25-Jan-2018 Southwest Airlines Co.investors.southwest.com/~/media/Files/S/Southwest-IR/LUV 4Q17...

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25-Jan-2018

Southwest Airlines Co. (LUV)

Q4 2017 Earnings Call

Southwest Airlines Co. (LUV) Q4 2017 Earnings Call

Corrected Transcript 25-Jan-2018


2 Copyright © 2001-2018 FactSet CallStreet, LLC

CORPORATE PARTICIPANTS

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

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

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

Andrew Watterson Chief Revenue Officer & Executive Vice President, Southwest Airlines Co.

Thomas M. Nealon President, Southwest Airlines Co.

Laurie Barnett Managing Director Communications & Outreach, Southwest Airlines Co.

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

OTHER PARTICIPANTS

Jamie N. Baker Analyst, JPMorgan Securities LLC

Jack Atkins Analyst, Stephens, Inc.

Hunter K. Keay Analyst, Wolfe Research LLC

Duane Pfennigwerth Analyst, Evercore ISI

Savanthi N. Syth Analyst, Raymond James & Associates, Inc.

Helane Becker Analyst, Cowen & Co. LLC

Brandon Oglenski Analyst, Barclays Capital, Inc.

Michael J. Linenberg Analyst, Deutsche Bank Securities, Inc.

Rajeev Lalwani Analyst, Morgan Stanley & Co. LLC

Mary Schlangenstein Dallas Reporter-Bloomberg News, Bloomberg LP

Conor Shine Reporter, The Dallas Morning News, Inc.

Dawn Gilbertson Senior Business Reporter, The Arizona Republic, Inc.

Robert Silk Senior Editor, Travel Weekly





MANAGEMENT DISCUSSION SECTION

Operator: Welcome to the Southwest Airlines Fourth Quarter 2017 Conference Call. My name is Tom, and I'll be

moderating today's call. This call is being recorded, and a replay will be available on Southwest.com in the

Investor Relations section.

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

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

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

Thank you, Tom, and welcome, everyone, to our fourth quarter earnings call. Joining me today, we have Gary

Kelly, Chairman of the Board and CEO; Tom Nealon, President; Mike Van de Ven, Chief Operating Officer;

Tammy Romo, Executive Vice President and CFO; and other members of senior management.

Please note today's call will include forward-looking statements. And because these statements are based on the

company's current intent, expectations and projections, they are not guarantees of future performance, and a

variety of factors could cause actual results to differ materially. As this call will include references to non-GAAP

results, which excludes special items, please reference in this morning's press release in the Investor Relations

section of Southwest.com for further information regarding forward-looking statements and reconciliations of non-

GAAP results to GAAP results.

Gary will begin with an overview of our performance, followed by Tammy with a detailed review of our fourth

quarter results and our current outlook. Following Tammy's remarks, we'll be available to answer questions.

And at this time, I'd like to turn the call over to Gary. ......................................................................................................................................................................................................................................................

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

Thank you, Ryan, and thanks, everybody, for joining our fourth quarter 2017 earnings call. It was an excellent

quarter all the way around, and I want to thank all our 56,000-plus employees for an exceptional year and

congratulate them on another very strong profitsharing for 2017 of $543 million, and that is in addition to the $70

million tax reform bonus that we shared.

After two years of modest unit revenue declines, we turned the corner in 2017, and that's despite a very

competitive industry environment. Unit revenues were up in the quarter 1.9% and just under 1% for the full year.

We're currently estimating 1% to 2% unit revenue growth on strong load factors and bookings for first quarter

2018, and our goal is for positive unit revenue comparisons again for this year.

Better revenue management tools and techniques enabled by our new reservation system will help mitigate any

competitive pressures for this year. I expect those benefits from the new system to begin in second quarter.

Fuel prices are up over the last quarter, and if futures prices become reality, we'll see some cost pressure there,

but the federal tax rate reduction more than offsets that pressure. And excluding fuel profitsharing and special

items, our unit cost outlook for the year is excellent with a goal of moving unit cost down slightly.





Depending on fuel prices, our goal is to realize operating margin expansion for 2018. Given the tax reform, in

addition to that, we would realize even greater net margin expansion, and both of those will drive stronger future

cash flows. But it is worth repeating that in addition to the margin expansion, we reduced our federal income tax

liability at the end of 2017 by $1.4 billion. And that cash flow benefit will flow through in the future years in addition

to the cash flow benefit from future margin expansion.

Our growth plans for 2018 are unchanged. We end the year with 750 aircraft which recovers the Classic fleet

retirement over the third quarter of last year, grows our fleet by 27 airplanes effectively over a 24-month period.

So I'm simply measuring year-end 2016 to the year-end of 2018.

Work is well underway to begin flying to Hawaii, so that is the focus for this year. And we announced this morning

our intention to add Paine Field in Everett, Washington later this year, and that will complement our presence at

Sea-Tac. Aside from the modest growth plans, our focus for 2018 will be on the basics.

Unlike the past seven years, we have no major strategic initiatives that are landing in 2018, and that allows a

more intense focus on running a great airline, offering outstanding customer service and controlling our cost.

Capital spending will also be down this year. 2017 closed out on a very positive note. 2018 looks even better for

all the reasons I just outlined.

And with that very quick overview, I'd like to turn it over to Tammy Romo, our Chief Financial Officer, to take us

through the quarter. ......................................................................................................................................................................................................................................................

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

Thank you, Gary, and thank you all for joining us today. I want to first thank our employees for their hard work and

congratulate them on another successful year, earning $543 million in profitsharing. 2017 was a year of many

accomplishments, and it ended with a strong fourth quarter performance. Fourth quarter net income was easily a

record with profits of $1.9 billion, yes, billion, or $3.19 per share. And as we announced in our 8-K filing earlier this

month, we recorded a very large tax adjustment as a result of tax reform.

In revaluing our deferred tax liabilities and assets to reflect a lower future tax rate, we recorded a one-time non-

cash tax benefit of $1.4 billion during the fourth quarter, which we called out as a special item. Excluding the tax

reform adjustment and normal hedge accounting special item, fourth quarter net income was a strong $459 million

or $0.77 per diluted share, $0.01 ahead of First Call consensus.

We were proud to celebrate the passage of tax reform with our employees and a $1,000 bonus to each of them

earlier this month. The employee bonus of $70 million was included in our non-GAAP results and impacted our

earnings per share by $0.07. With these strong returns and another year of strong operating cash flow in 2017,

we were able to make prudent investments in our business, take care of our people and return significant value to

our shareholders. We're off to a great start this year.

And in addition to covering more detail on our fourth quarter results, I will also provide an outlook for 2018.

Starting with revenues, we ended 2017 with record fourth quarter operating revenue of $5.3 billion, driven largely

by record passenger revenue of $4.7 billion. Strong demand for low fares resulted in a fourth quarter record load

factor of 85%. Passenger revenue yields were down slightly year-over-year, but improved sequentially from third

quarter as expected. And demand was strong during Thanksgiving and the December holiday period.





Freight revenue also performed well during the peak season, resulting in a 7.1% increase year-over-year. Our

Rapid Rewards and EarlyBird revenues also were strong. In fact, our EarlyBird revenue for fourth quarter 2017

alone was approximately $100 million, which was our initial target for EarlyBird when we first rolled out the

boarding option.

Overall, we were pleased with our record fourth quarter operating revenue performance that outpaced our

capacity growth to produce a RASM increase of 1.9% year-over-year, which was in line with our expectation. We

were also pleased to achieve a goal of unit revenue growth for full year 2017, albeit modest, considering the

unprecedented national disasters and competitive industry environment during 2017.

Looking ahead to first quarter 2018, passenger revenues appear stable and travel demand and bookings are solid

and as we expect, favorable year-over-year trends in first quarter 2018 freight and other revenues. Based on

these trends and our current outlook, we expect first quarter 2018 RASM to increase in the 1% to 2% range year-

over-year.

Later this quarter, we will issue an investor update. This 8-K will reflect any typical guidance updates as well as

potential changes to our guidance as a result of accounting changes based on the new accounting standard

related to revenue recognition. We plan to utilize our investor updates on a quarterly basis as needed. And

therefore, we will no longer report RASM guidance in our monthly traffic releases beginning with the report of

January traffic results early next month.

