Welcome to the Southwest Airlines First Quarter 2019 Conference Call. My name is Cody, and I will be moderating today's call. This call is being recorded, and a replay will be made 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.

Thank you, Cody, and welcome, everyone. Joining me on the call today, we have Gary Kelly, our Chairman and CEO; Mike Van de Ven, Chief Operating Officer; Tom Nealon, our President; Tammy Romo, Executive Vice President and CFO; and other members of our senior leadership team. Please note that our comments today will include forward-looking statements, and these are based on our current intent, expectations and projections. As we noted in our earnings release this morning, we have made flight schedule adjustments through August 5 as a result of the MAX groundings. And the guidance we will provide today is based on our estimates assuming the grounding of the MAX through August 5. A variety of factors, in particular those that are out of our control in connection with the MAX groundings, could cause our actual results to be materially different from our current guidance. We'll also make references to non-GAAP results, which exclude special items. And for more information regarding forward-looking statements and our reconciliations of non-GAAP to GAAP results, please visit the Investor Relations section of southwest.com. So with that intro, I'll turn it over to Gary.

Thanks, Ryan, and good morning, everyone, and thanks for joining us for our first quarter 2019 earnings call. Overall, I am as proud as I have ever been of our people. They did an extraordinary job, produced solid results among industry-leading margins and despite the challenges of near-record cancellations. But for the numerous cancellation events, it would have been a blowout quarter. But still, rock-solid margins, returns and cash flows, and a huge thank-you to our people for their resilience and for their perseverance. Based on where we are today and what we can see from today, the second quarter will be better. We're better prepared to handle the MAX schedule changes, prospectively through August 5, rather than the more chaotic daily cancellations. And our goal is to provide our customers a stellar experience during the busy summer, especially. Our on-time performance was solid in the first quarter, and it will be solid again here in the second quarter. Restoring the MAX to service as soon as it's ready is also a priority, of course. And assuming that happens within the next couple of months, we'll get back on our delivery schedule and our capacity plan. Mike, Tom and Tammy have prepared excellent briefings on our operations, commercial, and financial performances and expectations, and I don't want to steal their thunder, so I'm going to be brief this morning. But I did want to reiterate a couple of points. Despite the challenging year so far, first of all, we were once again named to Fortune's list of the World's Most Admired Companies. This year, ranked number 11. We were just ranked number 2 out of 500 companies on Forbes List of Best Employers. And all great companies start and end with having great people and being a great employer. So…

Well, thanks, Gary. The first quarter reinforced a couple things that I already know. Most important being that our people will absolutely rise to meet any challenge. And we had our fair share of challenges to start the year. The prevalent operational themes for the first quarter were launching our Hawaii service, and then, of course, the unanticipated maintenance rise up and our MAX groundings have impacted our operations. So, as you all will remember, the quarter started the minute the government shutdown in the middle of our ETOPS authorization. We had worked on some contingency plans, and despite losing about a month of timing, were still able to launch Oakland to Honolulu service in the first quarter as planned. And since then, we've added an Oakland to Maui, and we're going to launch service between Maui and Honolulu on Sunday. The service startup went extremely well. Our onboard experience has received high customer marks, and we are continuing to add service during the second quarter. Beginning in mid-February, we started to experience disruptions to the operations with unexpected maintenance write-ups. And just as that was returning to normal levels in mid-March, the MAX groundings occurred. Those combined items created unexpected, irregular operations to the last half of the quarter. So we were operating in a daily environment that consisted of canceled and delayed flights, aircraft swaps, crew reroutes, high volumes to our call centers, maintenance demand and logistics associated with the grounding and, of course, the customer anxiety at the airports. But our people, across the board, again, rose to the occasion and they took superb care of our customers and produced a very solid operational performance in spite of that environment. Our on-time performance for the quarter was 78.7, and that was just a tad lower than last…

Okay. Thanks, Mike. So, as you all know, we finished 2018 very strong. We came into 2019 with a lot of momentum. And I think that despite several significant challenges, we have delivered a very strong revenue performance going into -- in the first quarter. In fact, we achieved record first quarter operating revenues of $5.1 billion and our year-over-year unit revenue performance is expected to be among the top in the industry. And just to add on to what Gary said, the people of Southwest Airlines, they carried the day throughout the quarter under very, very tough circumstances. We had a lot of cancellations, a lot of reaccoms, and they serve our customers with the hospitality and the kindness that we are famous for. So it's been a challenging quarter, and you all did an incredible job. In our March 27 investor update, we shared the details behind the drivers of our revised Q1 RASM forecast, which we said would be up 2% to 3% year-over-year. And we ended the first quarter at the high end of that guidance, with RASM growth of 2.7%. So let me start the quick recap of Q1, and then I'll cover our outlook for the second quarter. So, in January, we were expecting Q1 RASM to increase in the range of 4% to 5%. And just as a reminder, there were several key factors that went into that original guidance: first, a continuation of the strength in the base business trends that we experienced in Q3 and Q4 of 2018; second, the benefit from November's system-wide fare increase; third, continued strong performance from our Rapid Rewards program; fourth, 1.5 points year-over-year RASM benefit from our new res system; and finally, a 1.5 RASM tailwind from Q1 2018's suboptimal flight schedule. We also planned…

