Marcy Brand – Investor Relations Gary Kelly – Chairman and Chief Executive Officer Tom Nealon – President Mike Van de Ven – Chief Operating Officer Tammy Romo – Executive Vice President and Chief Financial Officer Bob Jordan – Executive Vice President and Chief Commercial Officer Linda Rutherford – Vice President-Chief Communications Officer

Darryl Genovesi – UBS Securities LLC Hunter Keay – Wolfe Research Helane Becker – Cowen & Company Jack Atkins – Stephens Savanthi Syth – Raymond James Duane Pfennigwerth – Evercore Group LLC Susan Carey – The Wall Street Journal, Inc. David Koenig – Associated Press Brandon Oglenski – Barclays David Vernon – Bernstein Joseph DeNardi – Stifel Edward Russell – FlightGlobal

Welcome to the Southwest Airlines' Fourth Quarter and Annual 2016 Conference Call. My name is Tom, and I will be moderating today's call. This call is being recorded and a replay will be available on Southwest.com in the Investor Relations section. At this time, I'd like to turn the call over to Ms. Marcy Brand, Managing Director of Investor Relations. Please go ahead, ma'am.

Thank you, Tom, and good morning, everyone and welcome to today's call to discuss our fourth quarter and annual 2016 performance. Please note, today's call will include forward-looking statements and because these statements are based on the company's current intent, expectations and projections, they are not guarantees of future performance, and a variety of factors could cause actual results to differ materially. As this call will include references to non-GAAP results excluding special items, please reference to this morning's press release in the Investor Relations section at Southwest.com for further information regarding forward-looking statements and reconciliations of non-GAAP results to GAAP results. Joining me on the call today, we have Gary Kelly, Chairman of the Board and Chief Executive Officer; Tom Nealon, President; Mike Van de Ven, Chief Operating Officer; Tammy Romo, Executive Vice President and Chief Financial Officer; and Bob Jordan, Executive Vice President and Chief Commercial Officer. We will begin here shortly with Gary providing an overview of our performance followed by Tammy providing a more detailed review of our fourth quarter results and our current outlook. Following Tammy's remarks, all of our call participants will be available to answer your questions. We ask that you please limit yourself to one question and one follow-up, so that we can accommodate as many questions as possible. At this time, I will now turn the call over to Gary.

Thank you, Marcy, and good morning everybody and thanks for joining us for our 2016 earnings call. First, I want to thank all of our Southwest employees for their very hard work and congratulate them on a superb year and one where we set a number of records along with $586 million in property sharing. So congratulations to all of our folks. Next, I want to welcome and acknowledge Tom Nealon, President of Southwest Airlines. Tom welcome.

Thank you. Well, thank you. Thank you, Gary good morning everybody. Well, first of all, I am very excited to be Southwest. I am very excited about the new role. I have a lot of passion and a lot of energy for Southwest and for the people and the culture of Southwest Airlines, as you all know this is a very, very special place. We have tremendous momentum, we have a very clear purpose and we have a very clear vision. And I think we have a strategy that's going to help us achieve our vision overtime, and I see my role is driving the execution and the implementation of our strategy. I'm going to do it with Gary, I'll do it with Mike and with the entire team here at Southwest. So I'm very optimistic about our future and we are moving forward.

Well, congratulations again Tom on your new role and we're very excited to have Tom in this executive leadership role. And likewise, I want to welcome and acknowledge Mike Van de Ven, our Chief Operating Officer. Mike, welcome.

Thanks, Gary. I also am really energized about my expanded role and – and I agree with Tom, we've got a lot of momentum; I really believe that our best days are ahead of us and I look forward to working with Tom and Gary and really the rest of our team just to make that belief a reality. I do know a lot of you all already, I look forward to working with you guys a little bit closer – more closely in the future. So, thanks Gary.

Well, congratulations to you as well, Mike. And all three of us are very excited to be working more closely together. Well, obviously we're very pleased to report another record year, record year of earnings, record year of earnings per share. This is our 44th consecutive year of profits which of course is unprecedented in the airline industry but I'm not sure how many others in corporate America can say that they've been profitable for that many years ago, so my guess is not many. But it certainly allowed us to take great care of our people, great care of our customers, great care of our shareholders for over five decades, and as you can imagine we're very proud of that. We're very pleased to in 2016 and begin this year on a strong note. Our average fourth quarter '16 fares were down year-over-year $5.51. Unit revenues were down 2.9% but after two years of sequential declines it feels like we're bottoming plus we've outperformed the industry since 2014. We have a shot at flat unit revenues year-over-year here in the first quarter although our current forecast is somewhat below that. But that's our goal and we will work hard to hit that first quarter goal. But regardless we're seeing a strength sequentially from fourth quarter to first quarter, and that of course is a welcome change. We've already announced that we've slowed our growth year-over-year in 2017. Consistent with that even though we're growing international at a pretty significant rate, it's on a very small base; so the majority of our growth will be domestic. Another thing to note is that the percentage of developing markets has dropped below 4%, and obviously that's providing us some strength going forward as well. And really that's the big news for this quarter that business has strengthened, otherwise our report is pretty much an update, our 2017 plans have been set for quite some time, the vast majority of the work surrounding our initiatives for this year is complete. So we'll be finishing up and deploying our new reservation system, our new international terminal in Fort Lauderdale, the new Boeing 737-8 aircraft. As planned along with that we will be grounding and retiring the remaining classic fleet in the third quarter of this year, we will launch international flights out of Fort Lauderdale in June, and at that time we'll open up one new destination which is Grand Cayman. And in terms of route news for this year we'll also consolidate our northeastern Ohio operations into Cleveland, and we will consolidate our southwest Ohio operations into Cincinnati. And Cincinnati will be our second new city for this year. These airports are very close to Dayton and Akron Canton which will give us the opportunity to continue serving our customers in those cities along with winning more customers. So I'm very excited about our plans for 2017, I'm delighted that our trends have strengthened. Given that the current economic outlook is pretty good as well as the current outlook for moderate energy prices, we're hoping for another great year in 2017. Balance sheet is strong, our liquidity is very strong, our CapEx plans are very manageable and our goal is to continue rewarding our shareholders. So Tammy, with that very quick overview I'll turn it over to you to take us through the quarter.

