25-Apr-2019 Southwest Airlines Co.investors.southwest.com/~/media/Files/S/Southwest-IR/LUV... ·...

Corrected Transcript

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25-Apr-2019

Southwest Airlines Co. (LUV)

Q1 2019 Earnings Call

Southwest Airlines Co. (LUV) Q1 2019 Earnings Call

Corrected Transcript 25-Apr-2019


2 Copyright © 2001-2019 FactSet CallStreet, LLC

CORPORATE PARTICIPANTS

Ryan Martinez Managing Director, Investor Relations, Southwest Airlines Co.

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co.

Michael G. Van de Ven Chief Operating Officer, Southwest Airlines Co.

Thomas M. Nealon President, Southwest Airlines Co.

Tammy Romo Executive Vice President and Chief Financial Officer, Southwest Airlines Co.

Linda B. Rutherford Senior Vice President and Chief Communications Officer, Southwest Airlines Co.

......................................................................................................................................................................................................................................................

OTHER PARTICIPANTS

Jamie N. Baker Analyst, JPMorgan Securities LLC

Duane Pfennigwerth Analyst, Evercore Group LLC

Hunter Keay Analyst, Wolfe Research LLC

Rajeev Lalwani Analyst, Morgan Stanley & Co. LLC

Jack Atkins Analyst, Stephens, Inc.

J. Caiado Analyst, Credit Suisse Securities (USA) LLC

Alison Sider Reporter, The Wall Street Journal.

David Koenig Reporter, The Associated Press

Mary Schlangenstein Dallas Reporter-Bloomberg News, Bloomberg LP

Tracy Rucinski Reporter, Thomson Reuters

Ghim-Lay Yeo Reporter, FlightGlobal





MANAGEMENT DISCUSSION SECTION

Operator: Welcome to the Southwest Airlines First Quarter 2019 Conference Call. My name is Cody, and I will

be moderating today's call. This call is being recorded and a replay will be made available on southwest.com in

the Investor Relations section.

At this time, I'd like to turn the call over to Mr. Ryan Martinez, Managing Director of Investor Relations. Please go

ahead, sir. ......................................................................................................................................................................................................................................................

Ryan Martinez Managing Director, Investor Relations, Southwest Airlines Co.

Thank you, Cody, and welcome everyone. Joining me on the call today we have Gary Kelly, our Chairman and

CEO; Mike Van de Ven, Chief Operating Officer; Tom Nealon our President; Tammy Romo, Executive Vice

President and CFO and other members of our senior leadership team. Please note that our comments today will

include forward-looking statements. And these are based on our current intent, expectations, and projections. As

we noted in our earnings release this morning, we have made flight schedule adjustments through August 5 as a

result of the MAX groundings.

And the guidance we will provide today is based on our estimates assuming the grounding of the MAX through

August 5. A variety of factors, in particular, those that are out of our control in connection with the MAX grounding

could cause our actual results to be materially different from our current guidance. We'll also make references to

non-GAAP results, which excludes special items. And for more information regarding forward-looking statements

and our reconciliations of non-GAAP to GAAP results, please visit the Investor Relations section of

southwest.com.

So with that intro, I'll turn it over to Gary. ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co.

Thanks Ryan and good morning everyone. And thanks for joining us for our first quarter 2019 earnings call.

Overall, I am as proud as I have ever been of our people. They did an extraordinary job, produced solid results

among industry-leading margins, and despite the challenges of near record cancellations. But for the numerous

cancellation events it would have been a blowout quarter. But still rock solid margins, returns and cash flows and

a huge thank you to our people for their resilience, and for their perseverance. Based on where we are today, and

what we can see from today, the second quarter will be better.

We're better prepared to handle the MAX schedule changes prospectively through August 5, rather than the more

chaotic daily cancellations. And our goal is to provide our customers a stellar experience during the busy summer

especially. Our on-time performance was solid in the first quarter and it will be solid again here in the second

quarter. Restoring the MAX to service as soon as it's ready is also a priority of course. And assuming that

happens within the next couple of months we'll get back on our delivery schedule and our capacity plan. Mike,

Tom and Tammy have prepared excellent briefings on our operations, commercial and financial performance and

expectations and I don't want to steal their thunder.





So I'm going to be brief this morning. But I did want to reiterate a couple of points. Despite the challenging year so

far, first of all, we were once again named the Fortune's list of the World's Most Admired Companies. This year

ranked number 11. We were just ranked number 2 out of 500 companies on Forbes List of Best Employers. And

all great companies start and end with having great people and being a great employer. So we're very proud of

that. We were number one (sic) [marketing carrier] in the DOT rankings for 2018, Customer Satisfaction, again.

And we're off to a great start in 2019. Our brand and NPS scores remain strong in 2019 and industry-leading as

well. We have balance sheet leverage of less than 28%. We have almost $3.9 billion in cash. We have an

excellent cost-effective and risk-off fuel hedge in place for the next several years.

Our Hawaii expansion is off to an exceptional start, and of course, that is despite having numerous distractions in

the first quarter. Our technology plans for this year and next are ambitious but they are proceeding well and on

track. And then finally, I expect us to make progress on our cost initiatives this year, except for the capacity cuts

effect of course. And we're not giving up on our goal to expand margins and return on capital year-over-year.

Despite the challenges, we may very well set records in some financial categories this year. But having said that, I

admit that there's uncertainty surrounding a lot of things, certainly the timing of the MAX and as usual, the

economy and fuel prices. But we're off to a good start and we're planning on having a good year and making a lot

of progress this year.

So with that very quick overview, let me turn it over to our Chief Operating Officer, Mr. Mike Van de Ven. Mike? ......................................................................................................................................................................................................................................................

Michael G. Van de Ven Chief Operating Officer, Southwest Airlines Co.

Well, thanks Gary. You know, the first quarter reinforced a couple of things that I already know. The most

important being that our people will absolutely rise to meet any challenge and we had our fair share of challenges

to start the year. The prevailing operational themes for the first quarter were launching our Hawaii service and

then of course the unanticipated maintenance write-ups and our MAX groundings that impacted our operations.

So as you all will remember, the quarter started amid a government shutdown in the middle of our ETOPS

authorization. We had worked on some contingency plans and despite losing about a month of time we were still

able to launch our Oakland to Honolulu service in the first quarter as planned. And since then we've added

Oakland to Maui and we're going to launch service between Maui and Honolulu on Sunday.

The service startup went extremely well. Our onboard experience has received high customer marks and we are

continuing to add service during the second quarter. Beginning in mid-February, we started to experience

disruptions to the operations with unexpected maintenance write-ups and just as that was returning to normal

levels in mid-March, the MAX groundings occurred. Those combined items created unexpected irregular

operations for the last half of the quarter. So we were operating in a daily environment that consisted of cancelled

and delayed flights, aircraft swaps, crew reroutes, high volumes to our call centers, maintenance demand and

logistics associated with the grounding, and of course the customer anxiety at the airports.

But our people, across the board, again rose to the occasion and they took superb care of our customers and

produced a very solid operational performance in spite of that environment. Our on-time performance for the

quarter was 78.7% and that was just a tad lower than last year's 79.3%. And if we adjusted for the maintenance

and the MAX impacts, our on-time performance would have modeled in the 83% range and that would have put

us second in the industry from a Marketing Carrier's perspective. That's a good indication that the network design

and our operational approach are in sync and we have a strong operational foundation as we move forward.

Southwest had the top ranking for the fewest customer complaints for domestic marketing carriers in 2018 as

measured by DOT and as Gary mentioned, we maintained that position in both January and February, which are





the latest results. And again, that's just additional evidence that our people are really leaning into providing great

hospitality and service to all of our customers.

And our people have really owned the disruptions that these issues have caused our customers. Cumulatively,

the weather and the maintenance write-ups and the MAX groundings, they caused significant cancellations. We

canceled more than 10,000 flights during the quarter, roughly 4% of our published schedule. That was

significantly more than we would have expected going into the quarter. And in fact, that's the highest level of

cancellations since the third quarter of 2001, which was impacted by 9/11.

Of course, we've got much higher load factors and few receipts to re-accommodate impacted customers today.

But over the years, we've made significant investments in several operational recovery tools that minimize the

impact on our customers for those issues. So, in the first quarter environment 97.5% of our customers got to their

destinations the same day as scheduled. And that's compared to 97.8% last year when these issues didn't exist.

So a very solid, very customer service driven result given the unexpected challenges.

Turning to the MAX, we have 34 MAX aircraft grounded. 33 of them are in Victorville, California. We still have one

aircraft in Orlando that had the engine issue during the ferry flight. We're in the process of doing an engine

change on that aircraft. It will be ferried to Victorville sometime over the next week. Having all the airplanes in one

place improves the efficiency of our maintenance programs to the aircraft as well as re-launching the fleet when

we're able to do so.

