Southwest Airlines Co. Q2 FY2025 earnings call

• Southwest is on a transformational journey, with initiatives focused on product evolution, cost reduction, and partnership enhancements.
• Achieved on-time performance leadership in the first half of the year with a strong completion factor and quick recovery from cancellations.
• Launched basic economy product and checked bag fees on May 28 with a smooth operational rollout. Training for employees on new policies and tools was a key part of the preparation.
• Began retrofitting aircraft for extra legroom seating, with about 1/4 of the fleet already modified.
• Announced selling assigned and premium seating on July 29 for flights starting January 27, and service to St. Thomas starting next year. Also, new and enhanced benefits to co-brand credit cards offered through Chase were announced, aligning with new product offerings.

Bag fees revenue exceeded expectations. Checked bag take rates are higher than anticipated. About 1/4 of the fleet has been retrofitted for extra legroom seating. The revenue contribution from bag fees has exceeded initial expectations with no negative operational impact.

• Updated full-year EBIT guide: $600 million to $800 million, down from the previous $1.7 billion due to the macro environment and higher fuel costs.
• Expect significant EBIT expansion in 2026 as initiatives continue to ramp.
• Authorized a new $2 billion share repurchase program expected to be completed over a period of up to 2 years.
• Full-year capacity growth is projected to be at ~1% year-over-year, with trips down approximately 2%.

• Macro environment uncertainty that could impact demand.
• Potential negative effects from industry capacity dynamics.
• Uncertainty regarding customer reaction to product changes beyond the initial rollout.

Q: How should we think about the EBIT initiatives ramping up over 3Q and 4Q?

A: It's a combination of initiatives ramping up like bags, with about 2/3 of the year's expected EBIT contribution to be achieved in the back half, and sequential improvement in the demand environment.

Q: Bag fees are tracking ahead of plan. Is it just a volume thing, and any book away?

A: The outperformance is due to more checked bags per passenger than expected. There's no customer reaction to bag fees, no book away, and it's been stable at an annualized $1 billion number.

Q: Other revenue was lower despite the back season start. Any impacts?

A: The loyalty program hasn't performed as well recently, but new credit card benefits announced will likely improve this line item starting in Q3.

Q: How to handle aircraft sales in cash flow and P&L?

A: Aircraft sales are fully accretive, book gains are less than cash proceeds, and no book gains are included in the EBIT guide.

Q: Thoughts on load factor and connecting flights?

A: Focus is on load factor in the second half. Using intentional connecting opportunities and distribution changes to push load factor back up.