Southwest Airlines Co. (LUV) CEO Gary Kelly on Q4 2018 Results - Earnings Call Transcript

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About: Southwest Airlines Co. (LUV)
by: SA Transcripts
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Earning Call Audio

Southwest Airlines Co. (NYSE:LUV) Q4 2018 Earnings Conference Call January 24, 2018 12:30 PM ET

Company Participants

Ryan Martinez - Managing Director of 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

Linda Rutherford - Senior Vice President and Chief Communications Officer

Conference Call Participants

Joseph DeNardi - Stifel

Brandon Oglenski - Barclays

David Vernon - Bernstein

Jamie Baker - JPMorgan

Rajeev Lalwani - Morgan Stanley

Hunter Keay - Wolfe Research

Alison Sider - Wall Street Journal

Tracy Rucinski - Reuters

Ghim-Lay Yeo - FlightGlobal

David Koenig - The Associated Press

Robert Silk - Travel Weekly

Operator

Good day ladies and gentlemen, welcome to the Southwest Airlines Fourth Quarter and Annual 2018 Conference Call. My name is Greg, and I will be moderating today's call. This call is being recorded and a replay will be available on southwest.com in the Investor Relations section.

At this time, I'd like to turn the call over to Mr. Ryan Martinez, Managing Director of Investor Relations. Please go ahead, sir.

Ryan Martinez

Thank you, Greg, and welcome, everyone. Joining me today, we have Gary Kelly, our Chairman of the Board and CEO; Tom Nealon, our President; Mike Van de Ven, Chief Operating Officer; and Tammy Romo, Executive Vice President and CFO and other members of our senior leadership team.

Please note that our comments today will include forward-looking statements and those are based on the company's current intent, expectations and projections. A variety of factors could cause our actual results to be materially different from our current expectations. And we'll also make references to non-GAAP results, which exclude special items. So for more information regarding forward-looking statements and reconciliations of non-GAAP to GAAP, please visit the Investor Relations section of southwest.com.

Before we get started, I want to provide an update on the cadence of our planned investor updates for 2019. Beginning this year, we will discontinue the leasing month and traffic statistics, however, we will continue to practice we began last year providing a quarterly investor update in the last month of each quarter that would be March, June, September and December typically around mid-month.

So with that intro, I will turn the call over to Gary.

Gary Kelly

Thank you, Ryan and thanks everyone for joining us for the fourth quarter 2018 earnings call.

The earnings were outstanding -- an outstanding way to close an important but a very challenging year. I'm very grateful to all of our Southwest people. They are extraordinary and they really showed their resilience and their fortitude. They did an exceptional job and they have set us up very, very well for what ought to be a banner and a record year in 2019.

Our celebration is bittersweet; this is the first earnings report in history of Southwest Airlines without our beloved Herb Kelleher. It is a huge loss for us. It is a huge loss of course for Herb's family and really countless friends and acquaintances around the world that he touched in someway. World owes him a huge debt of gratitude for how radically better he made it and without a doubt we are more inspired at Southwest than ever to keep our company strong and keep it growing and to make Herb proud. So everybody look out.

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

I want to talk about 2019; I'll talk about the government shutdown in a minute. We have a stellar year planned as I told you all in October; our revenue outlook remains superb for the year. We're off to a great start in January, have industry leading forecast, I think first quarter on solid capacity growth and barring anything unforeseen we project unit revenue growth for the year in excess of 3% just like we said back in October.

Got strong traffic, strong yields supported by significantly enhanced revenue management capabilities that were rolled out during 2018. We've got new revenue enhancements committed and under construction as we previously promised and expected to come on line in 2020. Stay tuned for more details later on this year. And no, I am not talking about charging for bags.

Based on our current fuel prices, our unit cost outlook for the year is also quite good. It's under 2%. We have a terrific 70% fuel hedge built for 2019 at a reasonable cost with zero put exposure and dramatic protection say $100 a barrel, we'll have protection below that as well. But it is very dramatic at that level.

Our cost outlook ex-fuel and items for the year is in the 3% to 3.5% range. If we miss that range, it will be because we're below it. And the only caveat and the unforeseen category here is that we do need to hear our capacity target because the denominator is important when it comes to unit costs.

As we said in the release, CASM x is front half loaded for a couple of reasons, Tammy will go over those. The second half is flattish and that bodes well as we get into 2020 and really a good cop to what was a stellar cost performance in 2018. I'll call my good friend Herb Kelleher on the first half next year in terms of cost, which is it's an aberration -- it's an anomaly bordering on an aberration. So regarding our warning back in October about cost it's obviously uncharacteristic for us. Our early indications were simply coming in much higher than we had been previously expecting. We shared that and thanks to our leaders for doing a great job and arriving at a sensible budget for 2019 and committing to a series of initiatives that will drive further efficiencies. Of course, Southwest is famous for being a low cost efficient airline over a long period of time we've been able to control our cost x fuel to 1% to 2% unit growth per annum and that's largely been driven by wage and benefits inflation that everyone here is familiar with.

I don't expect that to change going forward except to say that it is our goal to control inflation to less than 1% to 2% per annum. It's important for a number of reasons that we strive for that but in any event the suggestions by some that our costs are not -- they're out of control or absolutely false.

We've made controlling our costs our number one priority for 2019 and also for the next several years. But I do want to add quickly that we'll also expect to improve our operational performance and our customer service delivery. So we don't -- we don't want to move backwards with those categories.

Over the past 15 years, we've seen a remarkable improvement in our revenue generating capabilities along with a dramatic improvement in our fuel consumption efficiency. Over the last five years, we've seen the best returns on invested capital in our history and it's obviously validates that our investments have more than paid off. So bottom-line 2019 is shaped up as a phenomenal year.

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

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

Tom Nealon

Okay. Very good. Thank you, Gary. Thank you everyone for joining us.

Well, I'm going to tell you we had used urban gear, we had a very, very strong fourth quarter, you will hear from Tammy in just a few moments. Our cost performance was very strong. We beat our guidance and our revenue performance was also very strong and we came in at the very upper end of our guidance and I do have to say that the entire Southwest family and by the way we are a family. It is a family. You all made it happen. I'm very thankful for each one of you and I appreciate all the hard work that you put in every day.

So we are in fact seeing fourth quarter yield momentum continue into the first quarter and we also continue to see solid passenger demand throughout the booking curve. I think that barring any major changes in the macro environment or a protracted continuation of the government shutdowns gearing over to do, we are set up very well for a strong first quarter and first half RASM performance.

