Southwest Airlines Co (LUV) Q1 2019 Earnings Call Transcript

Southwest Airlines Co  (LUV -8.87%)
Q1 2019 Earnings Call
April 25, 2019, 12:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the Southwest Airlines First Quarter 2019 Conference Call. My name is Cody, and I'll 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.

Ryan Martinez -- Managing Director, Investor Relations

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 five schedule adjustments through August 5th, as a result of the MAX grounding, and the guidance we will provide today is based on our estimates assuming the grounding of the MAX through August 5th. A variety of factors and particularly those that are out of our control in connection with the MAX grounding 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.

Gary C. Kelly -- Chairman & Chief Executive Officer

Thanks you, Ryan, and good morning, everyone, and thanks for joining us for our first quarter 2019 earnings call. Overall, I'm 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. And 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 are better prepared to handle the MAX schedule changes prospectively through August 5th, rather than the more chaotic daily cancellations. And our goal is to provide our customers a steller 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 plans. 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 the fortunes list of the world's most admired companies, this year ranked Number 11. We were just ranked Number 2, out of 500 companies on the 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 remained 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 is 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 overview, let me turn it over to our Chief Operating Officer, Mr. Michael Van de Ven. Mike?

Michael G. Van de Ven -- Chief Operating Officer

Well, thanks, Gary. The first quarter reinforced a couple of things that I already know. The most important being that our people will absolutely drive to meet any challenge, and we had our fair share of challenges to start the year. The prevail and operational teams for the first quarter were launching our Hawaii service. And then, of course, the unanticipated maintenance write-ups and MAX groundings that impacted our operation. So as you all will remember, the quarter started the minute the government shutdown in the middle of ETOPS authorization. We have worked on contingency plans, and despite losing about a month of time, we were still able to launch our Oakland to Honolulu service in the first quarter as planned. And since then we've added Oakland and Maui, and we're going to launch service between O'Malley and Honolulu on Sunday.

The service start-up 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 with the operations with unexpected maintenance write-ups and just that was returning to normal levels in mid-March, the MAX groundings occurred. Those combined items created unexpected irregular operations for the last half of the quarter. So we were operating in the daily environment that consisted of canceled and delayed flight, aircraft swaps, through 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 some superb care of our customers and produce 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 carrier's 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 has a top ranking for fewest customer complaints for domestic marketing carriers in 2018, as measured by the DOT. And if Gary mentioned, we maintain 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 into 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 MAX grounding they cause 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 have with impacted by 9/11. Of course, we've 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 back 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 set out one aircraft in Orlando that had the engine issue during the first flight. We're in the process of doing an engine change in that aircraft and will be ferried to Victorville sometime over the next week. Having all the airplanes in one place improves the efficiency of our maintenance programs of the aircraft as well as we launching of 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 just close to being a new delivery aircraft for the 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 the 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 inspection 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.

Gary and Ryan mentioned, we've moved the airplane from our scheduled service through August 5th, assuming 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 network. They will begin to fly in normal scheduled service pattern beginning August 6th. And of course, the ground continued pass that they will need to make further adjustments to the schedule.

So as we move into the second quarter, our operational team to provide an exceptional customer experience over the summer. Our unexpected maintenance events are behind us, since we reached a tentative agreement with AMFA. AMFA is 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 schedule and all impacted customers have been contacted and are in the process of being reaccommodated, and given the related capacity pull down, we are well staffed across the busy summer travel period, so that we can provide exceptional service. We're focused on giving our customers the safe, reliable on time and fun experience that that they're accustomed to on Southwest.

And so with that, I'll turn it over to Tom.

Tom Nealon -- President

Okay. Thanks, Mike. So, as you all know, we finished 2018, very strong. We came into 2019 with a lots of momentum. And I think that despite several significant challenges, we have delivered a very strong revenue performance going into the -- 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 what Gary said the people Southwest Airlines, they carried the day throughout the quarter under very, very tough circumstances, we had a lot of cancellations, a lot of recomps, and they served our customers with the hospitality and the kindness that we are famous for. So it's been challenging quarter and you all did an incredible job.

