A (4:05)

You guys had a killer quarter and congratulates on getting the financial results that you guys have. Have really been moving towards. I want to just to kind of dive into this a little bit deeper when you think about this. I mean, I have had the pleasure of spending a lot of time listening to old speeches from Herb from over the years, and he talks about the people and how important that is and really the heart of Southwest and why that that's so important to what you guys do. I want to just kind of really understand what your. What Southwest's defensible moat is for its overall strategic ethos for going into an era where there is lower growth writ large in the US Airline market.

E (4:45)

Thanks, John. Yeah. As you think about the moat that we have, you know, there's the financial side of things. We have the strongest balance sheet in the industry. We're one of three airlines in the world with an investment grade rating tremendous. You know, we talked about $17 billion worth of unencumbered aircraft that we have on the balance sheet, lowest debt balance of any airline in the US and so the financial stability that we have is just huge. Where we've fallen short for the last couple of years financially is on margins. And so so much of what we're doing now, and a lot of these things aren't new, you know, to Andrew's point, but so many of these things that we're doing now are to both lean into the customer and get back to industry leading margins. Things like what we just rolled out very smoothly, by the way, huge testament to Andrew and to the operations team for the way in which they prepared and rolled it out. But the extra legroom seating and the seat assignments, that is absolutely leaning into the customer. But in addition to that, there is an ability for us to generate additional revenue. And what we are likely to see is both folks deciding that they want to pay up for those and having higher net promoter scores along with it, because they're paying for something that's really meaningful to them, a product element that they want. And so, you know, as you think about who we are, you know, we have a very defensible financial balance sheet, but the margins really is what we've been focused on to get them back to where they need to be and things like that, the bag fees, the cost savings initiatives, those things help to get us back there. So that's kind of the financial moat on the other side of it, which is more the product moat. Of course, we've got cities where we are the primary carrier in those cities and have tremendous brand loyalty there, along with a lot of other cities. So that our network, we're probably half of the cities of the top 50 cities in the US were the number one carrier and at a bunch of others were number two. So we've got this incredible network that when you combine that with what Andrew just described, which is how you feel when, when you're on our airplanes, which is primarily due to just how incredible our people are, that is the moat. And that has been the moat for decades you mentioned. Herb. I'm one of the newer members here. You know, I watched this from the outside for so Long. And I'll tell you, coming in and seeing it firsthand, it's real. It feels different to fly on our airplanes. You put all that together and I really like where we stand.

C (7:16)

Let's just address sort of the elephant in the room here, which is Elliot Investment Management. Right. These guys have come in taking an activist position. We don't need to rehash all this. I think we've done this many times. But, you know, there's been. Externally, you get pushback. Oh, change, you know, very change resistant. But there's also been a lot of talk that Elliot is really the catalyst for all of this. And. And that's the reason that everything is happening. So, you know, is that right? Is Elliot exactly what you guys needed or. Or was this something that was maybe gonna be evolving anyway?

D (7:55)

Investor relations is Tom's area. But I'll give a part of an answer, and Tom can give a part of an answer. I would say they've been a great catalyst. People have accused us of moving slowly, and I think that's a fair criticism. Historically, Southwest Airlines could have moved faster. I will say, you know, the things we've rolled out, we rolled out well in the last couple of years, and we've sped up originally in our investor day, before Tom got here, September, I think it was 24. We promised like a three year plan before we get back to where we are today as far as kind of like our promised margins. And here we are much faster than that. And that, that catalyst of Elliot of like move faster gang, I think was let out for us. And then, you know, I think Tom coming in has been. He's super collaborative, brought us back, you know, got our mojo back cost wise. So we've added, you know, external talent along with the catalyst. And I think that really has brought. Brought us back to our prosperity. If we execute obviously on Q1 faster than we had originally projected.

E (8:53)

I think Andrew described it well. I think. I think they came in and helped to speed things up.

C (8:58)

So this kind of then takes me here though. If we think about the Investor Day in 2024, you guys were still very passionate about no check bag fee for the first bag back then, right? It was still settled. That obviously changed things. Like the boarding process changed. There were other things that changed from that original point. So, you know, clearly there have been internal discussions whether that's Elliot, whether that's the new board, which it's effectively an entirely new board over the last few years. You know, I guess you could tell us that. But is this the kind of thing that maybe you've gone too far. Do you think that maybe this was a race to get to a certain point now you need to walk it back, or are you guys still very comfortable with where you are?

