All right, folks. Moving right along. I think this is our final presentation before an amazing boxed lunch that I'm sure everybody is excited for. 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 CEO at the end. Andrew Watterson, thank you for joining us, Chief Commercial Officer. Tom Doxey, certainly no stranger to this event. Where did Danielle go? 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. Bob, let me turn it over to you for any sort of prepared remarks.
You bet.
We'll have a nice healthy chat.
All right, Jamie. Hey, thanks so much. Yeah, we're bringing up near the rear here, so that's all right. Yeah, we're no stranger. Thanks for having us. We appreciate it. Like to be here every year. I've got just a couple of remarks. We don't have a formal presentation. We really wanna have a conversation and talk to you about what's going on at 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. 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 number one airline ranking for 2025. Very proud of our people in that execution. We're seeing strong proof points that the initiatives are working, and that is in two categories. Number one, customers are buying the products. They want the new products that we are selling. Then it is showing up in the revenue performance. The revenue, we'll talk a lot about that today. You've heard that from other carriers. There's broad-based revenue strength. We are seeing specific revenue strength in the products, the new initiatives and products that we're selling at Southwest.
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 wild card is fuel that faces all of us. Again, we've got no presentation. We've got some questions from Jamie. We wanna 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. That's part of the reason there.
A big piece of that too is that our EPS guide that we gave you in January stands. Another reason that we didn't have an 8-K out this morning. 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. As far as we have visibility, that demand strength is across all forward months. Unique to Southwest Airlines, we're seeing a lot of strength in the demand for our new products, the seat ancillaries. 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.
$1 billion in bag fees a year, 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. 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. 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.
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.
Got it.
Let's get to that.
Grab a seat. Strap in.
Uh-oh.
I do wanna talk about the evolution at Southwest.
Yeah.
You know, I think I joked with you once or twice, but primarily with Gary Kelly. As the industry was evolving, I felt, you know, this goes back over a decade. I felt that Southwest was failing to evolve, failing to keep pace with the industry. I used to joke, you know, with Gary, and you know, middle age kinda sucks, but there comes a point where you can't fit in your college jeans anymore, and you just kinda have to, you know, 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.
Kind of a two-part question. One, in terms of the execution of evolution over the last year, I'm curious what grade you would give yourself. Second, have we put the lion's share of Southwest evolution behind us? If not, what inning are we in?
Yeah, I think, first off, I don't have any of my college jeans. They'd be 45 years old at this point. I have no idea whether I'd fit into them or not. I understand your question. I don't spend any time thinking about what could have been 10 years ago.
Oh, sure.
five years ago.
Yeah.
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. It is all about meeting the customer's needs. What we know is that customers love Southwest Airlines, highest NPS scores, best operation. But if we don't offer a product, if we don't offer it and they want it, they cannot fly Southwest. We're committed. 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. About 80% of customers that do fly Southwest wanted assigned seating rather than open seating. Timeline 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.
Yeah.
The next point of your question in terms of. 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. What comes next is going to be on the product side. It's gonna 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.
Again, nothing to report today specifically, but this is all about meeting the needs and the demands of your customers.
I guess building on that, and you're not gonna hurt my feelings if you don't remember this, but I think about six or seven quarters ago, I asked the team what the value proposition of Southwest really was. 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. Maybe my competitors do that, but just indulge me for a second.
Yep.
I asked a question. I was already in the queue. I didn't know what I was gonna ask, and my son, who had just moved to Seattle, texted me, and he's like, "Dad, should I get the Delta credit card or the Alaska credit card?" I said, "Well, I don't know. I'm busy. What about the Southwest card?" He said, "Well, Southwest, yeah, just doesn't really appeal to me." That happened about 10 seconds before, you know, I had to come up with a question. 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, you know, start from scratch? Quite honestly, I think the team stumbled a little bit. It bounced around. I did not think it was an A+ answer.
I'm gonna give you a second chance.
I hope that's not too obnoxious.
There's been a lot of evolution and sitting far enough apart.
Yeah, yeah. Not anymore.
He just graded you a-
Yeah. Not any more obnoxious than normal.
It's true.
No, they.
He's still pushing his bank's credit card, though. You gotta give him that.
Your value proposition is things like price. For a long time, we really laid our value proposition at the feet of one thing, policies.
You know, Bags Fly Free is a policy. Flight credits that never expire is a policy. 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 wanna go? The evolution of the product is really meant to attack that.
Okay.
Make the product more relevant to our customers, which means they're gonna wanna get the credit card. The credit card comes with amazing benefits like free bags and higher seat choice, those kinds of things. 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. It's very clear that customers have that high on their value proposition list. 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.
Yeah.
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. 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 the 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. 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.
Yeah. It's true that we have a full range of customers. Our higher end customers, the over 200K household income, we, you know, have a fairly high proportion. Slightly less than the big three, 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. 'Cause one of the tenets of, like, your appeal is your schedule. In a place like New York, where Wall Street analysts may be located, we're not terribly relevant. We bring people to New York. We're not really a New York's carrier. There's, like, at least four that think they're New York's carrier. We're not one of them. We are the carrier in Nashville. We are the carrier in SoCal.