Thank you, Tom. And hello, everyone. Gary, Mike and Tom have outlined the challenges that we've been managing through since the beginning of the year, and I'd like to add my thanks to all of our hardworking employees for their resilient focus today good care of our customers and for their unwavering commitment to Southwest. Despite the significant headwinds, we are off to a solid start to the year, with almost a 10% pretax margin, and we continue to consistently generate strong cash flows and shareholder returns. I want to also thank our people for their focus on cost control in the midst of all the challenges. Our first quarter nominal cost, excluding fuel and profit sharing, were relatively in line with where we expected them to be at the beginning of the quarter, despite the numerous headwinds. On a unit basis, ex fuel, special items and profit sharing, our cost increased 8.1% year-over-year. Relative to the approximately 6% we were expecting back in January, there were 2 primary drivers of the higher year-over-year growth. First, the flight cancellations that we experienced reduced our available seat mile growth in first quarter by about 2.5 points year-over-year. And combined with additional cost pressures from maintenance-related disruptions and weather increased our CASM-Ex by about 3 points, since we didn't have opportunities to shed costs that were predominantly fixed at close-in. Second, we had a $30 million increase to salary, wages and benefits due to our tentative agreement with AMFA, which represents a higher compensation for our mechanics compared with the previously rejected TA from last fall. This created another point of year-over-year CASM-Ex increase in first quarter. This 4-point negative CASM-Ex impact was offset by about 2 points due to better-than-expected completion factor, employee productivity and health care trends, as well as…

[Operator Instructions] We'll begin with our first question from Jamie Baker with JP Morgan.

Gary, hypothetically, how many consecutive quarters of stagnation, from a capacity perspective, would you be willing to tolerate before possibly considering nonorganic growth opportunities?

Oh, wow. Well, we've been asked several variations of that question, although not that one exactly. And right now, I'll just ask our folks to stay focused. We have a very good plan for 2019. We're not at the point yet where we need to call any material audibles. We're working on -- the MAX is pretty much the audible that is tasking our group right now. I have not asked them to consider contingency Plan B, C, D, E or whatever it might be. So, I just don't have a ready answer to that question. I think all of us are working under a reasonable assumption that the MAX is going to return to service in a reasonable amount of time. And then, whether we're back to normal, sometime during the third quarter or to begin the fourth quarter, in the grand scheme of things, is probably somewhat immaterial. I think what all of us are a little more concerned about is if that goes on too long, we have a -- Tammy referred to this, so we have a retirement program. So, Jamie, I think what we would be -- what we would have to scratch our heads with more is just from an operational perspective, we've already planned retirements. And that would imply that capacity goes down from here. But we certainly don't want that. And it would be a lot of work for us to go in and unwind our retirement plan, and I do not want to do that. That would not be efficient. We've got better things to work on, quite frankly. You've asked a much broader, more strategic question. And that's a pretty -- that's an outlier in terms of a scenario. And I just don't -- I don't think that, that is anything that we'll be spending any time thinking about right now. But clearly, strategically, we're in a growth mode, so is the industry. We need to be growing. And we don't -- we -- clearly, we do not want this stagnation, to use your word, to continue very long. But I just don't have a ready answer on that question. And I don't think that, that is a likely scenario.

Yes. That's very helpful, Gary. No, I appreciate it. A quick follow-up. In the event that the FAA does not require any sim time, and it seems to be moving in that direction, but other regulatory agencies do or other pilot unions do, whether here or abroad, is this a scenario that you've discussed with SWAPA at all? I mean, is there a risk that even if the FAA goes with an iPad-training protocol, just the public scrutiny and/or union pressures might lead you to nonetheless pursue sim-based training as a part of the return to service, because that would obviously slow the process down, possibly, quite a bit.

Well, again, just taking your question literally, which I think is the way you intend it, yes, I think that just getting pilots back into the simulator for an event would be a challenge, and that would take time. I think it just depends on what training one is talking about because our pilots are extensively trained. And again, I'm a layperson at this. But my own interpretation is that we already do the kind of training that one would be contemplating to put the MAX back into service. Mike, how many MAX simulators are there even in the world? So -- but the point is, managing the aircraft in a runway stabilizer scenario is something that we already train on and at least as best I can tell has already been covered. So again, I would just go back to we don't know what that would mean precisely. But at this point, we're not hearing that, that will be a requirement. I just go back to we are the most experienced 737 operator in the world. Our pilots are extensively trained. We don't hire them unless they have a tremendous amount of experience, Captain experience, for that matter. So regardless, we'll do whatever we have to do here, but we're obviously awaiting the Boeing service bulletin as well as the FAA or worthiness directive to know exactly what we'll have to do.

