Southwest Airlines Fourth Quarter 2025 Earnings Call - New Product Rollout Drives Guidance of at Least $4 Adjusted EPS for 2026

Jamie, Conference Call Moderator: Hello, everyone, and welcome to the Southwest Airlines Fourth Quarter 2025 conference call. My name is Jamie, and I will be monitoring today’s conference call, which is being recorded. A replay will be available on southwest.com in the Investor section. After today’s remarks, there’s an opportunity to ask questions. To queue up for an opportunity to ask a question, please press Star and One. To withdraw your question, the command is Star and then Two. Now, Danielle Collins, Managing Director of Investor Relations, will begin the discussion. Please go ahead, Danielle.

Danielle Collins, Managing Director of Investor Relations, Southwest Airlines: Thank you. Hello, everyone, and welcome to Southwest Airlines’ fourth quarter 2025 earnings call. In just a moment, we’ll share our prepared remarks, after which we will move to Q&A. Joining me today are Bob Jordan, our President and Chief Executive Officer, Andrew Watterson, our Chief Operating Officer, and Tom Doxey, our Chief Financial Officer. Before we begin, a reminder that today’s session will make forward-looking statements which are based on our current expectations of future performance, and our actual results could differ materially from expectations. Also, we will reference our non-GAAP results, which exclude special items that are called out and reconciled to GAAP results in our earnings press release. With that, I’ll turn the call over to Bob.

Bob Jordan, President and Chief Executive Officer, Southwest Airlines: Thank you, Danielle. Good morning, everyone, and thank you for joining our earnings call today. We’ve been looking forward to 2026, when all the incredible work undertaken by the Southwest team will show dramatically improved results. First, however, a few comments on this past year and our fourth quarter 2025 results. The fourth quarter capped a year of meaningful transformation and accelerated execution at Southwest. We finished the year and the quarter strong for both revenue and cost, achieving full-year EBIT of $574 million, which was above our prior guide of $500 million. Operating revenues of $7.4 billion for fourth quarter and $28 billion for the full year were quarterly and annual records. Our fourth quarter and full-year results underscore that our initiatives are generating the desired results and provide great momentum as we head into 2026.

We also ran a terrific operation, coming in number 1 in on-time performance, completion factor, and the lowest extreme delays in December, and our strong operational performance throughout the year led to Southwest earning the top spot as The Wall Street Journal’s Best US Airline of 2025. I’m proud of the results, but I’m especially proud of our people, who are the ones getting this done every single day, day in and day out. Before moving to 2026 and the exciting year ahead, I want to underscore some of the key initiatives that we successfully implemented in 2025, and here are the larger ones. We changed our product offering, including the implementation of bag fees, addition of a basic economy fare product, and flight credit expiration. Optimized our Rapid Rewards program, including variable earn and burn rates.

Amended our co-brand credit card agreement with Chase, including new benefits and improved economics. Launched free Wi-Fi for loyalty program members in partnership with T-Mobile. Expanded our online presence through new partnerships with Expedia and Priceline. Outperformed our $370 million cost reduction target for 2025, including the first layoff of non-contract and management employees. Added six new airline partners, launched Getaways by Southwest, added Red Eye flying, reduced turn time to increase aircraft utilization, deployed new technology to boost operational reliability, a key enabler of our top spot in The Wall Street Journal ranking of airlines. Discontinued the fuel hedging program. Completed $2.6 billion in share buybacks in 2025, representing about 14% of shares outstanding, while maintaining our investment grade rating. On Tuesday, we implemented assigned and extra legroom seating, which required retrofitting over 800 aircraft.

It is just a stunning list of initiatives undertaken by the Southwest team, all implemented on time and all delivered with excellence. In my 38-year career in this industry, I cannot think of another airline that embarked on so many fundamental changes to their business model and in such a short time, let alone executed so well. The list of initiatives falls into two categories: one, focused on offering a significantly better experience for our customers, and the other focused on revenue growth and operational efficiency. Collectively, the large investments we have made result in a fundamental transformation and evolution of our business model while building on our core historic strengths, the largest domestic network, a strong balance sheet, unmatched customer loyalty to our brand, outstanding service and hospitality, low cost and operational efficiency, our unique culture, and especially our unrivaled people.

This transformation is expected to result in a significant step up in how we grow earnings as compared to the past few years. For 2026, we are forecasting earnings that are dramatically higher than 2025. For the full year, we are not yet guiding an EPS range. While being well above Wall Street consensus, we are providing EPS guidance that represents the lower end of our internal forecast. With that qualifier, we are guiding full year 2026 adjusted EPS of at least $4, which is materially higher than 2025 adjusted EPS of $0.93. Let me share our reasoning why we are not yet providing an upper range for 2026 earnings... Assigned and extra legroom seating became operational just two days ago, and we see earnings upside based on how booking behavior related to those initiatives unfolds.

Specifically, upsell revenue from close-in bookings, which are more closely affiliated with business and price-flexible customers. And second, we expect growth in both the business and leisure customer base, driven by our new, more attractive product offering. We expect to have better visibility to the upside potential from these initiatives in the next month or two, and we’ll provide range-bound EPS guidance when the current quarter results are reported, if not before. Also, going forward, we plan to follow the industry norm of providing guidance to investors using broad company forecasts and results. This means we will step back from providing details and specific numbers around activities such as Bag Fees, assigned seating, the co-brand program, and so on. I believe that Southwest’s 2026 earnings growth will stand out when compared to other major airlines.

This is largely due to the nature of the many initiatives we have implemented, initiatives that were previously implemented by other airlines over the last decade or more, where Southwest is implementing these initiatives now, and the work will not stop here. We see meaningful opportunities ahead to grow earnings from areas such as route network optimization under a backdrop of improved operating margins in the business, increasing our corporate customer base, driven by product changes that better appeal to the business traveler. And this is a long-term journey, and we believe that, executed well, we will see the rewards and additional cost takeout and efficiency efforts. We have an exciting year ahead as we continue to deliver for our customers and for our shareholders. I am incredibly proud of our people.

They are the ones getting it done every single day, running a strong operation, serving our customers, and transforming our company for the future. With that, I will turn it over to Andrew.