E (9:48)

So, you know, I came in a few months after the investor meeting in the fall of 2024, and, you know, I'll describe it from my viewpoint and kind of where we are now. You know, if you look at where we are now, we have brand net promoter scores that are higher than they were prior to us announcing some of the changes that we announced earlier this year. We've leaned into the customer in, I think, really great ways. We've got free wi fi with our new partnership with T Mobile every day. We've got aircraft that are moving to the new spec. We've got the in seat power, of course, the extra legroom seats are available on all the aircraft now, larger bins. And you need to get to a point where all of those things become the product that people are expecting when they get on the airplane. So we're trying to move as quickly as we can to get all of the aircraft on that new spec, which is a really, really great product. And so as all of these things are moving forward, we've leaned into the customer. The scores are showing that the customers are. That this new product is resonating really well with them. And we've executed it really well. I mean, this is a testament to Andrew and Tony, Justin and so many people on their teams. Lauren, who runs a technology for us as well, the tech has worked, the processes, the training was in place. Bob has said it well. I think he said it well on our earnings call. In his 38 years at Southwest and in the industry, his comment was he has not seen this level of change at any airline in this short a period of time, let alone to have it executed as well as it was. And, you know, what we've guided for next year is a greater than 300% increase in earnings per share from 2025-26. So the customer scores are there. The. The operation's running really well. We talked about the brand impact that you have from things like this Wall Street Journal number one ranking, and it's resonating with customers and then we're getting our margins back.

B (11:45)

Hi, guys. I hate to sound like a Wall street analyst, but congratulations on the quarter. Still, I'm a little bit skeptical. That's my brand. The CEO of one of your top competitors tells people that the more and more, Southwest looks like the fourth best Legacy airline, the better it is for that guy's airline. And I think we know who we're speaking about here. You may disagree. I think he has a point here. You've got no first class. Tom mentioned wi fi, but it's free. It's also pretty crummy. There's a huge fleet of maybe we'll call them Legacy 737, 700s that could use a retrofit. The new partners aren't great. You have no lounges, wink, wink. And of course I can't get a cheese plate on your airline. So you guys need to do more to catch up. I know you say your NPS scores are pretty good, but what's coming next?

E (12:48)

Brian? So I'll jump in here. So as you've gone through that list of things, the net promoter scores that we have are as high as I have ever seen them. I didn't know net promoter scores, especially in flight, net promoter scores could be as high as what Southwest's net promoter scores are. The brand loyalty here is incredible and it's because of our people. The product is great. We've guided margins that put us right in line with these carriers that you've referred to. We are running a fantastic airline. And Andrew talked about the degree to which the speed with which this transformation is happening to get to where we are now and to be still in the early stages of this. We're not done. We're going to keep moving forward. We're going to keep leaning into the customer. We're going to keep leaning into efficiency. I love our hand. I love our hand better than the hand that any other airline in the US has.

D (13:45)

I'd say we need to do our work and deliver on the results we guided to. But we're guiding to profitability on par with the other two airlines. Right. Yet we do not have a benefit from the macro trends of our day which are premium and long haul international. So in today's post Covid world, you have to adopt your model to get the revenue efficiencies you need to deliver those margins. Now Delta staked out a pathway and kudos to them. They executed very well. United is now copying that pathway and they're doing a good job copying it. We clearly are not copying United or Delta. We've staked out a different way to serve our customers and a different way to prosperity. So the things you listed out that are would be shortcomings for the fourth best network carrier. I think is a false stalking horse. We are Southwest Airlines and we've staked out our own path as usual. And that path is leading us to prosperity equivalent to the others who are following the Delta trail. So as Tom said, we're comfortable with our hand.

B (14:45)

All right, Andrew, I'm gonna let the guys ask very serious questions next. But we want to break some news today on the show. Tell us about the future of cheese on the airline. Are we going to get more sufficient food on Southwest or are you still going to starve us on six hour stage lengths?

