Operator:

Hello, everyone, and welcome to the Southwest Airlines Second Quarter 2024 Conference Call. I am Gary, and I'll be moderating today's call, which is being recorded. A replay will be available on southwest.com in the Investor Relations section. After today’s remarks, there is an opportunity to ask questions. [Operator Instructions] Now, Julia Landrum, Vice President of Investor Relations, will begin the discussion. Please go ahead, Julia.

Bob Jordan:

Thank you, Julie, and thanks, everyone, for joining us this morning. We have a lot to cover today, so let's jump right in. In my comments today, I will touch briefly on our results for the quarter and then provide detail on the plans we announced earlier this morning to implement meaningful changes to our business and better position Southwest Airlines to produce higher returns in a more competitive higher cost environment. As Julie mentioned, Andrew will provide details on our revenue performance, including the work underway to calibrate our revenue management system and processes, and Tammy will discuss our cost, CapEx and balance sheet. Starting with our overall results, they are not where we need them to be, and they are not reflective of what we are capable of delivering. We will cover where we fell short as well as our action plan in detail later on the call, but I'll hit on a few highlights first. Our frontline employees executed very well as we continue to improve in nearly every operating and customer metric. Once again, we ran a high-quality operation with a completion factor of 99.5% despite challenging weather. This was further evidenced by our performance following Hurricane Beryl earlier this month. We experienced an 8% cancel rate on July 8th as the store moved through the Houston area but had only a 0.3% cancel rate the following day as we recovered quickly with almost no operational hangover from the prior day. I am very proud of our team. And following the global technology outages, we were able to recover very quickly and experienced a near zero cancel rate. Investments made to advance core operations and modernize technology meant that we had redundancy in place for key systems that we're experiencing issues. Time and time again, the purposeful investments we've made to improve our resilience and ability to recover from disruptions are demonstrating their value and that investment will continue. Our exceptional customer service continues to improve as well and was recently recognized by J.D. Power, where we were awarded the leading Economy Class Customer Satisfaction distinction for the third consecutive year. Reliable operational performance and customer service are and always will be cornerstones of our business model. Moving on to revenue performance. Unit revenue for the quarter declined 3.8% year-over-year primarily as a result of domestic capacity outpacing demand. The decline was also a result of Southwest specific challenges as we fully mature our usage of a new O&D based revenue management system. Andrew will go into more detail later, but bottom line, we sold too many seats for the peak summer travel period too early in the booking curve. It's not unusual to have growing pains with these types of systems. We are working quickly to action opportunities to drive performance improvement. We're also adding additional leadership expertise and support, including our plan to hire a Chief Revenue Officer to focus on revenue management and pricing. We continue to have confidence that the new revenue management system will be a driver of long-term revenue improvement. The management team and I, with the support of our Board, are completely aligned on the imperative to produce results and ultimately deliver returns ahead of our cost of capital. Doing so requires an evaluation of all opportunities and a willingness to evolve some long-standing selfless policies while staying true to our values. With that in mind, I'll discuss some of the changes we are making to further evolve Southwest Airlines. These are part of an ongoing strategic transformation of the business, and we will share more details during our Investor Day, where we will outline a comprehensive plan to deliver transformational commercial initiatives, improved operational efficiency, and capital allocation discipline. As I shared back in April, our teams have been hard at work evaluating fundamental changes to our seating, cabin and boarding procedures. It's clear that the open seating model that served us well for so many years is no longer optimal for today's customer. I want to stress that this decision was not made lightly. We have been very thorough and deliberate in how we approach the question, conducting multiple sophisticated research studies over many months that evaluated customer preference and looked at different types of cabin layouts and seating methods. Our research shows that 80% of our customers prefer an assigned seat, and 86% of our potential customers prefer an assigned seat. Further, when a customer defects from Southwest to one of our competitors, our open seating policy is cited as the number one reason why. The answer is clear, there is more demand for Southwest Airlines with an assigned seating model, and there is a significant ability to monetize the cabin more effectively with a premium seating option. By extension, these changes are expected to drive significant value for our shareholders. We feel confident that the solution we are implementing will retain the positive elements of the Southwest Airlines experience and enable us to evolve in a manner that's consistent with what today's air traveler is seeking. While specific cabin layouts are still being finalized, we expect roughly one-third of seats across the fleet to offer extended legroom. We're also designing a boarding process that retains the organized com our customers enjoy today, but also complements an assigned seating model. We've been studying this in depth to preserve our operational efficiency and how quickly we turn an aircraft. We've conducted both live boarding tests to understand passenger movement in a real world environment and also more than 8 million digital simulations to test different boarding options. These digital boarding simulations include data from real flights with real passenger manifest to understand differences in boarding times stemming from passenger mix, things like families traveling together, customers who may need more time to board experienced versus inexperienced travelers and more. The data clearly indicates that any operational impacts are neutral or an enhancement to current performance. We're also approaching this change in a capital-efficient manner. New aircraft will be delivered with our improved RECARO seats beginning early next year. For existing aircraft where we must retrofit to a new configuration, we plan to use existing seats within our fleet to avoid a large capital expenditure. We're working quickly to realize the value of this new model as soon as possible. New seat configurations require FAA certification, which typically takes several months and only then can we begin the process of retrofitting the fleet. We, therefore, expect to make bookings available beginning next year. The aircraft downtime should be minimal to complete the cabin changes, but keep in mind that we have a fleet of roughly 800 aircraft to retrofit and that will take time. Changing from an open seating model an assigned seating model will be a complex and transformational change that cuts across almost all aspects of the company and is one of several commercial initiatives currently underway to be detailed at our Investor Day. Given the significance of the changes I've asked our Chief Commercial Officer, Ryan Green, to take on leadership of this initiative on a full-time basis. As EVP of Commercial Transformation, Ryan will lead this effort along with other commercial initiatives already underway. Ryan has led the work to this point and is steeped in knowledge regarding customer trends and previously and successfully led efforts to transform our Rapid Rewards loyalty program and the digital customer experience, and Ryan will report directly to me. Additionally, today, we are publishing schedule that incorporate red-eye flying, which will phase in rapidly by summer 2025 and combined with ongoing reductions in turn time through new technologies and procedures will enable us to fund nearly all new capacity the next three years through initiatives rather than additional aircraft CapEx. These initiatives are part of a comprehensive strategic transformation and reflect a commitment and my personal commitment to deliver an implementing plan aimed at driving shareholder value and achieving ROIC well in excess of our cost of capital. We will provide more details around the timing and value of these initiatives and other tactical and strategic initiatives when we gather for Investor Day in late September, but we wanted to keep you up to speed on some of the decisions that we've made already and the deliberate plans we have in place to implement them. And before I close, I want to again recognize all the efforts from our incredible employees. Thank you for excellence and the dedication that you bring to work every single day. And with that, I will turn it over to Andrew to provide a full update on our revenue performance and outlook.

Tammy Romo:

Thank you, Andrew, and hello, everyone. As Bob mentioned, I will provide an update on our cost performance before turning to fleet and balance sheet. Overall, our second quarter CASM-X increased 6% year-over-year and we continue to expect CASM-X for full year 2024 to increase in the range of 7% to 8% on a year-over-year basis. The higher year-over-year CASM-X growth in the second half of this year is driven primarily by a continuation of market-driven labor cost pressure from our new contracts as well as from the moderation of year-over-year capacity growth. We are urgently and deliberately pursuing opportunities to mitigate cost pressures, including the drag from overstaffing related to previously reported Boeing delivery delays. As discussed on our first quarter earnings call, we have expanded our voluntary leave and time off programs to further reduce labor expenses and bring staffing levels in line with our current fleet. We have halted all the critical hiring, and we continue to expect to end this year with head count down roughly 2,000 from year-end 2023. And we continue to plan for headcount to be down again in 2025 as attrition levels exceed our controlled hiring levels. Our second quarter average fuel price of $2.76 per gallon was in line with our expectations. Our hedge portfolio continues to provide protection against spikes in prices and we are continuing to opportunistically add protection with no change to our target of a roughly 50% hedge position. Turning to our fleet. We prudently adjusted our 2024 delivery expectations prior to our April earnings report to mitigate Boeing delivery risk our internal planning functions. We, therefore, continue to plan for 20 -8 aircraft deliveries, 31 -700 retirements, and four -800 lease returns for the year. We remain committed to our fleet modernization benefit and our planned reduction in aircraft exceeds our planned delivery. We also remain committed to longer-term capacity discipline and ROIC production. We expect third quarter capacity to increase approximately 2% and fourth quarter capacity to decrease approximately 4%. Accordingly, our expectation for full year 2024 capacity continues to be up approximately 4% year-over-year. Looking beyond 2024, we remain committed to earning our right to grow and plan to keep any future growth at or below macroeconomic growth trends until we reach long-term financial goal of returns on invested capital consistently in excess of our cost of capital. Our expected capital spending for 2024 is approximately $2.5 billion, which is in line with our prior guidance and well below our expectations of $3.5 billion to $4 billion at the beginning of the year. We are in ongoing discussions with Boeing regarding the financial impact of delivery delays and as with past compensation, we expect any financial damages to be realized as a reduction in the cost basis of certain aircraft. Our balance sheet is obviously a critical competitive strength with an investment-grade rating by all three rating agencies. We continue to be in a net cash position as we ended second quarter with cash and short-term investments of $10 billion versus $8 billion outstanding debt. We expect a modest $29 million in scheduled debt repayments for the full year, and currently, 2024 interest income is still expected to more than offset 2024 interest expense. Following the pandemic, we have maintained elevated liquidity levels primarily to fund fleet modernization efforts, labor contract ratification bonuses, debt service considerations and to provide insurance against unforeseen business risk. With much of the uncertainty largely behind us, we intend to start normalizing our liquidity levels back towards pre-COVID levels targeting minimum total liquidity, including our undrawn revolver. Our long-term financial goals remain unchanged; maintain a strong balance sheet, investment grade credit ratings and ample liquidity, grow earnings, margins and capital returns. As Andrew said, we intend to pay off 2025 debt maturities at least partially in cash and specifically plan to repay or refinance the first tranche of the payroll support program loans as the associated interest rates start to ratchet higher for the industry beginning next year. We also remain committed to our legacy of healthy shareholder returns. We are proud of our history of returning capital to our shareholders. We returned more than $13.5 billion through share repurchases and dividends since 2010 and we returned $215 million to shareholders through dividends in the first half of this year. We paid another dividend just a couple of weeks ago during third quarter. We are actively reviewing our return of capital policies, and ultimately, our goal is to restore shareholder returns to historic levels. As I close, I want to reiterate that our financial performance is not reflective of what we can and must deliver. As shareholders, you expect us to lead the industry in financial performance and we will be satisfied with nothing less. There are areas we need to improve, which we are owning and addressing as a management team. Despite these distractions, our employees remain steadfast in their dedication to the mission of the company and to providing our storied and world-class hospitality to our valued customers. I am both proud and grateful for our employees. I am excited about the plans we have in place to secure a bright future for Southwest and to share more about our tactical and strategic initiatives, as well as our capital allocation plan at Investor Day in September. We remain fully committed to executing on a plan to restore returns on invested capital in excess of our cost of capital, as this remains our guiding financial principles. And with that, I will turn it back over to you, Julia.

Operator:

Let’s begin the question-and-answer session. [Operator Instructions] The first question comes from Brandon Oglenski with Barclays. Please go ahead.

Bob Jordan:

Yeah, Brandon. I think a lot of things changed. I mean you have changing demand patterns. We have customer preference that is always changing. It changed to some extent, also coming out of the pandemic. You can always debate when. At end of the day, it's the right thing to do right now, particularly as we over time have flown longer and flights are more full. I think that is a large driver of this. One of the things that's obvious is if you have a longer flight, customers have a preference to know where they are sitting, just like they have a preference to have seat back power. And I was, I'll admit, a bit surprised. We did extensive research here. Tens of thousands of customers of customers surveyed a lot work, conjoint analysis to understand products, what customers prefer what they're willing to pay for. And while I wasn't surprised that the preference ended up coming out for assigned seating, and more premium options in the cabin. I was surprised at the level of the preference, 80% in favor of assigned seating amongst our customers, 86% amongst those that fly other carriers. And then, of course, we reported, it was the number one reason that customers when they defect from Southwest Airlines that they leave us. So it's very clear that there's strong, strong demand. But you can always pick the time and the place. I'm 100% forward focused. In other words, we've done the work to ensure that this is the right change. The change is right to do now where you're not quite ready to share the time lines other than that we plan on selling the new seating in 2025, and we'll share all of that at our Investor Day in September, but it's clearly the right thing to do for our customers, for our employees and for our shareholders.

Bob Jordan:

Yes. I think you could always -- hindsight is always a lot more perfect. And so you can always look back and criticize the timing of a decision. I'm just telling you that we're 100% focused on transformational change here at Southwest Airlines, driving forward and driving forward with pace. You heard us today announce not just the assigned seating and the cabin changes. You heard us announce red-eye flying, which is not something we are working on. It's something we have worked on, and it's in the schedules published today. We've been working aggressively on operational systems, which we could talk about. And that work on operational systems allowed us during the tech outage last week to have a, I believe, was a 99.8% completion factor on the day of the tech outage. And we had systems, critical systems to the operation affected. So we are fully focused on transforming the company, driving forward, driving forward at pace and having a plan that addresses comprehensively delivering transformative commercial initiatives, improving our operational efficiency and addressing capital allocation discipline.

Bob Jordan:

You’re welcome.

Jamie Baker:

Hey, good afternoon, everybody. On assigned seating, do you envision still being able to board an aircraft with just a single agent?

Jamie Baker:

Perfect. Thanks. And second, and I don't know if you've ever commented on this in the past. But from a rapid rewards perspective, how important is Hawaii like, for example, could you disclose what percent of overall redemptions choose Hawaii, something like that? I'm just trying to model how important Hawaii is getting credit cards into people's wallets and driving brand profits, that kind of stuff? Thanks in advance.

Andrew Watterson:

Yeah. I can't recall off the top of my head, Jamie, but it is high. It's not as high as Aruba. Aruba is actually our highest redemption and that goes for kind of our East Coast customers who want a kind of aspirational vacation destination, and that allows under redeem for that. In the West, we have a very business-centric network in the West with leisure options being Vegas and Phoenix in season. So Hawaii is important to our customer franchise in the Western U.S. who are closer geographically to Hawaiian state of Florida for their beach and warm weather destination. So it's important for that customer base who is a repeat purchase customer base. So wrap rewards reflects someone who identifies their brand and wants in the credit cards, we have to have a multipurpose travel network for them and Hawaii is that for our Western US customers. So there -- that's one of the importance there and that why we spend so much time trying to mature doing so many adjustments to it to make sure it can fit profitably into our network as well as give that kind of customer adhesion point of aspirational vacation destination.

Andrew Watterson:

Thank you, Jamie.

Savi Syth:

Hey, good morning. Just on the O&D revenue management system, you kind of shared a lot of details. It seems like you've had revenue management changes in the past that have kind of come up with some issues as well. But I was curious, I think, Bob, in your comment on CNBC, you mentioned that you just sold too many seats at too low prices. And I don't know, Ryan, if you want to kind of talk about you're seeing a lot of fair sales still out there, and that doesn't seem to jive with realizing that you've sold too many seats at too low prices. I was kind of curious if you could talk about the fair sale activity you're doing today and how we should interpret that?

Andrew Watterson:

I think I would say just in the fair sale, Bob, that can be a red hearing we get often. We distribute directly to consumers, which means you always have to be out there pulling them to your website and promotional activity is the way that you do that. So the frequency of our sales does not hold a special meaning. It's a depth of a sale that would give you indications about any kind of promotional level of discounts we're giving. In that situation, I don't think anything has really changed. If you look at the current sales. So kind of we always expect us to be out there promoting to customers from our website that often has have a number attached to it to get them there. But that's a normal course of business, has been that way through good times and bad over the years.

Bob Jordan:

You've got two – yes, you've got two -- maybe three sides here. You've got to finish up the design of the lopo or the layout, which we're very close to here. And then there's a much long certification process. And then, of course, we have roughly 800 aircraft that need to be modified. We're going to do this in a capital-efficient way. We don't -- we're going to utilize, obviously, the new RECARO coming off the line with new aircraft beginning early next year or existing seats. But an 800 aircraft, it still takes a while to move all the way through the fleet even if it's a relatively rapid modification. Obviously, it's a complex change, so you have technology, process, training, other work to be done. It will be a pacing item as well. But -- and again, we'll be revealing the time lines in more detail in September. So the only tidbit we have out there right now is that our plan is to sell in the new form. So in the assigned seating rolled beginning in 2025. But more to come. And again, the fleet -- the mod is not complex. It just has to be approved. And then again, we have to move through 800 aircraft in the fleet.

Bob Jordan:

You want to. Thank you.

Conor Cunningham:

Hi, everyone. Thank you. Maybe just sticking on the premium stuff. So have you secured slots from an MRO perspective. And then you mentioned doing this on all 800 aircraft. I'm just curious on why you're doing the 700s if we're talking about retiring those over the next 10 years? And sorry for extra question on top of this. Like when you think about the layout, are you expecting the same amount of seats on each plane, not losing any seats by adding premium? Thank you.

Ryan Green:

Yes, I think that's the most important part, Conor, is that when you start wrapping seating benefits, premium seating benefits into your overall value proposition, whether you're selling it as an ancillary or a fair, the customer, when they go on to buy their flight from Dallas to Denver. They don't know if we're going to operate it with the 700 or a MAX 8 aircraft, and you want a consistent value proposition across the board to serve the customers' needs. So I think that's the most important piece of that equation to your question there.

Bob Jordan:

Yes, Conor, you bet. And we are still working on 2025, so I wouldn't take anything as an exact number. That was a commitment, obviously, over the next number of years and obviously, commitment until we are able to earn our cost of capital here. So, we've not picked a number necessarily for 2025, but we are going to be managing, obviously, our capital expenditures aggressively. Tied to that, and we haven't talked about the red-eye flying, but we're also announcing that today which I'm really proud of. And our customers want it, but what it also does for us is it produces ASMs without having to buy extra aircraft. I mean, the aircraft are available, obviously, overnight. That and the sophisticated technology and processes going into turn management, but that's allowing us to take time out of the turn. The combination of those two things, the red-eye flying and then the turn compression will allow us to fund nearly all, if not all, capacity, 2025, 2026, 2027 through initiatives and do buying incremental aircraft and spending incremental CapEx.

Bob Jordan:

Hey, Conor. Thank you.

Mike Linenberg:

Hey. Bob, I know you had mentioned earlier you talked about sort of capacity domestically running a bit higher than demand and maybe what was driving the price weakness. But how much of it do you think may also be attributable to just that more price-sensitive consumer who may be pushing back? I mean we are seeing that in other sectors and I would think that you tend to carry a healthy amount of that type of segment. Are you seeing it?

Ryan Green:

And Mike, just -- this is Ryan. Just to add a little bit of color to what Andrew said there. When you look at our customer base demographically and how that compares to our peers in the industry, it looks a lot more like -- our customer base looks a lot more like our legacy peers than it does LCCs or ULCCs -- the LCC or ULCC, peer set. Specifically, when you talk about households with incomes in the $100,000-plus bracket and $200,000 bracket that looks much closer to legacy than it does the LCC and ULCC peer set.

Tammy Romo:

Yeah. No, absolutely, Mike. And no, you -- there really isn't anything unusual to point out. We are anniversarying some of the contracts. So that is certainly contributing to that. And just to clarify on CASM-X numbers for last year. I know we've had, I think, some questions coming in on that just to make sure you all have the correct numbers. The specific numbers for the third quarter is $0.1067 and 4Q, it's $0.1097, bringing the full year to $0.1109. So just to make sure you've got all the right numbers in your model. But yeah, you got it. It's mostly anniversarying the contracts.

Mike Linenberg:

Great. Thank you.

Operator:

The next question is from Duane Pfennigwerth with Evercore ISI. Please go ahead.

Andrew Watterson:

Hi, Duane, it's Andrew. I would say there is obviously a lag with the implementation of the initiatives. So between now and then, we absolutely are aiming towards having margin improvement. I would actually put it on the back of three efforts, network changes many of which we've put in, and we will keep putting more in. You saw some big ones in Q1, and there's still some good modest-sized ones throughout the year this year. And then when the capacity is set then on the shorter duration, we're focused on yield improvements. You saw through the discussion about revenue management system, both the raising the negative that you saw in Q2, but also getting more out of the system is a positive on top of limiting the negative. So that's one factor. And then on the other is some -- we have a load gap and folks in that load gap in particular, you see our efforts on our new advertising campaigns, our entry into Google Flights and some of our customer acquisition activities help us to kind of broaden our customer base. It's down a little bit because we find that our road load don't travel as much per person as they did pre-pandemic. And so those efforts in the short to medium term will give a tailwind to load. So those marketing activities, originating activities and network changes, they are all 3 that we intend to work between now and the go-live of the initiatives.

Bob Jordan:

Yes. We -- I believe, just to get right your question and check bags, I believe we carry about 2x the industry standard. But then also, you've got bags that come out of the cabin that also has an issue in terms of how you manage the operation. Just to be real clear on bags-like-free as a policy, I mean, we're not looking at this point to change that policy. Our industry-leading set of initiatives of customer-friendly policies. And you know the list is a big part of what attracts people to Southwest Airlines. And after fair and schedule, bags fly free is cited as the number one issue in terms of why customers choose Southwest. So it's not something under consideration right now as we rethink our products related to the seating and the cabin.