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

So maybe I'm reading too much into this sentence. But the CapEx reiteration for this year has this clause of "assuming no prolonged grounding of the MAX aircraft." So is that to suggest that you might not take delivery of aircraft that you're scheduled to in the back half if it's still grounded and that CapEx would actually come down?

No. I think that -- I'll just be explicit. We are not taking any deliveries right now and, therefore, we're not paying for anything. So if you just took your scenario, and we don't get any more MAXes delivered in 2019, our CapEx would be dramatically lower. But Boeing cannot deliver an airplane now. So any airplanes that they are manufacturing, again, just to be crystal clear, they're at Boeing Field. And so they are not being delivered and we're not paying for them. Did I get that right, Tammy? Tammy is the one who sends the money. So, I just think she...

We will be writing our check as they are delivered.

There you go. So hopefully, that answers your question.

And then, just with respect to the longer-term cost profile. At the start out this year, obviously, there was some first half pressure. There's been a lot of noise and changes around this grounding. But you had talked about a flattening of the cost profile into 2020. Given the extra cost pressure that you're seeing this year, can you just update us on your thoughts of what the cost profile might look like into 2020?

Yes, sir. And Duane, that's what I was attempting to, at very high level, comment on in my remarks is that -- and Tammy mentioned this. So we're asking all of our departments to hit their budgets. And then, where they have activity-driven kinds of spending to obviously come in under their budgets. So we're not burning as much jet fuel, as one example. We're not incurring as many landings and takeoffs from a landing fees and rentals perspective. So to the extent that we have variable costs, we expect our departments to come in under. We have a series of cost initiatives to improve our efficiency. Those are continuing. And let's just assume that the MAX is back in the fleet in the summertime. I would expect us to hit our cost plan for the fourth quarter, which would be pure. You'd have a -- we'd have our schedule restored. We'd have all of our fleet. And I would expect the cost comparisons year-over-year to be quite good. I think it's a little -- and Tammy and Ryan get this question a lot right now, just trying to project forward to 2020 and what will the costs look like. Again, under that same assumption that we've restored the flying of the MAX this year, we don't see any different cost performance for 2020 at this point. Obviously, the comps are going to be dependent upon what ultimately happens here in 2019. But the cost outlook should be unchanged, based on that report.

Yes. So, certainly, by the time we get to the fourth quarter, we would expect to be on a good trajectory assuming the MAX are back in service at that time. So completely agree.

Now if Jamie's question all of a sudden becomes more of an issue, there's extra training or the training delays the MAX flying or whatever it might be, you understand that I'm not incorporating those unexpected events into that kind of a comment. It's assuming that we're back up and running as per normal with that kind of an outlook.

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

Thanks for all the color on this call today. And just to follow up on that line of questioning from Duane, is it fair to assume that the underlying ASM production on your 2020 CASM will be whatever was in the baseline for last year plus whatever is taking out -- I'm sorry, for next year, whatever's taken out for the MAX this year? Meaning, like 4% or 5% baseline plus 2%, 2.5% for the MAX groundings? Is that a fair way to think about that as you're thinking about the CASM profile for next year?

Yes, sir. And, Hunter, the other -- we built the airline to support by year-end Ryan's 775 airplanes, then we've got another 25-ish coming in 2020. So yes, we want to get airplanes and we want to fly them. So the capacity that we're thinking of to begin this year for 2020, that's what I want us to fly. Now again, there's still questions about exactly how the MAX will re-enter service. But assuming everything comes back online and we're up and running, we get all the airplanes, as we have committed to Boeing and they've committed to us, then yes, we would be flying the 2020 plan as we started this year.

Okay, great. And then can you talk about the 800 in Hawaii and any maybe operational challenges that you've had with that plane? I know why you flew it there originally. It makes sense. But it's probably not the most ideally suited aircraft for doing that in the MAX. Any operational challenges that you've had there? And also if you could kind of elaborate on how you're cracking the distribution nut inter-island Hawaii, particularly within the local community there?

I'll ask Mike to speak to the operational aspect and Tom to talk about the distribution.

So yes, so we really aren't having any, what I would call, significant operational issues with the 800. We're very comfortable with the airplane. We knew, though, that given its range that we would -- we may have to put some lids on the seats, especially in -- when you're flying against some of those headwinds. So that's been the biggest operational challenge for us. We're scanning bags on there, the weight balance program works well. We've got it blocked pretty well. The station performance, we're fully staffed in the stations. The people out there are excited. They're turning the airplanes well. So we're just -- we're learning how to navigate through the Honolulu airport a little bit better and the taxi times on the ground there. But in terms of the operation, the maintenance and the support and the crews of the airplane, all going as planned.