In our March 27 Investor Update, we share the details behind the drivers of our revised Q1 RASM forecast, which we said would be up 2% o 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 I'll cover our outlook for the second quarter.

So in January, we are 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 2018. Second to benefit from November systemwide fare increase. Third, continued strong performance from our Rapid Rewards program. Fourth, a 0.5 year-over-year RASM benefit from our new RES res system. And finally, a 0.5 RASM tailwind from Q1 2018 suboptimal flight schedule. We also plan for roughly $40 million shift in 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 based on. So let me quickly recap what's incurred since our earnings call in January. So first as we shared previously, we quantified the impact, the government shutdown to be roughly $60 million, and obviously government-related business travel was 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 a little more than half 0.5 point reduction to Q1 RASM. And this essentially lasted from mid-February through mid-March.

Third, in March 13th grounding of our MAX fleet was the next largest revenue drag was a slight benefit actually to our Q1 RASM. And fourth, softness in leisure demand and yields, which is really related to the government shutdown was approximately a 0.5 point negative impact to Q1 RASM. I think it's important to call out right now that this trend has changed and we are seeing leisure demand and yield strength in the second quarter. So we ended the quarter over $200 million off our original revenue forecast, and we ended the quarter about 2.5 points below our capacity plan. Upon 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 closed inventory to reaccommodate our customers due to the maintenance disruptions in 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're much better able to get out in front of the MAX cancellations to minimize the impact to our customers, and we are much more proactive in reaccommodating our customers several days in advance of the flight date.

So having said all that, our close-in yields remain strong year-over-year, business travel demand continues 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. And this was due the softer trends I just mentioned, as well as the reduction in inventory.

Our industry-leading Rapid Rewards program is performing extremely well and it's continuing to grow double-digits both in terms of the size of the customer portfolio as well as in terms of the total royalty revenue. We are continuing to see tremendous strength across every metric of Rapid Rewards, and this was an already strong base. In Q1, we saw record acquisitions of new Rapid Reward 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 in 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 contributed 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 in our industry-leading direct-to-consumer southwest.com platform. Our international markets are also doing very well and continued 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 in March 17th. 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 price and where to what we consider to be normal pricing levels, and we're seeing very strong demand in bookings. And lots of small samples that the early feedback from our customers as Mike alluded to is absolutely exceptional and their satisfaction with in-flight experience is actually higher than the rest of our system, which as you know, as always had an 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 long-haul trips as well.

So in summary for Q1, a lot has happened over the past three months. Several things have happened that we certainly did not anticipate, but a lot of things also having that we did expect. We saw 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 Rapid Rewards. And we saw a healthy year-over-year RASM benefit from our revenue management enhancements and just as a footnote, this is 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 in recent demand and yield trends have stabilized in our improving.

Earlier this month, as you know, we republished are scheduled for April 7th through August 5th, and the intent was very simple gets back, to get back to the schedule we knew we can fly the 700s and 800s that we are fleet. As we remove MAX place in the schedule, we're doing it in a way that maintains the integrity of our network in the strength of our schedule. Until the is back in service, we intend to operate slightly reduced schedule, but with the reliability and the hospitality that were famous for. It's a better and more efficient way to run the operation, and that's where our employees and our customers need from us.

Now, keep in mind that because of the MAX grounding, we will have less close-in seed inventory, because we're having to reaccommodate impact to customers and 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 are seeing a continuation of strength in close-in yields year-over-year. So the bottom line is that we are 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 two things drove this. First, we had the point impact in the suboptimal flight schedule. And second, we had 2 point impact following Flight 1380, so this equates to a 3 point RASM tailwind for Q2 2019. We also have a half point year-over-year RASM benefit due to the Easter shift into Q2.

So similar to the first quarter, we expect around the point in year-over-year RASM benefit in Q2 from our reservation system, and this is in comparison to roughly 0.5 point of RASM benefit in Q2 of last year. And we expect about 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. Exceeded our expectations in March, due the overwhelming demand on our initial flights. And despite a very short two-week booking window, our first flight sold out very quickly. In fact, the initial flights were sold out before we are even able to get the first email of Rapid Reward members. So this coming Sunday, we will continue. We will begin in around service between Honolulu and Maui, and will connect Honolulu and Kona and May 12th. On May 5th, we will launch service from our second California gateway, San Jose to Honolulu. And on May 26th, we'll connect San Jose to Maui. We have more Hawaii service to come and we are very pleased with how these markets 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. I am very proud of our people and I'm very proud of our first quarter results. And we are optimally 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 we control. The strength of the Southwest brand remains very high, our customer service and their brand NPS scores continue to be in the very top of the industry. We're continuing to grow our customer base, in particular, in a 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 very top of the industry again.