Thanks, Gary and I'm excited too. Welcome everyone. We are very pleased with the record profits we've reported this morning for 2016. Our earnings were a record $2.2 billion with operating income of $3.8 billion, excluding special items our 2016 net income was a record $2.4 billion with record operating income that produced a very healthy 19.4% margin. These results generated cash flows also at record levels enabling us to deliver on our commitment to invest in our employees, our customers and our shareholders. We had a return-on-invested capital of 30% which is just an outstanding accomplishment for the year. Before I jump into fourth quarter results, I'd also like to congratulate our employees on our 44th consecutive year of profitability and their 42nd consecutive year profit sharing which was $586 million for 2016. As you can see from our report this morning we ended the year with a solid fourth quarter performance. Our fourth quarter revenues were a record $5.1 billion and unit revenues declined 2.9% which was better than we expected at the beginning of the quarter. Travel demands and close in yield pick-up following the election and that carried through to the end of the year. Business travel leading to the December holiday was also better than we have expected early in the quarter. The strength in demand resulted in a record fourth quarter load factor performance of 84.4% and thus far the fair environment has held here in January. Based on these trends in current bookings, we are forecasting flat to down 1% RASM year-over-year as Gary took you through here in the first quarter. Considering our outperformance of the industry since 2014 and our 4% ASM growth in the first quarter, we encourage by the sequential improvement in our year-over-year RASM terms. We also expect strength in other revenues and continue into the first quarter of 2017. Turning to our cost performance; it was in line, right in line with our expectations. Unit costs excluding special items increased 2.9% year-over-year, largely driven by higher labor costs and union contracts ratified during 2016, as well as the accelerated depreciation associated with the retirement of our classical fleet. Our economic jet fuel price per gallon increased 2% year-over-year to $2.07 for the fourth quarter which was driven by higher crude and heating oil prices. Based on market prices in last Friday and our current quarter – current first quarter hedged positions, we expect our first quarter field price per gallon to decline from fourth quarter to the $1.95 to $2 per gallon range. And this estimate includes a hedging loss in the $0.25 to $0.30 range. And for the full year of 2017, we currently estimate a fuel price per gallon in the $2 to $2.05 range based on market including roughly $0.20 to $0.25 in fuel hedging losses for each quarter beyond first. So just a few comments on our non-fuel costs excluding fuel specialized items and profit sharing, our fourth quarter unit cost increased 4.4% year-over-year which was in line with our guidance, roughly 3.5 points of this increase was attributable to our new union agreements which included an immediate snap-up in wages for our flight attendants and pilots during the fourth quarter. An additional point was attributable to accelerated depreciation resulting from the retirement of our classic fleet. As for our 2017 cost outlook, we anticipate year-over-year cost inflation to peak here in the first quarter due to the timing of labor rate increases largely. And with this in mind, our first quarter CASM excluding feel special items and profit sharing is estimated to increase in the 6% to 7% range year-over-year. With about four points to this increase related to labor contract. By the fourth quarter of this year we expect our unit costs excluding special items and profit sharing to trail to roughly flat year-over-year. This brings full year 2017 unit cost excluding field special items and profit sharing to an estimated increase of approximately 3% year-over-year, almost entirely driven by wage rate inflations. Beyond 2017 we anticipate wage rate increases closer to inflationary like levels in accordance with the ratified agreements. As ever we remain focused on controlling spends through our operational investments and ongoing fleet modernization. Turning to our balance sheet; it remains as strong as ever with $3.3 billion in cash in short-term investments at year end. Our leverage including off balance sheet aircraft leases remains in the low to mid 30% range and we continue to be the only U.S. airline with an investment grade credit rating by all three credit agencies. During fourth quarter, we repaid $352 million in debt and capital lease obligations and retire the $110 million in convertible debt at maturity. As expected, the majority of bond holders converted their bonds to share of stock resulting in our remittance of approximately $68 million in cash and $6 million in shares. During fourth quarter we entered into a $215 million secured term loan and we issued $300 million in unsecured notes at our record 10-year low on coupon rate of 3%. In regards to our 2016 capital expenditures, we ended the year with $2 billion in CapEx as expected with technology and facilities spend as the most significant drivers outside of the $1.3 billion in aircraft CapEx. Our estimated CapEx for 2017 is approximately $2.3 billion with $1.3 billion of that for aircraft. With record earnings and sustained balance sheets, our operating and free cash flows reached record levels, enabling us to return nearly $2 billion to shareholders through buybacks and dividends. During fourth quarter we completed the $250 million accelerated share repurchase launched in third quarter and we launched a new one which we currently expect to complete in February. We have $950 million remaining under our $2 billion authorization, and since 2011 we have decreased our share count by more than 18% through over $5 billion of share buybacks and our Board of Directors declared our 161st consecutive dividend during fourth quarter. We have a decade long history of upholding our commitment to return value back to our shareholders which is a designation not only we can claim in the U.S. airline industry. I'll give you a quick recap on fleet; we ended the year with 723 aircrafts in our fleet as planned. Based on our current firm orders for delivery and 87 Classics will retire by the end of September. We intend to in this year just over – with just over 700 aircrafts in our fleet and then grow our fleet to around 743 aircraft by the end of 2018. We believe this level of fleet growth will allow us to continue to optimize and prudently expand our already robust network. The 5.7% increase in capacity during 2016 was predominantly in our domestic markets including our new city of Long Beach. We continue to manage 2017 capacity growth of approximately 3.5% with domestic growth accounting for roughly 2.5 points of that growth. Domestic capacity growth has moderated from 2016 levels from the highs of 5% to 6% to levels more in line with GDP and we are – I just wanted to point out our LTCs are growing in the low to mid-teens through the first half of 2017 but as this is said, just keep in mind that it's small part of the base. So just in closing, I – we just wanted to thank our employees again for just a tremendous quarter and tremendous and I just can't thank them enough for their outstanding customer service. So with that overview, I'll turn it over to you Tom and we're ready to take questions.

