西南航空 (LUV) 2018 Q1 法說會逐字稿

Welcome to the Southwest Airlines First Quarter 2018 Conference Call.

My name is Tom and I will be moderating today's call.

This call is being recorded and a replay will be available on the 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, Ryan.

Thank you, Tom.

And I want to welcome everyone to our first quarter earnings call.

Joining me today, we have Gary Kelly, Chairman of the Board and CEO; and Gary will kick us off with a few opening remarks.

We have Tammy Romo, our Executive Vice President and CFO who will provide an overview of our financial performance and outlook; Tom Nealon, our President, who'll cover our revenue trends and outlook; and Mike Van de Ven, our Chief Operating Officer, who'll provide an update regarding Flight 1380.

I have a few disclaimers before we get started.

Today's call will include forward-looking statements based on the company's current intent, expectations and projections.

A variety of factors could cause actual results to be materially different.

We will also include references to non-GAAP results, which exclude special items.

You can reference this morning's earnings release for further information regarding forward-looking statements and reconciliations of non-GAAP to GAAP results.

And I also want to note that the company adopted 3 new accounting standards effective January 1, 2018.

Certain prior year financial information has been recast to reflect the adoption of these new standards.

And for more information, please reference our Form 8-K furnished to the SEC on March 20.

You can find our earnings release and our SEC filings on the Investor Relations section of southwest.com.

And following our prepared remarks, we will open it up for questions.

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

Thank you, Ryan.

And good morning, everyone, and thanks for joining us for our first quarter earnings call.

And I'm pleased to have the opportunity to update our shareholders on a couple of important matters.

I want to start by sharing that our priority remains supporting and caring for all of those that were affected by Flight 1380 last week and, of course, in particular, the family and loved ones of Jennifer Riordan.

She was an extraordinary person, and of course, we all mourn her passing.

It was a dark day, but the compassion and concern and support since the event have been truly extraordinary, and it just touches your soul.

Our 5-person flight crew, led by Captain Tammie Jo Shults, performed magnificently.

Our ground operations team in Philadelphia threw themselves into the task of supporting all of the customers on that flight, which took many hours.

And on behalf of Southwest Airlines, I want to thank all of our competitors who came to our customers' aid that day.

There were many, but I especially want to thank American Airlines.

And, finally, I want to thank the selfless customers who heroically pitched in to help while the flight was being diverted to Philadelphia.

In the aftermath, we have many teams who have sprung in action for support of our customers, and our employees for that matter, as well as the NTSB.

We have an equal priority and that is ensuring that there are no blades with metal fatigue.

And our tech ops team, working with GE, CFM, Boeing and the FAA have truly led the industry through new inspection protocols, and for us, it dates back to 2016.

So last week, we accelerated the inspections.

They are going well.

I've been very pleased with the preliminary findings, which reveal no cracks or fatigue.

We're working with GE, CFM and the FAA very closely to ensure we're in full compliance of CFM's service bulletins as well as the FAA's emergency airworthiness directive that was issued last Friday.

And we continue to work with and support, of course, the NTSB in their investigation of this event.

We have multiple tasks underway and I want to assure you that the Southwest team is up to the task.

And the next priority I want to cover is our business.

Our first quarter results were very solid, despite it not being our best revenue performance, but it was still solid.

Strong margins, excellent cost performance, strong return on capital, strong free cash flow and shareholder returns makes for the second best earnings per share for our first quarter in our history.

The bookings softness that we mentioned in the press release since last week is predictable.

And excluding that effect and taking into account the Easter timing shift away from this year's second quarter, the sequential trends look pretty normal to me.

Regardless, our revenue plan this year has always been a second half story, and we've implemented better revenue management techniques already in first quarter to manage against overly aggressive discounting.

And we have several major enhancements to revenue management taking effect midyear relating to our new reservation system that you all are already aware of.

And of course, finally, we'll be optimizing our flight schedule roughly every 60 days as the second half unfolds.

And the bottom line of all this is demand has been strong.

It remains strong.

Tax reform should help that.

Our outlook is positive, and the prospect of record non-GAAP earnings per share is very much alive.

A couple of other notable items in the release.

We announced 4 Hawaii destinations: Honolulu, Kona, Maui and Lihue and our Hawaii work remains on track.

And we announced firming up 40 more MAX 8 options from the 2026, '27 time period, moving them to 10 per year starting in 2019.

This is, first and foremost, an extension of our fleet modernization strategy.

We have a very strong business case to replace older 737-700 aircraft, given the superior economics of the MAX 8. The tax reform benefit for Southwest makes this capital investment more feasible.

And, of course, I want to thank Boeing for their support in making that happen.

With that, I'd like to turn the call over to Tammy Romo to elaborate further on our first quarter results.

Thank you, Gary, and thank you all for being on our call today.

I also want to express my gratitude for employees on how they pulled together to take care of our customers and each other during incidents like last week's accident.

That's what families do in difficult times, and I'm very proud to work alongside all of our compassionate and caring people.

This morning, we reported a strong first quarter performance with net income excluding special items of $438 million, up 22% year-over-year.

And our earnings per share was $0.75, up an exceptional 29% year-over-year and $0.01 above consensus.

Our operating margin was a solid 11.8%, in line with first quarter last year.

And our net margin was 8.9%, an improvement from first quarter 2017 7.4% as we begin to realize significant savings from the lower corporate tax rate.

Our pretax ROIC was 27.1%., or 20.8% on an after-tax basis for the 12 months ended March 31.

Our first quarter revenue performance was right in line with our previous guidance.

Our cost performance was better than expected and that's primarily due to some spend shifting into the second quarter with a solid cost outlook for the year.

While we're off our plan here in the first half of the year, the benefits from our new reservation system are ramping up in the second quarter, with more significant benefits coming in the second half.

We also expect the pressure from our suboptimal schedule to recede in third quarter as we overcome our fleet deficit from our Classic retirement last fall.

Based on everything we note so far, we expect our second quarter year-over-year unit revenue performance to be a bottom for the year.

And we will keep after our goal to have positive unit revenues in the quarters ahead.

Our balance sheet remains very strong, and we had another quarter of very strong operating cash flow, allowing for $648 million of shareholder returns during the first quarter.

And as we continue to modernize our fleet, we still have manageable capital spending this year of $2 billion to $2.1 billion.

With strong first quarter margins under our belt, along with benefits coming online from our new reservation system, a great fuel hedge that provides meaningful protection in a rising fuel environment and the benefits from tax reform, we are well positioned to achieve our goal to expand our 2018 net margin year-over-year excluding special items.

And with that brief overview, I'll turn it over to Tom to walk you through our revenue trends and outlook.

Okay.

Thank you, Tammy.

Good morning, everyone.

So let me start off with our Q1 performance and I'll jump right into Q2.

So as you know, we had record operating revenues of $4.9 billion in the first quarter, which was driven by record passenger revenues of $4.6 billion.

We also had very strong performance in other revenues, which were up 19% year-over-year.

And this was a combination of strength in our EarlyBird and upgraded boarding products, both of which were up double digits for the quarter as well as the continued strength and growth in our Rapid Rewards program and business partner revenues, which are both performing very well.

And we also had, as you know, a record load factor of 81.5% for the first quarter.

So having said all that, our revenues grew right in line with our ASM growth of 1.8%.

