Southwest Airlines(NYSE:LUV) Q1 2018 profit call at 12: 30 p. m. on April 26, 2018, ETExecutivesRyan Martinez- Southwest AirlinesGary C. Kelly - Southwest AirlinesTammy Romo - Southwest AirlinesThomas M. Nealon - Southwest AirlinesMichael G. Van de Ven - Southwest AirlinesLinda B. Rutherford - Southwest Airlines Analyst K. Keay - Wolf ResearchBaker - JPMorgan Securities Co. , Ltd. Stephens, Inc. Rahyev Lavani Morgan StanleyLLCSavanthi N. Syth - Raymond James. Michael J. Linenberg - Deutsche Bank Securities Co. , Ltd. Duane in Finney lattice worth Isidaryl kenoise- UBS Securities Co. , Ltd. Steven Nicholas & Co. , Inc. Brandon R. Oglenski - Barclays Capital LimitedConor Shine - Dallas Morning News Co. , Ltd. Alana Wise - Schlangstein Palace Bloomberg News Gilberson CNBCDawn- Republic of Arizona LimitedDavid Koenig - Welcome to Southwest Airlines 2018 conference call in the first quarter. My name is Tom. I will host the call today. This call is being recorded and a replay will be provided in the southwest. In the investor relations section. At this time, I would like to transfer the call to Mr. Ryan Martinez, general manager of investor relations. Ryan, please continue. Ryan Martinez - Southwest Airlines Thank you Tom. welcome to our first quarter earnings call. With me today, we have Gary Kelly, chairman and CEO of the board and Gary will start our work with a few opening remarks. Tammy Romo, our executive vice president and chief financial officer, will outline our financial performance and prospects. Tom Nearon, our president, will introduce revenue trends and prospects; Mike Van de Ven, our COO, will provide an update on Flight 1380. There are a few disclaimer before we start. Today\'s call will include Forward-looking statements based on the company\'s current intentions, expectations and forecasts. Various factors may lead to a large difference in actual results. We will also include GAAP results for special items are not included. For more information on the forward, you can refer to the earnings release this morning Non--read statements and reconciliation Generally accepted accounting standards. I would also like to note that the company has adopted three new accounting standards since January 1, 2018. Certain prior- To reflect the adoption of these new standards, annual financial information was re-established. For more information, please refer to our form 8- K submitted to SEC on March 20. You can find our earnings release and SEC filing in the investor relations department in the southwest region. com. After we have prepared our remarks, we will ask questions. So at this time, I want to transfer the phone to Gary. Gary C. Kelly - Southwest Airlines Thank you, Ryan. good morning. Thank you for attending our first quarter earnings call. I am pleased to have the opportunity to introduce some important things to our shareholders. I would like to start by sharing that our priority is still to support and take care of all the people who were affected by flight 1380 last week, and of course, especially, Jennifer riodan\'s family and loved ones. She is an extraordinary person, and of course we all mourn her death. It\'s a dark day, but it\'s really unusual to empathize, care and support since the event, it\'s just touching your soul. Our five- The crew, led by captain Tammy Joe shutus, performed well. Our ground operations team in Philadelphia was put into the task of supporting all customers on the flight, which took several hours. On behalf of Southwest Airlines, I would like to thank all the competitors who came to help our customers that day. There are many, but I would like to thank American Airlines in particular. Finally, I would like to thank those selfless customers who bravely reached out on their flight to Philadelphia. After that, we have many teams taking action to support our customers and staff, as well as NTSB. Our top priority is to make sure there are no blades with metal fatigue. And our tech- The ops team working with GE, CFM, Boeing and the FAA really led the industry through the new inspection agreement, and for us it dates back to 2016. So we accelerated the inspection last week. They are going well. I am very satisfied with the preliminary findings that do not show cracks or fatigue. We are working closely with GE, CFM and FAA to ensure that we fully comply with the CFM\'s service bulletin and the FAA emergency airworthiness directive issued last Friday, of course, we continue to work with NTSB and support their investigation into this incident. We are working on multiple tasks and I would like to assure you that the Southwest team has completed this task. The next priority I want to discuss is our business. Although our first-quarter results are not the best, our performance is still very robust. High profit margin, high cost performance, high return on capital, high free cash flow and high return on shareholders, which makes the second The best earnings per share in our history for the first quarter. Since last week, the weak booking we mentioned in the press release is predictable, excluding the impact and taking into account the timing change of Easter in the second quarter of this year, for me, the sequential trend looks normal. Anyway, our income plan has been second this year. We have implemented better revenue management technology in the first quarter to deal with too aggressive discounts. We have made several major improvements in revenue management over the middle of the year, which are related to our new booking system, as you all know. Finally, of course, as the second half of the year unfolds, we will optimize our flight schedules about every 60 days. The bottom line is that demand has been strong. It is still strong. Tax reform should help that. Our prospects are positive, and the ones on the record are positive. GAAP earnings per share are very active. Several other notable items in the release. We have announced four destinations in Hawaii: Honolulu, Kona, Maui, and hue. We announced the addition of 40 MAX 8 options from 2026 For 2027 time periods, they will be moved to 10 each year, starting in 2019. This is the first extension of our fleet modernization strategy. We have a very strong business case that replaces the old 737- 700 aircraft, taking into account the superior economy of MAX 8. The benefits of tax reform in the Southwest make this capital investment more viable, and of course I would like to thank Boeing for its support in achieving this. With this in mind, I would like to transfer the call to Tammy Romo to elaborate further on our first quarter results. Tammy Romo - Southwest Airlines Thank you Gary, and thank you all for coming to us today. I would also like to say thank you to our staff for being United in last week\'s accident and taking care of our customers and each other. This is what the family has done in difficult times and I am very proud to be able to work with all of our compassionate and loving people. This morning, we reported strong net income for the first quarter, excluding special projects of $0. 438 billion, up 22% year on year. over- Our earnings per share are $0. 75 years, up 29% year on yearover-year and $0. Consensus above 01. Our operating profit is very considerable. 8%, flat with the first quarter of last year. Our net profit margin is 8. 9%, compared with 2017 and 7 in the first quarter. 4%, because we started to achieve significant savings from lower corporate tax rates. Our pre-Tax ROIC is 27 years old. 1%, or 20. 