Southwest Airlines Company (LUV) — Q4 2025 Earnings Call Transcript

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

Thank you, Danielle, and good morning, everyone, and thank you for joining our earnings call today. We've been looking forward to 2026 when all the incredible work undertaken by the Southwest team will show dramatically improved results. First, however, a few comments on this past year and our fourth quarter 2025 results. The fourth quarter capped a year of meaningful transformation and accelerated execution at Southwest. We finished the year and the quarter strong for both revenue and cost, achieving full year EBIT of $574 million, which was above our prior guide of $500 million. Operating revenues of $7.4 billion for the fourth quarter and $28 billion for the full year were quarterly and annual records. Our fourth quarter and full year results underscore that our initiatives are generating the desired results and provide great momentum as we head into 2026. We also ran a terrific operation, coming in #1 in on-time performance, completion factor, and the lowest extreme delays in December, and our strong operational performance throughout the year led to Southwest earning the top spot as The Wall Street Journal's Best U.S. Airline of 2025. I'm proud of the results, but I'm especially proud of our people who are the ones getting this done every single day, day in and day out. Before moving to 2026 and the exciting year ahead, I want to underscore some of the key initiatives that we successfully implemented in 2025, and here are the larger ones. We changed our product offering, including the implementation of bag fees, addition of a basic economy fare product and flight credit expiration. We optimized our Rapid Rewards program, including variable earn and burn rates. We amended our co-brand credit card agreement with Chase, including new benefits and improved economics. We launched free WiFi for loyalty program members in partnership with T-Mobile. We expanded our online presence through new partnerships with Expedia and Priceline, and we outperformed our $370 million cost reduction target for 2025, including the first layoff of non-contract and management employees. We added six new airline partners, launched Getaways by Southwest, added redeye flying, reduced turn time to increase aircraft utilization, deployed new technology to boost operational reliability, a key enabler of our top spot in The Wall Street Journal ranking of airlines, discontinued the fuel hedging program, and completed $2.6 billion in share buybacks in 2025, representing about 14% of shares outstanding while maintaining our investment-grade rating. On Tuesday, we implemented assigned and extra legroom seating, which required retrofitting over 800 aircraft. It is just a stunning list of initiatives undertaken by the Southwest team, all implemented on time and all delivered with excellence. In my 38-year career in this industry, I cannot think of another airline that embarked on so many fundamental changes to their business model and in such a short time, let alone, executed so well. The list of initiatives falls into two categories: one focused on offering a significantly better experience for our customers and the other focused on revenue growth and operational efficiency. Collectively, the large investments we have made result in a fundamental transformation and evolution of our business model while building on our core historic strengths. The largest domestic network, a strong balance sheet, unmatched customer loyalty to our brand, outstanding service and hospitality, low cost and operational efficiency, our unique culture, and especially our unrivaled people. This transformation is expected to result in a significant step-up in how we grow earnings compared to the past few years. For 2026, we are forecasting earnings that are dramatically higher than 2025. For the full year, we are not yet guiding an EPS range. While being well above Wall Street consensus, we are providing EPS guidance that represents the lower end of our internal forecast. With that qualifier, we are guiding full year 2026 adjusted EPS of at least $4, which is materially higher than 2025 adjusted EPS of $0.93. Let me share our reasoning why we are not yet providing an upper range for 2026 earnings. Assigned and extra legroom seating became operational just two days ago, and we see earnings upside based on how booking behavior related to those initiatives unfolds, specifically upsell revenue from close-in bookings, which are more closely affiliated with business and price flexible customers. And second, we expect growth in both the business and leisure customer base driven by our new, more attractive product offering. We expect to have better visibility to the upside potential from these initiatives in the next month or two, and we'll provide range-bound EPS guidance when the current quarter results are reported, if not before. Also going forward, we plan to follow the industry norm of providing guidance to investors using broad company forecasts and results. This means we will step back from providing details and specific numbers around activities such as bag fees, assigned seating, the co-brand program, and so on. I believe that Southwest 2026 earnings growth will stand out when compared to other major airlines. This is largely due to the nature of the many initiatives we have implemented, initiatives that were previously implemented by other airlines over the last decade or more, whereas Southwest is implementing these initiatives now. The work will not stop here. We see meaningful opportunities ahead to grow earnings from areas such as route network optimization under a backdrop of improved operating margins in the business, increasing our corporate customer base driven by product changes that better appeal to the business traveler. This is a long-term journey, and we believe that executed well, we will see the rewards and additional cost takeout and efficiency efforts. We have an exciting year ahead as we continue to deliver for our customers and for our shareholders. I am incredibly proud of our people. They are the ones getting it done every single day, running a strong operation, serving our customers, and transforming our company for the future. And with that, I will turn it over to Andrew.

