Southwest Airlines (LUV) Q4 2018 Earnings Conference Call Transcript

Southwest Airlines (LUV -0.54%)
Q4 2018 Earnings Conference Call
Jan. 24, 2019 12:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

See all our earnings call transcripts.

Prepared Remarks:

Operator

Good day, ladies and gentlemen. Welcome to the Southwest Airlines fourth-quarter and annual 2018 conference call. My name is Greg, and I will be moderating today's call. This call is being recorded, and a replay will be 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.

Ryan Martinez -- Managing Director of Investor Relations

Thank you, Greg, and welcome, everyone. Joining me today, we have Gary Kelly, our chairman of the board and CEO; Tom Nealon, our president; Mike Van de Ven, chief operating officer; 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 those are based on the company's current intent, expectations and projections. A variety of factors could cause our actual results to be materially different from current expectations.

And we will also make references to non-GAAP results, which exclude special items. So for more information regarding forward-looking statements and reconciliations of non-GAAP to GAAP, please visit the Investor Relations section of southwest.com. Before we get started, I want to provide an update on the cadence of our planned investor updates for 2019. Beginning this year, we will discontinue releasing monthly traffic statistics.

However, we will continue to practice what began last year of providing a quarterly investor update in the last month of each quarter, so that will be March, June, September and December, typically around mid-month. So with that intro, I will turn the call over to Gary.

Garry Kelly -- Chairman of the Board and Chief Executive Officer

Thank you, Ryan, and thanks, everyone, for joining us for the fourth-quarter 2018 earnings call. The earnings were outstanding, an outstanding way to close an important but very challenging year. I am very grateful to all of our Southwest people. They are extraordinary and they really showed their resilience and their fortitude.

They did an exceptional job, and they have set us up very, very well for what ought to be a banner and a record year in 2019. Our celebration is bittersweet. This is the first earnings report in the history of Southwest Airlines without our beloved Herb Kelleher. It is a huge loss for us.

It's a huge loss, of course, for Herb's family and really the countless friends and acquaintances around the world that he touched in some way. Our world owes him a huge debt of gratitude for how radically better he made it. And without a doubt, we are more inspired at Southwest than ever to keep our company strong and keep it growing and to make Herb proud. So everybody, look out.

Despite the 2018 challenges, we set a number of financial records. I'll just underscore the cash, record cash flow, Tammy, I think, we had record cash on hand to end the year, record low balance sheet leverage and all that despite almost 7% higher jet fuel prices. And Tammy and Tom and Mike are going to give you all a thorough recap of 2018, so I won't go on any further other than to repeat it was a strong year and a superb finish. I want to talk about 2019.

I'll talk about the government shutdown in a minute. We have a stellar year planned. As I told you all in October, our revenue outlook remains superb for the year. We're off to a great start in January, have industry-leading forecast, I think, for first quarter of solid capacity growth.

And barring anything unforeseen, we project unit revenue growth for the year in excess of 3% just like we said back in October. We've got strong traffic, strong yields supported by significantly enhanced revenue management capabilities that were rolled out during 2018. We've got new revenue enhancements committed and under construction as we previously promised and expected to come online in 2020. Stay tuned for more details later on this year.

And no, I am not talking about charging for bags. Based on our current fuel prices, our unit cost outlook for the year is also quite good. It's under 2%. We have a terrific 70% fuel hedge built for 2019 at a reasonable cost with zero foot exposure and dramatic protection at, say, $100 a barrel.

We'll have protection below that as well, but it is very dramatic at that level. Our cost outlook ex fuel and items for the year is in the 3% to 3.5% range. If we missed that range, it will be because we're below it. And the only caveat in the unforeseen category here is that we do need to hit our capacity target because the denominator is important when it comes to unit cost.

As we said in the release, the CASM-Ex is front-half loaded for a couple of reasons. Tammy will go over those. The second half is flattish. That bodes well as we get into 2020.

And really, a good comp to what was a stellar cost performance in 2018. I'll quote my good friend, Herb Kelleher, on the first half next year in terms of cost, which is, it's an aberration -- it's an anomaly bordering on an aberration. So regarding our warning back in October about cost, it's obviously uncharacteristic for us. Our early indications were simply coming in much higher than we had been previously expecting.

We shared that, and thanks to our leaders for doing a great job at arriving at a sensible budget for 2019 and on committing to a series of initiatives that will drive further efficiencies. Of course, Southwest is famous for being a low-cost efficient airline. Over a long period of time, we've been able to control our cost ex fuel to 1% to 2% unit growth per annum. And that's largely been driven by wage and benefits inflation that everyone here is familiar with.

I don't expect that to change going forward except to say that it is our goal to control inflation to less than 1% to 2% per annum. It's important for a number of reasons that we strive for that. But in any event, the suggestions by some that our costs are not -- they're out of control are absolutely false. We made controlling our cost our No.

1 priority for 2019 and also for the next several years. But I do want to add quickly that we'll also expect to improve our operational performance and our customer service deliveries, so we don't want to move backwards with those categories. Over the past 15 years, we've seen a remarkable improvement in our revenue-generating capabilities along with a dramatic improvement in our fuel consumption efficiency. Over the last five years, we've seen the best returns on invested capital in our history, and it obviously validates that our investments have more than paid off.

So bottom line, 2019 is shaped up as a phenomenal year. So last part, the government shutdown. I'll sum it up in a word. It is maddening.

And I will also state the obvious here, which is that no one can predict what impact it will have if it continues. So all of the bullish comments that I just shared assume that current trends continue or we at least -- or we abate some of the penalties that we're already incurring. But everyone needs to be on notice and on guard that this shutdown could harm the economy and it could harm air travel. What I can tell you is that we will do everything that we can to find a way to work through this slop and contain the damage and keep our finances strong.

So with that quick overview, let me turn it over to Mr. Tom Nealon.

Tom Nealon -- President

OK, very good. Thank you, Gary. Thank you, everyone, for joining us. Well, I got to tell you, we had -- as you just heard from Gary, we had a very, very strong fourth quarter.

You'll hear from Tammy in just a few moments. Our cost performance was very strong. We beat our guidance, and our revenue performance was also very strong. And we came in at the very upper end of our guidance, and I dare to say that the entire Southwest family, and by the way, we are a family, it is a family.

You all made it happen. I'm very thankful to each one of you, and I appreciate all the hard work that you put in every day. So we are, in fact, seeing fourth-quarter yield momentum continue into the first quarter. And we also continue to see solid passenger demand throughout the booking curve.

I think that barring any major changes in the macro environments, or a protracted continuation of a government shutdown, as Gary alluded to, we are set up very well for a strong first-quarter and first-half RASM performance. As I said in October call, Q4 was a clean quarter in terms of year-over-year comps. We had record operating revenues of $5.7 billion, which is up 8.5% year over year. And this was driven by strong performances in both passenger revenues and other revenues.

Our load factor was down one and a half points year over year, which was pretty much right in line with our expectations, while our passenger yields increased 3.7% for the quarter. And we saw stable trends across the booking curve, including close in, corporate business strength, as well as strength and solid holiday performance. Our average one-way fares were up 6.3% for the quarter, and our performance was consistent across all of our regions. And our yield strength produced a healthy fourth-quarter RASM.

It was up 1.8% year over year, which again was due to the upper end of our guidance range of plus 1% and 2%. And this is consistent with the original guidance we gave in October and reaffirmed again in December. I think it's also worth noting that keep in mind, this RASM performance was on a 6.5% increase in capacity. And we also overlapped a plus 2% comp in 2017, so I think that's pretty strong performance.

Our scheduled operating day was down 2% year over year in Q4 as we continued eliminating very early and very late shoulder flying which, by the way, is also consistent with what we described in our prior calls, just reducing our shoulder flying. Our new res system capabilities contributed roughly $95 million in EBIT benefit in the quarter, which was above the higher end of our guidance range of $80 million to $90 million. And this contributed a nice way to our yield performance for the quarter. So that puts the res system benefits at $205 million of EBIT for 2018, which is a bit ahead of our plan.