8% on an after- Tax base for the 12 months ended March 31. According to our previous guidance, our revenue performance in the first quarter was correct. Our cost performance is better than expected, mainly due to the good cost outlook for the second quarter of this year. While we were not planning here in the first half of the year, the benefits of our new booking system increased in the second quarter, with more significant benefits in the second half. We are also looking forward to the pressure of our submarine. As we overcome last fall\'s classic post-retirement fleet deficit, the best schedule for the third quarter will be reduced. Based on everything we know at the moment, we expect the second quarter of this yearover- This year\'s unit income performance will be a bottom of this year, and we will continue to pursue the goal of having positive unit income in the coming quarters. Our balance sheet is still very strong, and we have a very strong operating cash flow for the other quarter, with a shareholder return of $0. 648 billion in the first quarter. As our fleet continues to modernize, our capital spending this year is still under control, reaching $2 billion to $2. 1 billion. Our first quarter profit was strong and the benefits of the new booking system, a huge fuel hedge that provides meaningful protection in a rising fuel environment, and we\'re good to benefit from tax reform. Targeting our goal of expanding our net profit margin for 2018-over- Years for special items are not included. With this short overview, I will hand it over to Tom to give you an idea of our revenue trends and prospects. Thomas M. Nealon - Southwest AirlinesOkay. Thank you, Tammy. good morning, everyone. So let me start with first quarter performance and I will go straight into second quarter. You know, our operating income is $4. $9 billion in the first quarter, driven by a record $4 passenger revenue. 6 billion. We also have a very strong performance in other revenues, up 19% year on year. over-year. This is a combination of the advantages of our early products and upgraded check-in products, both of which reached double digits this quarter, as well as the continued growth of our fast reward program and business partner Revenue, both performed very well. As you know, we also have a record load factor of 81. 5% completed in the first quarter Nevertheless, our revenue is aligned with the growth of ASM. 8%. So when we share our 8- K last month, there were several factors that led us to update the RASM guidelines for this quarter and I would like to get a quick look at them. The first factor is our parade trend, which is the parade trend of the first 20 days, which is mainly the result of the spring break calendar change, which reduces the travel demand more than we expected. This leads to a negative impact on RASM that is less than 1 point. Nevertheless, we have completed a very powerful March with very powerful RASM performance and powerful load factors. In fact, in the last 11 days, we have seen our production grow in the medium term. single- Year of digital range-over-year. In particular, as Tammy said, the change in the Easter calendar from April to has given us some $40 million in benefits. The second factor we mentioned on the 8 thK was our sub- I think you all understand that. But as you know, we are in the process of fleet transition, which means that the number of our aircraft is reduced, which means that we will extend the day to more flights in the early morning and late night, this usually leads to lower production. But it is clear that these flights are still profitable and they contribute to the profitability of the entire network. But in fact, this quarter was negatively affected. As Tammy said, with the new aircraft in use, you will start to see this fade in the third quarter. The last factor is the environment of fair competition. On this issue, I would like to talk specifically to California, which is obviously a very competitive market, and we have been competing very aggressively and we will continue to do so. As we all know, our market position in California is very good. In fact, we have a 63% interior. Cal\'s market share and 26% of all commercial air travel, including international air travel both inside and outside California. We have increased a fair amount of capacity in California, and even if we increase our flights, we are able to increase our load factor and we are getting new customers in the Southwest for the first time. In fact, it is affecting our RASM. But we have low cost, low fare, high load factor and high operating profit margin. We are making strong profits and we are getting new customers, which is not a bad formula. We are well prepared for the competition and we will succeed. Integrated RASM impact of subsidiaries In a fare setting, the best schedule for the quarter is about 1 point. So, that\'s Q1. Let\'s talk about q2 now. At the macro level, as Gary suggested, we have seen strong demand throughout the quarter, and this demand is often spread across all regions. Having said that, I think we have a few unique factors that are affecting our RASM in the second quarter, which has led us to find a guide to drop 1% to 3%. As you would expect, the first is the impact of Flight 1380. We forecast a loss of RASM revenue for the quarter between 1% and 2%. In terms of context, in the first week after the accident, we saw somewhere between 0. RASM has dropped by 5 and 1 so far. Tilt in the direction of proximity Booking that was hard for us to recover. But we have also seen the impact on May Day and future travel. The overall impact of income is therefore not entirely clear, but we do expect to continue to have an impact over a period of time. Please keep in mind that last Tuesday we closed all marketing immediately after the accident. Includes all TV, all emails, all paid searches, all paid displays, all paid Social, everything. This is very important. Those marketing vehicles drove a lot to the west south. com. Last weekend, we began to slowly resume marketing. But when we got back to the market, we did start to see traffic to the southwest. But it has not returned to normal. I think this is almost what I would like to see in events like this. Traffic will rebound, but not yet. The second factor I would like to highlight is the continued impact of the shoulder flight I mentioned in the Q1 update. The same is true. We will have this situation throughout the second quarter, but we will start seeing this decrease in the third quarter as new aircraft are put into use. The third factor is the continued competitive environment in California. As I said, we are creating strong profits and we are ready to compete and we will be successful in finance and Southwest customers. Now, on the other side of the equation, we are still on track to get $40 million to $50 million in revenue from our new res system in the second quarter, as we discussed in the past We are still very confident that we will receive the $0. 2 billion annual benefit we have discussed with you in the past. So while we are clearly out of our revenue plan for the first half of 2018, for our year, the second quarter is the bottom --over- Year trend. Things will start to improve in the second half of this year. We will begin to balance our fleet with the delivery of our new aircraft. We will start over. Using the new aircraft to optimize the schedule, we will see more and more benefits from the booking system. As you expect from Southwest Airlines, we are very focused on the robust earnings, robust margins and strong returns for the second quarter. So, we are very optimistic. with this, Tammy, I will give it back to you. Tammy Romo - Southwest AirlinesThank you, Tom. When it comes to fuel, we have an economic fuel price of $2018 a gallon in the first quarter. 