Bob Jordan:

Well, the thing you have to think about, too, is the bags move around. And so we're working to take -- and we'll share a lot about this at our Investor Day. We are working through technology and processes to take time out of a turn because your free time there and basically free aircraft just fall out because you're able to utilize the aircraft more effectively during the day. And we don't have a large issue today with cabin overhead bags that are then slowing down the operation because the overheads are slowing, they have to be moved down into the check and moved into the haul. So -- or the bin. And so you'll just move the issue around. I mean, I'm sure you've flown on others, and there's a massive last-minute checking of bags from the cabin down into the bin under the aircraft, and that cost you a lot of turn time potentially, which then just burns aircraft time that could be used more effectively. So it's a trade, and we do look at the trade.

Duane Pfennigwerth:

I appreciate the thoughts. Thank you.

Scott Group:

Hey, thanks. Good afternoon. So I know you're going to quantify the changes in September, but just directionally, should we be thinking hundreds of millions? Is it more -- any way to help us think about how much CapEx this requires. And then just more conceptually, like some of the legacies would say, hey, it's not just extra legroom that you need for it to truly be sort of premium, like -- are there other changes you're contemplating beyond just extra legroom?

Scott Group:

That's helpful. And just to clarify, when you talk about substantially north of $1 billion, do we -- is that a -- I'm trying to -- is that a gross number or net number? Meaning in theory, we'll lose like the early boarding in flight that we have today, I would assume?

Scott Group:

Thank you, guys.

Operator:

The next question is from Sheila Kahyaoglu with Jefferies. Please go ahead.

Tammy Romo:

Yes. Hi, Sheila. Yes, we have a lot of flexibility with our order book from Boeing. We're not ready yet to lay out all of our plans. We'll do that out at Investor Day. But we have ample flexibility to reflow the order book to ultimately meet our needs. And we'll balance all of that clearly, given all of our objectives and including CapEx spend and also our initiative to renew the fleet. So we'll lay out all those details for you at Investor Day.

Sheila Kahyaoglu:

Okay. And then maybe one on cost to follow by them. With the red-eye buying, how do we think about additional head count required for that or any cost impact?

Sheila Kahyaoglu:

Thank you.

Julia Landrum:

Thank you. That wraps up the analyst portion of today's call. I appreciate everyone joining, and have a great day.

Whitney Eichinger:

Thanks, Gary. Welcome to the media on our call today. Before we begin taking your questions, Gary, can you remind everyone and shared instructions on how to queue up for a question?

Alexandra Skores:

Hi. Can you all hear me?

Alexandra Skores:

Yeah, this feels like a very historic step for Southwest with regard to the changes in policy today. I wanted to ask, are we entering a new era? Is this a step towards a new era for the company? And how is Southwest going to kind of differentiate itself from other major air carriers because that's been the history of Southwest? So I'm wondering if you can kind of speak to that.

Alexandra Skores:

And then my second question, just for some of the Dallas passengers too, I've been noticing have been pretty vocal about concerns about how this will be implemented. And I know you're not sharing specifics, but one that they are rather interested in is family boarding and that's like a prime reason why folks come into love field and have localized that to me. Can you share anything about how family boarding might be implemented with this new policy?

Ryan Green:

No, yes. I think moving -- there are friction points in the current customer experience that come along with open seating that we've had to adapt to by creating things like our family boarding section today. Just to give a little insight into that, almost 60% of customers are checked in within the first 30 seconds of the 24-hour check-in window opening. And that goes up to about 75% of customers checked in within the first hour. So, if you're a busy family and you don't hit the check-in window right on the nose, that causes anxiety. And so like Bob mentioned, this is one of those -- this is a way to solve lot of those friction points at the current open seating process has introduced and just causes more anxiety than we want. So I think families at the end of the day are going to love the change.

Alexandra Skores:

Great. Thank you.

Operator:

Next question is from Rajesh Singh with Reuters. Please go ahead.

Bob Jordan:

Rajesh, I can't speak for Elliott or speculating on what Elliot may or may not do. But so far, they've not shown any willingness to engage in any meaningful conversations with us. Most of that has been public personal attacks on leadership in the Board. So like any shareholder, we love to engage and hear their feedback. And -- but so far, there's been no willingness on their part to do that. So for our part here as a leadership team, we're focused 100% on moving the company forward on the plans that -- some of which we laid out today and on transforming this company ending our desired financial returns.

Ryan Green:

Yes. I think Rajesh, we'll have more to share on the overall value opportunity of the premium seating and assigned seating initiative at Investor Day this fall. On the cost side of the equation, we're doing it in a very capital efficient way. We're using existing -- existing seats. So there's a very little capital outlay here. And then on the revenue side, we'll have a value share here later in the fall.

Operator:

The next question is from David Koenig with The Associated Press. Please go ahead.

Bob Jordan:

Hey, Dave, we haven't called it the demise of open seating. It's a shift to assigned seating, but anyway. I would say that it didn't factor in terms of the analysis. So we -- this is all about trying to make right decision and making it not in emotion, but in data. So we -- as Ryan can talk about, just extensive surveying of our customers or non-customers to understand their preferences. And then also to understand things like if you have status on Southwest today, you know your A-List preferred, what benefits how do you value benefits and what would be attached to your status in the assigned seating and extra legroom world, for example. So just a ton of effort there and then a ton of effort to understand the operational impacts, if any, because we certainly don't want a assigned seating to turn the aircraft slower, which everything that worked on proved that it will not. So it was really about the change itself we do know for our employees, in particular, managing the boarding process, as you described, can be stressful and it can be for some of our customers. So while that wasn't a direct item that we studied, I think it could be that, that is an indirect benefit that we see.

Bob Jordan:

Yes. I think customers' preferences shift over time. And I think it's been clear, I think their preferences shift over time and travel patterns and travel behavior shift over time. Customers are just taking fewer short-haul trips today. They are flying longer. And when they fly longer, the importance of an assigned seat goes up. We've talked a lot about our desire and initiatives to grow market share with corporate business travelers in the managed business space, and they -- their preference is for an assigned versus an open seat. And so I think that that goes into it. And then when you look at premium, premium, just -- you can see it with in the airline industry ourselves, premium product growth has outpaced the growth in main cabin revenue for some time here. And then in other parts of the economy, consumers are just reducing nonessential retail purchases and spending that on experiences. So it's a combination of travel patterns changing and customer preferences changing over time that we're adapting to here.

Operator:

Next question is from Lori Aratani with The Washington Post. Please go ahead.

Bob Jordan:

No, I don't think I said customers are fickle. Just kidding. But no we...

Bob Jordan:

No, no, I'm kidding with you. I mean, preferences do change over change over time, and they sometimes long periods of time. And just more philosophically, you can have beliefs. We as a company can have beliefs and hold on to them. But if you don't understand in data, what is happening with your customers, that they can move away from you. So you've got to be willing to challenge everything that's not fundamental to you as an airline. But the -- we do -- we have periodically surveyed assigned seating. This is by far the deepest analysis we have ever done. And it has moved towards assigned seating over decades. I think the last time we looked at it, which was years -- many -- actually several years ago, the preference was more 50-50. But the -- you've got a different generation -- you've got -- what we're trying to point out too is, it's very clear that as different generations emerge and spend more on travel, their preferences are potentially very different than the prior generation. I mean, not making a value call at all, but you've got to aim because you're always working, you've got to aim at the customer that you're going to see in five years and 10 years. So I don't worry that -- the -- the fact this is what I love about way we're implementing this. We're not doing anything way out on the front. We're moving to assigned seating. We're moving to extra legroom, and we're doing it in a way that is consistent with Southwest Airlines, which is we're doing it in a very efficient way. And we're not putting in seats with -- that have doors and seats that massage you or something like that. We're doing things that make sense for Southwest. So I'm comfortable that we're moving towards the customer and that those customer desires will not shift on us.

Bob Jordan:

That's part of what we are hard at work finalizing. Now I think it's safe to assume that just like our current A-List, A-List preferred customers, there is a boarding benefit associated with their status level. I think it's safe to assume that there will be a seating benefit, seating benefits that are associated with it. But the exact nature of that and the details there are things that we're defining as we speak.

Bob Jordan:

Thank you.

Alison Sider:

Hi. Thanks so much. I just wanted to ask a safety-related question. Obviously, the FDA review is just starting or hasn't yet started. But as you internally look at some of the incidents that you've had recently, are there any common themes that are emerging, are there any lessons learned or changes that you're thinking about implementing to training or procedures?

Andrew Watterson:

Bob, I don't know that the -- it's not just the words we say safety is the priority, it's in our actions as well. So efforts started actually in April. We noticed some things that caught our eye. We merited further involvement from us. So within the construct of our safety management system, we engaged our flights safety personnel within the company with the representatives from our pilots union, their safety committee as well as the FAA and our certificate management office to set up a joint team to do some joint analysis and investigation of what are root cause drivers and what are actions we can take in the short-term and the medium-term. Some of the short-term actions was about enhanced communication and transparency because aviation safety today is based upon that kind of -- that transparency and collaboration. So that actually led to us communicating proactively to our personnel about what's going on, which then, of course, led to these things getting out in the press and getting more media. So there's a little bit of self-reinforcing there. But we clearly saw issues, and we clearly see things that we need to work on. So we have been, since that time, as we've dug into it, increased our focus and tempo on it. And the FAA now has increased theirs as well. So this is a carrier strictly holder evaluation process. It's something that every airline goes, roughly every five years, but it can be voted off cycle. The FAA – that was one other airline this year. Now they're doing with us, they can either do a kind of broad-based review or kind of audit or focus. They've chosen here as a focused effort for us. And so we expect that to begin here in the coming weeks and finite duration. However, the other work we already started will continue that process should always be ongoing. And so they can we can -- both sides can flex in additional resources from inside companies, inside organizations as well as outside. So this is a multilayer approach to safety, and I think it makes us better, but also it gives the FAA the more visibility to bring back into the rest of the aviation system and vice versa because a lot of the topics we see other airlines see and vice versa. So we're super happy to have this kind of great relationship and joint investigations.

Andrew Watterson:

No. I would say that what we're looking at in new product, internal communications is a human factor. So it's not the experience or airmanship necessarily of an individual. It's what's called kind of generically in the industry cockpit resource management. The how you interact between the pilot flying and the pilot monitoring. There's insights to be gained there. And I think that's what we're focused on. We've brought in external health, the FAA has bring external health. And they've told us they've seen some other things elsewhere that would be helpful to us. So this is a more about that dynamic than there's about any specific demographic.

Operator:

The next question is from Mary Schlangenstein with Bloomberg News. Please go ahead.

Andrew Watterson:

There is a focus on flight operations and pilot training, but there's a couple of items as well that will be finalized as they start up. So it's not everything. It's a handful of items. And with regards to what color eyes, we had two flights in particular in April that had some similarities that caught our eye and let us start this process. So that was one too many, if you will, and that's when we started up ASAP. Really, literally within days of us seeing that, we started the joint exercise with the FAA and our pilots union.

Andrew Watterson:

Well, I won't go into too much detail. I mentioned aviation safety is based on transparency and collaboration is part of that's voluntary disclosure. So since individual actors in the aviation safety system to self-disclose things that they saw, that they did in exchange for indemnity from that. And so I'm not at liberty to go into exactly what it is there, but you can see where the programs we've launched, you can see what the FAA has launched and how these things all fit together.

Operator:

This concludes our question-and-answer session for media. So, back to Whitney now for some closing thoughts.

Operator:

The conference you concluded. Thank you all for attending. We'll meet again here next quarter.

Operator:

Hello, everyone, and welcome to the Southwest Airlines First Quarter 2024 Conference Call. I'm Gary, and I'll be moderating today's call, which is being recorded. A replay will be available on southwest.com in the Investor Relations section. [Operator Instructions]

Julia Landrum:

Thank you so much. Hello, everyone, and welcome to Southwest Airlines First Quarter 2024 Conference Call. In just a moment, we will share our prepared remarks, after which we will be happy to take your questions. On the call with me today, we have our President and CEO, Bob Jordan; Executive Vice President and CFO, Tammy Romo; Executive Vice President and Chief Commercial Officer, Ryan Green; and Chief Operating Officer, Andrew Watterson.

Tammy Romo:

Thank you, Bob, and hello, everyone. As Bob just covered, this year is not shaping up as we had initially planned. We have never, and will never, accept underperformance. There are a lot of things that contributed to our current position, the impact of continued delivery delays from Boeing, significant market-driven inflationary pressure from new labor contracts, volatile fuel prices and dynamic customer travel patterns.

Andrew Watterson:

Thank you, Ryan, and hello, everyone. I'd like to start out by thanking our incredible Southwest employees for continuing to deliver a strong operational performance. We produced a solid first quarter completion factor of 98.5%, our highest first quarter performance over the past 5 years. We delivered year-over-year improvement in early morning originators, turn compliance and turn differential and mishandled bag rate, and again saw a year-over-year improvement in our Trip Net Promoter Score, as Ryan mentioned. Our on-time performance declined slightly year-over-year, largely due to weather challenges and delays driven by ATC programs.

Julia Landrum:

Great. Thanks, Andrew. That completes our prepared remarks. We will now open the line for analyst questions. To allow for as many calls as possible, we ask that you limit yourself to one question and a brief follow-up, if needed. We will now take the first question.

Michael Linenberg:

I guess, Tammy, I just want to -- on the bonuses to the employees incurred in the March quarter, just can you remind us that number again? I thought you -- I heard it. And then is it just we're going to see another piece in the second quarter with the approval of the flight attendant contract, by the way, congratulations, but another piece in the second? And then is that it for the year? If you can just remind me of those numbers.

Michael Linenberg:

Okay. Great. And then just my second question, Ryan, I recently, I've seen you give some presentations and talk about red eyes and red eye flying coming to Southwest Airlines. And I think you said it's about a 2-year time frame. I'm just curious, what are the gating issues? What are the things that need to get done to be able to actually implement them? Because it does seem like a pretty long time, but I do realize it is something new for Southwest.

Andrew Watterson:

Yes, this is Andrew. I'll add on. Some of the kind of bigger issues that slowed us down was with our crew contracts, our reserve periods. We had 2 reserve periods, for the pilots, in particular, and didn't allow for good coverage of red eyes. And so with a new contract, we'll eventually go to 3 reserve periods and allow us to better have reserve pilots on standby should there be a problem.

Robert Jordan:

And Mike, this is Bob. You didn't ask this, but on the why, maybe not just the. Timing. But obviously, we've known for a long time, our customers want red eye flying. It's a little bit limited in scope, but there are red eye flights that are very desirable for our customers. And so we wanted to do this.

David Vernon:

So Bob or Ryan, I think last quarter, we were talking about premium on the call. And you guys had made the comment that this is something that's cyclical, it comes up, it goes down. People put too much -- too many premium products in the cabin, and then they have to take them away in the down cycle.

Robert Jordan:

You bet, and thanks for the question. I think maybe I'd just start a little wider, which is we are always studying what our customer preferences are and if they're changing. That's now, over time -- and we're committed to meeting them. It's over time, we've added things like WiFi, and now we're adding seat power. We've added larger overhead bins, and so we're committed to meeting our customers' preferences.

Robert Jordan:

Well, we just don't -- I don't want to get into details because a lot of those we don't have. Again, we're looking at customer preference. Obviously, the -- how would you do it technically, how long would it, what impact, if any, would it have on the operation? Obviously, what's the financial impact?

Andrew Watterson:

And I'd add, Bob, our PSS is the industry standard Amadeus tool, which obviously works in those environments. So the underlying system is not prohibited from doing that.

Operator:

The next question is from Duane Pfennigwerth with Evercore ISI.

Ryan Green:

Duane, I think there is definitely regional performance. I mentioned in the prepared remarks that the West Coast did well. Particularly intra-Cal RASM and margins are up double digits year-over-year. Phoenix is doing really well. Vegas is doing really well. Of course, Vegas had some assistance there with the Super Bowl being there in February in the first quarter.

Duane Pfennigwerth:

Okay. Appreciate the thoughts. And then just on your capacity exit rate, why was it down low singles, low to mid-singles by the fourth quarter. How should we be thinking about early 2025? And are we still in a dynamic, where seats are down more than ASMs. In other words, I think that was by several points, maybe 5 points or so that seats were trailing ASMs. Is that still the dynamic in the fourth quarter?

Robert Jordan:

And maybe the other thing to add, too, just to disconnect from Boeing, is the work on the network that work to moderate -- significantly moderate our capacity isn't just Boeing. I mean, this is something we need to do. We need to manage ourselves, manage our appetite, continue to mature the network, continues, as Ryan said, to work on the part of the network that is underperforming and moderate our capacity until we are hitting our financial targets.

Andrew Watterson:

And I think you take the sources of growth that Bob talked about and the network restructure, that does imply that our central tenancy is for seats to trail ASMs and for trips to trail seats. That's a natural consequence of those actions.

Jamie Baker:

Yes. So Tammy, how should we be thinking about operating cash flow for the rest of the year? I mean we've got the retro component in there with the flight attendants. But presumably, a weaker demand outlook suggests some pressure on the air traffic liability. And then related, I guess, somewhat to that, the dividend consumes, what, $450 million a year, $450 million of cash. Any idea how the Board is thinking about that in light of some of the challenges that you articulated today?

Jamie Baker:

Okay. And then Bob, so question, when you report earnings, does management then break up and host townhalls throughout the company. The reason I ask is that some airlines, some companies do that. I honestly don't know of Southwest. But I have to wonder, I mean, is the tone with the front line as somber as it is on this call? I mean, I guess it's hard to answer. But if I was in Baltimore right now, chatting up employees, do they get what's going on right now and just how grim this guide is?

Robert Jordan:

Yes. Jamie, there's a lot in your question. So let me just start with we -- just to balance things out. Our financial returns are nowhere close to what we need and what we want them to be, period. And we will be relentless until we achieve those. The company -- so that is absolute.

Savanthi Syth:

If I might, just on the business revenue, that was a good performance here. I was curious what your 2Q outlook is reflecting in terms of expectations and what you're seeing there.

Tammy Romo:

Yes, Savi. We're -- as we said, we're expecting CapEx this year at $2.5 billion, and that includes about $1 billion in aircraft spend. We are working through our plans for next year. So it's a bit early to give you guidance for next year. Obviously, we're working through that actively now. So we'll update you on our CapEx spending plans as part of our comprehensive update in September at our Investor Day.

Tammy Romo:

We are absolutely working with the view to generate free cash flow. We -- so that will obviously be part of the equation as we pull together our plan for next year.

Operator:

Ladies and gentlemen, we will now transition to our media portion of today's call. Ms. Whitney Eichinger, Chief Communications Officer, leads us off. Please go ahead, Whitney.

Operator:

[Operator Instructions] And the first question comes from Alexandra Skores with the Dallas Morning News.

Robert Jordan:

Well, it's never -- I'll just start with this. It's never an easy decision to close a station or to materially reduce flights in the station. We love our airports. We serve our communities, and so it's always difficult.

Alexandra Skores:

And my second question, what kind of communications have been given to the employees at those airports?

Andrew Watterson:

Yes. We staged senior leaders there last night. So at very early morning hours, our people -- our leaders were there to explain the whys to the employees as well as to the airports, and then also to go through with them the different options they'll have for moving. It's a seniority-based system with our unions, and so how that will all work for them. And so they've gone through that.

Alexandra Skores:

Got it. So that's every employee that's impacted is going to be offering some sort of job?

Operator:

The next question is from Mary Schlangenstein with Bloomberg News.

Andrew Watterson:

There are about -- we took about half of O'Hare down from about 30 something flights to about 15, 18 flights during the seasoned day of the week. So it's about a 50% reduction in Atlanta. I can't remember off the top of my head, Ryan. It was 30%, I want to say, off the top of my head.

Andrew Watterson:

Yes, it's unfortunate. We had been restoring Atlanta over the course of post pandemic. We could never quite get back to the level of performance we needed there at the scale we needed. And so it's been reduced back down to a level just shortly coming out of the pandemic. And so it's still substantial activity there, it's just not as big as it was before.

Ryan Green:

Mary, it's Ryan. Well, it's new. As you know, it was just issued yesterday. So we're digesting exactly what all of that means. But based on our read, so far, I don't expect that it's going to be a significant impact. Of course, we already have the most customer-friendly policies in the industry. So we're best positioned to comply with any of these new regulations out of the gate.

Alison Sider:

I know that the overall demand environment remains very strong. But I am curious if you're seeing any indications of bookaway or traveler nervousness about Boeing or air safety more broadly?

Alison Sider:

Interesting. And the 4 cities, the 4 markets that you're exiting, are those cities that you think would have been more successful if you had the MAX-7 in your fleet or had it coming soon?

Operator:

The next question is from Dawn Gilbertson with Wall Street Journal.

Ryan Green:

Yes, I would agree with that on the incremental products. But what we are doing and what we can continue to do is to get better at how we price those products and drive incremental yield from those ancillary products.

Dawn Gilbertson:

If I can follow up then. My question is about -- you're talking about transformational changes here, and you're hinting at boarding and seating. So can you do -- what kinds of things can you do, if anything, that doesn't involve assigning seats? Because to me, that would be transformational for Southwest.

Robert Jordan:

No, you're -- you -- I think you're exactly right, which is that's why you want to look at all of these things. And we're just not ready to tell you exactly what we're studying, and we're not ready to tell you then how that could, if we decide to go forward, turn into a different product design and a plan. But yes, just conceptually, that where you're going is the reason we're looking at this is we know, over time, customer preference has changed. They have my whole 36 years here at Southwest Airlines.