So with that, let me turn it over to Tammy to take us through the financials.

Tammy Romo -- Executive Vice President & Chief Financial Officer

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 hard working employees for their resilient focus to take good care of our customers and for their unwavering commitment to Southwest. Despite this significant headwind, we are off to a solid start to the year with almost a 10% pre-tax 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 two primary drivers of the higher year-over-year growth. First, the flight cancellations we experienced reduced our available seat mile growth in first quarter by about 2.5 point year-over-year. And combined with additional cost pressures from maintenance related disruptions and whether increased our CASM-Ex by about 3 points since we didn't have opportunities to shed cost that 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 represent a higher compensation for our mechanics compared with the previously rejected DA 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 point due to better than expected completion factor, employee productivity and healthcare 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 and 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 and the 6% range similar to our initial first quarter estimate. As a reminder, the key drivers of our initial expectation worthy under-utilization of our fleet and first half of 2019 due to the delay in our service to Hawaii, and the resulting one time start-up cost, higher airport, labor and ownership cost, as well as the timing of maintenance events and technology investments.

While those drivers are still relevant, the reduced capacity from 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. First is our immediate cancellations in March. And we have about 1.5 point 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 grounding extended through August 5th, 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 sending 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 our full year 2019 cost under the assumption that MAX grounding do not extend beyond August 5th. We currently estimate CASM excluding fuel and profit sharing will increase and 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 grounding and 0.5 point of headwind due to DA 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 bank Brent crude at 25% and 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% hedged and the second half of the year. Our hedging premiums for this year remains at approximately $95 million or about $0.04 per gallon. Our 2019 hedging protection producers 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, should we continue to see rising energy prices. And as a reminder, our 2019 hedges are WTI and Brent crude.

Our hedging portfolio continues to be structured so that we fully participate in any market decline. 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% in first quarter, which was understandably lower than expected, but 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 have 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's 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 (inaudible) and 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 1st, 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 assets, which is primarily comprised of aircraft operating leases and airport operating leases, and a corresponding liability. We also removed $1.7 billion of assets constructive for others and the related construction obligation of $1.6 billion for completed Airport Terminal projects, such as Dallas Love Field, Houston Hobby in Fort Lauderdale .

The net impact was approximately $270 million reduction to the balance sheet. The impact to the income statement was immaterial. We have very manageable debt obligations 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 delivery schedule for this year.

Our 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 investments 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 three 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 help with our fleet modernization efforts, improving efficiency, reliability, fuel burn, and reducing our maintenance burden.

In second quarter, our 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 today and given MAX flight cancellations through August 5th, 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 will evaluate further flight schedule revisions based on the duration of the MAX grounding.

So in closing, and as a quick recap on what we share today, despite the ongoing MAX groundings, our employees continue to rally and take great care of our customers. Our revenue management system is producing revenue gains and performing exactly as we expected to, and we are expecting strong year-over-year RASM growth in second quarter.

We have a great fuel hedging protection for 2019 and beyond in place to mitigate rising fuel prices. Flight cancellations and lower capacity is putting pressure on our non-fuel unit costs, but 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.

Questions and Answers:

Operator

(Operator Instructions) We will begin with the first question from Jamie Baker with JPMorgan.

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

Hey, good afternoon, everybody. Gary, hypothetically how many consecutive quarters of stagnation from a capacity perspective, would you be willing to tolerate before possibly considering non-organic growth opportunities?

Gary C. Kelly -- Chairman & Chief Executive Officer

Well, we've been asked several variations of that question, although not that one exactly. Right now, I'm just asked 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 began fourth quarter, in the grand scheme of things, it's probably somewhat immaterial. I think what all of those are a little more concerned about 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 -- 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. Well, 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 the scenario. And I just don't -- I don't think that that is anything that will be spending anytime 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 (inaudible).