09 includes $0. 05 hedging profits $0 from settled contracts. 07 sets of insurance premium costs. The first quarter was volatile, but real market prices ended up falling only slightly from expectations in January. Looking forward to the second quarter, based on the market price and our hedge portfolio as of April 20, we expect the price of economic fuel per gallon to be around $2. 20, which is estimated to be $0. 07 hedging income and $0. 06 sets of insurance premium costs. For the whole of 2018, we expect economic fuel prices to be $2 per gallon. 15 to $2. 20 range. Including the estimated $0. 06 hedging income and $0. 06 sets of insurance premium costs. Our 2018 fuel hedge position has generated modest gains at the current Brent crude market price, with more material gains above $80 a barrel. Our hedge portfolios of 2018 and more provide us with protection from catastrophic increases in energy prices without the lowest risk exposure. It enables us to carefully adjust our business in an ever-rising fuel price environment to maintain our financial goals and reduce fluctuations in our income. We are continuing to achieve fuel efficiency benefits from the modernization of our ongoing fleet. Our first quarter increased by 1 per gallon ASMs. 3% year-over-year; For 2018, we continue to expect an improvement year of 2% to 3%-over- One year per gallon. Moving to our Africa Non-fuel costs for the first quarter Fuel Operating expenses excluding special projects increased by 1. 4%, and a slight decrease on a unit basis-over-year. Our unit cost is slightly better than the low end of our latest guide, mainly due to the cost shift to future quarters such as advertising. Year-over- The annual increase in wages, wages and benefits, maintenance and airport expenses is offset by lower depreciation and rental of aircraft and classic retirement benefits. In the second quarter, we expect our CASM, excluding fuel and profits. Sharing, increase in the range of 1% to 2%-over- In one year, the main drivers there include labor costs, including our agreement with AMFA, and higher costs associated with extended operating days driven by our classic retirement and current fleet deficit; As I mentioned earlier, the cost is shifted from the first quarter, in relation to the estimated cost-and other, more minor costs. For the full year of 2018, we expect our CASM, excluding fuel and profits Sharing of comparable years-over- Including our agreement with AMFA. I am satisfied with our cost performance in the first quarter, and we continue to focus on controlling costs and finding ways to improve productivity and efficiency. Now, before I introduce our financial position, capital deployment and growth prospects, I would like to hand it over to Mike to provide an update on Flight 1380. Michael G. Van de Ven - Southwest AirlinesOkay. Thank you, Tammy. So, this is what we know from NTSB so far. Our No. 1 engine failed and there was a missing part of the engine fan blade, which was 13 out of 24 blades. There is a residual part of the blade still attached to the fan hub; It was found tired when it was tested. NTSB indicates that fatigue fracture is the initial event that causes the fan blade 13 to break. Next, we know that the engine into the mask has suffered serious damage and loss, and that the parts of the cover may be responsible for damage to the fuselage, wing and stabilizer. The loss of a single blade inside the engine should not have such a huge impact. As Gary mentioned, we are fully working with NTSB and they are conducting a very thorough investigation. Throughout the investigation, we have been in touch with all interested parties. We only have some color on our fan blades. We have about 35,500 fan blades to support our fleet. We have checked about 17,000 of them before the accident last week and we are completing the remaining 18,500 -- This means the recommended service announcement schedule. Since the accident, we have accelerated the remaining inspections with the goal of completing them within 30 days and currently we have completed about 8,500 inspections. As Gary mentioned, we did not find any underground cracks. So, this is true-this is an all- Hands-On Deck activities to learn what happened and why by checking, investigating and diving in depth. We will make every effort to ensure that this does not happen again. It\'s really a 24/7 or so. the- Zhong worked hard, and I sincerely thank all those involved for their efforts and commitment. So, Tammy, I\'ll give it back to you. Tammy Romo - Southwest AirlinesThanks, Mike. I\'ll take a look at the balance sheet and cash flow now and then take you through quickly here. Our liquidity is strong and we ended the quarter with cash and short Regular investment is about $3. 2 billion. Operating cash flow for the first quarter was approximately $1 billion and free cash flow was $0. 708 billion, enabling us to return $0. 648 billion to shareholders through stock buybacks and dividends. According to our leverage target, our leverage is about 30%, at a low level. to mid-30% range. Based on our adjustment to Boeing orders, we have taken you through and our 2018 capital expenditure is expected to be between $2 billion and $2. Scope 1 billion. Included in this total, we expect about $1 in aircraft capital expenditures to reach 2018. 2 billion and non Capital expenditure on aircraft is between $0. 8 billion and $0. 9 billion. We continue to effectively balance and manage our overall capital allocation, and we remain focused on maintaining our strong balance sheet and healthy cash flow. We currently have a $0. 85 billion share repurchase authorization remaining $2 billion and we will continue to evaluate our investments in the company, employees and shareholders, including a portfolio of stock buybacks and dividends, and to promote long-term growth as the overall goal The long-term value of our shareholders. We benefit from a lower corporate tax rate and we continue to expect our effective tax rate of 2018 to be between 23% and 23. 5% range. To get a quick update on the fleet, we delivered 11 aircraft in the first quarter and at the end of the quarter we delivered 717 aircraft. As we communicated, our fleet ran a deficit compared to the middle of 2017, when we had about 735 aircraft before most of them retired. 