We're using this additional downtime to do any necessary inspections or planned work, so that when the fleet

can't be re-launched, it as close to being a new delivery aircraft from a maintenance perspective as possible.

Getting all 34 aircraft to re-launch and back in service is expected to take a month or so. We're still working on

those detailed plans. The aircraft will need software upgrades as well as make-ready-to-fly work, and that

includes things like unsealing the aircraft, oil and fluid checks, required inspections, system checks, cabin

cleaning, those types of things. Of course, there'll also be additional FAA pilot training requirements that will also

need to be completed.

As Gary and Ryan mentioned, we removed the airplane from our scheduled service through August 5. Assuming

the airplanes are cleared to fly before then, we'll pragmatically bring them back into our operational fleet and will

utilize them as spares to support the network. They would begin to fly in a normal scheduled service pattern

beginning August 6. And of course, if the groundings continue past that date, we'll need to make further

adjustments to the schedule.

So as we move into the second quarter, our operational theme is to provide an exceptional customer experience

over the summer. Our unexpected maintenance events are behind us since we reached the Tentative Agreement

with AMFA. AMFA is in process of educating our mechanics on the agreement. We expect the voting results in

the second half of May. The MAX flights have been pulled out of our schedules and all impacted customers have

been contacted and are in the process of being re-accommodated. And given the related capacity pull down, we

are well staffed across the busy summer travel period, so that we can provide exceptional service. We're focused

on giving our customers the safe, reliable, on-time and fun experience that they're accustomed to on Southwest.

And so with that, I will turn it over to Tom. ......................................................................................................................................................................................................................................................

Thomas M. Nealon President, Southwest Airlines Co.





Okay. Thanks Mike. So as you all know, we finished 2018 very strong. We came into 2019 with a lot of

momentum. And I think that despite several significant challenges, we have delivered a very strong revenue

performance going into – in the first quarter. In fact, we achieved record first quarter operating revenues of $5.1

billion, and our year-over-year unit revenue performance is expected to be among the top in the industry. And just

to add on to what Gary said, the people of Southwest Airlines, they carried the day throughout the quarter under

very, very tough circumstances with a lot of cancellations, a lot of re-accomms, and they served our customers

with the hospitality and the kindness that we are famous for. So it's been a challenging quarter and you all did an

incredible job.

In our March 27 Investor Update, we shared the details behind the drivers of our revised Q1 RASM forecast,

which we said will be up 2% to 3% year-over-year. And we ended the first quarter, at the high end of that

guidance with RASM growth of 2.7%. So let me start the quick recap of Q1 and then I'll cover our outlook for the

second quarter. So in January we were expecting Q1 RASM to increase in a range of 4% to 5%. And just as a

reminder, there were several key factors that went into that original guidance. First, a continuation of the strength

in the base business trends that we experienced in Q3 and Q4 of 2018. Second, the benefit from November

system-wide fare increase. Third, continued strong performance from our Rapid Rewards program. Fourth, 1.5

points year-over-year RASM benefit from our new res system, and finally, a 1.5 RASM tailwind from Q1 2018's

suboptimal flight schedule.

We also planned for roughly $40 million shift in revenue from Q1 to Q2 due to the Easter shift. And we also plan

to grow our Q1 capacity by approximately 3.5% to 4%. So that's what the plan was based on. So, let me quickly

recap what's occurred since our earnings call in January. So, first as we shared previously, we quantified the

impact of the government shutdown to be roughly $60 million. And obviously, government-related business travel

was the most easily identified. But we also began to see a clear trend change and leisure demand softened with

the prolonged shutdown and this continued pretty much throughout the quarter. Versus our original Q1 RASM

expectation of plus 4% to 5% the shutdown impact was what caused us to revise our Q1 RASM guidance down a

full point to plus 3% to 4%.

Second, the unscheduled maintenance events was another large contributor resulting in a little more than half a

point reduction to Q1 RASM. And this essentially lasted from mid-February through mid-March. Third, the March

13 grounding of our MAX fleet was the next largest revenue drag, was a slight benefit actually to our Q1 RASM.

And fourth, softness in leisure demand and yields, which is really related to the government shutdown, was

approximately a half point negative impact to Q1 RASM. I think it's important to call out right now that this trend

has changed. And we're seeing leisure demand and yield strength in the second quarter. So we ended the quarter

with over $200 million off our original revenue forecast and we ended the quarter about 2.5 points below our

capacity plan.

Now part of the RASM impact we saw, particularly in February and March, was due to having less inventory

available for higher-yield, close-end bookings. We had to use lot of this close-end inventory to re-accommodate

our customers due to the maintenance disruptions in the MAX grounding. Now in contrast to the unscheduled

maintenance disruptions, which were very unpredictable day in, day out and very difficult for our employees and

our customers, we were much better able to get out in front of the MAX cancellations to minimize the impact to

our customers. And we're much more proactive in re-accommodating our customers several days in advance to

the flight date. So having said all that, our close-in yields remained strong year-over-year.

Business travel demand continued to be strong as well. But we took fewer close-in bookings simply because of

the reduced inventory per sale. Our revenue management capabilities continued to perform very well and drove a

one point year-over-year RASM benefit in the quarter, which was slightly lower than our original expectation of a





point-and-a-half. And this is due to the softer trends, I just mentioned, as well as the reduction in inventory. Our

industry-leading Rapid Rewards program is performing extremely well and is continuing to grow double-digits both

in terms of the size of the customer portfolio, as well as in terms of the total loyalty revenue.

We are continuing to see tremendous strength across every metric of Rapid Rewards and this was on already

strong base. In Q1, we saw record acquisitions in new Rapid Rewards members. We also saw our highest ever

acquisition of new co-brand credit card holders. And we're also seeing very high retention rates, which is a great

combination. So, again, our Rapid Rewards program continues to perform extremely well. Our customers love the

benefits and the value of the program and there is a lot of runway in front of us for continued growth. In terms of

our ancillary products, they also contribute to the first quarter's RASM performance, also with strong double-digit

performance in our boarding products, including continued strength in the variable pricing of our EarlyBird product

that we implemented last fall.

That pricing structure is working very well and it's meeting all of our expectations. I think EarlyBird also benefited

from our improved merchandising capabilities on Southwest.com. And we will continue to invest our industry-

leading direct-to-consumer Southwest.com platform. Our international markets are also doing very well and

continue to develop and mature. Though this is only 4% of our system capacity, we are really pleased with the

performance that we're seeing. RASM, yields, load factors are all strengthening and our international business is

developing as planned. And we're also seeing noteworthy performance in Puerto Rico and the Caribbean. Finally,

we launched our service to Hawaii on March 17.

We began our initial flights by connecting Oakland to Honolulu and Maui. And as you know, we began our Hawaii

flights with very low initial pricing. And if you look at where we are today, we are moving up the pricing ladder to

what we consider to be normal pricing levels and we're seeing very strong demand in bookings. And while it's a

small sample step, the early feedback from our customers, as Mike alluded to, is absolutely exceptional and their

satisfaction with the in-flight experience is actually higher than the rest of our system, which as you know, has

always had extremely high Net Promoter Score. And I think this clearly speaks to the strength and the quality of

our economy product and not just on short and medium haul trips, but long-haul trips as well.

So, in summary for Q1, a lot has happened over the past three months. Several things that happened that we

certainly do not anticipate, but a lot of things also happened that we did expect. We saw 1.5 point year-over-year

tailwind in Q1, 2018 suboptimal schedule. We saw a continuation of strong year-over-year close-in yields. We

saw another very strong performance from Rapid Rewards, and we saw a healthy year-over-year RASM benefit

from our revenue management enhancements. And just as a footnote, this is our highest year-over-year quarterly

RASM since the third quarter of 2014. So that's it for Q1. Now, let's talk about the second quarter. So, we are

expecting strong year-over-year Q2 RASM performance in the range of up 5.5% to 7.5%.

And this is based on the current booking curves and pricing trends that we're seeing. This is a strong year-over-

year improvement, as well as compared with Q1. And recent demand and yield trends have stabilized and are

improving. Earlier this month, as you know, we republished our schedule for April 7 through August 5 and the

intent was very simple, to get us back to the schedule that we knew we could fly with the 737-700s and 737-800s

that were in our fleet. As we remove MAX flight in the schedule, we're doing it in a way that maintains the integrity

of our networks and the strength of our schedule. And until the MAX is back in service, we intend to operate a

slightly reduced schedule, but with the reliability and the hospitality that we're famous for.

It's a better and more efficient way to run the operation and that's what our employees and our customers need

from us. Now keep in mind, because of the MAX grounding, we'll have less close-in seat inventory, that's because

we're having to re-accommodate impacted customers on new itineraries, which by definition is being done with





close-in seat inventory. So this will have an impact on close-in higher yield April bookings. We saw improvements

in bookings and yields for Easter, and we're also seeing improvement in both May and June. The demand that

we're seeing is solid for both leisure and business travel, and close-in fares are holding up very nicely, and we're

seeing a continuation of strength in close-in yields year-over-year. So the bottom line is that we're encouraged by

the improvements that we're seeing in Q2.