And we are very pleased with the performance and the capabilities of the new system. We're pleased with how our revenue analysts have adopted it and really embraced it. We'll continue to enhance this and leverage it fully going forward as well. As we mentioned in our earnings release, we will be ending service to Mexico City later in the quarter.

But I have to say that overall, we are really pleased with our international business. Although our near and national markets are a small percent, about 4% of our capacity, they were, in fact, accretive to our Q4 RASM results. Our international RASM outpaced domestic RASM, and that was on almost 8% increase in capacity. And these markets are continuing to develop very nicely, very much in sync with our plan.

The international load factors, by the way, were also up year over year. And we saw a pretty nice improvement in the performance over Mexico beach destinations in the quarter. Having said all that, we don't have any plans to add any additional international this year mainly due to the fact that Hawaii is our top new market. But the RASM performance of our international markets is very strong and we're very pleased.

Our boarding and ancillary products also performed well. Both were up double digits year over year. And as you might recall, in late Q3, we introduced variable pricing for our EarlyBird product, and this is performing right in line, if not slightly ahead of our expectations. Business partner revenues were again strong in Q4, and our Rapid Rewards program continues to be a strong performer as our cobranded credit card revenue again grew double digits year-over-year in the quarter.

And we saw real strength across all metrics in the Rapid Rewards program. And this, by the way, is at already strong base. So we're seeing strong acquisitions in new Rapid Reward numbers, new credit card acquisitions that outpace passenger growth. And we're also seeing strong spending on the card and very high retention rates.

So this is a very healthy program. So our industry-leading program, Rapid Rewards, continues to perform extremely well and there is still a lot of runway in front of us for continued growth. So let me now shift to the first quarter. So based on our current bookings and yield trends, we do expect Q1 RASM to increase, as you've already heard, in the range of 4% to 5% year over year.

We are seeing a step up in our year-over-year RASM trend. And this is largely due to strength in our base business trends, including strength in close-in bookings, strength in corporate travel, and as I said just a moment ago, strong performance from Rapid Rewards. But in addition to these factors, there are several things I do just want to mention real quickly. First, in the holiday calendar fronts, we will be shifting, as you know, Easter from Q1 to Q2.

And this is about a $40 million revenue shift. It is a shift. Second, keep in mind that we didn't have any benefit in Q1 last year for our new reservation system. As you recall, this didn't begin to roll out until Q2 last year.

The bottom line is we are expecting a year-over-year RASM benefit in the first quarter of about one and a half points. That's pretty solid. Third, we had a one and a half point RASM headwind last year in the first quarter, and this was really driven by several things. First, the suboptimal flight schedule, which we are interested in being done talking about; the competitive fair environments; and the spring break calendar shift.

So none of those things repeat this year, and we see those as a one and a half point tailwind in Q1 this year. As you know, we also implemented a systemwide fare increase in late November, which we expect to be a benefit throughout 2019. So I do want you to keep in mind, our schedule is now optimized. Our fleet is at full strength and growing.

We now have strong revenue management capabilities that we did not have before, and we are better prepared to compete in an environment than we were a year ago. And finally, just like everyone, we are keeping a very close eye on the impact of the government shutdown, and we currently estimated $10 million to $15 million negative impact in January revenues thus far. And that is built into our Q1 RASM guidance. I do think it's important to keep in mind, though, that a relatively small piece of our business travel is tied to government contracts.

So our exposure is relatively low compared to others perhaps, but it's still meaningful and we're keeping a very close eye on this. I do want to turn to the second quarter for just a moment. We are expecting a healthy year-over-year RASM performance here as well, and that's based on the current trends as well as on the prior year headwinds that we experienced. And as a reminder, we had three-point RASM headwind in Q2 last year, and two things really drove this.

First was that suboptimal schedule again. That was 1 point. And second, we had a two-point impact following Flight 1380. Both those issues are behind us, and we see this as a three-point RASM tailwind for Q2.

And we should also see a year-over-year RASM benefit in the second quarter from our res system enhancements. So to wrap it up, we are very pleased with the revenue trends we're seeing as we start 2019. And our goal is very clear. We will grow RASM this year in excess of 3%, and we are off to a great start here in the first quarter.

So with that, I'll turn it over to Mr. Van de Ven. Michael?

Michael Van de Ven -- Chief Operating Officer

Thanks, Tom. We finished the year with a 79.2% DOT on-time performance. And that was lower than what we planned for, but still, it was a one-point, two-point improvement over 2017. But more importantly, our performance relative to the industry really showed improvement over the last half of the year.

We were 6th and 7th in the industry with respect to our on-time performance in the first and second quarters, but we improved at the fourth place there in the third and fourth quarters. And now, if you exclude Hawaii out of there, of course, we would have been third. The majority of that improvement was the addition of a tool that allows us -- that allows for our on-time performance to be an optimization criteria in the schedule design, and that added about a point of OTT rep in the second half of the year. And we did that without having to add any significant additional operational investments in our block and turn times.

And in fact, if you had looked at Southwest on a gauge adjusted basis, we have less block and turn time invested on an on-time performance point than anyone else in the industry. So being near the top of the industry in terms of performance while maintaining a really good asset productivity is a very cost-effective way for us to fund our reliability targets. Turning to bag handling for a second, we put over 123 million bags on airplanes in 2018 and we delivered 97.1% of them on the flights as they were tagged. Last year, that number rounded to 97.2%., so very consistent bag handling performance in '17 and '18.

And those are the best two years' performances in our history. We're doing all of that with pencil and paper as our primary tracking and processing tools. So in 2019, we're investing in scanning and subsequent automation that will be the building blocks not only improve bag handling but also improve the efficiency of our flight close procedures. And that again is going to give us an on-time performance lift without any additional block or turn time investments.

We continue to focus on hospitality efforts in 2018, and we pushed a lot of supplemental customer information to our stations so that they can go out and identify customers that we want to recognize or perhaps apologize for a previous bad experience. We hosted several hospitality summits for our people throughout the year. And those things are certainly making a difference because our complaints to the DOT are down 25% from where they were last year, and we had the lowest complaint ratio in the industry last year. Turning to ETOPS just for a second, our primary operational focus in the near term is getting that ETOPS authorization.

All that we have left are tabletop and validation flights that demonstrate our ability to execute a long-range navigation and our extended operational procedures. But until the government shutdown ends, we are at a total standstill. Now you may have heard that there had been additional FAA personnel authorized to return to work, but the work that they can do is limited to safety-specific activity. And certification of new or expanded operational capabilities, it doesn't fall within that definition and thus the standstill.

If the shutdown ends within a week, I think we have a reasonable chance of beginning service in the first quarter of 2019. Otherwise, it will likely be in the second quarter. In turning to 2019 a little bit further, we do have several other initiatives and technology efforts focused on enabling productivity enhancements. We plan to implement a new maintenance system either late in 2019 or possibly early in 2020.

And it's going to provide substantial opportunities to streamline our processes and eliminate some inefficient overhead costs we have associated with our current system. We're planning to make investments in our crew systems, better connectivity with our crews along with some improved decision support technologies to recover from our regular operations. And we also have more opportunities to continue to incorporate some of the more advanced predictive analytics in the NOC and to use that while we're running our daily operations. So just to close out, I think our operations are on very solid footing as we move into 2019.

The operational metrics are right where they need to be, and that gives us more time to focus on the cost opportunities that Gary and Tom have mentioned. And with that brief update, I will turn it over to Ms. Romo.

Tammy Romo -- Executive Vice President and Chief Financial Officer

All right. Thank you, Mike, and hello, everyone. I'm also very pleased with how our people closed out the year, strong, and fourth quarter. Our 2018 performance truly was a second half story.

