Southwest (LUV) Q1 2025 Earnings Call

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DATE

Thursday, Apr 24, 2025

CALL PARTICIPANTS

Bob Jordan: President, CEO, and Vice Chairman of the Board

Andrew Watterson: Chief Operating Officer

Tom Doxie: Executive Vice President and CFO

Julia Landrum: Vice President of Investor Relations

RISKS

Softer booking trends continued into Q2, particularly in leisure demand, with RASM guidance of flat to down 4% year-over-year

Full year 2025 and 2026 EBITDA guidance suspended due to macroeconomic uncertainty

Planned ASM growth reduced to approximately 1% for full year 2025, down from previous 1%-2% guidance

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Q1 Operating Revenue: Quarterly record of $6.4 billion, with RASM increasing 3.5% on all-time record yields

Q1 CASMx: 4.6% growth, significantly better than the original non-GAAP guidance of 7%-9% and revised guidance of approximately 6%

Initiative EBIT Targets: Reaffirmed $1.8 billion non-GAAP for full year 2025 and $4.3 billion for full year 2026

Capacity Reduction: Published schedules for Q3 and Q4 2025 to be reduced by 1.5 percentage points each

Debt Repayment: $2.6 billion, including $976 million prepayment of payroll support program notes and $1.6 billion convertible notes payoff

Share Repurchase: Intend to complete the remaining $1.5 billion of the $2.5 billion authorization by the end of July 2025

SUMMARY

Southwest Airlines reported mixed Q1 2025 results amid a challenging macroeconomic environment, with record revenue offset by softer leisure demand. The company is accelerating the implementation of revenue-generating initiatives, as highlighted in its Q1 2025 earnings call. while maintaining cost discipline and reducing capacity.

New initiatives launching in May include basic economy, flight credit expiration, and bag fees, with minimal Q2 contribution expected

Premium and assigned seating sales to begin in Q3 2025 for Q1 2026 flights, potentially providing some 2025 contribution through early bird upsells

Managed business travel remains stable, excluding government sector weakness

The company plans to focus growth this year on the Nashville, Phoenix, Sacramento, and Orlando markets

INDUSTRY GLOSSARY

RASM: Revenue per Available Seat Mile, a key airline industry metric measuring unit revenue

CASMx: Cost per Available Seat Mile, excluding fuel, a measure of non-fuel unit costs

ASM: Available Seat Miles, a measure of airline capacity

Full Conference Call Transcript

Jamie Baker: Hello, everyone, and welcome to the Southwest Airlines First Quarter 2025 Conference Call. I'm Jamie Baker, and I will be moderating today's conference, which is being recorded. A replay will be available on southwest.com in the Investor Relations section. After today's remarks, there will be an opportunity to ask questions. To queue up for an opportunity to ask a question, please press star and one. To withdraw your questions, the command is star and then two. Now Julia Landrum, Vice President of Investor Relations, will begin the discussion. Please go ahead, Julia.

Julia Landrum: Thanks, Jamie. Hello, everyone. And welcome to Southwest Airlines' first quarter 2025 earnings call. In just a moment, we will share our prepared remarks, after which we will move into Q&A. I am joined today by our President, CEO, and Vice Chairman of the Board, Bob Jordan, Chief Operating Officer Andrew Watterson, and Executive Vice President and CFO, Tom Doxie. A quick reminder that we will make forward-looking statements which are based on our current expectation of future performance, and our actual results could differ materially from expectations. Also, we will reference our non-GAAP results which exclude special items that are called out and reconciled to GAAP results in our earnings press release. Our press release with first quarter 2025 results and supplemental information, including our initiative highlights, were both issued yesterday afternoon and are available on our Investor Relations website. And now I'm pleased to turn the call over to you, Bob.

Bob Jordan: Thank you, Julia, and thanks everyone for joining us today. Before we get started, I want to welcome Tom to his first Southwest Airlines earnings call. We are very grateful to have you on the team, my friend. Last month, we announced a plan to transform our revenue strategy, improve our cost performance, and deliver meaningfully improved financial results on an accelerated timeline. Regardless of the economic environment, we remain focused on executing our strategic plan, which is a unique opportunity for Southwest, and on controlling what we can control. We are very encouraged by the results from the initiatives we implemented in the first quarter. Just to name and highlight a few, we amended our agreement with Chase, implemented enhancements to our Rapid Rewards program, and launched Expedia with results exceeding our expectations thus far. We also seamlessly implemented our turn time initiative in more stations and have now removed five minutes of turn time from scheduled in nineteen stations while leading the industry in on-time performance. Importantly, we executed on unit costs and our overall cost reduction plan. Transformational change in the implementation of our initiatives. Next month, we will begin offering a basic economy product and new fare structure supporting increased buy-up. We'll start charging checked bag fees and reduce the expiration of flight credits. We also remain on track to begin selling premium and assigned seating in the third quarter of this year for flights in the first quarter of 2026. In the first quarter, the team did a fantastic job focusing on execution. Our operating revenue was a quarterly record at $6.4 billion as RASM increased 3.5% on all-time record yields. Despite industry weakness in domestic main cabin travel, where we are currently more heavily weighted compared to our larger industry peers, we finished at the high end of our guidance range, outperforming on a relative basis and underscoring the team's strong revenue execution and early returns from our revenue management distribution and network initiatives. CASMx growth of 4.6% was materially better than our original guidance of up 7% to 9% and well below our revised guidance of approximately 6%. Of course, the big topic on everyone's minds right now is the macroeconomic environment. As we shared last month, the year started out very strong. However, that changed, especially in leisure demand. Since that time, we have seen softer booking trends continue into the second quarter. Andrew will cover in more detail here in just a moment. Amid the current macroeconomic uncertainty, it is very difficult to confidently forecast given recent and short-lived trends. Given this environment, we are not reiterating our full year 2025 or our full year 2026 EBITDA guidance. However, we remain confident and committed to continued strong execution of our initiatives, and we are reaffirming our targets of $1.8 billion full year 2025, and $4.3 billion full year 2026 incremental EBIT contribution from those initiatives. At Southwest, we are uniquely positioned in the industry given the transformative initiatives we have rolling out the rest of this year and into 2026, which should provide a significant benefit relative to our peers. Cost discipline is important in any environment. In an uncertain environment, it becomes paramount. I am very pleased that we are ahead of the game with our cost reduction plan. The cost work is going very well, and we saw proof of that in our first quarter CASMx performance. Those cost reduction targets are still in place, and we continue to seek opportunities to further increase and accelerate savings. We also had an already moderated capacity plan in place with full year 2025 planned ASM growth of 1% to 2% with this growth driven entirely by our turn in Red Eye efficiency initiatives. Given the current macroeconomic environment, we are being proactive in further reducing capacity in the second half of the year. These incremental schedule reductions are in progress, and we expect to reduce both third and fourth quarter published point and a half each, bringing expected full year 2025 capacity down to roughly 1% year over year. We are making these changes quickly to capture as many cost savings as possible. We will continue to evaluate and modify as needed with a focus on margin as we move through the rest of the year. As we manage through these challenging times, we will stay focused on our plan, but we'll also stay nimble. We have significant flexibility, including fleet flexibility, and we benefit from the industry's strongest investment-grade balance sheet with significant unencumbered assets. All of this helps us navigate the current environment while continuing to evolve for our customers and create value for our shareholders. Before I turn it over to Andrew, I want to say thank you to our people for their dedication, resilience, and for the world-class hospitality they deliver day in and day out. Our people set us apart, and that cannot be duplicated.

