SOUTHWEST AIRLINES CO(LUV)Q2 2026 法說會逐字稿

Hello, everyone. And welcome to the Southwest Airlines Second Quarter 2026 Earnings Conference Call. My name is Gary, and I will be moderating today's call. Please note that this call is being recorded. A replay of today's call will be available in the Investor Relations section of southwest.com. Following the prepared remarks, we will open the call for questions. At this time, I would like to turn the call over to Danielle Collins, Managing Director of Investor Relations. Danielle, please go ahead.

Thank you. Hello, everyone, and welcome to Southwest Airlines second quarter 2026 earnings call. In just a moment, we will share our prepared remarks, after which we will move into Q&A. Joining me today are Bob Jordan, our President and Chief Executive Officer; Andrew Watterson, our Chief Operating Officer; Justin Jones, our Chief Commercial Officer; and Tom Doxey, our Chief Financial Officer. Before we begin, a reminder that we will be making forward-looking statements, which are based on our current expectations of future performance and our actual results could differ materially from those 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 release. With that, I will turn the call over to Bob.

Thank you, Danielle, and good morning, everyone. I appreciate you joining our call today. Yesterday, we reported our second quarter results marking the first time all of our major initiatives were contributing throughout the entire quarter. Results put the earnings power of our business on full display and demonstrate the benefits of the transformation that we have executed. Our business now benefits from a broader and more diversified set of revenue and commercial levers than at any point in our history. The results demonstrate that the transformation is working: a 9% after-tax return on invested capital, an adjusted operating margin of 6.7% or a 3.3-point improvement year over year despite nearly $900 million year-over-year increase in second quarter fuel expense. We also generated nearly $2 billion in operating cash flow during the first half of the year despite record fuel expense. We reported adjusted earnings per share of $0.94, up approximately 120% year over year and well above both our initial guidance and analyst consensus. Adjusted unit revenues increased 20.1% year over year to an all-time quarterly record, exceeding the high end of our prior guidance range. While adjusted operating revenues increased 20.3% on capacity growth of only 0.2%. Managed business revenues grew 30% year over year to a new all-time quarterly record, surpassing the record established just one quarter ago. Customer response to our enhanced product offering is showing up in strong engagement results. Rapid Rewards new member enrollments increased 35% year over year and overall program size is a record with nearly 100 million members. Tier qualification activity also reached a record high in the quarter. Chase co-branded card account growth was also exceptionally strong with card acquisitions in the quarter up 28% year over year. Cost discipline continued as well with CASM ex increasing just 3.4% year over year on near-flat capacity, below the low end of our prior guidance, and cost discipline remains broad based across the company. With transformational initiatives now fully in place, our focus has shifted to optimization and unlocking the full potential of the business. Specifically, our focus is on optimizing the network, refining new products and pricing, growing managed business revenues and expanding co-brand opportunities. We have emerged as a stronger, more resilient and better-positioned Southwest while sustaining a unique set of core strengths that remain firmly intact: the largest domestic network with the most nonstop flights and the number one position in nearly half of the 50 largest U.S. airports; operational efficiency; cost discipline; powerful brand loyalty; and importantly, legendary service and hospitality delivered by our incredible people. That creates a differentiated position in the marketplace that no other airline can replicate, and that differentiation continues to show in the results. Southwest was named number one in customer satisfaction among economy passengers in the J.D. Power 2026 North America Airlines Satisfaction Study, our fifth consecutive year at the top spot, following recognition by The Wall Street Journal as its Best U.S. Airline of 2025. These recognitions reinforce that our hospitality, reliability, operational execution and value remain powerful core competitive advantages. And we continue to evolve the product that we offer to our customers. Just a few weeks ago, our first STARLINK-equipped aircraft entered service, marking the beginning of a new era of in-flight connectivity at Southwest. In early July, we expanded our airline partner network to nine carriers with the addition of Air Premia. With the launch of Anchorage in May, we completed the rollout of service to all five previously announced new destinations. And we are not stopping here. We will continue to drive enhancements that broaden our product offering and further deepen customer engagement. Now let me turn to our outlook. While fuel prices have remained volatile and elevated, industry recapture has been swift and pricing has remained sticky. Forward bookings are robust and we are optimistic the strong demand and pricing environment will be sustained. Importantly, the revenue strength we are seeing is not solely a fuel recovery story. It also reflects the idiosyncratic benefits of our own initiatives which are improving revenue quality, strengthening customer acquisition and engagement, broadening the earnings power of the business and creating earnings durability regardless of the macro environment. For full-year 2026, we now expect adjusted earnings per share of $3.25 to $4.25. This updated range replaces our prior expectation of at least $4, reflects the forward fuel curve as of July 17, and assumes the current fare environment and demand trends remain broadly intact. Even with an estimated year-to-date fuel headwind of approximately $1.33 per share, Southwest remains positioned to generate earnings that are broadly in line with our guidance at the beginning of the year and represent significant earnings growth and margin expansion, underscoring the resiliency of our business model. And before I close, I want to recognize our employees. None of what we have accomplished would have been possible without the dedication, resilience and commitment of our people, and we are proud to have accrued over $100 million year-to-date in profit sharing for our employees. Profit sharing reflects our longstanding belief that when the company succeeds, our people should share in that success. Our employees across the Southwest system, thank you for everything that you do for our customers and for one another. We set out to transform the company and today you can see the proof in the earnings. We have built a more durable and diversified business with greater earnings power and our focus is now on unlocking Southwest's full potential, further expanding margins and creating additional long-term value for our customers, our employees and our shareholders. And with that, I will turn it over to Andrew.