Thank you. [Operator Instructions] We will take our first question from Darryl Genovesi with UBS.

Great, thanks guys, appreciate the time. Gary in your opening remarks there I thought you said you're currently running – and correct me if I misheard you; but I think you said you're currently running below your [indiscernible] and you hope to get there by the end of the quarter. Did I hear that?

Yes, if we were to give you a point forecast today it would fall within that range of down one to flat. So right now flats at the top of the range. So really just repeating the obvious but our goal is to get to flat resin and we'll see if we can do it. But the reason – and then I think – you know, I think the important point though is what is – we're very comfortable in saying today as if the trends have improved and that sequentially they've also improved just in the short period of time for third – from fourth quarter to first quarter, so obviously that's a very welcome change.

Okay. And I guess would you characterize your guidance for the quarter as more or less a good run rate to use or are there items in there, related to the holiday shift? You know, first of all, is there any further may have impacted January and March within your guidance that maybe we should be aware of?

You're just talking about beyond the first quarter?

Yes. Within your guidance for flat to down 1%. I suspect there's probably some headwind in March and I guess there was – from the ladies and I was hoping that you could break that out. And then similarly, on the – you want to move [indiscernible] that I think some carriers have characterized likely to benefit January to some extent.

Yes. I will let Tammy do that, but the answer, I think to your question is it's not a straight line. So yes, there's a lot of choppiness in the quarter that are just trying to see our way through all the incomparabilities with periods. You have a holiday benefit, you have a holiday bogey and I'm thinking out loud, Tammy, I think there are some other things that are a little bit peculiar with the calendar change in January moving two days from the leap year also. You don't have the same number of strong days. Tuesday doesn't equal a Sunday, I'm sure you know. But what other color or solitary would you like to offer there?

Yes, I'll be happy to jump in there. We begin January with positive year-over-year routes and trends due to the holiday return travel as Gary was noting there for January. You have a little bit when you actually line up the calendar days, there's less pig days, if you will, in January this year versus last year. But yes, January here is starting off very solid comparing just walking to the quarter. February should have cleanest or easiest comparisons of the quarter with March being impacted by the Easter shift into April. So those are the things you probably want to focus on as you're trending for the quarter, but our outlook at this juncture is solid.

Great, thank you. If I could just ask Mike if you had any particular objectives that you would highlight with your expander responsibility that you think you might be more focused on or the company might be more focused on than the future than they have in the past? If you'd take a shot of that and appreciate it.

I think about our priorities. I break it into two categories or two buckets if you will and Gary really hit on the first one which is – and we have work to do, to I get the classics retiring, get the Max in, we have work to do to get the new reservation system in and that's all going great. Things like that, the work is in progress now is a category of priorities. From my perspective, the second category is very much focused on bringing our strategy and our vision to life. There's a lot of work going on there. I think about our vision statement which you all know, it's very clearly a statement of our intent. We intend to do this. We know it's going to take time, we're okay with that, the business is very strong. As I said earlier, we have a lot of momentum, I feel very good about that and I think we have time to execute the strategy in a very structured thoughtful way and there are all sorts of things that might kind of work together. Let me just give you an example or two of some of the things and I'll see if I can disclose the strategy, but I'll give you a few examples of things. Very clearly, we could do a better job of enabling our front line employees with the tools and information that they need to do their job. That's a big deal in terms of driving efficiency, it's a big deal in terms of improving their customer experience and to be honest with you, it's a pretty big deal in terms of improving the quality of life of our employees, so we are very focused on that so there's work to do there. I think when we think about our customer experience, you will get tremendous praise and great feedback from our customers on our customer experience, but there are areas there that we can do better at. Just a few examples, I guess one I'd call out is we have a very strong mobile customer experience today which is a big deal for customers. 10 years ago, five years ago, not so much. Today, it's a very big deal. I think ours is good, I think ours is solid, but there's a lot of enrichment, and a lot of function, and a lot of stepping you bring to that. That's an example. One of the things that Mike and I – I've hit Mike on his shoulder here, one of the things that Mike and I are working on together is to continue to build out the operational capabilities and we're driving for obviously reliability. We're driving obviously for efficiency. But the other thing we need to be building for is scale; we need to make sure that the operating processes that we're putting in places scale as we grow and that's a big deal for us. So that's some of the things that I'm focusing on personally.

Yes. I think that you will just hear Tom and I be really ride on top of one another in terms of what we think that our priorities are and maybe just saying that a little bit different than Tom did. But for me, my first priority really is our people. We've done a lot as Tom mentioned and Gary has talked about over the last several years expanding our company's capabilities and a lot of those changes are driving needs to change some of our older processes. Focusing on us, having efficient and coordinated process, as better tools for our people where they can have information that you need at your fingertips, having better decision support tools to help our customers and empowering them – that is probably the number one priority that I have. And then two and three below that, Tom mentioned, we have an operating infrastructure that we want to build the capabilities on. Our network is really complex and we've got a lot of opportunities, I think to improve our operation and reliability and our responsiveness in situations if we can make these kinds of investments. We've got a pretty critical focus areas, probably in the maintenance system, that cruise scheduling applications or flight management systems and decision support tools. And then lastly, really focusing on the cost. I think that we do a really good job with service and I think as our company is growing and we got more challenges in the industry on the cost front is to be focused on what we can do as a team and execute better to be more competitive on the cost side of the business.

Great. Thanks, guys. I appreciate your view.

And we'll take our next question from Hunter Keay with Wolfe Research.

Hi. I don't want to de-track from the results of the quarter and the outlook, but I do want to come back for the domestic capacity guidance increase. Your earnings release in October said you're going to go 2.0% and now you're saying 2.5%. I think and this is my personal thing. I think we're willing to hear from you that this is not going to turn into a repeat from what happened in 2015 with small increase after small increase. I don't think anybody has an issue with Southwest going 2.5% domestically, but I think we need to hear early signs. To hear this is not going to go back to 3% and then 3.5% by the time the year ends because if that dynamic repeats itself, I think it's to be no surprise to anybody if this stock fails to work.

Tammy, you want to address that?