So as we've shared our 8-K last month, there were several factors that caused us to update our RASM guidance for the quarter and I want to hit on those real quickly.

The first factor was our March RASM trends, which were off in the first 20 days of March.

And this was largely the result of a spring break calendar shift, which reduced travel demand more than we anticipated.

This resulted in a little less than 1 point of negative impact to RASM.

Having said that though, we finished March very strong with very strong RASM performance and strong load factors.

In fact during the last 11 days of March, we saw yields grow at a mid-single-digit range year-over-year.

And in particular, as Tammy said, the Easter calendar shift from April to March gave us a benefit of roughly $40 million.

The second factor we called out in our 8-K was our suboptimal flight schedule, and I think you all understand this.

But as you know, we are in the middle of a fleet transition, which means that we had fewer planes to fly the schedule, which then means that we are extending the day and doing more flying early in the morning and later into the night, and this generally results in lower yields.

But just to be clear, these flights are still profitable, and they contribute to the overall network profitability, but there was, in fact, a negative RASM impact for the quarter.

And, as Tammy said, you'll begin to see this recede in the third quarter as new aircraft come into service.

And the final factor was a competitive fare environment.

And on this one, I want to speak specifically to California, which is obviously a very competitive market.

And we've been competing very aggressively and we will continue to do that.

You all know that we have a very strong market position in California.

In fact, we have a 63% intra-Cal market share and 26% market share for all commercial air travel, which includes international in and out of California.

We've added a fair amount of capacity in California.

And even with our additional flights, we've been able to increase our load factors, and we're gaining new, first-time Southwest customers.

It is, in fact, impacting our RASM.

But we have low costs, low fares, high load factors and strong operating margins.

We are generating strong profits and we're gaining new customers, and that's not a bad formula.

We are very well prepared to compete and we will succeed.

The combined RASM impact of the suboptimal schedule and the fare environment was roughly 1 point of RASM for the quarter.

So that's Q1.

Now let's talk about Q2.

At the macro level, we're seeing strong demand, as Gary suggested, pretty much throughout the quarter, and it tends to be across all regions.

And having said that, I think that we had several unique factors that were impacting our second quarter RASM, and it gets us to have guided it down 1% to 3%.

In the first, as you would expect is the impact of Flight 1380.

We are forecasting lost revenue to be in the range of 1% to 2% in terms of RASM for the quarter.

And just for context in the first week since the accident, we've seen somewhere between 0.5 point and 1 point of RASM decline so far.

And that was skewed towards close-in bookings that will be very tough for us to recover, but we're also seeing an impact on travel for May and beyond.

So the full revenue impact isn't totally clear, but we do expect there would be a continued impact for some period of time.

Now keep in mind, last Tuesday, we turned off all of our marketing immediately following the accident.

That included all television, all e-mails, all paid search, all paid display, all paid social, everything, and that's pretty significant.

Those marketing vehicles drive a lot of traffic to southwest.com.

And we only began to slowly bring our marketing back up this past weekend.

But as we went back into the market, we did begin to see traffic to southwest.com ramp back up, but it is not yet back normal levels.

And I think that with an event like this, this is pretty much what I'd expect to see.

Traffic will rebound, but it's not there yet.

The second factor I wanted to hit on is the continued impact of the shoulder flying that I covered in Q1 update, and it's really the same thing.

We will have this with us throughout the second quarter, but we will begin to see that diminish in the third quarter as we bring new planes into service.

And the third factor is the ongoing competitive environment in California.

As I said, we are generating strong profits, and we are well prepared to compete.

And we will succeed financially and with our Southwest customers.

Now on the other side of the equation, we're also still on track to see $40 million to $50 million of benefit in the second quarter from our new res system, as we discussed in the past.

And we continue to feel very confident we'll capture $200 million annual benefit we discussed with you in the past.

So while we are clearly off of our revenue plan for the first half of 2018, the second quarter is the bottom in terms of our year-over-year RASM trends.

Things will begin to kick in and improve in the second half of the year.

We'll begin to get our fleet back in balance with our new aircraft deliveries.

We'll begin to reoptimize the schedule with the new aircraft.

And we'll see the increasing benefit from the new reservation system.

And as you expect from Southwest Airlines, we are very focused on solid earnings, solid margins and strong return in the second quarter.

So we are very optimistic, and with that, Tammy, I'm going to turn it back to you.

Thank you, Tom.

Turning to fuel, our first quarter 2018 economic fuel price per gallon of $2.09 included a $0.05 hedging gain from settled contracts and $0.07 hedging premium costs.

There was a lot of volatility during the first quarter, but actual market prices ended up being down only slightly from original expectations in January.

Looking ahead to second quarter, based on market prices and our hedging portfolio as of April 20, we expect our economic fuel price per gallon to be approximately $2.20, including an estimated $0.07 hedging gain and a $0.06 hedging premium cost.

And for full year 2018, we currently expect our economic fuel price per gallon to be in the $2.15 to $2.20 range.

And that includes an estimated $0.06 hedging gain and a $0.06 hedging premium cost.

Our 2018 fuel hedge position produce -- are producing modest gains at current Brent crude market prices, with more material gains of that kick in at $80 per barrel and above.

Our hedge portfolio for 2018 and beyond provides us protection against catastrophic rises in energy prices without floor risk exposure.

And it enables us to make prudent adjustments to our business in a rising fuel price environment in order to maintain our financial goals and reduce volatility in our earnings.

We are continuing to realize fuel efficiency benefits from our ongoing fleet modernization.

Our first quarter ASMs per gallon improved by 1.3% year-over-year.

And for 2018, we continue to expect a 2% to 3% improvement year-over-year in ASMs per gallon.

Moving to our nonfuel costs.

Our first quarter nonfuel operating expenses, excluding special items, increased 1.4% and decreased slightly on a unit basis year-over-year.

Our unit costs came in slightly better than the low end of our latest guidance, primarily due to cost shifting to future quarters such as advertising.

Year-over-year increases in salary, wages and benefits, maintenance and airport cost were offset by lower depreciation in aircraft rentals due to Classic retirement benefits.

For the second quarter, we expect our CASM, excluding fuel and profit sharing, to increase in the 1% to 2% range year-over-year.

And the primary drivers there include: labor costs, including our agreement with AMFA and higher costs related to an extended operating day driven by our Classics retirement, and our current fleet deficit; and as I mentioned earlier, costs shifting from first quarter and estimated costs related -- and other more minor costs.

For our full year 2018, we now expect our CASM, excluding fuel and profit sharing, to be comparable year-over-year.

And again, this includes our agreement with AMFA.

I am pleased with our first quarter cost performance, and we remain focused, as always, on controlling our costs and finding ways to be more productive and efficient.

And now before I cover our financial position, capital deployment and growth outlook, I'd like to turn it over to Mike to provide an update on Flight 1380.

Okay.

Well thank you, Tammy.

So here's what we know from the NTSB so far.

We had a failure of #1 engine.

And there was an engine fan blade partially missing, and that's blade 13 of 24.

There was a remnant of the blade that was still attached to the fan hub, and when it was tested, it was found to be fatigued.

And the NTSB has suggested that the fatigue fracture was the initiating event that caused fan blade 13 to break.

Next, we know that the engine inlet cowling suffered significant damage and loss.

And pieces of that cowling may be responsible for the damage to the fuselage, the wing and the stabilizer.