Turning to fuel, our fourth quarter 2017 economic fuel price per gallon was $2.09. Fourth quarter's $2.09 per

gallon included $0.19 of fuel hedging losses. However, our fuel hedging losses are behind us now. And our hedge

portfolio for 2018 and beyond provides us a nice protection against catastrophic prices and energy prices without

the forward exposure. And it enables us to make prudent adjustment to our business in a rising fuel price

environment in order to maintain our financial goals and reduce volatility in our earnings.

For 2018, we plan to early-adopt an accounting standards update related to hedging, where we will begin

reporting fuel hedging premium expense within fuel and oil expense above the line rather than within other gains

and losses below the line on the income statement.

As such, we are providing our 2018 fuel price per gallon guidance including fuel hedging premiums as shown in

this morning's earnings release. And we'll recast prior periods later in the first quarter as part of our 8-K update.

Moving on now to our outlook on fuel, based on market prices and our hedging portfolio as of January 19, for first

quarter 2018, we expect our economic fuel price per gallon to be in the $2.10 to $2.15 range including

approximately $34 million or $0.07 per gallon in fuel hedge premium, and an approximately $0.05 per gallon

hedging gain.

For full year 2018, we currently expect our economic fuel price per gallon to also be in the $2.10 to $2.15 range,

including approximately $135 million or $0.06 per gallon in fuel hedge premiums and a $0.04 per gallon hedging

gain. At current market prices, our 2018 fuel hedge position began to produce modest gains at about $65 per

barrel Brent crude with more material gains kicking in at our $75 per barrel range and higher.

Before I move to non-fuel costs, I want to spend a moment on fuel efficiency. As you know, we retired our

remaining Classic fleet in third quarter 2017 and introduced the more fuel-efficient 737 MAX 8 into our fleet in

fourth quarter.





As we've continued to modernize our fleet, we have seen a nice increase in available seat miles per gallon,

improving 1.3% year-over-year and fourth quarter. For 2018, we currently expect a 2% to 3% improvement year-

over-year in available seat miles per gallon.

Excluding fuel, profitsharing and special items, our fourth quarter unit costs increased 4.6% year-over-year.

Putting aside the year-end items for just a second, fourth quarter unit cost trends were in line with our original

expectations, as we saw expected increases in salary, wages and benefits, advertising spend that shifted from

third quarter, and incremental technology costs that included ramping up for ETOPS in preparation for Hawaii.

As disclosed in our January 2 8-K, we had 3.5 points of incremental cost pressure at year-end, primarily driven by

the employee bonus. Based on current cost trends, we expect first quarter CASM, excluding fuel, special items

and profitsharing, to increase in the 0.5 point to 1.5% range year-over-year.

The primary drivers of the year-over-year increase include inflationary increases in salary, wages and benefits,

which include higher costs related to an extended operating day driven by our Classic retirement and our current

fleet deficit.

We also expect increases in airport landing fees and rentals and maintenance. And then looking ahead to the full

year 2018, we expect our CASM, excluding fuel, special items and profitsharing, to be in the range of flat to down

1% year-over-year, which is a very solid performance. For 2018, our largest year-over-year costs tailwind is

approximately $200 million related to the Classic retirements and benefits and depreciation, aircraft rentals and

maintenance expense.

We also have some offsetting headwinds in the areas of maintenance of our aging 737-700 fleet as well as airport

costs. While the benefits of the Classics retirements are easier to see in depreciation and aircraft rentals, we do

have a 2018 Classic year-over-year benefit within maintenance expense. However, this Classic maintenance

savings is more than offset by the increased maintenance of our aging 737-700 fleet.

I'll just make a few comments on the balance sheet and our capital deployment. We ended 2017 with arguably the

strongest balance sheet in our history, and we're very proud of that. Our solid investment-grade rating is intact.

And we are pleased with the upgrades from both Moody's and S&P during 2017 as well as the recent positive

outlook revision by Fitch.

Our liquidity is strong with cash and short-term investments of approximately $3.3 billion at year-end. And during

the fourth quarter, we issued $600 million in unsecured debt at among the tightest spreads and lowest yields in

Southwest's history. With this additional capital, primarily to refinance existing debt, we continue to target leverage

in the low to mid-30% range.

Free cash flow for 2017 was a strong $1.8 billion, driven by $3.9 billion in operating cash flow and capital

expenditures of $2.1 billion. Our strong cash flow and financial position allowed us to return $1.9 billion to our

shareholders through share repurchases and dividends.

Our 2017 CapEx of $2.1 billion came in below guidance, primarily due to the shift of approximately $115 million

out of 2017 and into 2018 related to one MAX 8 delivery and several non-aircraft investments that were really just

a shift in the spend.





We are still expecting our 2018 CapEx to decrease versus 2017 and are currently estimating 2018 CapEx to be

approximately $1.9 billion. Included in this total, we expect 2018 aircraft CapEx of approximately $1 billion and

non-aircraft CapEx in the $900 million range, including the shifting I previously mentioned from 2017.

We continue to effectively balance and manage our overall capital deployment, and we remain focused on

preserving our strong balance sheet and healthy cash flows, while returning significant value to our shareholders.

And with the expected future cash savings from tax reform, we'll continue to evaluate our investments in our

company, our people and our shareholders, including the mix of share repurchases and dividends with an

overarching goal to drive long-term value for our shareholders.

Moving on to fleet, of course, fourth quarter was our first quarter flying our all-Boeing NGs and MAX aircraft on the

heels of retiring the remaining Classic fleet, and actually fourth quarter was the first. And we ended 2017 with 706

aircraft with the delivery of 19 aircraft during fourth quarter. This is one fewer plane than expected with one MAX

delivery shifting into 2018.

We currently have 13 MAX 8 aircraft in our fleet. And as you saw in our January 2 8-K update, we made some

minor changes to our Boeing order book. We exercised 40 options for a MAX 8 firm orders to deliver in 2019 and

2020, deferred 23 MAX 7 firm orders to better align with our future 737-700 retirements, and accelerated 23 MAX

8 firm orders to be 2021 to 2022 timeframe.

We will have significant 737-700 NG retirements over the next 10 to 15 years based on their age and this order

book refresh, along with our remaining order book and options, which allows us to manage through those

retirements in a measured way while allowing flexibility for growth.

Aircraft CapEx remains very manageable at approximately $1 billion per year on average for the next five years.

Our 2018 fleet and capacity plans have not changed, and we continue to expect to end the year with 750 total

aircraft based on our current firm aircraft delivery schedules.

On the capacity front and in line with our previous expectation, we expect 2018's full year capacity to increase in

the low-5% range year-over-year. In our third quarter 2017, approximately 5,000 flight cancellations due to the

natural disasters is driving roughly 0.5 point of our full year 2018 ASM year-over-year growth.

We expect our first half 2018 capacity to increase in the low-3% range year-over-year as we firmed up our first

half 2018 schedule. The next schedule will be published on February 15, and that will go out through September

28. For second half 2018, we expect our capacity to increase in the low-7% range, with higher year-over-year

growth in fourth quarter 2018 due to the impact of last year's Classic retirements. We remain excited about our

2018 growth opportunities, and we have a prudent 2018 growth plan that produces positive year-over-year RASM

growth based on our current outlook.

So, in closing, we had a really strong 2017 performance, and 2018 is shaping up to be another solid year, which

will also benefit significantly from tax reform. And as we start the year, we are well positioned for margin

expansion excluding special items. Our employees continue to deliver a reliable operation and product, and they

have been proving that they are best in the industry for the past 45-plus years.

I was thrilled that we could recognize their hard work with the recent year-end tax reform bonuses, and I am very

proud that they continue to be recognized for their world-class hospitality. We have a bright future ahead at

Southwest, and I'm excited for our shareholders with the momentum we have coming into 2018.





With that, Tom, I think we are ready to take questions.

QUESTION AND ANSWER SECTION

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

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

Jamie N. Baker Analyst, JPMorgan Securities LLC Q Hey, good afternoon, everybody. Gary, I still consider Southwest to be a point-to-point operator that just sort of

happens to have a few very large bases of operations that sort of resemble hubs. And I'm thinking this might be

an outdated characterization. I'm curious, the degree to which you currently schedule and revenue manage for

connectivity over places like Baltimore, Nashville, Denver, how that's changed over time, particularly with the new

res platform, and how you think it may evolve from here? ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Jamie, I think your view of Southwest is accurate. Some of the statistics that I remember well from the 1980s

when I joined is that in those days, at a much lower load factor, about 80% of our O&Ds flew non-stop. And then

the other 20% were split pretty evenly between through-traffic and connections. And in the 1980s and the 1990s

and really probably the early 2000s, we did not intentionally schedule for the convenience of connections.