D (15:04)

You know, we used to have shelf stable cheese on our Hawaii flights. We got rid of them much to my chagrin. I wanted to force you to eat shelf stable cheese on the way to Hawaii, but Tony was like no, Andrew, we have to change the offering. So we changed.

C (15:19)

So I know you guys keep talking about how the people are the differentiator. We've heard that on the calls. Bob said that I struggle with that. I agree, you have good people. But to me this will surprise no one. Network is going to be really much more of a key point here. Right. Because the people in a place like St. Louis or Kansas City, I mean that is going to be the big attraction to them is the first fact that you by far and away have the best network there. So I want to go to something that you said on the, on the earnings call here, Andrew. I believe you called it. There would be a modest reallocation of capacity. If I'm, if I'm right on that. Thanks to the changed product that you now have extra leg room. You now have all this and wondering if you can talk more about what exactly that means.

D (16:07)

Certainly there, there's two drivers of a reallocation and you should always be reallocating your network because that's the power it one of those is the higher water level, if you will. As we've increased our margin, we have new opportunities to take capacity from lower performing areas and move to high performing areas. And so as a company overall is more profitable. That opportunity just, you know, by default exists more. The second thing is, is our, in the old world we had open seating. Open seating was valued in customers who were in high frequency business markets going short haul. Not all the customers, but some of the key customers. Those customers travel less today and therefore that offering was, you know, no longer fit for today. The consequence of open seating is that the longer you flew, probably the worse we did. It's not 100% true, but if I were to over generalize. So now a longer flight, I'm not saying a transcon life type of market, but a longer Flight is now likely to do a lot better with assigned seating, extra legroom. So we're going to redeploy and into kind of our key cities, longer stage length markets, where before maybe they did well in high season, but not year round. You'll see us doing that. You look at our March schedule in Dallas and you'll see us moving around a little bit of capacity to go to longer stage length markets out of Dallas. We have a big customer base that gladly flies us short to medium haul. But longer haul, the offering was not the best. Now we have a high quality offering for a longer haul. We believe customers will adopt it and that'll, that'll be a tailwind for Dallas in this example.

C (17:44)

So that's reallocating capacity within Dallas itself. I mean, are there certain cities, I would assume, obviously, coastal and Hawaii. I mean, you have more opportunity for long haul. But, you know, should we expect to see more airplanes in those coastal cities, fewer in the middle? How are you thinking about that? Because I know you're not really growing much. Right. So it has to be just moving things around right now.

D (18:10)

Yes, you can. Also, it's also fleet allocation. So if you look at like how we've allocated our 175 seaters versus 143, we've moved the 175 some more longer hauls so they have more monetizable seats. And so we put them on some of the longer haul stuff. Understanding this is likely to be the case. We also, you know, maybe the orders is reverse of what you're, you're saying there we started some red eye flying, which is, you know, by definition a longer stage length last year. Now this comes along and it makes the red eye that much better. So it is allocations we've already done and allocations to come. It doesn't necessarily transform a particular city. It's just the cities where we have a strong customer base, you know, they want to buy more from us, we have a repeat purchase. Business people buy us to fly for business, to go see grandma, to go to Vegas, to go see Mickey, to go to the beach. And so giving more of those offerings to those cities that have a strong customer base is what's more about versus, say, transforming an individual city. Okay, Tom, the fleet questions coming, I can see it. A fleet question is coming.

C (19:11)

Oh, man. Yeah.

A (19:13)

Okay, I've been pegged. Is it written on my forehead here? Okay, okay. You, more than any other Southwest Airlines employee, knows the virtues and vices of the Airbus A220. You've seen it up close during your time at Breeze, and it's an airplane that made Breeze what really what it was. And of course, you know, Southwest kicked the tires on the airplane at the end of last decade. Team went to Europe to go look at a 300. I'm really curious, what did you learn about the a 220 at Breeze, and how does that experience and that knowledge apply to Southwest and its fleet right now? Does it apply?