And just as a reminder, we had a three point RASM headwind in Q2 of 2018 and two things drove this. First, we

had the one point impact from the suboptimal flight schedule. And second, we had a two point impact following

Flight 1380. So this equates to a three point RASM tailwind for Q2 2019. We also have a half point year-over-year

RASM benefit due to the Easter shift into Q2. So similar to the first quarter, we expect around a point in year-over-

year RASM benefit in Q2 from our reservation system, and this is in comparison to roughly a half a point RASM

benefit in Q2 of last year. And we expect about one point RASM benefit in Q2 due to lower capacity as a result of

the MAX groundings.

And finally, we expect another strong performance from our Rapid Rewards program in the second quarter as

well as continued strength and growth in our ancillary revenues. As we said, Hawaii is off to a great start. It's

exceeded our expectations in March due to the overwhelming demand on our initial flights. And despite a very

short, very short 2-week booking window, our first flight sold out very quickly. In fact, the initial flights were sold

out before we were even able to get the first e-mail out to Rapid Reward members. So this coming Sunday, we'll

continue. We'll begin interisland service between Honolulu and Maui and we'll connect Honolulu and Kona on

May 12. On May 5, we'll launch service from our second California gateway, San Jose to Honolulu.

And on May 26, we'll connect San Jose to Maui. We have more Hawaiian service to come, and we are very

pleased with how these markets are performing. And the expansion of the Southwest service into Hawaii is our

primary route development focus for 2019 to 2020. And that will also include more interisland service. So to wrap

it up, first quarter was challenging across many fronts certainly for revenue. I am very proud of our people, and I'm

very proud of our first quarter results. And we are off to a solidly positive RASM performance for the year. Our

goal to grow 2019 RASM in excess of 3% year-over-year has not changed.

We're dealing with some unforeseen circumstances, but we are focused on those things that we control. The

strength of the Southwest brand remains very high. Our customer service and our brand NPS scores continue to

be in the very top, the very top of the industry. We're continuing to grow our customer base, in particular in the

most valuable customer segments as well as in key markets. So we have a lot of momentum coming out of Q1,

and our immediate focus is on solid execution in Q2. And just like in Q1, our outlook for Q2 RASM should be at or

near the very top of the industry again.

So with that, let me turn it over to Tammy to take us through the financials. ......................................................................................................................................................................................................................................................

Tammy Romo Executive Vice President and Chief Financial Officer, Southwest Airlines Co.

Thank you, Tom, and hello, everyone. Gary, Mike and Tom have outlined the challenges that we've been

managing through since the beginning of the year, and I'd like to add my thanks to all of our hard-working

employees for their resilient focus to take good care of our customers and for their unwavering commitment to

Southwest. Despite the significant headwinds, we are off to a solid start to the year with almost a 10% pre-tax

margin, and we continue to consistently generate strong cash flows and shareholder returns. I want to also thank

our people for their focus on cost control in the midst of all the challenges. Our first quarter nominal cost excluding

fuel and profit sharing were relatively in line with where we expected them to be at the beginning of the quarter

despite the numerous headwinds.





On a unit basis, ex-fuel, special items and profit sharing, our costs increased 8.1% year-over-year. Relative to the

approximately 6%, we were expecting back in January there were two primary drivers of the higher year-over-

year growth. First, the flight cancellations that we experienced reduced our available seat mile growth in first

quarter by about 2.5 points year-over-year. And combined with additional cost pressures from maintenance-

related disruption and weather increased our CASM-Ex by about three points, since we didn't have opportunities

to shed cost that were predominantly fixed that close-in. Second, we had a $30 million increase to salaries, wages

and benefits due to our Tentative Agreement with AMFA, which represents higher compensation for our

mechanics compared with the previously rejected TA from last fall.

This created another point of year-over-year CASM-Ex increase in first quarter. This four point negative CASM-Ex

impact was offset by about two points due to better-than-expected completion factor, employee productivity and

healthcare trends as well as the shifting of advertising and airport cost out of first quarter and into future quarters

this year. This resulted in an 8.1% increase in our first quarter CASM excluding fuel, special items and profit

sharing year-over-year. To recap, if you exclude the impact from the unexpected events, first quarter 2019 CASM-

Ex growth would have been in the 4% to 5% range year-over-year. Looking to second quarter, our expectations

back in January were for year-over-year cost inflation, ex fuel and profit sharing in the 6% range similar to our

initial first quarter estimates.

As a reminder, the key drivers of our initial expectation were the underutilization of our fleet in first half 2019 due

to the delay in our service to Hawaii and the resulting one-time startup cost; higher airport, labor and ownership

cost as well as the timing of maintenance events and technology investments. While those drivers are still

relevant the reduced capacities for our MAX groundings for second quarter is now driving an additional five points

of inflationary pressure net of some flight crew and landing fee efficiencies from proactive flight cancellations

beginning in early April versus our immediate cancellations in March. And we have about one-half point negative

impact from advertising and airport cost shifting from first quarter.

As a result, we now expect second quarter CASM excluding fuel and profit sharing to increase in the 10.5% to

12.5% range year-over-year. Looking to the back half of this year, we initially expected flat CASM-Ex. With our

MAX groundings extended through August 5, we now estimate about three points of incremental unit cost

pressure in third quarter 2019 based on flight cancellations to-date. And while we hope this doesn't persist any

longer, there is still uncertainty around the timing of the MAX returning to service. That said based on what we

know today, we continue to expect sequential improvement in the year-over-year CASM-Ex fuel and profit sharing

from second to third to fourth quarter. For full year 2019 cost under the assumption that MAX groundings do not

extend beyond August 5, we currently estimate CASM excluding fuel and profit sharing will increase in the 5.5%

to 6.5% range year-over-year.

This includes about a two-point headwind from lower capacity as a result of the MAX grounding and a half a point

of headwind due to the TA with AMFA. Of course, we will keep you updated as we learn more. Moving on to fuel,

fuel prices have increased since the beginning of the year with Brent crude up 25% in first quarter since January

1. Also, our fuel efficiency improvement has been impacted by the MAX grounding. That said our first quarter

economic fuel price was in line with our most recent guidance at $2.05 per gallon. We have great fuel hedging

protection in place this year with 78% hedged in second quarter and 60% to 65% hedged in the second half of the

year. Our hedging premiums for this year remain at approximately $95 million or about $0.04 per gallon.

Our 2019 hedging protection produces modest gains at current market prices and kicks in more materially at a

$75 Brent crude equivalent, so we are very well-prepared should we continue to see rising energy prices. And as

a reminder, our 2019 hedges are a mix of WTI and Brent crude. Our hedging portfolio continues to be structured





so that we fully participate in any market decline. For second quarter 2019 and full year 2019 based on market

prices as of April 18 and given our current hedge, we expect our fuel price per gallon to be in the $2.10 to $2.20

range. Fuel efficiency improved a modest 0.5% at first quarter, which was understandably lower than expected

with the grounding of our 34 most fuel-efficient MAX aircraft in mid-March. Also, heavy winter weather also drove

a higher fuel consumption than we had planned.

Second quarter fuel efficiency is expected to be flat to down 1% year-over-year as the MAX has been removed

from the entire second quarter flight schedule. For the full year, 2019 fuel efficiency is now expected to be flat to

up 1% year-over-year. That said, fuel efficiency improvement remains a material part of our longer term cost story

with the MAX is back in service and more fuel efficient aircraft will comprise a growing percentage of our total

fleet.

Turning now to our industry-leading balance sheet, our strong financial position earned us an upgrade to A- from

Fitch during the quarter, which we are thrilled about. We ended the quarter with ample cash and short-term

investments of $3.9 billion with our $1 billion revolver fully available.

We adopted the new lease standard as of January 1, 2019 on a prospective basis. And as a result, the primary

impact was to the balance sheet. We recognized a $1.5 billion operating lease right-of-use asset, which is

primarily comprised of aircraft operating leases and airport operating leases and a corresponding liability. We also

removed $1.7 billion of assets constructed for others and the related construction obligation of $1.6 billion for

completed airport terminal projects, such as Dallas Love Field, Houston Hobby and Fort Lauderdale. The net

impact was approximately $270 million reduction to the balance sheet. The impact to the income statement was

immaterial.

We have very manageable debt obligations and capital spending plans for 2019, and at this point we continue to

expect 2019 CapEx in the $1.9 billion to $2 billion range, based on the remaining Boeing deliveries scheduled for

this year. On non-aircraft CapEx, we continue to make significant investments in technology and we are making

good progress on a new maintenance system.

Our significant airport investments, in LAX, Kansas City, Baltimore, Nashville and Boston are underway and

progress is being made on our maintenance hangars investments in Houston, Phoenix and Denver. We expect

our investments to help drive incremental revenue and productivity, as well as support longer-term cost objectives

and our growth plan.