Andrew Watterson: Thank you, Bob, and thanks to our people for their exceptional efforts enabled us to lead the industry in on-time performance and the fewest extreme delays. Our best first quarter performance in both categories in four years. Our first quarter completion factor of 98.6% was our best in twelve years. And despite some tough winter weather, we ranked number one on-time percentage and number two in completion factor on the day after winter storms. Huge progress from several years ago. We've already covered our first quarter RASM performance. I'll jump in with some color on second quarter RASM guide of flat to down 4%. On capacity up in the range of 1% to 2%. Both on a year-over-year basis. Our guidance range contemplates a continuation of the current environment with the largest impact coming from lower leisure travel demand. Corporate travel excluding the small percentage from government has also been softer but stable. The impact of Southwest is mitigated by our initiatives. Which are more targeted yields in the first half of this year and will begin targeting load factor in the back half of this year as we work to close our RASM gap to the industry improving network connectivity opportunities and marketing distribution initiatives. We Sales of our initiatives are already live. We're pleased with their performance. We expanded distribution to online travel agencies with the launch of Expedia in February. And our current performance is ahead of expectations. We're seeing better than anticipated booking volumes in this channel similar to what we've seen in the meta search tools. We're very encouraged by the expanded customer base provided by this channel. As many of these customers are new to Southwest or have not flown us in quite some time. We optimize our loyalty program to better align earn and burn rates. And have seen no negative trend changes as a result. Such as changes in either our credit card acquisitions or attrition. In fact, we had a record first quarter spend on our Copernet credit card. We've received the necessary approvals and certifications for the MAX-eight and seven thirty seven-eight hundred aircraft retrofits, and expect to begin retrofitting aircraft next month. Our turn time reduction initiative, which Bob mentioned, is now in place in nineteen airports, including several of our mega stations like Dallas and Nashville. Reducing turn time generates more flying from each aircraft increasing our capital efficiency and unlike normal utilization increases, which typically end the day earlier and later, this does not increase the operating day so it is favorable to RASM and CASM. And we launched Red Eyes in February, with Hawaii Red Eyes launched just this month. Our new initiatives launching next month include basic economy, flight credit expiration and bag fees. After announcing these changes, we saw no evidence of book away and real-time data. We've executed the turn in Red Eyes with no adverse operational impact. And feel confident we'll be able to introduce bag fees next month with minimal disruption. Significant planning is already underway in key areas of our operation. Including our gate and lobby experience, customer care, and back of service. Our goal is to mitigate any potential impact to transaction times in the lobby as well as designing new processes to manage the increase in expected check bags gate check bags, all while enabling our employees to continue to deliver incredible customer service. In addition, we're accelerating the installation of larger our aircraft. Outside the cost reduction plan, our largest initiatives at maturity are premium and assigned seating, bag feeds, and the loyalty program optimization. Credit expiration is also material estimated to yield in excess of $100 million per year. In terms of the ramp, the benefits from loyalty are expected to provide the largest lift to our 2025 EBIT. And will only partially be reflected in the second quarter. We expect minimal contribution from implementing basic economy bag fees and flight credit expiration the second quarter. Given they only apply to flights booked on or after May 28. The incremental revenues from these initiatives will meaningfully ramp in the third quarter and into the fourth quarter as we increasingly shift towards bookings made on or after May 28. We will continue to be urgent and deliberate at our execution. With that, turn it over to Tom.

Tom Doxie: Thanks, Andrew. I'm happy to be joining my first earnings call today with Southwest. I've enjoyed getting to know our employees in break rooms, hangers, and meeting rooms across our network, I've enjoyed being on the road meeting with the investment community as well. We have a lot of work ahead of us, I'm encouraged and excited about the progress that we've made so far. And I'm optimistic about our opportunities and where we are headed. Starting with our nonfuel costs, first quarter CASMx came in at 4.6%, beating our previously adjusted guidance of approximately 6%. This improvement was roughly split between a variety of smaller one-time items and a hyperfocus on cost discipline across our entire organization. For example, we reduced consulting and marketing expense, and pulled back further on discretionary spend. Looking ahead, we expect second quarter unit We are pleased with the execution of our cost reduction plan thus far. And the entire organization's commitment to efficiency. Moving to fuel, market prices have been extremely volatile in response to the broader macro environment. Overall, we have seen prices fall, which has helped offset some of the softness we are seeing on the demand front. We currently estimate our second quarter fuel cost per gallon to be in the $2.20 to $2.30 range, We recently announced that we have discontinued our fuel hedging program and have no plans to add to our portfolio. We remain 45% hedged in second quarter and 47% hedged for the full year, with hedged positions in place into 2027. Will be opportunistic in unwinding our existing positions based on market conditions. Moving to fleet, while we are not updating our previous assumption of thirty-eight seven thirty-seven MAX eight deliveries this year, we are increasingly optimistic about what we are seeing at Boeing. And their ability to deliver. As we shared in January, we anticipate retiring roughly fifty aircraft during 2025. As a reminder, we will continue to opportunistically transact on aircraft in our existing fleet based on actual aircraft deliveries, market conditions, and other factors. As such, we continue to expect 2025 gross capital spending to be in a range of $2.5 billion to $3 billion. Moving to our capital allocation strategy, we remain committed to investing smartly in our business, ensuring a strong and efficient investment-grade balance sheet, and returning value to shareholders. In the second quarter, we will pay down $2.6 billion of debt. This includes a $976 million prepayment of the first tranche of the payroll support program notes, which we actually paid last week, and the payoff of our $1.6 billion convertible notes in cash on May first. We will also continue to return value to shareholders. We have completed $1 billion of the previously authorized $2.5 billion share repurchase authorization. As we announced last month, we intend to complete the remaining $1.5 billion or more than 10% of our current market cap under our share repurchase authorization by the end of July. These decisions highlight our continued confidence in the execution of our plan and driving improved results. With that, I'll hand it back over to Bob.