Hunter, I think on the distribution side, we started service back in March. We've been on the ground in Hawaii for well over a year in terms of community outreach, community affairs. And so we've already got a pretty deep roots for such new operation, pretty deep roots in the Hawaiian community. And so in terms of distribution, it's what we always do at southwest.com. So they know the brand better than I would have expected, actually, because many people from Hawaii are traveling to the U.S -- or to the mainland rather, and they're flying Southwest. They know the brand. So a lot of local marketing, a lot of presence. And we're actually seeing very strong, very, very strong reception to the Southwest brand on-island. So that's probably how I'd best answer it.

Our next question comes from Rajeev Lalwani with Morgan Stanley.

First, just a clarification on the -- on some of the CASM questions from earlier. If capacity growth next year is going to end up being a lot higher simply because of the MAX timing, then shouldn't CASM actually be materially lower, say, flat to down versus that 1% to 2% or so that you were talking about before, Gary?

I don't think I quoted a number. Well, I know I didn't quote a number. So I think all I was trying to communicate at this point, and so this is April, so we've got a ways to go before we get into 2020. But whatever CASM we were expecting in 2020 before the events of this year, that's what I would be expecting next year. How that will compare to 2019, I don't think we're ready to say yet. Clearly, we're running higher on CASM here in the first half and that'll probably dribble into the third quarter. Well, it will because we've already reduced our flight schedule through August 5. So yes, you're going to have an easier comp because of all of this. But I don't think we are prepared today to give you any insight as to what that would be. If you thought it was up 1 to 2 before, yes, I agree. It's going to be something less than that, I just don't know how much less yet.

Yes, really nothing has changed from our last comment. So we're just setting aside all the noise from the unanticipated first quarter events, our long-term unit cost target remains unchanged. And so nothing -- no new update here today.

Yes. So what I meant earlier was just a nominal amount, not a year-over-year amount. So what else can we do for you?

And then on the RASM side, Gary, I think you've laid out some objectives earlier in the year. There's been a lot that's moved around. Can you just refresh us on where you are with sort of hitting those targets and whether or not, and this may be for Tom, do you think you can keep some of the momentum that you're seeing in 2Q going into the back half of the year such that there's not this massive step down, if you will?

Well, let me offer a quick comment, and then I know Tom will want to chime in here. In his remarks, he said that our goal remains in excess of 3% unit revenue growth for the year 2019 versus year ago. What I was intending to also suggest with my remarks is that we began the year with the goal to improve margins. We got a little bit of help on that front with lower fuel prices. That still is the case as we look forward today. We've got lower year-over-year fuel prices. We're a little wobbly with our fuel consumption numbers because of the MAX benefit we were getting and now not. But except for that, the fuel outlook still looks, at this juncture, looks really good. So we had a desire to drive better operating margins, net margins and returns on invested capital. That's not happening here in the first quarter. But I wouldn't give up on that especially in the second half of the year and for the full year. So our folks are doing a good job managing their cost. First quarter was really ragged with operations incurring -- even though we had fewer flights, there was more cost for per flight because of dealing with all of the irregular operations, as we call them. So that should perform, Mike, I think a lot better here in the second quarter because, like you and Tom were saying, we've gotten ahead of that. It's just a much more orderly way to reschedule the airline that way. So, Tom, you want to talk about the RASM?

Yes, and I think I'd just kind of restate that the 3% objective is the flight we have in the ground. We're going for it. I think that's what we're seeing so far. The first quarter, as you guys know, was a very -- I think you keep hearing the word choppy. Every earnings call, I hear the word choppy. The first quarter was very, very choppy. And we're coming out of that and we're seeing really nice stabilization of trends. We're seeing normalization of the curves. We're seeing normalization of demand and the fare environment seems to be really where we need it to be. And I think that it's just a shame we have this MAX thing going on because it's a pretty good business environment. So our corporate travel, which is a really good indicator of just the economy, is robust. I wish we had more close-in inventory to sell, but we're re-accommodating. That's a pretty good indicator of this core economic strength, and the business climate or the business bookings are strong. Like I said, wish we had more to sell. But that's my commentary on that.

And I think that's excellent. And I -- the one thing that I wanted to be sure that all of you took away from today, I read all kinds of crazy things about the impact on our brand and our customers are mad and on and on. Our business is really good. And it's in -- it's because our employees work so hard to serve our customers so well. So there are -- while no doubt there are always impacts to companies' brands based on things that happen, our brand is unbelievably strong and I think well deserved. And the operation integrity is intact and looks really, really solid, and there is no evidence of any weakness that is unique to Southwest after our first quarter, and I think we're all very proud of that. And again, very proud of our people for making that happen.

And the only other point I would add on to that is the flexibility and the strength of our network is tremendous. And I think you are seeing that in our results as we work through all these cancellations. So I'd just put an exclamation point there. And then I would also just point out that we have a new reservation system, new revenue management tools, which are also helping us manage through all the challenges. So just the strengths of Southwest just really do go on and on.

And the network changes, I think as some of you all have recognized, they were just masterfully done. So while we had to trim some capacity out, it was done in a way that, again, that also maintained the integrity of our customer offering. I'm very, very proud of that.