Thank you, Bob. As Southwest enters the next phase of its evolution, our focus is increasingly on optimization. Across the operation, we are working to improve asset utilization, strengthen operational execution, and drive greater efficiency while maintaining the reliability and hospitality that customers expect from Southwest. Operational excellence remains a key competitive advantage for our company and supports both the customer experience and the long-term profitability of the business. During the second quarter, we ranked first among large domestic carriers in completion factor and improved mishandled baggage performance year over year even with higher volumes of gate-checked bags. Trip Net Promoter Score also improved throughout the quarter reinforcing that our operational execution and enhanced product offering are resonating with customers. We also maintained the lowest customer complaint rate among the major U.S. airlines. Our priorities remain straightforward: operate safely, serve our customers reliably and continue to improve the efficiency and productivity of the operation. With that, I will turn it over to Justin.

Thank you, Andrew. I am excited to join today's call in my new role as Chief Commercial Officer, and I look forward to engaging with many of you in the months ahead. Our focus is clear: use Southwest's unique network, powerful brand, loyal customer base and expanded product offerings to improve revenue quality, strengthen returns and create durable earnings growth. We are not managing to any one metric. Our focus is on building a more productive commercial business that balances unit revenue growth, disciplined capacity, network profitability and long-term customer engagement. As Bob noted, second quarter adjusted RASM increased 20.1% year over year, well above the high end of our prior guidance range of 16.5% to 18.5%. Importantly, this performance was broad based reflecting contributions from our expanded product offerings, bag fees, online travel agencies, Chase-related revenue and continued strength in our base business. Adjusted operating revenue reached a record $8.7 billion, the highest quarterly revenue in Southwest history, demonstrating the earnings power of a broader and more diversified revenue platform. Looking ahead, we expect third quarter unit revenue growth of 17.5% to 19.5% year over year with a strong exit rate from Q2. We continue to see healthy demand, a constructive pricing environment and further opportunity to refine our commercial capabilities. Our third quarter unit revenue outlook includes a year-over-year headwind from lapping the 2025 implementation of bag fees and other initiatives. The network remains one of Southwest's greatest competitive advantages, and we will continue using it more efficiently to maximize returns and support long-term profitable growth. As we move through the remainder of the year, my focus will be on further unlocking the potential of our commercial initiatives, deepening customer engagement and ensuring that Southwest's commercial strategy continues to support sustainable margin expansion and long-term shareholder value. With that, I will turn it over to Tom.