We had strong cash flows in first quarter, allowing us to return $678 million to shareholders through share

repurchases and dividends.

Lastly, on fleet and capacity, we ended first quarter with 753 aircrafts in our fleet, taking delivery of three leased

MAX 8 aircrafts so far this year. We are currently working through the delivery delays with Boeing, but we don't

have any updates to share at this point. Although, our 41 remaining aircraft deliveries this year are on hold, the

majority of them are back-half loaded. As a reminder, we have 28 owned MAX aircrafts from Boeing and 13

additional leased MAX aircrafts in our order book for 2019.

We are evaluating our fleet retirement plan, but at this point, we continue to expect to retire as many as 18

aircrafts this year, but that will obviously be subject to the duration of the MAX groundings. Our retirement helps

with our fleet modernization effort, improving efficiency, reliability, fuel burn and reducing our maintenance

burden.





In second quarter, given MAX flight cancellations, we now expect capacity to be down in the 2% to 3% range

year-over-year. And for full year 2019, based on what we know today and given MAX flight cancellations through

August 5, we now estimate our annual 2019 capacity will increase in the 2% to 3% range year-over-year.

Our schedule is currently published through early November and that includes the first phase of our Hawaii plan

as Tom covered. And we'll evaluate further flight schedule revisions based on the duration of the MAX

groundings.

So in closing, and as a quick recap, on what we shared today, despite the ongoing MAX groundings, our

employees continue to rally and take great care of our customers. Our revenue management system is producing

revenue gains and performing exactly as we expect it to. And we are expecting strong year-over-year RASM

growth in second quarter. We have a great fuel hedging protection for 2019 and beyond in place to mitigate rising

fuel prices.

Flight cancellations and lower capacity is putting pressure on our non-fuel unit cost, but we continue to focus on

strict cost control and being nimble. Based on what we know today, we continue to expect solid margins in 2019

with the opportunity to deliver stellar returns on capital. We continue to make important investments in our people,

our fleet, the airports we serve and technology, which will support our scalability and many future growth

opportunities, including Hawaii. Another huge thank you to all of our employees who are managing through a lot

and continue to do a terrific job.

With that, Cody, I'll turn it back to you now to take questions. ......................................................................................................................................................................................................................................................

QUESTION AND ANSWER SECTION

Operator: Thank you. [Operator Instructions] We'll begin with our first question from Jamie Baker with

JPMorgan. ......................................................................................................................................................................................................................................................

Jamie N. Baker Analyst, JPMorgan Securities LLC Q Hey, good afternoon, everybody. Gary, hypothetically, how many consecutive quarters of stagnation from a

capacity perspective would you be willing to tolerate before possibly considering non-organic growth

opportunities? ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Well, we've been asked several variations of that question, although not that one exactly. And right now, I just

asked our folks to stay focused. We have a very good plan for 2019. We're not at the point yet where we need to

call any material audibles.

We're working on – the MAX is pretty much the audible that is tasking our group right now. I have not asked them

to consider contingency Plan B, C, D, E or whatever it might be. So, I just don't have a ready answer to that

question. I think all of us are working under a reasonable assumption that the MAX is going to return to service in

a reasonable amount of time. And then whether we're "back to normal" sometime during the third quarter or at the

beginning of the fourth quarter, in the grand scheme of things, is probably somewhat immaterial.





I think what all of us are a little more concerned about is if that goes on too long we have a – Tammy referred to

this – so, we have a retirement program. So, Jamie, I think what we would be – what we would have to scratch

our heads with more is just from an operational perspective, we've already planned retirements. And that would

imply that capacity goes down from here. But we certainly don't want that. And it would be a lot of work for us to

go in and unwind our retirement plan and I do not want to do that. That would not be efficient. We've got better

things to work on quite frankly.

You've asked a much broader, more strategic question. And that's a pretty – that's an outlier in terms of the

scenario. And I just don't – I don't think that that is anything that we'll be spending any time thinking about right

now. But clearly, strategically, we're in a growth mode, so is the industry. We need to be growing. And we don't –

we – clearly, we do not want this stagnation to use your word to continue very long. But I just don't have a ready

answer on that question and I don't think that that is a likely scenario. ......................................................................................................................................................................................................................................................

Jamie N. Baker Analyst, JPMorgan Securities LLC Q Yeah, that's very helpful, Gary. No, I appreciate it. A quick follow-up; in the event that the FAA does not require

any sim time, and it seems to be moving in that direction, but other regulatory agencies do or other pilot unions do

whether here or abroad, is this a scenario that you discussed with SWAPA at all? I mean is there a risk that even

if the FAA goes with an iPad training protocol, just the public scrutiny and/or union pressures might lead you to

nonetheless pursue sim-based training as a part of the return to service because that would obviously slow the

process down, possibly quite a bit? ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Well, again, just taking your question literally, which I think is the way you intend it. Yeah, I think that just getting

pilots back into the simulator for an event would be a challenge and that would take time. I think it just depends on

what training one is talking about because our pilots are extensively trained. And again, I'm a layperson at this,

but my own interpretation is that we already do the kind of training that one would be contemplating to put the

MAX back into service. Mike, how many MAX simulators are there even in the world?

But the point is, managing the aircraft in a runaway stabilizer scenario is something that we already train on and

at least, as best I can tell, has already been covered. So again, I'll just go back to, we don't know what that would

mean precisely. But at this point we're not hearing that that will be a requirement. I just go back to, we are the

most experienced 737 operator in the world. Our pilots are extensively trained. We don't hire them unless they

have a tremendous amount of experience – captain experience for that matter. So regardless, we'll do whatever

we have to do here, but we're obviously awaiting the Boeing Service Bulletin as well as the FAA Airworthiness

Directive to know exactly what we'll have to do. ......................................................................................................................................................................................................................................................

Jamie N. Baker Analyst, JPMorgan Securities LLC Q Gary, super helpful. Thank you very much. ......................................................................................................................................................................................................................................................

Operator: Thank you. We'll now take our next question from Duane Pfennigwerth of Evercore ISI. ......................................................................................................................................................................................................................................................

Duane Pfennigwerth Analyst, Evercore Group LLC Q





Hey. Thank you. So maybe, I am reading too much into this sentence. But the CapEx reiteration for this year has

this clause of assuming no prolonged grounding of the MAX aircraft. So is that to suggest that you might not take

delivery of aircraft that you're scheduled to in the back half if it's still grounded and that CapEx would actually

come down? ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A No. I think that this will all just be explicit. We are not taking any deliveries right now. And therefore we're not

paying for anything. So if you just took your scenario and we don't get any more MAXs delivered in 2019, our

CapEx would be dramatically lower. But Boeing cannot deliver an airplane now. ......................................................................................................................................................................................................................................................

Duane Pfennigwerth Analyst, Evercore Group LLC Q That's right. ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A So any airplanes that they are manufacturing, again, just to be crystal clear, they're at Boeing field. And so, they

are not being delivered and we're not paying for them. Did I get that right, Tammy? Tammy is the one who sends

the money, so I just... ......................................................................................................................................................................................................................................................

Tammy Romo Executive Vice President and Chief Financial Officer, Southwest Airlines Co. A We will be writing our check as they are delivered. ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A There you go. So, hopefully that answers your question. ......................................................................................................................................................................................................................................................

Duane Pfennigwerth Analyst, Evercore Group LLC Q And then just with respect to the longer-term cost profile. At the start of this year, obviously, there were some first

half pressure. There's been a lot of noise and changes around this grounding. But you had talked about a

flattening of the cost profile into 2020. Given the extra cost pressure that you're seeing this year, can you just

update us on your thoughts of what the cost profile might look like into 2020? ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Yes, sir. And Duane, that's what I was attempting to – a very high level comment on in my remarks is that and

Tammy mentioned this. So we're asking all of our departments to hit their budgets. And then, where they have

activity-driven kinds of spending to obviously come in under their budget. So we're not burning as much jet fuel,

as one example. We're not incurring as many landings and takeoffs from our landing fees and rentals perspective.

So, to the extent that we have variable cost, we expect our departments to come in under. We have a series of

cost initiatives to improve our efficiency. Those are continuing. And let's just assume that the MAX is back in the

fleet in the summer time.





I would expect us to hit our cost plan for the fourth quarter, which would be pure. You'd have a – we have our

schedule restored. We have all of our fleet. And I would expect the cost comparisons year-over-year to be quite

good. I think it's a little – Tammy and Ryan gets this question a lot right now, just trying to project forward to 2020.

And what will the cost look like. Again, under that same assumption, that we've restored the flying of the MAX this

year, we don't see any different cost performance for 2020 at this point. Obviously, the comps are going to be

dependent upon what ultimately happens here in 2019. But the cost outlook should be unchanged, based on that

report. ......................................................................................................................................................................................................................................................

