SOUTHWEST AIRLINES CO Q1 FY2025 earnings call

• Bob Jordan discussed the revenue strategy transformation, including amended Chase agreement, Rapid Rewards enhancements with dynamic reward pricing, Expedia launch exceeding expectations, turn time initiative reducing turn time in 19 stations, and cost reduction. Upcoming initiatives include basic economy product, check bag fees, and selling premium/assigned seating in 2026.
• Andrew Watterson highlighted on-time performance leading the industry, best first quarter on-time and completion factors in years, capacity up 1-2% year-over-year, distribution expansion to online travel agencies with Expedia performing ahead of expectations, loyalty program optimization with no negative trends, MAX 8/737-800 retrofits approved, and upcoming initiatives like basic economy and bag fees.
• Tom Doxey talked about non-fuel CASM-X at 4.6% beating adjusted guidance, second quarter unit costs expected 3.5%-5.5%, fuel price volatility, fleet plans including 38 MAX 8 deliveries, $2.5B-$3B gross capital spending, and capital allocation with $2.6B debt paydown and $1.5B share repurchase by end of July.

Operating revenue was a quarterly record at $6.4 billion as RASM increased 3.5% on all-time record yields. CASM-X growth of 4.6% was materially better than original guidance, coming in well below revised guidance. Revenue contribution was driven by strong execution in revenue management, distribution, and network initiatives, with operating revenue at a record $6.4 billion and RASM up 3.5%.

• Did not reiterate full year 2025 or 2026 EBIT guides. Reaffirmed incremental EBIT targets of $1.8 billion for full year 2025 and $4.3 billion for full year 2026 from initiatives. Second quarter unit costs expected in the range of 3.5% to 5.5%.

• Macroeconomic uncertainty, with demand weakening, especially in leisure demand, and softer booking trends continuing into the second quarter. Difficulty in confidently forecasting due to short-lived trends.

Q: So great to see no evidence of book away here based on your comments, but I believe you recently broadly polled your customer base on your recent initiatives. Can you share kind of what feedback you got from that poll and kind of if you're confident that book away kind of is not something that's going to emerge later on in the year?

A: Hi, thanks, Ravi. It's Andrew. So I did see that there's a lot of press pickup. I would just say we are constantly surveying our customer set, whether it's how was your flight today, what do you think about this initiative. And so we curate different panels to try to get different feedback on different policies, different ideas. And so there was nothing abnormal about that survey. We didn't do it just because we had the policy change. We've been doing stuff like that all along. And so this helps us understand the perceptions and how they evolve over time to different elements. And those surveys tell us kind of what we see overall with just our emails. In the beginning, people wrote us and said, hey, I'm concerned about this topic. When we answered their questions, they realized that, oh, if I'm going to engage customers Southwest Airlines, these don't really apply to me. And then so they kind of changed their feelings about it. We saw the same thing in surveys. The sentiment evolved as people better understood what they would keep. And generally, our engaged customers keep their benefits and get more when we go to assigned seats. And so the polling does show that those customers now fully internalize that difference from maybe the headlines originally. And so we see a fairly satisfied and engaged customer set as they wait for this next level of benefits to come out. So I think overall, we're pleased. It exceeded my expectations of how well our best customers have migrated to this new world we're going into with assigned seats and extra leisure and such.

Q: My question is for Tom. I'm getting just a lot of client questions with regards to the balance sheet and liquidity, given the buyback, all the debt pay down in 2Q, CapEx. I guess any color you can provide on how you think about liquidity targets right now in this environment, just how we should think about minimum cash right now?

A: Sure. Thanks, Andrew. Yes, we've been targeting, as you know, around $4 billion or so in cash. And as you look at the pay downs that we've had, and in addition to that, the incremental 1.5, that is the remainder of the previously announced 2.5 share repurchase. That brings us down to right about that mark. In addition to that, as you know, we've had significant unencumbered assets. We've talked about, it was in our release where we reiterated that 16 or so billion dollars in aircraft. And then there's some additional unencumbered assets there on the non-aircraft side as well. And so we look at all of that in totality. And then one other thing that I would say in addition to that is the focus here, and this isn't necessarily a balance sheet answer, but we are laser focused here on the incremental building of EBIT through the different initiatives that we have and are confident in those initiatives and both the roll out and magnitude of that. And, of course, that incremental EBIT is what ultimately gives you the optionality for your balance sheet when you look at the framework of investing in the business, maintaining that strong and efficient balance sheet, and then any potential return to shareholders that would result.