Yes. Just to summarize your question, Hunter, just discussing why our domestic went from 2% to 2.5% points. Really we just firmed up our capacity allocation and when it was all said and done, it was weighted heavier to domestic and that's really just the function of the additional seasonal international adjustments that we make and really just working through the logistics of our classic fleets. So it was just really firming up our capacity for the year.

Hunter, my answer is real straightforward. We were not changing our fleet plan, we've already committed to growing the system 3.5%, nothing has changed in our network plans for 2017 from October. I guess when we get down to the last half a point, things rounded differently, I don't really know. The only thing that we affirmed up since October is we committed to open Grand Cayman, which we have announced and that capacity was already a component of our flying out of Fort Lauderdale. In addition to that, we decided to consolidate in Cleveland and open and consolidate in Cincinnati and that is pretty much a neutral change in capacity. So we're simply moving capacity from one allocation to the other. Beyond those very basic things, I cannot recall any change at all that we have in our approach to scheduling capacity for 2017 and I think importantly, when we look at the levers that we have to drive, given a fixed amount of airplanes which those ins and outs also have not changed to my recollection. The only other level that we have left is to either increase or decrease the daily utilization and that also is unchanged. Other than just reporting the component of domestic versus international, I was a little surprised this morning to the reaction to that, I will admit. But in any event, I think my answer is nothing has changed.

That's good, Gary. I appreciate that and just getting a little bit deja vu with the 'rounding' because that was a word that you guys used a lot, again in 2015 as well. It was rounding as well as anybody. The sensitivity around this type, given your market share and your cost structure, you guys have the potential to be very, very disruptive. So I guess my follow-up question would be – and thank you for that color – are you prepared to use the word 'cap' in the context of domestic capacity growth to 2.5% with the realization obviously that the system is still going to be unchanged at 3.5%?

No, I'm not. But I think what I am saying is that there has been no change. There is no change that I am considering at this time. Something would have to happen for us to change, but no, I would never make a commitment like that because you just never know, something could happen. But there is no effort under way to bring in more airplanes – even if we wanted to bring in more airplanes. I doubt that that would even be physically possible knowing what we know with the market. We are already published through June – August, I beg your pardon, we have a June 4 schedule, it takes us through August. So the only thing left to tinker with would be the last four months of the year. Hopefully I've answered your question. But I do want to be clear that we're talking about 3.5% in growth and that in system ASMs and the split of that is 2.5% and 1%. But if you look at the domestic growth, if you just look at the increase in domestic compared to the domestic system, that's different arithmetic. This is the mix of the 3.5%, it's 2.5% and 1%. But international is growing 30% somewhat if you're comparing it to the small international base and then likewise the domestic increase compared to the domestic base is something like 3%. But I think the numbers that you all are referencing back to is the split of the 3.5%. So 2.5% versus 1% point.

Okay. Yes, you answered the question. Thank you, Gary.

And we'll take our next question from Helane Becker with Cowen & Company

Thanks, Operator. Hi, team. Thanks for taking the time. I just have a couple of questions. One, on the international, is it possible for you to break out revenue or actual ASMs as opposed to just reporting them in one group?

Hi, Helane. How are you doing? It's possible, but yes, we haven't provided that level of detail. The international is about 3% of our network. We've been pleased with the development. Just to give you a little bit color, we've been pleased with the development of those markets and if you just look at the international market as an entity, we are seeing a positive year-over-year unit revenue growth if you just look at the international markets. But again, it's a small, small percentage of the total system.

Is there a point in where you get big enough where that has to be broken out? Even if just in your annual report?

Yes. Absolutely. That's more [indiscernible] absolutely.

At a point, yes. So we're just not yet there, Helane.

Okay. And then my other question is unrelated to that. It's on maintenance cost of clients in the fourth quarter. Did something happen there in the fourth quarter that cost it to be down too much, or is that the accelerated retirement of the classics? And should we expect that 11% decline for the rest of this year?

You've got it, Helane. We are seeing a favorable impact of the retirement of the classes and you'll see that continue into 2017 as we go to the year here. So you've got it exactly right.

Okay, thank you.

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

Hi. Good afternoon, everyone. Thanks for taking my questions.

You bet.

Gary, I guess the first one for you – and it's a regulatory front – could you just sort of speak to what you're hearing out of Washington with regard any potential changes, stands or positions from a new administration relating either your business of the industry overall. Obviously we're all aware of potential tax policy changes which will benefit you, guys. But just sort of curious to get your thoughts on what we might see in terms of regulatory changes over the next few years and if that's a positive for your business or not.

Well, I think we're hoping for some positives here. There is three teams that were very enthused about. You have the tax reform, you mentioned the regulatory reform and then thirdly infrastructure investments which I will admit were a little bit weary of is to how that might either helped or head us, but clearly our primary objective is to modernize the air traffic control system which falls in infrastructure and could have a huge benefit for aviation and for the traveling public. But to answer your question, we probably know more than you do, but at this point, it is fair to say, is very early. I have not met with Elaine Chao [ph] yet and we're very enthused about her nomination, we're very enthused about working with her, but it's just very premature. I don't know that it's clear exactly what the administration's focus will be in aviation. I think there's broad desire to roll back regulations, but I don't know that we know of anything that is specific. If I had to spend more time in Washington here in the first quarter and hopefully by April may have a bit better read on that, but we've looked at which is a broader corporate issue, we've looked at the tax reform proposals and we're quite excited about that on the corporate front. But that's just on income tax. So then as I really speak to the very heavy burden that we have for aviation taxes which we also want to take up with the administration. So that's a long answer to your question and I think the bottom line is no, we don't know anything specific yet, but we sure like what we're hearing so far.

Well, that's very helpful insight though, Gary. Thank you. And then for my follow-up question, just a housekeeping for Tammy. The $109 million hedge asset for 2018-2019 that you referenced in the press release, could you maybe break that down in terms of what's tied to 2018 specifically?

Yes. For 2018, it's going to represent about $91 million of that of the $109 million that we reported in the press release.

Okay, great. Thank you again for the time.

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

Hey, good morning, or good afternoon, actually. Tammy, just a follow-up on an earlier question, I was wondering if you could elaborate a little bit more on what the holiday drags that we should – if you can quantify a little bit more the holiday's benefit to January and maybe the drags till March?