Our people's warrior spirit was on full display as they overcame great challenges last year to produce the outstanding results we reported this morning. And we have great momentum coming into this year. On top of the record fourth-quarter revenue performance Tom took you through, we had a solid fourth-quarter and full-year cost performance despite higher year-over-year fuel prices. We did see some relief in crude prices in the back half of December, which resulted in our fourth-quarter hedge fuel price of $2.25 per gallon, coming in at the lower end of our mid-December guidance range.

The lower market prices in December also provided an opportunity for us to add to our first-half 2019 fuel hedge position, as well as 2020 with the Brent crude spot price trading in the low $50 per barrel range. We are now 70% hedged for this year with 75% to 85% protection in first-half 2019 and a roughly 60% hedge in the second half of the year. For 2020, we are now roughly 50% hedged. Our hedging premiums for this year are approximately $95 million or about $0.04 per gallon compared with 2018 premium expense of $135 million or $0.06 a gallon.

Our 2019 hedging protection produces modest gains at current market prices and kicks in more materially at $70 Brent crude equivalent. So we're well prepared should we continue to see volatility in prices. And as we previously mentioned, our 2019 hedges are a mix of WTI and Brent crude oil and are structured so that we fully participate in a market price decline. Our first-quarter 2019, based on market prices last Friday and given our hedging positions, we expect our fuel price per gallon to be in the $2 to $2.05 range with an estimated $0.02 hedging gain offset by $0.06 of premium costs.

And for full-year 2019, we expect our fuel price per gallon to be the $2 to $2.10 range with an estimated $0.01 hedging gain, offset by $0.04 of premium cost. Fuel efficiency improved to 1.5% in 2018, and we expect a similar improvement year over year in first quarter and for the full-year 2019 in the 1% to 2% range, which is around $60 million in annual fuel savings. This will continue to be a key part of our cost story going forward, which should become more meaningful as we begin retiring -700 this year and continue taking on more fuel-efficient MAX aircraft. Excluding fuel special items and profit sharing, our fourth quarter unit costs were down slightly compared to last year and slightly better than our expectation and flat to up 1%.

As a reminder, fourth-quarter 2018 unit cost benefited from a year-over-year tailwind of about three points due to fourth quarter 2017's employee tax reform bonus. For full-year 2018, our CASM, excluding fuel, special items and profit sharing, ended right in line with our expectations of flat to up 1% year over year. Our unwavering focus on controlling costs played a significant role in managing cost inflation throughout the year, and I'd like to thank all of our employees for their tremendous effort. And I'd also like to thank our team for all the hard work they've put into completing our 2019 plan.

We currently expect our full-year 2019 CASM, excluding fuel and profit sharing, to increase in the 3% to 3.5% range year over year with the pressure weighted to the first half of this year. For first-quarter 2019, we're expecting our unit cost, excluding fuel and profit sharing, to increase around 6% year over year. And our second-quarter 2019 year-over-year CASM-Ex trend is expected to be similar to first quarter. For the second half of this year, current cost trends and expectations were just flat year-over-year unit cost, excluding fuel and profit sharing.

Our quarterly capacity growth is playing a big part in our first half cost pressure. And as you all know, the timing of our Hawaii flying has been delayed in this influx. And we're incurring Hawaii-specific start-up cost without the benefit of the flying, which alone is about a half-point penalty in our first-half CASM-Ex year-over-year trend. In addition, we expect first-half unit cost pressure from the underutilization of our fleet due to the timing of Hawaii.

This cost pressure should ease as we ramp up our Hawaii flying in the second half of this year. And this was all contemplated in our full-year capacity gross guidance of no more than 5%. With respect to our first-quarter CASM-Ex year-over-year inflation, as we mentioned in this morning's press release, the largest drivers of our 6% year-over-year CASM growth are the underutilization of our fleet and due -- in the first half of the year due to the delay in Hawaii flying in addition to higher airport cost and appreciation and the timing of maintenance and technology spend. As we said on our last call, controlling our cost is a top priority.

And as we always have, we'll continue our rigorous efforts to contain costs and protect our competitive advantage. Our long-term goal is to contain annual year-over-year growth in our unit cost, excluding fuel and profit sharing, to below 2%, which I believe is reasonable and achievable. And finally, as a wrap up of our cost discussion, the primary reason on our tax rate for fourth quarter came in closer to 20% as the realization of year-end tax credit. We continue to estimate our 2019 tax rate to be approximately 23.5%.

And on that note, the lower tax rate certainly was a welcome contributor to our record operating and free cash flow performance in 2018. We ended the year with ample cash and short-term investments of $3.7 billion with our $1 billion revolver fully available. Our balance sheet remains strong, and have very manageable debt obligations and capital spending plans for 2019. Since 2018, we invested approximately $1.9 billion into the business, which ended lower than our guidance of $2 billion but mostly due to timing.

In 2019, we continue to expect a similar level of CAPEX spending in the $1.9 billion to $2 billion range as we invest in the future of our airline. We are investing in technology, including a new maintenance system, which is as significant to the operations side of our business as our new reservation system into the commercial side. And we have airport investments under way, particularly at LAX and St. Louis.

And we're building a new maintenance hangar in Baltimore. And of course, we have 44 aircraft deliveries this year, including 28 new aircraft in Boeing, which I'll cover shortly. We expect our investments to help drive incremental revenue opportunities, as well as support longer-term cost adjustments as we roll out better tools for employees and more efficient processes and technologies to drive productivity as well as support our long-term growth plan. Our 2018 free cash flow was a record $3.1 billion, and we returned $2.3 billion to shareholders through share repurchases and dividends.

For 2019, we plan to continue our balanced approach to investing in the business and in our employees and with the opportunities to continue providing our free cash flow to our shareholders. Before I close, I'll quickly take you through our fleet and capacity plans. We ended 2018 with 750 aircraft in our fleet, in line with our target. And for 2019, we currently have a total of 44 aircraft deliveries, which is comprised of seven owned MAX 7, 21 owned MAX 8s and 16 leased MAX 8s.

This is 10 more than our previous order book disclosure as we had one December MAX 8s delivery that split into 2019. And we also had nine additional leased MAX 8 aircraft. These additional nine leased aircraft are earmarked for this year's fleet replacement needs. As we mentioned, we'll start retiring some of our oldest -700 this year as we continue with our fleet modernization efforts, which will help improve our fuel deficiency, operational reliability and maintenance burden.

Our current plan is to retire around 20 of our -700 this year, resulting in about 25 net aircraft additions for 2019 and a year-end 2019 fleet of approximately 775 aircraft. We expect first-quarter 2019 capacity to increase in the 3.5% to 4% range year-over-year. And for our full year 2019, we continue to expect our available seat miles to increase no more than 5% year over year. Our schedule is currently published through early August, and this schedule excludes expected Hawaii flying, which, as we covered, will be added as soon as we can.

Here, in a week or so, we'll publish our schedules through the end of September. Excluding Hawaii, our first-half 2019 capacity growth is 2.5%. And as a reminder, Hawaii is expected to represent up to half of planned 2019 capacity growth. And we're certainly looking forward to providing more capacity details once we're able to finalize our Hawaii schedules.

In the meantime, with our ETOPS process on hold, we have some uncertainty in our capacity plans for this year, so we will take it one schedule at a time for now. So in closing, despite our challenges in 2018, our employees rose to the occasion time and time again, and I thought our execution was very strong. As a quick recap on what we shared today, as Tom mentioned, we are starting 2019 with a very healthy RASM outlook. We remain committed to our low-fare brand, and our revenue management capabilities are as strong as ever.

We have been very focused on closing out our 2019 plan over the past few months. And despite some cost inflation above where we like to be this year, I feel really good about our 2019 cost plans and our path to arrest this trajectory going forward, in particular, the much improved cost outlook for second-half 2019. First and foremost, we want to expand our margins in 2019, and we want to improve our returns on capital. While fuel prices are currently down year over year, our improved fuel hedging position for 2019 and 2020 provides even more near-term protection if oil prices go back up.