As I said in the October call, Q4 was a clean quarter in terms of year-over-year comps. We had record operating revenues of $5.7 billion which is up 8.5% year-over-year and this was driven by strong performances in both passenger revenues and other revenues. Our load factor was down 0.5 half year-over-year, which was pretty much right in our expectations, while our passenger yields increased 3.7% for the quarter and we saw stable trends across the booking curve including close in, corporate business strength as well as strength in solid holiday performance.

Our average one way fares were up 6.3% for the quarter and our performance was consistent across all of our regions and our yield strength produced a healthy fourth quarter RASM that was up 1.8% year-over-year, which again was near the upper end of our guidance range of plus 1% and 2%. And this is consistent with the original guidance we gave in October and reaffirmed again in December.

I think it's also worth noting that keep in mind this RASM performance was a 6.5% increase in capacity and we also overlapped a plus 2% comp in 2017. So I think that's pretty strong performance.

Our scheduled operating day was down 2% year-over-year in Q4 as we continued eliminating very early and very late shoulder flying which by the way is also consistent what we discussed on our prior calls is reducing our shoulder flying. Our new res system capabilities contributed roughly $95 million EBIT benefit in the quarter, which was above the higher end of our guidance range of $80 million to $90 million and this contributed in a nice way to our yield performance for the quarter. So that puts the res system benefits in $205 million of EBIT for 2018, which is a bit ahead of our plan. And we are very pleased with the performance and capabilities of the new system, we're pleased with how our revenue analysts have adopted it and really embraced it and we'll continue to enhance this and leverage it fully going forward as well.

As we mentioned in our earnings release, we will be ending service to Mexico City later in the quarter, but I have to say that overall we are really pleased with our international business. Although our near international markets are small percent about 4% of our capacity, they were in fact decretive to our Q4 RASM results.

Our international RASM outpaced domestic RASM and that was an almost 8% increase in capacity and these markets are continuing to develop very nicely very much in sync with our plan. The international load factors by the way were also up year-over-year and we saw pretty nice improvement in the performance of the Mexico beach destinations in the quarter.

Having said all that, we don't have any plans to add any additional international this year mainly due to the fact that Hawaii is our top new market, but the RASM performance of our international markets is very strong and we're very pleased.

Our boarding ancillary products also performed well both were up double digits year-over-year and as you might recall in late Q3, we introduced variable pricing for our early bird product. And this is performing right in line if not slightly ahead of our expectations.

Business partner revenues were again strong in Q4 and our Rapid Rewards Program continues to be a strong performer as our co-branded credit card revenue again grew double digits year-over-year in the quarter. And we saw real strength across all metrics of the Rapid Rewards Program and this by the way is an already strong base. So we're seeing strong acquisitions in new ramp Rapid Award numbers, new credit card acquisitions that outpaced passenger growth. You're also seeing strong spending on the card and very high retention rates. So this is a very healthy program. So our industry leading program Rapid Awards continues to perform extremely well. And there is still a lot of runway in front of us for continued growth.

So let me now shift to the first quarter. So based on our current bookings and yield trends we do expect Q1 RASM to increase as you've already heard in the range of 4% to 5% year-over-year. We are seeing a step up in our year-over-year RASM trend and this is largely due to strengthen our base business trends including strength in close-in bookings, strength in corporate travel. As I said just a moment ago strong performance from Rapid Awards.

But in addition to these factors there are several of the things, I do just want to mention real quickly. First on the holiday calendar fronts, we will be shifting as you know Easter from Q1 to Q2. This is about a $40 million revenue shift, but it is a shift. Second, keep in mind that we didn't have any benefit in Q1 last year of our new reservation system. As you recall, this didn't begin to roll out until Q2 last year. The bottom line is, we are expecting a year-over-year RASM benefit in the first quarter about a 0.5 that's pretty solid.

Third, we had a 1.5 RASM headwind last year in the first quarter and this was really driven by several things. First, the suboptimal flight schedule, which we are interested in being done talking about. The competitive fair environment and the spring break calendar shift. So none of those things repeat this year and we see those the 1.5 point tailwind in Q1 of this year.

As you know, we also implement today a system wide fare increase in late November which we expect to be a benefit throughout 2019. So I do want to keep in mind our schedule is now optimized. Our fleet is at full strength and growing. We now have strong revenue management capabilities that we did not have before and we are better prepared to compete in any environment than we were a year ago.

And finally, just like everyone, we are keeping a very close eye on the impact of the government shutdown and we currently estimate $10 million to $50 million negative impact January revenues thus far and that is built into our Q1 RASM guidance. I do think it's important to keep in mind though that a relatively small piece of our business travel is tied to government contracts. So our exposure is relatively low compared to others perhaps but still meaningful and we're keeping a very close eye on this.

I do want to turn to the second quarter for just a moment. We are expecting a healthy year-over-year RASM performance here as well and as based on the current trends as well as on the prior year headwinds that we experienced. As a reminder, we had a 3 point RASM headwind in Q2 last year and two things really drove this. First was that suboptimal schedule again. That was a point. And second, we had a 2 point impact following Flight 1380. Both of those issues are behind us and we see this as a 3 point RASM tailwind for Q2 and we should also see a year-over-year RASM benefit in the second quarter from our res system enhancements.

So to wrap it up. We are very pleased with the revenue trends we're seeing as we start 2019. And our goal is very clear, we will grow RASM this year in excess of 3%. Now, we are off to a great start here in the first quarter.

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

Mike Van de Ven

Thanks, Tom.

We finished the year with a 79.2% DoT on time performance and that was lower than what we had planned for, but still it was a 1 point, 2 point improvement over 2017. But more importantly, our performance relative to the industry really showed improvement over the last half of the year. We were sixth and seventh in the industry with respect to our on time performance in the first and second quarters. But we improved into fourth place there in the third and fourth quarters. And you know if you exclude Hawaiian out of there of course we'd have been third. The majority of that improvement was the addition of a tool that allows for that our own time performance to be an optimization criteria and the scheduled design. And that added about 1 point of OTP lift in the second half of the year and we did that without having any significant additional operational investments in our block and turn times.

And in fact, if you would look at Southwest on a gauge adjusted basis, we have less block and turn time invested in an on-time performance point than anyone else in the industry. So being near the top of the industry in terms of performance, while maintaining really good asset productivity, it's a very cost effective way for us to fund our reliability targets.