Sure, Savi. I'd be happy to give you a little more color there. As we've said earlier, the holiday impact was better than we expected due to the improvement in the yields and stronger business travel. The holiday shift ended up impacting fourth quarter rather than the but about $0.5 no maximum, while was then what – we're about a half point which was better than what we were originally estimating, which was that 1.5 point, and we estimate the January benefit as probably in the $20 million range. In just you’re thinking about the quarter. Again just to remind you we've got the Easter impact to March, that will shift. So hopefully that provides you a little bit of color, but.

Any thoughts on the Easter one on that timing.

Yes, the Easter impact was about, it's probably in the same range the $20 million range as well.

Right. And Gary, if I might just go on the capacity question a little bit. We've had – you've had a low fuel and here we have classic retirement, so there's been a lot of capacity growth maybe hasn't been quarter-on-quarter normalized range and you look out I was just kind of curious how you think about that and what that level of might be. I know the fleet order looks like maybe 6% fleet growth in 2018 just your thought around that and if I may also on the mac delivery, your comfort level on the timing of the delivery and if there is any contingency plans if there are any delays around the delivery in 4Q.

I think – I think you characterize the last couple years well, to go back over a little bit longer period of time at least starting in 2012, 2012, 2013 and 2014 we had very, very modest if any capacity growth. So with the opening up of our field we were preparing for more aggressive growth in 2015, as a follow on to that along with opening of the Houston International Terminal, and then the third major route theme in that time period was the acquisition of slots from American at primarily at Reagan. So we were comfortable with above – with more aggressive growth in that time period because we thought those were unique opportunities and we thought they would be very profitable, and all of that proved to be true. So the 2016 experience was a follow on to that build up in 2015. And now we get into 2017 which is choppy as you mentioned because of the accelerated retirement and the grounding of the classics. So that will make for some choppiness, but so I think in relation to that 2018 will probably be a little choppy as well. Trying to give capacity guidance beyond what we have published, I think it is very speculative, we want to grow at a rate that will produce positive unit revenues, that is our goal. And trying to tie that to a number or to GDP or anything else is somewhat non-sensical. But in any event I think we're on the record as saying that we intend that our future growth would be no more than what we've had here in 2016. Which is pretty ambitious growth, so I see it being low single digits, that's just kind of put my thumb in the air, but right now we have plans which are very flexible which will allow us some rounding up or down. And we of course after this year we won't have many retirements for several years, and we'll be able to really dramatically reduce our capital spending after 2018 also but hopefully that's responsive to your question, but we're not wedded here to any one growth number, much less willing to commit one way or the other what it would be in the future. I think that would be a mistake, but that hopefully should give you some kind of ideas to the way we're thinking about it.

That’s helpful.

The MAX side, we're really, really good and Mike, would you like to speak to that.

Yes, as you know we're going to plan to put that in revenue service after we retire the classics and that will be at the end of the third quarter and from all discussions we've had with Boeing that airplane is performing magnificently. It is on schedule and we expect to be able to execute exactly as we have planned.

And I think you guys are doing already, right in increase your comfort level that there.

Yes, yes we've already done the service ready operational validation we had the airplane down at Dallas we fall and we've flown in and with and tested it with our system late last year and all – all those tested it just performed exceptionally well.

In addition to the airplane, obviously Boeing and GE need to do their parts but we then we have to be trained. So that's the other moving – moving piece of this and we believe we've got a full handle on that and have all the training capacity in place along with the hiring that Mike is going to need to support all that as well. So I think everything is lined up very, very well. And as I mentioned in my introductory room remarks there we have three major things for this year. And I don't know if putting a percentage to it is so literal but my thought is that 90% of the work for the new reservation system for the launch of international out of Fort Lauderdale or for the MAC is done. So we're now down to that last 10% and the deployment phase and I think we're all feeling very, very good about all three of those.

Got it, very helpful, thanks guys.

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

Good afternoon all, thanks for taking my question. And Gary, I know them so my question is can sound a little arrogant, but you keep in mind we don't run money, we don't run companies so that it is what it is but 50 points capacity I think it's not that big of a deal but maybe if we can look at the bigger picture. Do you feel the network is over in your level of return to margins and should we be thinking outside the fleet transition this year does growth ramp back up into 18 to 19 really grow into lower term profile and expand even or, how do you view this business long term given where your returns are today.

Well a fair question and – I would just offer up a couple of points I think it depends, it depends on three major levers the economy, fuel prices and competition. One thing that I don't think you all have focused on enough, is the competitive environment within the Southwest route network. So yes we're growing and producing really stellar returns. With this economic environment and as fuel price environment. But it's also in the face of very significant other airline capacity. So as I look at the fourth quarter is in it as an example. The markets that we serve we grew %% as you all know that's what we reported. But the big competitors against their base of service in our markets, grew much more than that, it was well over 6%. So there is a lot of capacity which is not too shocking given the set that southwest of the largest airline in the country. And we by definition serve the – the larger traffic pools. So if our competitors are going to grow, they're going to grow likely in our markets. But if you look at the growth of the rest of the carriers, I'll bet you 95% of their growth was in our markets. And I mention that to you just to give you a sense of how resilient Southwest is to competition. We have a great product, we have a great route network, we have a low cost, we don't charge back fees, are just a number of things that put us in a very competitive position. I think that that is the main factor for you to think about in answering that question. I think that if you go back to what Tom and Mike we're profiling. We're doing really well today, but we have ambitious plans to make Southwest only better in the future with a customer experience, with our operation but also to drive more efficiency. And in completing that strategy that should put us in a position where we can grow. How fast we grow I think will want to make that judgment on an annual basis. And maybe on a schedule by schedule basis. But the – I think the overall return under the assumption that we can continue to produce positive unit revenues, will be dependent upon where fuel prices land, and obviously that's been a main driver since 2014 and one of the reasons that we have these record returns on capital. My opinion on that is that I think we're going to continue to see pretty moderate energy prices over the next three to five years and we'll have hedging in place to protect against catastrophic increases. So that we can commit to some kind of a growth plan. But I think the returns will be very, very dependent upon that. Of course we all know how cyclical the business could be, everything that we see says that the economy is going to continue to expand for a number of years. But we all want to be careful in making commitments just in case that proves to be wrong.