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

Yes, that's very helpful, Gary. I appreciate it. 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 in sim-based training as a part of the return to service, because that would obviously slow the process down possibly quite a bit?

Gary C. Kelly -- Chairman & Chief Executive Officer

Well, again, just taking your question literally, which I think is the way you intended. 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 lay person of 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 runaway stabilizer scenario is something that we already trained on, and at least the 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 an 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 will do whatever we have to do here, but we're obviously awaiting the Boeing service bulletin as well as the FAA worthiness directive to know exactly what we'll have to do.

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

Gary, super helpful. Thank you very much sir.

Operator

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

Duane Pfennigwerth -- Evercore ISI -- Analyst

Thank you. So maybe I'm reading too much into the 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 in that CapEx would actually come down?

Gary C. Kelly -- Chairman & Chief Executive Officer

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

Tammy Romo -- Executive Vice President & Chief Financial Officer

We will be writing our check as they are delivered.

Gary C. Kelly -- Chairman & Chief Executive Officer

There you go. So hopefully that answers the question.

Duane Pfennigwerth -- Evercore ISI -- Analyst

And then just with respect to the longer-term cost profile at the start of this year, obviously, there were 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 2012?

Gary C. Kelly -- Chairman & Chief Executive Officer

Yes, sir. And Duane, that's what I was attempting to a very high level comment on in my remarks is that and Tammy mentioned this, we are 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 budget. So we're not burning as much jet fuel as one example. We're not incurring as many landings and takeoffs from our landing fees and rentals perspective.

So to the extent, we have variable cost. 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 summer time. 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 cost look like. Again, under that same assumption that we 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.

Tammy Romo -- Executive Vice President & Chief Financial Officer

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.

Gary C. Kelly -- Chairman & Chief Executive Officer

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

Duane Pfennigwerth -- Evercore ISI -- Analyst

Okay, thank you.

Gary C. Kelly -- Chairman & Chief Executive Officer

Yes, sir.

Operator

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

Hunter Keay -- Wolfe Research -- Analyst

Hey, thank you, everybody. Thanks for 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 taken out. I'm sorry, for next year would was taken out for the MAX this year, meaning like 4%, 5% baseline plus 2%, 2.5% for the MAX grounding. Is that a fair way to think about that as you're thinking about the CASM profile for next year?

Gary C. Kelly -- Chairman & Chief Executive Officer

Yes, sir. Hunter, other -- we've built the airline to support by year-end Ryan 775 airplanes, then we've got another 25-ish coming in 2020. So yes, we want to get the airplanes that we want to fly them. So the capacity that we are thinking of to begin this year for 2020 that's what I want us to fly now, again there is we -- there's still questions about exactly how the MAX reenter service, but assuming everything comes back on line and we are 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.

Hunter Keay -- Wolfe Research -- Analyst

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 have there, and also if you could kind of elaborate on how you're cracking the distribution inter Island Hawaii, particularly within the local community there. Thank you so much.

Gary C. Kelly -- Chairman & Chief Executive Officer

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

Hunter Keay -- Wolfe Research -- Analyst

Thank you.

Michael G. Van de Ven -- Chief Operating Officer

So that's, 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 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.

Ryan Martinez -- Managing Director, Investor Relations

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 pretty deep roots for such a new operation, pretty deep roots in the Hawaiian community. And so in terms of distribution it's what we always do is southwest.com, so they know the brand better than I would have expected actually, because many people from Hawaii are traveling to the US 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.

Hunter Keay -- Wolfe Research -- Analyst

Great, thanks.

Operator

Your next question comes from Rajeev Lalwani with Morgan Stanley.

Rajeev Lalwani -- Morgan Stanley & Company, Inc -- Analyst

Hi guys, thanks for the time. First, just a clarification on the -- on some of the CASM questions from earlier. If capacity growth next year is going end up being a lot higher simply because of the MAX timings and 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.

Gary C. Kelly -- Chairman & Chief Executive Officer

I don't think I quoted a number. Well, I know I didn't quarter 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 5th. So, yes, you're going to have an easier comp because of all of this. But I don't think we're 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.