Turning to bag handling for a second. We put over 123 million bags on airplanes 2018. And we delivered 97.1% of them on the flight, as they were tagged. Last year that number rounded to 97.2%. So very consistent bag handling performance in '17 and '18, and those are the best two year performances in our history. We're doing all of that with pencil and paper as our primary tracking and processing tools.

So in 2019, we're investing in scanning and subsequent automation that will be the building blocks for not only improved bag handling, but also improve the efficiency of our flight course procedures. And that again is going to give us an on time performance without any additional block return time investments.

We continue to focus on hospitality efforts in 2018 and we've pushed the last supplemental customer information to our stations so that they can go out and identify customers that we want to recognize or perhaps apologize for the previous bad experience. We've hosted several hospitality summits for our people throughout the year. And those things are certainly making a difference because our complaints to the DoT are down 25% from where they were last year and we have the lowest complaint ratio in the industry last year.

Turning to ETOPS just for a second, a primary operational focus in the near term is getting that ETOPS authorization. Although we have left a tabletop and validation flies that demonstrate our ability to execute our long range navigation and our extensive operational procedures. But until the government shutdown ends, we are at a total standstill. Now you may have heard that there have been additional FAA personnel authorized to return to work, but the work that they can do is limited to safety specific activity and certification of new or expanded operational capabilities, it doesn't fall within that definition and thus the fans bill.

If the shutdown ends within a week, I think we have a reasonable chance of beginning the service in the first quarter of 2019. Otherwise, it will likely be in the second quarter.

And turning to 2019 a little bit further. We do have several other initiatives and technology efforts focused on enabling productivity enhancements. We plan to implement a new maintenance system either late in 2019 or possibly early in 2020. And it's going to provide substantial opportunities to streamline our processes and eliminate some inefficient overhead costs we have associated with our current system.

We're planning to make investments in our crewing systems better connectivity with our crews along with some improved Decision Support Technologies to recover from our regular operations. And we also have more opportunities to continue to incorporate some of more advanced predictive analytics in the NOC and to use that while we're running our daily operations.

So just to close out, I think our operations are on very solid footing as we move into 2019. The operational metrics are right where they need to be. And that gives us more time to focus on the cost opportunities that Gary and Tom have mentioned.

And with that brief update, I will turn it over to Tammy Romo.

Tammy Romo

Right. Thank you, Mike, and hello everyone.

I'm also very pleased with how our people closed out the year strong and fourth quarter. Our 2018 performance truly was the second half story. Our people saw your spirit was on full display as they overcame great challenges last year to produce the outstanding results we reported this morning and we have great momentum coming into this year.

On top of the record fourth quarter revenue performance Tom took you through, we had a solid fourth quarter and full year cost performance despite higher year-over-year fuel prices. We did see some relief in crude prices in the back half of December, which resulted in our fourth quarter hedged fuel price of $2.25 per gallon coming in at the lower end of our mid-December guidance range. However, our market prices in December also provided an opportunity for us to add to our first half 2019 fuel hedge position as well as 2020 with the Brent crude spot price trading in the lowest $50 per barrel range.

We are now 70% hedged for this year with 75% to 85% protection in first half 2019 and a roughly 60% hedged in the second half of the year. For 2020, we are now roughly 50% hedged.

Our hedging premium for this year are approximately 95 million or about $0.04 per gallon compared with 2018's premium expense of 135 million or $0.06 a gallon.

Our 2019 hedging protection produces modest gains at current market prices and kicks in more materially at $70 Brent crude equivalent. Now we're well prepared should we continue to see volatility in prices. And as we've previously mentioned our 2019 hedges are a mix of WTI and Brent crude oil and are structured so that we fully participate in a market price decline.

For first quarter 2019 based on market prices last Friday and given our hedging position, we expect our fuel price per gallon to be in the $2 to $2.05 range with an estimated $0.02 hedging gain offset by $0.06 of premium costs.

And for full year 2019, we expect our fuel price per gallon to be in the $2 to $2.10 range with an estimated $0.01 hedging gain offset by $0.04 cents of premium costs.

Fuel efficiency improved 1.5% in 2018 and we expect a similar improvement year-over-year in the first quarter and for the full year 2019 in the 1% to 2% range, which is around $60 million in annual fuel savings.

This will continue to be a key part of our cost story going forward, which should become more meaningful as we begin retiring Dash 700s this year and continue taking on more fuel efficient MAX aircraft. Excluding fuel special items and profit sharing, our fourth quarter unit costs were down slightly compared to last year and slightly better than our expectation of flat to up 1%.

As a reminder, fourth quarter 2018 unit costs benefited from a year-over-year tailwind of about 3 point due to fourth quarter 2017's employee tax reform bonus.

For full year 2018, our CASM excluding fuel special items and profit sharing ended right in line with our expectations of flat to up 1% year-over-year.

Our unwavering focus on controlling costs played a significant role in managing cost inflation throughout the year and I'd like to thank all of our employees for their tremendous effort. And I'd also like to thank our team for all the hard work they put into completing our 2019 plan.

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

For the second half of this year, current cost trends and expectations suggest flat year-over-year unit costs excluding fuel and profit sharing. Our quarterly capacity growth is playing a big part in our first half cost pressure and as you all know, the timing of our Hawaii flying has been delayed and is in flux. And we're incurring Hawaii specific startup costs without the benefit of the flying, which alone is about a 0.5 point penalty in our first half CASM x year-over-year trends.

In addition, we expect first half unit cost pressure from the under-utilization of our fleet due to the timing of Hawaii. This cost pressure should ease as we ramp up our Hawaii flying in the second half of this year. And this was all contemplated in our full year capacity growth guidance no more than 5%.

With respect to our first quarter CASM x year-over-year inflation as we mentioned in this morning's press release, the largest drivers of our 6% year-over-year CASM growth are the underutilization of our fleet due in the first half of the year due to the delay and a lifeline, in addition to higher airport costs and depreciation and the timing of maintenance and technology spend.

As we said on our last call, controlling our costs is a top priority. And as we always have we'll continue our rigorous efforts to contain costs and protect our competitive advantage. Our long-term goal is to contain annual year-over-year growth and our unit costs excluding fuel and profit sharing to below 2% which I believe is reasonable and achievable.