Thank you, Bob. From a network perspective, Q4 capacity grew 5.8% year-over-year despite the fleet count being roughly flat year-over-year. Efficiency initiatives like reduced turn times and the introduction of redeye flying allowed us to maximize asset utilization while maintaining industry-leading reliability. For the full year, operating revenue increased 1.7% year-over-year, supported by initiatives kicking in and strong demand that drove both traffic and realized fares. My comment on realized fares reflects the effect of buy-ups from the changes we implemented. Fourth quarter RASM, which was impacted by the FAA mandated schedule cuts, was down slightly at negative 0.2% year-over-year. Building on the strong foundation, we're entering Q1 with momentum and confidence. We expect RASM to increase by at least 9.5% year-over-year, with contributions from yield, load factor, initiatives, and loyalty programs. Q1 capacity is expected to grow between 1% and 2% year-over-year, even as we operate with approximately seven fewer aircraft, a reflection of continued efficiency gains. Importantly, Tuesday marked the launch of two major product enhancements, assigned seating and our extra legroom offering. All aircraft conversions, technology development, and employee training were completed on schedule. Customer response has been overwhelmingly positive. These products are expected to be meaningful contributors to further revenue growth and customer satisfaction in 2026. I want to take a moment and reflect on the changes implemented two days ago. Overnight, we made the switch to assigned seating, implemented a differentiated service in our new extra legroom section, and changed our boarding process. On Tuesday, we operated more than 3,200 flights as a different airline while continuing to deliver our usual high-quality operation, a testament to our incredible team. These initiatives aren't just enhancements; they represent a fundamental transformation in how Southwest delivers value to customers and shareholders. We're evolving our product to meet the needs of today's travelers while staying true to the Southwest brand. In summary, Southwest is executing with discipline and delivering results that position us for sustained success. Our operational reliability, product changes, and strong demand trends give us confidence as we move into 2026. I'll now turn it over to Tom.

Thanks, Andrew. We delivered a solid quarter with an EBIT of $386 million. We continued our strong cost performance with CASM-X up 0.8% year-over-year despite operating less capacity than initially planned. Our fourth quarter performance reflects the strength of the transformation underway at Southwest and reflects well on our evolving culture, one that is relentlessly pursuing new revenue streams and operational efficiencies in areas that in the past, we had not focused on. At the same time, we continue to invest heavily in our customers, our people, and our technology to position Southwest for long-term success. Looking ahead, our initiatives, which represent a deep fundamental transformation of our business, are set to drive significant earnings growth in 2026. The impact from the initiatives launched in 2025 is well understood by us at this stage of the rollout, and we have confidence in our ability to deliver meaningful margin expansion and strong earnings growth this year. As Bob stated, for full year 2026, we are providing an adjusted EPS guide of at least $4, which represents the lower end of our forecast. For the first quarter of 2026, we are guiding an adjusted EPS of at least $0.45 per share, which also represents the lower end of our forecast and compares to a loss of $0.13 in the first quarter of 2025. We expect continued strong cost discipline with CASM-X projected to increase approximately 3.5% year-over-year, which includes approximately 1.1 points of impact from the removal of six seats from our 737-700 fleet to enable extra legroom seating. We plan to keep management headcount expense flat to 2025 levels in 2026, and we'll also be focused on operational efficiency within our frontline teams. Turning to fleet, Boeing continues to execute on its delivery commitments. We expect 66 Boeing 737-8 deliveries in 2026 and anticipate retiring 60 aircraft during the year. Full year net capital spending is expected to be in the range of $3 billion to $3.5 billion. In November, we issued $1.5 billion unsecured bonds at industry-leading terms. We ended the quarter with $3.2 billion in cash and a gross leverage ratio of 2.4x, both within our targets. During 2025, we repurchased $2.6 billion of shares and distributed $399 million in dividends. At the same time, we plan to make the necessary investments in our business while staying within the guardrails that support our investment-grade rating. In closing, 2026 is positioned to be a year of significant margin expansion and earnings growth for Southwest, and we remain confident in our ability to deliver and create long-term value for our shareholders. And with that, I'll pass it back to Danielle to start our Q&A.

