Southwest Airlines Co
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Southwest Airlines Co
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Welcome to the Southwest Airlines First Quarter 2019 Conference Call. My name is Cody, and I will be moderating today's call. This call is being recorded, and a replay will be made available on southwest.com in the Investor Relations section.
At this time, I'd like to turn the call over to Mr. Ryan Martinez, Managing Director of Investor Relations. Please go ahead, sir.
Thank you, Cody, and welcome, everyone. Joining me on the call today, we have Gary Kelly, our Chairman and CEO; Mike Van de Ven, Chief Operating Officer; Tom Nealon, our President; Tammy Romo, Executive Vice President and CFO; and other members of our senior leadership team.
Please note that our comments today will include forward-looking statements, and these are based on our current intent, expectations and projections. As we noted in our earnings release this morning, we have made flight schedule adjustments through August 5 as a result of the MAX groundings. And the guidance we will provide today is based on our estimates assuming the grounding of the MAX through August 5.
A variety of factors, in particular those that are out of our control in connection with the MAX groundings, could cause our actual results to be materially different from our current guidance. We'll also make references to non-GAAP results, which exclude special items. And for more information regarding forward-looking statements and our reconciliations of non-GAAP to GAAP results, please visit the Investor Relations section of southwest.com.
So with that intro, I'll turn it over to Gary.
Thanks, Ryan, and good morning, everyone, and thanks for joining us for our first quarter 2019 earnings call. Overall, I am as proud as I have ever been of our people. They did an extraordinary job, produced solid results among industry-leading margins and despite the challenges of near-record cancellations. But for the numerous cancellation events, it would have been a blowout quarter. But still, rock-solid margins, returns and cash flows, and a huge thank-you to our people for their resilience and for their perseverance.
Based on where we are today and what we can see from today, the second quarter will be better. We're better prepared to handle the MAX schedule changes, prospectively through August 5, rather than the more chaotic daily cancellations. And our goal is to provide our customers a stellar experience during the busy summer, especially.
Our on-time performance was solid in the first quarter, and it will be solid again here in the second quarter. Restoring the MAX to service as soon as it's ready is also a priority, of course. And assuming that happens within the next couple of months, we'll get back on our delivery schedule and our capacity plan.
Mike, Tom and Tammy have prepared excellent briefings on our operations, commercial, and financial performances and expectations, and I don't want to steal their thunder, so I'm going to be brief this morning. But I did want to reiterate a couple of points.
Despite the challenging year so far, first of all, we were once again named to Fortune's list of the World's Most Admired Companies. This year, ranked number 11. We were just ranked number 2 out of 500 companies on Forbes List of Best Employers. And all great companies start and end with having great people and being a great employer. So we're very proud of that.
We were number 1 in the DOT rankings for 2018, Customer Satisfaction, again. And we're off to a great start in 2019. Our brand and NPS scores remain strong in 2019 and industry-leading as well. We have a balance sheet leverage of less than 28%. We have almost $3.9 billion in cash. We have an excellent, cost-effective and risk off fuel hedge in place for the next several years. Our Hawaii expansion is off to an exceptional start, and of course, that is despite having numerous distractions in the first quarter.
Our technology plans for this year and next are ambitious, but they are proceeding well and on track. And then, finally, I expect us to make progress on our cost initiatives this year except for the capacity cuts effect, of course. And we're not giving up on our goal to expand margins and return on capital year-over-year.
Despite the challenges, we may very well set records in some financial categories this year. But having said that, I admit that there's uncertainty surrounding a lot of things, certainly the timing of the MAX and, as usual, the economy and fuel prices.
But, we're off to a good start. And we're planning on having a good year and making a lot of progress this year. So with that very quick overview, let me turn it over to our Chief Operating Officer, Mr. Mike Van de Ven. Mike?
Well, thanks, Gary. The first quarter reinforced a couple things that I already know. Most important being that our people will absolutely rise to meet any challenge. And we had our fair share of challenges to start the year. The prevalent operational themes for the first quarter were launching our Hawaii service, and then, of course, the unanticipated maintenance rise up and our MAX groundings have impacted our operations.
So, as you all will remember, the quarter started the minute the government shutdown in the middle of our ETOPS authorization. We had worked on some contingency plans, and despite losing about a month of timing, were still able to launch Oakland to Honolulu service in the first quarter as planned. And since then, we've added an Oakland to Maui, and we're going to launch service between Maui and Honolulu on Sunday. The service startup went extremely well. Our onboard experience has received high customer marks, and we are continuing to add service during the second quarter.
Beginning in mid-February, we started to experience disruptions to the operations with unexpected maintenance write-ups. And just as that was returning to normal levels in mid-March, the MAX groundings occurred. Those combined items created unexpected, irregular operations to the last half of the quarter. So we were operating in a daily environment that consisted of canceled and delayed flights, aircraft swaps, crew reroutes, high volumes to our call centers, maintenance demand and logistics associated with the grounding and, of course, the customer anxiety at the airports. But our people, across the board, again, rose to the occasion and they took superb care of our customers and produced a very solid operational performance in spite of that environment.
Our on-time performance for the quarter was 78.7, and that was just a tad lower than last year's 79.3. And if we adjusted for the maintenance and the MAX impacts, our on-time performance would have modeled in the 83% range, and that would have put us second in the industry from a marketing carriers perspective. That's a good indication that the network design and our operational approach are in sync and we have a strong operational foundation as we move forward. Southwest had the top ranking for fewest customer complaints for domestic marketing carriers in 2018, as measured by the DOT. And as Gary mentioned, we maintained that position in both January and February, which are the latest results. And again, that's just additional evidence that our people are really leaning in to providing great hospitality and service to all of our customers. And our people have really owned the disruptions that these issues have caused our customers.
Cumulatively, the weather and the maintenance write-ups and the MAX groundings, they caused significant cancellations. We canceled more than 10,000 flights during the quarter, roughly 4% of our published schedule. That was significantly more than we would have expected going into the quarter and, in fact, that's the highest level of cancellations since the third quarter of 2001, which was impacted by 9/11. Of course, we got much higher load factors and fewer seats to reaccommodate impacted customers today. But over the years, we've made significant investments in several operational recovery tools that minimize the impact on our customers for those issues.
So, in the first quarter environment, 97.5% of our customers got to their destinations the same day as scheduled. And that's compared to 97.8% last year when these issues didn't exist. So a very solid, very customer-service-driven result, given the unexpected challenges.
Turning to the MAX. We have 34 MAX aircraft grounded, 33 of them are in Victorville, California. We still have the one aircraft in Orlando that had the engine issue during the ferry flight. We're in the process of doing an engine change on that aircraft. It will be ferried to Victorville sometime over the next week. Having all the airplanes in one place improves the efficiency of our maintenance program for the aircraft as well as relaunching the fleet when we're able to do so. We're using this additional downtime to do any necessary inspections or planned work so that when the fleet can be relaunched, it's as close to being a new delivery aircraft from a maintenance perspective as possible.
Getting all 34 aircraft to relaunch and back in service is expected to take a month or so. We're still working on those detailed plans. The aircraft will need software upgrades as well as make-ready-to-fly work, and that includes things like unsealing the aircraft, oil and fluid checks, required inspections, system checks, cabin cleaning, those types of things. Of course, there will also be additional FAA pilot training requirements that will also need to be completed.