Operator:

The next question is from David Koenig with the Associated Press.

David Koenig:

Okay. And how many of the 2,000 do you think will be pilots?

Leslie Josephs:

Just knowing what you know now from these customer surveys about potential seating changes, are you thinking that it could be like a big front seat or bigger front seat-type product? Or do you think that, at some point, there will be a curtain on a Southwest Airlines plane?

Ryan Green:

Leslie, I'll try and take all of those. The first one on what we're learning from customer research, I think just stay tuned there. We'll have more to share on what we're learning and how that factors into what we may do different, if anything, at all. I will say though, the Southwest Airlines is -- we will stay true no matter what we do to the brand and who we are and how we approach customers. And I think things like curtains and things like that are a bit far field from who Southwest Airlines is.

Leslie Josephs:

And how does that compare with when the MAX came back in 2020 after the crashes?

Rajesh Singh:

Bob, all the additional voluntary time-off programs that you're considering, does that include the pilots as well?

Rajesh Singh:

Bob, you said that you were encouraged by Boeing's approach. Can you please share some specific examples and color that make you feel encouraged about their approach?

Andrew Watterson:

Thank you for the question. In 2022, we increased from having just a representative, which other airlines have, to having a team of AMP-certified mechanics on process, on site to inspect our aircraft as they go through the production process. I believe there's north of 85 inspection points that they look at between entering the factory and exiting the factory.

Operator:

The next question is from David Slotnick with TPG.

Robert Jordan:

Ryan can give you much more detail, but I think you want to know all those things. You want to know why do customers book Southwest? What do they expect of Southwest? You want to know why do they book others and not Southwest Airlines. You want to know if they have preferences for other things within our product that we don't offer today, how do you think about pricing, those kinds of things and how it affects their desire to book Southwest Airlines.

Ryan Green:

I think you hit it all. Clearly, with any sort of transformational change, you're going to have a very robust, highly scientific, very sophisticated statistical models and research methodologies to test all of those things that Bob walked through. that's what anybody would expect of a company like Southwest, and that's the rigor at which we are approaching studying this issue.

Ryan Green:

Look, we're going to study customer -- like we've said, we're going to study customer preferences, but there's strong demand today for Southwest Airlines and the brand that we put and the product that we put in the marketplace today, it has worked for us for over 50 years, and customers understand well who we are and what we bring to the marketplace. We're not going to try to be somebody that we're not. And so we'll study it all, but we're -- at the end of the day, we're going to remain true to who Southwest Airlines is.

Robert Jordan:

And I think the -- I know we've said this probably 20 times on the call today, and I think the other short answer is we're not ready to go into detail. We have work to do here, obviously, to continue to finish up our work. And then if there are things we do want to change, understand how we would do it in the Southwest way. And so we will be back with detail when we're ready. And if there is something that we're going to change, we're aiming to do that at our Investor Day, which is planned in September. And we'll share, obviously, a lot more then.

Whitney Eichinger:

Thanks to everyone who joined us today. If you guys have any further questions, our Communications Group is standing by. Their contact information, along with today's news release, are all available at swamedia.com.

Operator:

Hello, everyone, and welcome to the Southwest Airlines Fourth Quarter 2023 Conference Call. My name is Gary, 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. After today's prepared remarks, there will be an opportunity to ask questions. [Operator Instructions] At this time, I'd like to turn the call over to Ms. Julia Landrum, Vice President of Investor Relations. Please go ahead, ma'am.

Bob Jordan:

Thank you, Julia, and thank you, everyone, for joining the call today. As we close the books on 2023, I want to take a moment to reflect on how far we've come. And more importantly, I want to thank the people at Southwest Airlines for their dedication, their warrior spirit, their heart and ultimately, for their incredible resilience. At this time last year, we were getting back on our feet from the disruption following Winter Storm Elliott. We quickly mobilized to put immediate mitigation efforts in place, while simultaneously building a robust plan to prepare us for future extreme winter weather disruptions. We are also working to restore our network, address our staffing needs and return our aircraft to full utilization. And of course, we were in the middle of negotiations with the majority of our labor unions. I'm incredibly pleased to be on the other side of 2023 and to be able to share all the progress we made last year. We completed a comprehensive winter weather action plan, which has already been successfully tested in multiple weather, winter weather events, including the extended nationwide winter storms we experienced this month, but also with other types of disruptions such as hurricanes, severe fall in Chicago and the Maui fires. Through all of those events, our aircraft and crude networks remain stable. We recovered quickly, and we were able to minimize the impact on our customers. We also got fully staffed, restored our network and reached the full utilization of our fleet. Our network is in a healthy place, and it shows in our operational improvement. In fact, we improved in nearly every operational metric. Our completion factor performance, in particular, was fantastic at 99% for the full year, with fourth quarter being our best quarterly performance in more than a decade at 99.6%. We also made significant progress on our labor agreements, including ratification earlier this week of an agreement that secures industry-leading pay for our best-in-class pilots. We have now successfully reached ratification on nine contracts in a little over a year, demonstrating our commitment to providing competitive market compensation packages for our people. This is a huge accomplishment, and I would like to thank all those who have tirelessly supported those negotiations. Of course, all this was in addition to a host of other accomplishments, the rollout of a new revenue management system, the launch of multiple customer experience improvements and the negotiation of a very cost-effective order book with Boeing. The order book allows us to continue the modernization of our fleet and provides the opportunity to flex our growth plans up or down over the long-term. We also made rapid adjustments to capacity for both 2023 and 2024 and put in place significant network adjustments in response to changing demand patterns. These changes reduced our planned 2024 year-over-year capacity increase to roughly 6%, all of which is carryover from 2023 network restoration. So there will be no net new additional capacity in 2024 as we work to mature our route network. Moving to our performance. We continue to be very pleased with the core demand for our product. We saw close-end performance strength in November and December for both leisure and corporate travel. This led fourth quarter 2023 to be yet another record at just over $6.8 billion in operating revenue. And we are seeing that strength continue into 2024. This demand strength, combined with about $1.5 billion in incremental year-over-year pre-tax profit from our network optimization efforts and the contributions from our portfolio of strategic initiatives is driving us to expect additional revenue records and year-over-year operating margin expansion despite cost pressures from new labor agreements and increased aircraft maintenance expense. Our network changes are materially in place with the March schedule, where we expect to hit a profitability inflection point. While still early in the quarter, our initiatives are delivering towards our revenue target, and we expect to exit the quarter with a strong operating margin for the month of March. While we have significant inflationary pressures from our new labor agreements, we have initiatives underway that will begin to help counter these pressures with efficiency improvements. These include everything from scheduling techniques to digital modernization and we planned in 2024 with head count flat to down as compared with year-end 2023 as we slow hiring to levels that are at/or below our attrition rate that will drive efficiency gains in 2024 with more to come in 2025. All of this supports a solid plan with a line of sight to improve our financial returns and earn our cost of capital in 2024. While this represents notable progress, I want to be clear, earning adequate and consistent returns, ROIC well in excess of WACC is our financial North Star, and it's not negotiable. We will be relentless in executing against our plans, and we will continue to make adjustments, including capacity adjustments, if needed, until we deliver those results. Adequate and consistent return is how we have created decades of shareholder value, and it continues to be our key focus. Our current set of initiatives is tracking nicely and we'll provide you a lot more detail later this year at Investor Day. In addition, we're working on a next seven initiatives to support -- in support of sustainable returns over time. In closing, we made tremendous progress in 2023, and we finished the year a much stronger company. We will finish this year stronger again. We are fully committed to improving the customer experience, and delivering on our long-term financial targets, including generating returns for our shareholders. As always, I have confidence in our people and our business model, and I am particularly proud of our people for their dedication and their resilience. They remain our absolute greatest asset, the heart and soul of our company and the ultimate source of pride for me. And with that, I will turn it over to Tammy.

Ryan Green:

Thank you, Tammy, and hello everyone. Let me start by sharing that I am very pleased with the overall demand for our business, the execution from our amazing people, and the engagement of our loyal customers. Fourth quarter unit revenue finished slightly better than expectations at down 8.9% year-over-year. The improvement was driven by a strengthening of close-in revenue performance in November and December for both leisure and corporate business travel, as well as the continuation of overall strong holiday performance and market share gains from our managed business initiatives. I'm pleased to report that we saw no bookings impact from last year's operational disruption during this past holiday season, which speaks to the operational improvements we have made over the last year as well as the enduring loyalty from our customers. In addition, fourth quarter was another quarter with multiple record set, including record fourth quarter operating revenue and passenger revenue, as well as an all-time quarterly record for passengers carry. Fares also performed well in the fourth quarter, with our average passenger fare up about 2.5% year-over-year. And all-in-all, our fourth quarter operating revenues were up over $1 billion relative to fourth quarter of 2019. And while we still have work to do on our revenue performance, I remain very pleased with our progress. Looking to our full year results, we grew 2023 operating revenues nearly 10% year-over-year to a record $26 billion accompanied by record passengers, record Rapid Rewards revenue and record ancillary revenue. And speaking of records, we set operating revenue records in each quarter of the year and for the full year of 2023. As we move into 2024, we are seeing the momentum continue, and we're seeing early but highly encouraging benefits from our network optimization efforts, and we expect first quarter unit revenue growth of 2.5% to 4.5% when compared to the same period last year. This represents a solid sequential improvement in year-over-year unit revenue performance even when normalized for the five-point tailwind from the prior year disruption impact. In fact, our guide would imply first quarter 2024 nominal RASM to be about five points higher than our normal seasonal sequential average when compared with nominal fourth quarter of 2023 RASM. We currently have about 60% of expected bookings for first quarter already in place, slightly above normal, and we are seeing better than normal sequential RASM performance further demonstrating that our network optimization efforts are working. As we refined our capacity plans for this year, we've been able to pull in even more flying out of the shoulder periods, which we believe will be a tangible contributor in boosting our performance. While our forecast doesn't assume any material increase in demand for domestic air travel in 2024, we do have a line of sight to double-digit operating revenue growth year-over-year, driven largely by the network and initiative-driven revenue that Tammy detail. Included in that, of course, is our efforts to drive managed business. We are very pleased with the performance of our managed business initiatives and the success of our Southwest business team. In the past year, we had a solid increase in market share, more than three points in the managed business space and I'm very proud we improved our Business Travel News ranking from fourth place in the industry in 2019 to second place in 2023. We were the only carrier on the survey to receive an increased total score two years in a row while each of our competitors' scores have declined over that same period. It's another example of the progress we're making against the industry in the managed business space. Of course, we're also continuing our efforts to improve our customer experience and our Rapid Rewards program. We are seeing improved customer satisfaction scores with our Wi-Fi product as we proceed with our infrastructure investments there and more aircraft are joining the fleet every day within sea power and larger bins on board. We've made several enhancements to our award-winning Rapid Rewards program, including making it easier to reach our A-List and A-List Preferred levels and we will soon be rolling out the ability to book travel with a combination of cash plus Rapid Reward points later this spring. We introduced customer bag tracking to reduce friction in our customers' travel experience and we look forward to sharing more on our larger digital hospitality modernization plan in the coming months. All of this is designed to make it easier to fly with us and give customers even more reasons to choose Southwest. As we enter 2024, we have a very solid plan that leverages the unparalleled strength of our people, our product, our loyalty program and our route network, and we look forward to delivering on continued progress towards our long-term financial goals. With that, Andrew, over to you.

Julia Landrum:

Thank you, Andrew. This completes our prepared remarks. We will now open the line for analyst questions. We would like to speak with as many of you as possible, so we ask that you limit yourself to one question and a brief follow-up if necessary. Please go ahead with the first question.

Ravi Shanker :

Thanks. Good afternoon everyone. Maybe we can start with the $1.5 billion kind of initiatives. And any chance you can share more detail there, kind of details on what the different contributing items are, and also how much visibility do you have into that? Trying to get a sense of how much of that may be in the bag, so to speak?

Ryan Green :

Yes. Of the revenue initiatives there, a lot -- most of that is the network optimization and the continuing maturation of some of our development markets, development market percentage of mix continues to get more back to normal ranges by the end of 2024. So that certainly will help. And obviously, we've been able to watch those development markets mature throughout their curve here over the last few years. As it relates to the other revenue initiatives that are in place, they will continue to mature and then also provide additional benefit as we -- as the airline grows. A significant portion of that is the managed business initiatives that we've been talking about. And I'm very confident in how that those sets of initiatives continue to perform. We're definitely on track. Managed business got better in the fourth quarter from how it was performing in the third quarter, and then we're expecting another sequential improvement here in the first quarter with managed business. We can see that in place and how bookings are coming in, in January, and as we begin to get into the February booking curve here. So yes, everything that we can see, how we finished the fourth quarter and then what we can see here in the first quarter and going forward makes me very confident.

Ryan Green :

Well, premium certainly is a hot topic in the industry, and it's something that we watch -- that we're watching closely. We also talk to our customers on a regular basis. This is one of the things that we continue to get their feedback on. And I think we talked about it some on the last call. As you think about premium, historically in the industry, premium revenue has been highly cyclical. This is one of those times where carriers are adding premium seats into the cabin. But when the economic cycle shifts, they're pulling seats, premium seats out of the cabin. And so as we see kind of the recovery here from the pandemic, we'll have to see how these trends persist and go forward. I think overall RASM, obviously, we follow that and how we compare relative to the industry, and we're working on working on improving that as we go forward here. I will say that ancillary revenue, the majority of which is boarding products, our early bird product as well as our upgraded boarding product is doing very well. We're having record ancillary revenue performance. And so I think, yes, we have a single cabin, but we're able to improve RASM and grow ancillary revenue through some of those boarding products as well.

Operator:

The next question is from Jamie Baker with JPMorgan. Please go ahead.

Ryan Green:

You're there.

Bob Jordan:

Yes, Jamie, obviously, there are -- I mean, there are probably as many moving parts right now as I've ever seen. You've got -- as Ryan talked about, you've got a focus on parts of the cabin that are outperforming our route network that are outperforming, you've got -- you've got a lot of capacity moving around in the industry right now. You've got mergers. So it's tough to tell that -- and on top of that, obviously, you've got capacity impacts due to aircraft delivery, the DTF issues, all those things. So I think it's not to tease out. My guess would be that all of those factors probably get worse across the year. The impact of those are going to continue to increase, especially as you see more impacts on capacity and aircraft due to potential Boeing impacts, obviously, the geared turbofan. So more to follow. On our end, obviously, we're focused on Southwest Airlines. I'm really pleased with 2023 and all that we got accomplished that we talked about. We ended the year a much better carrier than we were the year before. The area of course, where I'm not satisfied is our financial performance. We're running roughly four points under our cost of capital right now. And that is our focus here at Southwest, and we've got a really good plan here in '24…

Bob Jordan:

Jamie, my apologies there. I don't know where we left off. But my point is we are focused on Southwest. We're focused in 24 years on expanding margins covering our cost of capital that sets us up for a lot of momentum to then even make even more progress in 2025. And thinking about capacity for Southwest Airlines, our capacity, our CapEx, as we plan forward, will obviously take into consideration the progress we are making against those financial goals. I just want you to know that. The backdrop of the industry, I think, is going to play out here across 2024, and we'll just have to see.

Bob Jordan:

Yes. Well, let me just back up a second. Obviously, there's a lot going on with Boeing. I mean, the MAX 8 is a great aircraft. We're very satisfied with it. And like Boeing, we support the work of the FAA and the oversight to improve quality, address any issues because at the end of the day, better Boeing is good for Southwest Airlines. The -- we periodically look at aircraft manufacturers and aircraft types. That's something we take up routinely here at Southwest Airlines. We've done that in the past. And our focus right now is on our own fleet plan, our fleet plan with Boeing. Obviously, working with Boeing to get the MAX 7 certified. But we do take that up periodically. You also have to understand every -- I know you know this, but there isn't -- as such, there's no such thing as being able to derisk all of this. Even if you have multiple aircraft providers, say we were 50-50, you'd have 400 aircraft to one type and 400 of another type, and so an issue still creates great risk for the company. So the best thing that we can do is work with Boeing to make them an even better company, which is exactly what's happening. We've got great confidence again in the MAX 8, and we're eager to get to MAX-7, we're not in charge of that certification date. But no, we have confidence that Boeing will get all this figured out with the FAA will come out a better company.

Bob Jordan:

Jamie, thank you.

Catherine O'Brien:

Hey, good morning, everyone. Thanks so much for the time. Maybe just a couple of quick ones. On unit revenue going forward, underlying your double-digit top line forecast for the year. Can you just help us think about where we go from the 1Q unit revenue forecast? I'm assuming based on the full year capacity outlook growth is going to slow from the first quarter into the remaining quarters of the year. So, that would be a sequential tailwind. You'll be lapping some of that easy comp from the book away as we move through the year. How does that impact where you think unit revenue trends quarter-to-quarter. Anything else lumpy we should be considering?

Operator:

Pardon me. This is a conference operator. We've again lost audio from the speaker location. Please standby as we try to regain it. Thank you. This is the conference operator. We've regained audio from the speaker's location. Please continue. Thank you.

Ryan Green:

Yeah. And I wouldn't add anything else, other than to say that the revenue initiatives, that component of the plan, those are -- there's very little lumpiness in those as well. Those are pretty evenly spread throughout the year. So it's really about the decelerating capacity in the back half of the year and the network maturation and optimization efforts coming on.

Bob Jordan:

Thank you, and I'll start, and then I'm sure Tammy you will pile in. I mean the -- we were accrued for our labor contract increases here. We've got nine done, two to go it's really, for the most part, it's rate increases here in 2024. So if you take the pilots, for example, they've got a 4% rate increase. We've got some benefit increases. That's the majority of the $6 million to $7 million. On top of that, you have maintenance pressure that was known. It's really the 800 engines coming off holiday and that's a couple of points. Those are going to be things, wage rate pressure, maintenance pressure that most of the industry shares. Now on the efficiency side, as we go across the year, we've peaked our hiring, and we will -- our target is to end the year in 2024 with fewer heads than we ended the year 2023, which will, of course, naturally make us more efficient for the 7% growth. It’s too early to talk about 2025. But as you maybe think about a forecast there, yeah, you would naturally decelerate from the unit cost pressure this year. And our goal, we're not ready to give you a number, of course, for 2025, but our goal will be to dramatically control that headcount growth again in 2025. And we'll be sharing a lot more about that at our Investor Day later in the year. Tammy, if you want to add anything?

Catherine O'Brien:

Thanks so much.

Operator:

The next question is from Duane Pfennigwerth with Evercore ISI. Please go ahead.

Ryan Green:

Yeah, Duane, it's Ryan. I think the macro environment for demand overall is very strong. I mean the way that we closed the fourth quarter, we saw a close-in performance kind of accelerate in the holiday time period which had us -- we came in above our expectations at that point. So I think that, that was a good sign as we got into the year. And as you sit here in the first quarter, the beginning of the first quarter, we've got about 60% of bookings on hand. That's plenty for us to get a good read on how the macro trends are performing. I think demand looks very strong in January and February, which are typically trough periods here. We're performing just fine. As you look into the stronger periods into March, I think spring break travel and the Easter travel period, that's looking very well. And then probably also, as it relates to the overall macro environment, if you just look at managed business trends. I think I mentioned this earlier, fourth quarter was better than third quarter and first quarter is expected to be better than the fourth. We've got very strong bookings in place on the managed business side here for February as we begin to get into that part of the curve. So I think the overall macro environment sets up well for us having a really good year.

Ryan Green:

Well, I would say destination-based markets are doing very well. International is doing very well. Hawaii, we beat our expectations in the fourth quarter. Phoenix, Orlando, Vegas, those markets are doing very well for us. I think when you look, California was slower to come back, it's doing -- it's improving for sure. So it's definitely pockets across the network. But again, I think overall, things continue to improve.

Operator:

The next question is from Brandon Oglenski with Barclays. Please go ahead.

Ryan Green :

Well, first of all, I would say, absolutely product matters. And I think that certainly from a coach product, Southwest Airlines has the best coach product in the industry. I would just echo what I said on the premium component of this is highly cyclical. And I think that we want -- before we would take up that question, you would want to -- or we would want to study that very closely as we think about that. Your question on how do we do relative in a long-haul market like Hawaii, as I mentioned, we beat expectations. We beat our own expectations for Hawaii in the fourth quarter. I think our yields continue to improve, and the Mainland to Hawaii component of that franchise. And we'll continue to develop those yields further. But no, I think that our product fares very well even in long-haul markets. But yes, on the whole, I think product matters. And I think when you look at the industry together, I think that there's at least some evidence out there today that demand for fares on the bottom end and lower products on the lower end of the segment, there may not be as much demand for those types of products today as what their once was.

Brandon Oglenski:

Bob and Ryan, I appreciate that. And then maybe if I can just get a quick follow-up for Tammy. Any ability to tell us where you view your weighted cost of capital today?

Brandon Oglenski:

Okay. Appreciate that Tammy.

Brandon Oglenski:

Thank you.

Helane Becker:

Thanks very much, operator. Hi everybody. Thank you for the time. As I look at your numbers for the fourth quarter, your revenues were up at 12.5% or something and your costs were up 10.5% and yet you weren't able to see significant margin improvement because of the things you already talked about where you have inflationary pressure. But as we look forward to the next one year, how should we think about the seasonality of your business now? Because it seems like you said everything was great for the fourth quarter, and yet you didn't perform significantly better than you did last year, and I would have thought that last year, given all the issues, you would have performed a lot better. So maybe you can help me bridge beyond just the obvious labor cost inflation and other inflationary pressures, how you get back to those margins you used to report? And then do you expect -- and then my other question is, do you expect any book away from the flight attendant asking for a strike vote.