300 classic Fleet 2017 in the third quarter. When we get to 2018 in the third quarter, our fleet deficit will be reduced. We will have 737- In the next 10 to 15 years, 700 people have retired, and we introduced you to the update of this order book in the earnings release, which Gary also introduced to you, in addition to our remaining order books and options, we can manage retirement and growth needs in a measured way. Aircraft capital expenditure remained at about $1. Between $2 billion and $1. With an average of 3 billion aircraft per year over the next five years, we will have 752 aircraft by the end of this year, our annual capacity prospects have not changed, and we continue to expect growth in the range of 5% --over-year. So in the end, our financial performance will have a solid start this year, and we will have a good start, in addition to special projects, to expand the net profit margin by 2018. We have achieved the meaningful benefits of tax reform, and I am pleased that we can continue our efforts by investing in our business and rewarding those we work hard to repay our shareholders, keep low cost and low fare for our customers. So with this overview, we can answer the question. Question-and- Thank you. We will take Hunter Research to answer the first question of Hunter Kay. Hunter K. Keay - Wolf Research Thank you guys. I appreciate this time. Tammy, what you\'re talking about now is the expansion of net profit margins. We talked about it last quarter. you\'re talking about EBIT profit margin expansion. Is there a change in the plan? Or did I just misunderstand the comment? Tammy Romo - Southwest AirlinesHi, Hunter. No, you did not misunderstand the comment. As we acknowledge here, we have no plans for the first half of this year. So, obviously, in terms of profit margins, it will depend on how quickly we see our revenue trends recover here. From a cost perspective, we feel very reliable about it. We already have a good hedge if you\'re on fuel, so it should be helpful in fuel. Of course, when you consider that tax reform benefits from a lower tax rate, we are satisfied with our net profit margin target. But we don\'t-I think, I\'m happy with the progress we made towards that in the first quarter. Our net profit margin, we have just had a good start this yearover- This year, we just have to look at how it performs in terms of revenue costs. But I am very pleased with the income benefits we received here in the second half of the year. I think we have extensively introduced these to you regarding the booking system. So our goal has not changed. We just continue to compound in terms of unit income. So I think this is really a question mark when we think about the outlook for the second quarter. But again, we are very happy with all the help we came here in the second half. Hunter K. Keay - Wolf ResearchThanks. Then, relative to the plan three months ago, the incremental 8 MAX 8 s that will come in 2019. Will those be offset by increments? Retirement 700? Tammy Romo - Southwest Airlines Yes, our orders to you, yes, these are for the modernization of our fleet. So yes, that\'s the purpose. Gary C. Kelly - Southwest Airlines Yeah Hunter, I\'ll say, I just want to review my own little backof-the- Envelope Math is here, but there are some planes moving around without Boeing orders from 2019 to 2018. So, I think we already talked to you. This number is 10, so there are 10 additional company deliveries in 2019, 2020,2021, 2022. Taking it as part of the modernization of our fleet definitely means that we have planned quite a few. 700 people have retired from these additional 40 fixed orders. Now we have flexibility in our fleet. We can choose not to do so. But this is what we share with you today, we have exercised 40 people, no matter how they fall, what we tell you today is that we will offset these people with retirement. Hunter K. Keay - Thank you, Wolf research. We will answer the next question from Jamie Baker of JPMorgan Chase. Jamie N. Baker - JPMorgan Securities Co. , Ltd. Good morning. Gary, I think this proves the culture of security in the southwest and your long term You don\'t have to participate in the semester record of the reservation- Analysis of the past. But since this is not the type of analysis you have to do in the past week, would you be willing to share some of the more specific modeling assumptions you accept when identifying lingering weaknesses in May? Have you followed some industry precedents? All I want to do is understand how you do the actual analysis, because thankfully, this is not an area familiar with the analysis in the Southwest, I mean, obviously, as a complimentThomas M. Nealon - Southwest Airlines Hey, Jamie. This is Tom. I will try to take that one if you don\'t mind and I will do my best for you (31:13). Jamie N. Baker - Thank you, JP Morgan Securities Co. , Ltd. Thomas M. Nealon - Southwest Airlines At this point, based on this morning, we may be a little closer to 1 than 0. 5 point. So, we have to stay ahead of this. But we don\'t seem to have any other incidents that cause traffic to drop, whether it\'s a technical outage or something we did in 2016. So, we do have some history, and when we have public activity, people realize that we see a drop in traffic and we usually see the time it takes to restore traffic. So this is the basis for us to think about this. But like I said, that\'s the bottom line. This is our baseline for analysis if you wish. I think another way we\'re trying to respond to this is that we really want to get our marketing back online through paid search. Keep in mind that we are not running any TV or any social networking sites right now. The reason we don\'t do this is because our TV and social media have a lot of personality and a lot of fun. We just don\'t think it\'s appropriate to get it back online yet. We are working closely with Linda Rutherford and her comps team, her social team, just listening to that sentiment and when is it appropriate for us to return to the market, right? But as far as your direct problem is concerned, we will review and cite the previous events and what happened with the traffic we see. This may be the best thing we have to do at this point, but I do think that 1% to 2% may be reasonable based on what we have seen so far. Jamie N. Baker - JPMorgan Securities Co. , Ltd. Good color. Tammy Romo - Southwest Airlines Yes, I will add some other ideas for clarity. As Tom said, we continue to see some weaknesses in our booking. As you expected, as we said, we are currently running at less than we expected Accident operation rate This is certainly understandable because Tom has taken you through all the reasons for our marketing. I just want to point out that this makes a lot of sense for our direct distribution model. So when we go back to our normal marketing campaign, we expect our trend to bounce back. But it is undeniable that it is difficult to accurately estimate the impact. But we know that we have lost 1 point, as we have pointed out in a year --over- Annual RASM for the second quarter. So, depending on the lost income, of course, it\'s hard to recover the loss at our close. But we hope that once marketing is back on line, we will see a rebound in these trends. Jamie N. Baker - JP Morgan Securities LLC understands that, as a quick follow-up, in your press release discussing slot transactions, you mentioned that \"the new slot will complement our network. \"I don\'t want to look too much, but you can say, develop our network. Does completion mean that you will only fly to the existing Southwest city with a new location? Or is this a lovely explanation? Gary C. Kelly - Southwest Airlines Oh, I think what we basically want to say is that we have a strong network in both cities that we can add from LaGuardia and Reagan. The main point is that we will simply use our existing fleet, our existing capacity, and these new routes will be part of the growth you are already familiar with, so. Jamie N. Baker - JPMorgan Securities Co. , Ltd. Gary C. Kelly - Southwest Airlines But the two markets are still developing markets for the Southwest, and we continue to patch the frequency and destination, so I guess yes, I don\'t necessarily read anything in the word \"add. Jamie N. Baker - JPMorgan Securities Co. , Ltd. I appreciate it, Gary. Thank you very much. We will be answering Jack Atkins\'s next question with Stephens. Jack Atkins -Stephens, Inc. Good afternoon. Thank you for your time. Gary, are you still looking forward to the positive performance of RASM this year? If not, are you prepared to adjust some schedules off-site In the past four months, in order to better match production capacity with market demand, we