As Gary and Ryan mentioned, we've removed the airplane from our scheduled service through August 5. Assuming that the airplanes are cleared to fly before then, we'll pragmatically bring them back into our operational fleet and will utilize them as spares to support the network. They will begin to fly in a normal scheduled service pattern beginning August 6. And of course, if the groundings continue past that date, we'll need to make further adjustment to the schedule.
So, as we move into the second quarter, our operational theme is to provide an exceptional customer experience over the summer. Our unexpected maintenance events are behind us since we agreed to the tentative agreement with AMFA. AMFA's in the process of educating our mechanics on the agreement. We expect the voting results in the second half of May.
The MAX flights have been pulled out of our schedules and all impacted customers have been contacted, and are in the process of being reaccommodated. And given the related capacity pull down, we are left across the busy summer travel period so that we can provide exceptional service. We're focused on getting our customers the safe, reliable, on-time and fun experience that they're accustomed to on Southwest.
And so with that, I will turn it over to Tom.
Okay. Thanks, Mike.
So, as you all know, we finished 2018 very strong. We came into 2019 with a lot of momentum. And I think that despite several significant challenges, we have delivered a very strong revenue performance going into -- in the first quarter. In fact, we achieved record first quarter operating revenues of $5.1 billion and our year-over-year unit revenue performance is expected to be among the top in the industry.
And just to add on to what Gary said, the people of Southwest Airlines, they carried the day throughout the quarter under very, very tough circumstances. We had a lot of cancellations, a lot of reaccoms, and they serve our customers with the hospitality and the kindness that we are famous for. So it's been a challenging quarter, and you all did an incredible job.
In our March 27 investor update, we shared the details behind the drivers of our revised Q1 RASM forecast, which we said would be up 2% to 3% year-over-year. And we ended the first quarter at the high end of that guidance, with RASM growth of 2.7%. So let me start the quick recap of Q1, and then I'll cover our outlook for the second quarter.
So, in January, we were expecting Q1 RASM to increase in the range of 4% to 5%. And just as a reminder, there were several key factors that went into that original guidance: first, a continuation of the strength in the base business trends that we experienced in Q3 and Q4 of 2018; second, the benefit from November's system-wide fare increase; third, continued strong performance from our Rapid Rewards program; fourth, 1.5 points year-over-year RASM benefit from our new res system; and finally, a 1.5 RASM tailwind from Q1 2018's suboptimal flight schedule. We also planned for a roughly $40 million shift in the revenue from Q1 to Q2 due to the Easter shift. And we also plan to grow our Q1 capacity by approximately 3.5% to 4%. So that's what the plan was based on. Let me quickly recap what's occurred since our earnings call in January.
So first, as we shared previously, we quantified the impact of the government shutdown to be roughly $60 million. And obviously, government-related business travel was the most easily identified. But we also began to see a clear trend change and leisure demand softened with the prolonged shutdown. And this continued pretty much throughout the quarter. Versus our original Q1 RASM expectation of plus 4% to 5%, the shutdown impact is what caused us to revise our Q1 RASM guidance down a full point to plus 3% to 4%.
Second, the unscheduled maintenance events was another large contributor, resulting in a little more than 0.5 points reduction to Q1 RASM. And this essentially lasted from mid-February through mid-March. Third, the March 13 grounding of our MAX fleet was the next largest revenue drag. It was a slight benefit, actually, to our Q1 RASM. And fourth, softness and leisure demand in yields, which is really related to the government shutdown, was approximately 0.5 points negative impact to Q1 RASM. I think it's important to call out right now that this trend has changed and we're seeing leisure demand and yield strength in the second quarter.
So, we ended the quarter with over $200 million off our original revenue forecast, and we ended the quarter about 2.5 points below our capacity plan. Now part of the RASM impact we saw, particularly in February and March, was due to having less inventory available for higher-yield close-in bookings. We had to use a lot of this close-in inventory to reaccommodate our customers due to the maintenance disruptions and the MAX grounding.
Now, in contrast to the unscheduled maintenance disruptions, which were very unpredictable day in, day out, and very difficult for our employees and our customers, we were much better able to get out in front of the MAX cancellations to minimize the impact to our customers. And we were much more proactive in reaccomodating our customers several days in advance of the flight date.
So having said all that, our close-in yields remained strong year-over-year. Business travel demand continued to be strong as well. But we took fewer close-in bookings simply because of the reduced inventory per sale.
Our revenue management capabilities continued to perform very well and drove a 1 point year-over-year RASM benefit in the quarter, which was slightly lower than our original expectation of 1.5 points. And this is due to the softer trends I just mentioned as well as the reduction in inventory. Our industry-leading Rapid Rewards program is performing extremely well and is continuing to grow double digits, both in terms of the size of the customer portfolio as well as in terms of the total loyalty revenue.
We are continuing to see tremendous strength across every metric of Rapid Rewards, and this was on an already strong base. In Q1, we saw record acquisitions in new Rapid Rewards members. We also saw our highest ever acquisition of new co-brand credit card holders. And we're also seeing very high retention rates, which is a great combination. So again, our Rapid Rewards program continues to perform extremely well. Our customers love the benefits and the value of the program, and there is a lot of runway in front of us for continued growth.
In terms of our ancillary products, they also contribute to the first quarter's RASM performance, also with strong double-digit performance in our boarding products, including continued strength in the variable pricing of our EarlyBird product that we implemented last fall. That pricing structure is working very well and it's meeting all of our expectations.
I think EarlyBird also benefited from our improved merchandising capabilities on Southwest.com. And we will continue to invest our industry-leading, direct-to-consumer Southwest.com platform. Our international markets are also doing very well and continue to develop and mature. Though this is only 4% of our system capacity, we are really pleased with the performance that we're seeing. RASM, yields, load factors are all strengthening, and our international business is developing as planned. And we're also seeing noteworthy performance in Puerto Rico and the Caribbean.
Finally, we launched our service to Hawaii on March 17. We began our initial flights by connecting Oakland to Honolulu and Maui. And as you know, we began our Hawaii flights with very low initial pricing. And if you look at where we are today, we are moving up the pricing ladder to what we consider to be normal pricing levels, and we're seeing very strong demand in bookings.
And while it's a small sample set, the early feedback from our customers, as Mike alluded to, is absolutely exceptional, and their satisfaction with the in-flight experience is actually higher than the rest of our system, which, as you know, has always had extremely high Net Promoter Score.
I think this clearly speaks to the strength and the quality of our economy product, and not just on short- and medium-haul trips, but on long-haul trips as well.
So, in summary, for Q1, a lot has happened over the past 3 months. Several things have happened that we certainly did not anticipate, but a lot of things also happened that we did expect. We saw a 1.5 point year-over-year tailwind in the Q1 2018 suboptimal schedule. We saw a continuation of strong year-over-year close-in yields. We saw another very strong performance from Rapid Rewards, and we saw a healthy year-over-year RASM benefit from our revenue management enhancements. And just as a footnote, this our highest year-over-year quarterly RASM since the third quarter of 2014. So that's it for Q1.
Now, let's talk about the second quarter. So we are expecting strong year-over-year Q2 RASM performance in the range of up 5.5% to 7.5%. And this is based on the current booking curves and pricing trends that we're seeing. This is a strong year-over-year improvement as well as compared with Q1. And recent demand and yield trends have stabilized and are improving.