Tammy Romo -- Executive Vice President & Chief Financial Officer

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.

Gary C. Kelly -- Chairman & Chief Executive Officer

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

Rajeev Lalwani -- Morgan Stanley & Company, Inc -- Analyst

Thanks. 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?

Gary C. Kelly -- Chairman & Chief Executive Officer

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 a 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 desired 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 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 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?

Tom Nealon -- President

Yes, I think I 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. 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 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 reaccommodating. That's a pretty good indicator of this core economic strength in the business climate or the business bookings are strong. Like I said, wish we have more to sell. But still, that's my commentary on that.

Gary C. Kelly -- Chairman & Chief Executive Officer

And I think that's excellent. 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. Our business is really good, and it's because our employees work so hard to serve our customers so well. So their -- no doubt there are always impacts the company's 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.

Tammy Romo -- Executive Vice President & Chief Financial Officer

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're seeing that in our results as we work through all these cancellations. So I just put a exclamation point there. And then I would also just point out that we have new -- a new reservation system new revenue management tools, which are also helping us managed through all the challenges. So just the strength of Southwest just really do go on and on.

Gary C. Kelly -- Chairman & Chief Executive Officer

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

Rajeev Lalwani -- Morgan Stanley & Company, Inc -- Analyst

Thank you.

Operator

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

Jack Atkins -- Stephens Inc. -- Analyst

Good afternoon. Thank you for taking my question. 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. 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 toward system level profitability has changed at all or if you're sort of thoughts there have changed, given that you've experienced last couple months.

Gary C. Kelly -- Chairman & Chief Executive Officer

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 and my experience, surprisingly well. And I think a lot of that is due to the fact that we have such a midst customer base in California, which is what this is geared for. And number two, because Hawaii 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 than 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 strength, 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?

Tom Nealon -- President

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. I'm thrilled where we are. But 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 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 versus our competition, by level 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 is a real dramatic difference. And we can make money at that price point because of our cost structure. And we feel great about this is kind of the classic Southwest effect. So I feel good about where we are Jack.

Gary C. Kelly -- Chairman & Chief Executive Officer

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

Jack Atkins -- Stephens Inc. -- Analyst

Well, that's great, thank you for that answer. And then 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 the next year?

Gary C. Kelly -- Chairman & Chief Executive Officer

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.

Tom Nealon -- President

They're totally (inaudible).

Gary C. Kelly -- Chairman & Chief Executive Officer

But I don't think, Tammy, we have any news to share.

Tammy Romo -- Executive Vice President & Chief Financial Officer

No news to share yet. So everyone's going to have to stay tuned there.

Gary C. Kelly -- Chairman & Chief Executive Officer

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

Jack Atkins -- Stephens Inc. -- Analyst

Thanks again for the time.

Gary C. Kelly -- Chairman & Chief Executive Officer

You bet.

Operator

We have time for one more question. We'll take our last question from Joe Caiado with Credit Suisse.

Joe Caiado -- Credit Suisse -- Analyst

Hey, good afternoon, everyone. 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 that have to happen there first. It sounds like there are 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?

Tammy Romo -- Executive Vice President & Chief Financial Officer

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

Joe Caiado -- Credit Suisse -- Analyst

Okay, thanks for that clarification. And then, I was wondering, are you able to comment on the results of the inspections that you've 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?

Gary C. Kelly -- Chairman & Chief Executive Officer

Joe, you're talking about the fuel nozzle coking?

Joe Caiado -- Credit Suisse -- Analyst

That's right, yes.

Gary C. Kelly -- Chairman & Chief Executive Officer

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 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 the 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 go create procedures to go to go monitor and inspect and repair, replace those things.

So as you asked the industry to look at 25 engines, we looked at 12 hours. 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 in 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.

Tom Nealon -- President

Joe, I think the only thing I would add to that is that every new engine, at least in my experience has it's -- I would just call it break-in issues. And it doesn't matter whether it's 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 engine. So I think in that regard, I didn't want you to give 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 in especially the fuel nozzle example that Mike was using as frequently. But it's not unusual for an engine that 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 to get better.