call it the third time? Gary C. Kelly - Southwest Airlines Well-I know Tammy and Tom will also have a look at your question. I think it is obvious that we have no plans. Now, we already have an activity, so I think as far as I tell you how confident I am that we will reach our goals, I think we all have to admit, we have deviated from our trend and we will have to regain our momentum here, I am sure we will. I don\'t know the exact time, the exact quantity, and what the final result will be. Now, I\'ll say again and again, don\'t read too much, but it\'s too close. So in a different way, it\'s not obvious that we can\'t do this at all. But again, we are not obvious. So what I want to say is that the goal will continue to be a positive performance of unit income and don\'t exclude us. The only thing I would like to add is that the profit is important and Hunter raised the issue with Tammy earlier and I just wanted to add. This is basically the same answer, and I think we are very confident about this year\'s net profit margin growth target, but it\'s a bit too close due to the same reason on the RASM side. So I think it depends a lot on the answer to the fuel price, first, the fuel price has been rising since the beginning of the year. Secondly, it is clear what will happen in terms of income. What do you do, Tom? . . ? Thomas M. Nealon - Southwest AirlinesWell, Jack. This is Tom. Hey. First of all, I agree with what Gary said just now. However, I also think that we are always concerned about the operation of the flight. We may look more closely at the profitability of shoulder flights. If it is not profitable, we will find a way to recover it and redeploy capacity elsewhere. But the flight on our shoulders now is actually profitable; it\'s accretive. It may be RASM dilution but it still helps us a lot. So, I don\'t think you\'re going to see that we\'re giving up profits in order to improve an indicator, right? Still, understand your goal and that\'s what I think of it. Gary C. Kelly - Southwest Airlines Yes, I think what Tom meant was that it was clear that we were more willing to move these shoulder flights back to the peak of the day, and that\'s more and more things we can do as the plane goes live. I agree with Tom. I think this is the best technology we can solve your problem here in the second half of the year. Jack Atkins -Stephens, Inc. Okay, great. The color is very helpful. Then, for my follow-up Just a question about the development of the new market, can you remind us again, once you start flying to a certain system, what is the timeline for getting a new market From the time you get into it, I\'m asking for it to improve profitability or get it to where it\'s growing, and I\'m asking this to start a Hawaiian flight to some extent, either at the end of the year Compared to your normal market development, how do you think flying to Hawaii will accelerate? Thomas M. Nealon - Southwest Airlines These are two different questions. Let me get the first one. The first question is how long it usually takes for the market to make a profit. When we connect the markets and customers we serve to understand us, it\'s usually three- A month or so from start-up to profit. I\'m sorry. I misspoke. Three years. I\'m sorry? Tammy Romo - Southwest AirlinesThree years. Thomas M. Nealon - Southwest AirlinesYeah, yeah. Three years. This is what we see. As far as Hawaii is concerned, I think we will see a very good ramp soon as customers on the West Coast know us. We have the largest customer base of airlines on the west coast. I think you\'re going to see it go up very, very quickly, and I think we\'re going to take the lead in pricing. I think we will generate a lot of traffic very, very quickly. Jack Atkins -Stephens, Inc. Okay, great. Thank you again. Tammy Romo - Southwest Airlines Add Tom\'s words and agree with the three years. Normally what we see in the international market is probably more than three years, and we will see where Hawaii falls, but it depends on the market. When you think of a market like Dallas Aida, we see the market growing very fast. About a year or so. Hawaii, given our massive presence on the west coast, I think we hope this will rise here soon. Gary C. Kelly - Southwest AirlinesYeah, I agree. Then, Jack, you didn\'t ask that, but our growth in the first quarter of this year was very modest. over-year. I think the market share we call \"development\" is 3% or even lower. So, this is a very small component of the current system, first. So, second, it makes us well start the expansion we are planning to make later this year, which means we don\'t have much market in development. Another small question I\'m going to raise is the growth of our latest market segment I. e. International Year-over- Very modest. I mean, it\'s a little low, too. to mid-single digits. So the system is maturing. We have some income. Enhanced queuing techniques, especially in the second half, I think we will be very capable of launching Hawaii. Jack Atkins -Stephens, Inc. Okay, great. Gary, Tom, Tammy, thank you very much for your answer. Gary C. Kelly - Southwest AirlinesSure. We will answer the next question with Rajeev Lalwani from Morgan Stanley. Rahyev Lavani Morgan Stanley Good afternoon, everyone. Gary C. Kelly - Southwest AirlinesGood afternoon. Thomas M. Nealon - Southwest AirlinesGood afternoon. Rahyev Lavani Morgan Stanley LLCTom, one or two questions related to the booking system, can you talk about the progress of the rest of the year? Maybe you can specifically provide those features that you will be opening so that we can get some comfort there. Then, as it relates to the impact of the schedule, what is the blow of 2Q RASM and apology if you have already provided it? Then, where can you see the benefits of 3Q and 4Q, or any color you can provide to help us with how to get there for our triangle positioning. Thomas M. Nealon - Southwest AirlinesYeah. Sure. I\'m glad to do so. So the main benefit that we have been discussing with you guys is the concept of O & D bid pricing capability or functionality. I think you understand this, but it does give us a way to really optimize non- Stop and connect passengers on the network. So that\'s what we want to do. The old method, for example, will focus more on Revenue Optimization at the flight level, so you will optimize the flight, but you are not optimizing at the trip level. So, that\'s what we\'re trying to do, and that\'s where the value comes mainly from $0. 