Earlier this month, as you know, we republished our schedule for April 7 through August 5, and the intent was very simple, to get us back to a schedule that we knew we could fly with the 700s and 800s that were in our fleet. As we removed MAX flight from the schedule, we're doing it in a way that maintains the integrity of our network and the strength of our schedule. And until the MAX is back in service, we intend to operate a slightly reduced schedule, but with the reliability and the hospitality that we're famous for. It's a better and more efficient way to run the operation, and that's what our employees and our customers need from us.
Now, keep in mind that because of the MAX grounding, we'll have less close-in seat inventory just because we're having to reaccommodate impacted customers on new itineraries, which by definition is being done with close-in seat inventory. So this will have an impact on close-in, higher-yield April bookings. We saw improvements in bookings in yields for Easter, and we're also seeing improvement in both May and June. The demand that we're seeing is solid for both leisure and business travel, and close-in fares are holding up very nicely, and we're seeing a continuation of strength in close-in yields year-over-year.
So, the bottom line is that we're encouraged by the improvements that we're seeing in Q2. And just as a reminder, we had a 3 point RASM headwind in Q2 of 2018 and 2 things drove this.
First, we had the 1-point impact from the suboptimal flight schedule and, second, we had a 2-point impact following Flight 1380. So this equates to a 3 point RASM tailwind for Q2 2019. We also had a 0.5 points year-over-year RASM benefit due to the Easter shift into Q2.
So, similar to the first quarter, we expect around 1 point in year-over-year RASM benefit in Q2 from our reservation system, and this is in comparison to roughly 0.5 points of RASM benefit in Q2 of last year. And we expect about a 1-point RASM benefit in Q2 due to lower capacity as a result of the MAX groundings. And finally, we expect another strong performance from our Rapid Rewards program in the second quarter as well as continued strength and growth in our ancillary revenues.
As we said, Hawaii is off to a great start. It has exceeded our expectations in March, due to the overwhelming demand in our initial flights. And despite a very short 2-week booking window, our first flights sold out very quickly. In fact, initial flights were sold out before we were even able to get the first e-mail out to Rapid Reward members.
So, this coming Sunday, we'll continue. We'll begin in and around service between Honolulu and Maui, and we'll connect Honolulu and Kona on May 12. On May 5, we'll launch service from our second California gateway, San Jose, to Honolulu, and on May 26, we'll connect San Jose to Maui. We have more Hawaii service to come, and we are very pleased with how these markets are performing. And the expansion of Southwest service into Hawaii is our primary route development focus for 2019 to 2020. And that will also include more inter-island service.
So, to wrap it up, first quarter was challenging across many fronts, certainly for revenue. And I am very proud of our people and I'm very proud of our first quarter results. And we are off to a solidly positive RASM performance for the year. Our goal to grow 2019 RASM in excess of 3% year-over-year has not changed. We're dealing with some unforeseen circumstances, but we are focused on those things that we can control. The strength of the Southwest brand remains very high. Our customer service and our brand NPS scores continue to be at the very top, the very top of the industry. We're continuing to grow our customer base, in particular, our most valuable customer segments, as well as in key markets.
So, we have a lot of momentum coming out of Q1 and our immediate focus is on solid execution in Q2. And just like in Q1, our outlook for Q2 RASM should be at or near the very top of the industry again.
So, with that, let me turn it over to Tammy to take us through the financials.
Thank you, Tom. And hello, everyone. Gary, Mike and Tom have outlined the challenges that we've been managing through since the beginning of the year, and I'd like to add my thanks to all of our hardworking employees for their resilient focus today good care of our customers and for their unwavering commitment to Southwest.
Despite the significant headwinds, we are off to a solid start to the year, with almost a 10% pretax margin, and we continue to consistently generate strong cash flows and shareholder returns. I want to also thank our people for their focus on cost control in the midst of all the challenges. Our first quarter nominal cost, excluding fuel and profit sharing, were relatively in line with where we expected them to be at the beginning of the quarter, despite the numerous headwinds. On a unit basis, ex fuel, special items and profit sharing, our cost increased 8.1% year-over-year. Relative to the approximately 6% we were expecting back in January, there were 2 primary drivers of the higher year-over-year growth.
First, the flight cancellations that we experienced reduced our available seat mile growth in first quarter by about 2.5 points year-over-year. And combined with additional cost pressures from maintenance-related disruptions and weather increased our CASM-Ex by about 3 points, since we didn't have opportunities to shed costs that were predominantly fixed at close-in.
Second, we had a $30 million increase to salary, wages and benefits due to our tentative agreement with AMFA, which represents a higher compensation for our mechanics compared with the previously rejected TA from last fall. This created another point of year-over-year CASM-Ex increase in first quarter. This 4-point negative CASM-Ex impact was offset by about 2 points due to better-than-expected completion factor, employee productivity and health care trends, as well as the shifting of advertising and airport costs out of first quarter and into future quarters this year. This resulted in an 8.1% increase in our first quarter CASM, excluding fuel, special items and profit sharing year-over-year.
So, to recap, if you exclude the impacts from the unexpected events, first quarter 2019 CASM-Ex growth would have been in the 4% to 5% range year-over-year. Looking to second quarter, our expectations back in January were for year-over-year cost inflation ex fuel and profit sharing in the 6% range similar to our initial first quarter estimates. As a reminder, the key drivers of our initial expectations were the underutilization of our fleet in first half 2019 due to the delay in our service to Hawaii and the resulting onetime startup cost; higher airport, labor and ownership costs; as well as the timing of maintenance events and technology investments. While those drivers are still relevant, the reduced capacity from our MAX grounding for second quarter is now driving an additional 5 points of inflationary pressure, net of some flight crew and landing fee efficiencies from proactive flight cancellations beginning in early April versus our immediate cancellations in March. And we have about 0.5 points negative impact from advertising and airport cost shifting from first quarter.
As a result, we now expect second quarter CASM, excluding fuel and profit sharing, to increase in the 10.5% to 12.5% range year-over-year. Looking to the back half of this year, we initially expected flat CASM-Ex. With our MAX groundings extended through August 5, we now estimate about 3 points of incremental unit cost pressure in third quarter 2019 based on flight cancellations to date. And while we hope this doesn't persist any longer, there is still uncertainty around the timing of the MAX returning to service. That said, based on what we know today, we continue to expect sequential improvement in the year-over-year CASM-Ex fuel and profit sharing from second to third to fourth quarter.
For full-year 2019 costs, under the assumption that MAX groundings do not extend beyond August 5, we currently estimate CASM, excluding fuel and profit sharing, will increase in the 5.5% to 6.5% range year-over-year. This includes about a 2-point headwind from lower capacity as a result of the MAX groundings and 0.5 points of headwind due to the TA with AMFA. Of course, I will keep you updated as we learn more.
Moving on to fuel. Fuel prices have increased since the beginning of the year with fixed Brent crude up 25% in first quarter since January 1. Also, our fuel efficiency improvement has been impacted by the MAX grounding. That said, our first quarter economic fuel price was in line with our most recent guidance, at $2.05 per gallon.
We have great fuel-hedging protection in place this year with 78% hedge in second quarter and 60% to 65% hedge in the second half of the year. Our hedging premiums for this year remain at approximately $95 million or about $0.04 per gallon. Our 2019 hedging protection produces modest gains at current market prices and kicks in more materially at a 75 Brent crude equivalent. So we are very well-prepared should we continue to see rising energy prices. And as a reminder, our 2019 hedges are a mix of WTI and Brent crude. Our hedging portfolio continues to be structured so that we fully participate in any market declines. For second quarter 2019 and full year 2019, based on market prices as of April 18 and given our current hedge, we expect our fuel price per gallon to be in the $2.10 to $2.20 range. Fuel efficiency improved a modest 0.5% at first quarter, which was understandably lower than expected with the grounding of our 34 most fuel-efficient MAX aircraft in mid-March.