We continue to invest in the business, in our fleet, facilities and technologies. And many of our investments this year will support future growth and scalability at Southwest Airlines as we continue our march to become the world's most loved, most flown and most profitable airline. In closing, I want to personally thank those of you who reached out to Herb -- reached out to us to share your personal stories and heartfelt thoughts about Herb to our Southwest family. He really did change the airline industry for the best.

And though will be missed greatly, his legacy will live on us forever. And with that, Greg, I'll turn it back to you now to take questions. 

Questions and Answers:

Operator

[Operator instructions] We'll now begin our first question from Joseph DeNardi with Stifel.

Joseph DeNardi -- Stifel Financial Corp. -- Analyst

Hey, good afternoon, everybody. Thanks for the time. Gary, I think there was some urgency from you last quarter regarding the cost pressure you were seeing and the need to find more revenue to offset that. I think, you mentioned that you were open to alternatives.

I mean, has that mindset changed? Because you're now more comfortable with '19 CASM-Ex and then 2020 returning to more normal levels. Can you just maybe update your perspective there?

Garry Kelly -- Chairman of the Board and Chief Executive Officer

Yes. Sure, Joe. To be honest with you, I don't remember exactly the words that I used. But I wouldn't say that anything has changed other than time has gone by.

We formed up our plan. We more than sustained our momentum. It's actually improved. And we've told you the truth in October and we're telling you the truth today.

We are very excited about 2019. I think, what I must admit was just the desire that we have to keep the pipeline full of new ideas and new initiatives. And in terms of what we have in flight right now, I think we're all very pleased, very encouraged with the changes that we made during 2018. We've got plenty of experience under our belt there.

And again, my hat's off to our commercial team. I think they did a phenomenal job. So we feel really good about that and even better about our forecast for 2019 and the benefits that would flow from that. Beyond that, I think I was clear in October that we weren't contemplating then nor are we contemplating now any new initiatives per se on the revenue front for 2019.

All I was doing today is just to reiterate that as far as 2020 goes and what I first mentioned in July, that work is more than an idea, it's a commitment. The construction is under way. Every time that we have relooked at the couple of ideas that we have under construction, they look better to us. So I don't think there's anything different in the message today other than we have better visibility, more certainty, and we're down the road with some of our work.

It's been firmed up, we've got a project planned, people working on it. And we're feeling very good about 2019 and encouraged about our opportunity to continue to augment that momentum in 2020.

Joseph DeNardi -- Stifel Financial Corp. -- Analyst

That's helpful, Gary. Just two very quick follow-ups. I mean, so should I understand that in terms of the ancillary or the revenue initiatives in 2020 that we should just wait to hear what you're planning on doing? At this point, you're not ready to talk about it? And then the second one is you mentioned the fare increase in November as a driver of PRASM. Can you just quantify that somehow so we can understand how impactful things like that are for your RASM? Like what it's adding to first quarter or beyond that?

Garry Kelly -- Chairman of the Board and Chief Executive Officer

Joe, I'll let Tammy address the latter question. On the first part of your question, yes, it's very straightforward. All we want people to know is that we're not sitting by and assuming that revenues will come to us, that we're continually looking for new ideas or it's a little early for competitive reasons to share exactly what we want to do. And so yes, you're going to have to stay tuned on that for some time later in the year when it's more ready for prime time.

That will give us better opportunity to forecast better what we think the benefits will be. But Tammy, you want to talk about the fare increase component?

Tammy Romo -- Executive Vice President and Chief Financial Officer

Sure, I'd be happy to do that. And as you all know, when you're assuming -- what you're assuming for revenue obviously depends on your assumptions in terms of the impact to traffic. But kind of all else equal and assuming no dilution in traffic, it can be up to us, say, call it 1%. But all that's been baked into the guidance that we provided you this morning.

Joseph DeNardi -- Stifel Financial Corp. -- Analyst

That's helpful. Thank you very much.

Operator

And moving on from Barclays, we have Brandon Oglenski.

Brandon Oglenski -- Barclays -- Analyst

Good afternoon, everyone. Thanks for taking my question. I guess, Gary or Tom, I mean, the revenue outlook here, especially in the first half, sounds pretty strong. I guess, can you talk strategically, as JetBlue rolls out, their version of basic economy and the majority of the industry goes to this ancillary-based pricing structure, is that strategically what's driving you guys to change some of these initiatives that we have to wait to hear about in 2020? And is it making it more difficult on the forward end of the booking curve to effectively generate the same RASM as your competitors?

Garry Kelly -- Chairman of the Board and Chief Executive Officer

Great question. Tom will take a swing at it, too. I think, the short answer is no, that's not what we are responding to, what we are -- our capabilities evolve over time. Hopefully, that means they improve.

And we see opportunities where we can drive business in greater volumes or more efficiently in terms of the pricing. And that's what we're going after here in the near term. I was asked -- I'm asked all the time about basic economy. You're not going to see basic economy from Southwest.

That's not what we do. And I already said, we're not going to charge for bag fees. We have, we think, better opportunities that fit our brand. I love the fact that we're different, and they un-bundle and we don't.

And so we just need to continue to find ways with the universe of travelers and the varying needs that they have to see how we can stay true to our brand and offer something of more value to road warriors, to once-a-year flyers, whatever it might be. And I'd say we have a long list of ideas. And right now, we're going to focus on a couple and they're going to come to market in 2020. Tom?

Tom Nealon -- President

What I think I'll add to that, Gary, is when you think about over time, there are some things that we would probably have done sooner if we were able to fire reservation system. The old SaaS cowboys system just preclude us from doing things that we would liked to have done years ago. Now we have the foundation of the one res system in, it really does set the foundation for us to do some things that honestly when we talk with you later in the year, you're going to think, that makes perfect sense. I would've expected you to have done that earlier.

Well, we would have if we could have. Now we can, so we will. So that's the kind of thing you're going to hear us really talking about. But in our ancillary business, if you look at our other EarlyBird product and things like that, these are not inconsequential.

And by thinking of what's the variable pricing, that kind of thing, we really do continue to drive strong ancillary performance. So I'm really proud of the product and where we are, and there's capability now that we have that we can build upon. So I guess, I'll stop with stay tuned for the Investor Day that Tammy will talk about at some point. But that's where it's at.

Garry Kelly -- Chairman of the Board and Chief Executive Officer

And just very quickly on your point about staying competitive. If you look at the results, I mean, there's no evidence that we are not competitive. In fact, there's evidence that we have the best combination of revenues and cost and returns, period. So I think we're all very confident about where we stand in our brand, and we'll put it up against anybody.

Brandon Oglenski -- Barclays -- Analyst

There's no doubt, Gary, your returns and margins are pretty much leading. But I guess, are we to think then that on the forward booking curve where you are facing competition from the ULCC models, you guys are able to get away with a higher fare structure? Is that true or...

Garry Kelly -- Chairman of the Board and Chief Executive Officer

Well, our ULCC overlap is gigantic, so I think that the results would say, yes. And I'm just pointing back to earlier comments that I made about our enhanced revenue management capabilities. So we're in a better position than ever to compete with low cost, high cost, you name it. And Tom has hinted that we are going to use -- we're leveraging this technology to pursue a couple of new revenue-generating ideas.

So we have a lot of strengths. We have more seats in the United States than anybody else. We have more customers than anybody else. We have the best frequent flyer program.

We have a great overall product in terms of the reliability in the on-time performance in the baggage handling. We have the best employees in terms of the hospitality. It is a dynamite package. Nobody can approach matching that combination of strengths.

Certainly, the ULCCs can't come close to that. And again, as I'll say, we're real confident about where we are. We never want to stand still, and we want to keep investing and making improvements.