Bob Jordan: Well, thank you, Tom. And before we start Q&A, I'd like to leave you with a few key points. First, we remain committed to exceptional execution regardless of the macro environment. We had strong execution in the first quarter, initiative implementation, cost discipline in our cost plan, capacity planning, and operational excellence. We will take it and we will move on to do the same in the second quarter. Second, we continue to deliver on our core business initiatives and are seeing positive results from recently launched initiatives including the optimized loyalty program and amended Chase agreement and the launch of Expedia. Third, we are evolving more than ever we're moving quickly. We remain confident that our initiatives, including the additional initiatives announced last month, will provide material incremental EBIT in 2025, 2026, and beyond. And finally, we are resilient and well-positioned to manage through a dynamic environment with our cost focus, capacity discipline, underscored by the additional reductions that we just announced, our portfolio of Southwest-specific initiatives, and as Tom just covered, our investment-grade balance sheet. So we are not slowing down. We will keep evolving to meet the needs of our current and future customers, improve our financial performance, and create value for our shareholders. I'm confident in our plan, confident in our execution, and confident in our people. But before I pass it back to Julie to start Q&A, I want to stop and acknowledge and thank her. This is her last earnings call as our Head of Investor Relations. That's a tough job and, Julie, you have done a fantastic job. And we will miss you on these calls, my friend. And with that, back to you.

Julia Landrum: This completes our prepared remarks. We will now open the line for analyst questions. We would like to get to as many of you as possible. We ask that you please limit yourself to one question. We will now take the first question.

Jamie Baker: Thank you, Julia. Again, to ask a question, please press star and then one. To withdraw your interest, please press star and two. If you are on a speakerphone today, we ask that you please pick up your hand before pressing the keys. And our first question today comes from Ravi Shanker from Morgan Stanley. So great to see no evidence of book away here based on your comments, but I believe you recently broadly pulled your customer base on your recent initiatives. Can you share kind of what feedback you got from that poll and kind of if you're confident that that book away kind of is not something that's gonna emerge later on the year? Thank you.

Andrew Watterson: Thanks, Rob. It's Andrew. So I did see that there's a lot of press pickup. I guess somebody found a survey and tweeted out would just say we are constantly surveying our customer set. Whether it's how was your flight today, do you think about this initiative. And so we curate different panels to try to get different feedback on different policies, different ideas. And so was nothing abnormal about that survey. We didn't do it just because we had the policy change. We've been doing stuff like that all along. And so helps us understand the perceptions and how they evolve over time to different elements. And those surveys tell us kind of what we see overall just our emails that there was in the beginning people wrote us and said hey, I'm concerned about this topic When we answered their questions, they kind of became they realized that, oh, if I'm gonna engage customer Southwest Airlines, these don't really apply to me. And then so they kind of changed their feelings about it. We saw the same thing in surveys. The sentiment evolved. As people better understood what they would keep. Generally our engaged customers keep their benefits and get more when we go to assign seats. And so the the polling does show those customers now fully internalize that difference from maybe the headlines originally. And so we see a fairly satisfied and engaged customer set as they wait for this next level of benefits to come out. So I think overall, we're pleased. It exceeded my expectations of how well our best customers have migrated to this new world we're going into with Assigned seeks an extra ledger and such.

Ravi Shanker: Very helpful. Thank you.

Andrew Watterson: Our next question comes from

Jamie Baker: Andrew D'Addora from Bank of America. Please go ahead with your question. Hi, good good afternoon, everyone.

Andrew D'Addora: My question is for for Tom. I'm getting, you know, just a lot of you know, client questions with regards to the balance sheet and liquidity given, you know, the the buyback, all the debt pay down in two q, CapEx I guess any color you can provide on how you think about liquidity targets, you know, right now in this environment, you know, just how we how we should think about, minimal minimum cash right now. Thank you.

Bob Jordan: Sure. Thanks, Andrew. Yeah. We've been we've been targeting, as you know, around $4 billion or so in cash. And as as you look at the pay downs that we've had and in addition to that, the incremental $1.5 that is the remainder of the previously announced $2.5 share repurchase. That brings us down to right about that mark. In addition to that, as you know, we've got significant unencumbered assets. We've talked about it was in our release where we reiterated that $16 billion or so billion in aircraft and then there's some additional unencumbered assets there. On the non-aircraft side as well. And so we look at all of that in totality. And then one other thing that I would say in addition to that is the the focus here, and this isn't necessarily a balance sheet answer, but but we are laser focused here on the incremental building of EBIT through the different initiatives that we have and are confident in those initiatives and and and both the rollout and magnitude of that. And and, you know, of course, that incremental EBIT is is what ultimately gives you the optionality for your balance sheet when you you look at the framework of, you know, investing in the in the business, maintaining that strong and efficient balance sheet and then any potential return to shareholders that would result.

Jamie Baker: Our next question comes from Catherine O'Brien from Goldman Sachs. Please go ahead with your question.

Catherine O'Brien: Hey, good afternoon, everyone. Thanks for the time. So I know you're suspending the full year EBIT guidance but you're maintaining the EBIT initiative targets. Can you just walk us through what's giving you confidence in achieving those initiatives targets? And I really mean more on the revenue side, realize the cost ones are more baked. Are there not sensitivities on some of these revenue initiatives to the macro like there are for the core business or or maybe you feel like you baked in enough cushion back in March? Just any color there would be helpful. Thanks.