Since 2009, we have had some percentage of our flights that will – we use the term internally, intentionally

connect. What is interesting is, when I started, the annual load factor was 58%. If you go back 20 years ago, if my

memory serves me right, it was 66%. Now, it's 85% – 84%, 85%. So there's been a significant boost, but the

boost of non-stop versus connecting traffic hasn't moved much at all, maybe 3 percentage points or 4 percentage

points.

So the net result of that is we are carrying more connecting traffic. We're carrying some of it more on purpose, if

you will, as opposed to by accident in the old days. But there's still a very – a real serious focus on point-to-point

non-stop. That's the way our network planners – it's the philosophy and that is the strategy.

What – I did want to use it as an opportunity though to complement them, because the load factors have gone up

20 to 30 points over a 20 to 30-year time period. And it's not because they have converted us to a hub-and-spoke

operation where we're more dominated by connecting traffic. It was really accomplished by optimizing the flight

schedule better and in some cases, thinning out some of the frequencies in our higher-frequency markets, but not

at the expense of the non-stop traffic.

Andrew Watterson, our EVP over commercial is here with us, and he may remember – I don't remember off the

top of my head exactly the percentage of whatever you think the relevant statistic would be that we intentionally

connect in terms of capacity. But it's obviously, Jamie, not the majority of our ASM. So, Andrew, do you recall

what that statistic is? ......................................................................................................................................................................................................................................................

Andrew Watterson Chief Revenue Officer & Executive Vice President, Southwest Airlines Co. A I would call slightly above 20%.





Jamie N. Baker Analyst, JPMorgan Securities LLC Q Okay. ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A And I think that was your specific question, but that – hopefully the background helped a little bit as well. ......................................................................................................................................................................................................................................................

Jamie N. Baker Analyst, JPMorgan Securities LLC Q Yeah, I know that, Gary. Thank you. That's terrific. And for a follow-up, the goal to maintain positive RASM for the

year, you're starting respectably at the 1% to 2% level. Presumably, the second quarter is no worse, probably

better. But given that capacity surge year-on-year in the second half, your annual aspiration would seem to imply

that you remain in positive territory in each of the four quarters. Assuming that's directionally accurate, what's the

driving factor that really gives you the confidence in second half positive RASM on at a higher base of year-on-

year capacity? Is there anything specific? ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A I do think there are a couple of fundamental specifics. The – and, first of all, your direction, I believe, is correct.

Now, admittedly, 1% to 2% outlook for the first quarter doesn't give us a lot of cushion for things to go sideways.

So I'll admit that on the outset. And that I think obviously applies even more to quarters two, three and four, just –

we just don't have as much visibility there. But when we get to the second half of the year, we should have a

much better schedule.

What I'm real proud of quite frankly in the fourth quarter is that we achieved pretty healthy unit revenue gains with

a not-so-great schedule. Because what has happened is we have retired, Mike, 50 airplanes in the third quarter.

The fleet shrunk. We tried to maintain a schedule presence that wasn't that different. And you have to take into

account seasonality dips that we would have scheduled anyway.

But in order to generate roughly the same amount of flights with fewer airplanes, we had to extend the day of the

airplane into times of the day that aren't as profitable, quite frankly. So there is a fairly significant discount to have

a flight operating at 9 PM as compared to operating at 6 PM. So all that means is that we believe we'll have a

superior schedule in place that will yield better by the time we get to the second half of this year. So that's point

number one.

And then point number two, notwithstanding the angst that I note yesterday and today about the industry, we've

got a new revenue stream in effect, it's coming online this year, that Tammy and our team is still pretty confident

that will hit in the $200 million range. So that should pick up throughout the year.

And I think that those are both pretty significant points. And nobody ever knows what the weather's going to be.

We can't really tell you what impact we're going to have from competition or the economy. One would hope the

tax reform is at least a floor on travel demand. We're not doing anything overt to plan for a pickup in travel

demand because of that. But obviously, we're hopeful that that will be a lift as well. ......................................................................................................................................................................................................................................................





Jamie N. Baker Analyst, JPMorgan Securities LLC Q Gary, this is great. Thanks so much. Take care, everybody. ......................................................................................................................................................................................................................................................

Operator: We'll take our next question from Jack Atkins with Stephens. ......................................................................................................................................................................................................................................................

Jack Atkins Analyst, Stephens, Inc. Q Hey, good afternoon, everyone. Thanks for taking my questions. Gary, just to start off, I have a couple of tax

reform questions. But Tammy referred to this in her prepared remarks, but would love to get your take on as well.

Southwest is really in this unique position among airlines, because you guys are the only airline that will benefit

immediately from the cash tax savings as well as through new lower corporate tax rate.

So I would love to get your thoughts for a moment on just how you all are prioritizing this increased cash flow?

We've already seen the special bonus to employees. But beyond that, are you all thinking about increased

reinvestment in the business? Or should we be thinking about a step-up in capital returns to shareholders

because it seems like your free cash flow could really step up quite a bit because of tax reform here? ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A I'll just offer a unsolicited editorial comment that it's about time that we level the playing field competitively on this

matter, as well as comparing our industry to other sectors. And, obviously, Jack, you're well informed on that. But

we're very happy with that. It helps us lower our cost, and we're not going to squander these savings. It puts us in

a much better competitive position. So the priorities are – I don't know if they are equal, but clearly, we'll want to

use this as an opportunity to keep our overall cost structure low, so that we can keep our fares low, drive strong

load factors and to continue to support our growth plan.

There's enough money available to us where we can think about investments in the business. And Tammy

explained well what we did with our Boeing order. But in terms of putting additional capital to work in the business,

we have two basic options: We can buy more airplanes and use them to grow the fleet, or we can buy new

airplanes and use them to replace older aircraft. And we have opportunities certainly in the latter that we'll be

exploring aggressively. The Boeing order is an example of that. So there may be more opportunities there in the

future.

I do want to be clear and say that we are not today thinking that we are going to increase our growth rate by

buying more aircraft. If that happens because circumstances support that, I think we'll all be very happy, but that

is not what we're thinking today.

In terms of taking care of our – so I've talked about customers, I've talked about investing in the business. In

terms of taking care of our employees, we're 85% unionized. So labor, I've read some what I would call

uninformed comments in the media. All compensation has to be negotiated with covered employees. So that is a

separate issue.

And then finally, in terms of continuing to support our shareholders, it just puts us in a stronger position to

continue doing what we've been doing, which is for the past, I can't remember, Ryan, how many years we've

increased the dividend annually. And we have obviously sustained a very healthy share repurchase program.





And I think it is worth mentioning, last year was a rough year in terms of Mother Nature and in terms of some of

the tragedies around the country. And it's a source of immense pride at Southwest that we're able to support our

communities, and I was very happy that we were in a position where we could actually boost that support also. ......................................................................................................................................................................................................................................................

Jack Atkins Analyst, Stephens, Inc. Q Great, Gary. Thank you for that. Thank you for that color. Asking about tax reform from another angle though, one

area that I think folks are sort of under-appreciating is the potential for boost to the economy in the relatively near

term from tax reform hitting folks' pocketbooks sooner rather than later in addition to increased business

confidence. So you said in your comments earlier, you're not preparing or planning for increased travel demand,

but as you think about how this sort of progresses over the next several quarters, as we go into the spring-

summer travel season and as we get into the peak travel season into the fall, it just seems to me like there is a

real opportunity here for a pickup in leisure travel in addition to business travel. Just would love to get some more

thoughts from you on that specific topic. ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Well, Jack, I agree with you. Again, I just don't want to give people the wrong impression about what we're

committed to do today. But I realize there's angst amongst some about the growth rate of the industry, but I think

a lot of people expect that GDP growth will accelerate. I think it will be very logical to assume from that that you

could see a boost in travel demand. Honestly, I think people should calm down, and I think this could prove to be

much ado about nothing.