E (19:53)

The A220 is a great airplane. You know, you get in there, it's got big windows, it's quiet, it's really fuel efficient. You know, not as many middle seats. So, you know, there's a lot of great attributes about that aircraft type. You know, of course, for us, we're. We're a 737 operator. We've got 737, 7002 and 8 hundreds. We're slowly retiring those and replacing those with 737. So far, Max 8, which has been a fantastic aircraft for us, it's widely known in the industry, you know, that's living up to its fuel savings and has just been fantastic for us. You know, probably more of a question for Boeing and for the FAA ultimately on the timing of the certification around the Max seven. But we've got a handful of aircraft that are already built Max 7s. And then, of course, we'll start to build new production Max 7s that will ultimately deliver to us and will be the aircraft for us in that size category.

A (20:51)

When you look at the way that Southwest has used the 700, it really is, I mean, Southwest regional jet, in many ways. It's, it's, it's your, it's your big rj. Does Southwest need a small, narrow body to operate those shorter and thinner stage lengths in the same way? The 700 was effectively Southwest Regional Jet. Obviously, the Max 7 is bigger than the 700. Do you need a small airplane in that segment?

D (21:14)

You know, as Tom mentioned, the A220 is a fine aircraft. You know, when you have one cockpit type, you get a level of aircraft and pilot productivity. When you go from, you know, from one to two, and you have two aircraft that do roughly the same mission, and it's two cockpit types, you really have a step up in a penalty. You get, you know, go to three, four or five, maybe that penalty goes down. And so I think you really have to think hard if you're going to introduce, you know, that second aircraft for a similar type mission. Now, if you're talking much smaller, like, you know, say the E175. Our scope agreement with Swap, it doesn't allow for that. So it's almost like why study it or why even kind of talk about it when you've kind of committed this? It does mean we have a bigger jet on shorter stage length. So we do have more connectivity as a result of that. People often every six to nine months, some journalists will discover that we have connections. And we started doing that, I think in 2009, long before I got here. And it's really a shorter haul where there's lower load factors because we have a bigger jet. We tried to have those in situations where we could have good connectivity or just have to have a lot more care and time of day placing so you make sure you get the demand curve. And so given that the situation we're in, we like the aircraft we have.

E (22:31)

And John, to kind of very succinctly answer the second part of the last part of your question. You know, do we need another aircraft type in order to be successful or to get to where we, you know, the answer is no. You know, the Max does what we need it to do for us to, you know, to, to be successful. You look at what we're guiding for 2026, that's going to be a year of an all 737 fleet. And you can see what we're guiding on, on the financial side and of course, doing that at the same time as the customer scores are high and as we continue to lean into the customer.

A (23:09)

Well, I think you both hit the nail on the head here. And I think there's a really interesting sort of angle to examine here, which is Andrew talked about the common cockpit. Tommy talked about where things are in terms of the focus on the MAX family right now. The 737 will not be built forever as much as Southwest wants it to be. How do you prepare the airline for that eventual transition to a new aircraft type? It might be another Boeing type that joins your fleet as single aisle strategically. Do you hold off on two pilot groups until that happens or do you sort of manage the complexity of that in the near term or again, just hold off to the bitter end?

E (23:49)

Yeah, we've got hundreds of Maxs that are still on order that will deliver for, for years to come. And you're right. I mean, I think like every airline, you know, we'll look into the future and see what might be around the corner. And as we get to that point and we see what that technology is and how it interacts with the aircraft that we have, you know, we'll we'll deal with it and we'll see where we are at that point. But yeah, we've, we've got hundreds of maxs delivering over the coming years and, you know, plenty of Runway there to do what we need to do now.

C (24:20)

What about bigger? You obviously can stay with the 737. You can go bigger. You can get a 9 in theory, you can get a 10 someday, but you could go into widebody. You could do anything now. You guys have changed everything in the last year. So. So, I mean, Andrew, do you want bigger airplanes? When you're looking at this, Tom, do you want to pay for bigger airplanes?