Also, heavy winter weather also drove a higher fuel consumption than we had planned. Second quarter fuel efficiency is expected to be flat to down 1% year-over-year as the MAX has been removed from the entire second quarter flight schedule. For the full year, 2019 fuel efficiency is now expected to be flat to up 1% year-over-year. That said, fuel efficiency improvement remains a material part of our longer-term cost story once the MAX is back in service and more fuel-efficient aircraft will comprise a growing percentage of our total fleet.
Turning now to our industry-leading balance sheet. Our strong financial position earned us an upgrade to A- from Fitch during the quarter, which we are thrilled about. We ended the quarter with ample cash and short-term investments of $3.9 billion, with our $1 billion revolver fully available.
We adopted the new lease standard as of January 1, 2019 on a prospective basis. And as a result, the primary impact was to the balance sheet. We recognized a $1.5 billion operating lease right-of-use asset, which is primarily comprised of aircraft operating leases and airport operating leases and a corresponding liability.
We also removed $1.7 billion of assets constructed for others and the related construction obligation of $1.6 billion for completed airport terminal projects such as Dallas Love Field, Houston Hobby and Fort Lauderdale. The net impact was approximately a $270 million reduction to the balance sheet. The impact to the income statement was immaterial. We have very manageable debt obligations and capital spending plans for 2019. And at this point, we continue to expect 2019 CapEx in the $1.9 billion to $2 billion range, based on the remaining Boeing deliveries scheduled for this year.
On non-aircraft CapEx, we continue to make significant investments in technology, and we are making good progress on a new maintenance system. Our significant airport investments in LAX, Kansas City, Baltimore, Nashville and Boston are under way, and progress is being made on our maintenance hangar investment in Houston, Phoenix and Denver. We expect our investments to help drive incremental revenue and productivity as well as support longer-term cost objectives and our growth plans.
We had strong cash flows in first quarter, allowing us to return $678 million to shareholders through share repurchases and dividends. Lastly, on fleet and capacity. We ended first quarter with 753 aircraft in our fleet, taking delivery of 3 leased MAX 8 aircraft so far this year. We are currently working through the delivery delays with Boeing, but we don't have any updates to share at this point.
Although our 41 remaining aircraft deliveries this year are on hold, the majority of them are back half loaded. As a reminder, we have 28 owned MAX aircraft from Boeing and 13 additional leased MAX aircraft in our order book for 2019. We are evaluating our fleet retirement plans, but at this point, we continue to expect to retire as many as 18 aircraft this year, but that will obviously be subject to the duration of the MAX groundings. Our retirements helped with our fleet modernization efforts, improving efficiency, reliability, fuel burn, and reducing our maintenance burden.
In second quarter, given MAX flight cancellations, we now expect capacity to be down in the 2% to 3% range year-over-year. And for full year 2019, based on what we know to date, and given MAX flight cancellations through August 5, we now estimate our annual 2019 capacity will increase in the 2% to 3% range year-over-year.
Our schedule is currently published through early November, and that includes the first phase of our Hawaii plan, as Tom covered. And we'll evaluate further flight schedule revisions based on the duration of the MAX grounding.
So in closing and as a quick recap on what we shared today, despite the ongoing MAX groundings, our employees continued to rally and take great care of our customers. Our revenue management system is producing revenue gains and performing exactly as we expect it to, and we are expecting strong year-over-year RASM growth in second quarter.
We have a great fuel hedging protection for our 2019 and beyond in place to mitigate rising fuel prices. Flight cancellations and lower capacity is putting pressure on our nonfuel unit costs, though we continue to focus on strict cost control and being nimble. Based on what we know today, we continue to expect solid margins in 2019, with the opportunity to deliver stellar returns on capital. We continue to make important investments in our people, our fleet, the airports we serve and technology, which will support our scalability and many future growth opportunities, including Hawaii. Another huge thank-you to all of our employees who are managing through a lot and continue to do a terrific job.
With that, Cody, I'll turn it back to you now to take questions.
[Operator Instructions] We'll begin with our first question from Jamie Baker with JP Morgan.
Gary, hypothetically, how many consecutive quarters of stagnation, from a capacity perspective, would you be willing to tolerate before possibly considering nonorganic growth opportunities?
Oh, wow. Well, we've been asked several variations of that question, although not that one exactly. And right now, I'll just ask our folks to stay focused. We have a very good plan for 2019. We're not at the point yet where we need to call any material audibles. We're working on -- the MAX is pretty much the audible that is tasking our group right now. I have not asked them to consider contingency Plan B, C, D, E or whatever it might be.
So, I just don't have a ready answer to that question. I think all of us are working under a reasonable assumption that the MAX is going to return to service in a reasonable amount of time. And then, whether we're back to normal, sometime during the third quarter or to begin the fourth quarter, in the grand scheme of things, is probably somewhat immaterial. I think what all of us are a little more concerned about is if that goes on too long, we have a -- Tammy referred to this, so we have a retirement program.
So, Jamie, I think what we would be -- what we would have to scratch our heads with more is just from an operational perspective, we've already planned retirements. And that would imply that capacity goes down from here. But we certainly don't want that. And it would be a lot of work for us to go in and unwind our retirement plan, and I do not want to do that. That would not be efficient. We've got better things to work on, quite frankly. You've asked a much broader, more strategic question. And that's a pretty -- that's an outlier in terms of a scenario. And I just don't -- I don't think that, that is anything that we'll be spending any time thinking about right now. But clearly, strategically, we're in a growth mode, so is the industry. We need to be growing. And we don't -- we -- clearly, we do not want this stagnation, to use your word, to continue very long. But I just don't have a ready answer on that question. And I don't think that, that is a likely scenario.
Yes. That's very helpful, Gary. No, I appreciate it. A quick follow-up. In the event that the FAA does not require any sim time, and it seems to be moving in that direction, but other regulatory agencies do or other pilot unions do, whether here or abroad, is this a scenario that you've discussed with SWAPA at all? I mean, is there a risk that even if the FAA goes with an iPad-training protocol, just the public scrutiny and/or union pressures might lead you to nonetheless pursue sim-based training as a part of the return to service, because that would obviously slow the process down, possibly, quite a bit.
Well, again, just taking your question literally, which I think is the way you intend it, yes, I think that just getting pilots back into the simulator for an event would be a challenge, and that would take time. I think it just depends on what training one is talking about because our pilots are extensively trained. And again, I'm a layperson at this. But my own interpretation is that we already do the kind of training that one would be contemplating to put the MAX back into service. Mike, how many MAX simulators are there even in the world? So -- but the point is, managing the aircraft in a runway stabilizer scenario is something that we already train on and at least as best I can tell has already been covered. So again, I would just go back to we don't know what that would mean precisely. But at this point, we're not hearing that, that will be a requirement. I just go back to we are the most experienced 737 operator in the world. Our pilots are extensively trained. We don't hire them unless they have a tremendous amount of experience, Captain experience, for that matter. So regardless, we'll do whatever we have to do here, but we're obviously awaiting the Boeing service bulletin as well as the FAA or worthiness directive to know exactly what we'll have to do.