Thanks, Justin, and welcome to the call. I am incredibly proud of our team for the continued focus on spending smartly as we have invested in our product, customers, operations and employees while expanding margins year over year despite significantly higher fuel costs in the quarter. We generated quarterly operating cash flow of $500 million, more than 32% higher year over year, and ended the quarter with liquidity of $5.3 billion, above our target of approximately $4.5 billion. Our gross leverage ratio was 2.1x within our stated range of 1 to 2.5x and improved from the 2.4x at year-end 2025 despite macro volatility. Our investment-grade balance sheet remains a key differentiator providing meaningful financial flexibility. Fuel prices averaged $3.92 per gallon during the quarter. Our fuel procurement team effectively managed through dynamic market conditions and took actions such as moving lower-priced Gulf Coast products to the West Coast to mitigate higher fuel costs in that part of our network. Looking ahead, we expect third quarter CASM ex to increase 3.5% to 4.0% year over year on capacity of flat to down 1%. Consistent with Bob's comments, we continue to see a path toward long-term margin expansion and earnings growth supported by disciplined execution, improving unit revenues and contributions from our initiatives. Combined with a strong balance sheet and substantial liquidity, we believe Southwest is well positioned to create sustainable long-term value for our shareholders. And with that, I will turn it back to Danielle for Q&A.

Thanks, Tom. This now concludes our prepared remarks. We will open the line for analyst questions. Back to back at the outset. All right, operator. We are ready for your first question.

Thank you. We will now begin the question and answer session. Our first question today is from Conor Cunningham with Melius Research. Please go ahead.

Everyone, thank you. I was hoping to start with the comp issue that you raised on unit revenue a little bit and maybe you could size that impact in 3Q so we can understand a little bit more. What people are trying to get at is the framing of how it progresses through the first half of 2027. I would have thought there would have been more maturation period and more uplift from initiatives to offset the timing of it. And then specifically to Justin, congrats on the new role. Just trying to understand your long-term growth view at Southwest and network development in general. Should we be reading anything into the ramp-up in supply in the fourth quarter and first quarter 2027 at all? High-level thoughts, thank you.

Hey, Conor. Thanks for the question. On the first, I would start by zooming out: our Q2 unit revenue was up 20%, an extraordinary number and far ahead of the rest of the industry as the transformation really kicked in and showed up in the results. The Q3 RASM guide is straightforward: it includes the headwind from the initiatives we put into place about a year ago in 2025, one of which was bag fees. Bag fees alone are about $1 billion a year, so we are starting off at a much higher base. If you adjust the guide for lapping those initiatives in Q3, our unit revenue guide would be well ahead of the unit revenues we posted in the second quarter. Either way, we saw strong demand across the second quarter, and that robust strength is fully in place and continuing in the third quarter. Next question.

This is Justin Jones. Thanks for having me on the call. On long-term growth: as Bob talked about in his prepared remarks, we are going to continue to grow while showing capacity discipline and focusing on building durable earnings. You can expect modest growth from us moving forward. You see a little bit of that in the fourth quarter and into 2027. We are well below our peers on capacity. My focus will be on strengthening the points of strength we have in the network. You will see capacity growth in those points and we will continue shifting capacity around to make those positions more durable long term. That will be the focus as long as I am in this role. Thank you.

The next question is from Andrew Didora with Bank of America. Please go ahead.

Hi there, good morning everyone. Tom, on the new 2026 EPS outlook can you help us with some of the inputs that underpin that, particularly CASM in 4Q? On that note, in terms of 4Q CASM, I know you are retiring 37 aircraft in the back half versus 23 in the first half. I would assume you have more plane sales in the back half than you have done to date. Any color on how to think about gain on sale in 3Q and 4Q, and anything that you booked in the second quarter would be helpful. Thank you.

Yes, thanks, Andrew. As far as fuel, we do not guide fuel; we provide a fuel estimate based on a given day and say it is based on the forward curve as of that day—we used July 17 for this update. We give you an estimate for the third quarter and you can run that out for the fourth quarter based on that information even though we are not providing a firm fourth-quarter fuel guide. For the non-fuel side, I'm really pleased with the way the management team is managing costs; we are seeing cost savings happening across the business to the tune of literally hundreds of millions of dollars of incremental savings as we work through the year. On fleet transactions specifically, this is a unique strength for us. When it comes to divesting or retiring assets, we are one of the best in the world at doing this. The team does a fantastic job. We have north of 400 NGs that will be retiring for years to come, well into the next decade. It may be a little lumpy by quarter, but this is a durable activity. In terms of timing, 3Q is going to be a little bit elevated versus 1Q and 2Q, and then fourth quarter probably looks more like the first and second quarter.

The next question is from Mike Linenberg with Deutsche Bank. Please go ahead.