Bob Jordan: Hey, Katie. Yes, Bob. Yeah. It's it's all of that. We have a lot of confidence both in the portfolio of cost and revenue initiatives in terms of the timing we they're all on track. And then the, you know, the financial benefit that we intend for them to play into the business. Of course, there are some sensitivities, there's some linkage to the to the base business and macro backdrop, but it's substantially smaller. The base business is off a lot. We were off kind of roughly three points in the first quarter from what we thought back in January. And then the second quarter, the base business come off about six points. Which is a substantial, you know, part of the top line. The revenue initiatives are targeted that you take something like Bagbeats, for example, they they just fall at such a smaller raise. If you you know, if if if six percent of bag fees as an example comes off, it's a much much smaller than a percent of the top line. So and we also feel like they're far more in elastic So while you could see some tied to the macro, it it's a far smaller number. So we have a lot of confidence both in the timing of the initiatives coming online and and then the the value. What is really hard to predict as everybody's been talking about today is the uncertainty and the booking trends in the macro economy. So while I got a lot of confidence in 2025 on delivering on the $1.8 billion initiative contribution the ability to forecast with any reasonable level of certainty the base business offset to that is what's really tough. So that that's really the reason we couldn't, you know, affirm the $1.7 billion for the year. Now we're not taking the $1.7 billion off the table. I wanna make sure you understand that that is still the internal target. You you get some inflection back of the trends here later in the year. You get some additional helpful fuel, You know, we guided the initiatives in in March at kind of a baseline level. The initiatives outperform. And there's absolutely a shot at hitting that $1.7 billion or some combination of all those things. So we're not taking it off the table. It's just the the the uncertainty in the demand base business side made it impossible to reaffirm that $1.7 billion.

Jamie Baker: Our next question comes from David Vernon from Bernstein. Please go ahead with your question.

David Vernon: Hey, thanks for taking the time guys. Question for you on the just the load factor in the passenger count. In relation to this idea that that we're not seeing any sort of book away or any sort of unique impact from some of the initiatives on the demand base, it looks like you guys are running, you know, lower from a from a demand destruction standpoint relative to peers on a year over year basis. You know, how do you think about explaining that sort of gap? And then, you know, when you think about that load factor running seventy four ish, what are your sort of expectations as we kinda get through the rest of the year?

Andrew Watterson: Hey, certainly, Andrew. If you kind of decompose the quarter, January was down like two points in load factor. And then Feb and March were down five point five points. As you can see, there's really a tale of two quarters as that weakness, macro weakness started in quarter. And when you have that kind of demand discontinuity, you have to be very careful about how you price. I think in your business they call it catching a falling knife. In our business we have to be very careful not to try close in discount because you could end up worse off. And so I think you see that in our yield numbers which were quite robust. And so we maintained that in the quarter and we saw very, very strong close end revenue performance in March and again in April. However, at the same time, we had previously been not participating in a lot of discounting especially like one hundred and twenty plus days before departure because we had low capacity growth. So it would be wise not to kind of be very prudent with your discounts further out. When we saw that macro environment kind of unfold in the quarter in Jan and Feb, we peeled off those kind of provisions if you will and participate further out in the booking curve which is not necessarily dangerous to have that kind of discounted generic volume. And you can see that in April now our year over year load factor improved at least two points from March to April and that was only a partial booking curve effect from that kind of renewed further out discounting. So we expect that kind of to normalize that macro shock to normalize over the booking curve as we get more in the routine of discounting further out. To make up for the kind of demand softness in consumer side. Because on the business side, it's been very stable ex government both state and local and federal are managed business is up. And so those are generally higher yielding customers who would be very careful about how you price in an environment where you have consumer weakness kind of business strength. And so that's why we chose that approach which, you know, led to much higher yields than you would expect and lower load factor you'd expect. We get a rasm on a year over year basis that over performed our peers.

David Vernon: Alright. That's helpful. And then I guess you know if you're thinking about kind of maintaining that kind of discipline on the pricing side, which I think many investors would would would would would be very comfortable with. You know, does does does that not sort of advocate for the position of maybe cutting capacity a little bit more than you than you're estimating in the second half of the year? Mean, just to just to get the the load factors back up a little bit. I mean, it would seem like the trims you're you're proposing making in the back half of the year seem a little bit light. And relation to kind of what we're seeing in in in the in the results. I'm just wondering how you're thinking about that capacity question as you get closer to the back half of the year?

Andrew Watterson: Certainly, it's a reasonable question to ask, especially looking externally. You've heard people talk about off peak. It's been a a post COVID issue and you've heard it really blossom this quarter. And so what that is is that you have less travel in the off peak times because business travel is down and the nature of business travel has changed. It's it's a result of this time of day, day of week, time of year. You have less demand. You know then our gauge is up seven percent you know post pandemic. So in those troughs then you don't you can't fill your aircraft. It shows up in lower load factor. And the peak time of day, day of week, time of year, that you really like have that seven percent mortgage and you can fill up and as you see we get high yield. So in a world in which demand has grown, yet peaks are higher and values are lower, you would expect to see net lower load factor from us and higher yields is exactly what you see in our results. We are very strongly pushing the yields in those peaks and admittedly having difficulty with the off peak You just reduce capacity, you both take away the goodness from the peak and you don't get as much benefit from the valley. Now we were conscious that we need to fill back up our load factors in our plan And so what we would need to do for the off peak is we is can do a little bit of stimulation because with basic economy coming, we'll be able to offer maybe different types of leisure discounts that will not undermine or create business buy down because business travels are not generally blocked from buying business based economy. And we see from our competitors flow or connectivity as a way to aggregate little bits of demand the off peak to fill up your flight. And so starting in August, we have a lot of connectivity, search and connectivity for that off peak period. We expect that to yield us more flow for that, the off peak load factor. Additionally, we previously changed the network to reduce capacity in underperforming areas. And put it into higher performing areas and that actually just started this month in April. So all these things together we think is a good plan to achieve our Investor Day promises closing our yield gap to our competitors as well as closing the load factor to ourselves pre and post pandemic.