And finally, as a wrap up of our cost discussions, the primary reason on our tax rate for fourth quarter came in closer to 20% is the realization of year end tax credits. We continue to estimate our 2019 tax rate to be approximately 23.5%. And on that note, the lower tax rate certainly was a welcome contributor to our record operating and free cash flow performance in 2013.

We ended the year with ample cash and short-term investments of 3.7 billion with our 1 billion revolver fully available.

Our balance sheet remains strong and we have very manageable debt obligations and capital spending plans for 2019.

In 2018, we invested approximately 1.9 billion into the business, which ended lower than our guidance of 2 billion mostly due to timing. In 2019, we continue to expect a similar level of CapEx spending and the 1.9 billion to 2 billion range as we invest in the future of our airline. We are investing in technology including a new maintenance system which is as significant to the operations side of our business as our new reservation system is the commercial side. And we have airport investments underway particularly at LAX and St. Louis. And we're building a new maintenance hangar in Baltimore. And of course, we have 44 aircraft deliveries this year including 28 new aircraft from Boeing, which I'll cover shortly.

We expect our investments to help drive incremental revenue opportunity as well as support longer term cost objectives as we roll out better tools for employees and more efficient processes and technologies to drive productivity as well as support our long-term growth plans.

Our 2018 free cash flow was a record 3.1 billion and we returned 2.3 billion to shareholders through share repurchase and dividends.

For 2019, we plan to continue our balanced approach to investing in the business and in our employees and with the opportunities to continue providing free cash flow to our shareholders.

Before I close, I'll quickly take you through our fleeting capacity plans. We ended 2018 with 750 aircrafts in our fleet in line with our target and for 2019, we currently have a total of 44 aircraft deliveries which is comprised of seven owned MAX 7, 21-owned MAX 8 and 16 leased MAX 8.

This is 10 more than our previous order book disclosure as we had one December MAX 8 delivery that split into 2019 and we also had 9 additional leased MAX 8 aircraft. These additional 9 leased aircraft are earmarked for this year's fleet replacement needs.

As we mentioned, we'll start retiring some of our oldest Dash 700s this year as we continue with our fleet modernization effort, which will help improve our fuel efficiency, operational reliability and maintenance burden.

Our current plan is to retire around 20 of our Dash 700 this year resulting in about 25 net aircraft additions for 2019 and a year end 2019 fleet of approximately 775 aircraft.

We expect first quarter 2019 capacity to increase in the 3.5% to 4% range year-over-year and for a full year 2019, we continue to expect our available seat miles to increase no more than 5% year-over-year. Our schedule is currently published through early August and this schedule excludes expected Hawaii flying which as we've covered will be added as soon as we can.

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

In the meantime with our ETOPS process on hold, we have some uncertainty in our capacity plan for this year. So we will take it one schedule at a time for now.

So in closing, despite our challenges in 2018, our employees rose to the occasion time and time again and I thought our execution was very strong. As a quick recap on what we shared today as Tom mentioned, we are starting 2019 with a very healthy RASM outlook. We remain committed to our low fare brand and our revenue management capabilities are as strong as ever. We have been very focused on closing out our 20 19 plan over the past few months. And despite some cost inflation above where we'd like to be this year, I feel really good about our 2019 cost plan and our path to arrest this trajectory going forward. In particular, the much improved cost outlook for second half of 2019.

First and foremost, we want to expand our margins in 2019 and we want to improve our returns on capital. While fuel prices are currently down year-over-year, our improved fuel hedging position for 2019 and 2020 provides even more near-term protection, if oil prices go back up.

We continue to invest in the business and our fleet, facilities and technologies and many of our investments this year will support future growth and scalability of Southwest Airlines as we continue our march to become the world's most loved, most flown and most profitable airline.

In closing, I want to personally thank those of you who reached out to Herb -- to reach out to us to share your personal stories and heartfelt thoughts about Herb to our Southwest family. He really did change the airline industry for the best and now he will be missed greatly. His legacy will live on forever.

And with that Greg, I'll turn it back to you now to take questions.

Question-and-Answer Session

Operator

Thank you very much ma'am. [Operator Instructions] We'll now begin our first question from Joseph DeNardi with Stifel.

Joseph DeNardi

Hey. Good afternoon everybody. Thanks for the time. Gary, I think there was some urgency from you last quarter regarding the cost pressure you were seeing and the need to find more revenue to offset that. I think you mentioned that you were open to alternatives. I mean has that mindset changed because you're now more comfortable with 19 CASM x and then 2020 returning to more normal levels. Can you just maybe update your perspective there? Thank you.

Gary Kelly

Yes. Sure, Joe. To be honest with you, I don't remember exactly the words that I used, but I wouldn't say that anything has changed other than time has gone by. We've firmed up our plan. We've more than sustained our momentum. It's actually improved. And we've told you the truth in October. We're telling you the truth today. We're very excited about 2019.

I think what I must admit was just the desire that we have to keep the pipeline full of new ideas and new initiatives. And in terms of what we have in flight right now, I think we're all very pleased, very encouraged with the changes that we made during 2018. We've got plenty of experience under our belt there. And again, my hat's off to our commercial team, I think they did a phenomenal job and so we feel really good about that and even better about our forecast for 2019 and the benefits that would flow from that.

Beyond that, I think I was clear in October that we weren't contemplating then nor are we contemplating now any new initiatives per se on the revenue front for 2019. All I was doing today is just to reiterate that that as far as 2020 goes and what I first mentioned in July that work is more than an idea. It's a commitment. The construction is underway. Every time that we have relooked at the couple of ideas that we have under construction they look better to us. So I don't think there's anything different in the message today other than we have better visibility more certainty and we're down the road with some of our work. It's been firmed up. We've got a project plan people working on it and we're feeling very good about 2019 and encouraged about our opportunity to continue to augment that momentum in 2020.

Joseph DeNardi

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

Gary Kelly

I will let Tammy address the latter question on the first part of your question. Yes. It's very straightforward. All we want people to know is that we're not sitting by and assuming that revenues will come to us that we're continually looking for new ideas for -- it's a little early for competitive reasons to share exactly what we want to do. And so, yes, you're going have to stay tuned on that for sometime later in the year when it's more ready for primetime. That will give us a better opportunity to forecast better what we think the benefits will be.

Tammy, you want to talk about the fare increase component?

Tammy Romo

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

Joseph DeNardi

That's helpful. Thank you very much.

Operator

And moving on, from Barclays we have Brandon Oglenski.