We'll now take our next question from Duane Pfennigwerth with Evercore ISI.
So maybe I'm reading too much into this sentence. But the CapEx reiteration for this year has this clause of "assuming no prolonged grounding of the MAX aircraft." So is that to suggest that you might not take delivery of aircraft that you're scheduled to in the back half if it's still grounded and that CapEx would actually come down?
No. I think that -- I'll just be explicit. We are not taking any deliveries right now and, therefore, we're not paying for anything. So if you just took your scenario, and we don't get any more MAXes delivered in 2019, our CapEx would be dramatically lower. But Boeing cannot deliver an airplane now. So any airplanes that they are manufacturing, again, just to be crystal clear, they're at Boeing Field. And so they are not being delivered and we're not paying for them. Did I get that right, Tammy? Tammy is the one who sends the money. So, I just think she...
We will be writing our check as they are delivered.
There you go. So hopefully, that answers your question.
And then, just with respect to the longer-term cost profile. At the start out this year, obviously, there was some first half pressure. There's been a lot of noise and changes around this grounding. But you had talked about a flattening of the cost profile into 2020. Given the extra cost pressure that you're seeing this year, can you just update us on your thoughts of what the cost profile might look like into 2020?
Yes, sir. And Duane, that's what I was attempting to, at very high level, comment on in my remarks is that -- and Tammy mentioned this. So we're asking all of our departments to hit their budgets. And then, where they have activity-driven kinds of spending to obviously come in under their budgets. So we're not burning as much jet fuel, as one example. We're not incurring as many landings and takeoffs from a landing fees and rentals perspective. So to the extent that we have variable costs, we expect our departments to come in under. We have a series of cost initiatives to improve our efficiency. Those are continuing.
And let's just assume that the MAX is back in the fleet in the summertime. I would expect us to hit our cost plan for the fourth quarter, which would be pure. You'd have a -- we'd have our schedule restored. We'd have all of our fleet. And I would expect the cost comparisons year-over-year to be quite good. I think it's a little -- and Tammy and Ryan get this question a lot right now, just trying to project forward to 2020 and what will the costs look like. Again, under that same assumption that we've restored the flying of the MAX this year, we don't see any different cost performance for 2020 at this point. Obviously, the comps are going to be dependent upon what ultimately happens here in 2019. But the cost outlook should be unchanged, based on that report.
Yes. So, certainly, by the time we get to the fourth quarter, we would expect to be on a good trajectory assuming the MAX are back in service at that time. So completely agree.
Now if Jamie's question all of a sudden becomes more of an issue, there's extra training or the training delays the MAX flying or whatever it might be, you understand that I'm not incorporating those unexpected events into that kind of a comment. It's assuming that we're back up and running as per normal with that kind of an outlook.
We'll now take our next question from Hunter Keay with Wolfe Research.
Thanks for all the color on this call today. And just to follow up on that line of questioning from Duane, is it fair to assume that the underlying ASM production on your 2020 CASM will be whatever was in the baseline for last year plus whatever is taking out -- I'm sorry, for next year, whatever's taken out for the MAX this year? Meaning, like 4% or 5% baseline plus 2%, 2.5% for the MAX groundings? Is that a fair way to think about that as you're thinking about the CASM profile for next year?
Yes, sir. And, Hunter, the other -- we built the airline to support by year-end Ryan's 775 airplanes, then we've got another 25-ish coming in 2020. So yes, we want to get airplanes and we want to fly them. So the capacity that we're thinking of to begin this year for 2020, that's what I want us to fly. Now again, there's still questions about exactly how the MAX will re-enter service. But assuming everything comes back online and we're up and running, we get all the airplanes, as we have committed to Boeing and they've committed to us, then yes, we would be flying the 2020 plan as we started this year.
Okay, great. And then can you talk about the 800 in Hawaii and any maybe operational challenges that you've had with that plane? I know why you flew it there originally. It makes sense. But it's probably not the most ideally suited aircraft for doing that in the MAX. Any operational challenges that you've had there? And also if you could kind of elaborate on how you're cracking the distribution nut inter-island Hawaii, particularly within the local community there?
I'll ask Mike to speak to the operational aspect and Tom to talk about the distribution.
So yes, so we really aren't having any, what I would call, significant operational issues with the 800. We're very comfortable with the airplane. We knew, though, that given its range that we would -- we may have to put some lids on the seats, especially in -- when you're flying against some of those headwinds. So that's been the biggest operational challenge for us. We're scanning bags on there, the weight balance program works well. We've got it blocked pretty well. The station performance, we're fully staffed in the stations. The people out there are excited. They're turning the airplanes well. So we're just -- we're learning how to navigate through the Honolulu airport a little bit better and the taxi times on the ground there. But in terms of the operation, the maintenance and the support and the crews of the airplane, all going as planned.
Hunter, I think on the distribution side, we started service back in March. We've been on the ground in Hawaii for well over a year in terms of community outreach, community affairs. And so we've already got a pretty deep roots for such new operation, pretty deep roots in the Hawaiian community. And so in terms of distribution, it's what we always do at southwest.com. So they know the brand better than I would have expected, actually, because many people from Hawaii are traveling to the U.S -- or to the mainland rather, and they're flying Southwest. They know the brand. So a lot of local marketing, a lot of presence. And we're actually seeing very strong, very, very strong reception to the Southwest brand on-island. So that's probably how I'd best answer it.
Our next question comes from Rajeev Lalwani with Morgan Stanley.
First, just a clarification on the -- on some of the CASM questions from earlier. If capacity growth next year is going to end up being a lot higher simply because of the MAX timing, then shouldn't CASM actually be materially lower, say, flat to down versus that 1% to 2% or so that you were talking about before, Gary?
I don't think I quoted a number. Well, I know I didn't quote a number. So I think all I was trying to communicate at this point, and so this is April, so we've got a ways to go before we get into 2020. But whatever CASM we were expecting in 2020 before the events of this year, that's what I would be expecting next year. How that will compare to 2019, I don't think we're ready to say yet. Clearly, we're running higher on CASM here in the first half and that'll probably dribble into the third quarter. Well, it will because we've already reduced our flight schedule through August 5. So yes, you're going to have an easier comp because of all of this. But I don't think we are prepared today to give you any insight as to what that would be. If you thought it was up 1 to 2 before, yes, I agree. It's going to be something less than that, I just don't know how much less yet.
Yes, really nothing has changed from our last comment. So we're just setting aside all the noise from the unanticipated first quarter events, our long-term unit cost target remains unchanged. And so nothing -- no new update here today.
Yes. So what I meant earlier was just a nominal amount, not a year-over-year amount. So what else can we do for you?
And then on the RASM side, Gary, I think you've laid out some objectives earlier in the year. There's been a lot that's moved around. Can you just refresh us on where you are with sort of hitting those targets and whether or not, and this may be for Tom, do you think you can keep some of the momentum that you're seeing in 2Q going into the back half of the year such that there's not this massive step down, if you will?