Now, we're growing this year, and we are planning to add new service to Hawaii. We're going to open up Paine

Field in Everett, Washington. And we're a growth company and we know how to do this, and we will want to

manage our growth very carefully. The success for us is dependent upon keeping our costs low, so we can keep

fares low and we can attract new customers either by stimulating or by moving them over to Southwest.

I think what you're talking about is, I don't know if it's a safety net, but it ought to provide some support for the

current growth plans. And, again, I just would reiterate that we haven't changed our growth plan because of tax

reform, but it should put us in a position where that is more of a realistic option in the future.

It won't happen for us in 2018, Andrew. I mean, we have the potential to push our utilization somewhat, but not

much, and probably not. So I think any future growth thoughts, in my opinion, would be beyond 2018 in any event.

And I'll just reiterate one more time what Tammy reported in terms of exercising the Boeing orders has no impact

to what our growth plans were or are for those years after 2018 as well. It's simply firming up options that we had

planned to exercise in any event, and now we have the right economics to go ahead and move forward and make

that commitment. ......................................................................................................................................................................................................................................................

Jack Atkins Analyst, Stephens, Inc. Q Okay. That's great. Thank you again for the time. ......................................................................................................................................................................................................................................................

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





Hunter K. Keay Analyst, Wolfe Research LLC Q Hey, thanks, everybody. Hey, Gary, I kind of want to continue this talk of fleet that we've talked about a little bit in

the call. Would you consider a new fleet type if there was significant cockpit commonality and maybe just overall

commonality with the 737? Or did your experience with AirTran's 717 sort of totally sour you on that concept? ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Hunter, no, it did not, but I just will repeat what I know you know. But the opportunity for us with the 717 versus

the 737 trade-off was an opportunity to replace a smaller airplane that was not common with a bigger airplane that

is common at the same cost. So it was a no-brainer, and that trade alone, Tammy, as I recall was worth couple

hundred million dollars a year. So that's part of the earnings boost that we're realizing over the past five years.

But no, we could have done it. Now, it might never got to the point where we integrated that aircraft into

Southwest Airlines. So every flight that it took after we acquired AirTran was on the AirTran operating certificate.

So we have – we never – we haven't realized what you're asking. I think the time horizon is important in

answering your question. I would assume that in a generation that we will be open-minded to what you're

suggesting in terms of my opening comments about thinking about 2018 and what's our focus, it's focused very

much on the basics, running a great operation, offering great customer service and managing our cost.

It is not anything that we are thinking about for 2018, 2019, 2020, 2021 as far as the eye can see. There is no

work underway here at all to think about a different airplane. I don't believe we have optimized our fleet mix yet

with a mix of 800/MAX 8 versus 700s, and of course, we don't have a MAX 7 yet. So I do think that there is an

opportunity to continue up-gauging here for some time.

And that also sort of puts off any serious thought about adding a different fleet type, because we don't have what

we consider to be the optimal fleet yet anyway. Boeing has other variations. They've got the MAX 9. Right now,

we don't – I don't sense that we have any interest in that airplane. There's a MAX 10 coming. And then there –

what's casually referred to in the media as the 797 or the 757 replacement. Both the MAX 10 and the idea of the

757 replacement are things that we'll talk to Boeing about, just to make sure we understand what those airplanes

do, what they don't do, but there's no serious effort to bring them on board.

And so, finally, Hunter, it would be a lot of work, I will admit to you, it would be a lot of work for us to take that on

because we are hardwired to operate the 737. We certainly have better capabilities today than we did when we

bought AirTran to take that work on, but it doesn't mean that it would still be free of cost or free of effort. And right

now, it's – we have immense opportunities to grow with the 737 MAX 8, MAX 7 that we're very excited about. That

will be our focus, I think, for a long time. ......................................................................................................................................................................................................................................................

Hunter K. Keay Analyst, Wolfe Research LLC Q Okay, that's very helpful. Thank you. And then just maybe a quick one, I appreciate the commentary on margin

expansion. And just to be clear, that's even with moving 150-some-odd-million-dollars of option premium expense

above the line. You are referring to EBIT margin when you talk about expanding margins this year. Is that correct? ......................................................................................................................................................................................................................................................

Tammy Romo Chief Financial Officer & Executive Vice President, Southwest Airlines Co. A Yes. Yes, that's correct, even with that.





Hunter K. Keay Analyst, Wolfe Research LLC Q Great. Even with that. Okay, thank you. Appreciate it. And by the way, that $150 million, is that about right,

Tammy? ......................................................................................................................................................................................................................................................

Tammy Romo Chief Financial Officer & Executive Vice President, Southwest Airlines Co. A That's – it's actually 135-ish for the year. And by the way, since you're asking about that, our goal would be to

bring that down in 2019, and we're budgeting somewhere in the $80 million range for that. So that will be a nice

tailwind for us as we move [ph] into 2019 (00:42:41). ......................................................................................................................................................................................................................................................

Hunter K. Keay Analyst, Wolfe Research LLC Q Okay. Thank you so much. ......................................................................................................................................................................................................................................................

Tammy Romo Chief Financial Officer & Executive Vice President, Southwest Airlines Co. A Very welcome. ......................................................................................................................................................................................................................................................

Operator: We'll take our next question from Duane Pfennigwerth with Evercore ISI. ......................................................................................................................................................................................................................................................

Duane Pfennigwerth Analyst, Evercore ISI Q Hey, thanks. I wonder if you could – I know you haven't given guidance based on the new accounting standard,

but maybe just high level, what you think the impacts would be to revenue growth, unit cost growth and margins in

2018. ......................................................................................................................................................................................................................................................

Tammy Romo Chief Financial Officer & Executive Vice President, Southwest Airlines Co. A Well, we're still looking at all of that. So I really would rather wait and provide all that for you in the 8-K. We're just

in the middle of finalizing all those results. So if you could just be a little more patient for us, we'll come back with

a very robust report later this quarter. ......................................................................................................................................................................................................................................................

Duane Pfennigwerth Analyst, Evercore ISI Q Okay. And then just how are you thinking about your cash tax rate under the new regime? ......................................................................................................................................................................................................................................................

Tammy Romo Chief Financial Officer & Executive Vice President, Southwest Airlines Co. A Our tax rates have been more in like the 20% range. And we'll – I wouldn't expect it to be any worse than that as

we move forward. We're still working through some of the technicalities on the depreciation rule. But by the time

we get to later this year, we're expecting full 100% expensing in the year that we acquire the aircraft.





So we're still working through a little bit of that to finalize it, but obviously, it will have a very meaningful impact on

our cash taxes for the year. And as we noted in the earnings release, we expect that to be in the hundreds of

millions of dollars a year, and that's both on a P&L perspective as well as on a cash basis. So it's very significant. ......................................................................................................................................................................................................................................................

Duane Pfennigwerth Analyst, Evercore ISI Q Thanks very much. ......................................................................................................................................................................................................................................................

Operator: We'll take our next question from Savi Syth with Raymond James. ......................................................................................................................................................................................................................................................

Savanthi N. Syth Analyst, Raymond James & Associates, Inc. Q Hey. Good afternoon. Just on the – just a follow-up, Tammy, on the fuel hedge comment. And I was glad to hear

that the target is to bring the premium down. But just curious with lot of the – it doesn't seem like you're getting

much of a asset here in 2018, even though fuel has kind of ran up. So I'm guessing the kind of catastrophic levels

that you're pinning the hedges that are pretty high. Given that most of your competitors aren't hedging either, I

mean, what's – maybe a better question is, how are you shifting your hedging strategy because it doesn't seem to

be necessarily paying off? ......................................................................................................................................................................................................................................................

Tammy Romo Chief Financial Officer & Executive Vice President, Southwest Airlines Co. A We just look at it differently, Savi. The hedging strategy is really insurance protection for us in the event we see a

spike in fuel prices. And it will start kicking in and showing some nice gains here, and in fact, we're already seeing

that. But it's really designed to provide protection should we see an unanticipated spike in the fuel prices.

So we set our premium budget every year and with the goal that we would have very meaningful protection

should prices rise to more catastrophic levels. But in the meantime, we're actually seeing some nice gains here.

And you'll see another jump up as you get into even the $75 per barrel range. And, Savi, if you look at our

sensitivity analysis that we normally provide, you'll see what I'm referring to. But it's really designed for us so that

should prices rise, we have time to adjust the business to those higher input costs. So we really think of it little bit

more as insurance protection.