Thank you, Tom. This concludes our prepared remarks. We will now open the line for analyst questions.

So I will follow the rule and ask my two questions upfront. First, I understand it's early in the rollout of your seat products, but I'm trying to gauge how you view the potential upside to your base case shared today. How does the January booked RASM compare to the first half of February? And how do both time frames relate to the 9.5% base case guide? I'm looking to understand what factors you are considering for potential upside, such as higher upselling, market share shifts, or something else. For my second question, you surpassed your 4Q CASM guide quite significantly. What factors contributed to that? Is there anything from the quarter that we should consider as we project '26 CASM-X beyond the first quarter?

It's Bob. I'll answer the first question, and then Tom will handle the second. Regarding the upper range, I want to emphasize that bookings across all our new products and initiatives are looking strong, and everything is on track. However, we aren't ready to share an upper range or upside at this moment. We have a wealth of booking data tied to the new initiatives, yet we have limited insights concerning close-in bookings and how customers are responding to fare upsell and seat add-ons, particularly those close-in bookings, which are mainly driven by business travelers. Those who are more flexible tend to exhibit higher uptake of ancillary services. We need more time to gather that information. I’m also eager to find out the potential, and I ask Andrew about it daily, but we will provide updates as soon as we can. We just require a month or two to fully assess the opportunities. Additionally, we have more plans in the pipeline; this isn’t a time to rest on our laurels. We're focusing on areas beyond the current initiatives, including further cost reduction, efficiency improvements, and network optimization. With our new products, we believe we can increase our corporate market share, and we are committed to continually refining the revenue initiatives we have recently implemented.

Catie, thank you for your question about costs. I'm really excited about how the entire management team is aligned in managing our spending effectively and being efficient with our costs. There is no transition we are discussing from the fourth quarter to the first quarter. We are genuinely focused on identifying efficiencies across various areas of the business, and this effort is spread across almost every line item where we are identifying cost-saving opportunities.

Just regarding the decline in load factor in the fourth quarter, it was larger than the decline in the third quarter. Can you explain what's happening there? I thought you were aiming for higher loads considering the OTA distribution and other factors. In that context, could you also mention if there is a specific load factor target that is necessary to achieve your bag fee target for 2026? Additionally, I would like to understand the decline in ATL. I know there is a revised credit agreement with Chase involved, but could you clarify what the main drivers are? There seems to be some concern about a significant drop from the third quarter to the fourth quarter while you anticipate a considerable revenue increase in 2026. Any insights on that would be helpful.

It's Andrew. I'll take the first one. And so I'd say that our employees are super engaged with the new Southwest. And it extends to our tech ops employees, and they did such a great job of retrofits of the aircraft overnight. They got so efficient that we were able to delay the -700 retrofits until January. Because in the -700s, as you probably know, we take out a row of seats. Now doing that late in the booking curves means there's limited revenue upside, but there is revenue upside, especially on the peak holiday travel dates. And extending that means that as we came out of it almost nil cost. And so doing that was EBIT positive. And so we don't manage the business for any kind of submetric of load factor or yield. We're largely managing for RASM or the RASM/CASM spread. And so in that situation, we chose a decision that maximized earnings but was unflattering perhaps the load factor, but it was the right decision. That's how we want to manage the company.