Well, let me offer a quick comment, and then I know Tom will want to chime in here. In his remarks, he said that our goal remains in excess of 3% unit revenue growth for the year 2019 versus year ago. What I was intending to also suggest with my remarks is that we began the year with the goal to improve margins. We got a little bit of help on that front with lower fuel prices. That still is the case as we look forward today. We've got lower year-over-year fuel prices. We're a little wobbly with our fuel consumption numbers because of the MAX benefit we were getting and now not. But except for that, the fuel outlook still looks, at this juncture, looks really good. So we had a desire to drive better operating margins, net margins and returns on invested capital. That's not happening here in the first quarter. But I wouldn't give up on that especially in the second half of the year and for the full year. So our folks are doing a good job managing their cost. First quarter was really ragged with operations incurring -- even though we had fewer flights, there was more cost for per flight because of dealing with all of the irregular operations, as we call them. So that should perform, Mike, I think a lot better here in the second quarter because, like you and Tom were saying, we've gotten ahead of that. It's just a much more orderly way to reschedule the airline that way. So, Tom, you want to talk about the RASM?
Yes, and I think I'd just kind of restate that the 3% objective is the flight we have in the ground. We're going for it. I think that's what we're seeing so far. The first quarter, as you guys know, was a very -- I think you keep hearing the word choppy. Every earnings call, I hear the word choppy. The first quarter was very, very choppy. And we're coming out of that and we're seeing really nice stabilization of trends. We're seeing normalization of the curves. We're seeing normalization of demand and the fare environment seems to be really where we need it to be. And I think that it's just a shame we have this MAX thing going on because it's a pretty good business environment. So our corporate travel, which is a really good indicator of just the economy, is robust. I wish we had more close-in inventory to sell, but we're re-accommodating. That's a pretty good indicator of this core economic strength, and the business climate or the business bookings are strong. Like I said, wish we had more to sell. But that's my commentary on that.
And I think that's excellent. And I -- the one thing that I wanted to be sure that all of you took away from today, I read all kinds of crazy things about the impact on our brand and our customers are mad and on and on. Our business is really good. And it's in -- it's because our employees work so hard to serve our customers so well. So there are -- while no doubt there are always impacts to companies' brands based on things that happen, our brand is unbelievably strong and I think well deserved. And the operation integrity is intact and looks really, really solid, and there is no evidence of any weakness that is unique to Southwest after our first quarter, and I think we're all very proud of that. And again, very proud of our people for making that happen.
And the only other point I would add on to that is the flexibility and the strength of our network is tremendous. And I think you are seeing that in our results as we work through all these cancellations. So I'd just put an exclamation point there. And then I would also just point out that we have a new reservation system, new revenue management tools, which are also helping us manage through all the challenges. So just the strengths of Southwest just really do go on and on.
And the network changes, I think as some of you all have recognized, they were just masterfully done. So while we had to trim some capacity out, it was done in a way that, again, that also maintained the integrity of our customer offering. I'm very, very proud of that.
We'll now move onto our next question from Jack Atkins with Stephens.
Gary, just to start off with you. It certainly sounds like Hawaii flying is off to a great start, both in terms of customer demand and also the experience. So now that you've got a couple of months under your belt in terms of booking trends, I'd just be curious to get your view on if the ramp time around those routes to get them towards system-level profitability has changed at all or if your sort of thoughts there have changed, given what you've experienced the last couple months.
Well, again, I'll let Tom speak to that, too. I'll just give you my opinion about that. First of all, we're very good at forecasting. And that market forecast, at least to me in my experience, surprisingly well. And I think a lot of that is due to the fact that we have such an immense customer base in California, which is what this is geared for. And number two, because Hawaii is such a terrific destination that is missing from our flight schedule. But I did -- we haven't talked about international. International is a bigger segment of our system than Hawaii is, of course. And our international segment is developing very, very nicely. I was very pleased at the performance here in the first quarter. And I just offer that up as a contrast. I think our opportunity in Hawaii is far greater and far easier than what we are tackling in international markets just because we don't necessarily have the same relative strengths. And we certainly don't have the awareness in our international destinations about Southwest that we do, as Tom mentioned on Hawaii. But I don't see, Tom, that it's -- I mean first of all, we've just gotten started, to be fair to the question. But I certainly don't see anything that would discourage us. In fact, the fact that, as you pointed out, the flights sold out before we even put out a press release, I was stunned. But what are your thoughts?
I think I've said this before, not sure I've said it on an earnings call, but we have such a built-in customer base in California wanting us to take them to Hawaii that I don't know how much faster than typically we should expect this to turn. I think this will develop faster than other new markets. You might have seen us do with international, where we don't have a built-in customer base. But I'm thrilled with where we are, but, yes, I did do some competitive shopping yesterday, just looking at the fares, and I really like where we are. I mean, we're very early into this and we're at pricing that is -- it's below the competition, but still it's good, solid, strong pricing. And not sure if you guys have taken a look at our pricing on dotcom versus our competition, but I love where we are very quickly in our development curve. So I think when you begin to add the bag fees, the first bag, second bag, third bag, there's a real dramatic difference. And we can make money at that price point because of our cost structure. And we feel great about it, this is kind of the Classic Southwest Effect. So I feel good about where we are, Jack.
And I do want to make sure that -- there was a question earlier, I just want to make sure that we were clear. And Mike commented on this. But we have 175 seats on these airplanes. We are not selling all 175, for operational reasons. And so that is -- and that was Mike's point earlier. So if you think about, in the context of your question, profitability, longer term, Mike, I think you would agree, the MAX will be the better airplane there. It just has better performance and better range characteristics. But even with that, I think we feel very good, and that's all factored into our modeling. And I just offer that up, Tom, because I think we have upside even to where we are today with the performance in those markets.
I would agree with that.
Well, that's great. And just for my follow-up, Gary, you alluded on the fourth quarter call to the potential for new revenue management levers that could be rolled out in 2020. And I know there have been a lot of things in terms of outside factors that have been taking up your bandwidth over the last few months. But is there anything you can update us on there in terms of the potential for revenue management opportunities as you look out into next year?
I would say in terms of the distractions, sort of the unplanned, I don't -- Tom, I don't think that has an impact on the work that we're doing on these couple of secret initiatives.
Nope. They're totally unconnected.
So, but I don't think, Tammy, do we have a news to share yet?
There is no news to share yet. So everyone's going to have to stay tuned there.
So stay tuned please, sir. And then begging for your patience there, so coming soon.
We'll take our last question from Joe Caiado with Credit Suisse.
Thanks for squeezing me in. I'll keep them short. Mike, I think you said it would take about a month once the grounding order is rescinded to get your 34 aircraft back into service; a number of things would have to happen there first. It sounds like there's some incremental costs associated with those preparations. So for you and Tammy, are those already embedded in your revised full year CASM-Ex guidance? Or are you not going to be picking up the tab on that and so, therefore, it is not included?
Yes. We've done our best based on what we know to incorporate all of the associated costs in our guidance. And obviously, if anything changes there, we'll update you. But it includes our -- it's included.
Okay. And then I was wondering, are you able to comment on the results of the inspections that you performed on the Wave 1B while they've been grounded and whether you've observed any kind of type of wear pattern that's different than what you expected?
Joe, are you talking about the fuel nozzle coking?
That's right, yes.