And the loss of a single blade inside the engine just shouldn't have caused such dramatic impact.

So as Gary mentioned, we're completely cooperating with the NTSB and they're doing a very thorough investigation.

We have been in constant contact with all the parties involved throughout the investigation.

Just some color on our of fan blades.

We've got roughly 35,500 fan blades that support our fleet.

We had inspected about 17,000 of those prior to the accident last week.

And we were on a path to complete the inspections on the remaining 18,500 by year-end.

And that would have met the recommended service bulletin time lines.

Since the accident, we accelerated those remaining inspections with the goal to have them complete in 30 days.

And we've completed inspections on about 8,500 of them at this point.

And, as Gary mentioned, we have had no findings of subsurface crack.

So this is really -- it's an all-hands-on-deck activity to work through the inspections, the investigation and to do a deep dive to understand what happened and why.

And we we're going to do everything we can to ensure it doesn't happen again.

It has truly been a 24/7 around-the-clock effort, and I sincerely want to thank everyone involved for their thorough and their diligent and their committed work.

So with that, Tammy, I'll turn it back to you.

Thanks, Mike.

I'll turn now to the balance sheet and cash flow and take you through that quickly here.

Our liquidity is strong, and we ended the quarter with cash and short-term investments of approximately $3.2 billion.

Operating cash flow was approximately $1 billion in first quarter and free cash flow was $708 million, allowing us to return $648 million to our shareholders through share repurchases and dividends.

Our leverage is approximately 30%, in line with our leverage target, which is in the low- to mid-30% range.

Based on our tweaks to our Boeing order book that we've already taken you through, our 2018 CapEx is expected to be in the $2 billion to $2.1 billion range.

Included in this total, we expect 2018 aircraft CapEx of approximately $1.2 billion and nonaircraft CapEx in the $800 million to $900 million range.

We continue to effectively balance and manage our overall capital deployment, and we remain focused on preserving our strong balance sheet and healthy cash flows.

We currently have 850 million remaining of our 2 billion share repurchase authorization, and we will continue to evaluate our investments in our company, our people and our shareholders, including the mix of share repurchases and dividends with an overarching goal to drive long-term value for our shareholders.

We are benefiting from a lower corporate tax rate.

And we continue to expect our 2018 effective tax rate to be in the 23% to 23.5% range.

Moving to a quick update on fleet.

We had 11 deliveries during first quarter and we ended the quarter with 717 aircraft.

As we communicated, we're in a fleet deficit compared to midyear 2017 when we had around 735 aircraft before the retirement of the bulk of our -300 Classic fleet in third quarter 2017.

And our fleet deficit will recede when we get into third quarter 2018.

We will have significant 737-700 retirements over the next 10 to 15 years.

And this order book refresh that we've covered with you in the earnings release and Gary also covered with you, along with our remaining order book and options, allows us to manage through our retirement and growth needs in a measured way.

Aircraft CapEx remains very manageable at approximately $1.2 billion to $1.3 billion per year on average for the next 5 years.

And we'll end this year with 752 aircraft, and our capacity outlook for the full year has not changed.

And we continue to expect an increase in the low 5% range year-over-year.

So in closing, our financial performance is off to a solid start for the year.

And we're off to a good start to expand our net margin for 2018, excluding special items.

And we are already realizing meaningful benefits of tax reform, and I am pleased that we can continue putting it to work by investing in our business, rewarding our hard-working people, and giving back to our shareholders and keeping our costs and fares low for our customers.

So with that overview, we are ready to take questions.

(Operator Instructions) And we'll take our first question from Hunter Keay with Wolfe Research.

Tammy, just quick point of clarification.

You're talking about net margin expansion now.

Last quarter we spoke, you said EBIT margin expansion.

Is that -- is there a change in the plan?

Or am I just misinterpreting the comment?

Hunter, no, you did not misinterpret the comment.

And as we've acknowledged here, for the first half of the year, we are off plan.

So obviously in terms of margins, it will depend on how quickly we see our revenue trends recover here.

And on the -- the cost side is we feel pretty solid about that.

And if you -- in terms of fuel, we're -- we've got a great hedge in place so that should be helpful on the fuel side.

Certainly when you take into the account tax reform benefit from the lower tax rate, we are -- we feel good about our net margin goal.

But we're not -- I guess I feel good about our progress toward that goal here in the first quarter.

Our net margin here -- we're just off to a great start here year-over-year.

And we'll just have to see how it plays out on the cost of revenue side.

But I feel really good about the revenue benefits that we have coming on here in the second half.

I think we've covered those with you pretty extensively with respect to the reservation system.

And so I believe no change in our goal.

We're just going to keep pounding away on the unit revenue side.

So I think that's really the question mark for us here as we think about our outlook for the second quarter.

But again, we feel really good about all of the help that we have coming online here over the second half.

Okay.

And then the incremental 8 -- MAX 8 that are going to be coming in 2019 relative to the plan 3 months ago.

Are those going to be offset by incremental -700 retirements?

Yes.

The order that we covered with you, yes, those are for our fleet modernization efforts.

So yes, that would be the intent.

Yes.

I would say, Hunter, that -- I'm just trying to recap my own little back of the envelope math here.

But there are some airplanes that are moving around, absent this Boeing order, from 2019 into 2018.

So I think we've covered that with you.

And the number is 10.

So there are 10 additional firm deliveries in '19, '20, '21, '22.

And casting this as part of our fleet modernization absolutely means that we are planning an equivalent number of -700 retirements for these additional 40 firm orders.

Now we've got flexibility in the fleet.

We can choose not to do that, but that is what we are sharing with you today, is that we've exercised 40.

And, however they fall, you would -- what we're telling you today is that we would offset those with retirements.

We'll take our next question from Jamie Baker with JPMorgan.

Gary, I think it's a testament to Southwest's safety culture and your long-term track record that you haven't had to engage in a book away analysis in the past.

But since this isn't the type of analysis that you had to do until this past week, could you -- would you be willing to share just some of the more specific modeling assumptions that you embraced in identifying the lingering weakness in May?

Is there some industry precedent that you're following?

All I'm trying to do is get at how you conducted the actual analysis.

Since, thankfully, this is not an area of analytical familiarity for Southwest and I mean that obviously is a compliment.

Well.

Jamie, this is Tom.

If you don't mind, I'm going to try and take that and do the best I can for you.

At this point, based on this morning, we're probably a little closer to 1 point versus 0.5 point.

So you know we're staying right on top of this thing.

But it's not as though we haven't had other events that would draw our traffic down, whether it was the technology outage or whether it was an event we had back in 2016.

So we do have some history with.

When we have a public event and people are aware, we see a dip in traffic, and we generally see what it takes to bring it back up.

So that's kind of the basis for how we're thinking about this.

But as I said, that's kind of baseline of how -- that's our analytic baseline, if you will.

I think the other way we're trying to respond to this is we really do want to get our marketing back online with our paid search.

Keep in mind, we're not running any TV or any social right now.

The reason we're not doing that is because our TV and our social has a lot of personality.

It has a lot of fun and it has -- and it's just -- we just don't think it's appropriate yet to bring that back up online.

We're working really close with Linda Rutherford, her comms team, her social team, just listening for the sentiment when does it feel appropriate for us to go back into the market, right?

So just in terms of your direct question, we are going back and referencing prior events and what we saw happen with our traffic and that's probably the best we have to go with at this point.