Tammy Romo Executive Vice President and Chief Financial Officer, Southwest Airlines Co. A Yeah. So certainly by the time we get to the fourth quarter, we would expect to be on a good trajectory, assuming

the MAX are back in service at that time. So, completely agree. ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Now, if Jamie's question all of a sudden becomes more of an issue, there's extra training or the training delays,

the MAX flying or whatever it might be, you understand that I'm not incorporating those unexpected events into

that kind of a comp. It's assuming that we're back up and running as per normal with that kind of an outlook. ......................................................................................................................................................................................................................................................

Duane Pfennigwerth Analyst, Evercore Group LLC Q Okay, thank you. ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Yes, sir. ......................................................................................................................................................................................................................................................

Operator: Thank you. We'll now take our next question from Hunter Keay with Wolfe Research. ......................................................................................................................................................................................................................................................

Hunter Keay Analyst, Wolfe Research LLC Q Hey, thank you everybody. Thanks for all the color on this call today. And just to follow-up on that line of

questioning from Duane, is it fair to assume that the underlying ASM production on your 2020 CASM will be –

whatever was in the baseline for last year plus whatever is taken out – I'm sorry, for next year whatever's taken

out for the MAX this year, meaning like 4% or 5% baseline plus 2%, 2.5% for the MAX groundings? Is that a fair

way to think about that as you're thinking about the CASM profile for next year? ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Yes, sir. And Hunter, the other – we built the airline to support by year-end, Ryan, 775 airplanes. And then we've

got another 25-ish coming in 2020. So yeah, we want to get the airplanes and we want to fly them. So the

capacity that we're thinking of to begin this year for 2020, that's what I want us to fly. Now again, there's still

questions about exactly how the MAX will re-enter service. But assuming everything comes back online and we're

up and running, we get all the airplanes as we have committed to Boeing, and they've committed to us then yes,

we would be flying the 2020 plan as we started this year. ......................................................................................................................................................................................................................................................





Hunter Keay Analyst, Wolfe Research LLC Q Okay, great. And then, can you talk about the 737-800 in Hawaii and any maybe operational challenges that

you've had with that plane? I know why you flew it there originally – makes sense – but it's probably not the most

ideally suited aircraft for doing that in the MAX. Any operational challenges that you've had there? And also if you

could kind of elaborate on how you're cracking the distribution nut, interisland Hawaii, particularly within the local

community there? Thank you so much. ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A I will ask Mike to speak to the operational aspect and Tom to talk about the distribution. ......................................................................................................................................................................................................................................................

Hunter Keay Analyst, Wolfe Research LLC Q Thank you. ......................................................................................................................................................................................................................................................

Michael G. Van de Ven Chief Operating Officer, Southwest Airlines Co. A Yeah. So we really aren't having any, what I would call significant operational issues with the 737-800. We're very

comfortable with the airplane. We knew though that given its range that we may have to put some lid on the

seats, especially in – we would find we get some of those headwinds. So that's been the biggest operational

challenge for us. We're scanning bags on there; the weight and balance program works well. We've got it blocked

pretty well. The station performance, we're fully staffed in the stations. The people out there are excited. They're

turning the airplanes well. So we're learning how to navigate through the Honolulu airport a little bit better, and the

taxi times on the ground. But in terms of the operation and the maintenance and the support and the crew of the

airplane, all going as planned. ......................................................................................................................................................................................................................................................

Thomas M. Nealon President, Southwest Airlines Co. A Hunter, I think on the distribution side, we started service back in March. We've been on the ground in Hawaii for

well over a year in terms of community outreach, community affairs. And so, we've already got pretty deep roots

for such a new operation, pretty deep roots in the Hawaiian community. And so, in terms of distribution, it's what

we always do. It's Southwest.com. So they know the brand, better than I would've expected actually because

many people from Hawaii are traveling to the U.S. or to the mainland rather, and they're flying Southwest. They

know the brand. So a lot of local marketing, a lot of presence and we're actually seeing very, very strong reception

to the Southwest brand on island. So that's probably how I'd best answer it. ......................................................................................................................................................................................................................................................

Hunter Keay Analyst, Wolfe Research LLC Q Great. Thanks. ......................................................................................................................................................................................................................................................

Operator: Thank you. Our next question comes from Rajeev Lalwani with Morgan Stanley. ......................................................................................................................................................................................................................................................

Rajeev Lalwani Analyst, Morgan Stanley & Co. LLC Q





Hi, guys. Thanks for the time. ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A You bet. ......................................................................................................................................................................................................................................................

Rajeev Lalwani Analyst, Morgan Stanley & Co. LLC Q First, just a clarification on the – on some of the CASM questions from earlier. If capacity growth next year is

going to end up being a lot higher simply because of the MAX timing then shouldn't CASM actually be materially

lower say flat to down versus that 1% to 2% or so that you were talking about before Gary? ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A I don't think I quoted a number. Well, I know I didn't quote a number. So I think all I was trying to communicate at

this point. And so this is April, so we've got a ways to go before we get into 2020. But whatever CASM we were

expecting in 2020 before the events of this year that's what I would be expecting next year. How that will compare

to 2019, I don't think we're ready to say yet. Clearly, we're running higher on CASM here in the first half and it'll

probably dribble into the third quarter. Well, it will because we've already reduced our flight schedule through

August 5. So yeah, you're going to have an easier comp because of all of this. But I don't think we are prepared

today to give you any insight as to what that would be. If you thought it was up 1% to 2% before, yeah, I agree. It's

going to be something less than that. I just don't know how much yet. ......................................................................................................................................................................................................................................................

Rajeev Lalwani Analyst, Morgan Stanley & Co. LLC Q Okay. ......................................................................................................................................................................................................................................................

Tammy Romo Executive Vice President and Chief Financial Officer, Southwest Airlines Co. A Really nothing. Yeah, really nothing has changed from our last comment. So, just setting aside all the noise from

the unanticipated first quarter events, our long-term unit cost target remains unchanged. And so nothing – no new

update here today. ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Yes. So what I meant earlier was just nominal amount not a year-over-year amount. So what else can we do for

you? ......................................................................................................................................................................................................................................................

Rajeev Lalwani Analyst, Morgan Stanley & Co. LLC Q Thanks. And then on the RASM side, Gary, I think, you laid out some objectives earlier in the year. There's been

a lot that's moved around. Can you just refresh us on where you are with sort of hitting those targets and whether

or not and this may be for Tom. Do you think you can see some of the momentum that you're seeing in 2Q going

into the back half of the year such that there's not this massive step down, if you will? ......................................................................................................................................................................................................................................................





Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Let me offer a quick comment and then I know Tom will want to chime in here. In his remarks, he said that our

goal remains in excess of 3% unit revenue growth for the year 2019 versus year ago. What I was intending to also

suggest with my remarks is that we began the year with the goal to improve margins. We have a little bit of help

on that front with lower fuel prices. That still is the case as we look forward today. We've got lower year-over-year

fuel prices. We're a little wobbly with our fuel consumption numbers because of the MAX benefit we were getting

and now not. But except for that the fuel outlook still looks – at this juncture looks very good.

So we had a desire to drive better operating margins, net margins and returns on invested capital. That's not

happening here in the first quarter. But I wouldn't give up on that especially in the second half of the year and for

the full year. So our folks are doing a good job managing their cost. First quarter was really ragged with

operations incurring even though we had fewer flights there was more cost per flight because of dealing with all of

the irregular operations as we call them. So that should perform, Mike, I think a lot better here in the second

quarter because like you and Tom were saying we've gotten ahead of that. It's just a much more orderly way to

reschedule the airline that way. So Tom, you want to talk about the RASM? ......................................................................................................................................................................................................................................................

Thomas M. Nealon President, Southwest Airlines Co. A Yeah, I think just kind of restated the 3% objective is the flight we have in the ground and we're going for it. I think

that what we're seeing so far. The first quarter as you guys know was a very – I think you keep hearing the word

choppy. Every earnings call I hear the word choppy. The first quarter was very, very choppy. And we're coming

out of that and we're seeing really nice stabilization of trends. We're seeing normalization of the curve. We're

seeing normalization of demand and the fare environment seems to be a really where we need it to be. And I

think that it's just a shame we have this MAX thing going on, because it's a pretty good business environment. So,

our corporate travel, which is a really good indicator of just the economy is robust, I wish we had more close-in

inventory to sell, but we're re-accommodating. That's a pretty good indicator of this core economic strength and

the business climate or the business bookings are strong. Like I said, we had more to sell. But that's my

commentary on this. ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A And I think that's excellent. And I – the one thing that I wanted to be sure that all of you took away from today;

hey, I read all kinds of crazy things about the impact on our brand and our customers are mad and on and on. Our

business is really good. And it's in – it's because our employees work so hard to serve our customers so well. So,

they're – well, no doubt there are always impacts to companies brands based on things that happen. Our brand is

unbelievably strong and I think well-deserved. And the operation integrity is intact and looks really, really solid and

there is no evidence of any weakness that is unique to Southwest after our first quarter and I think we're all very

proud of that. And again, very proud of our people for making that happen. ......................................................................................................................................................................................................................................................