We are the carrier, you know, in many places, Phoenix, Denver, lots of places around the country.
Like at the Laguna conference, everybody flies you in.
Exactly, yeah. In those places, our predicament was we would have all these people who travel us short haul, right? If somebody needed to go from Orange County to up to the Bay, maybe they would fly us, you know. Because we have lots of options around the Bay, not just SFO. But if you know, if you're flying longer haul, frankly, our product did not appeal to you. Our customer set shared their wallet with our competitors when they were flying further afield. Interwest, we had them. They would go east of Denver. We didn't. Having a product now that appeals to these people so they can share their wallet back with us is really the dynamic we're after here.
It's really starting to pay dividends 'cause people found they willingly will give us more money 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 worked well if you're going, you know, San Diego to Sacramento, but didn't work well if you're going to the East Coast.
Right. This is obviously the first time in your history that you've really made a conscious decision to lean into premium demand. You're kind of starting from scratch and you don't have, you know, lie-flat international. You know, I'm not going in that direction. I'm just trying to think. You know, Delta is at 49% of revenue coming through premium channels or for premium products, I should say. I assume United is in that ballpark. Air Canada just got off the stage. They're at 25-30%, but they're moving north. How high can your well, one, how are you gonna define that number? Given what you currently have on the drawing board, where can you take that? I don't see you going to 49%.
I mean, there's just not that much of the load that's allocated to, you know, better products. How do we think about the roadmap for further leaning into premium? That's the question.
Yeah. 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 fare buy-ups between product choices. There's work to optimize and dynamically price things like seat ancillaries. We have a lot of opportunity. I mean, the products are performing terrific, both from a demand and a pricing perspective, but we have an opportunity to continue to optimize that. Based on those learnings and sort of where we might need to look, we'll continue to look at other more premium. It really leaves two things. It leaves sort of true first class and then long-haul international.
Right.
which would drag something else. We're focused on optimizing the products in place.
Okay.
I would also say that if you look at all of our guides for the first quarter, it would imply that Southwest operating margins would be back in the hunt at being top of industry.
Yeah. Yeah.
I think that's material and that what you've been told over and over and over is you can only be there if you have premium and you have long-haul international, because that is where the revenues and drivers are coming from. It tells you something about our underlying product strength, which is the best domestic network, the best people and best service, the best operation as backed up by The Wall Street Journal rankings, and now a much more appealing product to our customers without adding long-haul international and two-by-two first class. 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 two things.
Expand on that. Do you think that's largely a function just of the network, the momentum that you have, the cost structure? 'Cause 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 Delta's versus Southwest.
I think it's all.
Yeah.
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 operations. It all comes together, and now with a product offering that appeals to folks that wanna fly longer haul to business, to folks that want some level of premium, and it's very hard to tear it apart. You put all that together, 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.
Yeah
as we continue to 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? You know, how you track that.
Andrew, you wanna take that?
Yeah. We're seeing 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, you know, of Basic, but also product-based sell-ups. Corporates are responding well on the price side and the volume side. 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 the month to go, and corporate books close in, as you know. Quite the momentum.
I'd reiterate that in this room today, even though you weren't here. That's a cool soundbite.
Yeah. Corporate is really working for us. We kind of professionalized that, stood it up a couple of years ago. We have the infrastructure, we have a sales force, we're in the distribution channels, and we just now have the product to go with it. Now our sales force, armed with a better product, is winning more business for us.
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? For example, at J.P. Morgan, 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've, you know, got friends around the industry. For other businesses, are companies reimbursing business travelers for that, or is that coming out of pocket?
It's broadly reimbursed. Now each-
It is. Okay.
Each company, each industry is a little bit different, and that.
Sure
that moves with the economy. Broadly speaking, corporates will book Basic, number one.
Yeah.
Number two, allow you to add on a bag or a reasonable seat that's within the coach cabin very easily. The very high end of consultants and banks may offer, you know, buy first class domestically.
Sure.
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.
Okay.
Including, allowing you to expense the Extra Legroom section.
Yes.
Right.
Yeah. Yeah, that was the point.
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, you know, social media posts, so they wouldn't let me, you know, move one seat over. The flight attendant, you know, they're having to police things. I mean
Yeah
How much of a strain is this putting on a culture that had developed sort of decades of muscle memory?
Yeah.
I think I separate it because there were actually two things going on.
Okay.
It was an incredibly successful implementation of all these things. With anything that is huge change, overnight, we changed our seating and our boarding completely.
Yeah.
Flipped a switch overnight. By the way, that next day when we operated in that new environment, we beat Delta, American, United in on-time performance and cancel rate.
In the middle of a large storm, right?
That's exactly right. I'm very proud of it. We put all this stuff in and still beat the network carriers in terms of performance. Any huge change, you're gonna have things that you discover. We have discovered the way some of the seat assignment algorithms work. It was clumping folks, and that's been fixed. In some cases, somebody that is A-List, so their tier, they ended up in a lower boarding group than we intended. This is all designed to be configurable, so we can literally change it on the fly. Those are being worked. I would put that in a very small but sometimes noisy category. It is a very small percent of all folks that are flying.