Jamie Baker: Alright. Thanks for the time. Our next question comes from Jamie Baker from JPMorgan. Hi, everybody. So here's what I'm trying to reconcile. Well, before Elliot you had various initiatives that were obviously intended to be accretive. But margins were still declining, which would imply assuming the initiatives worked, it would imply that know, sort of the core of Southwest was under pressure. So when we think about the goals that you laid out this past March, that know, you're talking about, say, do you simply steady state your sort of pre initiative assumptions and then layer on the initiatives on top of that and call that the guide? Because it it feels that that might be the way that you're doing it. Whereas I think the more conservative approach would be if the core actually is slipping, you know, you would add the initiatives in on top of some sort of reduction the base of earnings. If that makes sense.

Bob Jordan: Yeah, Jerry. I I think it does. I think yeah. You're you're you're always Andrew can talk to this too. I mean, you you need every single single year to continue to drive revenue production in RASM. That's just the way the business works. You're constantly adding initiatives on top of the base business to produce gains. At the end of the day, the particularly coming out of COVID with the change in demand, the change in the cost structure with new labor contracts, the stack of initiatives prior to what we talked about in the fall and again in March, which just insufficient to drive appropriate margins at Southwest Airlines, certainly industry leading margins. We just had too many revenue streams as an example that were just left on the table that other airlines have in place and we just don't have a place at Southwest and it was impossible to hit the, you know, to hit appropriate returns without acknowledging that. So what you've seen is this move to a set of initiatives that meets consumers where they are They want a size seating. They want access to premium and extra leg room. And then adding revenue initiatives that will be very accretive to the business like bag fees. And flight credit expiration. And we'll continue to add initiatives not ready to obviously report anything today, we'll continue to add customers want and we'll continue to add initiatives around expansion geographic expansion, adds to the network, those kinds of things. But I I'm not sure if I'm answering your question, but you you but we found ourselves at a point where the stack of initiatives prior, especially with the changes coming out of COVID, are just insufficient to meet the level of returns that we need at Southwest Airlines.

Jamie Baker: Okay. I appreciate the color, Bob. Andrew, go ahead.

Andrew Watterson: I'd say on top of that, Jamie, I think we've pretty much admitted that the value proposition we had not generating the revenue we created. Right. And so we did then with the latest set up with Investor Day and what we now your conference we've admitted that we are going to a different value proposition. We have a more segmented offering. Where customers can pay more to get more and that would lead to the revenue production to be sufficient to return back to previous levels of prosperity. And so that is in essence saying old model wasn't working so now we've pivoted to this new set.

Bob Jordan: And whatever and, you know, and and I've said this before, what I really like now I mean, nobody likes where we are with economic backdrop in this week. They said it's it's know, severely showed up in the last ninety days. But the majority of the levers, certainly the revenue levers that we have attacked, in particular, you know, the March and beyond set are really unique to Southwest Airlines. They're in place for other airlines today. So we have a unique set of revenue production that can come online for Southwest against this weak backdrop that is not available to others. Second thing is there is a there's strong cost that's very, very, very strong cost discipline at Southwest right now. The we had an original first quarter guide of eight, we came in and reguided six percent, and we came in at 4.6%. And it's across the board reductions in efficiency in the company. We're seeing performance in every department across the company on the cost front. And that will continue. So we have unique levers that, to me, are just not available to others, which will absolutely drive relative performance.

Jamie Baker: Gentlemen, thank you both. Jamie, thank you.

Jamie Baker: Our next question comes from Sheila Kahyaoglu from Jefferies. Please go ahead with your question.

Sheila Kahyaoglu: Good morning guys and thank you Julia. Maybe just to expand upon some of the questions could you talk about Bob or Andrew, whoever would like the expansion into mediums, like, Google flights and Expedia and how the yields you're experiencing their relative to volumes ultimately shake out compared to the core customer base. As we heard American talk about earlier today, mention the distressed discretionary consumer could often book in those channels is not surprisingly in that is seeing that area of weakness.

Andrew Watterson: Sheila, Andrew, I'll start off and see if I answer it and Bob can chime in here. And so, yes, the Expedia, I think, is ramped up faster than say Google Flights did. So we're pleased with that. It it represents between 4% and 5% of our booked customers for, you know, the recent months that we went live. It was a customer base that is you know, majority have not seen before or have not seen a long time. And so therefore, it's, you know, a new source of customers for us. You know, as one might expect with indirect distribution, it's particularly helpful in places where we don't have a strong point of sale. A big city where we're quite strong in San Diego, we get lots of people come to our website there. But we're, you know, very underweight, let's call it, in Boston and New York. And so it helps us there. So the kind of indirect distribution is kind of servicing its inherent need, which is to generate new customers would not otherwise come to your business, and it comes in a very, very cost-effective manner. So we're we're quite pleased with that. Google Flights is of a similar nature. The distribution doesn't go through, say, a GDS. It just comes straight to our website. It gives us additional opportunity to merchandise. So we're happy about that. But both the meta searches Google KAYAK and Skyscanner, and Expedia are really good partners. We don't it's not an either or. We like introducing that into our portfolio distribution. And plan to expand it and make sense over time.

Sheila Kahyaoglu: Andrew, maybe just another one then. If I can follow-up with you. You mentioned the initiative target yields in the first half and loads in the second half. How realistic is it that Southwest and its initiatives buck that normal relationship that you trade off one for the other?

Andrew Watterson: Yeah. I think what what's kind of going back to my earlier discussion, you just really peak off peak that you've heard probably a lot other lines talk about. The peak you have chances for yield. So the peak time demand exceeds And so that is what we're doing. You can see by our results and that's kind of we promised at Investor Day. We're getting frankly more traction than I expect. The load factor doesn't come from getting more volume during the peak because we're already full during the peak. Our problem is our empty seats are not the good times a day, the good days a week or, you know, good times of the year. It's the off peak. So how do we get more customers more bottoms and seats if you will, in the off peak? And so some of that will be we'll use the the the big economy tactic when it comes online here. But a lot of it will be connectivity. And so it's taking people going from, you know, Albany to Tucson where there's never gonna be a nonstop over perhaps connect through our network. And so designing connectivity facilitate these small bits of demand, you aggregate those small bits of demand enough and you can you help fill your aircraft. Of our competitors run big hub and spokes, they do this naturally. But for us, it's something that's kind of like a a addition to our normal point to point model. So we're going to focus that kind of connectivity in these off peak times of a day, of of a week, of year to drive the load factor. So it's two distinct things so that you're not doing that trade off of yield versus load you're talking about. Well, I just point out too that they did yeah. Yeah. It added a whole level another layer of sophistication to be able to manage this where you have to understand where that where each flight is ultimately going to land in terms of it of how full it's gonna be because it's gonna be managed two different ways. It's gonna be managed for yield, it's gonna be managed for load. And the new revenues management system that we put in last year is designed to to push yield and manage yields on those full flights, and you could see it. I mean, we had record all time yields in the first quarter. Not record first quarter, yields, but record all time yields in the first quarter. And and now it's about building load on those flights that are not in projected to go out full. The change in the rewards program and dynamic allocation on the birds eye will will help as well because it's it's very similar. You you wanna be able to manage up on the flights where those seats are very scarce because the flight's gonna be full, and then you wanna be able to manage for for load factor on those flights that are gonna have open seats and and discount those from a Raptor Wars perspective. So very pleased with the performance, especially on the yield side and that will attack the load side.