Andrew Watterson, Chief Operating Officer, Southwest Airlines: Thank you, Bob. From a network perspective, Q4 capacity grew 5.8% year-over-year, despite the fleet count being roughly flat year-over-year. Efficiency initiatives, like reduced turn times and the introduction of Red Eye flying, allow us to maximize asset utilization while maintaining industry-leading reliability. For the full year, operating revenue increased 1.7% year-over-year, supported by initiatives kicking in and strong demand that drove both traffic and realized fares. My comment on realized fares reflects the effect of buy-ups from the changes we implemented. Fourth quarter RASM, which was impacted by the FAA-mandated schedule cuts, was down slightly at negative 0.2% year-over-year. Building on the strong foundation, we’re entering Q1 with momentum and confidence.

We expect RASM to increase by at least 9.5% year-over-year, with contributions from yield, load factor, initiatives, and loyalty programs. Q1 capacity is expected to grow between 1% and 2% year-over-year, even as we operate with approximately 7 fewer aircraft, a reflection of continued efficiency gains. Importantly, Tuesday marked the launch of 2 major product enhancements: Assigned Seating and our Extra Legroom offering. All aircraft conversions, technology development, and employee training were completed on schedule. Customer response has been overwhelmingly positive, and these products are expected to be meaningful contributors to further revenue growth and customer satisfaction in 2026. I want to take a moment and reflect on the changes implemented 2 days ago. Overnight, we made the switch to Assigned Seating, implemented a differentiated service in our new Extra Legroom section, and changed our boarding process.

On Tuesday, we operated more than 3,200 flights as a different airline, while continuing to deliver our usual high-quality operation, a testament to our incredible team. These initiatives aren’t just enhancements. They represent a fundamental transformation in how Southwest delivers value to customers and shareholders. We’re evolving our product to meet the needs of today’s travelers while staying true to the Southwest brand. In summary, Southwest is executing with discipline and delivering results that position us for sustained success. Our operational reliability, product changes, and strong demand trends give us confidence as we move into 2026. I’ll now turn it over to Tom.

Andrew Watterson, Chief Operating Officer, Southwest Airlines7: Thanks, Andrew. We delivered a solid quarter with an EBIT of $386 million. We continued our strong cost performance with CASM ex up 0.8% year-over-year, despite operating less capacity than initially planned. Our fourth quarter performance reflects the strengths of the transformation underway at Southwest and reflects well on our evolving culture, one that is relentlessly pursuing new revenue streams and operational efficiencies in areas that, in the past, we had not focused on. At the same time, we continue to invest heavily in our customers, our people, and our technology to position Southwest for long-term success. Looking ahead, our initiatives, which represent a deep fundamental transformation of our business, are set to drive significant earnings growth in 2026.

The impact from the initiatives launched in 2025 is well understood by us at this stage of the rollout, and we have confidence in our ability to deliver meaningful margin expansion and strong earnings growth this year. As Bob stated, for full year 2026, we are providing an adjusted EPS guide of at least $4, which represents the lower end of our forecast. For the first quarter of 2026, we are guiding an adjusted EPS of at least $0.45 per share, which also represents the lower end of our forecast, and compares to a loss of $0.13 in the first quarter of 2025.

We expect continued strong cost discipline, with CASM-ex projected to increase approximately 3.5% year-over-year, which includes approximately 1.1 points of impact from the removal of 6 seats from our 737-700 fleet to enable extra legroom seating. We plan to keep management headcount expense flat to 2025 levels in 2026, and we’ll also be focused on operational efficiency within our frontline teams. Turning to fleet, Boeing continues to execute on its delivery commitments. We expect 66 Boeing 737-8 deliveries in 2026 and anticipate retiring 60 aircraft during the year. Full year net capital spending is expected to be in the range of $3 billion-$3.5 billion. In November, we issued $1.5 billion unsecured bonds at industry-leading terms.

We ended the quarter with $3.2 billion in cash and a gross leverage ratio of 2.4 times, both within our targets. During 2025, we repurchased $2.6 billion of shares and distributed $399 million in dividends. At the same time, we plan to make the necessary investments in our business while staying within the guardrails that support our investment-grade rating. In closing, 2026 is positioned to be a year of significant margin expansion and earnings growth for Southwest, and we remain confident in our ability to deliver and create long-term value for our shareholders. And with that, I’ll pass it back to Danielle to start our Q&A.

Bob Jordan, President and Chief Executive Officer, Southwest Airlines1: Thank you, Tom. This concludes our prepared remarks. We will now open the line for analyst questions. To help us manage time efficiently, we’ll ask that you please ask your 1-2 questions back-to-back at the outset.

Jamie, Conference Call Moderator: Ladies and gentlemen, we will begin that question-and-answer session. To join the question queue, you may press Star and then one using a touch-tone telephone. To withdraw your questions, you may press Star and two. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality. Once again, that is Star and then one to join the question queue. Our first question today comes from Kathryn O’Brien from Goldman Sachs. Please go ahead with your question.

Speaker 3: Hey, good morning, everyone. Thanks for the time. So I’ll listen to the rules, Danielle, and ask my 2 questions up front. So first question is, I realize it’s very early innings on the rollout of your seat products, but I’m just trying to get a sense of how you’re thinking about the upside to your base case you shared today. You know, how does January booked RASM compare to 1/2 February? And how do both of those timeframes compare to that 9.5% base case guide? You know, I’m just trying to get a sense of, like, what you’re evaluating on potential upside. Is that, you know, higher upsell and, you know, potentially higher upsell going forward, share shift, something else? I know that was a long first one. Second one, I’ll keep it quick.

You know, you beat your Q4 CASM guide pretty handily. What drove that? Anything shift out of the quarter we should be aware of as we model 2026 CASM-ex beyond 1Q? Thanks for the time.

Andrew Watterson, Chief Operating Officer, Southwest Airlines7: Hey there, Katie. It’s Bob. I’ll take the first one, and then Tom will take the second. You know, on the upper range... Well, first, I would just say that, you know, bookings for everything related to our new products and initiatives all look really good. So everything is on track. We’re just not ready to provide an upper range or upside today. I mean, it’s really simple. We’ve got lots of booking data related to the new initiatives, but we have limited data regarding close-end bookings and the behavior of, you know, fare upsell and seat ancillaries, especially with those close-end bookings, overweight business and customers that are more flexible and that tends to have higher ancillary take rates. So we just need to see it.