But I do think 1 to 2 is probably reasonable based on what we're seeing thus far.

Yes, and I'll just add a couple other thoughts, just to be clear.

We are continuing to see some weakness in our bookings, as Tom said.

And as you expect, and as we stated, we're currently running below our preaccident run rate.

And this is certainly understandable for all the reasons Tom's taken you through with respect to our marketing.

And I just point out that that's very meaningful to our direct distribution model.

So as we return back to our normal marketing activity, we expect our trends to rebound.

But admittedly, it is difficult to estimate the impact with precision.

But we know we've already lost about 1 point, as we pointed out, in year-over-year RASM for the second quarter.

So based on that lost revenue, of course, it'd be tough to recover a loss in our close-in bookings, but we are hopeful that once marketing comes back online, that we'll see those trends rebound.

Understood.

And as a quick follow-up.

In the press release, when you discussed the slot transaction, you mentioned that the new slots are going to "complement our network." And I don't want to read too much into that, but you could have said "grow our network." Does complement imply that you're only going to fly to existing Southwest cities with the new slots?

Or is that just too cute of an interpretation?

Oh, I think it -- I think all we were basically trying to say is that we have a strong network in those 2 cities that we're able to complement from LaGuardia and for Reagan.

And the main point was that we'll simply use our existing fleet, our existing capacity.

And those new routes will be a part of the growth that you're already familiar with.

So -- but both of those are still developing markets for Southwest and we continue to tinker with frequencies and destinations.

So I think, yes, I wouldn't necessarily read anything into the word complement.

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

Gary, do you still expect to be RASM positive this year?

And if not, are you prepared to maybe adjust some schedules in off-peak flying in the back third -- back 4 months of the year, in an effort to better to match capacity with market demand?

Well, I know Tammy and Tom will have a view as to your question as well.

I think that what is obvious is that we are off plan, now we've had an event.

So I think in terms of my confidence level in telling you that we're going to -- I am x-percent confident that we will hit our goal.

I think we all just have to admit that we're off our trend, and we're going to have to regain our momentum here, which I'm very confident we will.

I don't know exactly when, and I don't know exactly how much, and I don't know, because of that, what the end result will be.

Now I would say personally -- and again, don't read too much into this, but it's just too close to call.

So said a different way, it is not obvious at all that we cannot make it.

But likewise, it's not obvious that we can either.

So the goal will continue to be positive unit revenue performance, and don't count us out is all I would say.

The only other thing I wanted to add on to that is the margins are important.

And Hunter asked a question to Tammy earlier and I was just going to add on to that.

It's basically the same answer there that I think it's -- we're pretty confident of the goal of having net margin growth for the year.

But it's just a little too close to call that for the same reasons on the RASM side.

So I think a lot will depend on what happens on that answer to fuel prices, #1, which are up since the year started.

And then secondly, obviously, what happens on revenue.

Tom, will you...

Jack, this is Tom.

I just -- first of all, I concur with what Gary has said.

I also think though that we always look at how flights are performing.

And we'll probably take a more stringent look at how the shoulder flying is performing in terms of profitability.

And if it's not profitable, we will find a way to pull that back and redeploy the capacity elsewhere.

But the flying that we are doing on our shoulder right now is in fact profitable.

It's accretive.

It may be RASM-dilutive, but it's still very helpful to us.

So I don't think it's -- you'd see us turning profit away just to improve a metric, right?

Understanding your objective though.

So that's kind of my take on that.

Yes.

And I think what Tom is implying is that clearly, we would prefer to move those shoulder flights back into the peak part of the day and that's what we'll be able to do more and more as airplanes come online.

And I agree with Tom.

I think that is the best technique we've got to address your question here in the second half of the year.

Okay, great.

That's very helpful color.

And then for my follow-up, just a question on sort of new market development.

Could you remind us again, sort of historically, what's the time frame sort of to get a new market, once it -- once you start flying there, sort of system level profitability or get it to where it is accretive from the time you enter.

I ask this in context of sort of kicking off the Hawaii flying either late this year or early next year, and just -- how do you think that flying to Hawaii will ramp relative to sort of normal market development for you guys?

Well those are 2 different questions.

Let me take the first one.

The first one is how long does it typically take us for markets to turn profitable.

And when we connect markets where we serve and the customers know us, it's typically a 3-month turn from initiation to profitability.

I'm sorry, 3 -- I misspoke, 3-year.

Is that all right?

3 years.

Yes, yes, 3 years.

So that's what we're seeing.

In terms of Hawaii, I think that we -- we're going to see a really nice ramp-up very quickly, because the customers all know us in the West Coast.

We have the largest customer base of airline on the West Coast.

I think you're going to see it ramp up very, very quickly and I think we're going to have a lead on pricing.

I think that we're generating a lot of traffic very, very quickly.

Just to add on to what Tom said, the -- I agree with the 3 years.

Normally what we see for probably more of our international markets is 3 years.

We'll see where Hawaii falls, but it really depends on the market.

You -- when you think about a market like Dallas Love Field we saw that ramp-up very quickly.

That was probably about 1 year.

And Hawaii, I think we're hoping that we'll ramp up very quickly here, given our significant presence in the West Coast.

Yes, I agree.

And -- Jack, you didn't ask this exactly, but our growth is very modest here in the first quarter year-over-year.

And the percentage of markets that we call "development" is I think, Tammy, 3% or less.

So it's a very small component of the current system, #1.

And so #2, that sort of sets us up well to undertake an expansion that we plan later on in the year, meaning that we don't have a lot of markets under development.

And the other little factoid I was going to offer up is that the growth in our newest segment i.e.

international year-over-year is very modest.

I want to say that's also sort of low to mid-single digits.

So the system is maturing.

We've got some revenue-enhancing techniques that are queued up and -- especially for the second half.

And I think will be in a very good position to undertake the Hawaii launch.

We'll take our next question from Rajeev Lalwani with Morgan Stanley.

Tom, a question to you -- for you as it relates to the benefits around the reservation system.

Can you just talk about the progression through the rest of the year, and maybe specifically provide what are those features that you're going to turn on, so that we can get some comfort there?

And then as it relates to the impact around scheduling, what's the hit to 2Q RASM?

And apologies if you provided that already.

And then what do you see the benefit in 3Q and 4Q being?

Or any kind of color that you can provide to help us triangulate how to get there.

Yes, sure.

I'm glad to do that.

So the one res benefit, the primary one that we talked to guys you about is really this notion of O&D bid pricing capability or functionality.

And I think you understand that.

But what that does is it gives us the opportunity to maximize revenue by really optimizing the mix of nonstop and connecting passengers on the network.

So that's what we're trying to do there.

The old method just by way of example, we've focused more on optimizing the revenue at the flight level.

So you'd optimize the flight, but you're not optimizing at the itinerary level.

So that's what we're trying to do.

And that's where the value comes from of the primarily $200 million a year.

And we deployed this kind of late Q1 or mid-Q1.

And we're starting to see -- and so the team is kind of tuning it.

They're getting it going.

And we're seeing really nice benefits.

We feel really good about that and we have a lot of confidence in what we have already signed up for, for the first half and for the full year.

So we feel really good about that.

And Rajeev, tell me.

I really couldn't hear your second question was where does the margin enhancement come from in the second half?

Is that what you are asking?

Yes -- it's on the scheduling impact to 2Q RASM.