Operator

The next question will come from David Vernon with Bernstein.

David Vernon -- Sanford C. Bernstein -- Analyst

Good afternoon, and thanks for taking the time. I want to ask a little bit about the decision to kind of postpone any international growth this year. If you kind of look back the last couple of years, opening up international was kind of a growth avenue for you. And I wanted to get a sense for whether this is just the decision to kind of prioritize the organizational focus on Hawaii or whether maybe the opportunities for where you could get to in international markets are maybe getting more developed quicker than you thought.

I'm just trying to get a sense for how you're feeling about the potential still in international given that you're taking a pause this year.

Garry Kelly -- Chairman of the Board and Chief Executive Officer

No, it's the former, and we've been clear about that. So we're going to be growing, I think most people think, pretty aggressively this year. We've added a lot of airplanes to overcome the retirement of the classic fleet and then grow beyond that. So we'll -- we're at record fleet numbers this year, and we'll be adding a net of 25-ish in 2019.

So the to answer your question is, what do we do with 25 airplanes? And we're going to Hawaii. We're going big. That needs to be the focus, and it kind of crowds out expansion in other areas like international. Tom gave a quick summary of the international performance as we saw here in the fourth quarter, and taking a little breather there right now is allowing really good unit revenue development.

So that's all fine. But we have vast opportunities to grow internationally. And were it not for Hawaii, we would absolutely be adding some more international routes and augmenting some of our flying. So it's simply a matter of prioritization, and Hawaii, I think, deserves that kind of prioritization.

It's that big of an opportunity.

David Vernon -- Sanford C. Bernstein -- Analyst

And then no opportunities to maybe repurpose some of the equipment from underperforming domestic routes into maybe international? If that would be a little bit more attractive? Like how do you guys think about making that balance just in there?

Garry Kelly -- Chairman of the Board and Chief Executive Officer

Well, that's just -- you do that every day. So yes, we're pruning. And in fact, that will be part of our cost initiatives that we talked about back in October is evolving our route strategy so that not only is it more commercially viable but it also is more customer-friendly in terms of recovery if we have late flights, and that should help our cost performance. So we are always doing those kinds of things.

We have a very complicated network. There are infinite solutions as to how we route our aircraft, and that is one of the inputs. But yes, the answer is absolutely. Obviously, we're always doing that.

And we like where we are with the route system as it is right now, but we'll continue to prune it as we go forward.

David Vernon -- Sanford C. Bernstein -- Analyst

And then maybe just one quick follow-up on LaGuardia and Reagan. Can you give us a sense for when the timing of those gates that you leased from Alaska is going to kick in? And whether or not the capacity that would be going into those gates is in the ASM guide already?

Garry Kelly -- Chairman of the Board and Chief Executive Officer

You're testing my memory, but I believe it's in the fall in the November time period...

Michael Van de Ven -- Chief Operating Officer

Last year.

Garry Kelly -- Chairman of the Board and Chief Executive Officer

Of 2018. It's already gone in.

David Vernon -- Sanford C. Bernstein -- Analyst

Those are -- so those gates are already being utilized.

Garry Kelly -- Chairman of the Board and Chief Executive Officer

Those flights are in place and performing well. We've also moved -- LaGuardia is undergoing this massive makeover, and we moved our new facilities. So that's been very serendipitous for us to get really good real estate at the same time that we're adding flights. So all that's gone really well also.

David Vernon -- Sanford C. Bernstein -- Analyst

All right. Great. Thank you.

Operator

Moving on, from JPMorgan, we have Jamie Baker.

Jamie Baker -- J.P. Morgan -- Analyst

Hey, good afternoon, everybody. First question on Hawaii, and Tammy sort touched on this saying that Hawaii could constitute half of this year's growth. But I'm curious with the ETOPS delay relative to your initial expectations. Is that possibly sort of working to your advantage in so far as the non-ETOPS-related preparations are obviously still taking place in the background.

So does that imply that when you do finally start service, you can ramp up more quickly than planned? In other words, if the cadence was originally to add -- and I'm making this up, I don't know, three nonstop routes per quarter, so you'd be doing 12 after a year, if you don't start flying until the second quarter, could you still get to the year-end plan in less time because of the delay that you're currently taking? Or does it not work that way?

Garry Kelly -- Chairman of the Board and Chief Executive Officer

Well, this is probably a better question for Mike, isn't it? So Jamie, are you coming at it more from an operational buildup as opposed to a commercial ramp-up?

Jamie Baker -- J.P. Morgan -- Analyst

Well, both. Presumably, had you started service in the fourth quarter of last year, if you were flying it now, you'd have a plan in place for the fourth quarter of this year. As the date slips, does the fourth quarter plan come down? Or can you ramp more quickly because you're basically just twiddling your thumbs at this point, no offense, waiting for the government to get its act together.

Michael Van de Ven -- Chief Operating Officer

Yes. So Jamie, this is Mike. In terms of Hawaii, when you think about all the other non-ETOPS things, our staff is ready. Our procedures are ready.

Our gates are ready. Our equipment is ready. We're ready to go with that. The only pacing item we have with the ramp-up is making sure that as we ramp up, we have an adequate number of pilots trained for ETOPS flying.

And so I will tell you that the slope to ramp up over the first three to six months is probably what it is. And then after that, we don't have as many -- we don't have any constraints really after that.

Garry Kelly -- Chairman of the Board and Chief Executive Officer

Yes. And just philosophically, Jamie, we are going to be conservative. So this is -- there's a certification process for a reason. And I think what -- just to underscore what Mike just said, we're going to want to go at a pace that we're comfortable with.

And I don't think we will be at the same place at the end of the year that we would have been, Mike, had we started this February 1 in terms of flying. But at the same time, in the grand scheme of things, we're going to get there, and it's not talking about a year's delay. And we -- our commercial folks have other purposes for relative to the earlier question. There are plenty of places that we can put airplanes, and that is one advantage we have as an airline.

We can move the airplanes around. And our people are very resilient, and they're willing to do temporary duty in other locations. So -- but it's sloppy, and we've admitted that, and it's reflected in our first half numbers. Even with that, we're still looking at really a stellar year.

And other than that, nothing's changed. The nice thing is the FAA has approved our program. It is ready to go. All we have to do now is demonstrate to them that we can execute our program.

And so the line of sight to getting to the certification is pretty darn sharp, and the FAA is really anxious to get their part of this work done, too. It's just a shame that we are where we are with the shutdown.

Jamie Baker -- J.P. Morgan -- Analyst

Sure. Sure. That's very helpful color, and I wasn't -- I didn't mean to insinuate that it was -- that Southwest was to blame for the delay here. And second, as I'm sure you're aware, competitor growth in secondary cities is running quite a bit ahead of what's taking place in the major markets.

Obviously, United is driving some of that. Constraints at the hubs, also a contributing factor. But any time I think secondary cities, I obviously think Southwest. So is it safe to assume that in terms of year-over-year RASM, your larger markets are outperforming the secondary cities? Or would that be a stretch?

Garry Kelly -- Chairman of the Board and Chief Executive Officer

Well, I -- you know us so well, so I don't know that I'm trying to debate the point, but I think I don't think of Southwest as a secondary-city airline. 100% of our customers flow through our top, I don't know, 10 airports. So we're a big-city airline. And in other words, we don't -- just using your words, secondary, we don't go nonstop secondary to secondary.

We -- in recent years, as an example, we've added non-stops from San Antonio, let's say, to Kansas City. We're the No. 1 airline in each city. I would certainly not refer to them as secondary.

They're very substantial cities. We've got a lot of fans in both, and those are very successful flights. So I don't -- as I remember, we've got 85, 48 state cities and they're the top 85. And in fact, we tried to avoid the smaller cities because we fly, as you well know, we fly 737s, and we just don't generate enough volume compared to what we could do in other locales.