Brandon Oglenski

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

Gary Kelly

Great question. Well, Tom, will take this one and you are going to do two. I think short answer is, no. That's not what we are responding to. What we're -- our capabilities evolve over time. Hopefully that means they improve and we see opportunities where we can drive business in greater volumes or more efficiently in terms of the pricing. And that's what we're going after here in the near-term. And I was asked -- I'm asked all the time about basic economy. You're not going to see basic economy from Southwest. That's not what we do. And I already said, we're not going to charge for bag fees. We have we think better opportunities that fit our brand. I love the fact that we're different and they unbundle and we don't. And so we just need to continue to find ways with the universe of travelers and the varying needs that they have to see how we can stay true to our brand and offer something of more value to road warriors to once a year flyers whatever it might be. And I'd say, we have a long list of ideas. And right now, we're going to focus on a couple and they're going to come to market in 2020. Tom?

Tom Nealon

Well, I think all that I'll add to that Gary is, if you think about over time there are some things that we would probably have done sooner, if we were able our prior reservation system, the old SaaS cowboy system just precluded us from doing things that we would have liked to done years ago. Now that we have the foundation of the one res system in, it really does set the foundation for us to do some things that honestly when we talk with you later in the year you're going to think, yes, that makes perfect sense. I would expect you'd done that earlier. Well, we would have, if we could have. Now we can so we will.

So that's the kind of thing you're going to hear us when we are talking about. But, in our ancillary business, if you look at our other our early bird products and things like that these are not inconsequential and they're -- by thinking those are the variable pricing that kind of thing we really do continue to drive strong ancillary performance. So I'm really proud of the product and probably we are and there's capability that we have that we can build upon. So I guess I'll stop, stay tuned for Investor Day then you will talk about some point, right? But that's what it is.

Gary Kelly

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

Brandon Oglenski

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

Gary Kelly

Well, our ULCC overlap is gigantic. So I think the results would say, yes. And I'm just pointing back to earlier comments that I made about our enhanced revenue management capabilities. So we're in a better position than ever to compete with low cost, high cost, you name it. And Tom is or has hinted that we were going to use we're leveraging this technology to pursue a couple of new revenue generating ideas. So we got a lot of -- we have a lot of strengths. We have more seats in the United States than anybody else. We have more customers than anybody else. We have the best frequent flyer program. We have a great overall product in terms of the reliability in the on-time performance in the baggage handling. We have the best employees in terms of the hospitality. It is a dynamite package. Nobody can approach matching that combination of strengths. Certainly the ULCCs can't come close to that. And again, as I say we're real confident about where we are. We never want a standstill and we want to keep investing and making improvements.

Brandon Oglenski

Thank you.

Operator

Thank you. The next question will come from David Vernon with Bernstein.

David Vernon

Hey. Good afternoon and thanks for taking the time. I want to ask you a little bit about the decision to kind of postpone any international growth this year, if you kind of look back the last couple of years opening up international was kind of a growth avenue for you. And I wanted to get a sense for whether this is just a decision to kind of prioritize the organization's focus on Hawaii or whether maybe the opportunities for where you could get to in international markets or maybe getting more developed quicker than you thought? I'm just trying to get a sense for how you're feeling about the potential still in international given that you're taking a pause this year.

Gary Kelly

No. It's the former and we've been clear about that. So we're going to be growing, I think most people think pretty aggressively this year. We've added a lot of airplanes to overcome the retirement of the classic fleet, and then, grow beyond that. So we're at record fleet numbers this year and we'll be adding a net of 25-ish in 2019. So to answer your question, is what do we do with 25 airplanes? And we're going to Hawaii. We're going big that needs to be the focus. And it kind of crowds out expansion in other areas like international. Tom gave a quick summary of the international performance as we saw it here in the fourth quarter. And taking a little breather there right now is allowing a really good unit revenue development. So that's all fine. But we have vast opportunities to grow internationally. And were it not for Hawaii, we would absolutely be adding some more international routes and augmenting some of our flying. So it's simply a matter of prioritization and Hawaii, I think deserves that kind of prioritization is that big of an opportunity.

David Vernon

And then, new opportunities to maybe repurpose some of the -- some equipment from underperforming domestic routes into maybe International. That would be a little bit more attractive. Like how do you guys think about making that balance [indiscernible] there?

Gary Kelly

Well, that's just you do that every day. So, yes, we're pruning. And in fact that will be part of our cost initiatives that we talked about back in October is evolving our route strategy so that not only is it more commercially viable, but it also is more customer friendly in terms of recovery if we have late flights. And that should help our cost performance. So we are always doing those kinds of things. We have a very complicated network. There are infinite solutions as to how we route our aircraft and that is one of the inputs. But, yes, the answer is absolutely obviously we're always doing that and we like where we are with the route system as it is right now. But we'll continue to prune it as we go forward.

David Vernon

All right. Thank you. And then, maybe just one quick follow-up on the LaGuardia and Reagan. Can you give us a sense for when the timing of those [indiscernible] from Alaska is going to kick in and whether or not that capacity that would be going into those gates is in the -- ASN got already?

Gary Kelly

You're testing my memory, but I believe it's in the fall, in the November time period of 2018. It's already going in.

David Vernon

So those gates are already being utilized.

Gary Kelly

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

David Vernon

All right. Great. Thank you.

Operator

Moving on, from JPMorgan we have Jamie Baker.

Jamie Baker

Hey, good afternoon everybody. First question on Hawaii and Tammy, sort of touched on and saying that Hawaii could constitute half of this year's growth. But, I'm curious with the ETOPS delay relative to your initial expectations, is that possibly sort of working to your advantage and so far as the non ETOPS related preparations are obviously still taking place in the background, so does that imply that when you do finally start service you can ramp up more quickly than plan. In other words, if the cadence was originally to add and I'm making this up, I don't know, three nonstop routes per quarter. So you'd be doing 12 after a year. If you don't start flying until the second quarter, could you still get to the year end plan in less time because of the delay that you're currently taking or does it not work that way.

Gary Kelly

Well, that was probably a better question for Mike. So Jamie are you coming at it more from an operational build up as opposed to a commercial ramp up.

Jamie Baker

Well, both, presumably had you started service in the fourth quarter of last year, if you were flying it now, you'd have a plan in place for the fourth quarter of this year. As the date slips, does the fourth quarter plan come down or can you ramp more quickly because you're basically just twiddling their thumbs at this point n offense waiting for the government to get its act together.

