and connect you to everywhere else. That's just not our model.
Okay. You mentioned before, you know, aircraft delivery constraints. You know, what's the state of affairs with Boeing in terms of them being able to ramp up production? I know it's been a little bit of a drag on, you know, where you'd wanna be from a fleet standpoint, pushing you to push some bigger aircraft into smaller markets, that kinda stuff. Can you give us just, like, an update on where you are, how you're thinking about that, that ability of Boeing to meet the current state of demand and then how that also impacts the cost side of the story over the next two years?
Yeah. Again, I, I, you know, I don't wanna speak for Boeing, but they, but, I think Kelly's done a fantastic job. There are a lot, a lot of problems to be dealt with in every business unit, you know, with the government, with, with each customer, so complex, labor unions. And he's a good, he's done an excellent job knocking those down sort of one by one. For us, we, we see while we're not getting aircraft at the rate we would like or at the contractual rate, what we see is much better quality, much better stability of the deliveries. We're, we're seeing the relationship between the factory floor and management really improve. So I, what I see at Boeing, I really like. We're counting on about, we're counting on 38 deliveries this year.
We think that could be upwards to 50 or slightly more because of the improvements at Boeing. They are headed in the right direction. This is a long play. Those issues, issues at Airbus, the issues in particular with the gear turbo fan and the restrictions there, there are constraints that I think provide a constructive backdrop to the industry for years and years ahead of us. These are situations that take a long time to improve. I definitely see the improvements at Boeing. We are eager to get more aircraft. The good thing is we have a very, very attractive order book of a lot of aircraft at very attractive pricing. Our growth has been relatively low.
If we do not take all those aircraft for our own uses, then we will monetize those into the market. Our pricing compared to what the market pricing is is very strong. Whether we take the aircraft or we decide to sell the aircraft into the market, we are going to monetize every dime of value that we have in the Boeing order book.
Okay. As you think about other constraints kind of affecting the industry, obviously FAA and the redevelopment of an aircraft control system is very topical. What are your thoughts on the ability to actually get that done? I mean, it's been lifetimes of trying to fix this.
Yeah. Fixing, yeah, fixing, modernizing the ATC system has been a four, four-decade discussion at this point.
Yeah.
I think for the first time, I'm optimistic that we have the ability, the momentum, and the support to actually get something done. I've had a lot of conversations with Secretary Duffy, and he is fully behind all of this. The administration is fully behind it. It's a big number. You know, this is tens of billions of dollars. The work I think now is on the Hill to secure the funding and to secure the funding across appropriation cycles.
Yeah.
I'm optimistic that we can get it done. I'm optimistic that they're onto the right problems. I do think that we will get there. The United States needs it. We must have a functioning air traffic control system to allow all of us to grow, to inspire consumer confidence. I think we'll get there.
Any thoughts on the governance structure, right? 'Cause obviously, you know, Canada went through this. Obviously, it's the size of California, not necessarily the same magnitude of population and density and complexity. But, you know, is the FAA the right agency to lead this? Or do you think some other structural reform would be required to kind of really get the problem solved?
Yeah. These are big, complex problems. And, you know, there have been times in the past where there was a run at privatization. I do not see that in myself. I do not see that on the table. Number one, though, you have to have the will to go do these things. I see the will to go tackle the problems. Number two, you have to have a detailed understanding of how to tackle the problems. We at Southwest, we have actually been a piece of that. We have been through modernization of our own operational systems considerably over the last three years. And we had a team that went to the FAA to talk to them about how we broke our issues into small problems to solve them. The FAA was very receptive.
The Secretary was very receptive. I do think that you'll have to see some level of oversight to put in the proper governance to just oversee this issue because the problems are so complex. There's so much money. Again, I'm confident that we have the will, the focus, and can get the funding to get this done.
You mentioned earlier before, one of the strengths of Southwest is the balance sheet. You guys are taking on a little bit more debt than you have in the past. How should we think about the capital structure, going forward?
You know, we right now, I mean, we are, well, first, we're not gonna stray from what has made us successful. So we are committed to a strong investment-grade balance sheet. We're committed to being efficient in our capital structure and capital allocation. You're not gonna see us do something crazy like lever up to do share buybacks as an example. Right now, we sit at kind of roughly, we're slightly net cash. So we have very low debt levels.
Mm-hmm.
We have very low leverage and leverage targets. You know, we may play on the edges there in terms of being more and more efficient in the balance sheet. We're gonna stay investment grade, and we're gonna have the appropriate degree of leverage. No, I don't see any fundamental changes coming there.
Okay. You guys have been buying back stock, right, as you have been adding a little bit of leverage. As you think about the price you're paying today, obviously, that's a statement of confidence, you think, in terms of the earnings inflection. You know, if you were to go ahead maybe 12- 18 months and look back and say, "We didn't get close to the $4.3 billion." Or, "We got close to the $4.3 billion." What are the things that make it not happen? Is it all macro-related? Or is it also possibly some risk that the consumer reaction to some of these changes is different than you might have expected? Like, what do you worry about when you think about this? 'Cause it is a monumental set of changes, you guys.
It is a large set of changes. I, I again, I think we think obviously again, just think about $4.3 billion in EBIT layered on top of where our earnings are today. We think we are significantly undervalued, which is why we've been out there buying stock. We're finishing up the $2.5 billion share buyback authorization. We'll finish that up in July. We don't think the market has recognized the value of our plan. On the risk, you know, again, the risk is always going to be acceptance of the changes and implementation and execution of the changes. The execution is going just flawlessly. We're seeing terrific, you know, just terrific operational execution, cost execution. On the initiatives front, again, all of this stuff went in yesterday, and it went in flawlessly.
Everything for assigned seating and extra leg room is on track. I do not see risk there. On the consumer adoption, because the things that we are doing are things that basically every other airline has done, and number two, these are things our customers want. They want premium. They want extra leg room. They want, 80% of our customers want assigned seating. 80%-85% of the customers who will not choose us want assigned seating. They do not choose us because, number one reason, we do not have assigned seating. Even on the policy changes, you take bag fees. All you have to do is hold the Southwest Airlines Chase Rapid Rewards Visa to get a free bag. Even the policy changes, we are doing those in a way that are better than the competition. You take our basic economy fare.
For others, you have to pay an exorbitant, I can't remember if it's a change fee or refundability fee to then make it reusable. A lot of times, that fee is greater than the value of the funds you're trying to reuse. At Southwest, we're giving you six months of reusability even on that basic economy. I don't worry about customer defection. I don't worry about execution of the initiatives. I don't worry about the consumer not understanding them because they're industry standard. What I focus on is I don't think the investment community has fully valued the initiatives. $4.3 billion, number one, or the fact that this stuff is either already in or it's coming in over the next six months. I'm super bullish on Southwest Airlines, as you can tell.
I'm bullish about where we're taking the company. I'm bullish about the fact that we're moving to meeting the customer's needs. I love the fact that our employees are super excited about the changes.
All right. I think the speed at which you guys have pivoted against some of these things is definitely admirable. We want to thank you for coming out. I think this is probably a good place to leave it, especially because we're coming down to the 10-second mark. We like to be on time here when that is.
Hey, thank you so much. Appreciate it.
Thank you so much.
Yeah.
Thanks for joining us.
Thank you all.