Helane Becker:

That was a lot of question.

Ryan Green:

No, there's no evidence in anything that we track from a customer sentiment perspective that would make us concerned about that.

Helane Becker:

Okay. That’s really helpful. Thank you.

Operator:

We have time for one more question. We'll take that last question from Dan McKenzie with Seaport Global. Please go ahead.

Bob Jordan:

Yes, I'll answer directly and add Andrew, if you want to chime in. I think we're not ready to talk about that in maybe as much detail as you want until we get to our Investor Day here later this year. But absolutely, it's just like the goal of covering our cost of capital this year, and getting back to our historic returns and ROIC well above WACC, restoring efficiency is right alongside in terms of the key goal or a key goal. We ramped up our hiring quickly to be able to restore the network and get all of our aircraft flying. That hiring peaked in October to November, and we have been decelerating that rapidly here in the last 60 days. The plan is to, again, to grow six-or-so percent this year and then to end this year with the same or fewer heads than we began the year, which will obviously help our efficiency quite a bit. Not ready to discuss 2025, but we would have certainly a directionally similar goal in 2025. We also have a significant number to hate to tease here. We have a significant number of efficiency initiatives that we are planning around both efficiency of the aircraft, efficiency of our people and processes as we think about things like the turn, and we'll be sharing a lot more about that again in our Investor Day later this year.

Dan McKenzie:

Very good. And if I could just squeeze 1 last 1 in here. It's a question on the shift to the cloud. How much of Southwest has shifted to the cloud at this point? And once you complete that endeavor, what could the savings ultimately look like once that transition is completed? Is it tens of millions, hundreds of millions? And is that an opportunity?

Andrew Watterson:

I think, Bob, we -- I mean, fraction side it used to be very good progress. But when we talk about it internally, we're not talking so much of the cost you can take a hosted bigger system, breakup in micro services that are in the cloud and allows you to then get productivity and how you refresh and improve that application over time. So, it's really the speed to market for these new products and support the products is really what drives the benefit. So, it's elsewhere in the business, you get the benefit not so much any kind of hosted costs, if you will.

Dan McKenzie:

Very good. Thanks so much for the time guys.

Julia Landrum:

Okay. That completes the analyst portion of our call. A quick reminder that the transcript and a replay of the call will be available on our Investor Relations' website. I appreciate everyone joining, and have a great day.

Whitney Eichinger:

Thanks, Gary. I'd like to welcome members of the media to our call today. Before we begin taking questions, Gary, could you please give instructions on how everyone should queue up for a question?

Alison Sider:

Hi, thanks so much. I just wanted to see what you made of a center of Duckworth today calling on the FAA to deny the waiver Boeing of Sox to MAX 7. Is that anti-ice issue, do you think that something Boeing should have to address before they can start delivering those planes?

Andrew Watterson:

I would say that the certification is a technical process between the FAA and Boeing. And I think they've been doing a good job. It's been slower than we would like, but it's been technically based and it's off a public comment. So it's an opportunity for people to comment on that for technical analysis to be done. And so we're not a party to that. We want the aircraft. It's a question of when we'll get it, not if we'll get it. So we're pleased that they're taking their time to make sure it's safe and we support whatever way the FA wants to go.

Andrew Watterson:

We have already done that. So in late 2022, we changed our posture up there. Previously, we had for a long time, they have representatives at the factory. We increased it to a team of AMP license mechanics, whose job is to provide oversight of our aircraft in the production process. The Boeing provides customer quality people that are on their payroll, but our direction. And so they inspect at places where we ask in the factory the few days that Boeing takes to assemble an aircraft from the wings being built to rolling out. It's about roughly 80 areas where we have our requirements for things to be expected. Those people inspect -- our people inspect. And then several times a year, our quality assurance team goes up and inspect our inspectors to make sure everything is going well. So that provides a really good oversight in the production process once it leaves the factory, there's a customary acceptance in spectrums that happened the FAA overseas and give a final certificate of air worthiness. And then it comes on to our ops spec and we in our maintenance program, which is quite robust. And since we're by far the largest operator of the 737, we have provided lots of data and our continuing analysis and safety surveillance system allows for us to really understand the aircraft and make sure that it's performing and conforming as expected.

Operator:

The next question is from Leslie Josephs with CNBC. Please go ahead.

Bob Jordan:

Hey, Leslie, it's Bob. We don't -- obviously, like I said earlier, there is a lot going on in the industry. They're between merger potential mergers and acquisitions and issues with aircraft deliveries, the geared turbofan, I don't know in my 36 years in the industry. I've seen more moving parts as you have right now. One thing that's consistent here is we stick to our business. So we're focused on Southwest Airlines, improving Southwest Airlines being the best carrier that we can be improving our returns and profit and margins, all the things that we've talked about. It's impossible to speculate on what might happen. Our history would say that as opportunities arise for Southwest, if they make sense, we take a look at that. But I wouldn't want to speculate on anything going on in the industry, certainly around any other carrier.

Operator:

Our next question comes from Rajesh Singh with Reuters. Please go ahead.

Andrew Watterson:

Well, we get weekly updates on the status of the certification process. So we know what's been submitted and what hasn't. But obviously, then the FAA is the one who oversees that and inspect it makes ultimate decision previously, we've indicated that we had -- in our internal plan and assumption that it would be certified by April and that we would then spend time after of that. I think on our of spec that could take us at the end of the year, and therefore, it would be flat until next year. But that is -- that was only the latest assumption. We've had earlier assumptions all along this process. And as Tammy mentioned, we will modify our plan based on the new information. So should that change, we will move our assumptions and adapt our plan. So by this kind of conservative approach and giving ourselves the lead time, we won't let any kind of short-term ups or downs affect what we have planned for this year.

Bob Jordan:

Hey, Rajesh, Boeing has been a partner with us for 52 years. And I have absolute confidence that between the FAA oversight work that's going on, the work that Boeing is doing that Boeing will working with the FAA will address the quality issues, and we'll obviously come out of this a better company. I've talked personally to their leadership. They're committed to doing anything and everything it takes to be better and to address the problems. And as I said before, a better Boeing is very good for Southwest Airlines. So yeah, I have absolute confidence that they will work their way through this and address the issues.

Whitney Eichinger:

Thanks, Gary. The news release and our contact information are available at swamedia.com. We thank everyone for joining.

Operator:

Hello everyone, and welcome to the Southwest Airlines Third Quarter 2023 Conference Call. My name is Jamie and I will be moderating today’s conference. This call is being recorded, and a replay will be available on southwest.com in the Investor Relations section. After today’s prepared remarks, there will be an opportunity to ask questions. [Operator Instructions] At this time, I’d like to turn the floor over to Mrs. Julia Landrum, Vice President of Investor Relations. Ma’am, please go ahead.

Bob Jordan:

Well, thanks Julia and good morning everyone. Before we jump into the financials, I wanted to acknowledge that there have been heart wrenching challenges around the world the past several months. And we’ve had natural disasters in the communities that we serve. Earlier this quarter, I visited our team in Maui and witnessed firsthand the impact from the catastrophic wildfires on the island. Our hearts go out to all those who are suffering, and we’re really proud of the support we are providing including the volunteer efforts of our employees. Now moving to the results, operating revenues for the third quarter were just over $6.5 billion, up nearly 5% from the same period last year and a third quarter record. Despite the recent uptick in fuel prices and other inflationary pressures, we are again profitable with net income of $240 million excluding special items. Revenue strength was driven by solid leisure demand throughout the quarter and by managed business continuing to come in largely as expected, and Ryan will share more details with you, but overall, demand remains healthy. As we close out this quarter and look ahead to the end of the year, we are very pleased with our accomplishments. We are running a great operation, reaching significant milestones, completing important initiatives, and delivering great customer experience enhancements. We’re making great progress on labor agreements including yesterday’s announcement of a tentative agreement with our incredible flight attendants. The team will walk you through many of these accomplishments, but for now, I want to talk to you about immediate actions we are taking to adapt to the current demand environment and solidify our path to operational and financial excellence. Perhaps the biggest milestone is completion of our network restoration plan in the fourth quarter of this year. Reaching this milestone has obviously been a year’s long effort and has taken heroic coordination across the entire organization. It’s just incredibly challenging and I am so appreciative of every single employee. It truly was a whole company accomplishment. With this behind us, however, we are set up really well to focus on optimizing our business. That starts with reflowing the fleet order book to support orderly growth, and to that end, we just announced a new order book with our partner, Boeing, yet another milestone. This sets us up for orderly and measured growth and gives us flexibility to adapt in a dynamic environment and we have a lot of options as we move forward and we will plan in a way that allows us both the flexibility to move up or down, and this order book combined with opportunities to retire -700s and modernize our fleet supports that really well. Finally, as we move into 2024, we are carefully evaluating the current macro environment and post-pandemic travel behaviors to create the best possible plan for the Company. We are now planning for a sequential quarter-over-quarter decline in nominal ASMs in the first quarter 2024. This will result in capacity growth on a year-over-year basis of approximately 10% to 12%, all of which is carryover from growth this year. Note that this is a reduction from what we shared in July which was an expectation to grow approximately 14% to 16% on a year-over-year basis. In the back half of 2024, we expect a nominal decline in seats relative to the same period in 2023. Therefore, for the full year, our network plan will focus on absorbing current capacity, maturing development markets, and designing schedules for current travel patterns. This plan offers us the ability to redirect the teams that have worked so effectively to get us staffed and restored to now focus on better optimizing the operation. We will be relentless in our focus to wring out inefficiencies, drive productivity, increase reliability, and our goal to return margins to historic levels. We are still hard at work on both our 2024 and long-term plans, but we are building them with a priority and a focus on generating value, value for our employees, value for our customers, and of course, value for our shareholders. And with that, I will turn the call over to Tammy.

Ryan Green :

Thank you, Tammy. I’m going to walk through a review of our third quarter revenue results, provide context for our fourth quarter outlook and share some exciting commercial updates with you today. For additional detail on our revenue performance, please see this morning’s earnings release. Starting with third quarter, demand continues to be healthy. Operating revenue was a third quarter record of just over $6.5 billion and on a year-over-year basis operating revenue was up nearly 5%. And that’s on a tough compare period given pent-up domestic travel was still underway last year. When you compare revenue performance versus third quarter of 2019, operating revenue is up nearly 16% on 12% capacity growth. Also average fares were up 2.6% year-over-year and are up over 7% over third quarter 2019. So, while we have work to do to cover our unit cost challenges, I am pleased we are moving in the right direction. The nearly 5% operating revenue growth year-over-year on a capacity increase of 12.5% had unit revenue or RASM declining 6.8% for the third quarter of 2023. July 4th and Labor Day travel came right in line with our expectations. However, bookings for non-peak August and September, while stable, came in at the lower end of our expectations. This performance aligns with fall start dates for primary and secondary schools continuing to shift earlier in much of the country. For example, in our markets, a third of schools were back in session by the second week of August, which is nearly double what it was pre-pandemic and nearly 95% of schools were back before the Labor Day weekend. We are planning for these back to school trends to continue as we work on our August 2024 capacity plans. In addition, we had multiple records set from our ancillary products and our loyalty program. We had an all-time best quarter for ancillary revenue with 24% year-over-year growth and Rapid Rewards set a third quarter record for revenue generated from the program. New Rapid Rewards member acquisitions were a quarterly record and the number of engaged members grew 10% on a year-over-year basis. Rapid Rewards point redemptions were up 16% compared to the same period last year and retail spend on our co-brand Chase Credit Card was also a third quarter record. Our customers love the benefits they get from the card as evidenced by our low cardholder attrition which continues to be below pre-pandemic levels. Overall, we see a resilient consumer and high engagement with the Southwest Airlines brand. Consumer spending trends still favor services, particularly travel experiences, and we expect that will continue. Moving to the fourth quarter, we are seeing a continuation of healthy leisure booking demand and stable business travel patterns. As a result, we expect a nominal sequential increase in operating revenue, resulting in record fourth quarter revenue and passengers which would bring us to three consecutive quarters of record operating revenue. October performance has been strong to date and bookings for the holidays as a whole are also strong. RASM however continues to be impacted by higher than seasonally normal capacity, driven by our network restoration plan, a larger than normal investment in development markets, and business travel that while improving is still below historical levels. We also expect the close-in leisure trends we saw in non-peak August and September will persist into the non-holiday periods of the fourth quarter, and our guidance range does contemplate potential challenges from this year’s holiday placement including the expectation that a portion of return travel will spill into January. I am encouraged however that we have higher booked load factors for the December holiday period this year than we had at the same point last year, which indicates to me we’re not experiencing significant book away as a result of last year’s operational disruption. All-in, we expect RASM in the fourth quarter to finish down 9% to 11% on a year-over-year basis on capacity up approximately 21%. Again, we are steadfastly committed to addressing RASM performance to ensure a revenue plan that is appropriate. For the current near-term, we are continuing to execute a strategy of fare sale campaigns to address low demand flights with meaningful advanced purchase requirements. This helps build load factor in suboptimal capacity without impacting higher demand flights or diluting close-in yield strength. Looking to 2024, as Bob mentioned, we will address RASM by moderating capacity to better match demand and optimizing our schedules to accommodate current travel behaviors. Our current set of strategic initiatives including GDS participation and the new revenue management system will also contribute incremental pre-tax profits to 2024 as they mature and hit their full run rates. Finally, we’re tireless in working to make customer experience on Southwest Airlines even better and drive even more loyalty from our customers. Earlier this month we announced several exciting updates and the first involves several enhancements to our award winning Rapid Rewards program. We will add the ability for customers to combine Rapid Reward points with cash next spring which increases the ubiquity of our loyalty currency and makes it easier to book additional flights on Southwest Airlines. We also made it easier to reach our A-List and A-List Preferred levels in 2024 and are looking to reward our customers for their loyalty and entice them to fly with us whenever they travel. We have an imperative to win more customers and drive more travel from our most frequent travelers, and these enhancements are designed to give them even more reasons to choose Southwest Airlines. We also launched a new product for our corporate customers last week that will help us continue to grow our market share in the managed travel space. Our new product streamlines the process to book group travel for meetings, incentives and conventions, which is one of the fastest growing segments in the managed travel space. I’m very pleased with the response to the product so far as we already have millions of dollars in travel booked on the new tool in just the first few days. Finally, we recently introduced customer bag tracking, which gives our customers the ability to track their checked bags throughout their day of travel, both at the airport and in flight. This improvement was one of the investments we accelerated following last December’s disruption. By providing additional transparency and information to customers about where their bags are during their travel journey, we’re elevating the travel experience and removing friction for our customers. This enhancement is an early release of our larger digital hospitality modernization plan. So, congratulations to the teams that worked so hard to bring these great enhancements and solutions to market for our customers. Ultimately, we have to continue to win customers while taking into account the challenges of higher cost inputs as we build both our long-term commercial strategies and our near-term revenue plans, and we are committed to doing just that. With that, I will turn it over to Andrew.

Julia Landrum:

Thank you, Andrew. We have analysts queued up for questions. So, a quick reminder to please keep your questions to one and a follow-up, if needed. Please go ahead and begin our analyst Q&A.

Savi Syth:

If I might on the 2024 plan, you talked about inflationary headwinds to unit costs. And you historically don’t necessarily adjust capacity once kind of schedules are loaded. I was wondering if you could provide a little bit more color on how we should think about unit costs in 2024. Is this going to be up year-over-year, and some of the kind of bigger drivers of the unit cost trends?

Tammy Romo:

You covered everything really well, Bob. Just, Savi, to give you maybe just a little more color on where we’re seeing the obvious cost pressures. Clearly, as we’ve wrapped up a lot of agreements this year with our labor group, we have seen more inflation than normal in labor. And that’s driven by the higher wage rates. And we’ve been, as you know, accruing for those throughout the year. And then outside of labor, we’re -- we’ll see some inflationary pressures in maintenance as our 800 fleet is coming off of the holiday. So, just wanted you to keep that in mind as that wind down. But we are very -- all that said, we are focused in on our 2024 plan. We are going to work really hard here to drive efficiencies and certainly leverage our network opportunities. So, a little premature to give you guidance for the year, but we’re going to keep working really hard on our plan here to manage our CASM-X costs going forward. And we haven’t backed off of our Investor Day, what we shared with you at our 2022 Investor Day. Our longer term goal is to grow CASM-X in the low single digit range, and that would be on mid single digit capacity growth.

Bob Jordan:

Yes. Savi, the goal number one with our -- and we’ve been talking about reflowing our fleet order book with Boeing. Goal number one was to just get to orderly steady growth in the fleet plan. I think, if you look at -- we were stacking a lot of aircraft up that were delayed, and I think it pushed beyond even what you saw in the plan, a delivery expectation of 143, I think in 2024, which, of course, we’re not doing. So, I’m really happy, Boeing has been a great partner. We’ve got a new fleet plan that takes us -- that is very orderly. It takes us through 2031 at very attractive pricing, and there is a lot of flexibility in the new order book. So, we can flex up and we can flex down, as you see demand trends changing both ways. Just thinking about 2023, we’ve been talking about, again, taking control of the order and delivery plan and planning to that in our schedules, we plan to 70. Boeing looks like we will now be able to take 85 this year from Boeing and we’ll just offset that directly with retirements, which of course is a -- that’s a solid financial trade. And then, our goal next year is to take 85. Now, Tammy, do you want to add anything?

Bob Jordan:

But again, the new order is all about reflowing this so that the growth is orderly and steady and we have access to a lot of aircraft at attractive pricing and we have a lot of flexibility.

Catherine O’Brien:

Maybe just a follow-up on the cost question, if you don’t mind. Two things. I know you’re not prepared to talk about exact guidance on 2024, and I totally appreciate that the growth plans have changed. But I think last quarter you said you were committed to driving cost down year-over-year. Are we just back at the drawing table for that? And then, on the labor inflationary pressures you’re talking about, I know you’ve been accruing this year. So, what’s driving that incremental into next year? Is that just wage rate increases are higher than they used to be or something else in the pay package?

Bob Jordan:

And of course, for everybody, I mean, the labor cost increases are -- that’s a phenomenon we are all seeing as we all renegotiate contracts and some of the timing is different for folks, but those are going to be costs that I think you’re going to see generally across the board. It always takes -- they’re coming in a lump. And it always takes time to adapt to the higher cost structure and as you move across a period of time. The good thing is back to the network work. We are very committed to taking network action. We had already announced last quarter a full restructuring of the network that is going to yield over $500 million in pretax profit contribution in 2024. Beyond that now, we’re moderating the first quarter. We’re moderating the full year. Again, you’re going to have seats in the back half of the year that are actually going to be down nominally year-over-year. And all of that is designed to match the demand to the network and match the network to the demand, which should ultimately help revenue production, help RASM production.

Bob Jordan:

Yes. I’ll start, then Ryan can back clean up with me here. But it’s the -- I don’t want to speak for others, and it’s always hard to predict the future. But yes, there’s clearly an outperformance in long-haul international and premium right now, like there was an outperformance in domestic leisure this time last year. Typically, trends moderate. They always have been in this business for a very long time, and all things tend to sort of work their way back to a trend here. We’ll see. And if you think about Southwest Airlines, we’ve got a tremendous coach product. We’ve got terrific seating and great rep rewards program and Wi-Fi and all kinds of amenities we’re putting in power and larger overhead bins. We just announced bag tracking. So we’re obviously enhancing our product ourselves, which is a little different than premium, but certainly I think we have the most attractive coach product in the industry. Maybe attached to that, we’re always looking at what our customers, our preferences are and what they’re telling us, and we’ll always study that. And if over time, those preferences change. We’ll take a look at what that means for Southwest Airlines. Ryan?

Operator:

Our next question comes from Duane Pfennigwerth from Evercore ISI.

Bob Jordan:

Yes. Duane, obviously, that is absolutely the plan to improve margins in 2024, and we’re committed to getting back to our long term outperformance and operating margin. We’re talking about adapting to these new cost levels that will take time, but we’re moving quickly. That is a big piece of adapting the network and matching customer demand and these new demand trends to the network that we put out for our customers, both business and leisure. We have a lot of opportunity to wring out cost inefficiency through operating leverage, through new tools, through managing our headcount. We’ve got a lot of folks that are locked up in training as an example. As we slow our hiring and slow our growth here, that will come out in terms of costs. We have a lot of cost plays that we can make. We’re still working on our 2024 plans. But yes, I can assure you that a return -- growth in 2024 and then a return to industry-leading margins and the margins that our shareholders expect is absolutely a commitment. Tammy? I don’t know if you want to add anything, Tammy?

Duane Pfennigwerth:

Thanks. I appreciate those direct answers. But maybe just to throw out an alternative, if you can’t get your margins going in the right direction next year, if it’s more like 25% or 26%, what might you consider strategically or put on the table that hasn’t been on the table before? So if you think about things like seat assignments, base economy, bags fly free, historically, those have been sacrosanct. I mean, would there be more of an urgency to more aggressively take a look at the product and the service offering if you can’t get there next year?

Duane Pfennigwerth:

I appreciate that. I guess over the years, you deserve the benefit of the doubt when you’re printing industry-leading margins and saying we’re going to go with what our customers want. But if you have lagging margins, it may require a harder look. But, I appreciate you taking the questions. Thank you.

Operator:

Our next question comes from Mike Linenberg from Deutsche Bank.