And then what were the benefit start to be in the back half of the year?

Yes.

Rajeev, it's 1 point of benefit that we're expecting for 2Q in terms of our year-over-year RASM.

I'm sorry, (inaudible)

And 3Q, does that accelerate towards the end of the year?

That's...

There's a 1-point penalty in the second quarter

There's a 1-point penalty in the second quarter.

I thought I said penalty, so I apologize for that.

Okay.

And then what is the benefit in 3Q and 4Q or in the back half of the year versus that 1-point penalty in 2Q?

In the second half of the year, we -- and again for the second half, for the reservation benefit, just want to make sure on the shoulder flying.

So that's going to -- yes, we just expect that to recede.

We will have overlapped our fleet just by the time we get to say October.

And so we should see that continue to recede as we go through the year.

Okay.

And if I could ask Mike a quick question in terms of -- it's associated with the accident.

Have all your maintenance procedures been reviewed, et cetera, and you're all in good shape there, if that's appropriate to ask.

You're asking if -- are all of our maintenance procedures in line with the service bulletin?

Exactly.

Yes, so we went back.

And we've been participating with GE and CFM since the -- since our first incident back in August of 2016.

And so we have been lockstep with them on the service bulletins and the requirements through that.

And at this point in time, it doesn't look like we have a compliance concern.

I would just add that the procedures that we're using are the same ones that were developed with CFM back in 2016.

Meaning, that we do the ultrasonic inspection by removing the blade.

And then our service provider, which is GE, when they do the overhaul, they do a more extensive Eddy-current inspection at that point.

So the procedures themselves are unchanged.

What is different now with the most recent service bulletin and airworthiness directive is the frequency of doing those inspections.

And as I reported earlier, and Mike confirmed with his report, with the inspections that we have stepped up since last week, we've had no findings at this point, which is obviously what we would expect and obviously a positive.

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

Just if I might follow-up on the California strategy here.

It seems to me, and correct me if I'm wrong, that part of this kind of strategy of defending your position has been to kind of pull forward the opportunities maybe that you were kind of planning for California and kind of strengthening your offering to the passengers there.

So from an impact to unit revenue, should I think of that as more of kind of a near-term thing?

And is it kind of fair to assume that as that -- as you -- as those markets develop, that they should start to normalize?

Or is this kind of a multiyear kind of fast-tracking growth?

Well, I think it's the former.

I think what you've got here is very typical.

Whenever there is an expansion under way in a market, whether it's by us or by our competitors, there's going to be some impact on unit revenue, and then it matures over time.

And what you should expect is, all else being equal, to be fair, that you would see improved unit revenue performance.

And things are dynamic.

So we'll tune, our competitors will tune, but absolutely, this is -- the way we're looking at it, these are opportunities that there's an opportunity cost, if you will.

So we know that we have opportunities to enhance our route system in the West for our customers.

And at some point in time, we would attend to that.

So perhaps your interpretation that perhaps we're accelerating a bit, I don't quarrel with that.

But I would also point out that while Tom was highlighting California, it's really as an example.

The Southwest performance is not just California.

We've got competitive situations all over the country.

And considering how competitive it is, and I think Tom said this, it's performing very well.

But we -- we're not going to add this much capacity and have competitors adding this much capacity and not see some kind of a unit revenue impact.

I think the only time in my memory that, that has ever happened was the Love Field expansion.

And I think everybody knows how unique that was.

But it was almost instantly -- well it was instantly profitable and with nary an impact on unit revenues.

That was remarkable.

But that is clearly the exception.

That's helpful.

And if I may just on the clarification on the 2018 capacity growth.

How much of that is -- can -- is skewed around on the timing of kind of the launch of Hawaii?

Was Hawaii always kind of expected to be at the very end of the year, and therefore, not a meaningful driver when it comes to 2018 capacity?

Or depending on when Hawaii actually gets launched, could that capacity move around in the second half?

No, I think that's right.

I think that our best opportunity that we've been planning towards is -- will be pretty deep into the year.

So I think that you nailed it.

Your thought is spot on.

So that it wouldn't have an impact?

Well not -- it's not going to be a massive impact.

It just depends on when we get our -- first of all, you have to understand, we're still going through our certification process with the FAA on ETOPS.

We've been saying -- or we just announced those cities today, but we've been saying, we sure want to be able to sell this year.

And now we're saying we sure want to be able to fly this year.

It just really depends upon the ETOPS certification.

And I think it also -- I think what you'll see is part of the ETOPS certification, as you can't start with a full schedule, you have to kind of grow your way into it and demonstrate proficiency with the FAA and that kind of thing.

So I think the back half of the year, late in the year, I would love for us to be flying Hawaii, but I don't think it's going to have a significant impact on our capacity.

So in other words, right now, we reserved airplanes for these flights.

We haven't told you exactly what we're planning, because we don't -- we can't commit to an exact date yet.

And then I think what -- if we don't fly Hawaii later on this year, then the question becomes what do we do with those airplanes.

And I think that answer will be dependent upon when we know that and what our options are at that time.

So I think Tom was trying to give you the most honest answer possible.

It could have some impact on our capacity.

But in theory, it wouldn't.

If we're not flying in Hawaii with those airplanes, we'll fly somewhere else where we have an opportunity.

It just depends on when we know that and how productive we think that move off of Hawaii would be.

But right now, we're obviously hoping that those planes are going to Hawaii.

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

I guess just 2 questions here.

Gary, it looks like JetBlue is going to scale back Long Beach by about 1/3 and so obviously free up slots.

I know you're now in that market.

Is that a market that you feel like you're -- it's sufficiently served?

Or would you be interested in growing your Long Beach presence?

I'm sure Tom and I agree that we have been hobbled by not being able to have more access to Long Beach.

We have a very modest operation there, so that's welcome news.

Okay, okay.

And then just my second question, and this is, Gary or Tom.

Just the engines that -- through this inspection process.

As I recall, I believe, and I could be wrong in this, that you did have maybe power by the hour agreements.

And I'm just wondering does that -- if you do, does that cover some of the cost, mitigate some of the cost impact of these extensive engine -- or blade checks?

Mike, you want to speak to that?

Yes.

Sure, yes.

We have -- our engines are on 2 different types of agreements.

We have -- some of them are on this kind of power by the hour, as you say.

And then others are on time and material.

A particular airplane with our 700s are on time and material -- excuse me, on power by the hour.

And so yes, that does help us mitigate the cost of those, because the risk transfer is back to the GE, our service provider there.

Mike, do you have an early sense on what that potential cost could be in the quarter for Southwest, even the fact that you do have some protection there?

I mean are we talking is it millions of dollars?

Is it hundreds of thousands of dollars?

Like is -- or is it just too early?

It is a little early, but I would expect it to be in the millions of dollars, just to give you an idea directionally in that in terms of what would actually hit our CASMx line.

There's some capital costs involved with that.

But again, we've given you our best guess as to what the cost implications would be within the guidance that we've provided.

And that would be mostly outside of actually engine repair cost.

That would be overtime, those kinds of things, the labor costs associated with doing the inspections, some of the delays will be [lighting] costs, those kinds of things.

And we'll take our next question from Duane Pfennigwerth with Evercore ISI.

Gary, on capital allocation, you've got capital to allocate in lots of different ways.

I'm just wondering how you think about M&A versus other alternatives.