Well I appreciate the answer. As you look at your consistent results, you'll get your investment grade balance sheet and then you'll get your relative stock valuations, I mean what is the market missing in southwest stock. And what can you do as management team of the board to really try to maybe drive home that value for shareholders.

Well, we need to execute. I'm very happy with the – the value that we've been returning to shareholders, I think you're holders are as well I think the stock price performance has been very good over the last five years. So we're very pleased with that and we just want to continue. I think so – I think the opportunities for us are to continue to fine tune our customer experience and our revenue production. And then we need to be aggressive in managing the cost as Mike mentioned. So I think that if I don't know that people are missing. But it's not just southwest, every company intends to get better. And I think what we have to do is demonstrate to our investors that we will in fact continue to get better and better and better and through that continue to be an industry leader, and drive superior returns. We've we have a history of demonstrating that, we have better tools and strengths in place today than we have ever had in our history, implementing a new reservation system this year is going to be a game changer it won't change the game in May, but over the course of time over the next several years we will have significant new technologies and tools, that will be deployed that will make us even stronger. So it's all about being the best in class and winning customers against our competition, our competition is better today than it ever has been we're going to continue to get better as well.

I appreciate it thank you.

And we'll take our next question from David Vernon with Bernstein.

Hey guys, thanks a lot for taking the question. Could you maybe Gary, kind of dope about a little bit and talk about the step up in aircraft CapEx for 2017 and just give us a sense for kind of where that money is going to go, how that is going to impact the business in the next couple years and then longer term kind of what you think about and the things you want to get done in the next five years from an investment perspective, and how that can affect kind of the run rate spending the outlook any way.

Yes sir, I'd be happy to. Well first of all under the assumption that we continue on with the strategy that Tom and Mike and I are articulating here, which is to continue to operate on all Boeing 737 fleet, to continue our expansion in North America and do that at a steady pace, under that basic scenario. It feels like this is a pretty peak level of CapEx and especially given that we've accelerated these retirements, we have heavy spending to replace these retired airplanes here especially in 2017. So given that if feels like this is a peak year. The non-aircraft surge that we're seeing in addition to the airplanes in 2017, interesting for us is real estate oriented. So Mike is building a new flight training center, for which is a strategic move. And Mike can go into detail if you're interested in that, but that's in the hundreds of millions. We have other airport projects that we're investing in that are bumping up our real estate spending. The technology spending, Tammy[ph], I believe actually begins to level off in 2017. And that is largely because we're the bulk of the spending for the reservation system is behind us and I would like for our technology spending to continue to be robust but not have the levels that we have been spending, so we got a lot of technology desires here over the next several years but that spending should be leveling out. We also have a very significant technology investment underway that will complete in 2017, related to our maintenance record keeping. And that is tied directly into the – the new MAX aircraft. So those are just a couple of examples, future years we'll have other technologies that are being deferred right now. So we'll continue to have spending there but especially with the real estate Tammy I think that spending will come down and then obviously as we do as you are well aware of the aircraft spending will be significantly less, after 2018.

Yes.

Excellent. Maybe Tammy, just a follow up on the quick question on the guidance the 3% CapEx guidance, does that included training in any transition costs would be associated with the limitation other system or the fleet transition, or will there be some expectation in special charges on top of 3% guidance.

It includes the cost associated with the transitioned to new reservation system, as you pointed out there are some training costs, that will occur but we've incorporated all of that into our guidance. So we are working through just on your – your question on a special items, obviously those are always difficult to predict and if any. If we had some special items as you know last quarter associated with the – with our classics fleet, just down on some of the leases that we – we bought out the equity on a few leases because that was what make most of the [indiscernible] because we were working through how to most effectively retire aircraft. Now that short of – short of that there's I think normally what we anticipate going in any year would be just a normal fuel hedge adjustment to get an economic fuel prices.

Excellent, thanks so much for your time.

And we'll take our next question from Joseph DeNardi with Stifel.

Thank you very much. Hey Gary, in a world where Delta United American of all decided that they need a basic economy fare to compete effectively against the UCC competition. Why does Southwest not need something like that.

Well, to be honest we have think it's more a question for them as to why they think they need one is as opposed to why we think we don't need one. We have a very powerful brand, and Tom, and Mike and I and all of our leaders are very strongly aligned on this. There is huge value in offering all of our customers 100% of them a great product. So when do – we like to say in Southwest there is no second class, there is no second class, in addition to that we strive to keep the customer experience and just the product offering as simple as possible. So anytime we contemplate offering customers a choice, we are we debate that heavily. Because complexity drives confusion and it clouds the brand. So what you have at Southwest is a very strong brand positioning in customers minds that we stand for friendliness, reliability and low fares. That the whole free bags and no change fees becomes a very powerful component of all that. So we don't feel like we need it but let me just take the hypothetical. So if we were to undertake a basic product we – the only thing that we could do is take away from it. We wouldn't let you make a change, you board last, you couldn't take a bag, you couldn't bring a carry on. Well that complicates the message and we've spent 45 years educating our customers as to what to expect when they come the southwest, I think that would be a huge mistake. Now that's me that's talking for me I know Tom agrees with that, and I know that Mike agrees with that, I'm not saying for ever more that Southwest would never undertake something like that, but we would have to have a darn good reason to pursue our route that way. We don't have any plans to change our seating configuration and add bigger seats, compared to littler seats. It's just back to we want everybody to have a great experience of southwest and that is our greatest strength. So we go into the market you name the big city, what is our biggest opportunity. Our especially the every other competitor they lavish they – lavish attention on elite customers and they ignore the rest and that is our biggest opportunity, because we don't ignore anybody. And we just don't want to change that. So now you look at our current results competing against all array of competitors and there's just no imperial evidence that we're missing anything. And again I – I just point to eight quarters worth of very strong performance relative to the group. That's even in the face of our competitors adding a significant amount of capacity overlapping us, and we're still producing these guys' returns, so I feel really good about where we are excited that we're always going to make it better and we certainly don't see a need to pursue a strategy like that.