Yes, hey, good morning, everyone. Two questions. Andrew, well done on the completion factor. Credit due for running a good operation. On the other hand, we have seen delays go up pretty dramatically even on what look like blue-sky days. I'm curious how much of that is a function of you reducing turn times, combined with the fact that you are trying to increase connectivity. Second, to Tom and Danielle, kudos to reintroducing ROIC in the release—it’s important to us and investors. Can you detail what was the gain in the quarter on sales for aircraft? And when you talk about CapEx guidance coming in at or below the low end because it is net, is that a function of the pickup in aircraft sales or delayed deliveries from Boeing? What is driving that?

Thanks, Mike. I appreciate the confidence in completion factor. The Wall Street Journal measures operating quality across seven measures; we won it last year and are tracking well to win again. If you look at those measures, some have improved this year, but one we have come down on is on-time performance. I divide delays into two categories: large-scale events—weather, for example, where we continue to outperform peers—and day-to-day small-scale glitches. We expected changes when rolling out our new product; we organized management and technology teams to continually update since the rollout in January 2026. Consumers have reacted positively: satisfaction scores have inflected strongly and consumer choice behavior is evident in RASM results. What remains is in the last 10 minutes of the turn when we have high load; we are not turning as fast and are seeing smaller delays that don't drive consumer dissatisfaction but need cleanup. We're focusing our ground operations on reengineering the last 10 minutes now that the boarding product is stabilized so we can scrape that back and improve OTP. We're already seeing benefits in July and have some schedule changes in October, and expect process optimization will address this before the next high-volume holiday period.

Mike, on ROIC, I like that metric a lot. You'll see more detail in our 10-Q that comes out later today—we thought that additional disclosure would be helpful given questions during the quarter. The gains on sales in the quarter are worth probably a little north of maybe a point or so of CASM ex in the quarter. Again, think of it as durable and something that will continue for years to come. Gains on sales work in tandem with depreciation and maintenance expense: how much you depreciate changes book value, and maintenance spending on used assets brings economic value into those assets but is expensed when incurred. That dynamic can result in gains, and you saw a bit of that this quarter.

Thank you. The next question is from Savanthi Syth with Raymond James. Please go ahead.

Hey, good morning. To follow up on Justin's earlier response, where is growth focused and are there common themes where that capacity growth is happening as you roll out the new schedules, other than high-margin opportunities? Second, breakage accounting changes are noisy; it appears the adjustment this quarter was related to forward credits which stopped issuing in May last year. Any implications from the change in assumption around forward credits to how you are issuing credits today, which I think expire in 6 to 12 months, and the margin contribution you expected from that change?

Hey, Savanthi. I'll take the breakage question and Justin can take growth. On breakage, to simplify: it's a small change—about a three-point change in the estimate on a large pool of unused travel funds. They relate to 2022 to 2025 when we had a policy of never expiring funds, which was new to us; we learned trends and then changed policy mid last year related to funds expiration. There were moving parts. The main point is none of this breakage adjustment relates to 2026—it is clean for 2026. Going forward, learnings from the trend and the policy changes will factor into breakage on new pools of travel funds, but again the main point is the adjustment does not affect 2026 financials.

Savanthi, on growth themes: Southwest is in a position no other airline is. We have a market-leading position in more cities in the top 50 U.S. locations than any other airline. The theme you will see is us building on these points of strength because we're focused on customer loyalty and building diverse revenue streams. Network changes will align with that theme. The objective is to build long-term predictable earnings that we can count on for years to come, so capacity changes will be concentrated where we have those strengths.

The next question is from Jamie Baker with JPMorgan. Please go ahead.

Good morning. Justin, question on corporate revenue associated with seating initiatives: business travelers continue to return. How do their purchase patterns compare to consumers? It's unclear what percentage of businesses reimburse corporate flyers for those fares. I'm trying to figure out how much of a bump the new initiatives are driving as part of the overall corporate demand backdrop, and whether behavior differs from consumers. For Tom, on modeling: the implication on fourth quarter RASM is sizable despite lapping last year's initiatives and some capacity growth to overcome. It seems like you may be building more demand resilience into your guide than just flat-lining the current trend. Wanted to give you an opportunity to push back.