Sheila Kahyaoglu: Thank you.

Bob Jordan: Thanks, Sheila.

Jamie Baker: Our next question comes from Connor Cunningham from Melius Research. Please go ahead with your question. Hi, everyone. Thank you. I wanted to go back to Jamie's question around the initiatives. It seems like you're approaching, like, the the the list of initiatives from a from a gross standpoint rather than a net. So it would suggest that you would need to continue to to add to the list to keep improving. So when you when you do survey work, what are the customers asking for now? Are they asking for free Wi Fi? At this point given all the changes in the industry? And then, Tom, if you could just talk a little bit about the the the cost structure from an outside perspective. Like, as you've been there now for, you know, only a couple I guess, couple months, can you just talk about what you see as low hanging fruit outside of the initiatives that you've already been you're already working on? Thank you. Yeah. This is Tom. I'll start. So first, the the way that we're looking at the initiatives, and I think we've tried to be pretty clear with this, we feel like we've been conservative in the way that we that we've done these. These are not gross estimates. These these these are these these are net of the impact that we felt would would would would be there. So it's a really important distinction from the first part of your your question. I'll jump to the last and then I'll turn it over to to Andrew. He can he can revisit the second part of it. But what what I think if you look at the first quarter performance for CAS and X, what for me is great is that it's not any one thing. You know, sometimes you get a question on the call, but what was it that drove it? Well, it was that we had some engine overhauls that shifted from here to here or this one big thing that happened. Our answer today to that is that that it's happening everywhere. It's happening all throughout the company. And that's great. It's a bunch of things happening in every department. And and we've got leaders across this company that are bought in. South Southwest is used to winning. And winning is fun. And and we've got a team that's all rowing in the same direction. Because we wanna win. And that's a really exciting thing. And so I I'm seeing a a bought in set of leaders that are all growing in the same direction and looking to be creative and and spend smartly. Right? It it's it having good cost control doesn't just mean you know, cut cut cut. What it means is that you spend in the ways that are smart for the business, where you invest in the product in the right way, and and you invest in our people in the right way. And you get really efficient about the way that you do it. So I I've been really pleased with with what I've seen so far.

Andrew Watterson: I'd say, Bob's answer earlier about kind of what we're doing in the future. You always have to have an initiatives and work in the future, I think is a good kind of hint towards what we have now, this new offering which we like the pathway they're on, there will be additional things we add to it. So the value proposition we offer our customers will only strengthen as we go throughout the year and the next year. We have nothing to outline today. Only that there will be things coming about how we strengthen the attractiveness of Southwest Airlines, to the customers who want to be engaged with us and there we have extraordinarily large customer set very loyal customer set, very loyal. They've been with us for years. All across the country and so they want more from Southwest Airline They want to pay more for it more so we will continue to offer them more I think successfully.

Connor Cunningham: Can I just follow-up on that? So do you need to see things in the current initiative set before you can launch new ones? Like, is it that you wanna make sure that premiums work the way it is and before you do additional stuff? And then could you just talk about maybe, like, the loyalty component? Like, you're making a lot of changes Are people signing up for credit cards now to to offset some of the potential book weight? I know that you're not seeing it, but if it did happen, in in the future. Thank you. Sorry about that.

Andrew Watterson: No no worries. The and and so we definitely always have to have this list of initiatives. We don't need to see how Extra Legroom is booking. We know the path we're going down. We know what we're gonna offer. It's merely we're not ready to talk about it right now. But we do have a pipeline. You always have to have a pipeline with your customers. You can never let it go stale. And so we do have things we we know it's coming. Have taken a kind of bundled one size fits all product. We added upper buy up opportunities. With extra leg room assigned seats. We added kind of a base product with basic economy There are more features coming, more destinations are coming. And so the loyalty program is self reinforcing with that. We have a new These are Southwest Airlines. There's you know, immense opportunities to keep offering them more and to grow the that basic customers, especially in the cities where we have a a lead, if you will, and customer share. And so all this is at a normal course of business. We're not waiting for any one thing to to kick, if you will. It's more of a premeditated path that Ron and Bob talked about.

Connor Cunningham: Appreciate it. Thank you.

Jamie Baker: Our next question comes from Tom Fitzgerald from TD Callen. Please go ahead with your question. Hi. Thanks so much for the time. Quick one at first. Just apologies if I've I missed this earlier, but it looked like at Investor Day, you had talked about having sixty eight leg room seats on the MAX eight and the eight hundreds. But now it looks like it's only forty six. Is that correct? And if so, what changed?

Andrew Watterson: Yes. So we did change from the investor day layout. And so as we look at the whole kind of cabin, how best to monetize it, behind the behind the exit row extra leg room, was obviously going to be not as attractive as in the front of the exit row. So we decided to concentrate more extra leg room in front of the exit row to make them more attractive and to reinforce a price point for them. And the ones that were formerly extra leggings behind the exit row will turn those into form of preferred seats. So they will have a little bit extra have a little bit extra leg room. And so kind of a zero some space in the tube, we moved the thirty two's and the thirty five's and the thirty one's to configuration that has less DLR, we think gives us better revenue monetization opportunities in the end because overall our end goal was maximize the revenue per square foot. From the Lupa.