Andrew Watterson:

Thanks, Mike. I appreciate the question. We -- as we mentioned earlier, we were -- we have relooked at our network and moved our capacity around. So, it’s both the amount of capacity and the nature of the capacity. We did both of those moves. First, we kind of were doing the nature with our reconfiguration that Tammy referenced earlier. And for Orlando, we do have a lot more northbound flights, if you will. The international destinations, even though they loom large in our mind, they actually are modest-sized markets that require a decent amount of connectivity to fill them up. And so, Orlando being a little bit further north and having more flights for Southwest Airlines north of Orlando allows us to have the good complement of the local plus the flow. So a lot of the international destinations were to take our customer base here on vacation because we are a repeat purchase business. And so, we want our network in any given location to offer chances to fly for business, to go to Orlando, to go to Vegas, to go see grandma, to go on vacation and the beach. And so sometimes that’s nonstop, sometimes that’s connecting. And for a lot of the international, it requires us to offer that as a connection for some of our kind of further northern cities. So, Orlando, the combination of the local market plus allowing us to access our big customer bases on the Upper Midwest and Northeast makes a more network sense given scarce capacity, if you will. So net-net, that made sense. And then also, as you mentioned, the crew base in Orlando also makes the costs to serve that go down because you’re not staging crews in down to Fort Lauderdale. So work on both sides of the equation, as Bob said, revenue and costs, it made more sense for our international anchor in the Southeast to be Orlando.

Andrew Watterson:

No, I think this is -- during COVID, we had a kind of -- when demand was way down, and we have bigger aircraft, we don’t have a lot of RJs, we had to use more than usual connectivity to fill our aircraft. And then post-COVID, we went back to our normal, which is felt between 25% and 30% of our customers in our connecting itinerary, that’s been fairly stable, but they’re concentrated in certain areas, they help us fill up the early and late parts of the day and they also help us support certain geographies. So going to Hawaii, we have -- we have certain gateways there that allow us to access our customers in land access Hawaii. The same thing for international, a combination of Baltimore plus now Orlando helps you access international from parts of our network. So connectivity has always been the icing, not the cake, but we were very intentional about how we use it.

Ryan Green:

Yes, no problem. Yes, ancillary and loyalty were both. We had several records in the third quarter, and I expect good performance here as we look forward into the fourth quarter. Ancillary revenue is significantly outpacing our passenger growth, largely on the back of our upgraded boarding benefit. We’ve been able to increase prices there and hold on to take rates. EarlyBird as well is a strong performer. We’ve been able to increase price rate -- or prices on EarlyBird as well as some of our other ancillary products that went into effect in August. We raised prices on excess bag fees, pet fees, things like that. So ancillary, absolutely is a standout. And I think I’m expecting it to continue to exceed passenger growth in the fourth quarter. Loyalty overall, as you -- as I’m sure you’re following it, it’s a very -- it’s a key part of our strategy going forward. Rapid Rewards is the most preferred loyalty program in the industry on lots of different measures, primarily because customers are able to actually use the points that they’re earning. And so that’s driving spend on the card. Third quarter spend on the card was a record, and we expect to continue growing the program over time. We also made some additional changes to Rapid Rewards here earlier this month that I think is also going to continue to drive engagement from our customers. And it’s all about making it easier to get value out of the program for customers. We see when customers make a redemption, after that redemption, they fly us more, they spend more on their card. It just drives further engagement with Southwest Airlines. And so, doing things like adding the ability to combine cash and points, that’s all about making it easier to use Rapid Reward points, which will then in turn provide value back to Southwest. Same thing with lowering the tier requirements for A-List and A-List Preferred. We’re kind of bucking the industry trend there. Our competitors are making it harder to access benefits. We’re making it easier. And again, there’s value to the consumer there, but there’s also value back to Southwest. Customers stretch to reach A-List, A-List Preferred, Companion Pass. They fly more, they spend more on their cards as they get close to that. And so bringing those thresholds in closer makes it better for the customer, but it also drives value back to Southwest. So, we’ll continue to invest in Rapid Rewards and the program and ancillary overall. And I think we’ll -- we should expect to see continued growth.

Helane Becker:

Just a couple of questions to follow up. With the changes in Rapid Rewards and making it easier to earn what you would call status, isn’t that kind of amounting to fare cuts across the board?

Helane Becker:

Yes. I mean if it makes it easier for me to redeem my points, I mean, don’t you wind up selling fewer revenue seats?

Helane Becker:

Got it. Okay. That’s really helpful. And then the other question I had for my follow-up was, I think at one point, you guided to $1 billion to $1.5 billion in EBIT contribution in 2023. But I feel like that might be -- is that -- I guess, is that an easier comp because of Elliott last year that you’ll be able to achieve that?

Julia Landrum:

Okay. That concludes the analyst portion of our call. I appreciate everyone joining, and have a great day.

Linda Rutherford:

Thank you, Jamie. I’d like to welcome members of the media to our call today. Before we begin taking questions, Jamie, would you just give them instructions on how everyone can queue up.

Alexandria Skores:

I wanted to ask, obviously, the flight attendants reached their tentative agreement yesterday. And pilots were picketing at headquarters today. So I kind of wanted to ask a little bit about -- I know that NMB has meetings scheduled with you all throughout November. What -- can you give us a sense of when a pilots’ deal may come and what the time frame might look like on that?

Andrew Watterson:

I think I’ve been really encouraged over the last couple of months with both the pace and quality of negotiation meeting every week. Sometimes that’s with the mediators and sometimes that’s without the mediators. And so, we’ve made -- we’ve also had enhanced leadership negotiation from both sides, and leadership presence on negotiations from both sides, and that’s worked out really well. Our mediators have been quite active. And so, we have to have both sides agree to get to a deal. So no one side can predict when it’s going to finish. But we’ve made substantial progress with a small but a difficult list of things remaining to close out. And I have confidence in our team and the SWAPA and negotiating committed to be able to do that in a timely fashion. The mediator has -- barring no government shutdown, more dates for us throughout the rest of this month and next month. And I also would say that the also negotiations with our ramp union, TWU 555. And so hope to be engaged with them here in the next couple of weeks for next step there. So we can -- that would then be the last deal for us to close out.

Andrew Watterson:

That was a month or so ago. I can’t recall exactly, Bob. But they’ve voted that one down. Their union, as most unions do, follow up with the surveys to understand where the frontline workers, the members did not like the proposed agreement. Based on that feedback, the union will develop a slate of changes. We will do that on our side as well. And then, we’ll get back together in early to mid-November to talk about next steps with them for the next round. We’re not in mediation with that. We have I think very productive negotiations without mediators with the 555 and we expect that to continue.

Leslie Josephs:

Just curious about your discounting strategy. Your have fare sales frequently, but it seems like the fares are pretty low currently. Could you kind of put that into context with previous fare sales and how that compares and how you’re thinking about the fourth quarter?

Leslie Josephs:

And are there any specific routes or regions where you’re seeing you’re having to discount more or even times of the week or month or recent months?

Operator:

Our next question comes from Mary Schlangenstein from Bloomberg News.

Bob Jordan:

Yes. Mary, I’ll talk and then Andrew and Ryan can finish, obviously, correct me. But yes, that really is why we are making the -- both the network adjustment and optimization that we had already announced that is in the first quarter that’s worth over $500 million in profit next year. And then this new set of capacity adjustments, both in the first quarter and then throughout 2024 in the nonpeak period. It’s really about the shoulder periods -- the nonpeak periods being more shoulder than before. So for example, some of that was backfilled by business travel, which, again, business travel is rising for us. It’s just steady. It’s just not fully recovered to pre-pandemic levels. But as an example, this reduction in January and February of 2024 next quarter, that is really all -- that’s as much about matching new business travel demand trends and patterns as it is anything. So that carries through 2024, but yes.

Operator:

Our next question comes from David Slotnick from TPG.

Andrew Watterson:

I would just characterize it as we are moving back towards more pre-pandemic norms. Of course, managed business travel remains down relative to pre-pandemic levels. It’s -- the baseline in managed business is kind of slow and steady recovery, and we’re picking up market share with our initiatives in the managed business space. And so, we feel good about that. But when you turn to the leisure piece of this, there is still more close-in leisure today than there was pre-pandemic, but it is not at the level of what we saw earlier this year at the end of last year. So, I think it’s more of a reversing of trends here back to norms as kind of return to office trends and things like that also begin to change here a bit. I called it out in my prepared remarks, but specifically, in the third quarter, there’s other things that would have impacted close-in leisure. The school calendar changes are pretty significant in August specifically. And a third -- in our markets, a third of schools were back in session the second week of August. That’s double what it was pre-pandemic. And anybody that has kids, you usually don’t travel the week before your kids go back to school. So that kind of wipes almost all of August out there for a third of travel in our market. So there’s some things moving around in the macro environment that’s impacting it. But I think just generally characterizing, we’re kind of reverting back to norms.

David Slotnick:

And then just following up, you excluded the holidays specifically when you mentioned this during your prepared remarks. What’s the booking curve looking like for that? Where do you think we are in the curve sort of right now?

Operator:

And our next question comes from -- is a follow-up from Mary Schlangenstein from Bloomberg News.

Bob Jordan:

Yes. Mary, I’ll start and then Tammy can add on. But I think it’s really about a couple of things. Again, we -- the delivery -- Boeing is a great partner. We’ve all suffered supply chain and other issues. So the delivery challenges have just pushed a lot of aircraft forward, and we just want to make sure we got back through, let’s clean all that up, and let’s get back to where we -- the order book reflects orderly and appropriate growth. So, that’s why you see a pretty normal sort of 80, 85, 90 number year to year to year to year. That was number one. Let’s just clean all this up. Number two, the aircraft the new aircraft market is tight. And we want to ensure that we have access to aircraft into the future. And we’ve done that through 2031. We want to make sure that we locked in very attractive pricing, which we have with Boeing, again, as a great partner, and we’ve accomplished that. And then last, again, sort of -- there’s been more variability in -- our industry that I think I’ve ever seen. And so because of that, you just need to make sure you’ve got plenty of flexibility, and that’s flex up and that’s flex down. If you look at the level of options and other things, we have plenty of opportunity to move those annual numbers up and down as demand dictates. So it was really -- it was as much about sort of taking the uncertainty out of the future, but also walking up access to those aircraft that attracted pricing. Tammy?

Operator:

And ladies and gentlemen, this will conclude our question-and-answer session. I’d like to turn the floor back over to Ms. Rutherford for any closing remarks.

Operator:

Ladies and gentlemen, the conference has now concluded. We thank you for attending today’s presentation. You may now disconnect your lines.

Operator:

Good morning, and welcome to the Southwest Airlines Second Quarter 2023 Conference Call. My name is Anthony, 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. After today’s prepared remarks, there will be an opportunity to ask questions. [Operator Instructions] At this time, I’d like to turn the call over to Julia Landrum, Vice President of Investor Relations. Please go ahead, Ma’am.

Bob Jordan:

Thanks Julia, and good morning, everyone. I appreciate you joining us for our second quarter 2023 earnings call. I am very pleased to report a solid quarter with net income of $693 million, excluding special items, and all-time record quarterly revenue of just over $7 billion. The demand environment, especially for leisure travel, continues to be resilient as we have seen solid bookings throughout the busy summer travel season. Further, we continue to expect $1 billion to $1.5 billion of pre-tax profit contribution in full year 2023 for our strategic initiatives that we outlined at our Investor Day last December. Based on our current outlook, we continue to expect record operating revenue and solid profits in third quarter 2023 and year-over-year margin expansion for full year 2023. I especially want to thank our people for doing such a fantastic job. They helped us get a record number of customers and a record number of bags on a record number of flights successfully to their destinations, as we experienced the lowest second quarter flight cancellation rate in the past 10 years. It wasn’t without trials. We had a lot going on in the operation related to weather, and weather has continued to be a challenge here in July. Despite that, our employees have continued to deliver a very solid performance. From our network ops control center to the front line, our people have worked together extremely well to minimize cancellations and produce a very reliable operation, and I’m just so proud of them for getting our customers where they need to go, despite a challenging operational environment. While our cost outlook has increased for the year, the change is primarily driven by updates to our market wage rate accruals for open collective bargaining agreements. And while fluid, we’re making progress. It’s obviously very hard work and I’m just very appreciative of the dedication of everybody involved in the negotiation process. Now, thinking about where we are with the business, since 2018, we have seen very significant swings due to the grounding of the MAX, demand fall off, of course, from COVID, then the stress from the resurgence of demand, disruptions from post-pandemic supply chain issues, challenges with employee staffing, and most recently, uncertainty with our Boeing aircraft deliveries. The challenges we have faced since 2018 have made planning difficult, so smoothing out fluctuations is a must, and the best way to do that is with smooth and predictable capacity growth. We told you back in April that we were reflowing our order book to allow for orderly and measured growth, and we’re still finalizing the details of that with Boeing, but we remain confident that we will get the 70 deliveries in 2023 that are assumed for our published schedules, and we are working to build a 2024 plan that should be much more stable. We currently are planning to be flying the MAX 7 at some point next year, but if not, we’ll take MAX 8 instead just as we are doing now. Where that leaves us for full year 2023 capacity is unchanged for this year at up 14% to 15% year-over-year. As we shared this morning in our release, we are revamping our 2024 flight schedules. While our network is largely restored at this point, it is not optimized, especially for post-pandemic shifts in business travel. Those adjustments to the network will be largely complete by the March 2024 flight schedules, and we expect those efforts and the continued maturation of development markets to generate an incremental $500 million in pre-tax profit in 2024. The changes will also reduce the percentage of system capacity and development by more than half, returning to normal pre-pandemic levels by the end of next year. We already have our schedule published through March 6, 2024, and currently expect first quarter 2024 capacity to be up in the range of 14% to 16% on a year-over-year basis. Now, keep in mind that nearly 90% of that year-over-year growth is carryover from 2023. For the remainder of 2024, we are planning for a sequential deceleration in year-over-year growth in each quarter next year as we work our way back to our long-term goal of mid-single-digit growth year-over-year. We’ve made a lot of progress in the first half of 2023, completing several major milestones. We quickly developed and are on track for our winter operations plan. We have the staffing plan in place to fully utilize our fleet by the end of the third quarter and have the network restored by the end of the year. Again, to be clear, it’s restored but not yet optimized, and Ryan will share more on how we’re going to adjust the network based on post-pandemic travel patterns. But we have a lot of exciting things in the works that we believe are going to contribute to our 2024 financial results and help us deliver another year of margin expansion next year. In closing, our accomplishments in 2023 lay a foundation for us to shift our focus to restoring our industry-leading financial and operational performance, boost our operational resilience, and make advances in our industry-leading customer service through a focus on digital hospitality. I just can’t say this enough, I’m just so proud of our people. They are the heart of Southwest Airlines, and they deliver day in and day out for each other and for our customers. And with that, I will turn it over to Tammy.

Ryan Green:

Thanks, Tammy. I’ll walk you through our second quarter revenue results, provide context for our third quarter outlook and update you on some of our commercial priorities. And for additional detail on our revenue performance, I’ll point you to this morning’s earnings release. Starting with second quarter, demand continues to be resilient, especially for leisure travel. Overall trends have remained steady with operating revenue for the first half of 2023, consistently well above 2019 pre-pandemic levels. Operating revenue for second quarter was an all-time quarterly record of just over $7 billion. And in fact, we had record operating revenue in every month of the quarter. Second quarter 2023 unit revenue or RASM decreased 8.3% on a year-over-year basis on a capacity increase of 14.1%. And while it’s a year-over-year decline, it’s still our second highest second quarter RASM to date, which points to the tough comp we were up against from last year. And as a reminder, year-over-year RASM was impacted by a 5-point headwind from approximately $300 million of higher-than-normal breakage revenue that was recognized in the second quarter of 2022, resulting from flight credits issued during the pandemic that were set to expire prior to our later policy change to eliminate flight credit expiration dates. Overall, second quarter revenue came in at the favorable end of our expectations as close-in leisure held strong. Second quarter revenue from corporate travel came in largely as expected, as we realized sequential and year-over-year improvement in managed business revenue. And while travelers from some of our largest segments have reduced their frequency of their business trips from pre-pandemic levels, we’re very pleased with the gains we continue to make in the managed business space. Small and medium businesses, government and educations are strong points for us, and we are growing the number of accounts we have under contract. All of this has allowed us to continue to grow our share of the managed business travel. We gained additional passenger market share in the second quarter and exited the quarter seeing more unique travelers flying for business than we saw pre-pandemic. Moving to the third quarter, we’re seeing leisure booking and yield strength continue throughout the summer travel season with July revenue, which is essentially booked, expected to also be a record. Of course, much of the post Labor Day booking curve comes in closer but we’re very encouraged by the response to our June fare sale for off-peak fall travel and what that suggests for continued leisure demand. We had all-time record bookings the week of our fare sale with three booking days that were top 10 all-time records and included our record day for the most bookings ever taken. In fact, we have more passengers booked for third quarter travel at this point in the curve than we did at the same point in time for second quarter. Of course, on a revenue basis, nominal yields are typically weaker sequentially third quarter versus second quarter but the strength in passengers points to the continued demand for Southwest Airlines. We currently expect overall corporate travel to have a modest underlying trend improvement, and we expect to continue our gains in industry market share. Overall, however, we expect corporate travel demand will remain lower than leisure for the foreseeable future, particularly compared with pre-pandemic. So with a higher leisure mix, and as the number of business trips taken per traveler remain down for our most frequent customers, it gives us an opportunity to look at our current network design. Pre-pandemic, those travelers had a skew of short-haul travel with more frequent trips and also more midweek travel, and our current network is designed assuming those travel patterns would return. Moving forward, there is a revenue opportunity to adjust the network to adapt to the new travel patterns we expect to continue to see from our mix of business and leisure customers. Ultimately, this leaves us with third quarter unit revenue expected to be down 3% to 7% year-over-year on capacity up roughly 12% again on a year-over-year basis. The decline in year-over-year unit revenue is driven by capacity growing faster than seasonably typical as we restore the network and normalize the utilization of our fleet as well as tough prior year comparisons from the post-pandemic domestic demand surge. So, while there is still room to optimize our unit revenue efficiency, this guide implies a third quarter record for operating revenue. So again, we are in the process of adjusting our network to support our imperative of industry-leading financial performance. Starting with the January 2024 schedules, we’ve made changes to the composition of the network such that it supports the customer travel behavior changes I just mentioned. We made changes that reflect where our customers are traveling and when they’re traveling, including time of day and day of week, and this optimization will be largely complete in spring of 2024. In addition, we have more than 10% of our markets under development, which will normalize closer to pre-pandemic levels over the next 12 to 18 months. So, as we said in the release and as Bob mentioned earlier, the go-forward revenue opportunity from the network is substantial. And of course, we also expect continued revenue contribution growth from our existing and fully implemented revenue initiatives. Finally, we have always worked hard to consistently deliver the best hospitality and customer service here at Southwest. Our customer service is, of course, legendary, and our customer policies are industry-leading. And we are on track in deploying our onboard product initiatives, including Wi-Fi upgrades, larger overhead bins and in-seat power. We are now focused on widening our customer service advantage through prioritizations of a series of initiatives that will improve our digital hospitality and allow our customers to serve themselves in most cases. We aren’t ready to provide you all the details there, but the initiatives will help us achieve our goal to deliver the best and most efficient hospitality with next-generation tools, airport layouts and more. And now, with that, I’ll turn it to Andrew.

Julia Landrum:

Thank you, Andrew. We have analysts queued up for questions, so a quick reminder to please keep your questions to one and a follow-up, if needed. Operator, please go ahead and begin our analyst Q&A.

Scott Group:

Hey. Thanks. Good afternoon. So, wondering if you have any color on the pressure on load factors in the quarter? And then, guiding to a lot of pressure on RASM in Q3 as capacity accelerates. With Q4 capacity expected to accelerate further, do you think we should expect further RASM pressure? And given that, do you think about maybe moderating some of the capacity growth?

Bob Jordan:

Scott, it’s Bob. The other thing we -- obviously, the new -- we’ve got -- we’re in this new revenue management system as well that we’re -- I think will be fully taken over the network in terms of pricing this fall. And number one, I’m happy that we’ve been able to get it in. We got it in on time, but it thinks about your whole itinerary. And one of the things that happens, too, is it maximizes close-in demand. So, it wouldn’t be a surprise doing that that you might see a little bit of a lower load here, especially as we learn the new system, and again, all that was known as we did testing. Second thing is we know we’re in a suboptimal environment. We brought capacity back quickly as we restored our flying. I’m very proud of the team here. We will get all of our aircraft in the air and be unconstrained flying everything here at the end of the third quarter, which is actually ahead of our plan, but it’s not optimized. That’s why we’re doing all the work in the first quarter of next year around the network to optimize. The last thing, just Ryan talked about this, as you associate this to average fare, we have a large percent of our network in development. It’s over 10%. We added new cities. We grew Hawaii during the pandemic. We put kind of 100 aircraft or more into those investments, and those are still in development, and that will mature across 2024. And I expect that percent of our total system in development to be normal to fall across each quarter next year and to be normal sort of pre-pandemic normal by the end of next year. And I think, Tammy, if you just think about fares, the average fair drag from that sort of those excessive development markets compared to normal is about $2 right now. So, it just gives you a ballpark in terms of thinking about average fare as well.

Bob Jordan:

Do you want to take that, Tammy?