On corporate recovery: Bob mentioned corporate revenue was up 30% year over year. Corporate customers are more likely to book away from the most restricted fares, which is true industry-wide. The gap between the 30% corporate growth and total revenue growth largely reflects that dynamic. We're impressed with adoption of our new products by corporate customers: we see substantial fare growth, nominal load factor gains and an improving mix of O&Ds. Every metric we track on corporate looks good.

Jamie, on modeling: our guidance is third-quarter unit metrics and full-year EPS. The full-year EPS guide includes the earlier $4 guidance range and is an achievement given the environment. We have good visibility to the non-fuel cost side of the business between now and year-end, which we feel confident about. On revenue, we are comfortable with the assumptions embedded in our full-year guide; we are not making assumptions that require escalating unit revenue into the fourth quarter beyond what we've indicated. The third quarter guidance and the full-year EPS reflect our current views on revenue and cost dynamics.

The next question is from Duane Pfennigwerth with Evercore ISI. Please go ahead.

Thank you and nice job on relative margin progress. How are you thinking about free cash flow conversion and the underlying drivers over the longer term? Will free cash flow simply be a function of continued margin progress and earnings expansion, or are there other levers that could drive higher conversion even on a flattish earnings outlook into 2027?

Duane, great question. We've talked a lot about operating cash flow improvement as profitability improves. The translation from operating cash flow to free cash flow will largely depend on the timing of fleet transactions. Aircraft deliveries are a bit back-weighted in the year and non-aircraft CapEx is relatively constant. So if earnings and margins improve, that generates operating cash flow, and the conversion to free cash flow will be influenced by the timing of deliveries and fleet financing decisions. Because we predominantly pay cash or finance aircraft directly, the timing of those deliveries matters to net CapEx and free cash flow.

The next question is from Brandon Oglenski with Barclays. Please go ahead.

Good morning and thanks for taking my question. Bob, in your prepared remarks you mentioned refining pricing of the new suite of fares. Does that help in an environment where fuel is volatile, and how does it compare to how you did things in the past?

Brandon, the point is that the changes in our business are significant: we have a much more diverse set of revenue streams than ever before and customer reaction to the products has been very strong. Engagement metrics—35% increase in new Rapid Rewards members, record tiering qualification, 28% increase in co-brand card acquisition—show the promise of the transformation is showing up in the business. It fundamentally changes the model, earnings ability and durability. We have opportunities to continue to optimize the network, pricing around ancillaries and fare buy-ups, and the products themselves. Those engagement metrics are leading indicators for co-brand opportunity: we can continue to drive co-brand contribution and expand opportunities such as new cards. The transformation has fundamentally changed the earnings power of the company; you see it in year-over-year margin improvement—the only airline to strengthen margins by over three points year over year despite $900 million in higher fuel expense—and we have more to come from existing products and from expanding the product set. The backdrop remains strong and some of the strength reflects reactions to our new products. Managed business up 30% year over year on roughly flat capacity is remarkable and that strength continued into the third quarter. For example, third quarter is currently about 65% booked with yields running up 24% year over year compared to 13% for Q2 at this point. We are not seeing deceleration in demand, fares, managed business or product performance; we exited Q2 strong and are seeing that continue.

The next question is from Catherine O'Brien with Goldman Sachs. Please go ahead.

Good morning. Now that we are in the first full quarter of the new product initiatives, any stats you can share on buy-up from basic or baggage take rates versus your initial expectations and how that factored into the revenue beat? Tom, on the cost side, another beat—what was the main driver and how should we think about puts and takes on CASM into 4Q? And are aircraft sales included when you give the initial quarterly guide?

We won't break out the value of individual initiatives, but on trends versus expectations: we are outperforming. With basic economy, we're selling more basic economy fares because we expanded the product into more of our fare structure, and we're also seeing incremental sell-up: when customers trade up, they are choosing the options more often. Both trends are outperforming initial expectations, and we'll continue to tweak the models and the product with Tony Roach's team to make it better.

On drivers of CASM improvement, cost reductions are happening across the business: technology efficiencies, supply chain and maintenance efficiencies, non-frontline headcount staying flat, and strong productivity from our frontline teams. It is broad-based. On aircraft sales, yes—the simplified EPS structure in the guide is inclusive of any gains that would come as we dispose of these assets.

The next question is from Sheila Kahyaoglu with Jefferies. Please go ahead.