Okay, thank you for that Gary. I think this is a question for Bob, if he's on the call.

Yes, Bob here.

Yes. So estimate you guys do conservatively about a billion dollars in EBOT from Mile associate with your credit card, so feel free to comment on that if you like, but if you can tell – can you help us understand what that earnings stream would look like in a downturn, if we should we just make an assumption as to what spend would do and that's the downside or do new card sign ups in the rate you're selling the mile factor into that also.

Yes, I'm going I'm going to kick it back to Tammy for more the detail. But generally we're seeing and strength all across the board. So that's cards on up six new members that's retail strength. Obviously piece of the deal we chase depended on the cards as you see large fluctuations with the economy that would drive changes in things like retail spin, you're going to see some movement. So of course right now we're seeing upside there with the strength in retail spending on the card, but generally the story has been across a very long period of time now. That business again card acquisitions, new members, [indiscernible] spend in the card is continue to be very strong for a long period of time and actually outpace the base business about how to get back to Tammy for more detail.

I understand your question. The interest in getting more detail, but we’re not going to provide any details really today other than what we would normally provide. But other thing I would say rather large programs has ground to be a very meaningful contribution to our revenue and bottom line and since we launched it in 2012, and as Bob, commented on already are our membership Bob, It probably more than doubled, our co-brand credit card it's been significantly accelerated. Just all the way around it's been a tremendous success, but today we are not going to provide any more detail.

The only thing I might offer up and I think to fits in with your – with your earlier comment or question is that; we think we really got something here. So we relaunched completely redesign the program and launched that back in 2011, so now coming up on six years in March six years later. We are ecstatic with the success that we have had and really feel like our team nailed it. So what's driving that? Well first of all the program itself which is well known it's all public, you know how it works. And then second is the overall brand of southwest. In other words does a customer want to put their chips on the southwest, take a Southwest credit card; yes if they like Southwest. Well, if we start tinkering with the brand, we start offering the basic economy, blah, blah, blah. It will – it would risk the revenue stream and the loyal to the – loyalty that we have with that frequent flyer base. So just another – you just gave us another argument of why we want to be very thoughtful about tinkering with any changes. So my report to you is we don't have any thoughts about any radical changes to the program. And we also don't have any radical thoughts about changes to the brand. So the growth that we continue to see I think has been very, very significant and very exciting and obviously we're hopeful that that's going to continue.

Yes, that's very helpful. Gary I would just say that I think the limited disclosures around the economics of the of the card program in the loyalty program make it very difficult for the investment community to recognize how valuable it is, so I appreciate your time.

And I think that is a fair comment. And I know that Tammy, is taking that into very serious consideration.

Thank you very much.

And when you have time for one final question, we'll take that question from Duane Pfennigwerth with Evercore ISI.

Thanks for the time. Can you hear me okay?

Yes, we can hear you.

That’s great. Not a telecom analyst, an airline analyst so I figured out the phone.

You're good.

And tanks to let me join this call. So regarding the IT tools that you're implementing this year and sort of scheduling variability. Can you talk about where Southwest is today in terms of its ability to shape capacity by day of week and perhaps seasonally within the month. And how the tools you're implementing will change that, and what the timeline on those changes would be.

Yes we can and I have several experts here. Who would like to take that question?

I think it's really about incremental improvements that we have the ability today to shape passively obviously within a day, within a week, and across longer time periods and so you see. Yes very the schedule as opposed the old days [indiscernible] Southwest ran the same schedule every day, we do vary the schedule across the days of the week. You also see us making more changes to the schedule post obligations. So maybe not as much as I would like to keep fairly stable schedule for our customers but we do go in to make post publication changes. So the tools that are coming are all about incremental change of the more than they are drastic change, so we will have the ability to make – to include more variability within the day. More variability within a week to add things like red eyes if we were to choose to do that over a period of time. And this will all layer on as we were obviously one risk here in May and post that I do think we – we're going to walk into that carefully, because of one of those things that I think that customers value about the brand is that we – we have a strong schedule offering, we have a fairly stable schedule offering. So and – so will walk into that over a period time post the one raise implementation.

Duane, this is Mike. And just follow on with what Bob, was talking about it. I've been talking a little bit about some of the operational infrastructure investments that we need to have and so. I think that we will have good commercial capabilities to have that kind of variation, we also made the same kind of operational capability, so we'll need to be able to vary our staffing at the airports. Vary our staffing with our current systems, vary our maintenance programs with aircraft availability and those are some of the things when Tom, was talking about building an operating infrastructure that scalable and gives us flexibility. Those are the kinds of things that they are investments in our infrastructure designed to give for us.

And Duane, the other thing I would mention just strategically here. We decided before that will we deploy this new system that we were going to focus on the bases. And that really – it really took on two forms number one is we wanted our technology resources focused on delivering a really good reservation system, period. Secondly we wanted to allow our frontline the opportunity to get trained, and then become proficient on the basic replacement. And so we opted not to be more aggressive and pushing for value added changes, that would complicate the technology deployment and it would complicate the change management if you will. So in a different way we just need to get this preservation system replaced and we need to do it really, really well, and it is a gigantic project. So we sort of are under promising for the benefits, right now, but then the – the opportunity that you mention is something that we will absolutely want to press for as a follow on, but the way to think about it here in 2017 and particularly in the second quarter is that we are just replacing our reservation engine and that is plenty. And it's going really well, release one was extraordinarily well done. And release two is virtually done as we speak and will be spooling up our training here in about thirty days. So I think it's all – it is all rolling out exactly like we had hoped and desired.

Okay, thanks for the time.

And that concludes the analyst portion of today's call. Thank you for joining. Ladies and gentlemen will now begin our media portion. At this time I'd like to introduce Miss Linda Rutherford vice president and chief communications officer. A – Linda Rutherford: Thank you, Tom. And welcome to the numbers of our media here on afternoons call, and well get started with the meetings Q&A portion Tom, if you give them some instructions on how to queue up for questions.