Joe Caiado -- Credit Suisse -- Analyst

Great. Thanks everyone.

Ryan Martinez -- Managing Director, Investor Relations

Okay, 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.

Operator

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

Linda B. Rutherford -- Senior Vice President, Chief Communications Officer

Thank you, Cody, and welcome to the members on our media 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

(Operator Instructions) We'll now begin with our first question from Alison Sider with Wall Street Journal.

Alison Sider -- Wall Street Journal -- Analyst

Thanks so much. 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 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?

Gary C. Kelly -- Chairman & Chief Executive Officer

Hi Alison, this is Gary. I think you should expect a 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 will gauge our messaging according to what questions our customers have, to a large degree, but Tom any thoughts you want to share there?

Tom Nealon -- President

It's a pretty, 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 certainly going to be some people that I expect 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 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 the 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. 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 and they've a lot of trust in Southwest. And I think they have good reason to have confidence 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 will have a very comprehensive plan that communicates directly to our customers and our employees, every step of the way. But that's -- there's is more work to be done as we learn more, but we're very focused on it. So appreciate the question.

Gary C. Kelly -- Chairman & Chief Executive Officer

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 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 the question. But I agree with Tom, I think that there will be those questions, and I think people get -- I think they will quickly get comfortable with the answers.

Alison Sider -- Wall Street Journal -- Analyst

And if I could just ask one follow-up, have you been sort of serving 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 response have you been getting?

Gary C. Kelly -- Chairman & Chief Executive Officer

Yes, that's what Tom mentioned, yes, we are absolutely doing that.

Operator

And we'll take our next question from Dave Koenig with the Associated Press.

David Koenig -- Associated Press -- Analyst

Okay, well, thanks. Here's another of those questions, I guess. First, Gary are you going to seek compensation from Boeing over the groundings, Tammy talked 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?

Gary C. Kelly -- Chairman & Chief Executive Officer

No, I don't think we're going to have any concern or any risk of using all ## 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 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 our customers know us, trust us, they know we know the 737. So I don't want to overstate my comment or have my comment inflated. I was just raising that is -- wouldn't surprise me if a few people said that.

David Koenig -- Associated Press -- Analyst

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

Gary C. Kelly -- Chairman & Chief Executive Officer

Yes, we're basing that David on the customers that we're 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 customers' perception of the brand through our trip Net Promoter Score as well as our brand Net Promoter Score as well as 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.

Tom Nealon -- President

And then on the Boeing aspect of your question, yes, we're not happy with the situation who would be. Boeing is already conceded that there are things that they need to address. And obviously, we totally agree with that. We have a great partnership, we are 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 will continue to have a great partnership with Boeing Company. With respect to anything along the lines of business arrangements or contract arrangements or whatever it might be. Those are things that will take up with Boeing privately.

And again, I would just restate the obvious. This is not a good situation and will 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 is every reason to believe that that will continue to be the case. I want to return to service with this software modification.

David Koenig -- Associated Press -- Analyst

Okay. Thank you.

Operator

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

Mary Schlangenstein -- Bloomberg News -- Analyst

Thanks. I have a couple of quick questions from 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 have expected on those planes due to coking? And my second question is, what intrigued you enough about A220 that you actually went to Airbus to take a look at the plane?

Michael G. Van de Ven -- Chief Operating Officer

We'll starting on the fuel nozzle issue, Mary, I don't know if there's any sooner than we expected. Coking is not -- it's not unusual. There is a good thing about on 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 that. As Boeing learns more about it as we 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 will need to do on a go-forward basis.

Gary C. Kelly -- Chairman & Chief Executive Officer

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

Michael G. Van de Ven -- Chief Operating Officer

Yes. I don't think that this LEAP engine, it's maturity, I don't think it's all -- it's maturity curve is all that different than what the 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 with Southwest, we feel like we're right on that curve.

Gary C. Kelly -- Chairman & Chief Executive Officer

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

Michael G. Van de Ven -- Chief Operating Officer

Yes. So, Mary, obviously, our fleet team was down in Europe and (inaudible). 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 have an opportunity to go out to the Paris Air Show last year. And with a 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, talked to Pratt & Whitney. And it was just a great way to go just gather information about the marketplace out there. Everyone 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.