In response to your second question regarding ATLs, one of the advantages we have now is greater differentiation in our product. This allows us to offer different benefits to various levels within the loyalty program, enabling us to recognize more loyalty revenue sooner. Previously, the main advantage from the program came when points were redeemed, but now, depending on your status, you can benefit earlier. For instance, you might book a flight paying cash tomorrow and have the ability to select a seat for free because of your status, or you may be entitled to free baggage. These are benefits that can be accessed sooner. Therefore, the differentiation in our product offering now allows us to recognize more revenue sooner, which means there is less revenue categorized as ATL. So, if anyone is looking at the ATL category and noticing it is smaller and assuming there might be future revenue weakness, that is not the case.

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

Yes, Jamie, although it's a quick one. I'll take the first, and then Andrew will take the second because it's quick. No, we do not have any active aircraft RFPs in the market, okay?

We stopped selling early bird tickets for departures after Tuesday. Now, customers can secure a good seat by purchasing the stand-alone ancillary option. We are noticing that the stand-alone ancillary is accelerating closer to the departure date, which is something Bob mentioned. We do not fully understand this yet and expect to gain more insights in the next month or two regarding the booking patterns for those higher fare passengers.

Jamie, I think the easy thing is upgraded boarding and early bird, the old ancillary ended on Monday with open seating and the new ancillary started on Tuesday from a revenue perspective, and that's the best way to think about it.

I have a few points to discuss. Generally, when ancillary fees increase, fares tend to decrease based on historical trends. What do you think might be different this time? Can you share what percentage of fare changes occurred since Tuesday compared to before? Also, Tom, regarding the modeling aspect, I'm assuming that in January, you faced challenges with availability and tough comparisons. Are we finishing the quarter with RASM projected to be in the teens, based on your guidance? I know there are several questions, so thank you.

Yes, I'll take the first one, and Tom will take the second. I think they're really disconnected. So ancillaries, especially now that a lot of that is a seat ancillary, which comes much later, it tends to be a separate decision from the fare purchase or the original booking and purchase of the ticket. So we don't see the correlation in terms of the ancillaries go up, the fare goes down. I mean all of this change, especially with the assigned seating and extra legroom is driven from a revenue benefit perspective by offering customers choice and then giving them buy-up opportunities at the time that they book and then giving them ancillary opportunities at the time, for example, when they select a seat. But no, we don't see that correlation at all that you're discussing.

And to your second question, of course, we're not going to give RASM guidance by month, but it is a true statement that the extra legroom seats and the seat assignments enhance unit revenues.

I have two questions. First, Tom, you provided the CapEx number in the release, indicating it was net. Can you give us an idea of what the gross CapEx number might be or perhaps share the divestiture gains from aircraft sales in 2025?

Sure, Mike. So we'll stick with the range that we've guided. There is an element of aircraft sales that are there that bring that down from the gross number. But we'll stick with what's out there in the public number as the net CapEx.

Okay. But it's specifically aircraft sales offsetting it. It's not sale leaseback gains or anything else?

That's correct.

Okay. Great. And then just my question to Andrew. Segmentation, it's kind of a new thing. I mean, maybe you'll disagree with me, but I think it is somewhat of a new thing for Southwest. I mean, even in your commentary, you said that you're learning a lot about customer behavior. As we think about how things evolve, sort of what inning are we in? And what are the milestones that you're going to look for that things are really starting to pick up? And maybe as a kind of a teaser here, I know in the past, I recall you indicating that the majority of your bookings or tickets sold used to be in the lowest fare bucket. And I would suspect that, that's going to change, especially as people want the assigned seats and the extra legroom. Can you just give us sort of thoughts on how you see that evolving and maybe some of the key milestones?