And by the way, I’m dying to know the upside, as well, and asking Andrew every day, but seriously, we will let you know as soon as possible. We just need, you know, a month or two to really see the potential. And then maybe separate from that, we’re not stopping there. We have, you know, there’s no victory lap. We have other things that we are focusing on above and beyond this potential with the current initiatives. I mean, we have the opportunity for more cost takeout, efficiency, network optimization. With our new products, we think we can grow our corporate share, and of course, we’re gonna continue to optimize the revenue initiatives that we’ve just put in place.

Katie, thanks for your question on costs. I’m really excited, continue to be really excited about the way in which the entire management team is aligned in spending smartly and being efficient with our costs. There’s no shift that we’re talking about today out of 4Q into 1Q. So this is truly us going in and finding efficiencies in different areas of the business, and it’s widespread. Throughout really every line item, we’re finding cost items.

Bob Jordan, President and Chief Executive Officer, Southwest Airlines1: All right-

Jamie, Conference Call Moderator: Our next question-

Bob Jordan, President and Chief Executive Officer, Southwest Airlines1: Next question.

Jamie, Conference Call Moderator: Our next question comes from Conor Cunningham from Melius Research. Please go ahead with your question.

Bob Jordan, President and Chief Executive Officer, Southwest Airlines1: Hi, everyone. Thank you. Just on the load factor decline in 3Q or, sorry, in 4Q, and then it just was larger than the decline in 3Q. Can you just help frame up what’s happening there? I was under the impression that you were pushing for additional loads, you know, given this, the OTA distribution and so on. And within that comment, maybe you could talk about, like, is there a load factor target that you need to hit your bag fee target for 2026? And then-

Speaker 5: ... my second question, sorry. I was hoping you could talk about the decline in the ATL. I realize that there’s a revised credit, you know, Chase agreement in there, but just if you could just frame up the drivers. I think that there is some concern out there in terms of like there being a larger decline from 3Q to 4Q, and then you expect a pretty big revenue uplift in 2026. So just any thoughts around there would be helpful. Thank you.

Andrew Watterson, Chief Operating Officer, Southwest Airlines: Hey, Andrew, I’ll take the first one. And so I’d say that, you know, our employees are super engaged with the New Southwest, and it extends to our tech ops employees, and they did such a great job of retrofits of the aircraft overnight, that they got so efficient that we were able to delay the 737-700 retrofits until January. Because the 737-700s, as you probably know, we take out a row of seats. Now, doing that late in the booking curves means there’s limited revenue upside, but there is revenue upside, especially on the peak holiday travel dates. And the extending that means that, you know, it came out of it almost nil cost. And so doing that was EBIT positive.

So we don’t manage the business to for any kind of submetric of load factor or yield. We’re largely managing for RASM or the RASM-CASM spread. And so in that situation, we chose a decision that maximized earnings, but was, you know, unflattering, perhaps the load factor, but it was the right decision. That’s how we wanna manage the company.

Andrew Watterson, Chief Operating Officer, Southwest Airlines7: And to your second question on ATL, one of the benefits that we have now is we have more differentiation in our product, and the ability to provide differentiation to, you know, those that are at different levels within the loyalty program, is that more of the revenue can be recognized. The loyalty revenue can be recognized sooner. Whereas previously, we had to wait, you know, primarily the benefit that was derived from being in the program was when you would ultimately redeem points. Well, now, depending on your status, you have the ability to derive a benefit. You may book a flight paying cash tomorrow, where you have the ability, because of your status, to select a seat for free. You may have the ability to have a free bag or bags.

So those are benefits that can be derived sooner. So that differentiation that we have in our product offering now allows us to recognize more revenue sooner. So obviously, that means that there is less that falls into that ATL category. So if anyone is looking at that ATL category and seeing that it’s smaller and trying to, you know, forecast some sort of revenue weakness in the future, that’s not what’s happening.

Speaker 5: Appreciate it. Thank you.

Jamie, Conference Call Moderator: Our next question comes from Jamie Baker from JP Morgan. Please go ahead with your question.

Andrew Watterson, Chief Operating Officer, Southwest Airlines0: Yeah, good morning, everybody. A couple, you know, for Tom. So, you know, with assigned seating broadly anticipated by customers, I’d have thought there might have been a surge in early bird bookings, you know, given that, you know, there’s this significant ramp from the new initiatives. But, you know, I guess asked differently, wasn’t there already a meaningful amount of early bird in the base? I just kind of thought people would have front-run the changes by protecting themselves with that. And then second, with so many changes at Southwest taking place, I recognize the team isn’t going to rule anything out. But, you know, maybe for Bob, can you disclose if you have any aircraft RFPs in the market? This is not usually a state secret. You know, everybody knew Delta had a wide-body campaign, stuff like that.

Just curious if you can comment on that. Thank you to you both.

Andrew Watterson, Chief Operating Officer, Southwest Airlines7: Yeah, Jamie, I’ll. It’s a quick one. I’ll take the first, and then Andrew will take the second, ’cause it’s quick. No, we do not have any active aircraft RFPs in the market.

Andrew Watterson, Chief Operating Officer, Southwest Airlines0: Okay.

Andrew Watterson, Chief Operating Officer, Southwest Airlines: And then the other one, the early bird, we, if I’m understanding your question correctly, we ceased selling early bird for departures after Tuesday. And so, now people can get a good seat by buying the standalone ancillary. And we do see standalone ancillary, you know, accelerate close in, and that’s the part that Bob talked about we don’t fully understand yet, and expect to have in the next month or two, more insights into how that, the booking curve ends for those higher fare passengers.

Andrew Watterson, Chief Operating Officer, Southwest Airlines0: Well, so maybe I misunderstood. I, I thought, you know, four weeks ago, you know, somebody could have bought early bird to kind of avoid this seating fee. So that’s not how it worked?

Andrew Watterson, Chief Operating Officer, Southwest Airlines: Not for departures on Tuesday, the 27th and beyond.

Andrew Watterson, Chief Operating Officer, Southwest Airlines0: Okay.