Bob Jordan:

Yes. And I think I would just add, too, you talked about the large capacity in the first quarter that we’ve just talked about, 14 to 16. It’s still capacity. But just as a reminder, with the restoration -- getting all the aircraft flying this year, it’s going to produce a lot of capacity just doing that because we were so constrained, particularly on the pilot side, which again goes away in the third quarter. So, it produces a lot of carryover, especially into early next year. So 90% of that growth in the first quarter is simply carryover from adds back here in 2023. As you think about the network optimization, yes, as Tammy said, it’s a play on both sides. But the travel patterns -- it’s clear, the travel patterns post-pandemic are not what they were pre-pandemic. Some of that is leisure, a lot of that is that business. I expect business to continue to come back, but I think it’s going to trail the restoration of leisure here for a while. So, Ryan talked about this, but it’s things like a much more aggressive reduction into -- on a Tuesday and a Wednesday for example. Normally, that schedule would fall about 2 points from a Monday. I think it’s going to fall about 8 points with the optimization of the network. We’re managing much, much better management of really early and really late flights, which obviously have RASM penalties on those. So anyways, it’s definitely a revenue play, but it’s really meant to just match the post-pandemic demand and travel patterns to what we’re seeing to the network.

Operator:

Our next question will come from Savi Syth with Raymond James.

Tammy Romo:

Yes. Hi Savi. We are in the midst of working on our detailed 2024 plan and certainly getting back to pre-pandemic levels of profitability is our goal. And as we’ve shared with you, adjusting our network to the current demand environment and current business environment is a part, a significant part of that plan. We’re not ready, obviously, to provide guidance for next year, but certainly getting back to those levels of profitability is the goal. So, the first order of priority is to fly all of our fleet and optimize our staffing levels to that flying and to the network adjustments that we’ve taken you through. And in addition to that, we’ve got ongoing contributions from our initiatives as we continue to grow the network. And certainly, we’ll continue to get contributions from our ongoing fleet modernization plans. So, we’ve -- certainly a lot of moving parts here as we work to rebuild following the pandemic. It’s obviously been a little messy here. But the good news is that we are almost fully restored and will be soon, and we will be certainly pivoting and putting our efforts on producing year-over-year margin expansion for 2024.

Tammy Romo:

Savi, it is our best attempt to adjust our market rates to current market rates. And obviously, there’s been changes as we’ve been moving along here, and we’ve been adjusting as we go. And certainly, for the third quarter, we have factored all of that into our third quarter cost guidance, as best we can estimate. So -- and I think that’s an important point, Savi. So, we’ve got -- we’ve been accruing all along, as you know here -- as you know. And so, just keep that in mind as you compare Southwest to maybe some of the other guys in the industry.

Savi Syth:

And that’s pilots and that’s all labor groups…?

Savi Syth:

And I mean the driver of that increase, was it kind of all labor groups driving it up or this quarter more because of pilot -- you’ve seen some pilot…

Operator:

Our next question will come from Duane Pfennigwerth with Evercore ISI.

Ryan Green:

Yes. Hey Duane, it’s Ryan. Just on the geographic elements and kind of what’s stronger versus what are we seeing that’s weaker. The Hawaii franchise itself, now that is -- that’s part of our markets that are under development. And so there is the development element of that, but we’ve been very pleased with the Hawaii franchise overall, especially the main lands of Hawaii, element of that franchise. Load factors are very high. Yields are improving. So we’re very, very happy with how Hawaii is performing. To your comments on why -- network changes, we have made some changes to the network in Intra-Cal and that intra-Cal itself, despite the West Coast being a little bit slower to come back in the recovery, Intra-Cal itself is performing well. Leisure-based markets, Florida is performing well, just typically strong leisure markets in this environment continue to perform very well for us in the strong leisure environment. So that kind of gives you a flavor for what’s going well. The opportunities, we -- there are markets as we brought back the network and restored the network, there are different geographies that have different levels of capacity kind of as we bring those cities back. And obviously, you have to work to absorb the capacity as it comes into the market. So, we’re working on those markets where there’s kind of been outsized capacity growth, and we’ll continue to focus there. But, one of the things that Southwest Airlines benefits from is we have largely a relatively diverse domestic footprint. And as different parts of the country respond differently and have go through different economic cycles, we’re able to kind of weather that a little bit better maybe than some of our peers. So, that’s an inherent advantage for us as we go forward.

Andrew Watterson:

I’m sorry. Duane, it’s Andrew. I’d also add that we want to -- when you make change to your network, you want to kind of understand before you make fulsome changes. So, we have been making adjustments. So, in September as the first schedule we have on modified Tuesday, Wednesday capacity versus Monday, Thursday, Friday, so we -- it’s not as aggressive as we have started in January. So we want to have that out there and see how -- both to understand that before we started making changes and then some of the network changes that we’re doing, we also stepped into them over the course of September through fourth quarter. We like what we saw on the forward bookings and so we made the kind of full adjustment starting in Q1. So, it’s essentially done by March, except for the seasonality type adjustments I talked about will obviously happen as that season rolls around.

Duane Pfennigwerth:

Okay, great. And then just for my follow-up, I wonder if you’d be willing to kind of quantify the excess training investment and I think the reliability investment, which I guess is actually bigger, you would know. But, can you give us a sense for the magnitude of those that are unlikely to kind of reoccur or maybe wind down next year?

Operator:

Our next question will come from Jamie Baker with JP Morgan.

Tammy Romo:

Well, keep in mind, Jamie, that capacity is going to be a factor in that as we continue to add back capacity. So, I think that’s the primary driver.

Bob Jordan:

Yes. I’ll let Ryan talk to the specifics, as you think about markets and trying to tease that apart. But I’ll just start at the top, and you mentioned a lot of this early on. I mean, we are just -- obviously, we track customer trust and all those things, preferences and they’re all heading in the right direction and look really good. To me, the top line factor is just thinking about demand for the brand and is there any hangover effect. I mean, we had tremendous strength in the quarter. We had, again, record operating revenues, record passengers, record flights, all those things. We had our fall sale, and I believe each of those days was a record in terms of our highest booking day in our history. We haven’t talked a lot about, Ryan can talk more about demand on the business side. We’re seeing, I would say, significant market share gains in terms of our piece of the business. We talked about that at Investor Day in December. And since that time, we’re seeing really meaningful shifts in market share our way on the business side. So, as you think about demand for the brand, demand for the product that shows up, obviously, in bookings, we’re just not seeing any sign of weakness. Ryan?

Operator:

Our next question will come from Conor Cunningham with Melius Research.

Tammy Romo:

I’ll start. And -- well, first of all, we do believe we have growth opportunities. And I’ll just remind you again that we did make investments during the pandemic to grow our route network. And as we reported, we have a larger than normal amount of our capacity in development markets. But those are progressing and they’re trending in line, if not higher than our expectations. So, we’re pleased with that growth. And based on what we’ve seen so far, we have no plans to pull back on the development of those markets because we believe those are really good markets for Southwest over the long term. And we believe we have additional opportunities in our strong hold market. So, now, that said, based on our assessment of our growth opportunities, we believe that supports mid-single-digit ASM growth. Now, as always, and I remember that plan very well, at the end of the day, we are determined to drive the returns on invested capital that we can all be very proud of. And as always, one of the wonderful things about Southwest Airlines as we build our plans with ample opportunity. So to your point, we have a flexible order book and flexible fleet plans. And you’re exactly right. If we -- if we’re not -- we don’t have -- we’ve given you our plans, but should we need to adjust, we’ve got the levers that we could we could do so. But, at this point, based on everything that we’ve seen, we believe with these network changes that we can drive the revenue performance next year that we all desire. So, a lot of moving parts here, and we’re busy at work on our 2024 plan. But again, as we look ahead to next year, we are very focused on delivering a 2024 plan that will deliver margin expansion and as well as expansion and return on invested capital.

Conor Cunningham:

Okay. That’s helpful. And then maybe just to put a finer point on 2024 or as we just think about what you’ve added so far, the implications for ‘24. If you just pull fourth quarter capacity through ‘24, I think it’s -- the implied capacity growth is like 6% year-over-year. So, is that the low watermark that we should expect next year? I’m just -- again, just trying to understand the context of this measured and orderly and all these other moving parts you have that’s going on with your number right now. Thank you.

Bob Jordan:

Yes.

Sheila Kahyaoglu:

Hi. Thank you, everyone. So just lots of moving pieces on RASM and obviously a very hot topic. As we look out to 2024, you gave us a lot of moving pieces. How do we think about earnings growth for 2024, given you have $500 million benefit from network optimization, but RASM, it will be down most likely and CASM-X could be up. So, is there a possibility for flat earnings or revenue -- EBIT growth next year?

Tammy Romo:

I think you covered it.

Operator:

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

Operator:

[Operator Instructions] You may now go ahead.

Bob Jordan:

Thanks for the question, Andrew, you can chime in, too. So obviously, we are -- negotiations are complex. We are eager to reach agreements with all of our groups that have opened contracts right now. We’re meeting very regularly with SWAPA and very hopeful for progress there, but nothing new to report. You’ve heard about the strike authorization vote. Obviously, that is a NMB defined process, mediation is a defined process. So, it’s -- I’d say there is no strike or an imminent strike. There are a lot of steps that would lead up to that. And obviously, we want to make progress well ahead of any of those, but there’s no threat of an imminent strike or anything like that. There are many, many steps that would have to occur first. No, we have a desire to get all of our contracts closed up, obviously, including that with our pilots to get them taken care of. They do a fantastic job, and we certainly want progress there.

Operator:

Our next question will come from Mary Schlangenstein with Bloomberg News.

Andrew Watterson:

I’ll handle the timeline. So we have -- October is the deadline we’ve given ourselves to get everything ready. We expect winter storms to actually be after that, but our internal deadline is October. And so that will be when we report our third quarter earnings, it will be later in October, and we’ll make sure to go through and have a comprehensive review and status update where we are on that. But so far, things are on track, and we’re taking delivery and encouraged by the results.

Mary Schlangenstein:

Yes. I was asking if that’s the cost for everything that you’ve put in place as a result of the disruptions or if that was just related earlier to the mention of additional training costs for ramp workers.

Bob Jordan:

And Tammy, I think it also includes things like we did gratitude pay. And we did -- we had some incremental customer reimbursements this year and things like that that are really a onetime related to the disruption that don’t show up again in ‘24.

Operator:

Our next question will come from Dawn Gilbertson with The Wall Street Journal.

Ryan Green:

Hey Dawn, it’s Ryan. Good to talk to you. Yes, you’re right. Some of our competitors for a while now have been talking about premium revenue and that being a tailwind to their RASM performance. And I think that it probably has a material impact on their RASM performance that our business model just we don’t participate in that premium revenue stream to any of the same degree that they do. However, having said that, our ancillary revenue in the second quarter as an example was a record. It was a very good quarter for EarlyBird. EarlyBird had been lagging a little bit through the pandemic recovery, but EarlyBird, it performed very well in the second quarter. Upgraded boarding, we added the ability in the third quarter of last year to purchase upgraded boarding on digital -- on your mobile device. Take rates have tripled since that point. And so, we’ve had very strong upgraded boarding revenue over the course of the last year. And we’ve been able to maintain the price and grow the price actually some on upgraded boarding and EarlyBird as well. So, ancillary revenue is definitely a high point for us in the quarter. It’s just we don’t participate at the same level from a premium revenue standpoint as some of our competitors do. Related to your last question on the ability to buy A-List status, we have historically -- we run campaigns, we call those tier qualifying points, the ability to kind of top off -- pay a little bit and top off your tier qualifying points to get to A-List, A-List Preferred. That’s nothing new. We’ve recently run some of those campaigns, but we’ve done those historically in the past as well.

Ryan Green:

Yes, we generate hundreds of millions of dollars from those boarding products on an annual basis. And like I said, we just had a record here in the second quarter. So those revenues continue to grow.

Operator:

Our next question will come from Leslie Josephs with CNBC.

Ryan Green:

Yes. Hey Leslie, it’s Ryan. So certainly, there is a RASM headwind with the capacity growth that’s a little bit -- or that’s above seasonal norms in the third quarter. So, there’s definitely a headwind there. But if you take third quarter on balance and just look at the demand in place, I’m very encouraged by where the third quarter sits today. We are anticipating a record third quarter revenue here over the next couple of months. We have more bookings in place actually at this point in the curve for third quarter than we had at the same time -- same point in time in the curve for second quarter. We had an all-time record fare sale in June for our fall travel. We had top 10 booking days during that fare sale and including our all-time record for bookings taken in a single day. And that compares to -- even when we open up schedules for the summer or for the holidays, we took more bookings for the fall during the fare sale than we have any other day in our history. So, we’ve got a tremendous base of bookings in place for the fall. I think that that shows a lot of demand for the Southwest Airlines product, like we’ve talked about on the call. And from a fare standpoint, July is roughly booked at this point and the strong fare environment from the second quarter has persisted here into July. So, I think that while RASM is decelerating here in the third quarter, we do have the capacity headwinds. But when you compare that to some of the domestic RASM of our peers, I think the way we’re shaping up looks favorable.

Alison Sider:

I guess, the pilots have been talking a lot about attrition in the last couple of months. I’m curious if that’s something you’re seeing in your data, if it’s at a level that’s unusual or concerning? And then, I guess, if so, like do you have a sense of when in their careers are pilot leaving or a sense of why?

Bob Jordan:

Yes. I mean, it’s definitely higher than normal, and again, as Andrew said, completely makes sense in the context of the hottest pilot market in history. But I think where that impacts the business, I mean we -- our plan was to hire 17 -- I think 1,700 pilots net this year. We’re still on that plan. And that, of course, was intended to fly the whole fleet, get all of our aircraft back up of the year. In the area, we’ll do that in the third quarter -- by the end of the third quarter, actually ahead of our original plan, which was the fourth quarter. So I feel good about all of this. And yes, I think the fact that the attrition is up a bit is not a surprise given this is the hottest market for pilots, I believe, in history.

David Slotnick:

Following up a little bit on what Leslie asked. It’s -- I understand where the RASM headwind would be. But just considering that -- considering the capacity growth, do you think that they are going to stay similar or come down? Do you think pricing power is going to fall a little bit in the fall? And then, just secondary to that, are you expecting to see really any kind of return to the shoulder season seasonality that we had pre pandemic, or are you really seeing just leisure travel staying at study levels into the fall? Thanks.

Bob Jordan:

And I think we probably mentioned this several times, but if you look at our fare performance in the second quarter and sort of run that through, you just have to be aware of this breakage change from last year, about $300 million impact that impacted year-over-year the fare calculation. So if you just look at average fares year-over-year, I think it looks like they’re down 2.7%. If you normalize that for the breakage impact last year, they’re actually up this year, 2.2%. They’re actually up. So I just -- as you think about our fares and extrapolating that, just want to make sure you know that because they are actually up year-over-year.

Ryan Green:

I think I just would characterize what we’re seeing in terms of demand and the bookings that we have in place for the fall that would -- that tells me that we’ve got a strong third quarter ahead of us here.

Linda Rutherford:

Thank you, Anthony. If you all have any other follow-up questions, you can reach our communications team at 214-792-4847 or through our media website portal at www.swamedia.com. Thank you all so much.

Operator:

Good day, and welcome to the Southwest Airlines First Quarter 2023 Conference Call. My name is Chad, 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. After today’s prepared remarks, there will be an opportunity to ask questions. [Operator Instructions] At this time, I’d like to turn the call over to Mr. Ryan Martinez, Vice President of Investor Relations. Please go ahead, sir.

Bob Jordan:

Thank you, Ryan, and thank you, everyone, for joining us this morning. We incurred a first quarter net loss that was in line with our expectations, driven by a $380 million pretax negative financial impact related to the December operational disruption, roughly $325 million of that was from lower revenue in January and February, much of that cancellations of holiday return trips. We saw a strong rebound in revenue trends in March, resulting in record first quarter revenues despite the impact of the December disruption. Travel demand remained strong thus far, but we remain mindful of the uncertain economic environment. You have to be given all the headlines and trends we are seeing across many industries. We have tough year-over-year revenue comparisons here in the second quarter with last year’s domestic revenue environment getting a boost from international closures. Taking that into consideration, demand, particularly leisure continues to show strength as we head into the busy summer travel season. Our cost outlook is higher this year due to a few moving parts, as we are making additional investments in the operation based on our learnings from December. I won’t go through all of our key findings and work to shore up our winter preparedness because we’ve done that a few times now, I am very proud of our people for the operation they have delivered this year and for the relentless focus on executing our plan to fortify the operation in preparation for winter 2023. Despite the near-term cost pressures, we have not lost focus on our goal to effectively manage the real inflationary cost increases we are seeing and equally as important, maintain our competitive cost position. As we look ahead, we currently expect solid profits here in Q2. We continue to expect solid profits for full year with the goal to grow full year margins and ROIC year-over-year as well as have our route network roughly restored by year-end. We are reducing our full year 2023 growth plans due to a lower planning assumption for Boeing MAX deliveries this year. This relates to the recent news of further supply chain challenges at Boeing. The outcome is a reduction to our 2023 capacity and CapEx outlook, and we are currently reevaluating our hiring needs relative to our most recent expectation to hire more than 7,000 net new employees this year. We will be moderating our overall hiring plans as we get into the second half of 2023. In the meantime, we are most focused on revisions to our second half 2023 flight schedules to account for fewer aircraft, which Andrew will cover in more detail. I’m very proud of the progress we are making on our customer experience enhancements. As a reminder, we are investing in three onboard initiatives, enhanced Wi-Fi, in-seat power and larger overhead bins. In early March, our first new aircraft with hardware from our new Wi-Fi provider, Viasat, entered revenue service. By third quarter, we expect all of our existing aircraft to be flying with upgraded Wi-Fi and Anuvu hardware, offering increased speed and reliability. So just great progress on that front. Our new MAX 8 deliveries are coming into service with in-seat power and larger overhead bins. So, those are already entering service as well. We’re also very-focused on mobile and other enhancements on our technology road map to offer more self-service options for our customers to give them more flexibility and ease during their journey. Highlighting one of our stronghold markets, Southwest is the number one airline in Kansas City, growing from 6 flights in 1982 to 75 flights today. And I’m proud to say that our service in Kansas City is now fully restored the pre-pandemic levels. We recently celebrated the opening of the new Kansas City Airport in February, and we serve as the Chair of the Airport and Airlines Affairs Committee. We really appreciated the opportunity to partner with the airport to deliver a beautiful new terminal that will serve us and the community well for a very long period of time. It was a great partnership all the way around, and it is a beautiful facility. We continue to work hard on labor agreements for our people and we continue to make progress. We just reached a tentative agreement with TWU 550, which represents our Meteorologists, and I want to commend both negotiating committees for the spirit of cooperation that led to that agreement. We remain focused on negotiations with the union representing our ramp in ops employees and mediation with unions representing our pilots and flight attendants and remain committed to competitive market compensation packages for our people. We are very eager to get new contracts and have a significant amount of wage rate increases and have already been accrued and set aside and we look forward to rewarding those remaining groups soon. In closing, I’m just so very proud of our people. They are the hardest Southwest Airlines, and they deliver day in and day out for each other and for our customers. And despite the negative impacts in Q1, we believe we still have a solid plan for 2023. We are carefully managing the business in the near term, and we continue to believe in our long-term strategy and set of initiatives. And with that, I will turn it over to Tammy.

Ryan Green:

Thank you, Tammy. I’ll take a minute to expand on the commentary in our press release this morning and provide more color on our first quarter results and second quarter outlook. Our first quarter revenue trends remained steady and within expectations throughout the quarter, with first quarter revenue growth of 21.6% year-over-year. This was right at the midpoint of guidance going back to our January earnings call. And as a reminder, we had two competing storylines in first quarter that played out as we anticipated. First, we incurred an estimated $325 million negative revenue impact that was isolated to January and February. This was the result of cancellations for return holiday travel and a slowdown in bookings following our operational disruptions in late December. We believe these negative revenue impacts have subsided and are now behind us. We saw the reverse over the second half of the quarter and witnessed strong revenue trends throughout March. That showed up in terms of overall demand, rapid reward redemptions and yields. And so, even with the negative revenue impact at the beginning of the quarter, we had record first quarter operating revenues of $5.7 billion and record first quarter RASM of $0.15. Managed business revenues also improved significantly throughout the quarter and by March were nearly restored to March 2019 levels, just shy of 100%. That is tremendous progress, and it feels like we’re very close to full corporate revenue recovery at Southwest. Our managed business revenues have trended ahead of the industry due to our revenue initiatives in the corporate space, and this is driving new corporate accounts which of course, opens up access to incremental new pools of corporate passengers. And while the managed business recovery still isn’t consistent across traveler sector or size of accounts, we expect further sequential improvement in managed business revenues from first quarter to second quarter. How the demand comes in may be a bit choppy with more volumes further out in the booking curve, but this doesn’t seem to be unique in the industry based on ARC data. Regardless, we expect to continue making market share gains in the managed business space as we gained another point of market share in first quarter while we expect to grow passenger volume from our initiatives on very solid yields. In terms of the leisure booking curve, it has moved further out from what we saw last summer and fall and seems to have more or less normalized to pre-pandemic levels. Leisure demands and yields, which are well above pre-pandemic levels, continue to be strong heading into summer, and we’re currently seeing the sequential improvements in operating revenue and yields that we would expect in the seasonally strong second quarter. All in all, the overall domestic revenue environment remains strong, and our initiatives are performing in line with our expectations. So in short, we’re pleased with what we’re currently seeing. Our second quarter RASM guidance range of down 8% to 11% contains a 4.5-point year-over-year headwind. As a reminder, second quarter 2022 operating revenues included approximately $300 million of additional breakage revenue, a higher-than-normal amount related to flight credits issued during the pandemic that were soon set to expire as well as our later policy change to eliminate flight credit expiration dates. Adjusting for this headwind, our second quarter RASM guidance would be down around 5%, and we’re pleased with the core trends we’re seeing. This year-over-year headwind will not persist in the second half of 2023. We’re also pleased with the performance of our Rapid Rewards program, co-brand credit card and all ancillary products in first quarter, and we’re expecting another strong year-over-year performance in second quarter. We saw a first quarter record of new Rapid Rewards members added to the program and also had a first quarter record of ancillary revenue per passenger. And finally, our portfolio of new cities, including Hawaii, continue to mature. I’m also proud to announce that we have completed the selection and rollout of our new revenue management system, which is the Amadeus Network Revenue Management product. Our implementation timing is slightly ahead of our previous timeline of mid-2023 and we’re very pleased with the revenue results we saw from Amadeus during the production pilot. We are encouraged about the future opportunity for incremental revenue, which really starts in earnest in third quarter as the new Amadeus product is now fully implemented and is currently managing all future bookings and departure dates. This is just an excellent job by our revenue management team to skillfully manage multiple revenue management systems as we recovered from the pandemic and which ultimately led to this selection. I’m just very proud of the team. In closing, I want to mention that we have watched our brand metrics very closely since the disruption and our scores have improved significantly throughout the first quarter. We are very fortunate to have a loyal customer base at Southwest that we do not take for granted, and we’ll continue to communicate to them about our remediation plans and aim to consistently deliver the hospitality, customer service and operational reliability they are accustomed to from us at Southwest. And with that, I’ll turn it over to Andrew.