Thank you, ma'am. [Operator Instructions] And thank you for your patience and we'll take our first question from Susan Carey with Wall Street Journal.

Good afternoon, probably Tammy, this is for you. Maybe I missed it in all of the new releases such but there was a lot of discussion on the call about you were 3.5% capacity year-over-year addition for 2017 but what did you say or did I miss it, what is your 1Q capacity growth going to be.

You're talking about our first quarter for it for this year just to make sure. We are growing our capacity about 4% year-over-year and here in first quarter.

4%. Thank you.

We'll take our next question from David Koenig with the Associated Press.

I'm sorry if I missed this, but I know it's very early but any color you can provide about the commentary on the pickup presidency election in red state blue state business slick we want to get away, by market, by market sheer of ULCC anything.

No, I think Dave, as you know in the overall in the economy it's very broad consumer. I mean economic activity picked up, the markets picked up. I don't know that I can totally explain it I guess one could believe the theory that first of all there are certainty now you know who the president is. Second of all there is some optimism about tax reform, that would be a boost to the economy. And that regulatory reform et cetera. So I think that we're being swept up in this broader tide of optimism and it's not unique to Southwest either, the red we've seen at least we have heard from our competitors with their public comments that they've seen the same thing. What was interesting to us and Tammy's mentioned this several times, is the business travel that picked up in that sort of between holiday period. December before Christmas which can be a really low travel period many years and for whatever reason this year it was – it was pretty strong. I don't know if that's the same effect or whether it's something different, the calendar is always odd to we – we actually saw a Halloween business effect this year which was kind of interesting, probably relative to the fact that the last couple years it was over the weekend. But a lot of moms and dads will probably forgo a business trip so they stay home with their kids. I mean there's these things we run into and they are curious. But what has been pleasant for us is since early November the pickup has been sustained. We ended up with a record low tractor for the quarter and we're looking at very strong bookings here in the first quarter and at least with the traffic that we've seen so far through January it's also been quite strong. So that's – unless you guys have some other theory that's about the best I can come up with, Tammy you have any other thoughts on this.

I think you captured it perfectly.

Okay. Thank you.

And we'll take our next question from Edward Russell with FlightGlobal.

Hi, thank you for taking my question. You mentioned that Max is on track to arrive at the end of this – third quarter, can you comment though about whether Southwest will be the first operator of the MAX other airline has said they're going to begin aircraft earlier and just curious, if you can comment on that.

Yes, I don't – I don't really know exactly what the what other airlines are delivering plans are or when they will be operating the airplane, but has as we've been on record with we're going to operate the airplane as soon as we have the classics retired, and that is because of some of the training differences and to training challenges we would have between having tiles go between a classic and a MAX airplane. So we'll have the classics retired at the end of the third quarter and at that point Tom will launch service with a MAX. If another airline and obviously they're operating before that we’ll not be the first operator, but for us it doesn't – it doesn't concern me one way or the other.

Okay, do you anticipate Southwest to be the first to take the first delivery if not being the first operator.

Yes. I consider what the Southwest Airlines is a lot of customer for the MAX, we order the airplane, it's the first one off the delivery line, we are ones that have done the service ready operational validation for Boeing or the ones that are working very closely with Boeing to make sure that it is operating as they – as everyone intended, and I feel like we are a major player in that.

You know, Dave, as we get this question by the way. So there I know there's an interest in the answer. But we're not really focused on that, we know that Boeing has built planes that are for Southwest of where we have got our name on them, so we don't need them for – for flying until October 1. So when aside from just readiness. When we get them like I don't think we care in the grander scheme of things but as Mike said, we're the largest customer regardless of when we take the first delivery.

Okay, thank you.

And we have time for one more question. We will take our last question from [indiscernible].

Hi everybody, good afternoon. So I was just wondering if you guys could provide a little bit of color on how you're thinking about your MAX order, anything specifically some other restricted airport that you're operating out of like in Dallas LUV or Chicago Midway, does the situation at the airport maybe you should take a look at upgrading some of your MAX orders to something like the MAX-9 were even the MAX-10…

No. At this time we are committed to eight. We are the launch customer on the seven which comes Mike and 2020.

2019.

2019, and so that's it. We think that the eight is the right airplane for us. We'll use the MAX-7 and it may prove to be a bigger player in our strategy on longer term, but right now our focus is more on the eight and that's mainly because the 800 mix of our 700 plus airplane fleet is still a minority of the airplanes that we'd like for it to play a bigger role, so that will be the emphasis for a while. We don't have any need at this point for a bigger than the eight airplane and there is not any effort within Southwest exploring anything beyond that, just taken the MAX-8 and then the MAX-7.

Okay, great and then if I could ask just one follow up one additional question could you maybe comment a little bit on the early performance and you're seeing on your [indiscernible].

Yes it's early. And the load factors look fine. It is a weak part of the year seasonally. And what I've been. Bob, I've been actually pleasantly surprised at the demand from Cubans flying to the U.S and back a lot of times with our international routes and the again you have to understand that we're new at this, we've only been flying international about two and a half years. A lot of our markets we've built up the airplanes with U.S citizens only operate and coming back. In this case where we're getting a fair amount of local traffic coming to the U.S as well. But it's way too early to tell, we need to go through a full annual cycle and see what this is like. I get asked all the time about whether it's meeting or expectations. I didn't have any expectations I mean I don't know how you would know, because we have – we have there has been air service to Cuba for 50 years, so the fact that we've got people on the airplanes I think is really good. And just lastly, with the way we approach new markets we're – we're very well prepared that the initial response could be rather weak. And we have a lot of experience in being patient in stimulating the market getting people to notice that we're there and change their travel habits and have a lot of success of course under our belt with that approach. So I'm happy with the initial results. There is nowhere near where we want them to be eventually, but at this point don't have any reason to believe that they can't get there.

Okay, thanks so much.

At this time I'd like to turn the call back to Mrs. Rutherford for any final remarks.

Thanks so much, Tom. Thank you all for your time and questions this afternoon and if you as always have any follow you can reach a member of our communications group at 2147924847 or via the online user at wamedia.com. Thank you very much.

And that concludes the call for today. Thank you for joining.