Andrew Watterson, Chief Operating Officer, Southwest Airlines: All those were just seat assignment. We do have a kind of upgraded boarding, early boarding you could do, but we didn’t really push it and promote it that much because we didn’t want to add customer confusion. We will do that later, but that’s a modest thing. The large money is coming from fare upsells, so buying a higher fare product or buying standalone ancillary.

Andrew Watterson, Chief Operating Officer, Southwest Airlines7: Yeah, Jamie, I think the easy thing is upgraded boarding and early bird, the old ancillary, ended on Monday with open seating, and the new ancillary started on Tuesday. From a revenue perspective, and that’s the best way to think about it.

Andrew Watterson, Chief Operating Officer, Southwest Airlines0: Perfect. Thank you.

Jamie, Conference Call Moderator: Our next question comes from Scott Group, from Wolfe Research. Please go ahead with your question.

Speaker 5: Hey, thanks. So, just a couple of things. So big picture, usually when ancillary goes up, fare goes down, you know, historically. What do you think is sort of different here? Is there any way to sort of share, like, what % is going on - since Tuesday, is going basic versus prior? And then maybe just, Tom, like a modeling kind of question, like, I’m guessing January, you know, you, you didn’t have seats, it’s the toughest comp, like, are we exiting the quarter with like RASM in the teens or something like that? Is that the implication of this guide? So I know there’s a few, but thank you.

Bob Jordan, President and Chief Executive Officer, Southwest Airlines: ... Yeah, yeah, I’ll take the first one, and Tom will take the second. You know, I think they’re really disconnected. So ancillaries, especially now that a lot of that is a seat ancillary, which comes much later, it tends to be a separate decision from the fare purchase or the original booking and purchase of the ticket. So we don’t see the correlation in terms of, you know, the ancillaries go up, the fare goes down. I mean, all of this change, especially with the assigned seating and extra legroom, is driven from a revenue benefit perspective by offering customers choice and then giving them buy-up opportunities at the time that they book, and then giving them ancillary opportunities at the time, for example, when they select a seat.

But no, we don’t see that correlation at all, that you’re discussing.

Andrew Watterson, Chief Operating Officer, Southwest Airlines7: To your second question, you know, of course, we’re not gonna give RASM guidance by month, but it is a true statement that the extra legroom seats and the seat assignments, you know, those enhance unit revenues.

Andrew Watterson, Chief Operating Officer, Southwest Airlines9: All right, next question, please.

Jamie, Conference Call Moderator: Our next question comes from Mike Linenberg from Deutsche Bank. Please go ahead with your question.

Andrew Watterson, Chief Operating Officer, Southwest Airlines2: Yeah, hey, thanks, everyone. So, yeah, two questions. I have a CapEx question for Tom and a revenue question for Andrew. So, I guess, Tom, you know, in the release, you did give us the CapEx number, although you indicated that it was a net CapEx number, so presumably, either... I don’t know if there’s either sale leasebacks or there’s aircraft divestitures. Can you give us a rough sense of maybe what the gross CapEx number is, or, or, or maybe, you know, to give us a sense of, you know, divestiture gains, from aircraft sales in 2025?

Andrew Watterson, Chief Operating Officer, Southwest Airlines7: Sure, Mike. So we’ll stick with the range that we’ve guided. There is an element of aircraft sales that are there that bring that down from the gross number. But we’ll stick with what’s out there in the public number as the net CapEx.

Andrew Watterson, Chief Operating Officer, Southwest Airlines2: Okay, but it’s specifically aircraft sales offsetting, and it’s not sale-leaseback gains or anything else?

Andrew Watterson, Chief Operating Officer, Southwest Airlines7: That’s correct.

Andrew Watterson, Chief Operating Officer, Southwest Airlines2: Okay, great. And then just my question to Andrew. You know, segmentation, you know, it’s kind of a new thing. I mean, maybe you’ll disagree with me, but I think it is somewhat of a new thing for Southwest. I mean, even in your commentary, you said that, you know, you’re learning a lot about customer behavior. As we think about how things evolve, you know, sort of what inning are we in? And you know, what are the milestones that you’re gonna look for that things are really starting to pick up?

You know, maybe as a kind of a teaser here, I know in the past, I recall, you know, you indicating that the majority of your bookings or tickets sold used to be in the lowest fare bucket. I would suspect that that’s gonna change, especially, you know, as people want the assigned seats and the extra legroom. Can you just give us, you know, sort of, you know, thoughts on how you see that evolving and maybe some of the key milestones? Thanks for taking my question.

Andrew Watterson, Chief Operating Officer, Southwest Airlines: Thanks, Mike. Yes, we’re going from a kind of fare rule-based segmentation. We always had segmentation, like with advanced purchase and stuff like that, to a product-based segmentation, which you can kind of pay more to get more. And so the question becomes, who will pay more to get more from our current customer base? And we’re seeing that our current customers who previously bought the kind of base product, all in, wanted to buy up. They wanted more from us. They wanted the ability to buy these extra product features, and even if they’re buying early in the booking curve, they’re willing to pay for them.

Then, of course, later in the booking curve, where most of those people are, that are price flexible, you expect to see kind of a surge of people demanding the higher products. So, we expect to go from, like, 80%+ buying the lowest fare product down to something, you know, half or less buying the very basic product. So we don’t know what that’ll look with a full booking curve for the full year through high season and low season, but we know that that accelerates at the end, and that’s kind of what we’re waiting for.

So the level of acceleration we see through kind of February and March, where you have low season and high season, will give us a really good idea of what the upside is for this.

Andrew Watterson, Chief Operating Officer, Southwest Airlines9: All right-

Jamie, Conference Call Moderator: Our next question comes from John Godin from Citigroup. Please go ahead with your question.

Andrew Watterson, Chief Operating Officer, Southwest Airlines1: Hey, guys. Thanks for taking my question. Congrats on the big RASM guide. I wanted to just sort of reask it a little bit on the 9.5%. What is literally in that number, and what isn’t it? It sounds like there’s a low expectation of the ancillaries coming in, but it’s not like you have zero. But I just wanted to kind of understand, you know, really what’s in there versus what could be upside. That’s question one. And question two, it seems like there’s a decent chance this year is an all-time high EPS annual year for you. When I look at the last times that happened, ASM growth was considerably higher.