D (24:45)

You know, right now I'm focused on, you know, finishing the job we have. We're transforming the company. The, we've got a good guide here for first quarter and a good guide for the year, but the work's not done. And so will Southwest ultimately have something like that? Perhaps. But you know, our management time is really focused on finishing the deal with what we have right now. It's not trivial, the transformation. We've been underway and so we might as well make sure we, we get across the finish line there. What happens in the, in the far future, it's, it's kind of early to speculate though. Our boss has talked about it and I think it's, it's almost symbolic in some ways of saying if our customers want something, we need to provide. And so like open seating, we probably should have or not probably we should have changed earlier, but we didn't. So we, as a lesson to us, we should look at what our customers want, understand what that means for us to be able to serve them, and so we should. Nothing should be off the table. So it uses those to help us make sure our aperture is wide enough that we are satisfying customer needs.

B (25:48)

I want to drill down a little bit more into the transformation plan. Yours was unique. I listened to a lot of these calls. Almost every airline now is talking about loyalty. Every three or four words. It was like the last thing that Barry Biffle was talking about until he was disappeared. Your loyalty program does fine. You make a lot of money in it.

C (26:11)

But.

B (26:11)

But do you guys view that as an opportunity to do even better? Andrew, I don't often offend you, but when we met at the Wings Club gala in October, I said, one of the problems with Southwest now is that you're signing up partners. But do you remember what I said? They're eighth rate partners. Remember that?

A (26:31)

I was there when he said it. And actually I think I was even offended on Andrew's behalf, actually.

C (26:35)

I'm not gonna lie.

A (26:37)

But.

B (26:37)

But is there a possibility to make this loyalty program look a little bit more like your peer loyalty programs with arbitrage opportunities? People are desperate to get this credit card so they can fly all over the world in business class or first class, and maybe you can juice that revenue a little bit, or have you taken this as far as it can go?

D (26:58)

We do have a strong loyalty program. Loyalty programs are part and parcel of the airline business, and it really reflects a situation where your customers like you and therefore will transfer that, that like. Or that love, in our case, to the bank card. And so that's why we do well with our. With our credit card business, because, you know, our customers really want to fly Southwest, really want to be associated with Southwest, and so give them opportunities to be engaged with the loyalty program, whether it is swiping at Costco or, you know, traveling across the ocean. That is something that, yes, makes that loyalty programs stickier. And so we have gone down the path of interline partners. It is a capability we have creating. So we are signing up lots of partners. Even if you disparage them, we have some that are, you know, you may feel higher rated and lower rated, but, you know, where you start is not where you finish. So we intend to have more attributes to our loyalty program to give more options for using it or earning from it. And so we are down that path, and you will see our partnership change over the. Over the very near future. It wasn't too long ago that people criticized for having zero partners. Now we have, you know, six plus partners and more coming this quarter. And so we will keep going down that path. What you see is not where we'll end, but you have to start somewhere. And once again, back to what Tom said about things went well. Things have gone well. Like, no one's talked about how that didn't go well. Right. So we are executing, we are delivering. There's not technology problems, it's not operational problems. We are delivering at pace.

B (28:27)

All right. Contrary to popular belief, I am not a points blogger. Points is something that I do in my spare time. As John reminds us, this is an aviation business podcast. So as far as revenue opportunities, I mean, is there. Is there material room for you guys if you can focus on loyalty to get that money up in a significant way?

D (28:52)

Of course. And, you know, we've talked about lounges. You've heard us talk about that. We have nothing announced today. We're not going to announce anything. You know, tomorrow, because this takes kind of a strong business case, good negotiations. And so if you want to do lounges, what you're doing is you're offering a high fee credit card. So a high annual fee credit card in a lounger are two sides of the same coin. Obviously, our competitors do that. And if you look at lounges, when, when I was younger, maybe Brett was younger, people in lounges were flying first class. Today they are people with these high fee credit cards flying economy and on the phone going, yeah, yeah, yeah, I'm in the lounge. As part of their Instagram world. And so that is something that still would be consistent with our product, that it would be the Southwest Airlines path for us to have such an offering. So we're looking at it doesn't mean we'll do it, but you see us take enough actions, but that we're talking about it openly or hinting about it, but we're not yet across the Rubicon to say, hey, we're doing this.

