00:00I want to start with the story that Jonathan and Emery were just talking about, this idea of higher fuel
00:04costs. This morning we see another leg higher.
00:06We're hearing, yes, people are concerned about oil prices, but that they've been managing through. I mean, how have you
00:12managed to offset the increased cost through raising prices,
00:16cutting roots, and potentially raising costs on charging for bags?
00:20Yeah, so you need to cover the extra costs from higher fuel. You can't do it in a matter of
00:25days, but you can organize yourself and do it in a matter of months and quarters.
00:28And so we have been taking actions to conserve costs, improve fuel efficiency, but also raise revenue through additional bag
00:36fee increases through fare increases
00:38and other demand generation activities that allow you to move your revenues up to cover that increased cost, hopefully by
00:45the end of this year, early next.
00:46Has it impeded your quest to become profitable and your actual ability to do so so far this year?
00:51Well, we had the highest adjusted net margin in the U.S. industry in Q1, so we restored profitability before
00:56fueling up,
00:57which is better than the other way around. We certainly anticipate that transformation activity driving us throughout the rest of
01:03the year from a profit perspective.
01:04So we're focused on that and have more to go.
01:06Have you been surprised by how little demand destruction there's actually been, that customers keep flying even as you raise
01:12prices?
01:12Well, the drivers of demand are corporate profits really drive business travel and corporate profits has held up well.
01:17And job growth, as we saw last week, is also strong, and that drives leisure travel.
01:21So the fundamentals of demand generation are strong, and that really helps the customer overcome increased prices.
01:27How does business travel this year compared to last year? Is it actually more or is it less because of
01:33the higher costs?
01:34It's incredibly strong right now. Last year in a terrorist, there's a lot of uncertainty. Businesses hate uncertainty.
01:39And so they pulled back on travel in the uncertain times. Now it's higher costs from fuel.
01:43They understand that. They can act on that. And as we said in Bernstein conference last week, we're seeing 25
01:48% growth in corporate travel from March on.
01:52There has been some speculation that businesses would pull back on first-class travel and business-class travel
01:57because the costs are going up to such a degree. Have you seen any signs of that?
02:01No, we've not seen any change in business travel. If anything, it's an acceleration in March versus February.
02:05So businesses are out-traveling themselves trying to generate the revenue they need for the higher-cost environment.
02:11Going forward, do you expect to be able to raise prices further without seeing demand destruction?
02:17Well, you certainly have to organize yourself to have the higher revenue. There's many levers you can do.
02:21In general, the higher your costs, the lower your growth rate. So you have to look at your growth of
02:24supply versus demand growth.
02:26And so as long as demand keeps growing and you can modify supply, even if it's not a direct fare
02:30increase, you can get the revenue traction you need.
02:32Southwest was known as the place you could go for the cheapest fares. You would wait in lines in different
02:36groups and then everybody would get on the plane.
02:38There wouldn't be seat assignments. There's been a transformation of the identity of Southwest since you took over really as
02:44chief operating officer in 2024 with some of the activist shareholders.
02:50Have you seen a change in your customer base in a dramatic way?
02:53Not really. What we've seen is our customers have given us more of their share of wallet.
02:57So we went from a one-size-fits-all to a pay-more-to-get-more model.
03:00So we still have a base fare product that if you're just very cost-sensitive, that's for you.
03:04But we've found that our customers really were eager to pay us more to have the exact seat they want,
03:08the exact product they want.
03:09So it's worked out fabulously well.
03:11Going forward, do you expect that you are going to see increases in demand also from the economy, sort of
03:17your rank and file versus just those who can afford some of the perks?
03:20You know, we see a broad base. We talked about a cake-shaped economy.
03:24There's actually a very broad middle of people who have the ability to travel and they're traveling.
03:28And so when you give them a multiple price points and they can choose to what fits them, you see
03:32you can really harvest demand.
03:33Economists might call it marching down the demand curve.
03:35Going forward, do you expect that you're going to have to raise prices further?
03:39I think we're going to have to have a mix of revenue-enhancing opportunities, whether that's on the price side,
03:43capacity changes, or other fee changes.
03:46And so the big changes in prices, I think, happened in March.
03:50And now it's more incremental-type changes you have to do to capture.
03:53How much more can you charge for?
03:55I mean, yes, drinks, sure, baggage fees, going to the bathroom.
03:59I mean, honestly, at what point can you sort of run out of things to monetize?
04:02Well, as demand growth happens, that puts natural upward pressure on revenue.
04:07So you can see as customers get raises, as businesses get higher profits, they can afford a little bit more.
04:14They end up paying and budgeting a little bit more.
04:15So now we're in kind of the gradual grain of price increases versus kind of the big one we had
04:21to begin with.
04:21You know, we were talking to the United CEO, Scott Kirby, yesterday, and he said he wasn't surprised by the
04:26jobs report that we got on Friday
04:27based on how much he had seen an acceleration in demand into the summer.
04:30Did you feel the same way, that you actually see a reacceleration rather than some sort of deceleration in response
04:35to higher prices?
04:36March saw a big inflection upwards.
04:39And so March, even though the war was kind of hot and heavy at that point, we saw a big
04:43acceleration of both business and leisure travel demand.
04:45So the U.S. economy is roaring, it seems to us.
04:49Do you think that the inflationary inputs of what you're experiencing in terms of the costs that you're paying are
04:53also going up at an accelerating pace?
04:56They're modest to us.
04:57So maybe if you're the Fed chairman, you think differently.
04:59But for us, the changes in compensation, the changes in input costs, ex-fuel, are modest.
05:05Meanwhile, there has been an issue with respect to deliveries of planes, Boeing in particular.
05:09We've heard of some of the issues and how that's crimping plans.
05:13How do you see that resolving?
05:14How much has that put a damper on some of what you're planning going forward?
05:17I give big kudos to Boeing a few years back.
05:20It was not their finest hour, but now they're delivering us a quality aircraft on time.
05:24So we're pleased with what Boeing has given us.
05:26And the MAX 7, which has been much delayed, is seemingly very close to certification based on what the FAA
05:32administrator said.
05:33So we're very pleased with how Boeing's moving along.
05:35Meanwhile, we did hear from IATA that you are seeing profits crimped pretty significantly for airlines.
05:41It doesn't seem like that's what you're saying at all.
05:43It seems like you've been able to offset and recoup all of the oil price increases in terms of your
05:48other measures.
05:49Have you seen any impact to your growth trajectory?
05:52I know you say you've got to pull back some of your expansion and your growth.
05:54But with respect to profitability, have you seen any kind of deterioration in that?
05:58Well, higher fuel does lead to lower profits.
06:00And so really the question becomes for next year.
06:03As we get into the late summer, early fall, it's business planning season for most companies for the following year.
06:08And so where will oil be?
06:09What will the trajectory be for next year?
06:11That's when you'll be able to understand, well, what's my growth rate next year?
06:14How does that impact everything?
06:15Do you think that oil prices need to come down for your company, for the broad industry to be okay?
06:21Or do you think that they could stay here in perpetuity and end up with a pretty healthy airline sector
06:27because of the demand and consumers' ability to absorb higher costs?
06:30Over the last decade plus, we've seen airlines be able to adjust to high fuel environments.
06:34We've also seen the high fuel doesn't last forever.
06:36So it will come down, the question is when, and we can organize ourselves to kind of meet that glide
06:41slope down the fuel price to restore profitability.
06:43So whether it returns to where it was last year or if it stays higher for longer, we can organize
06:48ourselves.
06:48And the uncertainty is much less than one might imagine.
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