As you get back to your return target, I’m curious how we should be thinking about a reacceleration in growth. Thanks.

Bob Jordan, President and Chief Executive Officer, Southwest Airlines: Yeah, I’ll take the first one, and then maybe a combo, maybe Andrew, on the second one, especially thinking about capacity. You know, thinking about breaking down RASM detail, I mean, last year, just got to pause, it was just a fundamental transformation of the business model of this company, and it went extremely well. I’m so very pleased and proud of our people. And now all of that, I mean, all these initiatives, they are the business. They are the new business of Southwest Airlines. It’s not a set of initiatives any longer.

Andrew Watterson, Chief Operating Officer, Southwest Airlines8: ... and we’re managing that way. And, so everything in our 2026 guides include those run rates coming off of the implementation in 2025, and then, of course, the assigned seating launch here on Tuesday. Now, that’s just how we’re managing the business, and we’re focused, even more beyond that on the additional upside, you know, managing those initiatives, and optimizing, and then our incremental opportunities, again, like network optimization, further cost takeout. So we are moving to, as you obviously know, an EPS guide. Everything related to the initiatives and the run rates are baked in, and, that’s how we’re thinking about managing the business, and we will provide the upside once we are able to quantify it.

Andrew Watterson, Chief Operating Officer, Southwest Airlines: And then on the growth, I mean, we’re not thinking about any kind of crazy growth rates or anything like that. What we’re thinking about mostly is in addition to whatever modest growth rates we, we choose, is a reallocation of capacity. And so we, we have a product now that we see demand for that before we weren’t offering. And then also the waterline for all of our markets rises with increased profitability. So we have a great opportunity to redeploy capacity within our current footprint, to you know, have less of a negative and more of a positive by moving capacity around. That’s what we’re really focused on over the in the next 12-24 months, and we think there’s a, that’s upside to the numbers we’ve currently given you.

Jamie, Conference Call Moderator: Our next question comes from Duane Pfennigwerth from Evercore ISI. Please go ahead with your question.

Speaker 9: Hey, thank you. I wanted to follow up, Tom, on a comment you made about the loyalty, faster loyalty, rev rec. I assume there was a bump up with the bag fees and now another bump up with seats and extra legroom. So whatever the RASM tailwind was from rev rec in 4Q, it’s likely larger now in 1Q. I wonder if you would frame how many points of your 10 points in RASM growth is due to rev rec policy changes? And then my follow-up, do you have any data or early learnings on, you know, receptivity of seats or maybe uplift in core Southwest markets versus maybe more jump ball markets where you have lower share? Thanks. Thanks for taking the questions.

Andrew Watterson, Chief Operating Officer, Southwest Airlines7: Thanks, Duane. We haven’t quantified publicly what the change is there. You know, there’s a shift that goes, you know, where the split prior was, was part ATL, part other revenue. You know, now it’s part ATL, some to other revenue and some to passenger revenue. But the exact percentages there, you know, some of that relates to the way that our program is structured, and so we don’t get into the details of that. Our Qs and Ks have a bit more color on it, but we don’t go into the specific percentages.

Andrew Watterson, Chief Operating Officer, Southwest Airlines: On the second one, we find that the new product is giving us a strong tailwind in all of our markets. So it’s not just a traditional Southwest stronghold where we see the benefit, it’s across all customer segments and across all geographies, and that’s what’s really encouraging for us.

Jamie, Conference Call Moderator: Our next question comes from Tom Fitzgerald from TD Cowen. Please go ahead with your question.

Andrew Watterson, Chief Operating Officer, Southwest Airlines8: Hey, thanks so much for the time. Just curious on the Extra Legroom fee. I think last fall we had talked about that hitting its full run rate potential in the third quarter. Is that still the expectation as you sit here today? And then, on the fuel side, I think at one point last year, Tom, we had talked about there being like a nice fuel offset with bag fees from the bag fee implementation, and I’m wondering if you started to see that this year. Thanks again for the time.

Andrew Watterson, Chief Operating Officer, Southwest Airlines: Yeah. I think previously in our guidance, we’ve given that we expect in next year that we have the full run rate benefit of the seats. Obviously, we’re endeavoring to get that faster. We know there’s a ramp up as customers adapt to it. That’s also part of our discussion of the complete upside. But right now, we’re seeing a strong initial reaction, as I said earlier, both to buy-ups and seat ancillaries.

Andrew Watterson, Chief Operating Officer, Southwest Airlines7: Tom, I love that you asked about fuel. Just last week, I’ll brag a little bit about our operations team here. Just last week, was in a meeting where we were walking through the full list of fuel savings initiatives that we have. You are correct. One of those is that as we carry fewer bags overall, which we knew would be a byproduct of the bag fee, there are fewer bags, you know, on board the aircraft, and there is a fuel savings that comes from that. But there are so many other things that we’re doing as a company, you know, new technology tools that we have that are helping us, as well as just, you know, the behavior that we have in our airports and in our maintenance facilities to be able to save fuel.

So often in this industry, we talk about CASM-ex, and you know, it’s appropriate, but fuel is a big expense, too, and we’re doing a lot to become more efficient there as well.

Jamie, Conference Call Moderator: Our next question comes from Atul Maheswari from UBS. Please go ahead with your question.

Andrew Watterson, Chief Operating Officer, Southwest Airlines8: Good morning. Thanks a lot for taking my question. Two questions. First, based on your implied RASM for the full year and based on what we’ve heard from others, it would appear that if you all hit your outlooks, there might be a meaningful shift in airline revenues as percentage of GDP this year versus, you know, the past few years. I know you can only speak for Southwest, so the question is: If the incremental revenues that you’re generating this year, is that primarily coming from your existing customers who always wanted to spend more at Southwest, but basically could not in the past since you did not have that offering? And that would explain why, you know, the revenue GDP equation moves to the right.

Speaker 0: ... is the incremental revenues that you’re generating this year coming from attracting customers of other airlines, which would mean that, you know, the revenue GDP equation does not change much for the overall industry, even as Southwest generates the significant revenue dollars? So that’s question one. And then question two, in the at least $4 EPS target, what is assumed for macro, given Southwest and really the broader industry clearly lost a good portion of revenues last year due to macro issues. So in that $4, what portion are you assuming that you get back? Thank you very much.