Yes. So when we had -- on March 26, when we were ferrying that last flight from Orlando to Victorville, we did have the in-flight shutdown and it turned back to Orlando. So the working theory on that particular airplane was that there was coking around the fuel nozzles and it created a variance in the hot spots and cold spots in the engine and the hot spot in the engine, we had some damage with respect to a little pressure turbine. So GE went out and asked -- the good thing about the engine temperatures and fuel coking is it's pretty manageable. It builds over time. It lends itself to trends that are detectable and then you can go great procedures to go monitor and inspect and repair or replace those things. So as you asked the industry to look at 25 engines. We looked at 12 of ours. And we've done some engine replacements. We've done some nozzle replacements. The way we're thinking about our fleet sitting down, and I mentioned it earlier, we like to almost get it at a new delivery status when it comes back up and flying. And so if we can do an engine change on that and it precludes us from having to do inspections after we relaunch the fleet, we'd rather go do things like that.
Joe, I think the only thing I would add to that is that every new engine, at least in my experience, has its -- I would just call it, break-in issues. And it doesn't matter whether it's a CFM engine or some other manufacturer. And our technical operations work with the manufacturer to develop inspections and repair processes. And they are doing what they need to do to maintain these engines. So I think in that regard, I didn't want you to get the impression that we are doing investigative work here on the engines right now. We're not doing that. We know what we need to be doing. We're working with CFM to clear some of these items out so that they don't have to be inspected and, especially the fuel nozzle example that Mike was using, as frequently. But it's not unusual for an engine to have some break-in things happen. And the engine for the most part has performed in line with our expectations, especially with the fuel efficiency. It's a great, quiet ride and it's a good engine, and I expect to -- I only expect it to get better.
Well, great, that concludes the analyst portion of our call. Of course, if you have any other questions, please reach out to me. And thank you all for joining us.
Ladies and gentlemen, we'll now begin our media portion of today's call. I'd like to first introduce Ms. Linda Rutherford, Senior Vice President, Chief Communications Officer.
Thank you, Cody. And welcome to the members of our meeting on today's call. We'll go ahead and get started with the Q&A portion. And, Cody, if you would just go ahead and give them instructions on how to queue up.
[Operator Instructions] We'll now begin with our first question from Alison Sider with The Wall Street Journal.
Can you tell us anything about sort of how you're thinking about steps you'll take once the MAX is eventually allowed to fly again, steps you'll take to reassure passengers, set people's minds at ease that it is safe? Have you started having those sorts of conversations with Boeing or with the pilots or flight crew? What kind of messaging should we expect around that?
Alison, this is Gary. I think you should expect messaging. I don't think we're ready, Tom, to say exactly what that is yet. But it's a great airplane. Boeing is a great company. This is -- we're looking forward to, obviously, working with the FAA to get it ungrounded. And we'll gauge our messaging according to what questions our customers have, to a large degree. But, Tom, any thoughts you want to share there?
That's a pretty good question. I think everyone's asking the same question. There's just so much media and coverage on the topic that everyone's got an opinion, and I think that there's certainly going to be some people that I expect would probably book away for some period of time. That's probably -- I have no idea how to quantify that, by the way. But I think there will be some people that do that. I think we have a very good understanding between our marketing team and our communications team. We're doing a lot of work understanding what our customers' perceptions are, what their understanding is of the issues, what their awareness is of the issues, what their concerns are with the issues. So I think we have a pretty good perspective on that. I think what's also pretty interesting, at least from my perspective, is since this has been going on, our customers' perception of the Southwest Airlines, the brand, the company, the people, has not changed at all with the grounding of the MAX. There's some words that they use when they talk to us about what they think of us and they use words like they're very loyal to Southwest. They have a lot of confidence in Southwest. They have a lot of trust in Southwest. And I think they have good reason to have confidence and trust because, as you've heard throughout the call, we know the 737 better than any carrier in the world, and they understand that about us. So we're working through our plan right now. And I can tell you that we'll have a very comprehensive plan that communicates directly to our customers and our employees every step of the way. But that's -- there's more work to be done as we learn more, but we're very focused on it. So appreciate the question.
But we'll certainly want to share what we have done to satisfy ourselves that the airplane is ready to return to service. And I think Boeing has work to do to clarify exactly what this functionality is for, what it's not for, because I do think there is a lack of understanding in the media even. And so there's work to be done, I think, on both fronts. But I'm confident that we're up to that task. And I think what Tom mentioned again, we mentioned earlier, which is key, which is we have a great brand. It's one that people trust. And we earn that every day. So we'll want to certainly be mindful of that and message what we are comfortable in committing to. And clearly, we're not going to do anything that we think is unsafe. So that's not even a topic. That's not even a question. But I agree with Tom. I think that there'll be those questions and I think people will get -- I think they will quickly get comfortable with the answers.
And if I could just ask one follow-up. Have you been sort of surveying customers about how they're feeling about the MAX right now? Is that something you've been directly communicating about with people? And what kind of responses have you been getting?
Yes. That's what Tom mentioned, is, yes, we're absolutely doing that.
We'll take our next question from David Koenig from the Associated Press.
Here is another of those questions, I guess. First, Gary, are you going to seek compensation from Boeing over the groundings? Can we talk about the hit to CASM, the additional fuel spending? Clearly, there's a hit to your revenue. And I'm also -- I'm sorry, it was hard to hear Tom, when he was talking about people booking away. But can you give some sense of what magnitude you expect that to be? Is it going to be serious enough that you might not be even be able to use all 34 of the planes you've got plus the 41 you're supposed to get?
No. I don't think we're going to have any concern or any risk of using all 34 airplanes. And we'll fill them up just like we always do. The only point I was trying to make was there's certainly going to be some people that are concerned, and they may be intimidated to fly for some short period of time. I don't think it's going to be a massive issue for us. I think that our customers know us, trust us, they know we go the 737. So I don't want to overstate my comment or have my comment inflated. I was just raising that as I wouldn't surprise me if a few people said that. But I think we're going to be fine.
I appreciate that clarification. That's good. But are you basing that on surveys that you're doing or are you basing that on history of past planes that have had accidents, what?
Yes, we're basing that, David, on the customers that we are talking to. And we're doing a lot of research, if you will, with third parties as well as directly with our customers. And we're very attentive to what is the customer's perception of the brand through our trip Net Promoter Score as well as our brand Net Promoter Score as well as what we're hearing and seeing on social media. So I think we've got a really good handle on what our customers are thinking and feeling and what we need to be doing. And then on the Boeing aspect of your question, well, yes, we're not happy with this situation. Who would be? Boeing has already conceded that there are things that they need to address and, obviously, we totally agree with that. We have a great partnership. We're the -- I think without a doubt, the most successful airline in history. We've got an impeccable safety record. In terms of our partnership, what's important, obviously, is where we go from here. And I would fully expect that we'll continue to have a great partnership with the Boeing company. With respect to anything along the lines of business arrangements or our contract arrangements or whatever it might be, those are things that we'll take up with Boeing privately. And again, I would just restate the obvious, that this is not a good situation. And we'll all need to work together to work our way out of it. Boeing is a very fine company. They build fantastic airplanes. Mike has said this many times, when we launched the MAX, the MAX 8 we felt was the best narrow-body airplane in the world, ever. And there's every reason to believe that, that will continue to be the case once it returns to service with this software modification.
We'll now take our next question from Mary Schlangenstein with Bloomberg News.
I have a couple of quick questions for Mike. Mike, I wanted to ask you following up on the Leap engine question, are you finding a degrading of any of the parts like the fuel nozzle sooner than you would've expected on those planes due to the coking? And my second question is, what intrigued you enough about the A220 that you actually went to Airbus to take a look at the plane?