You have some experience there.

Are there cyclical considerations or other considerations?

How do you think about that in the current environment?

Well, Duane, I think it's very fair to say that our primary focus is investing in Southwest Airlines.

This year in particular, we've got a lot of our major strategic initiatives behind us.

There's always work to do.

But in particular here at 2018 and my hope is '19 and '20, we're really focused on the quality and the cost effectiveness of our operation, the hospitality of our customer service, those very basic things.

We want to continue to grow the airline.

We've got wonderful opportunities to grow.

And the tax reform obviously is a nice little boost to our sources of financing.

So I -- there's no imperative that we need to be hunting for an acquisition.

I think that, that's different than where we were in the late 2000s, 2009, 2010.

And clearly, this is our priority, is just to grow organically.

Having said that, we've always got to have our eyes open and be thinking about how we can improve shareholder value.

And if there's a good opportunity in our view, it's something that we'll take a look at.

We're always thinking about that.

But admittedly, that is not a focus and clearly not a focus right now.

We'll take our next question from Darryl Genovesi with UBS.

Of the $200 million from the new revenue management and reservation system that you said is going to come through this year, have you said how much of that is embedded in your second quarter guidance?

Yes, Tom.

Yes, we did.

We said between $40 million and $50 million...

$40 million and $50 million.

Was attributed to the second quarter.

And targeted, you'll get to $200 million for the run rate in the year.

And then if I could just follow up on Rajeev's question.

If I think about your fleet this year on a seat basis, it looks like you're going to average about 115,000 seats in the fleet, which is 2.5% to 3% higher than last year.

If I consider that within the context of your low 5% ASM growth guidance, it implies something like 200 basis points of incremental utilization this year versus last.

And that number is -- looks to me to be pretty steady in quarters 1 through 3, and then stepping up in the fourth quarter, based on the acceleration of your capacity growth that's implied by your guidance in the fourth quarter.

And I guess when I try to think about the RASM headwind that you called out from suboptimal time of day flying, I guess you think that that's something that should be more or less correlated with the year-over-year increase in your utilization rate.

So can you just sort of reconcile the dynamic with utilization versus what you're saying on the RASM hit from off-peak flying sort of abating as we make our way through the year?

Well, I'll go first here.

I think the answer is no.

I'm not necessarily following all the puts and takes that you're describing.

And my recollection, without having studied that this morning, is that our utilization for this year is "very normal." And we pushed the fleet pretty hard in the fourth quarter last year.

So my recollection is that the absolute utilization of block hours and all those kind of basic things that we use to look at is very normal in the second half of the year, and especially the fourth quarter.

So why don't you let our IR folks take that one off-line, and we can be sure that we're following your question.

The gauge is increasing because of the classic -- all these things, I know you know, that's increasing.

The stage length right now, as I recall, is down a bit.

It's down.

So the trips are doing what the trips are doing and it -- so anyway, I just don't have all that in front of me.

And I think it'd be easier just to take that off-line, if that is okay.

And we'll go next to Joseph DeNardi with Stifel.

Gary, it feels like the last couple of quarters have been pretty un-Southwest-like.

The revenue side hasn't met expectations, there's a little bit of CASM creep this year.

Can you just talk about -- obviously, some of this is outside of your control, but a lot of it is in your control, I think.

Can you just talk about why you think this has happened?

And what gives you confidence that you can get back on track in the near future?

Well, I think it's a fair question.

I don't know that I would agree that it is so un-Southwest-like.

I think sometimes we do get spoiled by how good our performance is.

It's just been -- I think, in retrospect, it's been a challenge to go through this fleet transition.

And it's also been a challenge in the same year to roll out a brand-new reservation system.

So I think it's more timing than it is absolute execution.

I think the third thing that I would put in there that -- and these are things, again, that we're focused on.

So the third thing that I would say that we're focused on is just the competitive fare environment.

And we've already made some enhancements to our revenue management techniques in the first quarter, I think to better manage in that kind of environment.

And so those are the 3. I think the route system itself is very strong.

We're continuing to optimize it as time goes by, understanding that right now, the length of the airplane day is too long.

I just mean which cities are we in flying to, which other destinations, that process has been really sound and especially over the last several years.

So all of that looks really good to me.

The international expansion looks really solid, and those markets are showing very dramatic improvement as they are quote, "developing and reaching maturity." So I think we just have some fairly significant things that we're managing through, and I -- it's not an apology.

I kind of go back to my opening comments.

When we know that it wasn't our best revenue performance, we still had a really good quarter and we're very well positioned to finish this year very strong.

But I understand your point.

We get it here.

And any time we have a plan and we miss it, we aren't happy with ourselves.

So I can assure you that we're not saying that this is satisfactory.

In that sense, we're never satisfied.

But on the whole, I think it's still a very solid performance.

Okay.

That's very helpful.

And some of my other questions got asked, so I'll go with this one.

The disclosures that you guys provide around the Chase agreement continue to be kind of the worst in the industry.

So I'm just wondering if you could address that.

And then secondly, can you appreciate that the market and the investment community may like to know more about a business where you essentially take a cut of every dollar spent on the Southwest Chase credit card?

Sure.

I'll be happy to provide a little more information for you, since you ask today.

So what -- so just to kind of help you understand the economics a little bit better.

If you look at our passenger revenues and other revenues related to Rapid Rewards, approximately $490 million of our passenger revenues were attributable to Rapid Rewards redemption.

And most of our revenue -- other revenue, which I believe we've laid it out before, relates to our partner revenue associated with Rapid Rewards.

So overall, we're continuing to see a nice growth in our Rapid Rewards Program and for the first quarter, that grew in excess of our capacity growth.

So that should give you a little more insight on the revenues, and we'll be providing more robust disclosures for you once we get our 10-Q filed.

And then, if you -- just to help you on the balance sheet a little bit, $1.8 billion of our roughly $4 billion, I think it's $4.4 billion air-traffic liability, the current portion of that on the balance sheet, relates to Rapid Rewards.

So when you add that amount to the $1 billion of noncurrent ATL related to Rapid Rewards that you see on the balance sheet, you'll get a total air-traffic liability balance related to Rapid Rewards of $2.8 billion.

So roughly half of our total ATL when you add -- look at both the current and noncurrent portion, relates to Rapid Rewards.

So I hope that helps you in your analysis.

I mean, Gary, can you understand why the market would maybe want to know about that business?

I'm just interested on your perspective on it.

Well, I'd be happy to share my perspective.

And again, I'm certainly deferring to Tammy to guide us as to what our requirements are, and we'll meet whatever requirements we have for disclosure.

And I don't mean this in a harsh way at all, but you ranking us last doesn't move me at all.

I think what we have to balance is first of all, our function here is called Investor Relations.

And I'll bet you give them high marks.

I think they bend over backwards to meet our investors' needs.

And that's kind of very much the spirit of Southwest Airlines.

At the same time, we're slugging it out with competitors every single day, and there are things I do not want them to know.

I don't want them to know how we manage our revenues, and that would include the Chase component.

I consider all of these things -- well, many of these things, to be proprietary.

So that's the only reason.

We're not trying to hide anything from our investors per se, but I think you understand that investors also aren't loyal to Southwest.

They own our competitors.

So we just have -- we're -- we have the duty of protecting Southwest, and we guard that very jealously.