Gary C. Kelly -- Chairman & Chief Executive Officer

Mary, I did want to add to this, I want to be very clear. The timing is a bit unfortunate, and I've read speculation that it's an 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 is, we are 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 in the perpetuity, I'm not prepared to say that. But in any event, that the timing is unfortunate.

Analyst -- -- Analyst

So Mike, did you like the A220?

Michael G. Van de Ven -- Chief Operating Officer

Yes, But Mary (inaudible), I like the A220, I like the Embraer product, it was just -- it kind of like going to a new car show. You just like all the different products that you see out there.

Analyst -- -- Analyst

Yes, great. Okay, thank you, Mike.

Operator

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

Tracy Rucinski -- Reuters -- Analyst

Hi there, good morning. 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 orders through to 2026. When would it be reasonable to consider adding any other models and what might those be?

Gary C. Kelly -- Chairman & Chief Executive Officer

Well, I'll be a little repetitive. We're not planning on adding different aircraft fleet to -- aircraft type to our fleet. Okay, so, I'll just repeat that, that we are not planning to do that. As a practical matter, 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 in 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 mind. And 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.

Operator

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

Ghim-Lay Yeo -- Flightglobal -- Analyst

Hey guys, thanks for taking my question. I just a question regarding the 737 retirement plan. I know, Gary, you said that you would like to avoid having to unwind retirement plan for 2019. And I was just wondering if Southwest is considering 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 (inaudible) on 737 nice capacity. Thank you.

Gary C. Kelly -- Chairman & Chief Executive Officer

That's a great question. And I think it's a short easy answer, the answer is no. We're 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 as we will unwind some of the airplanes that we already own or leased. And again, we don't have a plan to do that. Tammy. I think you've got 18 retirements plan for 2019.

Tammy Romo -- Executive Vice President & Chief Financial Officer

For 2019.

Gary C. Kelly -- Chairman & Chief Executive Officer

And Tammy you 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 changed 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 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.

Michael G. Van de Ven -- Chief Operating Officer

Yes, we've been out in the used market 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 used or leased NG when we already have NGs on the properties that are already in our maintenance program, already in our maintenance profile. It 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 of the market at all for NGs.

Gary C. Kelly -- Chairman & Chief Executive Officer

And the reason that we don't want to unwind retirements, there would certainly be vastly easier compared to bringing another airplane on to 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 bringing on new airplanes to replace.

Ghim-Lay Yeo -- Flightglobal -- Analyst

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

Gary C. Kelly -- Chairman & Chief Executive Officer

Correct. That's from all parties we've talked to. And certainly, I put great reliance on our pilots. our flight operations leadership, our pilot union. And they are very confident in what we do as an airline. 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're the litmus test for me, and they're confident in the airplane and the training and 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 are very comfortable with the plan as we currently understand it.

Tracy Rucinski -- Reuters -- Analyst

Okay, thanks for your time.

Operator

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

Linda B. Rutherford -- Senior Vice President, Chief Communications Officer

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

Operator

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

Duration: 91 minutes

Call participants:

Ryan Martinez -- Managing Director, Investor Relations

Gary C. Kelly -- Chairman & Chief Executive Officer

Michael G. Van de Ven -- Chief Operating Officer

Tom Nealon -- President

Tammy Romo -- Executive Vice President & Chief Financial Officer

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

Duane Pfennigwerth -- Evercore ISI -- Analyst

Hunter Keay -- Wolfe Research -- Analyst

Rajeev Lalwani -- Morgan Stanley & Company, Inc -- Analyst

Jack Atkins -- Stephens Inc. -- Analyst

Joe Caiado -- Credit Suisse -- Analyst

Linda B. Rutherford -- Senior Vice President, Chief Communications Officer

Alison Sider -- Wall Street Journal -- Analyst

David Koenig -- Associated Press -- Analyst

Mary Schlangenstein -- Bloomberg News -- Analyst

Analyst -- -- Analyst

Tracy Rucinski -- Reuters -- Analyst

Ghim-Lay Yeo -- Flightglobal -- Analyst

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