Now, going forward, more tactically, the technique that we're using going forward, we're mindful of the downside

exposure and the way we have our hedges layered on, we do not have any downside risk or floor exposure over

– well, for our entire hedge book. So I think we are very well positioned. ......................................................................................................................................................................................................................................................

Savanthi N. Syth Analyst, Raymond James & Associates, Inc. Q And, Tammy, just a follow up, the targeted – the $80 million, how do you achieve that? ......................................................................................................................................................................................................................................................

Tammy Romo Chief Financial Officer & Executive Vice President, Southwest Airlines Co. A Pardon me, Savi? ......................................................................................................................................................................................................................................................

Savanthi N. Syth Analyst, Raymond James & Associates, Inc. Q





How do you achieve the reductions to $80 million? ......................................................................................................................................................................................................................................................

Tammy Romo Chief Financial Officer & Executive Vice President, Southwest Airlines Co. A That we've been layering on our – we've been layering on our hedges and where we are – by doing that, we've

had opportunities to build what I would say are very nice hedge positions at very reasonable fuel premium levels.

So, keep in mind, we've been building up to these levels and that's the result of the price of the options that we've

put in place. ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A And, Savi, I didn't look back at the press release, but there's a heavier weight in 2018. So 2019 is a really good

hedge. It's got a nice balance between how much money we've spent on it, the coverage that we get and then the

sensitivity that Tammy has provided in there. So it's really a very clean hedge, as is 2020, we're off to a good start

with that one. 2018 has a little slop in it as I recall, Tammy, because we had to go in and unwind some of the puts

that were on. So there was little bit of penalty, if you will, in terms of the way that that year was built.

But if part of your question is do we think $135 million is the right number, no. Tammy and I both agree. That's

more money than we want to spend on the program, especially considering that our margins are handsome and

that we have opportunities to grow the margins in addition to that. So we're willing to absorb more risk with energy

prices going up than we were going back to 2012, 2013 when we had much tighter margins and a more ambitious

transformation plan that was underway. So we have a different time, we have a different opportunity, and I think

our folks have done a great job of taking full advantage of that. ......................................................................................................................................................................................................................................................

Savanthi N. Syth Analyst, Raymond James & Associates, Inc. Q That's all very helpful color. Thank you. And just a quick one on the unit revenue, you mentioned that the demand

– so the demand was strong in the peak period. Just kind of curious what you're seeing in the off-peaks. And just

wondering if this industry just has a little too much supply in off-peaks, and if there's anything we can do about

that as you kind of continue to layer on supply? ......................................................................................................................................................................................................................................................

Tammy Romo Chief Financial Officer & Executive Vice President, Southwest Airlines Co. A Demand for us, Savi, through the first quarter, as you could see from our load factor performance, was very

strong. We're generating record load factor performances. And, of course, the story there has been at lower

yields. Certainly, when we're in off-peak seasons, I think it's fair to say we all have to work a little harder for that

demand. But as you could see from our fourth quarter performance and based on the outlook that we've provided

you earlier in the call that we're seeing very nice demand even in the off-peak period. ......................................................................................................................................................................................................................................................

Savanthi N. Syth Analyst, Raymond James & Associates, Inc. Q Great. ......................................................................................................................................................................................................................................................

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





Andrew, you can comment on this too, if you would like. But the industry over time has gotten better and better at

varying capacity according to seasonality. And I think it's probably fair to say that we were a little late to that game

because we were just hardwired to have a constant schedule throughout the year, but now I feel like we have fully

caught up there.

So you have some – some of the competitors have a more pronounced peak and valley in terms of the scheduling

than others. But the capabilities are there, and I just – again, I'll speak for Southwest. I think we do a pretty darn

good job of matching that. Now, we felt like going back to 2017 that we had one schedule that maybe was a little

bit too long and didn't move into the seasonally softer period fast enough. I don't know that I would call it a

mistake per se, but it is a change that we've already planned for 2018 as an example.

So it's an iterative process. You learn as you go. And school in, school out, the timing of holiday, all these things

are fairly complex inputs. But I agree with what Tammy said, we're looking at a record load factor potentially here

again in the first quarter, so the demand is there and even with seasonality. ......................................................................................................................................................................................................................................................

Savanthi N. Syth Analyst, Raymond James & Associates, Inc. Q Okay. Very helpful. Thank you. ......................................................................................................................................................................................................................................................

Tammy Romo Chief Financial Officer & Executive Vice President, Southwest Airlines Co. A But one more comment just to add on to that with – particularly with some of our new international markets that

does provide us opportunity to maybe do a little more seasonal flying than what we've done historically as well. So

our commercials folks do a fantastic job managing through those off-peak demand periods. ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Yeah. And what we don't do is we don't vary much by day of week. And that is something that we have on our to-

do list to get better at that. We do vary by day of week, but not as much as we know we could. So it's an

opportunity for us prospectively. ......................................................................................................................................................................................................................................................

Savanthi N. Syth Analyst, Raymond James & Associates, Inc. Q Okay. Great. Thanks, guys. ......................................................................................................................................................................................................................................................

Operator: We'll take our next question from Helane Becker with Cowen & Company. ......................................................................................................................................................................................................................................................

Helane Becker Analyst, Cowen & Co. LLC Q Thanks very much, operator. Hi, everybody. Thank you so much for the time. Gary, I have a question for you

about Houston and Dallas specifically. With oil prices up $20 in the last five or six months, are you seeing better

system traffic out of those two locations than perhaps elsewhere in the network? ......................................................................................................................................................................................................................................................






Well, Midland is the one that's so easy to see plus or minus, and it's really strong. I will say, after this really

tumultuous time in the energy markets over the past three to four years, we just haven't suffered in our energy

markets like you're remembering decades ago. So it has been interesting. And, of course, you've also seen the

U.S. oil and gas activity haven't collapsed. They've managed their way pretty effectively to $50 crude oil.

So I don't – Andrew, I don't think that we've seen a very significant variation there. I think what is – what you see

in a more pronounced way is where there's just a lot of competitive activity, and that, of course, is out in the West.

But Texas is an entity and Houston, Dallas specifically both look very strong. And again, I don't know that I would

attribute that to a change in the last quarter of oil prices up $10 a barrel. I don't think that that activity has

fluctuated all that much. ......................................................................................................................................................................................................................................................

Andrew Watterson Chief Revenue Officer & Executive Vice President, Southwest Airlines Co. A Over a long horizon both cities have become much more economically diversified. ......................................................................................................................................................................................................................................................

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

Andrew Watterson Chief Revenue Officer & Executive Vice President, Southwest Airlines Co. A And even Houston itself with how it's going with southside of town, a significant medical industry in the southside

of town, it continues, no matter what the economy. ......................................................................................................................................................................................................................................................

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

Helane Becker Analyst, Cowen & Co. LLC Q Got you. Okay. And then, just a question on Hawaii. Tammy, you made a comment in your prepared remarks

about sort of a bit of a headwind with ETOPS qualifications, et cetera for this year. I mean, is that – given how big

the airline is and the comments that you guys just made about more diversification, is that a just de minimis cost,

or will we actually see that in the numbers? ......................................................................................................................................................................................................................................................

Tammy Romo Chief Financial Officer & Executive Vice President, Southwest Airlines Co. A Yeah, Helene, it's de minimis. And yes, and I was referring to – that was just the investment for – to get started in

Hawaii and the spend related to ETOPS. So I just want to be clear. We're on track with respect to ETOPS. And

it's all green at least at this point with respect to our plan to start service to Hawaii. And yes, the spend related to

that, it really isn't that significant. ......................................................................................................................................................................................................................................................

Helane Becker Analyst, Cowen & Co. LLC Q When... ......................................................................................................................................................................................................................................................





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

Helane Becker Analyst, Cowen & Co. LLC Q Go ahead. ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A I was just going to give you an update on the when, W-H-E-N, that while I agree with Tammy that we are on track

with our work plan, we're just now – that means that we're at the point where we have submitted to the FAA an

application. And now the work begins with the FAA, if you will, although we've been partnering very well with them

on the application up to this point.

So we don't have any further update today on when we might be publishing and when we might be flying. Our

goal is to do both this year, but I think we're all very confident that we'll at least be selling by the end of this year.

But there's really no more information to offer up, other than we are at least on track with our own work plan up to

this point. ......................................................................................................................................................................................................................................................