Thanks, Mike. Yes, we're going from a kind of fare rule-based segmentation. We always had segmentation like device purchase and stuff like that to a product-based segmentation, which you can kind of pay more to get more. The question becomes who will pay more to get more from our current customer base. We're seeing that our current customers who previously bought the kind of base product all in wanted to buy up. They wanted more from us. They wanted the ability to buy these extra product features. And even if they're buying early in the booking curve, they're willing to pay for them. Then, of course, later in the booking curve, where most of those people are that are price flexible, you expect to see a kind of a surge of people demanding the higher products. We expect to go from like 80-plus percent buying the lowest fare product down to something half or less buying the very basic product. We don't know what that will look over the full booking curve for the full year to high season, low season, but we know that that accelerates at the end, and that's kind of what we're waiting for. The level of acceleration we see through the kind of February and March, where you have low season, high season will give us a really good idea of what the upside is for this.

Congrats on the big RASM guide. I wanted to just sort of reask it a little bit on the 9.5%. What is literally in that number and what isn't? It sounds like there's a low expectation of the ancillaries coming in, but it's not like you have 0. I just wanted to kind of understand really what's in there versus what could be upside. That's question one. And question two, it seems like there's a decent chance this year is an all-time high EPS annual year for you. When I look at the last time that happened, ASM growth was considerably higher. So as you get back to your return target, I'm curious how we should be thinking about a reacceleration in growth.

Yes, I'll address the first question and then provide some insights on the second one, particularly in relation to capacity. Regarding RASM details, last year marked a significant transformation in our business model, which was highly successful. I am extremely proud of our team. Currently, all of our initiatives are integral to our operations. They have become the core of Southwest Airlines, moving beyond just being initiatives. We are managing our business with this perspective. Our 2026 guidance incorporates the operational run rates stemming from our implementations in 2025, including the launch of assigned seating this Tuesday. This is our management approach. We are also looking beyond that for further growth, optimizing our initiatives and exploring additional opportunities like network optimization. We are transitioning to an EPS guidance model. All aspects related to these initiatives and run rates are considered, and that is how we approach managing our business. We will share the potential upside once we can measure it accurately.

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

I wanted to follow up, Tom, on a comment you made about faster loyalty revenue recognition. I assume there was an increase due to the bag fees and now another due to seats and extra legroom. So whatever the revenue per available seat mile tailwind was from revenue recognition in the fourth quarter, it's likely larger now in the first quarter. Can you explain how many points of your 10 points in revenue per available seat mile growth are due to changes in revenue recognition policy? Additionally, do you have any data or early insights on the reception of seats or perhaps an uplift in core Southwest markets compared to more competitive markets where you have a lower share?

Thanks, Duane. We haven't quantified publicly what the change is there. There's a shift that goes where the split prior was part ATL, part other revenue. Now it's part ATL, some to other revenue and some to passenger revenue. But the exact percentages there, some of that relates to the way that our program is structured, and so we don't get into the details of that. Our Qs and Ks have a bit more color on it, but we don't go into the specific percentages.

On the second one, we find that the new product is giving us a strong tailwind in all of our markets. It's not just a traditional Southwest stronghold where you see the benefit. It's across all customer segments and across all geographies, and that's what's really encouraging for us.

I'm curious about the extra legroom fee. Last fall, we discussed it reaching its full potential in the third quarter. Is that still the plan? Also, regarding fuel, I recall that we mentioned last year there would be a good offset from bag fees. Have you noticed that happening this year?

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

And Tom, I love that you asked about fuel. Just last week, I'll brag a little bit about our operations team here. Just last week was in a meeting where we were walking through the full list of fuel savings initiatives that we have. You are correct. One of those is that as we carry fewer bags overall, which we knew would be a byproduct of the bag fee, there are fewer bags onboard the aircraft, and there is a fuel savings that comes from that. But there are so many other things that we're doing as a company, new technology tools that we have that are helping us as well as just the behavior that we have in our airports and our maintenance facilities to be able to save fuel. So often in this industry, we talk about CASM-X, and it's appropriate. But fuel is a big expense too. We're doing a lot to become more efficient there as well.