Ryan Martinez:

Thank you, Andrew. We have analysts queued up for questions. So, a quick reminder to please keep your questions to one and a follow-up, if needed. Operator, please go ahead and begin our analyst Q&A.

Duane Pfennigwerth:

Hey. Thanks. Just on costs, I totally appreciate you have a business to run and there’s moving pieces. But the slow drip of these CASM revisions has been painful for your investors. And so, my question is, do you feel like the band-aid is finally being ripped off today? And what are the circumstances that would cause you to raise your CASM expectations again this year?

Tammy Romo:

Yes. No, I think you covered it, Bob. Yes, the primary cost pressure is salary, wages and benefits, and that’s clearly driven by inflationary pressures here. So, certainly not unique to us. And capacity, as always, is going to have an impact on our CASM-X at the end of the day. But we -- our second quarter cost here, at least the profile should be pretty fully loaded, so to speak. That said, we’re always going to look for opportunities to improve. We have our ongoing operations modernization plan. So, we’ve incorporated that best we can. And of course, as we move forward, we have opportunities as we gain operating leverage with the network. So, understand the question. But when we have capacity changes, that typically does drive some change in CASM-X. So, that’s the primary culprit here as we look at 2023.

Duane Pfennigwerth:

Appreciate those thoughts. And then maybe just a quick follow-up on breakage. I hope this is the last quarter we hear about it. But given the dynamics in 2Q, do you think the June quarter will be your weakest year-over-year RASM -- down RASM quarter? And what RASM outcome are you managing in the back half of the year too? Thank you for taking the questions.

Bob Jordan:

Yes. The only thing I’ll add there, Duane, is that it’d be tough. I think clearly, the financial headlines and the macro environment, we’ve got to be mindful of that and what’s happening around this year. But so far, we’ve seen no impact on air travel, the revenue looks good here for the second quarter and what we can see, it’s probably tough to speculate beyond second quarter and into the second half of the year. We’ll just have to -- as we get kind of mid-July timeframe and get a view into mid-August and into the fall, we’ll have a better idea of how things are shaping up beyond the sequentially strong second quarter. But again, nothing but strong trends here as we look forward and out into the summer.

Scott Group:

So, Andrew, I want to follow up on the capacity cuts. When you were talking through the point of capacity, you said some -- maybe I misheard sure, but I thought you said a point out of Q3 and then like 6 points or something out of Q4. I didn’t really understand it. And then more importantly, what does this mean for capacity next year? Is there now more growth next year to catch up? Is there less growth because we’re just going to continue this? How do I think about that?

Bob Jordan:

Yes. I think the other thing just to point out is maybe related is the -- we talked a lot about what’s constraining the airline. And right now, that is pilot hiring. So, we have aircraft effectively that we are not producing capacity out of today because the constraint is just pilots. A lot of -- a lot of carriers are dealing with this, and that was going to true up roughly at the end of the year. Now, with the order book dropping, the deliveries issue dropping from 90 to 70, that’s the point at which the pilot constraint turns into an aircraft constraint is -- will definitely be earlier. It will be post summer, late third quarter, early fourth quarter. We’ll flip to aircraft constrained from pilot constrained. And we’ll just take that into account as we -- again, as we think about hiring and planning for this year and then planning again for next year because again, a lot of the hiring is planning for growth next year. So number one, the constraint will flip to aircraft constrained. And then second, we want -- again, as Andrew said, we want orderly growth. We don’t want 152 aircraft next year. We want to grow. We have a lot of opportunities, but we want that growth to be orderly and measured and as consistent as we can be year to year to year. So hopefully, that helps with just thinking about capacity next year and how that relates to the order book. We have work to do with Boeing, obviously. The news is still pretty fresh about 10 days or so all we have work to do to -- with Boeing to just think about how to reflow the order book here, and we’ll get through that and keep you informed as we do that.

Andrew Watterson:

Yes, Scott. I think if you look here, we’ve looked at this a lot of different ways and you think about what the guide and what revenue performance is looking like here as we go into the second quarter. The first quarter has got a lot of noise in there, whether you’ve got Omicron last year or you’ve got our disruption this year. And also, in addition to that there is a lot of international tailwinds out there in the industry that while international is strong for us, we just -- obviously, we don’t have as much exposure to that as some of our peers in the industry. And so, when you isolate to the domestic performance and you go back to pre-pandemic, whether you’re looking at 2018, 2019, and kind of projecting that forward in terms of growth and revenue performance. When we look at fourth quarter, no matter really how you cut it, fourth quarter to second quarter, first quarter to second quarter, we’re pleased with how that ends up, what that comparison looks like. And it looks to us like it’s relatively in line with what else is out there.

Operator:

The next question is from Jamie Baker from JPMorgan. Please go ahead.

Bob Jordan:

Yes. I think the -- I think that’s a really good way to summarize how we’re thinking about it as well, just in terms of sequential -- think about the sequential trend there. But yes, we feel like the revenue impact from the ops disruption, most of it was holiday return travel that obviously was canceled because the outbounds weren’t there. And we had some book away, it feels like it was isolated to January and February. March was really strong. We had double-digit margins in March, very strong demand. As Ryan pointed out, we had record additions in terms of rapid reward members in the first quarter. So, there’s a lot of evidence of strength. As you look into the second quarter, we don’t see any evidence of book away at this point. The trends are strong. Now, we have work to do. Let me just acknowledge that when you look at just -- we do a lot of brand surveys. And as we look at all of that, there is work to do across the year to continue to restore some of our brand health as completely expected following what happened in December. The numbers are improved tremendously from December through April here. We’re seeing that moves up very, very quickly. But we need to run a reliable operation for our customers. We’re doing that. We were number two in the first quarter and had completion factors that were up 2 points year-over-year, on-time performance that I think was up 3 points quarter-over-quarter. We are focused on delivering a wonderful product with great hospitalities -- hospitality from our employees. We need to execute. But no, there’s no evidence at this point that the book away is continuing. Trends are strong, but we do have work to do on the brand front.

Jamie Baker:

So, that’s kind of a good segue, I guess, into my next question. So from a passenger perspective, or let’s say, a new passenger. So somebody that’s just starting to fly, they’ve reached that economic level or they’re just entering the workforce, whatever. Somebody that’s not already loyal, what’s the value proposition for flying Southwest these days? I mean, I get it in a point-to-point -- for point-to-point operations, many instances where you’re going to be up, your only competitors are connecting flights. So, that’s a no-brainer. But in truly competitive markets, if the price is equal and if a passenger isn’t already led to your brand or your credit card ecosystem, what does Southwest do to attract that first-time buyer?

Andrew Watterson:

No. I largely would say the same exact thing. The things that have made Southwest Airlines great historically, in my mind, are only better today, and I think customers understand that. And despite what happened in December, and Bob said many times that that’s not going to define us going forward, and it doesn’t. When you look at our brand scores, customers new and existing give us a whole lot of credit. We’re by far the most customer-friendly and business-friendly airline in terms of great service at a great price with the most rewarding frequent flyer program. We win time and time again. More seats are redemption seats on Southwest Airlines than any of our competitors, not even close. So we’re by far the most rewarding airline. And when you look at our stable of customer-friendly policies with bags fly free, no change fees forever regardless of the fare that you fly and we’re even making it more flexible with flight credits that don’t expire. I think the value proposition is only getting better.

Operator:

And the next question will come from Savi Syth from Raymond James.

Tammy Romo:

Yes. Sure, Matt. And just sharing a few thoughts. We’re -- so again, first of all, the cost pressures are not unique to Southwest. But even with those inflationary pressures, we are bending our CASM-X down this year and we still feel good about our competitive position. So, we’ve got the labor contracts accrued. We’ve got those accrued in our long term -- or reflected in our long-term targets. And we are very focused on bending our cost down again in 2024. Specific to your question, we do have some onetime costs here this year related to the operational disruptions, and that’s probably in the $100 million to $150 million range, and that shouldn’t repeat next year. So, as Bob covered very thoroughly, the -- what we need to focus on now is solidifying our fleet plan and our capacity plan for next year. But as we look ahead, driving our unit cost down is certainly our goal. And as we get further in our planning, obviously, we’ll provide more guidance there.

Matt Roberts:

And then, sorry to elaborate on one question that was asked earlier as well. But in terms of the capacity plan, at the Investor Day in December, it seemed like it was not dependent on aircraft deliveries and that the initial guide provided then was firm despite any delivery delays. So what’s the difference now? Is that based on the current environment and outlook that you feel the need to scale back, or is there something else?

Operator:

And the next question will be from Helane Becker from TD Cowen. Please go ahead.

Ryan Green:

Yes. Helane, it’s Ryan. We measure Net Promoter Score and focus on it on a weekly basis, if not on a daily basis. And there’s really -- we track actually two types of Net Promoter Scores. One is more as a brand overall and is a longer term measure. And then the other is based on the customers’ trip that they just took based on the trip you just took would you recommend Southwest Airlines. And on the longer-term brand measures, we’ve got trackers in place and like we said, some of those -- those scores have improved as we’ve gone through throughout the quarter here. And Bob mentioned, overall, we’re going to have to continue to focus on those longer term measures and just continue to execute to see continued upward momentum on the brand Net Promoter Score. When it gets to the actual trip Net Promoter Score, which is a little bit more near term in terms of how are we performing today, those scores have improved over the course of the first quarter really is a function of how well we have been operating over the course of the first quarter. So, we continue to operate well. Those scores should continue to improve over time as well -- in addition to the enhancements that we’re making in the product, and you see those show up in Net Promoter Scores. As an example, on the aircraft that we have where we have improved and enhanced Wi-Fi, the investments are paying off. Net Promoter Scores are up. The scores on the aircraft where we have the larger overhead bins, those Net Promoter Scores on those aircraft are also up. So, as we make improvements and enhancements to the product and as we continue to execute and operate reliably, those scores should come up -- continue to come up over time.

Bob Jordan:

Yes. And I’ll let -- Helane, thank you so much for the question. I’ll let Andrew weigh in, in detail. But yes, I didn’t call it out specifically because I mean we have a large and complex network. And of course, there -- we work issues every single day. So, we’ve talked about Florida before, you obviously are very aware of the issues that have been discussed for carriers at certain -- New York, but yes, we’re experiencing issues in Vegas with the reduction in available runway capacity, and we’re working with the FAA and the ATC to deal with that. But it’s one component of things that happen every single day, but no, absolutely is impacting certain days our on-time performance. But Andrew, you want to give any detail?

Operator:

The next question is from Conor Cunningham from Melius Research. Please go ahead.

Andrew Watterson:

So within restoration, you have -- restoration would be like what we flew before. And that’s one bucket and say, okay, we want to restore our cities to the level of activity and the roughly the root network they had before COVID. So, that’s when we say restoration we’re doing that. We had the 18 new cities in the Hawaii expansion we did and we modified that at the margin. And there’s airports where we currently operate and they’ve had expansions with dates and infrastructure. So, we’ve added more growth into there. So, it’s that third bucket, so at Denver, Phoenix, where we had new gates and we’re putting additional growth and they’re above what they were in pre-COVID. So, they’re more than restored. And so, that kind of places where we were growing above restoration because we had additional infrastructure, those will be less than they would have been if we had all these aircraft. I’m not saying it will be Phoenix and Denver, but I’ll use those examples. So I put in three buckets. The COVID expansions and the 18 new cities in Hawaii, the second bucket being restoring what we flew before. And the third being this newer stuff and the cities we already have a big customer base, that’s where you’ll see the flex then so that we can simultaneously keep the COVID stuff and restore our network.

Andrew Watterson:

On the growth, there will be carryover. There’s stuff that we will start in the back half of the year with the aircraft that are coming, and that will be a carryover growth into next year. So that will be -- you’ll quickly be able to calculate that. But then the additional growth next year, that’s really depending on what Bob was talking about with reflowing the aircraft. We’ve got the 152 mathematically that could come that would be too much to ingest. We want an orderly growth. And so that, in addition to the carryover, that’s something that’s yet to be determined, but we -- it involves negotiating with Boeing and how the aircraft would flow in.

Bob Jordan:

Yes. And we’re early -- obviously, it’s really early to be talking about 2024. And it’s early to be talking about the result of the discussion with Boeing because we’re just now beginning the discussion because the impact is new. I think the argument is a couple of things, is one we -- the COVID, we all work -- dealt with COVID and the capacity bounced up and down and up. And so it doesn’t help to move around so much up and down year to year to year because it’s just -- it’s hard to manage that lumpiness or choppiness with the -- you’ve seen our hiring numbers for last year and the planned hiring numbers initially for this year. That level of growth and hiring in advance for the level of deliveries we had originally planned, it just adds cost because you’re constantly hiring ahead for anticipation of what’s coming in the next year. So moving to something that is much more predictable. Again, we want to grow. We’ve got a lot of opportunities. We want to grow. We just want that growth to be measured and orderly. And working with Boeing to come to a point where it’s much more predictable year to year to year as we reflow the order book, I think, will be very, very helpful. It will be helpful in terms of how we manage ourselves here. It will be helpful in terms of how we plan and manage our costs. It will give us time to bring out inefficiencies. Again, I was talking about the advanced hiring is just one example -- an example to prepare for high levels of growth. It would give us time to settle that out, bring that out. It will give us time to work on operating leverage where we can add capacity into places where we have gaps, we can add that capacity at much lower cost. So, I think still good growth, but managed, measured, repeatable growth is much better for the Company. And that’s the intent is to just take the plan, reflow and be much more predictable and less choppy year-to-year-to-year.

David Vernon:

Ryan, can you talk a little bit about what kind of load factors embedded in the 2Q guide? It just seems like when looking across the other airlines, they’re one and three quarter basis points ahead of where Southwest finished first quarter in load factor. And maybe as a follow-up to that, Bob and Andrew, we’re talking about restoring the network and getting back to where we were. I mean if the demand isn’t there and load factors under pressure, why wouldn’t we rethink that a little bit, especially if we’re constrained in getting resources and having difficulty kind of getting the operation up to that level? If there’s a little bit of a sign of demand with this, wouldn’t we want to back away from that restoration plan a little bit?

Andrew Watterson:

I’d also add to -- there’s a comp here. If you think about this time last year, what we did is we -- as we did in COVID, we would republish our schedules because demand was so vacillatory. And so what that means is you sell, sell, sell and then you republish and you consolidate the customer has already purchased on to a fewer number of flights, which kind of artificially pushes up your load factor. That is a poor customer experience. We committed to stop doing that about a year ago, and so we have not done that. And so, that’s going to make a load factor like-for-like more difficult. So, if our competitors largely have continued that practice, but back to kind to Jamie’s question about why people choose us, we want a good customer experience. That means not changing the flight that we’ve already sold them. Secondly, I would say that Ryan talked about, they put in a new revenue management system. So -- and it’s been managing things for a while. I would not necessarily assume that the load factor would have been the right choice, so to say, for the RASM performance. And so, it may make different decisions with regards to load factor compared to our old system, and therefore, that element may be a little different. And the third element is we fly two different aircraft sizes, the 700 sizes and 800, and we’ve been taking 800s because of 700s have not been delivered yet. And so that will, in many markets or some markets mean we have a too big of an aircraft at the current level, if you will. As we get our network completely restored, you can fill those extra seats with extra connections, but to do the extra connections, you need that restoration. So, a short haul today may not be as full because there’s not an opportunity to connect to a longer haul that was there before. So as the network gets restored, that will help close some of that load factor gap on those shorter flights that are missing connectivity.

Ryan Martinez:

Okay. Dave, I’ll assume, you’re done there. Thanks, everybody, for joining. That wraps up the analyst portion of our call today, and I will turn it back over to the operator.

Linda Rutherford:

Thank you, Chad, and I’d like to welcome members of the media to our call today. We can go ahead and get started with the Q&A portion if you will give them instructions for queue up.

Alexandra Skores:

I’m wondering, we talked a little bit -- a lot about growth in demand over this call. I’m wondering if you could talk in relation to how that’s affecting airfares. And how you’re looking at that going into the summer travel even.

Bob Jordan:

Ryan, as you -- I’m just looking for the fact, my memory is in the first quarter, peers were roughly 5%. 5, 6 or I think it’s the number I’ve got in my head. And again, this is not a direct correlation in -- but costs are up materially. We talked a lot about just regular inflation. You see it every day, everywhere. There’s a lot of labor and wage inflation. We’ve talked a lot about our costs and accruing for labor contracts. We’re happy to pay our people. We want to pay our people great, but there is real wage and supply chain and other inflation year-over-year, first quarter ‘22 to first quarter ‘23. Our operating revenues were up 21.6%, which is awesome on 10% capacity. But fuel was up 54%. So just the other -- the flip side of fares is the -- you raise fares to manage your cost and there are real cost increases there. So I just want to point that out as well.

Alison Sider:

I guess, on Boeing on this latest delivery issue. I guess, how has your experience been dealing with Boeing on this one? It seems kind of -- it’s not the first time you’ve dealt with an issue like this and just curious to know with Boeing if their communication, their ability to deliver, if those things have improved.

Alison Sider:

And I guess turning to the sort of the state of near misses or runway incursions the last couple of months across the industry, given that there doesn’t seem to be a real clear single cause or single common denominator in all of these incidents, does that -- what is that -- are there things that you can do or you have been doing to kind of try and address those or prevent future incidents sort of given that they’re not -- they haven’t all been the same?

Operator:

The next question will be from Dawn Gilbertson from The Wall Street Journal.

Ryan Green:

Yes. Hey Don. I think it’s really what you would expect in terms of where customers want to go this summer. International is -- demand is smoking hot for international destinations. I mean, obviously, we participate in that to a lesser degree than what some of our competitors do. But international is really strong. And then -- it’s really the typical summer destinations that you would expect. Florida -- into the Southwest, Hawaii Mainland, our Hawaii franchise is performing very well. So there’s no real huge surprises in the data when you kind of double-click as to where customers want to go. It’s kind of per normal.

Ryan Green:

Wish I could give you a ...

Dawn Gilbertson:

What about indications? I know that that’s done by another [ph] company, but are you seeing -- is there a shift to vacation packages more or even on your own website? Anything you’ve noticed in the appetite for vacation packages?

Operator:

And the next question is from Leslie Josephs from CNBC. Please go ahead.

Bob Jordan:

Those are two very different questions. So on the hiring, I would just tell you, again, we’re really early in this process with Boeing to understand the impacts specifically, and we pick the 70 in terms of planning or deliveries for 2023, but in terms of understanding exactly where are they -- and then a lot of your hiring again is in advance. So we need to understand what 2024 looks like. I just want to acknowledge today that it’s a significant enough change to the delivery schedule and then therefore, the capacity as well that we are going to go back through our hiring plans, and they will be moderated. I can’t tell you exactly where that is, obviously, because we were highly constrained for the year, and now we’re still likely pilot constrained through, call it, early fourth quarter is my best guess. It’s the group that we probably continue to press to keep the hiring on, at least in the near term here until we flip to aircraft constrained. But no, I don’t have any specifics other than just acknowledging that as the capacity is coming down, we’re going to go back and look at our headcount needs. I mean, it’s prudent to do that. It’s the right thing to do for cost. It’s the right thing to do for efficiency. We’re known for our efficiency, and we’ll go back and do that and we’ll do that quickly. What was your second question?

Bob Jordan:

Premium. I forgot. My apologies. We are always -- I think we talked about things like assigned seating before. It’s just as an example that we periodically -- we regularly study and survey our customers to understand what’s important to them. What do they want in our products, that includes potential changes -- and so we -- and that we periodically do deeper studies on things like assigned seating. And so far, historically, that’s always told us that our customers love our product. And you’ve seen us -- you have seen us add things now like power and then the larger bins and enhancing the Wi-Fi, and that comes from our customers telling us that’s what they want. Now flipping to, well, what work is underway. I’ll just tell you, there isn’t -- there is no work underway to think about a assigned seating to think about premium in the cabin. It doesn’t mean we won’t do that at some point. We are working -- we do work regularly on things like ancillary. So the upgraded boarding product that we -- a few quarters ago, now allow you to buy on the mobile device, and it’s worked really, really well. Those are enhancements that we’re looking at and continue to look at service to our customers. But no, there’s no work underway around premium cabin, assign seating those kinds of things. Our customers love our product. It’s all about being reliable. It’s all about providing terrific service and hospitality. It’s all about putting into place the things that we’ve already committed to, like power, larger bins, enhanced Wi-Fi, continuing to push on digital self-service and then really bring out efficiency here. We’ve grown quickly. We’ve added a lot of people, and we want to work very hard to regain our efficiency, increase margins and ROIC and returns year-over-year and get back, in some cases, to the -- work towards the goals that we laid out at Investor Day, but there’s no work underway in the premium side.