Good morning. Putting a finer point on Q2 to Q3 guidance: legacy peers are guiding to RASM acceleration, yet your midpoint decelerates sequentially. Can you parse the tailwinds and headwinds causing the sequential deceleration—specifically initiatives, comps and macro demand?

Sheila, the sequential change Q2 to Q3 is simply the headwinds created by the initiatives we put into place about a year ago in 2025, including bag fees. Bag fees alone are roughly $1 billion a year, so the comparable base is higher. If you adjust for bag fees and other initiatives we implemented, the Q3 guide would be sequentially ahead of our Q2 20.1% unit revenue. There is no deceleration in demand, fares, managed business strength, or product performance—this is a factor of the base stepping up because of the products implemented last year.

The next question is from John Godyn with Citi. Please go ahead.

Thanks for taking my question. Bob, you mentioned assets that are impossible to replicate at Southwest. Other airlines might argue similarly. Without getting to a specific number, how should we think about how much incremental investment it would take for a competitor to replicate the combination of assets and advantages you describe?

John, the point isn't about replicating any single element; it's the combination. We've changed the business model to meet customer needs and expectations, diversified revenue streams and created more durable earnings, combined with historic core strengths that are tough to replicate: the largest domestic network, the most nonstop flights, number one position in nearly half of the top 50 U.S. cities, operational efficiency and cost discipline tied to aircraft utilization and network management, and the best service and hospitality from our people. Any one of these is hard to replicate; the combination plus our improved product and diversified revenue streams makes the position uniquely durable. We may continue to invest in products, but the combination of core strengths and recent transformation is very difficult for competitors to match.

The next question is from Ravi Shanker with Morgan Stanley. Please go ahead.

Thanks. On corporate share, now that revenue initiatives are bedding in, how has share shifted in corporate and how much room do you think there is to get to your view of corporate share? Also, you mentioned hundreds of millions of dollars in incremental cost saves—how much is already in the guide and what's the long-term runway on that?

On corporate share: corporate revenue growth, load factor improvements and O&D mix improvements indicate progress. We have some disadvantages versus peers in certain channels and there are tactical initiatives teams can pursue to increase corporate adoption. Corporate share growth will also ride on network improvements: as we build points of strength and improve the network product, corporate share increases. We are already seeing corporate load factors go up as we made changes.

Ravi, the hundreds of millions of dollars of savings are included in the guide. These are incremental savings we've uncovered since the beginning of the year through disciplined efforts by leaders across the company to make their areas more efficient. This isn't just finance pushing cuts; it's every leader partnering to find savings across the business, and those savings are incorporated into the full-year guidance.

The next question is from Tom Fitzgerald with TD Cowen. Please go ahead.

Thanks. A fleet question: can you talk about your long-term maintenance agreements and how that could be an advantage as there is a transition to new technology engines? Also, should we expect airline benefit revenue component of loyalty to grow with the overall business into 2027, or is that more flat based on cardholder spend?

On the fleet side, the maintenance value in the assets we sell is strong and trading well in the market. Aircraft and engines and the maintenance value are robust and we benefit when selling assets into that market. The market for maintenance value is elevated and we expect that strength to continue.

On the co-brand and loyalty revenue: yes, over time as products and customer engagement mature, you should expect that to show up in co-brand remuneration. We see leading indicators—growth in new membership, tiering and card acquisitions—that will mature into continued card spending growth and co-brand revenue. We intend to continue expanding co-brand offerings and opportunities, including more card products and potential things like lounges in the future. Those efforts are underway and will help drive card spend and co-brand remuneration as engagement deepens.

The next question is from Scott Group with Wolfe Research. Please go ahead.

Thanks. On capacity: Q4 up 4% to 5% year over year is a big sequential increase. Can you help us understand that and any early thoughts on capacity for 2027?

Our Q4 sequential growth of about 4.5% may see some slight tweaks as we get closer, but where that capacity is going is to our points of strength—not expansion into underperforming new markets. We expect those deployments to produce profitable earnings this year. We remain focused on capacity discipline this year and into next. We're not prepared to discuss full-year 2027 capacity yet; you can see what's out in the first quarter and we'll make adjustments as needed.

The next question is from David Vernon with Bernstein. Please go ahead.