We'll now move onto our next question from Jack Atkins with Stephens.

Gary, just to start off with you. It certainly sounds like Hawaii flying is off to a great start, both in terms of customer demand and also the experience. So now that you've got a couple of months under your belt in terms of booking trends, I'd just be curious to get your view on if the ramp time around those routes to get them towards system-level profitability has changed at all or if your sort of thoughts there have changed, given what you've experienced the last couple months.

Well, again, I'll let Tom speak to that, too. I'll just give you my opinion about that. First of all, we're very good at forecasting. And that market forecast, at least to me in my experience, surprisingly well. And I think a lot of that is due to the fact that we have such an immense customer base in California, which is what this is geared for. And number two, because Hawaii is such a terrific destination that is missing from our flight schedule. But I did -- we haven't talked about international. International is a bigger segment of our system than Hawaii is, of course. And our international segment is developing very, very nicely. I was very pleased at the performance here in the first quarter. And I just offer that up as a contrast. I think our opportunity in Hawaii is far greater and far easier than what we are tackling in international markets just because we don't necessarily have the same relative strengths. And we certainly don't have the awareness in our international destinations about Southwest that we do, as Tom mentioned on Hawaii. But I don't see, Tom, that it's -- I mean first of all, we've just gotten started, to be fair to the question. But I certainly don't see anything that would discourage us. In fact, the fact that, as you pointed out, the flights sold out before we even put out a press release, I was stunned. But what are your thoughts?

I think I've said this before, not sure I've said it on an earnings call, but we have such a built-in customer base in California wanting us to take them to Hawaii that I don't know how much faster than typically we should expect this to turn. I think this will develop faster than other new markets. You might have seen us do with international, where we don't have a built-in customer base. But I'm thrilled with where we are, but, yes, I did do some competitive shopping yesterday, just looking at the fares, and I really like where we are. I mean, we're very early into this and we're at pricing that is -- it's below the competition, but still it's good, solid, strong pricing. And not sure if you guys have taken a look at our pricing on dotcom versus our competition, but I love where we are very quickly in our development curve. So I think when you begin to add the bag fees, the first bag, second bag, third bag, there's a real dramatic difference. And we can make money at that price point because of our cost structure. And we feel great about it, this is kind of the Classic Southwest Effect. So I feel good about where we are, Jack.

And I do want to make sure that -- there was a question earlier, I just want to make sure that we were clear. And Mike commented on this. But we have 175 seats on these airplanes. We are not selling all 175, for operational reasons. And so that is -- and that was Mike's point earlier. So if you think about, in the context of your question, profitability, longer term, Mike, I think you would agree, the MAX will be the better airplane there. It just has better performance and better range characteristics. But even with that, I think we feel very good, and that's all factored into our modeling. And I just offer that up, Tom, because I think we have upside even to where we are today with the performance in those markets.

I would agree with that.

Well, that's great. And just for my follow-up, Gary, you alluded on the fourth quarter call to the potential for new revenue management levers that could be rolled out in 2020. And I know there have been a lot of things in terms of outside factors that have been taking up your bandwidth over the last few months. But is there anything you can update us on there in terms of the potential for revenue management opportunities as you look out into next year?

I would say in terms of the distractions, sort of the unplanned, I don't -- Tom, I don't think that has an impact on the work that we're doing on these couple of secret initiatives.

Nope. They're totally unconnected.

So, but I don't think, Tammy, do we have a news to share yet?

There is no news to share yet. So everyone's going to have to stay tuned there.

So stay tuned please, sir. And then begging for your patience there, so coming soon.

We'll take our last question from Joe Caiado with Credit Suisse.

Thanks for squeezing me in. I'll keep them short. Mike, I think you said it would take about a month once the grounding order is rescinded to get your 34 aircraft back into service; a number of things would have to happen there first. It sounds like there's some incremental costs associated with those preparations. So for you and Tammy, are those already embedded in your revised full year CASM-Ex guidance? Or are you not going to be picking up the tab on that and so, therefore, it is not included?

Yes. We've done our best based on what we know to incorporate all of the associated costs in our guidance. And obviously, if anything changes there, we'll update you. But it includes our -- it's included.

Okay. And then I was wondering, are you able to comment on the results of the inspections that you performed on the Wave 1B while they've been grounded and whether you've observed any kind of type of wear pattern that's different than what you expected?

Joe, are you talking about the fuel nozzle coking?

That's right, yes.

Yes. So when we had -- on March 26, when we were ferrying that last flight from Orlando to Victorville, we did have the in-flight shutdown and it turned back to Orlando. So the working theory on that particular airplane was that there was coking around the fuel nozzles and it created a variance in the hot spots and cold spots in the engine and the hot spot in the engine, we had some damage with respect to a little pressure turbine. So GE went out and asked -- the good thing about the engine temperatures and fuel coking is it's pretty manageable. It builds over time. It lends itself to trends that are detectable and then you can go great procedures to go monitor and inspect and repair or replace those things. So as you asked the industry to look at 25 engines. We looked at 12 of ours. And we've done some engine replacements. We've done some nozzle replacements. The way we're thinking about our fleet sitting down, and I mentioned it earlier, we like to almost get it at a new delivery status when it comes back up and flying. And so if we can do an engine change on that and it precludes us from having to do inspections after we relaunch the fleet, we'd rather go do things like that.