2 billion a year. When we deploy this, oh my God, it\'s kind of like late Q1 or mid Q1 and we\'re starting to see it-so the team is adjusting it and they\'re working on it, we see very good benefits. We are very happy about this and we have a lot of confidence in the first half and full year we have signed up. So, we are very happy about this. Rajeev, tell me again, I really can\'t hear your second question, where did the margin increase in the second half come from? That\'s what you asked? Rahyev Lavani Morgan Stanley LLCYeah, this is about scheduling, the impact of scheduling on 2Q RASM, and then what would be the benefit of the second half of the year? Tammy Romo - Southwest Airlines Yes, yes, Jack, this is-Rajeev, as far as our year is concerned, this is a benefit of the 2Q we are looking forwardover-year RASM. Rahyev Lavani Morgan StanleyLLCOkay. And in 3Q? Tammy Romo - Southwest Airlines Sorry, fine. Rahyev Lavani Morgan Stanley LLCAnd will accelerate by the end of this year (44:36)? Tammy Romo - Southwest AirlinesThat\'s well. . . Gary C. Kelly - Southwest Airlines There were 1 penalty in the second quarter. Tammy Romo - Southwest Airlines There were 1 penalty in the second quarter. I thought I said the fine, so I apologize for it. Rahyev Lavani Morgan StanleyLLCOkay. Then what are the benefits of 3Q and 4Q or the second half compared to 2Q\'s 1 penalty? Tammy Romo - Southwest Airlines In the second half of the year, again, in the second half of the year, in the interest of booking, just want to ensure the shoulder flight part. So that will-yes, we just hope it will go away. By the time we reach October, our fleet will overlap, so we should see that this continues to fade over the course of the year. Rahyev Lavani Morgan Stanley If I can ask Mike a simple question. In terms of the accident-related issues, has all your maintenance procedures been reviewed, etc. , and if appropriate, are you in good condition there? Michael G. Van de Ven - Southwest Airlines Are you asking if all of our maintenance procedures are in compliance with the service announcement? Rahyev Lavani Morgan StanleyLLCExactly. Michael G. Van de Ven - Southwest AirlinesYes. Let\'s go back to what we have been involved in 16 years since the first incident with GE and CFM in August 20. Therefore, we have been in line with them on service announcements and requirements. We don\'t seem to have a compliance issue at this time. Rahyev Lavani Morgan Stanley Very helpful. Guys, I\'m sorry for the mess. Gary C. Kelly - Southwest Airlines I just want to add that the program we are using is the same as the one developed by CFM in 2016, which means that we do an ultrasound by removing the blade. Then, our service provider, GE, will do a wider range of eddy current checks at this point when doing a major overhaul. So the program itself is the same. Unlike recent service announcements and air readiness directives, the frequency of these inspections is now being carried out. As I reported earlier, Mike confirmed this with his report and since last week we have stepped up the inspection and at the moment we have not found out, which is obviously what we are looking forward, obviously positive. Rahyev Lavani Morgan StanleyLLCThank you. We will answer the next question of Savi Seth with Raymond James. Savanthi N. Syth - Raymond James. Hey. Good afternoon. If I can follow up on the California strategy in my opinion-correct me if I am wrong-part of the strategy to defend your status is to drive the opportunity, maybe you are planning for California and strengthening the services you provide to the passengers there. So in terms of the impact on unit income, should I think it\'s more of a proximityterm thing? Is it fair to assume that they should start normalising as these markets evolve? Or, it\'s a fast for years. Tracking growth? Gary C. Kelly - Southwest Airlines I think it\'s the former. I think what you get here is very typical. Whenever the market expands, whether it is us or our competitors, it will have some impact on unit income. It matures over time. What you should expect is that, to be fair, you will see an improvement in unit income performance. Things are dynamic. So we will adjust, our competitors will adjust, but absolutely, this is-the way we look at it, these are opportunities-there are opportunity costs if you want. So we know that we have the opportunity to strengthen our route system in the West for our customers, and at some point we will focus on that. So maybe your explanation is that maybe we\'re speeding up a little bit and I don\'t object to that. But I also want to point out that this is really an example when Tom is emphasizing California. Southwest shows are not just California. We have competitors all over the country. Considering its competitive power, I think Tom said this and it did very well. But we will not add so much capacity, we will not let competitors increase so much capacity, and we will not see the impact of some unit income. I think the only time that happens in my memory is the expansion of the field of love. I think everyone knows how unique it is. However, it is almost instantly profitable and has no impact on unit income. This is amazing. But this is obviously an exception. Savanthi N. Syth - Raymond James. That\'s helpful. I just wanted to clarify the 2018 capacity growth if I could. How many of them-could be biased in the timing of Hawaii\'s launch? Is Hawaii always expected at the end of the year and therefore not a meaningful driver of capacity in 2018? Or, depending on when Hawaii actually starts, will this capacity move in the second half of the year? Gary C. Kelly - Southwest Airlines No, I think so. I think the best opportunities we have been planning will go deep into this year. So I think you\'re done. Your idea is correct. Savanthi N. Syth - Raymond James. So that it will not have an impact. Thomas M. Nealon - Southwest Airlines Well, it won\'t be a huge impact. It depends on when we get it-first of all, you have to understand that we are still going through the certification process with FAA and ETOPS. We have been saying that we have just announced to these cities today, but we have been saying that we will definitely be able to sell out this year. Now what we have to say is that we definitely want to fly this year. It really depends on ETOPS certification. What I think you will see is part of the ETOPS certification, which is that you can\'t start with the full schedule. You must develop in this regard and demonstrate your proficiency with the FAA and similar things. So I think in the second half, later this year, I hope we can fly to Hawaii. But I don\'t think it will have a significant impact on our ability. Gary C. Kelly - Southwest Airlines In other words, we have now booked the aircraft for these flights. We haven\'t told you about our plan yet because we can\'t determine the exact date yet. Then I think if we don\'t fly to Hawaii later this year, then the problem becomes how we deal with these planes. I think the answer will depend on when we know about this and the choices we had at the time. So I think Tom wants to give you the most honest answer. This may have some effect on our ability, but it will not in theory. If we don\'t go to Hawaii on these planes, we will fly to other places where we have a chance. It depends on when we know this and how efficient we think it will be to leave Hawaii. But now, obviously, we want these planes to fly to Hawaii. Savanthi N. Syth - Raymond James. Got it. Good color. Thank you guys. We will answer the next question from Mike Linenberg of Deutsche Bank. Michael J. Linenberg - Deutsche Bank Securities Co. , Ltd. Hey. I think there are only two questions here. Gary, it looks like JetBlue will shrink about the third in Long Beach. So, obviously, release the slot. I know you\'re in that market right now. Do you think this is a well-served market? Or are you interested in increasing your presence in Long Beach? Gary C. Kelly - Southwest AirlinesSure. Tom and I agreed that we were hampered by the inability to get into Long Beach more. We have very limited business there, so this is good news. Michael J. Linenberg - Deutsche Bank Securities Co. , Ltd. Okay. Okay. Then there\'s my second question. This is Gary or Tom. Just the engine through this inspection process, as I remember, I believe, I may be wrong because you do have power --by-the-Hour agreement. I\'m just wondering if this covers some of the costs if you do, mitigating some of the cost implications of these extensive blade inspections? Gary C. Kelly - Southwest Airlines Mike, do you want to talk to him? Michael G. Van de Ven - Southwest AirlinesYeah, sure. Yes, we