But that is the only reason that we wouldn't provide more information because we don't want our competitors to know, and so we'll continue to make judgments about what will meet your needs and also meet the company's needs.

Yes.

Thank you, Gary.

And I wasn't trying to insult Investor Relations by any means.

I just think more color on that side of the business could help sentiment and the multiple on the stock.

I think that's pretty clear.

Oh no.

I don't think anybody feels insulted.

You ask a fair question and, hopefully, at least gave you a reason why we just don't open up the whole general ledger.

And we have time for one more question.

We'll take our final question today from Brandon Oglenski with Barclays.

So Gary, I'll just ask one, and I think you even alluded to it, if you can't get the Hawaii flying off the ground, you'll find somewhere else to put the aircraft in the back half of the year.

But the reality is fuel prices have come up quite a bit since we've had that plus 7% capacity growth outlook out there, and this is an issue for your competitors as well, but costs go up and revenue is not tracking.

So everyone's being asked as an investor to believe it's different this time.

We're going to offset fuel.

But no one's taking that proactive step yet to really reflect that reality.

So are we just looking at fuel prices are too volatile and not thinking long term?

Or how should investors expect fuel volatility that maybe commoditize?

Or is that just something we just have to live with?

Well, let me give it a try, and you redirect if I'm not hitting your point.

But first of all, these are phenomenal financial results.

After being in the business for 4 decades, I'll take this year over the vast majority of the years that I've been working in the industry.

So these are really, really good results.

We are very well positioned from a couple of perspectives, with our fuel hedging as well as the really prosperous margins that we have, the cost outlook we have in other areas and the revenue outlook that we have.

I think we're very well positioned to manage our way through a real fuel price shock.

What we have now is not an issue.

If we get to $100-plus a barrel, then I think we have something else to talk about.

But I'll just repeat, which I hope will sum it up, what our goals are.

Our goals are to have every year positive unit revenue performance.

And in addition to that, perhaps more importantly, we want margin expansion.

So when fuel prices go down, the industry doesn't seem to get much credit for margin expanding.

And likewise, I think we all need to recognize that margins will be impacted somewhat when fuel prices go up.

So if fuel escalates more rapidly, clearly, that would put more pressure on us to also have our revenues cover that.

That won't happen in a quarter.

And one of the tools that we would have to look to would be the schedule.

But I think Tom made the point on it.

I would just say as an analogy, we're still better off flying these shoulder flights because they are profitable.

And at the margin, they add profits as compared to simply not flying it.

So fuel prices would have to be looked at in the same way.

If we were not able to raise fares, would that immediately lead to a decision to stop flying some of our airplanes?

Well, not if they're still profitable.

So I think a lot of this just depends, but again, the bottom line is we're very motivated.

We're very motivated to generate shareholder returns, which means we'll need to continue to drive unit revenue growth.

But the prize is to continue to generate very, very strong margins and aspire to margin growth.

We've got net income margins which we have a shot at this year to grow significantly.

I'm happy.

I think it's a very good environment.

And at least we're well positioned to have to manage our way through a somewhat higher fuel cost environment.

And that concludes the analysts portion of the call today.

Thank you for joining.

Ladies and gentlemen, we'll now begin with our media portion of today's call.

I'd like to first introduce Ms. Linda Rutherford, Senior Vice President, Chief Communications Officer.

Tom, thank you very much.

We can go ahead and get started with the media portion of our call today, if you'll give them some instructions to queue up for questions.

(Operator Instructions) We'll now begin with our first question.

Our first question comes from Conor Shine with The Dallas Morning News.

So my question is just regarding -- and I understand that NTSB is still involved in looking at the accident from 2016 with the engine failure.

I wonder if there's any color or comment you guys can provide about what the conversations were like with CFM International in the months following that, and what level of risk was expressed around those fan blades?

Well, Mike, I'll -- maybe I can start and you can correct it.

But well, I think that there was, first of all, surprise that a fan blade would fail, and then also surprise that the inlet cowl would -- it would fail in such a way that it would destroy the inlet cowl.

So that immediately led to the realization that we needed to increase the inspections.

So GE actually does the engine maintenance, not CFM, right, I believe.

So GE increased their -- they changed their inspection technique.

They do our overhaul work, Conor, which is -- has to happen before 20,000 cycles.

And they have -- they changed their inspection technique to the eddy current.

And then Southwest, working with CFM, also implemented the ultrasonic examination.

And we -- we're doing that.

Initially, on the -- just in layperson's terms, we were identifying the older blades in our fleet and examining those first, and then ultimately, by the end of 2017, decided that we would inspect every single blade in our fleet every time that we touched it for a maintenance step in between the overhaul, and that is every 3,000 cycles.

And by the way, that is what you now see the service bulletin by CFM and then the airworthiness directive by the FAA has evolved essentially to that.

So -- well, I beg your pardon, I think it's just the service bulletin by CFM, but -- so I think the short answer is I thought their response was appropriate.

It was aggressive.

And we'll continue to work with the manufacturer to improve the blades, so that in essence, the inspections aren't necessary.

But again, you look at what Mike reported earlier and what I did, we've -- with all the blades we've examined, you just don't find any cracks in these blades.

I think we found one previous to 2017, and that blade, of course, was discarded, but just very, very few failures.

But we will continue to work with both Boeing and GE to improve those engines.

In the meantime, we'll make sure there are no blades on engines that have fatigue in them.

Yes, Conor, you also just -- in that first event back in '16, the engine -- the worldwide fleet of those engines probably had north of 300 million flight hours on it, and that is the first time in the history of an engine that they had that kind of an event.

And so I thought that GE and CFM, I thought they were very aggressive on trying to understand what happened there, and whether or not it was just an anomaly, or that it was some type of age or other type of issue.

And so I agree with what Gary said, so they focused on inspection techniques.

There were leading improvements to inspection techniques.

There was an introduction of the ultrasonic inspection.

There was a drive to look at older engines and into certain part numbers and then to this most recent service bulletin that I think is very comprehensive.

And we'd be happy to take you through that in more detail because there have been -- there is confusion.

There have been now 3 service bulletins by CFM.

And, Mike, I think that they probably supersede...

They do.

The previous one in effect.

But that's confusing.

The FAA was working on a proposed rulemaking asking for comment during 2017 while we were already doing these inspections.

So that has never been issued in that form.

Instead, the FAA came out with an emergency airworthiness directive last Friday, which we'll do all the incremental inspections required by that very easily before their deadline.

I think we'll want to work with them to agree that we're in compliance with all the other engines that we have inspected, things like that.

But the stepped-up inspections are necessary.

I think we're doing them at a very quick interval.

And it's just to make darn sure that we don't have any blades on an engine that have a crack in them.

We'll take our next question from Alana Wise with Reuters.

So this is something that I think has been a little bit unclear throughout the course of this whole thing.

But prior to the blowout on Tuesday, had the engine involved been inspected as part of the 2016 look into this class of engines?

No, that was made clear.

That engine was not inspected.

And the reason is because it did not meet the criteria that the manufacturer had established for inspection.

It was due for the inspection this year.

So it was on -- again, it was on the schedule to be inspected, but just had not been inspected by April.

So -- what, of course, we've done since last Tuesday is we said we're going to inspect every engine in the fleet, meaning every blade in the fleet, either since 2016 or over the next month.

And then we'll have a baseline, and we'll be inspecting those every 3,000 cycles from that point forward.