Two questions. First, based on your implied RASM for the full year and based on what we've heard from others, it would appear that if you all hit your outlook, there might be a meaningful shift in airline revenues as a percentage of GDP this year versus the past few years. I know you can only speak for Southwest. So the question is, is the incremental revenues that you're generating this year, is that primarily coming from your existing customers who always wanted to spend more at Southwest but basically could not in the past since you did not have that offering? And that would explain why the revenue GDP equation moves to the right. Or is the incremental revenues that you're generating this year coming from attracting customers of other airlines, which would mean that the revenue GDP equation does not change much for the overall industry even as Southwest generates significant revenue dollars. So that's question one. And then question two, in the at least $4 EPS target, what is assumed for macro given Southwest is really the broader industry clearly lost a good portion of revenues last year due to macro issues. So in that $4, what portion are you assuming that you get back?

Yes, Atul, it's Bob. I can address both of those. The guidance for 2026 reflects the performance of our initiatives based on our current customer base. Firstly, we are not assuming a significant recovery in the macro environment, and secondly, we are not accounting for a major shift in market share. However, I believe our more attractive product offering, especially for our business customers, presents an opportunity for growth over time. Although it's a longer journey, our product now resonates more with everyone, particularly our business customers. This is something we will focus on this year, providing additional upside. To be clear, market share shifts are not included in our calculations, nor is a recovery in the macro economy planned.

Congratulations to the entire Southwest team on that #1 Wall Street Journal ranking, especially in a year that you've been doing a lot of change. I know you're not providing granular guidance, but I was curious, Tom, if you could provide color on CASM-X progression through the year. And particularly, is it fair that the 3.5% pressure in 1Q is maybe the high watermark, especially with capacity stepping up? And then maybe for my second question, on the corporate front, I'm curious what kind of corporate revenue growth you saw in 4Q and maybe what the trends are that you're seeing so far in 1Q?

Thank you, Savi, and I appreciate the recognition for our #1 ranking in the Wall Street Journal. It’s a significant achievement for our outstanding operations team and our staff. Regarding CASM-X, we have provided guidance for the first quarter, and we will also provide guidance on unit costs and unit revenues in the upcoming quarters, which will not extend beyond the first quarter. I can say that we have a solid understanding of our costs for this year. It has been a couple of years since we established our labor agreements, and it typically takes some time for those costs to materialize. Now that we are a couple of years removed from that, we have a clear perspective on what our costs will look like for the year, allowing us to factor that into the full year EPS number we shared with you today.

And for corporate, you pull out government, which was kind of volatile there in Q4, our corporate business is up mid-single digits. In January, we had very high bookings that others have reported. So a very strong start to the year in corporate bookings. The benefit, though, as we talked about before, is the new product. We invested in our corporate infrastructure a while ago, a couple of years ago. We have presence in the distribution channels. We have the sales force, the kind of BTN rankings about how well we are to do business is we're #2 just behind Delta. What's missing is the product that the corporate travelers want to buy. The companies let them expense. Having this new product, we will combine that with marketing efforts, our sales force efforts, incremental distribution efforts, and we think there's upside to our corporate business from this new product on top of the infrastructure we already built.

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

Yes, Andrew, I'll start by emphasizing that we are not finished with our efforts. There is still a lot of hard work ahead, and we are pleased with the momentum, but this is just a journey. We will continue to pursue additional opportunities beyond the ongoing transformation. Last year, we significantly reduced costs, and we are on track to do more this year, even doubling our original cost target. We faced a difficult corporate layoff, but I'm happy to report that the company remains intact and is actually moving faster now, exhibiting greater agility and pace. This realization has been enlightening, showing us that we can push even harder. Our corporate overhead will be reduced again this year, and I acknowledge that we will continue to focus on costs and efficiency. While we aren't ready to provide specific numbers yet, I want to make it clear that we are not done with this transformation and will be exploring other opportunities throughout the year.

I would say our teams, revenue management, marketing, we focus on revenue maximization. We don't get caught up in load factor yield. Our tools and our people now include the incremental upsells. We get an incremental passenger comes with a bag fee, a seat fee, other type of ancillary; that's included into our calculus. So quantitatively, that's in there, but they're all about revenue maximization, not going after the submetrics because that can really lead you down a bad path. We've done a good job over the last 18 months of doing that, and we'll continue doing that going forward.