Tammy Romo Executive Vice President and Chief Financial Officer, Southwest Airlines Co. A And the only other point I would add on to that is the flexibility and the strength of our network is tremendous. And

I think you are seeing that in our results as we work through all these cancellations. So, I just put an exclamation

point there. And then, I would also just point out that we have a new reservation system, new revenue

management tools which are also helping us manage through all the challenges. So, just the strength of

Southwest just really do go on and on.





Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A And the network changes, I think as some of you all have recognized, they were just masterfully done. So, while

we had to trim some capacity out, it was done in a way that – again, that also maintained the integrity of our

customer offering and very, very proud of that. ......................................................................................................................................................................................................................................................

Rajeev Lalwani Analyst, Morgan Stanley & Co. LLC Q Thank you, gents. ......................................................................................................................................................................................................................................................

Operator: Thank you. We'll now move on to our next question from Jack Atkins with Stephens. ......................................................................................................................................................................................................................................................

Jack Atkins Analyst, Stephens, Inc. Q Good afternoon. Thank you for taking my questions. ......................................................................................................................................................................................................................................................


Jack Atkins Analyst, Stephens, Inc. Q Gary, just to start off with you. It certainly sounds like Hawaii flying is off to a great start, both in terms of customer

demand and also the experience. Now that you've got a couple of months under your belt in terms of booking

trends, I'd just be curious to get your view on if the ramp time around those routes to get them towards system

level profitability has changed at all, or if you're sort of thoughts there have changed given that you've

experienced the last couple of months? ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Oh, again, I'll let Tom speak to that, too. I'll just give you my opinion about that. First of all, we're very good at

forecasting. And that market forecast, at least to me and my experience, surprisingly well. And I think a lot of that

is due to the fact that we have such an immense customer base in California, which is what this is geared for. And

number two, because Hawaii is such a terrific destination that is missing from our flight schedule. But I did – we

haven't talked about international. International is a bigger segment than our – of our system than Hawaii is, of

course. And our international segment is developing very, very nicely. I was very pleased at the performance here

in the first quarter.

And I just offer that up as a contrast. I think our opportunity in Hawaii is far greater and far easier than what we

are tackling in international markets, just because we don't necessarily have the same relative strength. And we

certainly don't have the awareness in our international destinations about Southwest that we do, as Tom

mentioned, on Hawaii. But I don't see, Tom, that it's – first of all, we've just gotten started – to be fair to the

question. But I certainly don't see anything that would discourage us. In fact, the fact that as you pointed out, the

flights sold out before we even put out the press release. I was stunned. But what are your thoughts? ......................................................................................................................................................................................................................................................





Thomas M. Nealon President, Southwest Airlines Co. A I guess, I think I've said this before, that's what I said in the earnings call, that we have such a built-in customer

base in California wanting us to take to Hawaii that I don't know how much faster than typically we should expect

this to turn. I think this will develop faster than other new markets you might have seen us do with international.

We don't have a built-in customer base. I'm thrilled where we are, but I did do some competitive shopping

yesterday just looking at the fares and I really like where we are.

I mean, we're very early into this and we're pricing that is – it's below the competition – but still it's good, solid

strong pricing. I mean, unless you guys take a look at our pricing at dotcom versus our competition, but I love we

are, very quickly, in our development curve. So, I think when you begin to add the bag fees, the first bag, second

bag, third bag, there's a real dramatic difference, and we can make money with that price point because of our

cost structure. And we feel great about it; this is kind of the Classic Southwest Effect. So I feel good about where

we are Jack. ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A And I do want to make sure that – there was a question earlier – I just want to make sure that we were clear. And

Mike commented on this. But we have 175 seats on these airplanes. We are not selling all 175 for operational

reasons. And so that is – and that was Mike's point earlier. So if you think about – in the context of your question

– profitability longer-term, Mike, I think you would agree, the MAX will be the better airplane there. It just has

better performance and better range characteristics. But even with that, I think we feel very good and that's all

factored into our modeling. And I just offer that up, Tom, as I think we have upside even to where we are today

with the performance in those markets. ......................................................................................................................................................................................................................................................

Thomas M. Nealon President, Southwest Airlines Co. A I would agree with that. ......................................................................................................................................................................................................................................................

Jack Atkins Analyst, Stephens, Inc. Q Well, that's great. Thank you for that answer. And then just for my follow-up, Gary, you alluded on the fourth

quarter call to the potential for new revenue management levers that could be rolled out in 2020. And I know there

have been a lot of things in terms of outside factors that have been taking up your bandwidth over the last few

months. But is there anything you can update us on there in terms of the potential for revenue management

opportunities as you look out into next year? ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A I would say in terms of the distractions, sort of the unplanned, I don't – Tom, I don't think that's had an impact on

the work that we're doing on these couple of secret initiatives. ......................................................................................................................................................................................................................................................

Thomas M. Nealon President, Southwest Airlines Co. A Nope. ......................................................................................................................................................................................................................................................





Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A They are totally – but I don't think Tammy, we have any news to share yet? ......................................................................................................................................................................................................................................................

Tammy Romo Executive Vice President and Chief Financial Officer, Southwest Airlines Co. A No, news to share yet. So everyone is going to have to stay tuned there. ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A So stay tuned, please, sir. And then begging for your patience here, so, coming soon. ......................................................................................................................................................................................................................................................

Jack Atkins Analyst, Stephens, Inc. Q Okay. Thanks again for the time. ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A You bet. ......................................................................................................................................................................................................................................................

Operator: Thank you. We have time for one more question. We'll take our last question from Joe Caiado with

Credit Suisse. ......................................................................................................................................................................................................................................................

J. Caiado Analyst, Credit Suisse Securities (USA) LLC Q Hey, good afternoon, everyone. Thanks for squeezing me in. ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A You bet, Joe. ......................................................................................................................................................................................................................................................

J. Caiado Analyst, Credit Suisse Securities (USA) LLC Q Mike, I think you said that it'll take about a month once the grounding orders rescinded to get your 34 aircraft back

into service; a number of things that have to happen there first. It sounds like there's some incremental costs

associated with those preparations. So for you and Tammy, are those already embedded in your revised full year

CASM-Ex guidance? Or are you not going to be picking up the tab on that and so therefore it is not included? ......................................................................................................................................................................................................................................................

Tammy Romo Executive Vice President and Chief Financial Officer, Southwest Airlines Co. A We've done our best based on what we know to incorporate all of the associated costs in our guidance. And

obviously, if anything changes there we'll update you. But it includes our – it's included. ......................................................................................................................................................................................................................................................





J. Caiado Analyst, Credit Suisse Securities (USA) LLC Q Okay. Thanks for that clarification. And then I was wondering are you able to comment on the results of the

inspections that you performed on the LEAP-1B while they've been grounded? And whether you've observed any

kind of type of wear pattern that's different than what you expected? ......................................................................................................................................................................................................................................................

Michael G. Van de Ven Chief Operating Officer, Southwest Airlines Co. A Joe, you're talking about the fuel nozzle coking? ......................................................................................................................................................................................................................................................

J. Caiado Analyst, Credit Suisse Securities (USA) LLC Q That's right. Yeah. ......................................................................................................................................................................................................................................................

Michael G. Van de Ven Chief Operating Officer, Southwest Airlines Co. A Yeah. So when we had – on March 26, we were ferrying the last flight from Orlando to Victorville, we did have the

in-flight shutdown and we turned back to Orlando. So, the working theory on that particular airplane was that there

was coking around the fuel nozzles and it created a variance in the hotspots and cold-spots in the engine and the

hotspot in the engine we had some damage with respect to the lower pressure turbine.

So, GE went out and asked – the good thing about the engine temperatures and fuel coking it is – it's pretty

manageable. It builds over time. It lends itself to trends that are detectable and then you can go create

procedures to go monitor and inspect and repair/replace those things. So GE asked the industry to look at 25

engines. We looked at 12 of ours. And we've done some engine replacements. We've done some nozzle

replacements. The way we're thinking about our fleet as it's sitting down, and I mentioned it earlier, we like to

almost get it at – in a new delivery status – when it comes back up and flying. And so if we can do an engine

change on that and it precludes us from having to do inspections after we re-launch the fleet, we'd rather go do

things like that. ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Joe – the only thing I would add to that is that every new engine, at least in my experience has it's – I'll just call it

break-in issues. And it doesn't matter whether it's a CFM engine or some other manufacturer. And our technical

operations work with the manufacturer to develop inspections and repair processes. And they are doing what they

need to do to maintain these engines.