Helane Becker Analyst, Cowen & Co. LLC Q That's great. Thank you so much. ......................................................................................................................................................................................................................................................

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

Operator: We'll take our next question from Brandon Oglenski with Barclays. ......................................................................................................................................................................................................................................................

Brandon Oglenski Analyst, Barclays Capital, Inc. Q Hey. Good afternoon, everyone, and thanks for getting me on the call. Tammy, I just want to come back to the

comment about margins. When you say margins up, that's including the hedge gains and losses year-on-year,

right? ......................................................................................................................................................................................................................................................

Tammy Romo Chief Financial Officer & Executive Vice President, Southwest Airlines Co. A That's right, to be very clear, yes. ......................................................................................................................................................................................................................................................

Brandon Oglenski Analyst, Barclays Capital, Inc. Q So if we were to back out the hedge loss last year and the hedge gains this year, then we're probably going to be

flat to down on margins, right? ......................................................................................................................................................................................................................................................





Tammy Romo Chief Financial Officer & Executive Vice President, Southwest Airlines Co. A Are you talking 20...? ......................................................................................................................................................................................................................................................

Brandon Oglenski Analyst, Barclays Capital, Inc. Q Right. Well, that's for us to do. I know you haven't guided to that. So I guess my question is, with your RASM

guidance for the first quarter, when do we start to realize the benefits from the reservation system? And can you

talk through what those are, again? Because I know we had some negative impact on the implementation in 3Q

and 4Q. I think you guys said on your last call that it should have been out of the run rate of revenue by now. But

can you give us an update on how we should see that progress through the year? ......................................................................................................................................................................................................................................................

Tammy Romo Chief Financial Officer & Executive Vice President, Southwest Airlines Co. A Sure, I'd be happy to. We don't have exact numbers to give you today, but certainly directionally, the impact here

in the first quarter; we're not expecting that to be significant at all. And then as we move into the second quarter,

we should start seeing some benefit, but we will just be picking up some steam there.

And then, really the bulk of the benefit will be in the second half of the year. So I'm hesitant to throw out any

numbers because we're in the middle of all of this. But by the second quarter, we're hopefully ramping up to

something more in the $50-million-plus range, and then with the bulk of the benefit again coming in the second

half. ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Let me clarify your margin question though. The guidance that Tammy offered up and then I offered up is that

CASM, excluding all the items, would be flat to down, number one. So it excludes fuel. So then, number two, we

told you that we're in a positive unit revenue outlook for the first quarter, and that's our goal for the year. So that

margin expansion is coming without fuel. And I was careful to mention that fuel prices, it was excluding fuel

prices. So you'll have to factor fuel prices and on a hedge basis then to determine the operating margin effect of

that. But based on futures prices right now, we would have margin expansion for the year. ......................................................................................................................................................................................................................................................

Brandon Oglenski Analyst, Barclays Capital, Inc. Q Right. And I understand that. And I guess that would be my follow-up question. I mean, it's been a tough two days

for airlines stocks here. What I'm insinuating is that if we back out the hedges, like if we just took you to market

rates on fuel, it's pretty tough to get margins up, it's not even down this year. And that's the case for a lot of

airlines. ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A No. No, that's not what I said. I said without fuel, our margins would be up. So I think in other words, keeping fuel

constant or however you want to think about it, our margins would be up. CASM ex-fuel right now is – our

guidance that we gave you is flat to down. And RASM, the goal is positive. That means margin expansion without

fuel. ......................................................................................................................................................................................................................................................





Brandon Oglenski Analyst, Barclays Capital, Inc. Q Maybe we're not talking apples-to-apples here, but the input cost underlying all this, right, has gone up a lot. So I

think what investors are looking for is – and I don't want you to comment about other airlines obviously. But what

are expectations for how does the industry adapt to an underlying higher cost structure? And when should we

start to see that? Because if I go through the – your capacity growth is about the same as you've been effectively

guiding to now for maybe the past three or four quarters. But obviously, the underlying cost of business have

come up a lot. So what should be the proper investor expectations for when we start to see some adaptation to

what is fundamentally a higher cost structure now? ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Yeah, I understand. Yeah, obviously, we're not in line with the rest of the industry. We have a better outlook than

they do, superior margins, superior returns. And what they will do, I can't tell you. So I don't know. What we're

going to do is, what we've shared with you, we think we have a very superb position and outlook for this year. And

I'm, again, very excited about the prospects for 2018. We should see operating margin expansion given the

current outlook for fuel prices. And then, it will be even easier for us because of the tax reform to see even better

net margin expansion. ......................................................................................................................................................................................................................................................

Brandon Oglenski Analyst, Barclays Capital, Inc. Q Okay. Thank you, Gary. ......................................................................................................................................................................................................................................................

Operator: We'll take our next question from Michael Linenberg with Deutsche Bank. ......................................................................................................................................................................................................................................................

Michael J. Linenberg Analyst, Deutsche Bank Securities, Inc. Q Yes, good morning or good afternoon. Hey, Tammy, two questions. One is just on the CapEx for the year. I

believe that you indicated that aircraft CapEx would be [Technical Difficulty] (01:03:19)... ......................................................................................................................................................................................................................................................

Tammy Romo Chief Financial Officer & Executive Vice President, Southwest Airlines Co. A Hey, Michael, sorry, you're breaking up a little bit there. Would you mind trying that again? ......................................................................................................................................................................................................................................................

Michael J. Linenberg Analyst, Deutsche Bank Securities, Inc. Q I'm sorry. Oh, sorry. I was asking about CapEx. And I think you're guiding to $1.9 billion, and I think you indicated

today that the aircraft piece is $1 billion. When we go back to January when you had your 8-K, I think you

indicated that it was a little bit less – it was going to be less than $1 billion. So maybe there's some rounding

there. So when I look at the non-aircraft piece, knowing that you did push I think $115 million into 2018, it still

seems like that that's a pretty high non-aircraft piece. Normally I think you're sort of in that $500 million, $600

million range when you don't have big projects underway. So I was just curious what's driving that, call it, $900

million, $900-million-plus of non-aircraft CapEx? ......................................................................................................................................................................................................................................................





Tammy Romo Chief Financial Officer & Executive Vice President, Southwest Airlines Co. A Sure. The non-aircraft CapEx, we're seeing – actually our technology CapEx, we're expecting that to be down a

little bit due to the completion of the One Res, and we're seeing a little higher mix of our technology spend hitting

OpEx. So that's impacting that. But where we're seeing the increase is really more in facilities. And we had some

plans related to some of our hangars, and that's impacting that and some investments relating to pilots training

facilities. So that's up a little bit. So we're seeing our technology down little bit, but that's being offset by an

increase in facilities. So those are the major drivers there. ......................................................................................................................................................................................................................................................

Michael J. Linenberg Analyst, Deutsche Bank Securities, Inc. Q Okay. Okay. So those are the big ones. And then just on the unit cost guide to be sort of flat to down. And I know

last quarter you said you felt confident about flat. And since then, the only thing that I can think that has changed

is that we had the fourth quarter bump up in 2017 on the employee cost, and I think that was like 3.5 points. Is

that the primary difference between the guidance today versus where we were a quarter ago? Or are there a

couple other things that maybe are helping to drive a better CASM outlook? ......................................................................................................................................................................................................................................................

Tammy Romo Chief Financial Officer & Executive Vice President, Southwest Airlines Co. A No, you really nailed it, Mike. There's really nothing significant from the last update that we provided. But as you

already noted, we did have higher expense due to the employee tax reform bonus. So that made our comps a

little bit easier. But with or without that, I feel really – I think our comps outlook for this year is very solid. And as

ever, we are very focused on our cost, and we'll continue to be very diligent there in our cost control efforts. But

that's the primary driver from our previous guidance. ......................................................................................................................................................................................................................................................

Michael J. Linenberg Analyst, Deutsche Bank Securities, Inc. Q Agreed. Yeah, thanks, Tammy. Thanks, everyone. ......................................................................................................................................................................................................................................................

Operator: And we have time for one more question. We'll take our last question from Rajeev Lalwani with

Morgan Stanley. ......................................................................................................................................................................................................................................................

Rajeev Lalwani Analyst, Morgan Stanley & Co. LLC Q Good afternoon. ......................................................................................................................................................................................................................................................