Bob Jordan, President and Chief Executive Officer, Southwest Airlines: Yeah, Atul, it’s Bob. I can take both of those. Really, what’s in our guide for 2026 is the performance of the initiatives, you know, kind of on our current customer base. So there’s no assumption, number one, of a big snapback in the macro, and there is no assumption, number two, of a big share shift. Now, again, I do think with the far more attractive product offering, especially to our business customers, that is part of the upside that we can pursue over time. That’s a longer journey, but I do think the product offering now certainly appeals more to everybody, but certainly appeals more to our business customers. So that is something we’ll be attacking this year, and that provides additional upside.

But no, to be specific, there’s not a share shift in the calculation, and there’s not a, you know, a planned economic snapback in the economy, in the macro.

Jamie, Conference Call Moderator: Our next question comes from Savi Syth from Raymond James. Please go ahead with your question.

Andrew Watterson, Chief Operating Officer, Southwest Airlines5: Hey, good morning, and congratulations to the kind of greater Southwest team on that number one Wall Street Journal ranking, especially in a year that you’ve been kind of doing a lot of change. I know you’re not providing kind of granular guidance, but I was curious, Tom, if you could, you know, provide color on CASM-ex progression through the year. Particularly, is it fair that the 3.5% pressure in 1Q is maybe the high watermark, especially with capacity stepping up? And then maybe for my second question, on the corporate front, I’m curious, you know, what kind of corporate revenue growth you saw in 4Q, and maybe what the trends are that you’re seeing so far in 1Q.

Andrew Watterson, Chief Operating Officer, Southwest Airlines7: Thanks, Savi, and thanks for the shout-out on the Wall Street Journal number one ranking. That is a big deal. Another thing to brag about for our really great operations team and for our people. On CASM-ex, you know, we’ve given guidance for the first quarter. That’ll be... You know, we’ll give guidance for unit costs and unit revenues, you know, during the quarters, and so, you know, won’t go beyond one Q. But what I will say is that I feel like we have a good handle for what the costs are this year. You know, it’s been a couple of years now since we’ve had our labor agreements. Usually takes a little bit of time for some of those costs to come in.

And so now that we’re a couple of years separated from that, and you know, we’ve got, I think, pretty good view on what costs will look like for the year, and we’re able to take that into account as we develop the full year EPS number that we’ve given to you today.

Bob Jordan, President and Chief Executive Officer, Southwest Airlines: For corporate, you pull out government, which was kind of volatile there in Q4, our corporate business is up mid-single digits. And then entering this year and in January, we had very high bookings, as others have reported, so a very strong start to the year in corporate bookings. The benefit, though, as we talked about before, is the new product. We’ve invested in our corporate infrastructure a while ago, a couple of years ago. We have now presence in the distribution channels. We have a sales force. The kind of BTN rankings about how well we are to do business is we’re number two, just behind Delta. And so what’s missing is a product that the corporate travelers want to buy, and frankly, that the companies let them expense.

Having this new product, we will combine that with marketing efforts, our sales force efforts, incremental distribution efforts, and we think there’s upside to our corporate business from this new product on top of the infrastructure we’ve already built.

Jamie, Conference Call Moderator: Our next question comes from Andrew Didora from Bank of America. Please go ahead with your question.

Speaker 0: Hey, good morning, everyone. Andrew, I know you mentioned earlier that you obviously managed to RASM, not a yield or load factor. But just curious, like if you could give us any color on kind of how you’re thinking about your load factor, particularly here into 1Q. Obviously, you’re coming off a pretty low base last year, I think around 74%. You know, historically, 1Q’s are closer to 80, so any thoughts around that would be helpful. And then for my second question, I know, Bob, you spoke to the opportunity for maybe some more cost takeout this year. Could you speak to maybe where that could come from and maybe how to think about, you know, CASM and cost opportunities in a 2%-3% growth world? Thank you.

Bob Jordan, President and Chief Executive Officer, Southwest Airlines: Yeah, Andrew, let me just give it a start. The main point was a couple of things. I don’t want anybody to think that we’re done. I mean, there’s no victory lap here, as I said. There’s a lot of work, hard work ahead. We’re pleased with the momentum, but we are not done. This is a journey, and we’re gonna keep pressing on additional opportunities beyond the transformation that that’s been underway. So you know, we took a lot of cost out last year, more this year. We’ve you know, we doubled the original cost target. We did our first corporate layoff, which was tough, but what I can tell you is, you know, nothing broke. The company, if anything, is moving faster. There’s more agility, more pace.

I think it’s been somewhat enlightening that we can press harder. And so there, you know, our corporate overhead will be down, our headcount will be down again this year. So I’m just admitting that we’re gonna press even harder on costs, on efficiency. So we’re not ready to quantify anything yet, but just making sure that everybody understands that we aren’t done with this transformation. We will be attacking other opportunities throughout the year.

Andrew Watterson, Chief Operating Officer, Southwest Airlines: I would say our teams, revenue management, marketing, we focus on revenue maximization. We don’t get caught up in load factor or yield. Now, our tools and our people now include the incremental upsells. We get an incremental passenger comes with a bag fee, a seat fee, other type of ancillaries. That’s included into our calculus. So quantitatively, that’s in there, but they’re all about revenue maximization, not going after the submetrics, because that can really lead you down a bad path. And I think, or just look at revenue maximization, we have done a good job over the last, you know, 18 months, of doing that, and we will continue doing that going forward.

Jamie, Conference Call Moderator: Our next question comes from Ravi Shanker, from Morgan Stanley. Please go ahead with your question.

Andrew Watterson, Chief Operating Officer, Southwest Airlines4: Great. Thanks. Good morning, everyone. Sorry, to go back to the, January twenty-seventh changes, obviously an important topic here. So I’ll hit one topic with multiple questions. I think you said that it’s going better than expected. A, can you confirm that? And B, can you-- do you guys know if both the incoming revenues and the book away are higher than expected, or is the book away lower than you initially expected? And maybe a second question on the same topic. Is there a risk that, the ancillary revenues are higher out of the gate because people are maybe taken by surprise with some of the changes, and maybe that normalized over time, or do you think it gets better from here? Thank you.