have two different types of protocols. We have some power like this-by-the- As you said, one hour, and then all the other times and materials are on time. The 700 special plane was on time and materials-sorry, powered --by-the-hour. So, yes, it does help us to reduce those costs because the risk transfer is back to GE, our service provider there. Michael J. Linenberg - Deutsche Bank Securities Co. , Ltd. Mike, do you have any early knowledge of the potential costs in the southwest and even do you have some protection there? Are we talking about millions of dollars? Is it hundreds of thousands of dollars? Or is it too early? Tammy Romo - Southwest Airlines It\'s a bit early now, but I hope it will provide you with a targeted idea for millions of dollars. In terms of what impact our CASM will be. Ex line, which involves some capital costs. But, again, we have given you our best guess of the cost impact within the guidance we provide. Michael G. Van de Ven - Southwest Airlines And these costs are basically not covered by the cost of engine maintenance. These things will happen over time. Labor costs related to inspections, some other delayed modifications (55:52) The cost of these things. Michael J. Linenberg - Deutsche Bank Securities Co. , Ltd. Okay. Okay. Great. Thank you. Thank you all. We will take Evercore ISI with us to answer the next question from Duane Pfennigwerth. Duane in Finney lattice worth Thank you all. Gary, you have a lot of different ways of allocating capital. I just want to know what you think about mergers and acquisitions and other options. You have some experience there. Are there any periodic or other considerations? How do you see this in the current environment? Gary C. Kelly - Southwest Airlines Well, Duane, I would like to say that our main focus is that it is very fair to invest in Southwest Airlines. This year, in particular, we have many major strategic plans. There is always work to be done. But, especially in 2018, my hopes are 2019 and 2020, and what we really focus on is quality and cost. The effectiveness of our operations, the hospitality of our customer service, these are very basic things. We hope the airline will continue to grow. We have a great opportunity to grow. Obviously, tax reform is a good boost to our sources of financing. Therefore, there is no need for us to look for acquisitions. I think this is different from what we were in late 2000; 2009, 2010. Obviously, our priority is organic growth. Having said that, we have to keep our eyes open and think about how to improve shareholder value, and if we think there is a good opportunity, that\'s what we\'re looking. We have been thinking about this, but there is no denying that it is not a focus, and it is clearly not a focus now. Duane in Finney lattice worth Very good. Thank you. We are going to answer the next question from Daryl kenovichy of UBS. Darryl kenowice UBS Securities, ladies and gentlemen Thank you for your time. Of the $0. 2 billion of the new revenue management and booking system that you said will be completed this year, have you said how many of them are embedded in your second-quarter guidance? Thomas M. Nealon - Southwest Airlines Yes, Tom. we did it. We say between $40 million and $50 million. Tammy Romo - Southwest Airlines $40 million and $50 million. Thomas M. Nealon - Southwest Airlines. . . Because of the second quarter. Darryl kenowice UBS Securities Co. , Ltd. Thomas M. Nealon - Southwest Airlines Our goal is to run at $0. 2 billion this year. Darryl kenowice UBS Securities Co. , Ltd. If I can follow up on Rajeev\'s issue. If I consider your fleet based on seats, it looks like your fleet has an average of 115,000 seats, which is 2. Up 5% to 3% from last year. If I think in the context of your low 5% ASM growth guidance, that means there are 200 basis points in incremental utilization this year compared to last year. In my opinion, this number is fairly stable in the first to third quarters, and then accelerated in the fourth quarter based on the acceleration of the capacity growth implied by your guidance in the fourth quarter. I think when I try to think about the harsh headwinds that you send out from a sub-optimal flight time of the day, I think it should be more or less relevant to this year --over- Your utilization rate is increasing year by year. So can you please coordinate the dynamics and utilization, not what you said on RASM When we spent the year, the peak flight was a little faded? Gary C. Kelly - Southwest Airlines Well, let me go first. The answer is No. I don\'t necessarily follow all the points and points you describe. I remember not looking into it this morning, and our utilization rate this year was \"very normal \". \"In the fourth quarter of last year, we pushed the fleet very hard. So my memory is that in the second half, especially in the fourth quarter, it\'s pretty normal to absolutely take advantage of block time and all these basic things we \'ve seen in the past. So why don\'t you let our IR personnel go offline and we can be sure we\'re following up on your issue. This standard is increasing for classic reasons-I know all these things you know, but this is increasing. I remember a bit of a drop in stage length right now. Tammy Romo - Southwest AirlinesIt\'s down. Gary C. Kelly - Southwest Airlines So travel is doing what travel is doing. So anyway, I don\'t have all of this in front of me, and I think it\'s easiest to go offline if I can. Darryl kenowice UBS Securities Co. , Ltd. Thank you very much. Gary C. Kelly - Southwest AirlinesYes, sir. OperatorWe went next to Joseph DeNardi with stephil. Joseph William dennadi Steven Nicholas & Co. , Inc. Yeah, thanks. Gary, I don\'t feel very good in recent quarters. Southwest-like. Revenue has not yet met expectations of a slight increase in CASM this year. Can you talk? Obviously, there are things that are out of your control, but I think a lot of things are within your control. Can you talk about why you think this has happened? What gives you the confidence to get back on track in the near future? Gary C. Kelly - Southwest Airlines I think it\'s a fair question. I don\'t know. I \'d agree with it-Southwest-like. I think sometimes we get messed up with our performance. I think, in retrospect, going through this fleet transition is a challenge. Introducing a new booking system in the same year is also a challenge. So I think it\'s more timely than absolute execution. I think the third thing I will put there, these are the things that we focus on again. So the third thing I want to say is that we are concerned about the environment of fair competition. In the first quarter, we have made some improvements to our revenue management technology, which I think is for better management in this environment. These are three. I think the route system itself is very powerful. We are continuing to optimize it over time because we know that the length of the aircraft Day is too long now. I mean, which city we are in and which other destination we are flying. The process has indeed gone well in the past few years. So it\'s all really good for me. International expansion looks very solid and they show very significant improvement as these markets \"develop and mature. \"So I think we\'re dealing with something quite important. This is not an apology. I will go back to my opening remarks. When we know that this is not our best earnings performance, we still have a very good quarter and are very capable of doing it this year. Joseph William dennadi Steven Nicholas & Co. , Inc. Okay. Gary C. Kelly - Southwest Airlines But I know what you mean. We got it here and whenever we had a plan we missed it and we were not happy with ourselves. So I can assure you that we are not saying that this is satisfactory. In this sense, we will never be satisfied. But overall, I think it\'s still a very solid performance. Joseph William dennadi Steven Nicholas & Co. , Inc. Okay. That\'s helpful. Some of my other questions have also been asked, so I will continue to ask this question. The disclosures you provide around the Chase agreement continue to be the worst in the industry. So I\'m just wondering if you can fix this. Secondly, can you understand that the market and investment community may want to learn more about the business you basically cut every dollar of credit cards in southwest chase? Tammy Romo - Southwest AirlinesSure. Since your request today, I would be happy to provide you with more information. So, if you look at our passenger income and other income related to quick rewards, it will help you understand economics better, about $0. 