Southwest Airlines (NYSE: LUV) reported Q1 EPS of $0.75, $0.01 better than the analyst estimate of $0.74. Revenue for the quarter came in at $4.9 billion versus the consensus estimate of $5.01 billion.

Cost Performance and OutlookFirst quarter 2018 total operating expenses increased 1.9 percent to $4.3 billion. Total operating expenses per available seat mile (CASM, or unit costs) increased 0.1 percent, as compared with first quarter 2017. Excluding special items in both periods, first quarter 2018 total operating expenses increased 1.9 percent to $4.4 billion, or 0.1 percent on a unit basis, year-over-year.

Effective January 1, 2018, the Company early adopted ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities. The new standard eliminated ineffectiveness for all derivatives designated in a hedge for accounting purposes, as well as changed the Company\'s classification of premium expense associated with fuel hedges from Other (gains) and losses, net, to Fuel and oil expense within the unaudited Condensed Consolidated Statement of Income. As such, the classification of premium expense for the three months ended March 31, 2017, has been recast under the new standard in order to be comparable with current period results. First quarter 2018 economic fuel costs3 were $2.09 per gallon, including $.07 per gallon in premium expense and $.05 per gallon in favorable cash settlements from fuel derivative contracts, compared with $2.03 per gallon in first quarter 2017, which included $.07 per gallon in premium expense and $.29 per gallon in unfavorable cash settlements from fuel derivative contracts. First quarter 2018 ASMs per gallon, or fuel efficiency, improved 1.3 percent year-over-year, driven primarily by the retirement of the Classic aircraft and the addition of the more fuel-efficient 737 MAX 8 aircraft.

Based on the Company\'s existing fuel derivative contracts and market prices as of April 20, 2018, second quarter 2018 economic fuel costs are estimated to be approximately $2.20 per gallon6, including $.06 per gallon in premium expense and an estimated $.07 per gallon in favorable cash settlements from fuel derivative contracts, compared with $1.99 per gallon in second quarter 2017, as recast, which included $.06 per gallon in premium expense and $.32 per gallon in unfavorable cash settlements from fuel derivative contracts. As of April 20, 2018, the fair market value of the Company\'s fuel derivative contracts for the remainder of 2018 was a net asset of approximately $158 million, and the fair market value of the hedge portfolio settling in 2019 and beyond was a net asset of approximately $308 million. Additional information regarding the Company\'s fuel derivative contracts is included in the accompanying tables.

Excluding fuel and oil expense and special items in both periods, first quarter 2018 operating expenses increased 1.5 percent, as compared with first quarter 2017. First quarter 2018 profitsharing expense was $102 million, as compared with $99 million in first quarter 2017. Excluding fuel and oil expense, profitsharing expense, and special items, first quarter 2018 operating expenses increased 1.4 percent, and declined 0.3 percent on a unit basis, year-over-year.

Earlier this month, the Company reached an Agreement in Principle (AIP) with the Aircraft Mechanics Fraternal Association (AMFA) that represents the Company\'s Mechanics and Related Employees.

Based on current cost trends, the Company estimates second quarter 2018 CASM, excluding fuel and oil expense and profitsharing expense, to increase in the one to two percent range, compared with second quarter 2017\'s 8.17 cents, as recast, which excluded fuel and oil expense, profitsharing expense, and special items. This second quarter 2018 year-over-year increase includes the current estimated impact of the AIP with AMFA, as well as a preliminary cost estimate related to the Flight 1380 accident. Due primarily to increases in salaries, wages, and benefits, which includes the impact of the AIP with AMFA, the Company now estimates annual 2018 CASM, excluding fuel and oil expense and profitsharing expense, to be comparable with annual 2017\'s 8.47 cents, as recast, which excluded fuel and oil expense, profitsharing expense, and special items.

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