Joe, I think the only thing I would add to that is that every new engine, at least in my experience, has its -- I would just call it, break-in issues. And it doesn't matter whether it's a CFM engine or some other manufacturer. And our technical operations work with the manufacturer to develop inspections and repair processes. And they are doing what they need to do to maintain these engines. So I think in that regard, I didn't want you to get the impression that we are doing investigative work here on the engines right now. We're not doing that. We know what we need to be doing. We're working with CFM to clear some of these items out so that they don't have to be inspected and, especially the fuel nozzle example that Mike was using, as frequently. But it's not unusual for an engine to have some break-in things happen. And the engine for the most part has performed in line with our expectations, especially with the fuel efficiency. It's a great, quiet ride and it's a good engine, and I expect to -- I only expect it to get better.

Well, great, that concludes the analyst portion of our call. Of course, if you have any other questions, please reach out to me. And thank you all for joining us.

Ladies and gentlemen, we'll now begin our media portion of today's call. I'd like to first introduce Ms. Linda Rutherford, Senior Vice President, Chief Communications Officer.

Thank you, Cody. And welcome to the members of our meeting on today's call. We'll go ahead and get started with the Q&A portion. And, Cody, if you would just go ahead and give them instructions on how to queue up.

[Operator Instructions] We'll now begin with our first question from Alison Sider with The Wall Street Journal.

Can you tell us anything about sort of how you're thinking about steps you'll take once the MAX is eventually allowed to fly again, steps you'll take to reassure passengers, set people's minds at ease that it is safe? Have you started having those sorts of conversations with Boeing or with the pilots or flight crew? What kind of messaging should we expect around that?

Alison, this is Gary. I think you should expect messaging. I don't think we're ready, Tom, to say exactly what that is yet. But it's a great airplane. Boeing is a great company. This is -- we're looking forward to, obviously, working with the FAA to get it ungrounded. And we'll gauge our messaging according to what questions our customers have, to a large degree. But, Tom, any thoughts you want to share there?

That's a pretty good question. I think everyone's asking the same question. There's just so much media and coverage on the topic that everyone's got an opinion, and I think that there's certainly going to be some people that I expect would probably book away for some period of time. That's probably -- I have no idea how to quantify that, by the way. But I think there will be some people that do that. I think we have a very good understanding between our marketing team and our communications team. We're doing a lot of work understanding what our customers' perceptions are, what their understanding is of the issues, what their awareness is of the issues, what their concerns are with the issues. So I think we have a pretty good perspective on that. I think what's also pretty interesting, at least from my perspective, is since this has been going on, our customers' perception of the Southwest Airlines, the brand, the company, the people, has not changed at all with the grounding of the MAX. There's some words that they use when they talk to us about what they think of us and they use words like they're very loyal to Southwest. They have a lot of confidence in Southwest. They have a lot of trust in Southwest. And I think they have good reason to have confidence and trust because, as you've heard throughout the call, we know the 737 better than any carrier in the world, and they understand that about us. So we're working through our plan right now. And I can tell you that we'll have a very comprehensive plan that communicates directly to our customers and our employees every step of the way. But that's -- there's more work to be done as we learn more, but we're very focused on it. So appreciate the question.

But we'll certainly want to share what we have done to satisfy ourselves that the airplane is ready to return to service. And I think Boeing has work to do to clarify exactly what this functionality is for, what it's not for, because I do think there is a lack of understanding in the media even. And so there's work to be done, I think, on both fronts. But I'm confident that we're up to that task. And I think what Tom mentioned again, we mentioned earlier, which is key, which is we have a great brand. It's one that people trust. And we earn that every day. So we'll want to certainly be mindful of that and message what we are comfortable in committing to. And clearly, we're not going to do anything that we think is unsafe. So that's not even a topic. That's not even a question. But I agree with Tom. I think that there'll be those questions and I think people will get -- I think they will quickly get comfortable with the answers.

And if I could just ask one follow-up. Have you been sort of surveying customers about how they're feeling about the MAX right now? Is that something you've been directly communicating about with people? And what kind of responses have you been getting?

Yes. That's what Tom mentioned, is, yes, we're absolutely doing that.

We'll take our next question from David Koenig from the Associated Press.

Here is another of those questions, I guess. First, Gary, are you going to seek compensation from Boeing over the groundings? Can we talk about the hit to CASM, the additional fuel spending? Clearly, there's a hit to your revenue. And I'm also -- I'm sorry, it was hard to hear Tom, when he was talking about people booking away. But can you give some sense of what magnitude you expect that to be? Is it going to be serious enough that you might not be even be able to use all 34 of the planes you've got plus the 41 you're supposed to get?