Mike Van de Ven

So Jamie, this is Mike. In terms of Hawaii, when you think about all the other non-ETOPS things our staff is ready, our procedures are ready, our gates are ready, our equipment is ready. We're ready to go with that. The only taking item we have with ramp up is making sure that as we ramp up, we have an adequate number of pilots trained for ETOPS flight. And so, I would tell you that the slow to ramp up over the first three to six months is probably what it is. And then after that we have as many -- we don't have any constraints really after that.

Gary Kelly

And just philosophically, Jamie, we're going to be conservative. So this is -- there is a certification process for a reason and I think what I just underscore what Mike just said. We're going to want to go at a pace that we're comfortable with. And I don't think we will be at the same place at the end of the year that we would have been Mike had we started that's February 1, in terms of flying. But at the same time in the grand scheme of things, we're going to get there and is not talking about years delay and we are commercial folks have other purposes for -- relative to the earlier question.

There are plenty of places that we can put airplanes and that is one advantage we have as an airline. We can move the airplanes around and our people are very resilient and they're willing to do temporary duty in other locations. So it's sloppy and we've admitted that and it's reflected in our first half numbers. Even with that, we're still looking at a really a stellar year and other than that nothing is changed.

The nice thing is, the FAA has approved our program. It is ready to go. All we have to do now is demonstrate to them that we can execute our program. And so that the line of sight to getting to the certification is pretty darn sharp and the FAA is really anxious to get their part of this work done too. It's just a shame that we are where we are with the shutdown.

Jamie Baker

Sure, sure. That's very helpful color and it wasn't -- I didn't mean to insinuate that it was -- that Southwest was to blame for the delay here. And second, as I'm sure you're aware competitive growth in secondary cities is running quite a bit ahead of what's taking place in the major markets. Obviously, United is driving some of that constraint with the hubs also a contributing factor. But anytime I think secondary cities, I obviously thanks Southwest. So is it safe to assume that in terms of year-on-year RASM, your larger markets are outperforming the secondary cities or would that be a stretch?

Gary Kelly

Well, I -- you know us so well, so I don't know that I'm trying to debate the point, but I don't think of Southwest as a secondary city airline, 100% of our customers flow through our top -- I don't know 10 airports. So we're a big city airline. And in other words, we don't, just using your words, secondary, we don't go non-stop secondary to secondary. We know in recent years as an example, we've added non-stops from San Antonio, let's say to Kansas City, we're the number one airline in each city. I would certainly not refer to them as secondary. They're very substantial cities. We've got a lot of fans in both and those are very successful flights.

So I don't know as I remember we've got 85 -- 48 states cities and they're in the top 85. And in fact, we try to avoid the smaller cities because we fly as you well know, we fly 737s and we just don't generate enough volume compared to what we could do in other locales. So I think the net answer is, we're used to competition. I mean that's not going to go away. That will continue to make us better. And we're just continuing to play to our strengths and continue to expand strategically in a way that plays to our strengths.

Jamie Baker

Strong answers to both questions. Thanks gentlemen.

Operator

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

Rajeev Lalwani

Good afternoon, Gary. Hi.

Gary Kelly

Hi.

Rajeev Lalwani

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

Gary Kelly

Well, Tammy, I might let you, Mike and Tom kind of talk about how we got from there to here. It's just I don't know there was anything real fancy. What was a little fancier was putting together cost initiatives that all of our leadership agreed and committed to which is a little bit more of a longer project. But going through the annual budget is a grind. And as I admitted in my comments earlier, it was coming in much higher than what I was expecting. And we fessed up and told you all that. And I think our folks have done a nice job in trimming that back. But your point about 2020 is a good one. And I will admit to you that's exactly where my mind will start in terms of the expectations for 2020 is something that's flat on a run rate basis. But it's -- but I will also admit to you that it's a little too early to tell. And until we -- the devil can be in the details and we definitely want to have more confidence that that is in fact to run rate before we just put these bold statements out there. But we're 1% to 2% inflation over a long period of time. And this is a very efficient company to begin with and we have invested significantly in driving more revenue and driving more fuel efficiency. So I'm proud of that. And that's what you should expect from us going forward is on an annualized basis over a long period of time no more than 1% to 2%, our goal as I said is to now bring that lower. Our aspirational goal among our leadership is to keep unit cost flat.

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

Tammy Romo

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

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

So as I mentioned earlier, we picked up some more airplanes and so that's we certainly expect to see some improvement from the fleet modernization effort. So really right now we're focused on execution this year and obviously already working on improvements beyond 2019.

So, and again, I'll just remind you that we're back on a better CASM x trajectory in the second half of this year, which is around flat year-over-year. So we'll continue making tweaks to our schedule to balance our operation efficiency with our commercial opportunity. So I think that's the more significant opportunity here in the second half of the year. And as Mike mentioned and I covered a little bit, we're currently investing in operational technology projects and those should provide better tools to help us improve staffing efficiency and just allow our employees to eliminate pain points from their daily processes.

So as we look ahead just -- those are some of the types of initiatives that we have time in our bag of tricks here. And as we work to just ensure that we hit the trajectory that we've shared with you today. So that's really probably the main point I want to point out. Anyone else technically.

Gary Kelly

Tammy, we want to make sure that everyone understands that -- I don't know if happy is the right word, but I am not satisfied with unit cost growth in 2015 of 3% to 3.5%. So don't get us wrong. We were taking corrective action. Right now that's what we -- that's what we're facing. And we've had plenty of years in our history where we've had 3% unit cost growth and it's just going to be one of those years, but that is certainly not what you should extrapolate going forward we expect a lot more research for this.

Tom Nealon

So Tammy and Gary talked about, how we feel about 2019. We'll work to hit that plan and we hit plans. Let me talk about beyond 2019 and how we're thinking about really the 2020 and beyond kind of cost thinking. I guess I think it's really important to start with -- so where are we starting from? And we are one of the most efficient airlines in the world by the way. So we are very, very efficient. But, we do have opportunities and I think that you'll be at some point, I do want to take you through this, we want to take you through this. But there -- we're working on things you'd expect us to be working on.