So I think in that regard, I didn't want you to get the impression that we are doing investigative work here on the

engines right now; we're not doing that. We know what we need to be doing. We're working with CFM to clear

some of these items out so that they don't have to be inspected and especially the fuel nozzle example that Mike

was using as frequently. But it's not unusual for an engine to have some break-in things happen and the engine

for the most part has performed in line with our expectations, especially with the fuel efficiency. It's a great quiet

ride and it's a good engine and I expect it to – I only expect to get better. ......................................................................................................................................................................................................................................................

J. Caiado Analyst, Credit Suisse Securities (USA) LLC Q





Great. Thanks, everyone. ......................................................................................................................................................................................................................................................

Ryan Martinez Managing Director, Investor Relations, Southwest Airlines Co. A Well, great. That concludes the analyst portion of our call. Of course, if you have any other questions, please

reach out to me and thank you all for joining us. ......................................................................................................................................................................................................................................................

Operator: Ladies and gentlemen, we will now begin our media portion of today's call. I'd like to first introduce

Ms. Linda Rutherford, Senior Vice President and Chief Communications Officer. ......................................................................................................................................................................................................................................................

Linda B. Rutherford Senior Vice President and Chief Communications Officer, Southwest Airlines Co. A Thank you, Cody, and welcome to the members of our media on today's call. We'll go ahead and get started with

the Q&A portion and Cody, if you would just go ahead and give them instructions on how to queue up. ......................................................................................................................................................................................................................................................

Operator: Absolutely. [Operator Instructions] We'll now begin with our first question from Alison Sider with Wall

Street Journal. ......................................................................................................................................................................................................................................................

Alison Sider Reporter, The Wall Street Journal. Q Thanks so much. Can you tell us anything about, sort of how you're thinking about steps you'll take once the MAX

is eventually allowed to fly again, steps you'll take to reassure passengers, set people's minds at ease that it is

safe? Have you started having those sorts of conversations with Boeing or with the pilots or flight crew? What

kind of messaging should we expect around that? ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Hi, Alison. This is Gary. I think you should expect a messaging. I don't think we're ready, Tom, to say exactly what

that is yet. But it's a great airplane. Boeing is a great company. This is – we're looking forward to obviously

working with the FAA to get it ungrounded. And we'll gauge our messaging according to what questions our

customers had into a large degree. But Tom, any thoughts you want to share there? ......................................................................................................................................................................................................................................................

Thomas M. Nealon President, Southwest Airlines Co. A It's a pretty good question. I think no one's asked the same question. There is just so much media and coverage

on the topic that everyone's got an opinion and I think that there's certainly going to be some people that I expect

will probably book away for some period of time. That's probably – I have no idea how to quantify that by the way.

But I think there will be some people who'd do that. I think we have a very good understanding from our marketing

team and our communications team. We're doing a lot of work understanding what our customer's perceptions

are, what their understanding is of the issues, what their awareness is of the issues, what their concerns are with

the issues. So, I think we have a pretty good perspective on that.

I think what's also pretty interesting, at least from my perspective is, since this has been going on, our customer's

perception of the Southwest Airlines, the brand, the company, the people has not changed at all with the

grounding of the MAX. There's some words that they use when they talk to us about what they think of us and

they use words like, they're very loyal to Southwest. They have a lot of confidence in Southwest. They have a lot





of trust in Southwest. And I think they have a good reason to have confidence and trust because as you've heard

throughout the call, we know the 737 better than any carrier in the world and they understand that about us. So

we're working through our plan right now. And I can tell you that we'll have a very comprehensive plan that

communicates directly to our customers and our employees every step of the way. But that's – there's more work

to be done as we learn more, but we're very focused on it. So I appreciate the question. ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A We'll certainly want to share what we have done to satisfy ourselves that the airplane is ready to return to service.

And I think Boeing has work to do to clarify exactly what this functionality is for, what it's not for, because I do

think there is a lack of understanding in the media even. And so there's work to be done I think on both fronts. But

I'm confident that we're up to that task. And I think what Tom mentioned again, we mentioned earlier which is key,

which is we have a great brand. It's one that people trust. And we earn that every day. So we'll want to certainly

be mindful of that and message what we are comfortable in committing to. And clearly, we're not going to do

anything that we think is unsafe. So that's not even a topic. That's not even a question. But I agree with Tom. I

think that there'll be those questions and I think people will get – I think they will quickly get comfortable with the

answers. ......................................................................................................................................................................................................................................................

Alison Sider Reporter, The Wall Street Journal. Q And if I could just ask one follow-up. Have you been sort of surveying customers about how they're feeling about

the MAX right now? Is that something you've been directly communicating about with people? And what kind of

responses have you been getting? ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Yeah, that's what Tom mentioned is yeah, we're absolutely doing that. ......................................................................................................................................................................................................................................................

Alison Sider Reporter, The Wall Street Journal. Q Okay. Thanks. ......................................................................................................................................................................................................................................................

Operator: Thank you. We'll take our next question from David Koenig from The Associated Press. ......................................................................................................................................................................................................................................................

David Koenig Reporter, The Associated Press Q Okay, well, thanks. Here's another of those questions, I guess. First, Gary, are you going to seek compensation

from Boeing over the groundings? Tammy talked about the hit to CASM, the additional fuel spending. Clearly,

there's a hit to your revenue. And I'm also – I'm sorry it was hard to hear Tom when he was talking about people

booking away – but can you give some sense of what magnitude you expect that to be? Is it going to be serious

enough that you might not even be able to use all 34 of the planes you've got plus the 41 you're supposed to get? ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A No, I don't think we're going to have any concern or any risk of using all 34 airplanes. Then we'll fill them up just

like we always do. The only point I was trying to make was there's certainly going to be some people that are





concerned and they may be intimidated to fly for some short period of time. I don't think it's going to be a massive

issue for us. I think that our customers know us, trust us. They know we know the 737. So I don't want to

overstate my comment or have my comment inflated. I just raised that as – won't surprise me that few people said

that. But I think we're going to be fine. ......................................................................................................................................................................................................................................................

David Koenig Reporter, The Associated Press Q I appreciate that clarification. That's good. But are you basing that on the surveys that you're doing or are you

basing that on history of past planes that have had accidents? What? ......................................................................................................................................................................................................................................................

Thomas M. Nealon President, Southwest Airlines Co. A Yeah, we're basing that, David, on the customers that we are talking to. And we're doing a lot of research, if you

will, with third parties as well as directly with our customers. And we're very attentive to what is the customer's

perception of the brand through our trip Net Promoter Score as well as our brand Net Promoter Scores, as well as

we're hearing and seeing on social media. So I think we've got a really good handle on what our customers are

thinking and feeling and what we need to be doing. ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A And then on the Boeing aspect of your question; well, yeah, we're not happy with this situation. Who would be?

Boeing has already conceded that there are things that they need to address and obviously we totally agree with

that. We have a great partnership. We're – I think without a doubt the most successful airline in history, we've got

an impeccable safety record in terms of our partnership. What's important obviously is where we go from here.

And I would fully expect that we'll continue to have a great partnership with the Boeing Company with respect to

anything along the lines of business arrangements or our contract arrangements or whatever it might be.

Those I think that we'll take up with Boeing privately. And again, I will just restate the obvious that this is not a

good situation. And we'll all need to work together to work our way out of it. Boeing is a very fine company. They

build fantastic airplanes. Mike has said this many times. When we launched the MAX, the MAX 8 we felt was the

best narrow-body airplane in the world ever. And there's every reason to believe that that will continue to be the

case once it returns to service with this software modification. ......................................................................................................................................................................................................................................................

David Koenig Reporter, The Associated Press Q Okay. Thank you. ......................................................................................................................................................................................................................................................


Operator: Thank you. We'll now take our next question from Mary Schlangenstein with Bloomberg News. ......................................................................................................................................................................................................................................................

Mary Schlangenstein Dallas Reporter-Bloomberg News, Bloomberg LP Q





Thanks. I have a couple of quick questions for Mike. Mike, I wanted to ask you following up on the LEAP engine

question, are you finding a degrading of any of the parts like the fuel nozzle sooner than you would've expected

on those planes due to the coking? And my second question is what intrigued you enough about the A220 that

you actually went to Airbus to take a look at the plane? ......................................................................................................................................................................................................................................................

Michael G. Van de Ven Chief Operating Officer, Southwest Airlines Co. A Well, starting on the fuel nozzle issue. You know Mary, I don't know if that's any sooner than we expected. Coking

is not – it's not unusual. If there is a good thing about coking on fuel nozzles, they built over time, their trends are

detectable. And you can clearly create monitoring and inspection and repair or replace procedures to take care of

all of that. As we – as Boeing learns more about it as they monitor their worldwide fleet, I'm certain they will have

design changes or design improvements that they will get into the production line and it will mitigate the

inspections that we will need do on a go forward basis. ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A And I think that's key, Mary. Mike used the word learning and CFM not Boeing. But if anything that is new there

will be learnings. And there will be things that were designed and intended to operate or perform a certain way

that don't. So that was the point I was trying to make early on the Analyst Call. That's certainly taken place here. ......................................................................................................................................................................................................................................................