Well, starting on the fuel nozzle issue, Mary, I don't know if it's any sooner than we expected. Coking is not unusual. If there is a good thing about coking on fuel nozzles, they built over time, their trends are detectable and you can clearly create monitoring and inspection and repair or replace procedures to take care of all of that. As Boeing learns more about it, as they monitor their worldwide fleet, I'm certain that they will have design changes or design improvements that they will get into the production line and it will mitigate the inspections that we'll need to do on a go-forward basis.
And I think that's key, Mary. Mike used the word learning and it was CFM, not Boeing. But it's anything that is new, there will be learnings. And there will be things that were designed and intended to operate -- or perform a certain way that don't. So that was the point I was trying to make early on the analyst call. That's certainly taking place here.
Yes, Mary, I don't think that this Leap engine in its maturity, I don't think it’s all -- its maturity curve is all that different than what this CFM engine was, what the gear turbo fan is, what the Rolls-Royce engine on the 787 is. They all have a kind of a maturity curve. And this one feels, at least in my history at Southwest, we feel like we're right on that curve.
You make an excellent point. CFM 56 has been a phenomenal engine, and it had a rocky start. And whatever the CFM was before that on the Classic, same thing. It had kind of rocky start, and GE and CFM do a wonderful job. Do you want to talk about Airbus?
Yes. So, Mary, our fleet team was down in Europe and visiting, but that's not anything unusual. We have relationships with all the OEMs, most of the lessors around the world. And we're just always out there trying to discuss and evaluate economics and opportunities in airplanes. And I had an opportunity to go out to the Paris Air Show last year. And it was a great opportunity for me because I got to talk with Boeing and GE about the MAX. I got to learn a little bit about Airbus and NEO. Bombardier was out there with the C Series at that time. I talked to Embraer. I talked to Pratt & Whitney. And it was just a great way to go, just gather information about the marketplace out there. Every one of those people have great products and great airplanes and really, that was just nothing more than our fleet team trying to gain a little understanding of what's out there.
And, Mary, I did want to add to this, I want to be very clear, the timing is a bit unfortunate. And I dread speculation that it's intentional on our part to perhaps consider a change from our current direction with Boeing and the MAX, and that is not true. We didn't reveal that we took this trip. That was a leak by somebody. And so, again, I just wanted to point out there's -- we're not trying to send any message whatsoever. This trip was planned a long time ago, Mike. And so I'll just leave it at that. We have no plan to do anything other than grow our fleet with the MAX. Will that be the case into perpetuity? I'm not prepared to say that. But in any event, the timing is unfortunate.
So, Mike, did you like the A220?
Yes. But, Mary, I like all new toys, shiny new toys.
Well, it's a great airplane. It is a great airplane.
Yes. But, Mary, [Indiscernible] and I like them all. I like the A220. I like the Embraer product. It was just -- it's kind of like going to a new car show. You just like all the different products that you see out there.
We'll take our next question from Tracy Rucinski with Reuters.
So just to follow up a little bit on those comments, Gary. At what point would you consider making any additions or changes to your fleet? I know you have about 250 or more MAX on order through 2026. When would it be reasonable to consider adding any other models and what might those be?
Well, I'll be a little repetitive. We're not planning on adding a different aircraft fleet to -- aircraft type to our fleet, okay. So I'd just repeat that. We are not planning to do that. As a practical matter, we are -- we want to grow our airline and we will grow the airline over the next several years, Mike, at least with the Boeing MAX as a practical matter. So in order for us to add a different aircraft type, that would be work for us, and that's not work that would be completed in 12 months. I don't want to put a timeline on it because we're not working on it and I don't know how long it would take to do that. So hopefully, that at least gives you some parameters to think about. What we might be doing 10 years from now or 20, that's just not what we're talking about here today. But we have no intention of doing anything different in the near term whatsoever. And we're not preparing ourselves as if we have to do something different in the medium to long term either. That doesn't mean we won't change our minds. And there's -- as usual, there's all those caveats. So Mike really answered the question. We have the Airbus, the A220 is new, and we have an obligation to look at it and understand what it is. It is in our wheelhouse, so to speak. It's a narrow-body airplane that would be eligible for consideration to do the mission. That's what he's doing and nothing more.
We'll take our last question from Ghim-Lay Yeo from Flightglobal.
I just had a question regarding the 737 retirement plan. I know, Gary, you said that you would like to avoid having to unwind the retirement plan for 2019. And I was just wondering if Southwest intends on doing any short-term leases of 737 NGs or just going out to the used marketplace? What are you seeing in the market in terms of pricing and availability, especially with the release on 737 flight capacity currently? Thank you.
Well, it's a great question, and I think it's a short, easy answer. The answer is no, we are not contemplating going out into the used market. I think the only thing that would, Mike, make sense to me is if we wanted to add some NGs to the fleet is we would unwind some of the airplanes that we already own or lease. And again, we don't have a plan to do that. Tammy, I think you've got 18 retirements planned for 2019.
For 2019.
And Tammy mentioned that her plan at this point is to follow through with at least most of them. So there might be a couple of airplanes that we change our mind and decide to keep. But all of this is working under the assumption that the grounding -- that the airplane is ungrounded in the relatively near future and that way, we don't have to wrestle with that question. If it's grounded for an extended period of time, we'll have to develop a plan, quite frankly. And I don't think, Mike, that would include going out onto the used market. But to be honest with your question, we just -- we're not working on that scenario. And we just -- because we don't think it is a worthwhile effort, because we don't think it is a likely scenario. If that scenario materializes, I'm very confident that we can react to it and handle it, but it's nothing that we're working on.
Yes. We've been out of the used market for the last couple of years. We've got most of the NG airplanes out there that we like. It just doesn't make a lot of practical sense for us to go out and search the market for a used or leased NG when we already have NGs on the property that are already in our maintenance program, already in our maintenance profile. It'd just be easier for us to extend that than it would be to go out and get a new airplane. So we're not looking out in the market at all for NGs.
And the reason that we don't want to unwind the retirements, that would certainly be vastly easier compared to bringing another airplane on in the market, like Mike said. But he's already set a maintenance program for each one of these tail numbers and we would have to redo our maintenance plan to then add in maintenance under the assumption that we're keeping the aircraft longer. And that's the kind of work that I would -- I just don't want our tech ops department to have to add to their list. They have other things that I think are more important to work on. And we prefer to continue on with the retirement of those airplanes and bring on new airplanes to replace them.
Sure. And just, Gary, you mentioned that there has been no indication so far that there might be additional simulator training for the 737 MAX for when it becomes ungrounded. Is that just from what you gather from your discussions with Boeing and the FAA? Are you hearing anything from the union at all with regards to that?
Correct. That's from all parties we've talked to. And certainly, I put great reliance on our pilots, on our flight operations leadership, our pilot union. And they are very confident in what we do as an airline, how we train. We just made a $250 million investment in our flight training facility, which is absolutely state-of-the-art and a huge source of pride here. And they are the litmus test for me and they are confident in the airplane, in the training, in the return to service with still some questions to be answered, admittedly. But if they were not, then I would not be. But the fact of the matter is they're very comfortable with the plan as we currently understand it.
At this time, I would like to turn the call back over to Ms. Rutherford for any additional or closing remarks.
Thank you, Cody. If you all have any follow-up questions, as always, our communications team is standing by for you, our online newsroom at swamedia.com or by calling us at 214-792-4847. Thanks so much.
That concludes today's call. Thank you for joining.