As you know, social media has a tendency to amplify things. I would put that all in a category of expected tweaking of the product after it was implemented. That's moving very quickly. Were our employees on board with this evolution of Southwest Airlines? Absolutely. I've been at Southwest 38 years. I've never seen, especially the frontline, embrace change because they saw many things. Number one, they're gonna 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 pre-boarding issues that we were known for.
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." 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. Bob, thank you for the quote, "not more obnoxious than normal," I think I'm gonna use that again, to describe Jamie in multiple ways.
I was just responding.
love that.
Is it true?
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. When you look at the American Express Delta relationship, they both built up lounge networks kind of independently.
Right.
American Express came maybe a little bit later, obviously after the Delta lounge network. Delta was already fully established. 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.
Yeah.
Is there an opportunity for Southwest and Chase, you know, for you to maybe piggyback off of some of that? Is there a way to maybe sort of co-brand a lounge 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.
Yeah, I think I would say nothing to report.
Like Delta.
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 access. Obviously, yeah, we have a terrific and strong partner with Chase, so to the extent that our wants and needs intersect, that would be wonderful. Again, nothing to report. I would just tell you that the way we think about something like this is, it is, again, in the context of pursuing what customers want from Southwest, because we wanna give you fewer and fewer reasons to fly somebody else.
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. It's got to fit both. We wouldn't do something that violates that tenet simply because it is highly favorable to our customers. 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. Tom, last year at our conference, I think it might have been day number two or something like that for you.
Yeah. I do remember when you asked me a very specific question on day two.
Yes. Thank you.
I'm the obnoxious one?
I owe you an apology for that.
I don't know, did Jamie grade your answer?
Ooh.
Yes.
Did you hear Jamie said, "And I'm the obnoxious?
Yeah, exactly, because it was a little unfair of me. For those in the room or on the webcast, what I asked Tom a year ago was, you know, how do you think about the balance sheet and leverage targets and so forth? 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, you know, all the change we talked about. Can you maybe just, you know, eventually, as last year progressed, you did land on some balance sheet targets.
Can you maybe just talk about sort of that dynamic between, you know, the boardroom, you know, I know you're not gonna 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?
Yeah. 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. We put guardrails in place, gross debt to EBITDAR between 1 and 2.5 x. The idea there is, you know, everybody can see where our ratings are, and you also know the components that make up those ratings. We were very deliberate about putting guardrails in place that would 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. 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.
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 save versus where you could have raised unsecured debt? Why the pivot? Was it just to keep some secured lenders happy, or why'd you do that?
Yeah. There was a bit of savings that we have there. You know, you talk with folks about the level of unsecured assets that we had, and I'm sorry, unencumbered assets that we have. You know, we have upwards of $40 billion of unencumbered assets. You know, you talk with folks, some of whom are in this room today, and they tell you know, you get credit for having assets in that category, but it kind of gets to a law of diminishing returns. We did take a very small portion of that group, and we're gonna save a little bit of borrowing costs there as we did that.
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 wanna ask you. When I think about, gosh, Muse Air, Morris Air making a run on Frontier in bankruptcy, the ATA, involving 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've 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 jet fuel environment.
If we are, or better yet, the next downturn that comes along, should I still consider Southwest as an entity that uniquely tries to harness the power of a downturn, or you just at a certain size and scope now that the plan for the next downturn is just kinda hunker in the bunker and make it to the other side, and 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.
I should have started with that one.
I think it's all. You almost have to put M&A aside because it can be more attractive in certain periods. It really comes down to the specific carrier and their reasons, network. You know, can this be approved, synergies, all the fleet that really make that attractive and which I think actually drive the transaction more than the downturn.
Yeah.
I would just say that we don't comment on those kinds of things. You know, 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. None of us know what fuel prices are gonna do, whether this is a one-month spike, it's a nine-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 focus on agility, cost discipline, which you're seeing come through the quarters. We are low-cost, we have great fares, and we have tended to win in periods of a challenge for consumers. Gas prices go up, consumers pull back a bit. You see things like premium pullback, and that's where Southwest has won. 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. This is so. It's only been a few weeks.
Yeah.
It's very hard to understand or know what the environment's gonna create. 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 three months, nine 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. Excuse me. Could you hand that, please? Thank you.
Hi, Bob, and thanks, everyone, for coming out.
Sure.
My question is, as you kind of look back on the results of the changes so far, really important ones like, you know, the assigned seating and the boarding groups, you mentioned a lot about optimizing. 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 the program that the other airlines are doing, focusing on a hub system? How would you say that's affecting your margins?
Yeah. It is all. Our initiatives and the reach of the product, reach of the network will continue. Adding partners, as you know, we've added distribution. 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, one, and two, produce more value for our shareholders.
Gentlemen, thank you very much. Look forward to.
Andrew, thank you.
Next year. Thank you.