Michael G. Van de Ven Chief Operating Officer, Southwest Airlines Co. A Yeah, Mary I don't think that this fleet engine, its maturity, I don't think it's all – its maturity curve is all that different

than what the CFM engine was, what the gear turbo fan is, what the Rolls-Royce engine on the 787 is. They all

have a kind of a maturity curve. And this one feels at least in my history at Southwest, we feel like we're right on

that curve. ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Yeah, you make an excellent point. CFM56 has been a phenomenal engine and it had a rocky start, and whatever

the CFM was before that on the Classic same thing. It had kind of rocky start and GE and CFM did a wonderful

job. You want to talk about the Airbus? ......................................................................................................................................................................................................................................................

Michael G. Van de Ven Chief Operating Officer, Southwest Airlines Co. A Yeah. So Mary, our fleet team was down in Europe and visiting. But it's not anything unusual. We have

relationships with all the OEMs, most of the lessors around the world. And we're just always out there trying to

discuss and evaluate economics and opportunities in airplanes. And I had an opportunity to go out to the Paris Air

Show last year. And it was a great opportunity for me, because I got to talk with Boeing and GE about the MAX. I

got to learn a little bit about Airbus, NEO; Bombardier was out there with the C Series at that time. I talked to

Embraer. I talked to Pratt & Whitney, and it was just a – it was a great way to go, just gather information about the

marketplace out there. Every one of those – people have great products and great airplanes and really that was

just nothing more than our fleet team trying to gain a little understanding on what's out there. ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A





And Mary, I did want to add to this. I want to be very clear. The timing is a bit unfortunate. And I dread speculation

that it's intentional on our part to perhaps consider a change from our current direction with Boeing and the MAX

and that is not true. We didn't reveal that we took this trip. That was a leak by somebody. And so again, I just

wanted to point out there is – we're not trying to send any message whatsoever. This trip was planned a long time

ago, Mike. And so I'll just leave it at that. We have no plan to do anything other than grow our fleet with the MAX.

Will that be the case into perpetuity? I'm not prepared to say that. But in any event, the timing is unfortunate. ......................................................................................................................................................................................................................................................

Mary Schlangenstein Dallas Reporter-Bloomberg News, Bloomberg LP Q So, Mike, did you like the A220? ......................................................................................................................................................................................................................................................

Michael G. Van de Ven Chief Operating Officer, Southwest Airlines Co. A Yeah, but, Mary, I like all new toys, I'm into toys. ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A That's a great airplane. It is a great airplane. ......................................................................................................................................................................................................................................................

Michael G. Van de Ven Chief Operating Officer, Southwest Airlines Co. A I like the A220. I like the Embraer product. It's kind of like going to the new car show. You just like all the different

products that you see out there. ......................................................................................................................................................................................................................................................

Mary Schlangenstein Dallas Reporter-Bloomberg News, Bloomberg LP Q Yeah, great. Okay, thank you Mike. ......................................................................................................................................................................................................................................................

Operator: Thank you. We'll take our next question from Tracy Rucinski with Reuters. ......................................................................................................................................................................................................................................................

Tracy Rucinski Reporter, Thomson Reuters Q Hi, there. Good morning. So just to follow-up a little bit on those comments Gary. At what point would you

consider making any additions or changes to your fleet? I know you know you have about 250 or more MAX on

order through 2026. When would it be reasonable to consider adding any other models and what might those be? ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Well, I'll be a little repetitive. We're not planning on adding a different aircraft fleet to – aircraft type to our fleet,

okay? So I'll just repeat that. We are not planning to do that. As a practical matter we are – we want to grow our

airline. And we will grow the airline over the next several years Mike at least, with the Boeing MAX as a practical

matter. So in order for us to add a different aircraft type that would be work for us and that's not work that would

be completed in 12 months. I don't want to put a timeline on it, because we're not working on it. And I don't know

how long it would take to do that.





So hopefully that at least gives you some parameters to think about. What we might be doing 10 years from now

or 20, that's just not what we're talking about here today. But we have no intention of doing anything different in

the near-term whatsoever. And we're not preparing ourselves as if we have to do something different in the

medium- to long-term either. And that doesn't mean we won't change our minds. And as usual there's all those

caveats. So, Mike really answered the question. We have the Airbus. The A220 is new. And we have an

obligation to look at it and understand what it is. It is in our wheelhouse so to speak. It's a narrow-body airplane

that would be eligible for consideration to do the mission. That's what he's doing and nothing more. ......................................................................................................................................................................................................................................................

Tracy Rucinski Reporter, Thomson Reuters Q Thank you. ......................................................................................................................................................................................................................................................

Operator: Thank you. We have time for one more question. We'll take our last question from Ghim-Lay Yeo with

FlightGlobal. ......................................................................................................................................................................................................................................................

Ghim-Lay Yeo Reporter, FlightGlobal Q Hey, guys. Thanks for taking my question. I just had a question regarding the 737 retirement plan. I know Gary

you said that you would like to avoid having to unwind the retirement plan for 2019? And I was just wondering if

Southwest is considering any short-term leases of 737 NGs or just going out to the used marketplace? And what

are you seeing in the market in terms of pricing and availability, especially with the squeeze on 737 light

capacities? Thank you. ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Well, that is a great question. And I think it's a short easy answer. The answer is no. We are not contemplating

going out into the used market. I think the only thing that would, might make sense to me is if we wanted to add

some NG's to the fleet as we will unwind some of the airplanes that we already own or lease. And again, we don't

have a plan to do that. Tammy, I think you've got 18 retirements plan for 2019? ......................................................................................................................................................................................................................................................

Tammy Romo Executive Vice President and Chief Financial Officer, Southwest Airlines Co. A For 2019. ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A And Tammy mentioned that her plan at this point is to follow through with at least most of them. So there might be

a couple of airplanes that we change our mind and decide to keep. But all of this is working under the assumption

that the grounding – that the airplane is ungrounded in the relatively near future and that way we don't have to

wrestle with that question. If it's grounded for an extended period of time, we'll have to develop a plan quite

frankly. And I don't think Mike that would include going out into the used market. But to be honest with your

question, we just – we're not working on that scenario. And we just – because we don't think it is a worthwhile

effort because we don't think it is a likely scenario. If that scenario materializes, I am very confident that we can

react to it and handle it but it's nothing that we're working on. ......................................................................................................................................................................................................................................................





Michael G. Van de Ven Chief Operating Officer, Southwest Airlines Co. A Yeah. We've been out of the used market for the last couple of years. We've got most of the NG airplanes out

there that we like. It just doesn't make a lot of practical sense for us to go out and search the market for a used or

leased NG when we already have NGs on the property that are already in on maintenance program, already in

our maintenance profile. It's just easier for us to extend that and would need to go out a new airplane. So we're

not looking out in the market at all for NGs. ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A And the reason that we don't want to unwind the retirements, that would certainly be vastly easier compared to

bringing another airplane on to the market like Mike said. But he's already set a maintenance program for each

one of these tail numbers and we would have to redo our maintenance plan to then add in maintenance under the

assumption that we're keeping the aircraft longer. And that's the kind of work that I would – I just don't want our

tech ops department to have to add to their list. They have other things that I think are more important to work on.

And we prefer to continue on with the retirement of those airplanes and bring on new airplanes to replace them. ......................................................................................................................................................................................................................................................

Ghim-Lay Yeo Reporter, FlightGlobal Q Sure. And just now Gary you mentioned that there has been no indication so far that there might be additional

simulator training for the 737 MAX for when it becomes ungrounded. Is that just from what you gather from your

discussions with Boeing and the FAA? Are you hearing anything from your union at all with regards to that? ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Correct. That's from all parties we've talked to. And certainly, I put great reliance on our pilots, our flight

operations leadership, our pilot union. And they are very confident in what we do as an airline, how we train. We

just made a $250 million investment in our flight training facility which is absolutely state-of-the-art and a huge

source of pride here. And they are the litmus test for me and they are confident in the airplane, in the training, in

the return to service with still some questions to be answered admittedly. But if they were not, then I would not be.

But the fact of the matter is they're very comfortable with the plan as we currently understand it. ......................................................................................................................................................................................................................................................

Ghim-Lay Yeo Reporter, FlightGlobal Q Okay. Thank you Gary. ......................................................................................................................................................................................................................................................

Operator: At this time, I would like to turn the call back over to Ms. Rutherford for any additional or closing

remarks. ......................................................................................................................................................................................................................................................

Linda B. Rutherford Senior Vice President and Chief Communications Officer, Southwest Airlines Co.

Thank you, Cody. If you have any follow-up questions as always our communications team is standing by for you,

our online newsroom at swamedia.com or by calling us at 214-792-4847. Thanks so much. ......................................................................................................................................................................................................................................................

Operator: That concludes today's call. Thank you for joining.





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