Bob Jordan: Yeah. What we showed at Investor Day was a was a very strong hypothesis of of what we would do as we continue to do work and move through the design of the aircraft and the layout. Yeah. At Andrew's point, we found that they're they was a better way to maximize the revenue per square foot in the aircraft with it, which is the whole game here. Now All of that again is well underway. I'm very excited that gonna begin those aircraft retrofits here next week on on the thirtieth. And so the whole this entire initiative is moving along really well, but all along the way, you continue to discover things that have refined what we showed you at Investor Day. But I'm very pleased with the progress.

Tom Fitzgerald: The other thing that's great, by the way, is that the mod is relatively simple. Now we have a lot of airplanes to modify, but to the extent that we find that we want to make a change here or there, the ability to do that is is very different than some of the more complicated modifications that you see. You know, happening around the industry.

Tom Fitzgerald: Okay. That's really helpful. And then as a follow-up, just to kind of piggyback on some of the questions that Jamie and Connor have asked, one of your competitors talks a lot about being the brand loyal airline. In a specific market. And I'm just thinking about markets where you're really dominant in, like, a Saint Louis or a Nashville versus some of the more competitive markets like a Denver or a Chicago, and an issue is that you might need to become the brand loyal airline in some of those more competitive markets again. And I'm just, like, wondering, you know, you talked a little bit you hinted a little about a month ago at JPMorgan, but, you know, other initiatives, just where you're thinking it, where your head's at right now, your latest thinking on, you you know, maybe fleet initiatives, whether it's trying to get scope relief to, you know, roll out RJs or or partner with the original airline or, you know, acquiring wide bodies be able to offer more of an international product. But just love to think about how, you know, how you're thinking if there's been any change in your thinking or any updates and and and the time out on that. Because, you know, if you think about Southwest in in twenties, it seems like a lot of these decisions you'd have to start putting in place now to really get the airline humming where you'd like it to be. Again for the time.

Bob Jordan: Yeah. Yeah. It's, yeah, it's interesting that the phrase brand loyal, airline nobody, has a stronger domestic air network than Southwest Airlines. Nobody has more domestic customers than Southwest Airlines. Nobody has more loyal customers in those points of strength. Nobody has higher NPS scores So how are you defining brand loyal customers? Southwest Airlines is the winner. And we're gonna continue to grow more and more points of strength of course, we're gonna continue to constantly understand what our customers want. That's why we're moving to assigned seating. That's why we're adding extra leg room. We'll continue to move to our customers' needs and meet their needs. And nobody is gonna out hospitality, out operate, or out loyal brand loyal Southwest Airline.

Jamie Baker: Our next question comes from Duane Penningworth from Evercore ISI. Please go ahead with your question.

Duane Penningworth: Andrew, you mentioned I think you did anyway, managed business is up Can you talk through the trends you saw through March and April one of your peers, you know, talked about a slowdown. It it sorta turned negative on volume, but has picked back up more recently to kinda low singles. Any any green green shoots you're seeing yet on that front?

Andrew Watterson: I would say yeah. What I said is you especially if you took out the government, both state, local, and federal, which did see a market slowdown starting in January. The rest of it is up, you know, and and stable. You know, within that, you always have geography geographies or industries that are plus or minus one quarter or the other. Insurance, technology, banking were up this quarter. Manufacturing and health care were down a little bit. So the I would consider those just the normal kind of vagaries of industries moving up and down. On the same with geography. So what's kind of different about this environment is that if you have kind of any kind of macro weakness usually shows up business first. And business travels highly correlated with corporate earnings Corporate earnings have held up. Business travel has held up. And so we're pleased with that. It's the customers discretionary travel that is really the crux of the slowdown. And so like others report on that, so nothing new there. But, you know, steady as she goes with with managed business travel is certainly welcome.

Duane Penningworth: Thanks. And then just on premium, it's come up in a couple of other questions, but is it still is the target still one third of your seats When do you expect that to go live? And and and by that, I mean, like, which quarter would we actually start to see the contribution? And then how big of a RASM tailwind does that represent going from effectively no premium to know, one third of your seats?

Andrew Watterson: Yeah. I'll answer part of it. Ultimately, the benefits was in our investor day number, which I'll I'll refer you back to that. But I would say premium, Dwayne, I would think about it as four zones which we can monetize in the aircraft. So we're going from, you know, find your own seat with early bird upgrade boarding to assign seats and we will have kind of a preferred behind the exit row We will have extra leg room. We'll have preferred in front of the exit row. So then you'll have the kind of standard at the very back. So you have multiple zones for which there'll be different price points The standard will be free for certain fair products. And so there's really more than premium from my mind gives us opportunities for discrete levels of sell up with it through fair product or ancillary for people to pay more for more, which is either space or position the aircraft for a particular price. And so customers responded well to that idea. Obviously, our peers do it. So that I think gives us a more opportunity to monetize the cabin. As part of this kind of segmented offering I talked about as we move away from a one size fits all.

Bob Jordan: And we we talked, you know, about the elements of the segmentation. But, you know, having having basic economy and the ability to be able to buy up from that is is a really big deal. Right? We've talked about the fact that we we sell a lot of our inventory in the lowest of the four categories today, which is which is one to get away. And and and in many cases, we are pricing against a basic economy fare at, you know, at a competitor, and and the offering of that basic economy is something much less than what we're offering and want to get away. So that's something that we're fixing as part of this. Then everything that Andrew described, whether it's bags, whether it's seats, all of these things layer on top of that to be able to provide that that value. But that that that that is sort of the underlying foundation that allows the to to to function. And and just just about timing. So, yeah, again, selling the new assigned seating extra leg room in the third quarter of this year for operation in the first contribution. I do think you have a chance to see some contribution in 2025 because we'll have retrofitted more and more aircraft before you get to that first quarter date And so so if you buy early bird today, in that world, you'll have access by boarding early to what is basically the extra leg room seats that are already in the reconfigured aircraft. So I think there's a chance that you see some additional upsell in terms of products that we sell today simply because you now have access to that better seating.

Andrew Watterson: I think in in the way to model it, Duane, is that basic? It'll have Avaya up to a kind of more first level standard. Gives you some seating a Biot's preferred, a Biot's extra leg room. So you got those four buyout opportunities today which really don't exist. So that's the power of this change.

Duane Penningworth: Thank you.

Andrew Watterson: Our next question comes from Savi Syth from Raymond James. Please go ahead with your question.