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

Rajeev Lalwani Analyst, Morgan Stanley & Co. LLC Q Gary, a question for you. You've obviously seen the announcement by United. And they seem to be pushing little

more aggressively in important markets to you. Is that something that investors should be concerned about? Or





do you think that maybe they're looking at a different type of passenger than you're focused on and so there

shouldn't be much of an impact? ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Well, admittedly, any time flights are added or flights are subtracted from a market, there is an impact. So I

wouldn't want to ever try to put one past you. It's just not truthful to say that, so added capacity will definitely dilute

some traffic. But I think back to the future there with Jamie's opening question, we focus on non-stop, low-fare

traffic, and a high-cost legacy airline does not. And there are many, many historic examples where we might have

a share of seats in a market, but a significantly higher share of traffic in that market. And again, it's because they

don't want to fill up their segments with low-fare customers at the expense of choking off the higher fare

opportunity that they have or they're connecting passenger through their hub.

In your life time, we've gone from being a very small player in Texas to the largest airline in the country,

fundamentally based on what I just described. It is a cost advantage that translates to a fare advantage, and we

generate a dramatic number of customers, over 130 million for last year. And, Tom, I think that's the second

largest in the world. ......................................................................................................................................................................................................................................................

Thomas M. Nealon President, Southwest Airlines Co. A It is... ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A So the markets that I recall that they spiked out, we had a very significant presence in. In one case, we have a

different airport, and I would argue, an airport advantage. So will it impact us? Yes. Will it harm Southwest

Airlines, is bold talk, but we should always be humble and always respectful of our competitors, and we are in this

case. But I think we have all the tools we need to continue to perform well in every market that were impacted.

And I just will remind you that 10 years ago, we were barely starting in Denver. And 12 years later, we're the

number one airline in terms of the number of passengers in Denver. So I kind of rest my case. In this case, you've

got legacy carriers who were not prepared, went bankrupt, shrunk. They shed cost and as – are using that as a

strategy and now an opportunity when times are better to try to reclaim some that they lost and gave up, and that

will be very, very hard battle for them. ......................................................................................................................................................................................................................................................

Rajeev Lalwani Analyst, Morgan Stanley & Co. LLC Q That's great color, Gary. And then, just another quick one for you. This may be for Tammy. You talked about just

[audio gap] (01:10:34) dollars from tax reform, et cetera. Should we take that to mean that the capital – the CapEx

numbers that you've put out for this year may be the floor, and maybe we should look to – for that number to

either move up or stay where it is going forward? ......................................................................................................................................................................................................................................................

Tammy Romo Chief Financial Officer & Executive Vice President, Southwest Airlines Co. A Well, we – well, it's not going to – I guess it wouldn't go down from here, we'll start there. But we've given you all

of our plans, at least so far. And just pointing back to what Gary walked you through earlier, any opportunities on

the capital side would probably be more along the lines of fleet in terms of opportunities to continue to renew our





fleet. But right now, you have our order book. And we are at very manageable levels. But outside of maybe the

fleet and potential opportunities there to modernize and invest in the business in that way, but for 2018, there's

really – I think that would be our big opportunity. And we'll explore that, but again, I don't know if they would have

a meaningful impact here on 2018. ......................................................................................................................................................................................................................................................

Rajeev Lalwani Analyst, Morgan Stanley & Co. LLC Q Okay. Thank you so much. ......................................................................................................................................................................................................................................................

Operator: That concludes the analyst portion of the call today. Thank you for joining. Ladies and gentlemen,

we'll now begin our media portion of today's call. I'd first like to introduce Ms. Laurie Barnett, Managing Director of

Communications and Outreach. ......................................................................................................................................................................................................................................................

Laurie Barnett Managing Director Communications & Outreach, Southwest Airlines Co. A Thank you, Tom. I'd like to welcome members of the media to our call today. Before we begin taking questions,

Tom, would you please give instructions on how everyone should queue up for a question? ......................................................................................................................................................................................................................................................

Operator: Yes, ma'am. [Operator Instructions] We'll now begin with our first question from Mary Schlangenstein

with Bloomberg News. ......................................................................................................................................................................................................................................................

Mary Schlangenstein Dallas Reporter-Bloomberg News, Bloomberg LP Q Hi. Thanks for taking my question. Gary, you referred to uses of the tax savings. You noted that compensation

with your unionized employees is something that would have to be negotiated. So what you're saying is that you

would not do a mid-contract pay increase for your employees using some of that savings? ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Well, I didn't say that, but it – in other words, we can – if the two parties want to negotiate, we can negotiate at

any time. I'm just pointing out the obvious, which is unilaterally, we're not going to wage – or increase wages

across the board, because we can't by federal law. So, all that has to be negotiated. ......................................................................................................................................................................................................................................................

Mary Schlangenstein Dallas Reporter-Bloomberg News, Bloomberg LP Q Okay. But you wouldn't rule out the possibility that you could do either open negotiation to do some sort of a side

agreement to a contract on increasing pay before the next contract's negotiated? ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A I don't see that anything is different in 2018 than ever. So we have contracts in place. They take quite an effort to

negotiate. We have several contracts, Mike, that are up for amendment this year. So that will obviously be the

priority. So I'm not suggesting, Mary, that I think all of a sudden that we or our unions would want to do that. I'm

just pointing out that if the two sides agree, we can always do that.





And our outlook is what we've reported. And any long-term commitments we make will always be with an eye

towards just trying to be prepared for the unexpected. And I think there were several questions earlier today about

fuel cost increases, and I was interviewed earlier this morning about my concerns on the outlook. And it's those

kinds of things that I am mostly focused on and concerned about, in other words, fuel – oil price increases and the

impact that that would have. So while we have seen significant reductions in our taxes, there are always other

challenges that we have out there. And all those things would have to be factored into any long-term

commitments that we would entertain. ......................................................................................................................................................................................................................................................

Mary Schlangenstein Dallas Reporter-Bloomberg News, Bloomberg LP Q Great. And just if I could clarify one thing you said. You made a comment I guess on the 737 9, and I didn't catch

what you said. Did you say you might be interested in that aircraft? ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A I've said that as it stands today, we don't have any interest in adding that aircraft to our fleet. That doesn't mean

that we won't change our mind at some point. But the net of a long answer was, we love the 737 MAX 8. We're

working with Boeing on the 737 MAX 7. I'm sure that that will be a wonderful aircraft when it's ready, and that is

our focus. And we're not working on anything else when it comes to the fleet, just those two. ......................................................................................................................................................................................................................................................

Mary Schlangenstein Dallas Reporter-Bloomberg News, Bloomberg LP Q Great. Thank you very much. ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Yes, ma'am. ......................................................................................................................................................................................................................................................

Operator: We'll take our next question from Conor Shine with The Dallas Morning News. ......................................................................................................................................................................................................................................................

Conor Shine Reporter, The Dallas Morning News, Inc. Q Hey, guys, thanks for taking the question. I'm just looking for a little bit of help to understand exactly how these tax

changes are going to play out over a little bit longer term. I know you guys reported the $1.4 billion being realized

from 2017. Is that of a similar magnitude you guys are expecting in 2018, 2019? Was that a one-time thing

because of – just the timing of these changes? How much are you expecting this to reduce what you guys pay in

federal taxes going forward? ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A So, Conor, as a very quick background, the tax return doesn't match our financial statements. So they're just

different rules. So there is a tax liability on our books at a 35% tax rate that was related to all the years leading up

to 2017. And we would have to pay that $1.4 billion based on the tax returns in the future. So since taxes are now

at 21%, that's what's driving – it's simply reducing that liability from 35% to 21%, and that – the cash amount for

that would flow out over years in the future. That is not a proxy for what we would save each year now

prospectively. And I would just put it in the – Tammy had hundreds of millions. It depends on what our earnings





are for 2018. But if the earnings are close to what they were in 2017, it's $0.5 billion. So it's a big amount of

money. And I think our investors all do the arithmetic and understand that very well, but it's that order of

magnitude. ......................................................................................................................................................................................................................................................

Conor Shine Reporter, The Dallas Morning News, Inc. Q That's helpful. Thank you. ......................................................................................................................................................................................................................................................

Operator: We'll take our next question from Dawn Gilbertson with The Arizona Republic. ......................................................................................................................................................................................................................................................