49 billion of our passenger income is due to a quick reward redemption. I believe we have previously pointed out that most of our revenues and other revenues are related to our partner income, which is related to rapid returns. So in general, we continue to see good growth in our fast reward program, with growth in the first quarter outpacing our capacity growth. So this should give you a lot more insight into your income, once we get 10-Q filed. Then just to help you on the balance sheet. $1. We\'re about 8 billion of $4 billion-$4, I think. 4 billion air- Transportation liabilities, the current part of the balance sheet is related to quick rewards. So when you add this amount to the non-current ATL that you see on your balance sheet that is $1 billion related to the quick reward, you will receive the total air traffic liability balance associated with a quick reward of $2. 8 billion. So when you add, we total about half of ATL-related to quick rewards when you look at the current and non-current sections. So I hope this will help with your analysis. Joseph William dennadi Steven Nicholas & Co. , Inc. Gary, can you understand why the market would want to know more about the industry? I\'m just interested in your point of view. Thank you. Gary C. Kelly - Southwest Airlines Well, I \'d love to share my opinion. Again, I will certainly postpone Tammy to guide our requirements and we will meet any of our requirements for disclosure. I don\'t mean to be harsh at all, but you didn\'t touch me by putting us at the last point. I think what we need to balance is, first of all, our function here is called investor relations. You will give them high marks, I bet. I think they go out of their way to meet the needs of our investors. This is the spirit of Southwest Airlines. At the same time, we are competing with our competitors every day, and there are some things I don\'t want them to know. I don\'t want them to know how we manage our revenues, which will include the Chase component, thinking about all of these things-well, a lot of them are proprietary. So that\'s the only reason. We are not trying to hide anything from investors. But I think you also understand that investors are not loyal to southwest. Our competitors are theirs. So we have the responsibility to protect the Southwest, we are careful to protect the Southwest. But that\'s the only reason we\'re not willing to provide more information, because we don\'t want our competitors to know, so we\'ll continue to make judgments about meeting your needs and the needs of the company. Joseph William dennadi Steven Nicholas & Co. , Inc. Thank you, Gary. I have not tried to insult the investor relationship in any way. I just think that more colors in this area may help with multiples of emotions and stocks. I think it\'s clear. Thank you. Gary C. Kelly - Southwest Airlines Oh no, I don\'t think anyone feels insulted. You asked a fair question and I hope to give you at least a reason why we don\'t disclose the whole general ledger. We still have time to answer a question. We will be answering our last question today from Brandon ogrenski and Barclays. Brandon R. Oglenski - Barclays Capital LimitedHey. Good afternoon, everyone. Thank you for letting me in at last. So, Gary, I\'ll just ask a question, and I think you even mentioned that. If you can\'t get the Hawaiian plane to take off from the ground, you\'ll find somewhere else to place the plane in the second half of the year. But the reality is that fuel prices have risen a lot since we had a 7% capacity growth outlook. This is also a problem for your competitors, but the cost is rising and the revenue is not being tracked, so as an investor, everyone is asked to believe that this time is different. We need to offset the fuel. However, no one has taken proactive steps to truly reflect this reality. So, are we just looking at volatile fuel prices without thinking about the long term? Or how should investors expect the resulting fuel volatility? Or is this just something we have to live on? Gary C. Kelly - Southwest Airlines OK let me give it a try and you redirect if I don\'t get to your point. But first of all, these are amazing financial results. After doing business for 40 years, I will be working in this industry for most of this year. So these are very, very good results. From several perspectives, we are in a very favorable position in terms of fuel hedging and the really prosperous profits we have, our cost outlook and revenue outlook in other areas. I think we are very capable of managing our path through real fuel price shocks. What we have now is not a problem. If we get $100 Add another bucket. I think we have something else to talk about. But I repeat, I hope what our goal is. Our goal is to have positive unit income performance every year. On top of that, perhaps more importantly, we want to expand our profits. As a result, when fuel prices fall, the industry does not seem to receive much credit because of the expansion of profit margins. Again, I think we all need to recognize that profit margins are somewhat affected when fuel prices rise. So if the fuel grows faster, obviously it will put more pressure on us to make up for that as well as our income. This will not happen in a quarter. One of the tools we have to look for is the timeline. But I think Tom pointed this out on an-I just want to say that as an analogy we \'d better take these shoulder flights because they are profitable and profitable, they increased their profits compared to simply not flying. Therefore, fuel prices must be viewed in the same way. If we can\'t raise the fare, will this immediately lead us to decide to stop driving some of our planes? If they can still make money, they won\'t. So I think it depends a lot. But our bottom line is that we are very motivated. We are very motivated to generate shareholder returns, which means we need to continue to drive growth in unit income, but our goal is to continue to create. The profit margin is very high, eager for profit margin growth. We have net income margins and we have a chance to grow significantly this year. I\'m happy. I think this is a very good environment. at least we are very good. We are positioned to manage our roads with a slightly higher fuel cost environment. Brandon R. Oglenski - Barclays Capital Limited Thank you, Gary. This is the end of the analyst part of today\'s call. Thank you for joining us. Ladies and gentlemen, we will start with the media section of today\'s conference call. I \'d like to introduce it first.