Good morning. With card acquisitions up 28%, any geographic patterns or card spending activity indicators that help gauge consumer strength? Also on Starlink: you mentioned 300 aircraft earlier—Is that a cap? Do you intend to equip the whole fleet, and if so, when would that be complete?

Card growth is broad based across regions; there isn't any one region driving it. We're seeing strong response to product changes and offers across the board.

On Starlink, our pace is driven by antenna availability from the supplier. Our tech-ops team is prepared to install as many as delivered under our contract. For the long term we haven't given a firm timeline for full-fleet equipage, but all aircraft already have free Wi-Fi and we're moving to the next generation, so conceivably we could be among the first to offer very high-speed connectivity across the fleet. We're excited about the capability.

The next question is from Atul Maheswari with UBS. Please go ahead.

Good morning. On San Diego: a competitor mentioned gaining several points of corporate share there amid sizable industry capacity growth. Can you talk about Southwest's strategy in that market? Second, on fuel: your second quarter jet fuel per gallon was below others and below the Gulf Coast average of roughly $4. Remind us of your West Coast exposure and any fuel sourcing dynamics in 2Q that drove your per-gallon cost to be below other airlines.

On San Diego, I can't speak to specifics about competitor moves. We are seeing corporate load-factor points grow there as we have increased capacity, and corporate share has come along with that growth.

On fuel, thanks for the shout-out to our fuel team. They did an incredible job managing supply and pricing. We're about 50% Gulf exposure and we shipped some Gulf Coast product to the West Coast during the quarter when pricing differentials were acute. There was a period when international fuel was more than a dollar per gallon higher; we mitigated West Coast exposure and took other actions that helped our average per-gallon cost come in below others. Our balance sheet and procurement flexibility enable these types of actions, and the team deserves credit.

The next question is from Chris Wetherbee with Wells Fargo. Please go ahead.

Good morning. Since the first-quarter call, how many fare increases have you implemented, and were there any in July? Just trying to get a sense of opportunities for more in the second half. Second, was the revenue breakage adjustment contemplated in the second-quarter guide?

On fare increases, we won't detail exact counts; there have been system-wide and more localized adjustments. The fare environment is robust and we're seeing strong booking response that continues into the fall. On RASM, remember the 20.1% unit revenue increase in Q2 was driven both by the macro fare environment and by our idiosyncratic initiatives, which significantly contributed to our outperformance versus the industry.

On the breakage accounting question: as Bob mentioned earlier, the revenue breakage item this quarter did not relate to 2026 and therefore was not contemplated in the Q2 guide. If the assumption around breakage had changed slightly in a different way, it would have reduced some revenue into 2025 and resulted in even higher year-over-year RASM. But again, it wasn't relevant to 2026.

We have time for one final question and that will be from Daniel McKenzie with Seaport Global Securities. Please go ahead.

Thanks for squeezing me in and congrats to the team on a breakout quarter. Bob, for longer-term holders with a two- to three-year horizon, how are you thinking about demand durability? What concrete data points give you confidence this strength is durable? Second, what's the appetite for returning additional capital to shareholders from here?

Daniel, Tom will address capital allocation, but on demand durability: there are multiple supporting points. First, consumer demand for travel remains resilient across sectors and geographies; pricing and revenue strength have been broad-based. Second, unique to Southwest, our product changes are resonating and producing engagement: managed business revenue up 30%, Rapid Rewards new members up 35%, card acquisitions up 28%, and other measures of engagement are trending strongly. Those are leading indicators of future spending and retention. Third, the transformation demonstrates we can change and execute: we continue to optimize the network, refine products and pricing, and expand offerings like Starlink and co-brand opportunities. These elements together—broad consumer demand, strong product engagement and continued optimization—lead me to be confident in durable demand and revenue quality over time.

On capital returns: we've repurchased meaningful shares over the last couple of years—around $4 billion. We won't speak to specific future repurchase plans here; our capital allocation will continue to follow communicated guardrails. Uses of cash include reinvesting in the business, including aircraft purchases that are highly accretive—replacing older 737-700s with brand-new 737 MAX aircraft—as well as investments driving the outperformance you saw this quarter.

Thank you everyone for joining us today and for your continued interest in Southwest Airlines. We look forward to speaking to you again next quarter.

This concludes today's conference call. Thank you for your participation. You may now disconnect.