I apologize for revisiting the January 27 changes, as it is clearly an important topic. I have a question that covers multiple aspects. First, can you confirm that things are going better than expected? Secondly, do you know if both the incoming revenues and the book-away figures are exceeding expectations, or is the book-away lower than originally anticipated? Additionally, is there a chance that the ancillary revenues might be higher initially due to people being caught off guard by some of the changes, and could that eventually stabilize over time? Or do you believe the situation will improve from this point onward?

I'll try to go through your questions there. So yes, the ELR and the preferred seats and assigned seats in general is going better than expected. We are getting book away from other carriers when they have poor reliability. We have that consistently over the last couple of years. So that is a tailwind. It doesn't happen every single day, but it does happen quite frequently is a benefit, and those people now come over and buy a stand-alone seat or a higher fare. This is very helpful to have that extra book away. So we find that what people do when they get to the gate, a crowded flight, they have a higher propensity to buy up. So you get to the gate, it's crowded, and you're like, 'What seat am I? Oh, I want to change my seat; I will pay more.' We see the fuller the flight, the higher the ancillary benefit.

My first question, and congrats on the entire undertaking and the progress you've made. I'd love to hear what feedback you're getting on the product segmentation. Are customers even aware? How has that changed your promotional activity? In cities like Chicago, where it's become a hot city of late, what really differentiates Southwest versus a network carrier? And maybe my follow-up on the $4 of EPS, what is the assumed paid load factor in total ancillary uplift in the extra legroom seats relative to the '25 base?

Sheila, let me take a piece of the first one, and I think Andrew will take the second. What is different about Southwest Airlines now, obviously, has been a common question since we implemented assigned seating. I've been here 38 years, and we have changed constantly over those 38 years. Every single one was, 'Well, you're just not the same Southwest.' Every single time that person or those folks were wrong. Our people and their heart for serving our customers, I mean, that is and always will be the greatest competitive advantage that Southwest has. That's the difference. That was true on Monday with open seating, and it was true on Tuesday with assigned seating, and nobody, no other airline can copy the heart and the soul and the service of our people. So that's what makes Southwest Airlines different.

In a place like Chicago, particularly at Midway, we have a very strong network. Our service to customers is robust, and we offer lower costs than our competitors, allowing us to provide great deals. We are focused on increasing our revenue per available seat mile. With lower costs, we can offer fantastic deals. Additionally, while many airlines speak about reliability, achieving high reliability is incredibly challenging. Our reliability at Midway surpasses that of any other airline in Chicago, giving our customers confidence in a better experience than they would have at O'Hare. When it comes to hospitality, many claim their employees excel, but our Net Promoter Scores indicate that our staff genuinely provides excellent service. This level of hospitality is difficult to replicate. You can instruct staff to treat customers better, but if they don’t, what can be done? Our employees are motivated to treat customers well. These aspects of great hospitality and reliability provide us with sustainable advantages.

Congrats as well. I think I'll just keep it to one here. But Bob, I mean, I think just judging by some of these questions and definitely like the bloggers and the airline observers out in the ecosystem, there's this view, and I think you've hit on it in the answers to a couple of these questions, but like Southwest is losing its uniqueness, no more free bags, and now it's or maybe less egalitarian. The reality is, I think if we listen to all your competitors, things have moved much more towards a premium focus with consumers. So I don't know, can you just maybe wrap this up a little bit? Isn't this just offering the market what they wanted? And incrementally, I think you hit on the culture too, but has the employee base really fully embraced this too?