Savi Syth: Hey. Hey. Good afternoon. Just a follow-up on on David's question earlier on on the load factor. I was curious you know, you are getting max base and and retiring seven hundreds, you know, not getting the max sevens, but you've also talked about maybe in the future not needing as many of the kind of the smaller gauge aircraft like, what kind of an impact is just not having the kind of a gauge of aircraft you want having on on your load factor or is that not not the driver here?

Bob Jordan: I I think today, I'll let Andrew really give you more detailed information I I don't know that I don't think that it's a factor today. We're not so at a balance in terms of the number of aircraft at the one hundred and seventy five. It really comes to play more today in terms of where we have potentially restricted operations like Chicago Midway as an example with the length of the runway. Obviously, if this goes on and on and on and they're they're we're not Boeing is not delivering the MAX seven that smaller aircraft that becomes more of an issue, but we're really nowhere close to that.

Andrew Watterson: Our load factor on the big plane the same as the load factor on the small plane. And so we really appreciate having the more seats in the prime time where you need it. And so it's we're really able to make use of that extra seating when you have excess demand and that really gives us a good return. It's just when it off peak you have that many more seats that are empty. The trip cost doesn't really vary that much. Between a max seven and a max eight. And so carrying around ten empty seats or excuse me, twenty five extra seats is not going to be it's not that much different. Whereas you could sell those on a peak day, a peak time of year. So right now we're pleased with the have the max eight. But there are certain situations where we want a max seven. So versus pre pandemic, the percentage that we think we need has gone down. It's not zero, but it is much smaller than it used to be.

Savi Syth: That's helpful. And and if I might follow-up on on Duane's question on on corporate, what's the size of that kinda government exposure and and I know some of your kinda competitors have reduced the dedicated seats into those areas? Like, have you been able to kinda offset some of that weakness? Or is that kinda continuing drag here?

Andrew Watterson: It's a modest percentage. I can't remember them off the top of my head. What sticks in my head was you take out a government and we're up like 4% in managed business. So I I just can't remember what it was. Yeah. I think the government my my memory is the government exposure, and then whether you count state, it's sort of in the 2% range and some maybe actually a little bit less. So while it's awful lot, the percent of the business that it represents is very small.

Savi Syth: Helpful. Thank you.

Julia Landrum: Alright. With that, we're gonna wrap up our analyst portion of today's call. I appreciate everyone joining and hope you all have great day.

Jamie Baker: Ladies and gentlemen, we now will transition Miss Whitney Eichinger, chief communications officer leads us off. Please go ahead, Whitney.

Whitney Eichinger: Thanks, Jamie. Welcome to the media on our call today Before we begin taking your questions, Jamie could you please share instructions on how to queue up for a question?

Jamie Baker: To queue up for an opportunity to ask a question, please press star and one. To withdraw your questions, the command is star and two. If you're on a speakerphone, we do ask that you please pick up your handset before pressing the keys. We'll pause for a moment and then start answering your questions. And our first question today comes from Alison Snyder from Wall Street Journal.

Alison Snyder: Hi. Thanks so much. There's been a lot of talk among some of your competitors, you know, even earlier today about O'Hare. And ramping up there. And I was just curious, can what you guys see as your future at O'Hare?

Andrew Watterson: It was not uncommon for us to be in multiple airports a multi airport geography and use those multi airport geographies. We have an anchor store, if you will, and that is midway for us. And so O'Hare is designed to to complement. We have a midway for a kind of fairly large customer base we have in the city of Chicago. And so we're pleased that Chicago's Department of Aviation can accommodate us in both airports. And so we tend to be in both airports and served Chicagoland to the best of our ability.

Alison Snyder: Got it. But you don't see it as a sort of a major growth airport?

Andrew Watterson: Yeah. We're low growth this year, Nick. So right now, we're pleased with what we have in Chicago. Our growth this year is more focused on Nashville, Phoenix, Sacramento, some in Orlando. And so each year, we have kind of a growth vector, and it is and those I just mentioned this year, And for future years, those haven't yet been decided, but Chicago has got a strong customer base for us and then having a good move our capacity when one part of the country is booming and one's busier, we can move our aircraft. And vice versa. And so that allows us to you know, have good diversity. And so we're we're pleased with that. We have Chicago and the rest of our network. Thanks.

Jamie Baker: Our next question comes from Mary Schlangenstein from Bloomberg News. Please go ahead with your question.

Mary Schlangenstein: Thank you. I wanted to ask as consumers view Southwest is becoming more and more like every other airline, I'm wondering in the promotions that you're working on go going forward, what are gonna be some of the the hard assets, the product assets that you can point to that differentiate you in the future, not things like hospitality, friendly employees, But what are some of the hard assets that you can point to that would be a reason for somebody to fly Southwest versus one of your competitors?

Bob Jordan: Hey. Well, Mary, I mean, to start with, there's a lot. We we have a a network that is far different than our competitors rather than having a few strong hubs that we you know, then connect the vast majority of the traffic through. We are we are large in dozens of cities. And therefore have the most non stops in in the domestic network. So our schedule is far superior to our competitors. We're running a terrific operation We were number one in the Wall Street Journal rankings in the first quarter. And that's what taking time out of the turn We're still running the top operation in the industry. Yeah, you kind of said it, but for hospitality, hospitality is a huge piece of this. Our our people and the service that they deliver and the way they treat our customers is a huge difference. The vast majority of the notes and compliments that I get from our customers is all about the way one of our employees made them feel, went out of their way, to help them with something. So I think that's a huge piece of this, and that's what leads to the industry best NPS scores. And in fact, the NPS scores in the aircraft during travel with our flight attendants that's the highest scoring part of the journey. So I don't think you can dismiss that. And then as we move along, we'll continue to add the attributes like adding different seating and adding the extra leg room. There are a lot of product attributes that we're looking at not ready to announce different things today, we'll continue to add those along the way as well. But no. I think our list of differentiators is very long. Thank you.

Andrew Watterson: Thank you, Mary.

Jamie Baker: And ladies and gentlemen, this concludes our question and answer session for Media. So back over to Whitney now for closing comments.

Whitney Eichinger: If you have any further questions, our communications group is standing by. Their contact information along with today's news release are all available at SWAMedia.com. Thanks.

Andrew Watterson: The conference has now concluded.

Jamie Baker: Thank you all for attending. We'll meet again here next quarter. You may now disconnect your lines.

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