So I think the net answer is, we're used to competition. I mean, that's not going to go away. That will continue to make us better. And we are just continuing to play to our strengths and continue to expand strategically in a way that plays to our strengths.

Jamie Baker -- J.P. Morgan -- Analyst

Strong answers to both questions. Thank you, gentlemen.

Operator

And moving on, from Morgan Stanley, we have Rajeev Lalwani.

Rajeev Lalwani -- Morgan Stanley -- Analyst

Gary, a couple of questions for you on the CASM side. First, can you just walk us through the steps you took and the mitigants you pursued to kind of bring costs down to 3%, 3.5%? And what sort of labor impact you have in those numbers? And then secondly, it seems like in the back half of the year, you're going to be kind of flattish on unit costs. Why isn't that a good run rate to use going forward? Is it labor that can disrupt out a bit and maybe get you closer to 2%, sort of that longer-term target? So just some thoughts there on sort of this year and then longer term.

Garry Kelly -- Chairman of the Board and Chief Executive Officer

Well, Tammy, I might let you, Mike and Tom kind of talk about how we got from there to here. It's just -- I don't know if it was anything real fancy. What was a little fancier was putting together cost initiatives that all of our leadership agreed and committed to, which is a little bit more of a longer project. But going through the annual budget is a grind.

And as I admitted -- my comments earlier, it was coming in much higher than what I was expecting. And we fessed up and told you all that, and I think our folks have done a nice job in trimming that back. But your point about 2020 is a good one. And I will admit to you, that's exactly where my mind will start in terms of expectations for 2020.

It's something that's flat on a run-rate basis. But it's -- but I will also admit to you that it's a little too early to tell. And until we -- the devil can be in the details, and we definitely want to have more confidence that, that is, in fact, the run rate before we just put these bold statements out there. But we're 1% to 2% inflation over a long period of time, and this is a very efficient company to begin with.

And we have invested significantly in driving more revenue and driving more fuel efficiency, so I am proud of that. And that's what you should expect from us going forward is on an annualized basis over a long period of time, no more than 1% to 2%. Our goal, as I said, is to now bring that lower. We are -- our aspirational goal among our leadership is to keep unit cost flat.

And so I can assure you with the cost initiatives that are under way, that will be the expectation of the goal going into 2020. But it's far too early to tell you that, that is our forecast for the year. But Tammy, you want to color a little bit how we got from there to here?

Tammy Romo -- Executive Vice President and Chief Financial Officer

Sure. And I'd be happy to do that. And I do want to remind everybody, on the last call, we were early in our planning, which -- there is normally a lot of scrubbing that we do when we get the original submissions on our annual plan. What -- now clearly, the inflation, the read that we talked about, that was because it was more than certainly what we were expecting and, obviously, what we had indicated to you all.

So I think the important point and takeaway today is the guidance that we've shared with you. Obviously, it was higher than 3.5% when we started the journey. And through a combination of scrubbing our costs and changes, we have made some tweaks to our schedule in the second half. And we have continued fleet modernization, which we've also fine-tuned our plans there.

We landed on the range that we provided here to you today. So as I mentioned earlier, we picked up some more airplanes, and -- so that's -- we certainly expect to see some improvement from the fleet modernization efforts. So really, right now, we're focused on execution this year and, obviously, already working on improvements beyond 2019. So -- and again, I'll just remind you that we're back on a better CASM-Ex trajectory in the second half of this year, which is around flat year over year.

So we'll continue making tweaks to our schedule to balance our operational efficiency with our commercial opportunities, so I think that's the more significant opportunity here in the second half of the year. And as Mike mentioned, and I covered a little bit, we're currently investing in operational technology projects. And those should provide better tools to help us improve staffing efficiency and just allow our employees to eliminate pain points from their daily processes. So as we look ahead, just -- those are some of the types of initiatives that we have kind of in our bag of tricks here as we work to just ensure that we hit the trajectory that we've shared with you today.

So that's really or probably the main points I'd want to point out. Anyone else add anything?

Garry Kelly -- Chairman of the Board and Chief Executive Officer

Well -- and Tammy, I did want to make sure that everyone understands that -- I don't know if happy is the right word, but I am not satisfied with unit cost growth in 2019 of 3% to 3.5%. So don't get us wrong. And we are taking corrective action. Right now, that's what we -- that's what we're facing.

And we have had plenty of years in our history where we've had 3% unit cost growth, and it's just going to be one of those years. But that's certainly not what you should extrapolate going forward. We expect a lot more of our sales than that. Yes, sir?

Tom Nealon -- President

So Tammy and Gary -- this is Tom. Tammy and Gary talked about how we feel about 2019, and we'll work to hit that plan, and we hit plans. Let me talk about beyond 2019, and how we're thinking about really the 2020 and beyond kind of cost thinking. I guess, I think it's really important to start with, so where are we starting from? And we are one of the most efficient airlines in the world, by the way.

So we are very, very efficient. But we do have opportunities, and I think that you'd be -- at some point, I do want to take you through this. We want to take you through this, but there -- we're working on the things you should expect us to be working on. Just an example, we fly over 4,000 flights a day.

And every day, you do have your regular operations. So your regular operations, by definition, are inherently inefficient. So what can we do to drive efficiency in recovering the network, right, during a weather outage or whatever it is. So there is work going on.

That's just -- and this an example. This is just in the network, very, very modestly transparent to the customer and net neutral to the revenue. The whole thing, just modest tweaks to things like that filter across the operations. So driving out inefficiency is how we're thinking about this.

This is not just pruning things. This is really thinking about the broader, big processes that we use to drive the operations. So in 2019, we're going to drive the budget. We're going to drive the efficiency we need.

2020 and beyond are bigger themes actually. And that's how we're thinking about it.

Garry Kelly -- Chairman of the Board and Chief Executive Officer

And just one other thing very quickly, just to remind everybody. What's driving the 3%, 3.5%? It's a couple of basic things: significant airport projects and investments around the country; No. 2, a heavier aircraft maintenance burden that is manifesting in 2019; No. 3, we are seeing a step-up in depreciation from deployment of more aircraft and also the deployment of technology projects.

So one of the things that we did for 2019 is we said, let's just make sure that we are taking into account the benefits that should flow through our cost structure that a lot of these investments that are being deployed. And that was a lot of the improvement that we saw since October. I guess, in the interest of time, we ought to move on to our next question.

Operator

And we have time for one more question. We'll take that last question from Hunter Keay with Wolfe Research.

Hunter Keay -- Wolfe Research -- Analyst

Thanks for getting me on. I was wondering if you might be so kind to compare your outlook for some of these Hawaiian markets with BWI, Oakland, which is kind of a high-load factor, low-yield market. But the point-of-sale it makes is obviously going to be very different. I was wondering if you might think in time if, given these factors, the RASM performance in Hawaii can be in line or better than how you deal in that market.

Garry Kelly -- Chairman of the Board and Chief Executive Officer

That is a great question. And I'm going to sidestep it a little bit, Hunter, because I don't like to talk about individual specific markets and their profitability. We just always had a tradition of maintaining our thoughts sort of in a proprietary way about that. Setting the comparison aside for a second, all of the forecast that we have done from a very significant point of strength in California to Hawaii have been exceptional.

So I'm expecting that they would form like a typical start-up initially, but they'll develop quickly and be very, very satisfactory performers, point No. 1. What we were, I think, pleasantly surprised with is when we were urged to contemplate inter-island flying, which when we first revealed in October of 2017 that we were going to Hawaii, we were not thinking that it. Once we looked at that, we were pleasantly surprised how it forecast as well.

And so I think on both aspects of that business, the mainland to the islands and then the inter-island, both forecast well. And based on our experience with forecasting and understanding our customers and our markets and the competitive dynamics, we feel very, very good about the viability of that. Or else, we wouldn't have made the choice and the judgment to ramp that up very quickly. We would have been much more cautious.