No. I don't think we're going to have any concern or any risk of using all 34 airplanes. And we'll fill them up just like we always do. The only point I was trying to make was there's certainly going to be some people that are concerned, and they may be intimidated to fly for some short period of time. I don't think it's going to be a massive issue for us. I think that our customers know us, trust us, they know we go the 737. So I don't want to overstate my comment or have my comment inflated. I was just raising that as I wouldn't surprise me if a few people said that. But I think we're going to be fine.

I appreciate that clarification. That's good. But are you basing that on surveys that you're doing or are you basing that on history of past planes that have had accidents, what?

Yes, we're basing that, David, on the customers that we are talking to. And we're doing a lot of research, if you will, with third parties as well as directly with our customers. And we're very attentive to what is the customer's perception of the brand through our trip Net Promoter Score as well as our brand Net Promoter Score as well as what we're hearing and seeing on social media. So I think we've got a really good handle on what our customers are thinking and feeling and what we need to be doing. And then on the Boeing aspect of your question, well, yes, we're not happy with this situation. Who would be? Boeing has already conceded that there are things that they need to address and, obviously, we totally agree with that. We have a great partnership. We're the -- I think without a doubt, the most successful airline in history. We've got an impeccable safety record. In terms of our partnership, what's important, obviously, is where we go from here. And I would fully expect that we'll continue to have a great partnership with the Boeing company. With respect to anything along the lines of business arrangements or our contract arrangements or whatever it might be, those are things that we'll take up with Boeing privately. And again, I would just restate the obvious, that this is not a good situation. And we'll all need to work together to work our way out of it. Boeing is a very fine company. They build fantastic airplanes. Mike has said this many times, when we launched the MAX, the MAX 8 we felt was the best narrow-body airplane in the world, ever. And there's every reason to believe that, that will continue to be the case once it returns to service with this software modification.

We'll now take our next question from Mary Schlangenstein with Bloomberg News.

I have a couple of quick questions for Mike. Mike, I wanted to ask you following up on the Leap engine question, are you finding a degrading of any of the parts like the fuel nozzle sooner than you would've expected on those planes due to the coking? And my second question is, what intrigued you enough about the A220 that you actually went to Airbus to take a look at the plane?

Well, starting on the fuel nozzle issue, Mary, I don't know if it's any sooner than we expected. Coking is not unusual. If there is a good thing about coking on fuel nozzles, they built over time, their trends are detectable and you can clearly create monitoring and inspection and repair or replace procedures to take care of all of that. As Boeing learns more about it, as they monitor their worldwide fleet, I'm certain that they will have design changes or design improvements that they will get into the production line and it will mitigate the inspections that we'll need to do on a go-forward basis.

And I think that's key, Mary. Mike used the word learning and it was CFM, not Boeing. But it's anything that is new, there will be learnings. And there will be things that were designed and intended to operate -- or perform a certain way that don't. So that was the point I was trying to make early on the analyst call. That's certainly taking place here.

Yes, Mary, I don't think that this Leap engine in its maturity, I don't think it’s all -- its maturity curve is all that different than what this CFM engine was, what the gear turbo fan is, what the Rolls-Royce engine on the 787 is. They all have a kind of a maturity curve. And this one feels, at least in my history at Southwest, we feel like we're right on that curve.

You make an excellent point. CFM 56 has been a phenomenal engine, and it had a rocky start. And whatever the CFM was before that on the Classic, same thing. It had kind of rocky start, and GE and CFM do a wonderful job. Do you want to talk about Airbus?

Yes. So, Mary, our fleet team was down in Europe and visiting, but that's not anything unusual. We have relationships with all the OEMs, most of the lessors around the world. And we're just always out there trying to discuss and evaluate economics and opportunities in airplanes. And I had an opportunity to go out to the Paris Air Show last year. And it was a great opportunity for me because I got to talk with Boeing and GE about the MAX. I got to learn a little bit about Airbus and NEO. Bombardier was out there with the C Series at that time. I talked to Embraer. I talked to Pratt & Whitney. And it was just a great way to go, just gather information about the marketplace out there. Every one of those people have great products and great airplanes and really, that was just nothing more than our fleet team trying to gain a little understanding of what's out there.

And, Mary, I did want to add to this, I want to be very clear, the timing is a bit unfortunate. And I dread speculation that it's intentional on our part to perhaps consider a change from our current direction with Boeing and the MAX, and that is not true. We didn't reveal that we took this trip. That was a leak by somebody. And so, again, I just wanted to point out there's -- we're not trying to send any message whatsoever. This trip was planned a long time ago, Mike. And so I'll just leave it at that. We have no plan to do anything other than grow our fleet with the MAX. Will that be the case into perpetuity? I'm not prepared to say that. But in any event, the timing is unfortunate.

So, Mike, did you like the A220?