Andrew Watterson, Chief Operating Officer, Southwest Airlines: All right, I’ll try to go through your questions there. So, yes, the ELR and the preferred seats and assigned seats in general is going better than expected. We are getting book away from other carriers when they have poor reliability. We have that consistently over the last couple of years. So that is a tailwind, doesn’t happen every single day, but does happen quite frequently, and it is a benefit, and those people now come over and buy a standalone seat or a higher fare. So that’s very helpful to have that extra book away. And then the ancillary, we find that what people do when they get to the gate, it’s a crowded flight, they have a higher propensity to buy up.

So you get to the gate, it’s crowded, and you’re like: "Well, what seat am I? Oh, I wanna change my seat. I will pay more." And so that we see the fuller the flight, the higher the ancillary benefit.

Jamie, Conference Call Moderator: Our next question comes from Sheila Kahyaoglu from Jefferies. Please go ahead with your question.

Andrew Watterson, Chief Operating Officer, Southwest Airlines6: I’ll take it. Thank you guys so much. My first question, and congrats on the entire undertaking and the progress you’ve made. I’d love to hear what feedback you’re getting on the product segmentation. Are customers even aware? How does that change your promotional activity? And in cities like Chicago, where it’s become a hot city of late, what really differentiates Southwest versus a network carrier? And maybe my follow-up on the $4 of EPS, what is the assumed paid load factor and total, ancillary uplift in the extra legroom seats relative to the 25 base? Thanks.

Bob Jordan, President and Chief Executive Officer, Southwest Airlines: Sheila, let me take a piece of the first one, and I think Andrew will take the second. You know, what is different about Southwest Airlines now, obviously, has been a common question since we implemented assigned seating. And I’ve been here 38 years, and we have changed constantly over those 38 years, and every single one was, "Well, you’re just not the same Southwest." And every single time, that person or those folks were wrong. So I just want to clear this up. I mean, our people and their heart for serving our customers, I mean, that is and always will be the greatest competitive advantage that Southwest has. That’s the difference.

That was true on Monday with open seating, and it was true on Tuesday with assigned seating, and nobody, no other airline can copy the heart and the soul and the service of our people. So that’s what makes Southwest Airlines different.

Andrew Watterson, Chief Operating Officer, Southwest Airlines: I would say, in a place like Chicago, at Midway, we have a very strong network. So our offering to, customers where you wanna go, we have the strong network there. Price, we have lower costs than our competitors, and so we can offer, you know, great deals. Conscious, we’re still pushing RASM. With lower costs, we can push, great deals. Reliability. Now, airlines talk about reliability, but it’s extraordinarily difficult to copy. And the fact that we have much higher reliability than any airline in Chicago, customers can count on, coming to Midway and having a much better reliability, than over at O’Hare. And then hospitality. Once again, everyone says their employees are the best, but guess what? Look at NPS scores.

Our employees really deliver a great hospitality and a high score, and it’s extraordinarily difficult to copy. You can tell your people to treat customers better, but if they don’t, what do you do? For us, our customers—our employees want to treat customers well, and so these are durable advantages of having great hospitality and great reliability.

Jamie, Conference Call Moderator: Our next question comes from Brandon Oglenski from Barclays. Please go ahead with your question.

Andrew Watterson, Chief Operating Officer, Southwest Airlines9: Hey, good morning, and congrats as well. I think I’ll just keep it to one here, but Bob, I mean, I think just judging by some of these questions and definitely, like, the bloggers and the airline observers out in the ecosystem, there’s this view, and I think you’ve hit on it in the answers to a couple of these questions, but, like, Southwest is losing its uniqueness. No more free bags, you know, and it’s, it-- now it’s egalitarian or maybe less egalitarian. But the reality is, I think if we listen to all your competitors, things have moved much more towards a premium focus with consumers.... So I don’t know, can you just maybe wrap this up a little bit? Like, isn’t this just offering the market what they wanted?

Incrementally, I think you hit on the culture, too, but, you know, has the employee base really fully embraced this, too? Thank you.

Bob Jordan, President and Chief Executive Officer, Southwest Airlines: Hey, Brian, thank you. And, yeah, this, this is about one thing, and that is chasing our customer. We, we are, we are committed to following the customer, providing what they want, today, which is different than what they wanted 5 and 10 years ago, and what they want in the future. Because we know if Southwest Airlines doesn’t provide it, they’re gonna go to a competitor, and we are not going to let that happen over time. So this is completely. This has nothing to do with copying anybody. This has to do with offering our customers, what they want. And then, as Andrew said, doing it even better, because we’ve got the employees and the service delivery and the reliability, that they cannot match.

I mean, just look, I’m not meaning to brag, but maybe I am, but we won the number 1 ranking in The Wall Street Journal Best US Airline for 2025 for a reason. That’s because our service was better, our operation was better, and customers see it. And again, at the high level, we are on track. I mean, you see the numbers that we’re guiding for 2026. So we’re seeing customers embrace the changes, book the product. We are not seeing book away from Southwest Airlines. If anything, we’re encouraged that we’ll see share shift to Southwest Airlines because the product is a stronger offering now, especially with corporate. So again, this is all about following the customer.

Jamie, Conference Call Moderator: Our next question comes from David Vernon from Bernstein. Please go ahead with your question.

Speaker 8: Great. Maybe Bob, just to kind of build on that, idea, right? If you’re gonna be taking share or raising fares by something in the double digits, like, normally you would think there’d be some sort of demand elasticity problem in that math. Why isn’t that the right way to think about this? Why isn’t the big risk here that, you know, you put all these changes in, customers get used to them, and then eventually, they can just look across other airlines, and maybe you’re more expensive, and you see, you know, some of the expectation for what you’re gonna get in the unit revenue growth, competed away? Because it is still a pretty competitive market, as far as we look at it, anyway. Any thoughts on the

Bob Jordan, President and Chief Executive Officer, Southwest Airlines: Yeah, and thank you. Again, it’s not. This is not about raising fares. This is about offering our customers choice that we know that they want. So offering them a very basic fare, if that’s what they want, offering them a fare that comes with extra legroom and a drink and a different level of service and boarding, if that’s what they want, and a lot of products in between. So it’s the customer’s choice to buy up, which is very different than sort of across the board, raising fares. Same thing on the ancillary side. Just like we sold, you know, EarlyBird and Upgraded Boarding, we’re offering our customers a choice around priority boarding and obviously choice around seat selection. So this has nothing to do with raising the fares.