So we're putting our money where our mouth is. And in any event, as you know, the exposure is limited. And I think Hawaii builds up to be a point, Tom, or something like that of our capacity. But that's sort of a backhanded way of saying we're bullish about it.

I don't intend it that way. We're going to have a very viable schedule. We have a lot of customers who are huge fans of Southwest that we're confident will get on board. Hawaii is a huge destination, which is -- you have to take that into account when you do the comps to other markets of comparable distance.

And we're going to do well is the bottom line. And where our -- we continually update our forecast. Our judgment about this opportunity has been unchanged.

Hunter Keay -- Wolfe Research -- Analyst

Now just a real quick one for you, Gary. You said look out in the beginning of the call. It was interesting. It jumped out at me.

Who were you talking to?

Garry Kelly -- Chairman of the Board and Chief Executive Officer

Whoever is listening. We're -- it's been an emotional experience for our company to lose someone like Herb. And I can't remember whether you ever had the opportunity to meet him, but the impact he had on people is absolutely profound. And you will -- you get on a Southwest Airlines airplane, and everybody feels like they know him.

Everybody feels like they -- that he loves them. And people are inspired. So there's just no stopping us, and it's all about our people in terms of making this airline work. And they are as inspired as ever, and they're the ones who win these customers.

They're the ones who win the Fortune most admired and just on and on and on. And it comes from the heart, and there is no company in the world that is like this. So whoever wants to get in our way, better look out.

Ryan Martinez -- Managing Director of Investor Relations

Well, I think that's a great way to wrap up there. Thank you for all the questions. That concludes our analyst call. And of course, if you have any additional questions, please give me a ring, and thank you for joining us today.

Operator

Ladies and gentlemen, we will now begin with our media portion of today's call. I'd like to first introduce Ms. Linda Rutherford, senior vice president and chief communications officer.

Linda Rutherford -- Senior Vice President and Chief Communications Officer

Thank you, Greg. And I'd like to welcome the members of the media to our call today. We'll jump right into the Q&A portion.

Operator

[Operator instructions] We'll take our first question from Alison Sider with The Wall Street Journal.

Alison Sider -- Air Travel Reporter -- The Wall Street Journal

Hi. Thanks for taking the question. You talked a lot about the shutdown, the impact of the shutdown at a high level. I was wondering if you might be able to give us a sense of whether it's becoming a problem for safety, for operations.

Whether you're seeing any kinds of delays either in the airport or in the air.

Garry Kelly -- Chairman of the Board and Chief Executive Officer

Well, I'd like -- thanks, Alison. I'd like for Mike to have a chance to answer that, too. But I think the bottom line is no. Tammy and Ryan put in the press release the dollar impact that we've seen, and that's pretty specific to government travel.

And that's something that we're comfortable that we can estimate. You used the word safety. It is safe and it will be safe. I think the risk is that things slow down in order to retain a safe operating environment, that's both from an air traffic perspective as well as an airport perspective.

So the -- I am so proud of our FAA and TSA employees. That I feel like they're doing a phenomenal job. They shouldn't have to endure this. And I think our whole country should offer their thanks to them for keeping the airlines running.

Our business is one that is intimately tied in with the federal government. The federal government touches every single customer that goes through the airport, and they touch every single flight that we have, and it goes beyond just those things. But so far, the operation, Mike, has been actually superb since the beginning of the year. But what would you like to add, sir?

Michael Van de Ven -- Chief Operating Officer

I think, Gary, you hit all the high points. I agree with what you said. No matter what, we will be safe. It's just whether or not the volume of activity can keep pace with all the different staffing, whether it's TSA or traffic control or things like that.

And so I do think that the longer that it goes, the more risk that we have. Maybe there are longer people waiting times at checkpoints. That the taxiing times may lengthen. Your in-flight times may change.

It might be a little bit longer trail between airplanes. So those are the kinds of things that, I think, we ought to be cognizant about.

Garry Kelly -- Chairman of the Board and Chief Executive Officer

And again, I also -- to be clear, we're not seeing that. In fact, Mike's operation, the on-time performance is better this year than it was a year ago so far. So things are so far, knock on wood, are going just fine. So this is all conjecture.

But those are the things that we're all worried about, and this thing just can't go on. I feel the FAA has made a good point about what is the impact right now. Well, they are not allowed to hire anybody. If they did, it wouldn't do any good because they're not allowed to train anybody.

And so they already have a hard time keeping their air traffic control positions filled. And it takes years of experience to develop proficiency, and this is harmful. And so we know at some point down the road, there will be some harm someway, somehow. But this is crazy.

It just absolutely needs to end. And if left as it is, it will harm the economy. It will harm air travel. I don't know what impacts are on other industries, but these are important jobs, or they wouldn't be there.

The notion that they are not essential is absurd. They're all essential. And so we just need to end sooner than later. But right now, knock on wood, everything is running remarkably well, and that's a real tribute to the federal government employees.

Alison Sider -- Air Travel Reporter -- The Wall Street Journal

Are you hearing any concerns from your crew from pilot to flight attendants? Are they coming to you with any worries about the sort of the robustness of the system?

Garry Kelly -- Chairman of the Board and Chief Executive Officer

I've never heard one. Mike, any? Tammy? Tom? But no, never heard one. I think, in fact, I would bet you, and you're welcome to talk to anybody who will talk to you, bet you you'll hear the same thing that you've heard from me, which is people are there, and they're working hard. I think any time I see anybody, I thank them for their hard work, and so should you when you travel or do things.

Operator

Moving on, we have Tracy Rucinski with Reuters.

Tracy Rucinski -- U.S. Aviation Correspondent -- Thomson Reuters

Hi, there. Again on the shutdown. So far, there aren't any signs of Washington reaching an agreement to reopen. Is there anything that the airline industry can do or is doing to force an end to the deadlock?

Garry Kelly -- Chairman of the Board and Chief Executive Officer

I think the short answer is no. As you would expect, the industry, aligned with many other industries, has communicated to leadership in the federal government that the risk of continuing this and the harm that can be done. So absent that, what else can be done? And we're going to do everything that we can to find ways to mitigate this and not simply sit here and be victims about this. But in the end, this isn't -- we're dealing with a monopoly, so we don't have the choice to go to someone else to provide our air traffic services or our security services.

It's just not available to us. And this shouldn't work this way, but it does. So in the meantime, we just need to have cool heads and attend to our business as best we can. And we're determined here that we're going to have a very good year in 2019 no matter what.

And we'll do our best to work through this swamp.

Tracy Rucinski -- U.S. Aviation Correspondent -- Thomson Reuters

And just a minor question again about the timing of Hawaii. You said that a chunk of your first quarter unit costs were due to start-up costs from Hawaii. If that launch does end up rolling over into the second quarter, will there be an additional unforeseen cost impact?

Tammy Romo -- Executive Vice President and Chief Financial Officer

Yes. This is Tammy. Yes, if that continues into the second quarter, there will absolutely be a continued cost impact. And obviously, it depends on the duration there.

Garry Kelly -- Chairman of the Board and Chief Executive Officer

But that's pretty much factored into your...

Tammy Romo -- Executive Vice President and Chief Financial Officer

That's all in our guidance.

Garry Kelly -- Chairman of the Board and Chief Executive Officer

That's all in our guidance.

Operator

And next, from Flightglobal, we have Ghim-Lay Yeo.

Ghim-Lay Yeo -- Americas Managing Editor -- Air Transport, FlightGlobal

Hi, guys. Thanks for taking my questions. I have a follow-up about Hawaii. I know you plan to start inter-island flying probably shortly after you get the FAA approvals to begin Hawaii service.

How soon afterwards can you actually launch inter-island flying? Has that time line shifted at all now that you're not exactly sure when Hawaii service will actually start?

Garry Kelly -- Chairman of the Board and Chief Executive Officer

Mike, you want to talk about that?