Yes. But, Mary, I like all new toys, shiny new toys.

Well, it's a great airplane. It is a great airplane.

Yes. But, Mary, [Indiscernible] and I like them all. I like the A220. I like the Embraer product. It was just -- it's kind of like going to a new car show. You just like all the different products that you see out there.

We'll take our next question from Tracy Rucinski with Reuters.

So just to follow up a little bit on those comments, Gary. At what point would you consider making any additions or changes to your fleet? I know you have about 250 or more MAX on order through 2026. When would it be reasonable to consider adding any other models and what might those be?

Well, I'll be a little repetitive. We're not planning on adding a different aircraft fleet to -- aircraft type to our fleet, okay. So I'd just repeat that. We are not planning to do that. As a practical matter, we are -- we want to grow our airline and we will grow the airline over the next several years, Mike, at least with the Boeing MAX as a practical matter. So in order for us to add a different aircraft type, that would be work for us, and that's not work that would be completed in 12 months. I don't want to put a timeline on it because we're not working on it and I don't know how long it would take to do that. So hopefully, that at least gives you some parameters to think about. What we might be doing 10 years from now or 20, that's just not what we're talking about here today. But we have no intention of doing anything different in the near term whatsoever. And we're not preparing ourselves as if we have to do something different in the medium to long term either. That doesn't mean we won't change our minds. And there's -- as usual, there's all those caveats. So Mike really answered the question. We have the Airbus, the A220 is new, and we have an obligation to look at it and understand what it is. It is in our wheelhouse, so to speak. It's a narrow-body airplane that would be eligible for consideration to do the mission. That's what he's doing and nothing more.

We'll take our last question from Ghim-Lay Yeo from Flightglobal.

I just had a question regarding the 737 retirement plan. I know, Gary, you said that you would like to avoid having to unwind the retirement plan for 2019. And I was just wondering if Southwest intends on doing any short-term leases of 737 NGs or just going out to the used marketplace? What are you seeing in the market in terms of pricing and availability, especially with the release on 737 flight capacity currently? Thank you.

Well, it's a great question, and I think it's a short, easy answer. The answer is no, we are not contemplating going out into the used market. I think the only thing that would, Mike, make sense to me is if we wanted to add some NGs to the fleet is we would unwind some of the airplanes that we already own or lease. And again, we don't have a plan to do that. Tammy, I think you've got 18 retirements planned for 2019.

For 2019.

And Tammy mentioned that her plan at this point is to follow through with at least most of them. So there might be a couple of airplanes that we change our mind and decide to keep. But all of this is working under the assumption that the grounding -- that the airplane is ungrounded in the relatively near future and that way, we don't have to wrestle with that question. If it's grounded for an extended period of time, we'll have to develop a plan, quite frankly. And I don't think, Mike, that would include going out onto the used market. But to be honest with your question, we just -- we're not working on that scenario. And we just -- because we don't think it is a worthwhile effort, because we don't think it is a likely scenario. If that scenario materializes, I'm very confident that we can react to it and handle it, but it's nothing that we're working on.

Yes. We've been out of the used market for the last couple of years. We've got most of the NG airplanes out there that we like. It just doesn't make a lot of practical sense for us to go out and search the market for a used or leased NG when we already have NGs on the property that are already in our maintenance program, already in our maintenance profile. It'd just be easier for us to extend that than it would be to go out and get a new airplane. So we're not looking out in the market at all for NGs.

And the reason that we don't want to unwind the retirements, that would certainly be vastly easier compared to bringing another airplane on in the market, like Mike said. But he's already set a maintenance program for each one of these tail numbers and we would have to redo our maintenance plan to then add in maintenance under the assumption that we're keeping the aircraft longer. And that's the kind of work that I would -- I just don't want our tech ops department to have to add to their list. They have other things that I think are more important to work on. And we prefer to continue on with the retirement of those airplanes and bring on new airplanes to replace them.

Sure. And just, Gary, you mentioned that there has been no indication so far that there might be additional simulator training for the 737 MAX for when it becomes ungrounded. Is that just from what you gather from your discussions with Boeing and the FAA? Are you hearing anything from the union at all with regards to that?

Correct. That's from all parties we've talked to. And certainly, I put great reliance on our pilots, on our flight operations leadership, our pilot union. And they are very confident in what we do as an airline, how we train. We just made a $250 million investment in our flight training facility, which is absolutely state-of-the-art and a huge source of pride here. And they are the litmus test for me and they are confident in the airplane, in the training, in the return to service with still some questions to be answered, admittedly. But if they were not, then I would not be. But the fact of the matter is they're very comfortable with the plan as we currently understand it.

At this time, I would like to turn the call back over to Ms. Rutherford for any additional or closing remarks.

Thank you, Cody. If you all have any follow-up questions, as always, our communications team is standing by for you, our online newsroom at swamedia.com or by calling us at 214-792-4847. Thanks so much.

That concludes today's call. Thank you for joining.