Brandon, thank you. Yes, this is about one thing, and that is chasing our customer. We are committed to following the customer, providing what they want today, which is different than what they wanted 5 and 10 years ago and what they want in the future because we know if Southwest Airlines doesn't provide it, they're going to go to a competitor, and we are not going to let that happen over time. This has nothing to do with copying anybody. This has to do with offering our customers what they want. Again, as Andrew said, doing it even better because we've got the employees and the service delivery and the reliability that they cannot match. Look, I'm not meaning to brag, but maybe I am, but we won the #1 ranking in The Wall Street Journal Best U.S. Airline for 2025 for a reason. That's because our service was better, our operation was better, and customers see it. Again, at a high level, we are on track. You see the numbers that we're guiding for 2026. Customers embrace the changes, book the product. We are not seeing book away from Southwest Airlines. If anything, we're encouraged that we'll see share shift to Southwest Airlines because the product is a stronger offering now, especially with corporate. This is all about following the customer.

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

Yes. This is not about raising fares. This is about offering our customers choice that we know they want. Offering them a very basic fare if that's what they want, offering them a fare that comes with extra legroom and a drink and a different level of service and boarding if that's what they want. It's the customer's choice to buy up, which is very different than sort of across the board raising fares. Same thing on the ancillary side, just like we sold early bird and upgraded boarding. We're offering our customers a choice around priority boarding and obviously a choice around seat selection. This has nothing to do with raising the fares. This has to do with offering customers choice that they can then choose to buy or not buy. What we are seeing is that they are choosing to buy those new options.

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

So on the buyout, that's the type of stuff that we are working out that Bob is bugging me for all the time. We're not going to give those right now. It will become clear over time as we give the high end of our guide and start to report. Right now, we're just focused on delivering the current guide. In corporate bookings, we found that the kind of segmentation we introduced with the basic fare that the corporates found they did not want that in their ecosystem. Our sales force did a great job helping configure selling tools so that that was not featured, and that was beneficial to our corporate revenues. As we offer these ancillaries, we'll be doing the same thing, and we anticipate additional benefit once the tools and expense policies calibrate to our new offerings that we'll see additional benefits from that.

And Dan, just quickly on the lounge question. I think I mentioned before there, we are looking at, again, things that our customers want. There's nothing specific to report there today, but just know that the assumptions that we have internally around what that could look like are built into our guide. They are not incremental to the guide that we've given you for the quarter or for the year. I want to go back to your first sentence. I just can't help myself about the congrats on the implementation. I just want to say thank you. I got to thank our people again. The level of execution last year with so many things. It was just done so flawlessly on time with quality to win The Wall Street Journal #1 ranking at the same time as changing the company, and then to have a winter storm that's historic and manage it incredibly well. Come out of that with no hangover at all. The next day, do the largest changeover in the history of the company with assigned seating and have excellent operating metrics on that day. I just don't know how to say anything, but wow, I'm just stunned by what our people have done.

I guess I wanted to talk a little bit about the business commentary and I guess what you're looking to see over the course of the next couple of weeks. Presumably, there's been some conversations there, and you seem optimistic about upside. Any insight there would be helpful and maybe where some of the share might be coming from? And then the second question would just be sort of understanding what's embedded in the $4-plus guidance around buybacks.

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

On the buyback question, we continue to believe that the shares are undervalued relative to the long-term fundamentals of the business. We'll continue to be opportunistic there, and we'll make sure that we stay in the guardrails that keep us with our investment-grade rating. One other thing I'll add to that too is we've invested a tremendous amount of capital into our people and into our business as well and into our customers. We've talked about the investments we made into the cabin and things like the bigger bins, new lighting, new seats, in-seat power, and free WiFi. All these things are part of that capital allocation as well. We stay within the guardrails. We invest in the business. We invest in our people, and we invest in our customers and ensure that we stay in those investment-grade guardrails.

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

Actually, we took turn time out, Jamie. So all this is, we've scripted out what we sell when and what happens when in our boarding. We have standards and those allow us to handle both employees traveling for non-revenue as well as upselling in the gate area. All of that, I think, works well for cost efficiency and revenue optimization.

And I've just got to add again. We took time out of the turn, managing all these changes, which include changes to boarding, and we won The Wall Street Journal ranking as the Best U.S. Airline, most of which are operational metrics. Not bad.

And on that note, we'll conclude today's call. As always, if you have any follow-up questions, please reach out to Investor Relations, and we appreciate everyone for joining.