So hopefully, all those moving parts made sense to you.

Except for your question, the engine had been through all of its required inspections and overhauls, et cetera.

So it was fully up-to-date in terms of its maintenance.

It just had not been inspected for this current matter yet.

So again, it would have been later this year.

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

Gary, I wanted to ask, you said there had been one previous cracked blade found before 2017.

Can you say when that was?

And then my second question is maybe for Mike.

You said you haven't found any fatigue or cracks.

But have you found anything else in the blade inspections that you guys thought were -- was unusual or noteworthy or anything at all?

Well no, Mary, I'll start in terms of -- so yes, we've got to do the blade inspections.

And I wouldn't say we've found anything noteworthy.

We see normal coating, maybe the normal mix you would find on fan blades with a foreign object, debris, things like that.

So we have -- as we found those in these inspections, we have replaced those blades.

And then back on your question on -- that -- the comment that Gary had, the -- that had a crack in it, that was part of some work that we were doing with GE, and it was back in May of 2017.

Okay.

So it was after the 26th incident?

Yes, that was part of the -- right, it was part of the inspection processes that we were going through and found that blade.

And we have -- I think we have about 36,500 blades.

And so out of all those blades, we found one.

And so we -- obviously, now we know that there will be blades with cracks in them.

So there's nothing so extraordinary about that.

But it is at least, hopefully, comforting to know that there was only one that was found with the inspections that were done.

So now we'll just -- the point being, we'll just have to keep up with all the blades in the fleet with very frequent inspections with -- out of an abundance of caution to make sure that none slip through.

Okay.

And if I can double check on the number.

You said 36,500.

I thought Mike earlier said 35,500, but maybe I just misheard, the total number...

It's 35,500.

As usual, Mike is right.

We'll go next to Leslie Josephs with CNBC.

You, Mike, had said earlier that a fan blade itself isn't capable of causing so much damage.

Are there any tests you're doing or CFM is recommending to test the cowling or how stable it is or something like that?

And my second question: are you speaking or working on any training with the flight attendants?

I know there was a lot of commentary about people using the oxygen masks wrong.

Just about how to ensure that passengers are following along with the safety briefings.

Yes, just a couple of things.

First of all, in terms of engines and engine design, the engines are frequently tested with respect to a fan blade failure and having those contained inside the engine and then the engine cowling.

The cowling that we're talking about now is an inlet cowl.

So it's before -- it conducts airflow into the engine.

So it's before the containment part of that.

And that's what we're talking about is whether or not there are opportunities in the inlet cowl to improve its durability, so that it can minimize the kind of energy that comes out with this fan blade release.

In terms of the flight attendants, one of the great -- actually, one of the great things about social media is that you do get a good view of what is going on inside the cabins.

And we absolutely would look and try to learn from things that we can do better, make our customers more safe, make sure that the training and the communication out into the cabin is adequate.

And as a matter of fact, the NTSB has set up a group to kind of study the in-cabin services.

So I know that they'll do a thorough investigation of that and may come out with some good recommendations.

Since that incident, since the 1380 they've done that?

Who's that, the NTSB?

Yes.

Yes, as part of the 1380 -- as part of the investigation, they're looking at the onboard in-cabin activity.

Okay.

But you're not working on anything specifically just yet?

We're supporting them in that effort.

We'll take our next question from Dawn Gilbertson with the Arizona Republic

I have 2 questions.

One, can you give us, either Tammy or Gary or somebody, a dollar figure associated with the bookings hit from flight 1350 (sic)?

Well, I think what Tammy and Tom were talking about earlier was 1 to 2 points -- or percent of second quarter revenues.

So have you got that off the top of your head?

An absolute number?

It's in the $35 million to $40 million range right now.

Yes.

I would say (inaudible).

It's just a rough -- it's a ballpark, $50, -- yes, it's $52 million.

If you just do the math and it's a wide range so we were kind of going in the middle, it's going to be at least a $50 million impact.

And if you just do the math, it's $50 million to $100 million.

Okay.

And one more question unrelated to that, for Tom on the ETOPS certification and Hawaii.

I'm not -- no ETOPS expert.

But when you were just mentioning, you were talking about through this process, you might be able to start small with Hawaii as you're going through the process.

Can you give us any more color on that?

I just wasn't aware that was an option as you go through.

I thought that you had to get your certification and then the service began.

Oh no, once we get the certification, we will begin service.

So I think the question is when will we get the certification.

We're hoping to get it sometime later this year.

But in terms of our schedule, Gary announced the 4 cities, the 4 airports we intend to serve.

Our network planning team certainly has laid out here's what we would see the schedule being.

We have not been -- it's not time for us to announce that.

But when we do start service, it will be smaller.

It will begin to ramp up over time, I would think.

Okay.

I must have misunderstood what you said then.

Yes.

It's always -- in other words, Dawn, it's always been our intention to start modestly, like with probably one city pair and focus that way.

And then we would like to ramp up pretty rapidly and ultimately, to those airports 4 that we announced today.

Obviously that's our committed plan, to serve all 4. What we've not announced is what routes and when we'll start and which one we'll start with.

But we're -- we've always intended, and the FAA has always understood that we'll start modestly.

And when you say modestly, with that one city pair, is that your goal for this year, if you are able to pull it off this year?

I mean on the first day, I think it would be probably one city pair.

And part of that, I think in fairness to us, is to be determined and in working with the FAA.

But that's kind of the idea that you ought to be thinking about.

Now I don't see us serving just one city pair for very long and I'd rather not say how short just yet.

But yes, I think we're definitely planning to short -- to start, sorry, very modestly.

We'll go next to David Koenig with the Associated Press.

I know it's getting late.

I have 2 questions, but the first is kind of to clarify what Mike said earlier and then Gary followed up on.

So if I heard Mike correctly, you've got -- you've inspected, it sounds like, 25,500 or so of your 3,500 -- 35,500 blades, excuse me.

So that would mean you've got, what, about 10,000 left to inspect, and you're going to do those in a 30-day window.

Are those all newer second-generation blades?

Well, we've been focused mostly on our 700 fleet, David.

So yes, so the lion's share of what's remaining really is the 800 fleet.

And those should be -- we just started taking the 800s 5 or 6 years ago, so generally speaking, yes, those should be the newer generation blades.

But I think, David, we started with, going back to 2016, the oldest blades, then we worked out within Southwest and with CFM, the oldest engines.

And so the focus has been on engines since then, knowing that blades move around between engines.

So by accelerating all the inspections to within the next 30 days from last week, we will have covered every single engine, regardless of the age of the blade.

Right.

Okay, great.

Well that leads into the other question I had which was whether you ever considered grounding any planes, like maybe those with engine cycles, with more -- the most engine cycles since -- either new or since their last shop visit.

Was that ever under thought?

Based on all the evidence that we have, based on discussions with CFM, Boeing, the FAA, the NTSB, that wasn't a consideration, because of the accelerated inspection cycle and just the history of the data that we have on these fan blades.

And ladies and gentlemen, at this time, I'd like to turn the call back over to Ms. Rutherford for any closing remarks

Thank you all very much.

If you have any follow-up questions, please do reach our communications team.

You can get them at (214) 792-4847 or via our media website at www.swamedia.com.

Thanks very much.

Ladies and gentlemen, this does conclude today's conference.

Thank you for joining.