Just an example, we fly over 4000 flights a day and every day you do have your regular operations. Well, your regular operations by definition are inherently inefficient. So what can we do to drive efficiency in recovering the network, right, during a weather outage or whatever it is. So there is work going on, but just that that is an example adjusting that network very, very modestly transparent to the customer, net neutral to the revenue, the whole thing, just modest tweaks to things like that filter across the operations. So driving out inefficiency is how we're thinking about this. This is not just pruning things. This is really thinking about the broader big processes that we use drive the operation. So in 2019, we're going to drive the budget, we are going to drive the efficiency we need, 2020 and beyond are bigger themes actually. And that's how we're thinking about it.

Gary Kelly

And just one other thing very quickly just to remind everybody what's driving the 3%, 3.5%. It's a couple of basic things, significant airport projects and investments around the country. Number two, a heavier aircraft maintenance burden that is manifesting in 2019. Number three, we are seeing a step-up in depreciation from deployment of more aircraft and also the deployment of technology projects. So one of the things that we did for 2019 is, we said let's just make sure that we are taking into account the benefits that should flow through our cost structure of a lot of these investments that are being deployed. And that was a lot of the improvement that we saw since October.

I guess in the interest of time we ought to move on to our next question.

Operator

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

Hunter Keay

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

Gary Kelly

That is a great question. And I'm going to sidestep it a little bit under because I don't like to talk about individual specific markets and their profitability. We just always had a tradition of maintaining our thoughts sort of in a proprietary way about that setting the comparison aside for a second. All of the forecast that we have done from a very significant point of strength in California to Hawaii have been exceptional. So I'm expecting that they will perform like a typical startup initially and develop quickly and be very, very satisfactory performers, point number one.

What we were I think pleasantly surprised with is when we were urged to contemplate inter island flying which when we first revealed in October of 2017 that we were going to Hawaii, we were not thinking that. Once we looked at that, we were pleasantly surprised how it forecast as well. And so I think on both aspects of that business the mainland to the islands, and then, the inter island both forecast well. And based on our experience with forecasting and understanding our customers and our markets and the competitive dynamics we feel very, very good about the viability of that. Or else we wouldn't have made the choice and the judgment to ramp that up very quickly. We would have been much more cautious.

So we're putting our money where our mouth is and in any event as you know the exposure is limited. I think Hawaii builds up to be a point Tom or something like that of our capacity. But that's sort of a backhanded way of saying we're bullish about it. I don't intend it that way. We're going to have a very viable schedule. We have a lot of customers who are huge fans of Southwest that we're confident will get on board. Hawaii is a huge destination which is you have to take that into account when you do the comps to other markets of comparable distance. And we're going to do well is the bottom line and while we continually update our forecast, our judgment about this opportunity has been unchanged.

Hunter Keay

Just real quick in for you Gary. You said look out in the beginning of the call, it was interesting it jumped out at me. Who were you talking to?

Gary Kelly

Whoever is listening. It's been an emotional experience for our company to lose someone like Herb. And I can't remember whether you ever had the opportunity to meet him, but the impact he had on people is absolutely profound. And you get on a Southwest Airlines airplane and everybody feels like they know him. Everybody feels like they that he loves them and people are inspired. So there's just no stopping us. And it's all about our people in terms of making this airline work and they are as inspired as ever and they're the ones who win these customers, they're the ones who win the Fortune Most Admired and just on and on and on and it comes from the heart. And there is no company in the world that that is like this. So whoever wants to get in our way better look out.

Hunter Keay

I got you. Thank you very much. I appreciate it.

Ryan Martinez

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

Operator

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

Linda Rutherford

Thank you, Greg and I like to welcome the members of the media to our call today. I will jump right into the Q&A portion. Greg if you don't mind just refreshing them on how they can tee up for a question.

Question-and-Answer Session

Absolutely ma'am [Operator Instructions]. We'll take our first question from Alison Sider with Wall Street Journal.

Q - Alison Sider

Hi. Thanks for taking the question. You talked a lot about the shutdown -- the impact of the shutdown at a high level. I was wondering if you might be able to give us a sense of whether it's becoming a problem for safety, for operations whether you're seeing any kinds of delays either in the airports or in air?

A - Gary Kelly

Well, thanks Alison. I'd like for Mike to have a chance to answer that too. But I think the bottom line is, no. Tammy and Ryan put in the press release the dollar impact that we've seen and that's pretty specific to government travel. And that's something that we're comfortable that we can estimate. You use the word safety. It is safe and it will be safe. I think the risk is that things slow down in order to retain a safe operating environment. That's both from an air traffic perspective as well as an airport perspective.

So I am so proud of our FAA and TSA employees. I feel like they are doing a phenomenal job. They shouldn't have to endure this. And I think our whole country should offer their thanks to them for keeping the airlines running. Our business is one that is intimately tied in with federal government. The federal government touches every single customer that goes through the airport and they touch every single flight that we have and it goes beyond just those things. But so far the operation Mike has been actually superb since the beginning of the year. But what would you like to answer.

A - Mike Van de Ven

I think you did all the high points, I agree with what he said no matter what it will be safe. It's just whether or not the volume of activity can keep pace with all the different staffing whether it's TSA or air traffic controllers or things like that. And so I do things that longer that it goes more risks that we have that maybe there are longer waiting times at checkpoints that had to wait -- taxiing times may lengthen, your in-flight times may change maybe a little bit longer trial between the airplanes. So those are the kinds of things that I think we ought to be about.

A - Gary Kelly

And again, also to be clear, we're not saying that. In fact, Mike's operation the on-time performance is better this year than it was a year ago so far. So things so far knock on wood are going just fine. So this is all conjecture. But those are the things that we're all worried about and this thing just can't go on. I feel the FAA has made a good point about what is the impact right now. Well, they are not allowed to hire anybody if they did they wouldn't do any good because they're not allowed to train anybody. And so they already have a hard time keeping their air traffic control positions filled. And it takes years of experience to develop proficiency and this was harmful. So we know at some point down the road there'll be some harm, some way, somehow. But this is crazy. It just absolutely needs to end. And if it left as it is, it will harm the economy. It will harm air travel.

I don't know -- what impacts are on other industries, but these are important jobs or they wouldn't be there. The notion that they're not essential is absurd, they're all essential. And so it just the sooner than later, but right now knock on wood everything is running remarkably well and that's a real tribute to the federal government employees.

Q - Alison Sider

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

A - Gary Kelly

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

Q - Alison Sider

We will do. Thanks.

Operator

Moving on, we have Tracy Rucinski with Reuters.