C (29:51)

All right. Now, John already asked Tom about his past life at Breeze. So, Andrew, we're going to go a little bit further backwards and talk about Hawaiian. We're actually just going to talk about Hawaii. But Hawaii has been an interesting market for you guys. Obviously it was a big initiative when you first went in. You've made a lot of changes since then. You, you've made several tweaks on mainland flying, but you've reduced inner island. There's a lot that has gone on there. Maybe some of that gets addressed with extra legroom being important on things of those stages. I just want to know if you can talk about some of the lessons you've learned from when you went into Hawaii compared to where you're at now. And you know, where you see that going as part of the network.

D (30:36)

A couple big lessons is don't enter Hawaii just before your aircraft are going to be grounded, nor enter Hawaii just before a pandemic. Those are two things one should never do. And then the part that was, that was our fault is after the pandemic, we didn't do the work to mature it. So we started it up in 2019, got the Max grounding, kind of, kind of froze it. Then we, you know, the pandemic there is very strict and wide and understandably so, given its hospital infrastructure. And we came back out, we didn't treat it as if it was a brand new market and do the work to mature because we enter a new market, it takes up a new city. Let's say it takes up to Three years to mature it. And so not doing that work as a management team, not focusing on it meant that it didn't progress up the curve as it should have. We went back at it, you know, about 18, you know, or so months ago and have been focused on it. And we see the revenue performance has been going up very quickly. And then we're past 12 months, we're lapping. We're getting, you know, RASM increases that are very healthy on top of RASM increases that were already healthy the year before. And so it hasn't finished. So I'm very pleased now the team's focused on it. You had that maturation go, but there was a, you know, between the max grounding Covid and then our inattention post Covid, it didn't go as fast as it was, but it's working extraordinarily well now, especially from the mainland. It really reinforces our west coast franchise.

C (31:55)

I know we're. We're getting close to finishing here, but you talk about checked bag fees. Kind of curious to go back to the beginning of the conversation where, you know, there was discussion about this is what people want. Extra legroom, assigned seating. And I don't disagree about that. But I think the. The question about the checked bag fee, I don't know that anyone was asking for checked bag fees.

D (32:23)

Right.

C (32:24)

So, you know, do you consider that to be the same type of thing, or is that really just a money grab?

D (32:29)

Effectively, I think Tom was asking for them.

E (32:34)

The overwhelming majority of the items that we've done as part of this transformation fit into that category where you get the Venn diagram that overlaps, where it's both leaning into the customer and also generating a financial result. You're right. I mean, not every single one of those. It's not a full overlap between those two. But the overwhelming majority of what we've done, we've seen the. The net promoter scores come up in addition to the financial impact, which has been really, really meaningful. I mean, again, guiding more than 300% increase from last year to this year on the financial side and the execution that was able to ultimately enable that, I think just speaks to the impact of the things that we've done.

B (33:18)

Thank you both so much for coming on the air show today. I do have one question before we go, and I just want to tell the listeners to. Tom and Andrew chose to be on this podcast together. So they walked right into this one. Guys, your boss, Bob Jordan, is in his late 60s. People tend not to stay around as CEO into their 70s. So I'm curious, which one of you is going to be the next CEO of Southwest Airlines?

E (33:48)

Oh, Brian. Bob's incredible. You talk about somebody who has just incredibly genuine love for every single one of the 70,000 plus people at Southwest Airlines. It's been almost four decades. Being a servant, leader, being humble. You know, these are things that are a big part of working at Southwest. And Bob starts it from the top. So what you're going to get from both Andrew and me is how much we really appreciate working for Bob. I mean, he's the one who's leading this transformation. He is an incredible leader, and I think we're both just grateful to be working for him.

D (34:22)

I'm just trying not to get fired.

C (34:25)

No, this is the point, Andrew, where you say, no, it's me.

E (34:31)

Oh, that's great, Brett.

C (34:33)

All right, well, thank you, guys.

A (34:35)

Thank you so much for joining us. This has been a lot of fun.

D (34:38)

Thank you.

E (34:38)

Thanks, guys.

A (34:42)

You've been listening to the Air Show. If you have suggestions or questions for us or interested in sponsoring the podcast, go to our website, theairshow podcast.com to get in touch.

C (34:51)

Leo Duran produced and edited this episode. Our theme music is by Joshua Mosier. Thanks for listening and we'll be back soon.