Dawn Gilbertson Senior Business Reporter, The Arizona Republic, Inc. Q Hi. Good morning. Two questions, first for Tammy on – you mentioned that EarlyBird revenue totaled $100 million

in the fourth quarter. And I don't remember your exact words, but you said, just to put that in perspective, that was

your initial target. Did you mean that is what you thought you'd get annually from EarlyBird when it was introduced

several years ago? ......................................................................................................................................................................................................................................................

Tammy Romo Chief Financial Officer & Executive Vice President, Southwest Airlines Co. A Yes, going back when – yes, that – the point I was making there is that it's been very successful. It's in high

demand by our customers. But yes, the point was is, we achieved $100 million in one quarter, which when we

rolled it out was our target for the full year. ......................................................................................................................................................................................................................................................

Dawn Gilbertson Senior Business Reporter, The Arizona Republic, Inc. Q Wow. Is this the first time it's hit $100 million a quarter? ......................................................................................................................................................................................................................................................

Tammy Romo Chief Financial Officer & Executive Vice President, Southwest Airlines Co. A Yes, it's been... ......................................................................................................................................................................................................................................................

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

Tammy Romo Chief Financial Officer & Executive Vice President, Southwest Airlines Co. A Yes, this is – which is – it kind of popped out to me, and so... ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Yeah, it was notable. Now, Dawn, in fairness, we're a bigger airline today than when we launched it in 2009. But

still, I mean, it's definitely well exceeded our expectations. ......................................................................................................................................................................................................................................................





Dawn Gilbertson Senior Business Reporter, The Arizona Republic, Inc. Q What about – what's the total figure for the year on EarlyBird, Tammy? ......................................................................................................................................................................................................................................................

Tammy Romo Chief Financial Officer & Executive Vice President, Southwest Airlines Co. A For the full year – I will pull that for you real quick, but it would be roughly – if you'll hang on, we'll get back and

report back. ......................................................................................................................................................................................................................................................

Dawn Gilbertson Senior Business Reporter, The Arizona Republic, Inc. Q Sure. Okay. And the other question related to that is, I mean, any plans – you went from $12.50 – I can't

remember what it started at, but I know then $12.50 and then $15. Is it likely to stay at $15? Or given the success,

might that be due for an increase? ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Well, we have to have some secrets. We're trying to keep our cost under control. We're trying to keep our fares

low. So I think we've got a good opportunity to hold firm here at least for the meantime. ......................................................................................................................................................................................................................................................

Dawn Gilbertson Senior Business Reporter, The Arizona Republic, Inc. Q For the meantime. Okay. And then the other question, Gary, for you, as it relates to Hawaii. I mean, I know you

said from the very start there is no guarantee you were going to start flying this year. But just in reading between

the lines of what you just said briefly, it sounds to me like the chances that you're going to fly there this year

sounds very, very slim. Is that... ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Oh, no. No, no, no, that's – I didn't intent that at all. No, I think our goal has been from the outset to be flying by

the end of the year. We didn't necessarily share all that with you, but that was our goal. Achieving that goal is not

totally within our control. I think what is actually encouraging is that in terms of the work that we do control, we are

right on target. And gosh, Mike, we're what, six months into this, and I guess three months after our

announcement? So we are well underway. I think there is a chance that we can be flying by the end of the year,

and that will be our goal. I think what we're much more confident in saying is that we'll be at least selling by the

end of the year. But I don't think that we are less likely to be flying than we have been. If anything, we may be

more likely just because we know now what we've been able to get done over the past six months. ......................................................................................................................................................................................................................................................

Dawn Gilbertson Senior Business Reporter, The Arizona Republic, Inc. Q What would you put the chances of flying this year at? ......................................................................................................................................................................................................................................................






I don't know how to do that because again, we're working with the federal government. And now, it will be

dependent upon their timetable. And then they may come up with work that we may be underestimated. So I just

don't know that there's any way to handicap that. But what I've told, our team is, in the grand scheme of things,

whether we're flying late this year or early next year, it won't matter over the next generation. I think mainly we

want to do this work. We want to do it. We want to do it well. We want to launch when everything is all lined up.

And if we get it done and we're up and flying by the end of this year, I'll be happy. I think everybody will be. If we

don't, it won't be the end of the world. ......................................................................................................................................................................................................................................................

Dawn Gilbertson Senior Business Reporter, The Arizona Republic, Inc. Q Okay. That's fair enough. When is the next schedule extension after February 15? ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Roughly 60 days later. You want to call that... ......................................................................................................................................................................................................................................................

Dawn Gilbertson Senior Business Reporter, The Arizona Republic, Inc. Q Will that take you through the end of the year? ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A April 15. No. ......................................................................................................................................................................................................................................................

Dawn Gilbertson Senior Business Reporter, The Arizona Republic, Inc. Q Will that take you through the end of the year? ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A No, it probably takes you into November I would guess. ......................................................................................................................................................................................................................................................

Dawn Gilbertson Senior Business Reporter, The Arizona Republic, Inc. Q Okay. All right. Thanks for the time. I appreciate it. ......................................................................................................................................................................................................................................................

Operator: And we have time for one more question. We'll take that question from Robert Silk with Travel

Weekly. ......................................................................................................................................................................................................................................................

Robert Silk Senior Editor, Travel Weekly Q Good afternoon. Gary, can you talk to me about the – sort of the appeal of Paine Field? Is there anything other

than just the fact that Sea-Tac is constrained, or does it bring more to the table than that? ......................................................................................................................................................................................................................................................





Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A I do think it brings more to the table. It's attractive from a handful of aspects. So one is, we're really good at flying

to alternative airports. And it – if you have low cost and low fares, it helps people become aware of that option.

And so it is bringing something new in that sense. And so I'm forgetting Sea-Tac for a second. And the second

thing is, there is a significant pool of customers north of the city that just ground traffic constraints are such that if

they have a more convenient flight option, I think that they will take that. And we've seen that benefit again

throughout our 46-year history, if we can provide a more convenient airport, and I think that that sort of fits several

criteria.

This airport is going to be, by definition, a lot smaller. And I think for customers, that's a more pleasurable

experience in some ways. You don't have as many flight options, which is a drawback sometimes of a really small

airport. But all those things I think are very meaningful. But you hit on it on the point also, which is Sea-Tac for us,

we're constrained. And we do want to increase our presence in the Seattle Metro area, and this is a really good

opportunity for us to do that. And then finally, if we – there's only five daily departures left with what the airport has

planned for in terms of the real estate, I think they've got two gates. So if we don't move on this, we may likely

lose the opportunity and we'll certainly be able to accommodate five more round trips with our capacity plans. So

I'm excited about it. It's something that two years ago really wasn't on our radar. And I think it will be a nice

opportunity and a real plus for our customers in the Seattle Metro area. ......................................................................................................................................................................................................................................................

Robert Silk Senior Editor, Travel Weekly Q Just one quick follow-up, the five left or the five you're taking, or is it those five plus five more? ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A My understanding is that this takes the airport to 24 daily departures, and that is the capacity that they have built.

So it's not a governmental constraint, it is just the practical capacity of the terminal. ......................................................................................................................................................................................................................................................

Robert Silk Senior Editor, Travel Weekly Q Fair enough. ......................................................................................................................................................................................................................................................

Operator: And at this time, I'd like to turn the call back to Ms. Barnett for any additional or closing remarks. ......................................................................................................................................................................................................................................................

Laurie Barnett Managing Director Communications & Outreach, Southwest Airlines Co. A Thank you, Tom. I'm going to turn it back to Tammy to provide that answer regarding EarlyBird. ......................................................................................................................................................................................................................................................

Tammy Romo Chief Financial Officer & Executive Vice President, Southwest Airlines Co. A Yes. Dawn, that – it was just at $400 million for the full year. ......................................................................................................................................................................................................................................................

Laurie Barnett Managing Director Communications & Outreach, Southwest Airlines Co. A





Thank you. ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A That's convenient. ......................................................................................................................................................................................................................................................

Tammy Romo Chief Financial Officer & Executive Vice President, Southwest Airlines Co. A It's very convenient. ......................................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A 100 times four is really good. ......................................................................................................................................................................................................................................................

Laurie Barnett Managing Director Communications & Outreach, Southwest Airlines Co.

Excellent. Well, members of the media, if you have any other questions, our communications group is standing by

at 214-792-4847. Thank you. ......................................................................................................................................................................................................................................................

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

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