This has to do with offering customers choice that they can then choose to buy or not buy. What we are seeing is that they are choosing to buy those new options.

Jamie, Conference Call Moderator: Our next question comes from Dan McKenzie, from Seaport Global. Please go ahead with your question.

Speaker 6: Oh, hey, thanks for the time. First, huge congrats to the entire company for pulling off, I think, what most thought couldn’t be done. But a couple questions here. First, you know, the 50% of the tickets that are sold with the buy-up feature, my question really is, what % of revenue does this account for? What would you expect it to account for once you’re at maturity? And then secondly, here, if corporate bookings are up high single digits or double digits, what fares are they replacing? My guess is they’re displacing the $39 fare. And then, just related to that, corporate, I’m just curious if the CapEx guide embeds new lounges.

Andrew Watterson, Chief Operating Officer, Southwest Airlines: So on the buy-up, that’s the type of stuff that we are working out, that Bob’s bugging me for all the time, and so we’re not gonna give those right now. It’ll become clear over time as we give the high end of our guide and we start to report, but right now we’re just focused on delivering the current guide. And corporate bookings, we found that the kind of segmentation, where we introduced the basic fare, that the corporates found that they did not want that in their ecosystem. So, our sales force did a great job of helping configure selling tools so that that was not featured, and that was beneficial to our corporate revenues.

As we offer these ancillaries, we’ll be doing the same thing. We anticipate additional benefit once the tools and expense policies calibrate to our new offerings, that we’ll see additional benefits from that.

Bob Jordan, President and Chief Executive Officer, Southwest Airlines: Dan, just quickly on the lounge question, I think I mentioned before there, you know, we’re obviously looking at, again, things that our customers want. There’s nothing specific to report there today, but just know that the assumptions that we have internally around what that could look like are built into our guides, so they’re not incremental to the guides that we’ve given you for the quarter or for the year. I want to go back to your first sentence. I just can’t help myself about, you know, the congrats on the implementation. I just want to say thank you, and I got to thank our people again.

The level of execution last year with so many things, it was just done so flawlessly, on time, with quality, and to be able to win The Wall Street Journal number one ranking at the same time you’re changing the company, then to have a winter storm that’s historic and manage it incredibly well, come out of that with no hangover at all. And by the way, the next day, do the largest changeover in the history of the company with assigned seating and to have excellent operating metrics on that day. I just don’t know how to say anything, but wow, I’m just stunned by what our people have done.

Jamie, Conference Call Moderator: Our next question comes from Chris Wetherbee from Wells Fargo. Please go ahead with your question.

Speaker 4: Yeah, hey, thanks. Good morning. Thanks for getting me on the call. I guess I wanted to talk a little bit about the business commentary, and I guess what you’re looking to see over the course of the next couple of weeks. Presumably, there’s been some conversations there, and you seem optimistic about upside. So any insight there would be helpful and maybe where some of the share might be coming from. And then the second question would just be sort of understanding what’s embedded in the $4+ guidance around buybacks. Thank you.

Andrew Watterson, Chief Operating Officer, Southwest Airlines: On the first one, I would separate out the, the two segments—two things between, one, the, what we see as the upside from the ancillary sales and the buy-up. Those are the normal booking curve management, what we expect to see there, through the low season of February and the high season of March. That’ll help us understand better what the, upside potential in the short term. What’s not in our guide is this kind of, medium-term, benefit from increased corporate share or increased corporate revenue as people buy, our ancillaries on the company dime. And so that is something that will unfold over medium term and is not in our guide.

Andrew Watterson, Chief Operating Officer, Southwest Airlines7: On the buyback question, you know, we continue to believe that the shares are undervalued relative to the long-term fundamentals of the business. And so, we’ll continue to be opportunistic there, and we’ll make sure that we stay in the guardrails that keep us with our investment-grade rating.

Jamie, Conference Call Moderator: And our next-

Andrew Watterson, Chief Operating Officer, Southwest Airlines7: One other thing I’ll add to that, too, is, you know, we’ve invested a tremendous amount of capital into our people and into our business as well, and into our customers. We’ve talked about the investments we made into the cabin, things like the, you know, the bigger bins, and the new lighting, and the new seats, and the in-seat power, and free Wi-Fi. You know, all of these things are part of that capital allocation as well. So we stay within the guardrails. We invest in the business, we invest in our people, and we invest in our customers, and ensure that we stay in those investment-grade guardrails.

Jamie, Conference Call Moderator: Our next question comes from Jamie Baker from JP Morgan. Please go ahead with your question.

Andrew Watterson, Chief Operating Officer, Southwest Airlines0: Oh, yeah. Thanks for squeezing me in at the last minute. So the earlier comment about passengers making buy-up decisions at the gate, have you padded your turn times to account for that? Is there any sort of operational impact from that phenomenon? Thanks.

Andrew Watterson, Chief Operating Officer, Southwest Airlines: Actually, we took turn time out, Jamie, and,

Andrew Watterson, Chief Operating Officer, Southwest Airlines0: Sorry.

Andrew Watterson, Chief Operating Officer, Southwest Airlines: Yeah. So, all this is, you know, we’ve scripted out what we sell when and what happens when in our, in our, in our boarding. We have standards, and those allow us to handle both, employees traveling for non-revenue, as well as, upselling in the, in the gate area. And so, all that, I think, works well for cost efficiency and revenue optimization.

Bob Jordan, President and Chief Executive Officer, Southwest Airlines: I’ve got to just add again, I mean, we took, we took turn time out of the turn, managing all these changes, which include changes to boarding, and we won the Wall Street Journal ranking as the best U.S. airline, most of which are operational metrics. I mean, not bad.

Bob Jordan, President and Chief Executive Officer, Southwest Airlines0: On that note, we’ll conclude today’s call. As always, if you have any follow-up questions, please reach out to Investor Relations, and we appreciate everyone for joining.

Jamie, Conference Call Moderator: Ladies and gentlemen, with that, we’ll conclude today’s conference call and presentation. We do thank you for joining. You may now disconnect your line.