Q - Tracy Rucinski

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

A - Gary Kelly

I think the short answer is no. As you would expect, the industry aligned with many other industries has communicated to leadership in the federal government. The risk of continuing this and the harm that can be done so absent that. What else can be done. And we're going to do everything that we can to find ways to mitigate this and not simply sit here and be victims about this. But in the end this is -- we're dealing with a monopoly. So we don't have the choice to go to someone else to provide our traffic services or our security services. It's just not available to us and it shouldn't work this way, but it does. So in the meantime, we just need to have cool heads and attend to our business as best we can and we're determined here that we're going to have a very good year in 2019 no matter what. And we'll do our best to work through this slop.

Q - Tracy Rucinski

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

A - Tammy Romo

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

A - Gary Kelly

But that's pretty much factored into your --

A - Tammy Romo

That's all in our guidance.

A - Gary Kelly

That's all in.

Q - Tracy Rucinski

Okay. Thank you.

Operator

And next we will hear from FlightGlobal we have Ghim-Lay Yeo.

Q - Ghim-Lay Yeo

Hi, guys. Thanks for taking my question. I have a follow up about Hawaii. I know you plan to start in Thailand flying probably shortly after you get the FAA approvals to begin a Hawaii service. How soon afterwards can you actually launched into [indiscernible] flying has that timeline shifted at all, no, that you are not exactly sure when Hawaii services actually start.

A - Gary Kelly

Mike, you want to talk about that.

A - Mike Van de Ven

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

A - Gary Kelly

But I think what Mike had planned is, we got our approval from the FAA for our program by the end of December and that was a huge accomplishment. I was very proud of our folks and very thankful to the FAA. They worked hard to get there. All that was left during the month of January and Mike had all this scheduled, they had dates scheduled. They had the task scheduled, was to validate for the FAA that we knew our program and that we could handle different scenarios that would be posed. All that led to a schedule that assuming everything was passed if you will that we would be selling next week. And Mike had planned, once we started selling that we would be flying sometime in February. So now he is going to roll this.

So if we get started, again, with the FAA let's say February 1, I think you can roughly allow a month and then we would be able to get our certificate and sell, and then we would be flying in the following month. And it just rolls. So with that that's roughly the amount of time that we're going to need from the time that we get back on task until we fly. So it's somewhere or no homie to this because it will still depend, but it's somewhere around six to eight weeks. I would say from the time that he starts working with the FAA to finish to the time that we would be flying.

And then Mike has to publish schedules for his flight crews and that is on a monthly cadence so it's -- so that's it. Anyway that should give you some rough idea. I think it is possible if we get started quickly that we could be flying in March. We don't see a path to flying in February. It's too late for February but we could be flying in March. But we don't start with the FAA units, part one it's going to be April. So that's kind of a rough road.

A - Mike Van de Ven

So it is just to play out through that and the launch in mainline service to one location, we will have mainline service to a second location and then as we get more Hawaii locations out there we have more options than to connect that inter island flying and that's what I will launch with the mainland service first and follow on with the other flying.

Q - Ghim-Lay Yeo

Sure. And I have a separate question about the Mexican city. Are you able to see a little bit more wider than was it mostly because corporate in mind and materialize, has there been any self implements from what's been going on with the Mexican city airport situation.

A - Gary Kelly

Right now. Our focus is primarily on destinations from our strong points in the U.S. The better performing destinations for us right now or the leisure destinations. Mexico City, we are showing very nice improvement. It's more much more of a business market and given where we are right now we just have better opportunities in terms of deploying that capacity. I'd love for us to be back in Mexico City one of these days. Tom and his team are working on better commercial capabilities in terms of marketing and foreign countries accepting foreign currency and all of those things are futures, which certainly support service to a place like Mexico City better than what we have today. But we just have better alternatives. And like I said hopefully we'll be back in Mexico City one of these days. Our priority right now obviously is adding Hawaii service.

Q - Ghim-Lay Yeo

Sure. Thank you for your time.

Operator

Next question will come from David Koenig with The Associated Press.

Q - David Koenig

Hi. Gary I think I heard you say that Southwest has communicated your concern about the shutdown to government. But if I heard that if I understood that correctly, anything you can say about who you have talked to especially any of their principals in the White House or Congress?

A - Gary Kelly

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

Q - David Koenig

Okay. And have you gotten any feedback on what they heard. What was the response from the people that they talked to. I assume they are talking about A4A then?

A - Gary Kelly

I'm talking about A4A and I don't recall any response.

Q - David Koenig

Okay.

A - Gary Kelly

I've seen nothing -- I've seen no response in writing, I'll put it that way.

Q - David Koenig

What can you and I mean the airline industry do that you haven't done yet?

A - Gary Kelly

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

Q - David Koenig

All right. Thanks.

Operator

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

Q - Robert Silk

Good afternoon guys.

A - Gary Kelly

Hi. Good afternoon.

Q - Robert Silk

[indiscernible] one of the ones that reported the drone on approach to Newark a couple days ago. How big of an issue of a concern is it for Southwest and other airlines obviously, the FAA moved quickly on new rules relating to drones that will make it easier for airports for them to be tracked and also to detect them and potentially disable them.

A - Gary Kelly

Rob, are you still there? Robert.

Q - Robert Silk

Did you not hear me?

A - Gary Kelly

Yes. I think so. We got you.

Q - Robert Silk

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

A - Gary Kelly

No, no. We got it.

A - Mike Van de Ven

I'm not -- this is Mike. I'm not familiar with a near a Southwest Airlines flight, in a drone opportunity if I can. But just generally speaking whether it is bird and bird strikes or drones or any other type of activity the airline industry is interested in making sure that the airspace especially above the airports coming into those critical times are well regulated and maintained. So the industry is very supportive of having some type of regulatory requirements and oversight for drones having them registered, having them have certain requirements in terms of their operations trying to limit their availability especially in critical airspace close to the airport. And I know that the FAA is focused on that. I know that there are several other regulatory groups and trying to figure out how we control all this new technology.

A - Gary Kelly

You're focused on when they're not on furlough. That is critical. It would be nice to have them off furlough so they can be focused on what is an important question.

Q - Robert Silk

Thanks. I appreciate it.

End of Q&A

Operator

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

Linda Rutherford

Thank you, Greg, appreciate it. Thank you all for joining us today. Of course, if you have any other questions, our communications group is standing by 214-792-4847, or you can certainly reach us through the media site www.swamedia.com. Thanks so much.

Operator

And ladies and gentlemen, that concludes today's call. Thank you for joining.