Michael Van de Ven -- Chief Operating Officer

Yes. So we're going to -- when we first start out Hawaii, we're just going to be focused on the mainland to Hawaii flying for a period of time, and then not launch into the inter-island flying. There'll -- probably after leaving a couple of months of service before we get into the inter-island flying.

Garry Kelly -- Chairman of the Board and Chief Executive Officer

But I think what Mike had planned is we got our approval from the FAA for our program by the end of December, and that was a huge accomplishment. I was very proud of our folks and very thankful to the FAA. They worked hard to get there. All that was left during the month of January -- and Mike had all this scheduled, the date scheduled.

The task scheduled was to validate for the FAA that we knew our program, and that we could handle different scenarios that would be posed. All that led to a schedule that, assuming everything was passed, if you will, that we would be selling next week. And Mike had planned, once we started selling, that we would be flying sometime in February. So now he's going to roll this.

So if we get started again with the FAA, let's say, February 1, I think you can roughly allow a month, and then we would be able to get our certificate and sell, and then we would be flying in the following month, and it just rolls. So we -- that's roughly the amount of time that we're going to need from the time that we get back on task until we fly. So it's somewhere -- don't hold me to this because it will still depend. But it's somewhere around six to eight weeks, I would say, from the time that he starts working with the FAA to finish, to the time that we would be flying.

And then Mike has to publish schedules for his flight crews, and that is on a monthly cadence. So it's -- so anyway, that should give you some rough idea. I think it is possible, if we get started quickly, that we could be flying in March. We don't see a path to flying in February.

It's too late for February. But we could be flying in March. If we don't start with the FAA again until next month, it's going to be April. So that's kind of a rough rule of thumb.

Michael Van de Ven -- Chief Operating Officer

So let me just lay out for you there then. We're going to launch a mainland service to one location. we'll have mainland service to a second location. And then as we get more Hawaii locations out there, we have more options then to connect in that inter-island flying.

And that's why we will launch with the mainland service first and then follow on with the inter-island flying.

Ghim-Lay Yeo -- Americas Managing Editor -- Air Transport, FlightGlobal

Sure. And I have a separate question about Mexico City. Are you able to see a little bit more about why that didn't work out? Was it mostly because top-rate demand didn't materialize? Has there been any of sort of influence from what's been going on with the Mexico City airport situation?

Garry Kelly -- Chairman of the Board and Chief Executive Officer

Right now, our focus is primarily on destinations from our strong points in the U.S. The better-performing destinations for us right now are the leisure destinations. Mexico City was showing very nice improvement. It's much more of a business market.

And given where we are right now, we just have better opportunities in terms of deploying that capacity. I'd love for us to be back in Mexico City one of these days. Tom and his team are working on better commercial capabilities in terms of marketing in foreign countries, accepting foreign currency and all of those things in our futures, which would certainly support service to a place like Mexico City better than what we have today. But we just have better alternatives.

And like I said, hopefully, we'll be back in Mexico City one of these days. Our priority right now, obviously, is adding Hawaii service.

Operator

Next question will come from Dave Koenig with the Associated Press.

David Koenig -- Reporter -- The Associated Press

Gary, I think I heard you say that you've -- Southwest has communicated your concern about the shutdown to the government, if I heard that -- if I understood that correctly. Anything you can say about who you have talked to, especially any of the principles in the White House or Congress?

Garry Kelly -- Chairman of the Board and Chief Executive Officer

We have, as a part of the trade association, the trade association has communicated on all of our behalfs. And off the top of my head, I don't remember who was on that list, but I'm sure it was a long list of officials that received that communication.

David Koenig -- Reporter -- The Associated Press

OK. And have you gotten any feedback on what they heard? And what was the response from the people that they talked to? They -- I assume you're talking about A4A.

Garry Kelly -- Chairman of the Board and Chief Executive Officer

I'm talking about A4A, and I don't recall any response. I've seen nothing -- I've seen no response in writing. I'll put it that way.

David Koenig -- Reporter -- The Associated Press

OK. Is there -- what can you -- and I mean, the airline industry, do that you haven't done yet?

Garry Kelly -- Chairman of the Board and Chief Executive Officer

I think all we can continue to do is to reach out to members of Congress, reach out to leadership, reach out to the White House. And there are -- I can assure you, there are ongoing opportunities for us to do that, and we will.

David Koenig -- Reporter -- The Associated Press

All right. Thanks.

Operator

We have time for one more question. We'll last hear from Robert Silk with Travel Weekly.

Robert Silk -- Reporter -- The Travel Weekly

You're fooling us by grumbling. Thanks so much. So Southwest aircraft was one of the ones that reported the drone on approach to Newark a couple of days ago. How big of an issue -- of a concern is it for Southwest and other airlines obviously? Did the FAA move quickly on new rules relating to drones that will make it easier for an airport's instruments to be able to tracked and also to detect them and essentially disable them?

Garry Kelly -- Chairman of the Board and Chief Executive Officer

Are you still there, Robert?

Robert Silk -- Reporter -- The Travel Weekly

Did you not hear me?

Michael Van de Ven -- Chief Operating Officer

Yes, I think so.

Garry Kelly -- Chairman of the Board and Chief Executive Officer

We gotcha.

Michael Van de Ven -- Chief Operating Officer

Can you hear us?

Robert Silk -- Reporter -- The Travel Weekly

I hear you all. I asked about drones. Do I need to repeat the question?

Garry Kelly -- Chairman of the Board and Chief Executive Officer

No, no, we got it. We got it.

Michael Van de Ven -- Chief Operating Officer

So I'm not -- this is Mike. I'm not familiar with the near -- Southwest Airlines flight with a near drone opportunity there at the time. But just generally speaking, whether it is birds or birds strikes or drones or any other type of activity, the airline industry is interested in making sure that the airspace, especially above the airports coming into those critical times, are well regulated and maintained. So the industry is very supportive of having some type of regulatory requirements and oversight for drones, by having them registered, having them have certain requirements in terms of their operations, trying to limit their availability especially in critical airspace close to the airports.

And I know that the FAA is focused on that. I know that -- and I think there are several other regulatory groups trying to figure out how we control all this new technology.

Garry Kelly -- Chairman of the Board and Chief Executive Officer

They're focused on it when they're not on furlough. So -- but that is a critical to having them off furlough so they can be focused on what is an important question.

Operator

And at this time, I'd like to turn the call back over to Miss Rutherford for any additional or closing remarks.

Linda Rutherford -- Senior Vice President and Chief Communications Officer

Thank you, Greg. Appreciate it. Thank you all for joining us today. Of course, if you have any other questions, our Communications Group is standing by.

(214) 792-4847 or you can certainly reach us through the media site, www.swamedia.com. Thanks so much.

Operator

[Operator signoff]

Duration: 90 minutes

Call Participants:

Ryan Martinez -- Managing Director of Investor Relations

Garry Kelly -- Chairman of the Board and Chief Executive Officer

Tom Nealon -- President

Michael Van de Ven -- Chief Operating Officer

Tammy Romo -- Executive Vice President and Chief Financial Officer

Joseph DeNardi -- Stifel Financial Corp. -- Analyst

Brandon Oglenski -- Barclays -- Analyst

David Vernon -- Sanford C. Bernstein -- Analyst

Jamie Baker -- J.P. Morgan -- Analyst

Rajeev Lalwani -- Morgan Stanley -- Analyst

Hunter Keay -- Wolfe Research -- Analyst

Linda Rutherford -- Senior Vice President and Chief Communications Officer

Alison Sider -- Air Travel Reporter -- The Wall Street Journal

Tracy Rucinski -- U.S. Aviation Correspondent -- Thomson Reuters

Ghim-Lay Yeo -- Americas Managing Editor -- Air Transport, FlightGlobal

David Koenig -- Reporter -- The Associated Press

Robert Silk -- Reporter -- The Travel Weekly

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