Holden Wilen:

I believe it was at Investor Day where you guys said that you’ve added like more than 8,000 new corporate accounts last year. I’m just wondering, as you continue to see the managed business travel recovery in the first quarter, how many more accounts you were able to add during that period? And if you can point to any specific factors as to why you think managed business travel is continuing to recover for you guys. Thanks.

Bob Jordan:

Well, we put a lot of emphasis on building the team over years now, adding technology like the GDS access. And it’s -- I mean, it will pay off over time. I think as Ryan said, I think that’s the reason you’ve seen us restore or nearly restore ourselves in March here, the pre-pandemic first airline to do that. And Ryan check me, but I think we’ve had 9 of our 10 best managed business booking days in the last two weeks in our history...

Bob Jordan:

In the month of April. So we’re just -- so you’re seeing that strength is continuing. And I do think it’s because of our investments and winning share.

Operator:

And ladies and gentlemen, we have time for one more question. And we’ll take our last question from David Slotnick from TPG. Please go ahead.

Ryan Green:

Yes. David, I’m not sure that I caught all of the question there, you were breaking up a bit. But I think the question was others are maybe changing their overbooking policies and kind of what are we doing in that regard. We do not overlook our aircraft. We haven’t overbooked. We have not done any of that since 2017. So, we’re going on 5 or 6 years here of not overbooking. It does happen occasionally when we have to downgauge an aircraft from an aircraft with more seats to fewer seats or for rate-restricted, things like that. We may have an oversell that we have to deal with. But those are few and far between. And so, we’re not -- going forward, we’re not looking at dealing with any sort of materialization rates or any change in the booking curve by changing our overbooking policy.

Operator:

And this concludes our question-and-answer session. I would like to turn the conference back over to Ms. Rutherford for any closing remarks.

Operator:

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

Operator:

Good day, and welcome to the Southwest Airlines Fourth Quarter and Full Year 2022 Conference Call. My name is Chad 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. After today's prepared remarks, there will be an opportunity to ask questions. [Operator Instructions]. At this time, I would like to turn the call over to Mr. Ryan Martinez, Vice President of Investor Relations. Please go ahead, sir.

Bob Jordan :

All right. Thank you, Ryan. I appreciate everybody joining us this morning. Well, we're disappointed to report a Q4 net loss, as we were on track to produce a healthy fourth quarter profit prior to December 21. We provided an 8-K investor update earlier this month that quantify the preliminary estimate of the financial impacts, so a Q4 loss is likely not a surprise. But I would like to take a few minutes to talk about the operational disruptions. And first and foremost, I want to apologize again to our customers and our employees for the impact the operational disruption had on them and on their holiday plans. We are intensely focused on reducing the risk of repeating that type of operational event, again, like we had last month, and we are highly focused on our customers and our plan going forward. And customer refunds and reimbursements remain a top focus. While not proud of what happened, I am very proud of our people and all that they have done to take care of our customers and their needs. Well, in terms of the events themselves, we canceled more than 16,700 flights from December the 21 to the December 31. The first few days through December the 23 were specific to the winter storm, and we began to have additional disruptions in the operation on December the 24. As the largest carrier in roughly half of the top 50 U.S. travel markets, we were impacted by rolling storms to an extraordinary degree. We experienced gridlock and many of our largest airports along with a high frequency of short notice cancellations, which created urgent and repeating efforts to repair the aircraft routings and then our pilot and flight attendant schedules. Given the overwhelming volume of flight cancellations over multiple days, combined with manual workstreams, we determined that the best course of action to get back on track operationally was to reduce our December 27 through December 29 flight activity by roughly two thirds. And that allowed us time to reset the operation to normal flight levels beginning on December the 30. But based on what we know at this point, our processes and technology generally worked as designed. But we were hit by an overwhelming volume of close in cancellations, which put us behind and creating crew solutions, which in turn pushed us to manual efforts and solutions and Andrew will cover that in detail more here in just a minute. So we've got several streams of work underway. Immediately following the disruption, we move swiftly to put mitigation efforts in place to reduce the risk of future operational disruptions and to help fortify our operational resilience. We created an early indicator dashboard that closely monitors operational health and signals and alert if we approach predefined operational thresholds. We established supplemental operational staffing that can quickly mobilize to support crew recovery efforts at the first sign of a potential workload backlog. We enhanced our existing tools for crew members to communicate electronically to crew scheduling during irregular operations. And we're in the process of swiftly updating and upgrading our crew recovery tools and system to solve the backlog repair of crew member schedules, which was one of the key issues during the disruption. With these short term risk mitigation steps in place or underway, we're taking additional steps to review the events and determine any additional changes to our plans. We worked early on with our Board of Directors and they've established an operations review committee that is working with our management to understand the events and help oversee the company's response. We've engaged a third-party global aviation firm Oliver Wyman, for a third-party assessment of the event and help make recommendations of additional mitigation elements for us to consider. And that work will conclude here over the next several weeks. And with that assessment and our own, we will reassess our 2023 plans, keeping in mind that we already had a robust operational modernization plan in place for 2023 and Andrew will walk you through that in greater detail as well. I want to reiterate that Southwest has a very long history of innovation and continuous improvement. We've been investing up to $1 billion per year on technology, both recurring and investment [spend] (ph) included and we have implemented numerous large scale technology and business projects over the past five years, including things like the first implementation of the Amadeus Reservation System in North America, co-developing an innovative network planning system that's now part of the Amadeus product portfolio, ETOPS certification and processes for Hawaii flying, new aircraft maintenance systems, a DDS platform capabilities and connection to three other platforms, a new [pair] (ph) product, and automated ancillary services capabilities, and we're in the process of wrapping up the replacement of our revenue management system, which actually involves three RM systems simultaneously in production, which is an absolute technical feat. That list is not meant to be comprehensive, but hopefully it gives you an idea of what we've done and what's underway. We're also currently budgeted to spend $1.3 billion of our 2023 annual operating plan on investments, upgrades and maintenance of our IT systems, which is higher than what we spent in 2022. The recent disruptions will likely accelerate some of our plans to enhance our processes and technology, but I suspect that the operational modernization opportunities that Andrew outlined at Investor Day have largely captured the key workstreams and we will dedicate the capital needed to execute in a timely and efficient manner. We currently plan to stick with our 2023 growth plans. We were appropriately staffed for our 2022 flight schedules including the holidays and we continue hiring this year to be appropriately staffed for our 2023 flight schedules. Our plans call for adding over 7,000 new employees in 2023, which is actually a decrease of nearly 40% from 2022 hiring levels. We have the order book from Boeing that we need in 2023. And with the short-term mitigation elements that we put in place, we believe we are well prepared to execute our network restoration plans this year. Nearly all planned 2023 capacity additions will go to restoring the network and adding breadth and depth in existing Southwest markets. And that network restoration should significantly help our operational resilience efforts over the long term. Andrew will also cover that in more detail. Finally, we continue to work hard on labor agreements for our people. And I'm very proud of the fact that we were able to reach agreements with several of our unions recently, including our flight instructors, our facilities maintenance techs, our customer service agents and, just earlier this week, a tentative agreement with our dispatchers. We continue negotiations with the unions representing our ramp and ops employees and mediation with unions representing our pilots and flight attendants. And we intend, as always, to have competitive market compensation packages for our people. In closing, we still made tremendous progress in 2022. And despite some impact here in Q1, we believe we still have a solid plan for 2023. We are holding ourselves accountable to the plans that we outlined at our early December Investor Day, and it is still our goal to achieve the long-term financial targets that we outlined. And I know that our people are up to the task. I'm just extremely proud of them for their dedication to the cause that is Southwest Airlines, and they remain absolutely our greatest asset, the heart and soul the company and a tremendous source of pride for me personally. And with that, I will turn it over to Andrew.

Tammy Romo:

Thank you, Andrew, and hello, everyone. I will provide a quick overview of our financial results and share some additional comment on our 2023 outlook. As a result of the operational disruptions in late December, driving a $620 million negative after-tax net impact, we reported a fourth quarter net loss of $226 million, excluding special items. These results are clearly disappointing and not where we expected to be. Our quarterly performance leading up to December 21 was strong and trending in line with our previous guidance expectation aside from CASM-X, which I will cover in a minute. As Bob mentioned, we still made tremendous progress in 2022 despite the operational setback in late December generating full year 2022 net income of $723 million, excluding special items. Despite the negative revenue impact from the flight cancellations in December, we generated record fourth quarter operating revenues. Brian will speak to our revenue performance and outlook here shortly, so I will turn to our cost performance and outlook. Beginning with fuel, our fuel hedge performed well last year, especially in a volatile market environment. In total, our full year 2022 fuel hedge benefit was roughly $950 million with roughly $170 million in fuel expense savings in fourth quarter alone. For 2023, we are 56% hedged in first quarter, 51% hedged in the second quarter and 47% hedged in second half 2023, which equates to 50% hedged for the full year. Based on the January 20 forward curve, we now estimate our first quarter fuel price to be in the $3.25 to $3.35 per gallon range, up $0.25 from our previous guidance and our full year 2023 fuel price to be in the $2.90 to $3 per gallon range, up $0.05 from our previous guidance. Our first quarter guidance includes $0.16 of hedging gains and a hedging premium expense of $0.06 per gallon. We recently added to our 2024 fuel hedge portfolio and are now 39% hedged with a fair market value of nearly $561 million in total for 2023 and 2024. We will continue to seek cost-effective opportunities to expand our hedging portfolio in 2024 with the goal to get to roughly 50% hedging protection. Moving to our non-fuel cost. We experienced a significant cost increase in fourth quarter primarily as a result of the December operational disruptions, including a lower capacity from the flight cancellations. The year over three-year negative impact to fourth quarter CASM, excluding special items, fuel and profit sharing, our CASM-X was 23 points. In addition to the impact from lower ASM, the majority of this headwind was driven by the estimated redemption value of rapid reward points offered to customers impacted as a gesture of goodwill and travel expense reimbursements to customers. There was also premium pay and additional compensation for employees, but that made up a much smaller portion of the 23-point CASM-X impact. Excluding the impact from the operational disruptions, our fourth quarter CASM-X was roughly 4 points higher than the high end of our previous guidance range of up 14% to 18% compared with fourth quarter 2019. This was primarily due to additional labor accruals at year-end. As a reminder, we have been accruing for all open labor contracts since April 1, 2022, and these accruals are dynamic as we continuously evaluate market compensation. Looking forward, we continue to experience year-over-year inflationary cost pressures as well as cost headwinds due to operating at suboptimal productivity levels. We now estimate first quarter CASM-X to increase in the range of 2% to 4% year-over-year, which is approximately 2 points higher than our previous guidance of flat to up 2%. This 2-point increase is due to the continuation of premium pay for a portion of January relating to the December operational disruptions as well as an increase in labor accruals for open contracts. For full year 2023, we now estimate CASM-X to decrease in the range of 6% to 8% year-over-year compared with previous guidance of down 1% to 3%. The vast majority of the change in guidance is related to the year-over-year impact from lower fourth quarter 2022 capacity as well as higher fourth quarter 2022 cost attributable to the December 2022 operational disruption. We have also increased our labor accruals this year, which results in a slight offset year-over-year. Putting aside the effects of the December operational disruptions, we continue to expect our second half 2023 CASM-X trends to improve from first half 2023 year-over-year. Turning to our fleet. We ended 2022 with 770 aircraft, which is net of 26-700 retirements. We received a total of 68 aircraft deliveries from Boeing MAX 8, which was two more than our previous expectation of 66 aircraft. However, we are still short 46 aircraft from the 114 contractually scheduled 2022 MAX deliveries due to Boeing supply chain challenges and the timing of the -7 certification. These 46 orders are reflected as 2023 deliveries in the order book included in our press release this morning. However, we don't expect to be caught up on MAX deliveries by the end of this year. We continue to expect 100 MAX-8s this year, which remains our planning assumption, and we continue to expect to retire 27 -700 aircraft which will bring our fleet count to 843 at the end of this year. We have also recently exercised options for delivery in 2024, as outlined in our press release. Our full year 2022 CapEx was $3.9 billion, relatively in line with our previous guidance. In regards to our CapEx plans for this year, we continue to estimate spend to be in the range of $4 billion to $4.5 billion, which includes $1.2 billion in non-aircraft capital spending. Bob and Andrew touched on our current thoughts regarding technology spend this year in light of the operational disruption. But I want to reiterate that we are focused on executing our operational modernization plans outlined at Investor Day, which includes our current expectation to spend approximately $1.3 billion this year, including both capital and recurring spend on technology investments, upgrades and system maintenance. And our total CapEx range should allow for additional CapEx investments as needed. Moving to our balance sheet. We ended the year with cash and short-term investments of $12.3 billion after paying a total of $3.1 billion to retire $2.9 million in principal of debt and finance lease obligations during 2022. This includes the $1.2 billion principal prepayment of our 2023 notes, which leaves a modest $85 million in scheduled debt repayments this year. Our leverage is at a very manageable 47%, which we expect to decline over the next several years. Our balance sheet remains strong, and we continue to be the only U.S. airline with an investment-grade rating by all three rating agencies. In closing, I am immensely proud of the progress our people made throughout 2022 and their continued resiliency through numerous unexpected challenges. While the last several weeks have been tough, we have not lost sight of the priorities and focus areas that we outlined at Investor Day. In addition to the operational modernization plans we already mentioned, we are eager to wrap up negotiations with all of our open contract labor groups. Although it's disappointing, we expect another loss in first quarter this year due to a carryover revenue drag from the operational disruption, we remain steadfast in our focus to generate consistent quarterly profitability. And even with the first quarter headwinds, our 2023 plan continues to support solid profits with year-over-year margin expansion for full year 2023. Furthermore, we remain determined to achieve our long-term financial targets to grow our profits, margins and returns while delivering on our commitment to provide outstanding customer service and reliable operations that have been a source of tremendous pride over our 51-year history. And with that, I will turn it over to Ryan.

Ryan Martinez:

Thank you, sir. We have analysts queued up for questions. So a quick reminder, to please keep your questions to one and a follow-up if needed. And operator, please go ahead and begin our analyst Q&A.

Ravi Shanker :

Thanks, good afternoon everyone. Bob, thanks to you and the team for all the detail. Again, there was a lot of detail there, but if you were to just take a step back and look at the bigger picture here, there have been a few operating issues for, I'd say, the last 18 months or so. Is this just a series of unfortunate events given unprecedented circumstances? Or do you take a step back and say, hey, we have not invested in kind of tech and systems and things that we should have. Now we're catching up and kind of going forward? I think in that kind of realization understanding sort of determines your response and maybe also kind of if the regulators are focusing on this kind of how they will react to it.

Andrew Watterson :

No, I think this functional gap was also -- other airlines use the software, and they had not asked for that gap to [be covered] (ph) there. So it was new for us. It's new for this tool at GE Digital has sold to not just us. And so it's not a common practice. It gets so far behind on issues resolved. In this situation, it did. We have a lot of medium-sized cities that are in the swathe of the weather. And we saw, as we got increased stress in the operation because of the cold weather, it led to incremental cancellations we talked about. We precanceled, as we always do, in large weather events. But then the larger that impacted -- larger-than-expected distress in the operation from the weather led us to more cancellations closer in, and that's what gave us a problem, which manifested in this kind of past issue that the solver could not take care of.

Ravi Shanker :

Got it. That is very clear. Thank you for additional color. Maybe as a quick follow-up. I think you said that the 2023 revenue impact seems to be isolated to Jan and Feb. What was the driver of that? Is that just kind of recovering the schedule to normal? Or did you see a buyer strike? And do you have any indication that, from a reputational standpoint -- because, obviously, we know that Southwest is one of the most beloved like airline brand in the country. Kind of are you seeing any eroding of that in customer confidence? Thank you.

Ryan Green :

Yeah. I'll just give some additional color here. The first quarter is a tale of two halves. In the first quarter -- the first half of the quarter is very low demand time period, and that was impacted by the cancellations like Bob mentioned. And then it's just very tough with the hangover from the operational event kind of the first couple of weeks in January to get real traction. We did not want -- if you go out and look at the fares that we have published for this time period, there are regular kind of routine promotional fares. We didn't think it would help to be overly promotional in this time period. But then when you get into the second half of the quarter and President's Day and beyond and kind of into March, as Bob mentioned, both loads and yields look like we were on plan. March right now is roughly 40% booked. So that's enough to give us a good read on the month. And if you just kind of take the load and yields where they sit today and project that out forward and kind of what we would expect from here and what that implies for March overall, I think we're going to be very pleased with the performance in the month of March. So we're not seeing any sort of elevated cancellation rates for March. As Bob mentioned, March performed very well, responded very well to the sale. And so it just feels like it's -- we're kind of back on plan here in March. And then if you look at managed business travels, it's very early in the managed business travel booking curve, but those -- what we can see, those also look encouraging. So yeah, so the second half of the quarter, I think we're going to hopefully get back to the momentum we were seeing in the fourth quarter before the event. And we'll continue to monitor customer sentiment as we go forward here. But yeah, the customers expect us to do the right thing here, but largely, they're loyal and sticking with us.

Operator:

The next question will be from Scott Group from Wolfe Research. Please go ahead.

Ryan Green :

It was a little hard to hear. It was a little hard to hear there, but I think that the question was really relative to the industry and performance do we expect to price any differently. I think we're not going to comment on forward pricing here beyond what's kind of out there on the shelf and what you all can see. But what I will say is that the go-to-market and promotional plan that we have executed thus far and thus far in this year is the exact same go-to-market and promotional plan that we had relative to before the event. So we're approaching things kind of per normal here. And I would expect, as we kind of get back on the plan in March and beyond, I expect that it will be just a normal year here in terms of how we manage things going forward. Yields -- loads and yields have been very strong. Going back to the post-Omicron environment last year, we had record yields in the fourth quarter even despite the event, and those yields would have been higher without the event. So we're -- it's a strong fare environment now, and I expect that to continue.

Scott Group :

Okay. And then hopefully, this sounds better. But I understand you don't think you need to cut capacity. But as you talk about kind of reduced risk, why not be a little bit maybe more prudent and cut some capacity and get through a period of better operations where you really ramp up the capacity?

Andrew Watterson :

I'd also say if you -- if one was worried about, can you operate this level of capacity, you would expect that to show up in your operating performance. And I mentioned that we were number two through Monday. I just got sitting here the updated numbers through yesterday, and we're number one in the industry in OTP for the month of January. For the month of December, we were number five out of 10 airlines even with the disruption, and we're number four going into the disruption, and we were number three during Thanksgiving, number three to the month of November. So it's obvious that we're able to operate the capacity that we have out there. It's not sitting out -- the fact we're above average in the industry with regard to that. So not showing that as a root cause. We're hesitant to make adjustments given that we think it could also be helpful as we go forward. But once again, we're going to get down to the root causes. And then when they show up, we will take actions based on the root causes. There's lots of solutions that people want to throw out there to us. But when you kind of take action on a potential solution and you don't understand if it addresses the problem, all you're doing is wasting resources and not necessarily addressing the problem. So we want to bottom out the problem even though it takes a little bit longer than people would like and then address those problems so it doesn't happen again.

Andrew Watterson :

Thank you.

Brandon Oglenski :

Hey, good afternoon. And thanks for taking my questions. So Andrew, maybe if I can follow up there. I mean, if I listen to this call, it sounds like you guys were properly staffed. The technology really wasn't the problem apart from this GE Digital issue. And you guys are talking about the network not being the issue. Cost guidance, CapEx guidance, all that really hasn't changed this year. So the outlook just kind of missed a beat but keeps going on. The problem is you guys did cancel a lot more flights than your competitors. And if I look at your completion factor this month, I think you will be trailing your competitors. Just look at yesterday, I think about a 6% cancel rate. So I guess what confidence can you give investors and your customers and your other stakeholders here that this was really just a one-off thing and not something that is more structural within the company?

Bob Jordan :

Yeah. And if you take the data in January is very way down the weeds here, but it's very polluted by the January 11 NOTAM issue, where there were all kinds of issues as well. for most of -- prior to the day you're talking about here, most of the day, I think the 15 days or so prior to that, we were 99 -- in the 99-plus a couple of several days in the 99.9% completion factor range, several days canceling one flight. So you just have to watch the aggregate because if you have an anomaly in a day that's very different, like the day Andrew described or the NOTAM day, it will throw that -- it will throw it off. Obviously, you know that.

Brandon Oglenski :

And for sure, we do look at seats and flights impacted. But I guess coming off this call, where is the urgency to ensure that specific to you guys this doesn't happen again? I mean, does it come in the form of more urgency on the pilot contract? Do you need to look at more non-aircraft CapEx? I mean just help investors get their arms around it, please.

Andrew Watterson :

I'd say we know what happened to the last on the fall as I call it. We've put in place with urgency. And that was the urgency we had, make sure the same thing doesn't repeat itself. So we have the safeguards for that same thing not to repeat itself, but we think there could be common root causes. That's why when we take the time between the weather starting and us getting to that kind of position with our crew scheduling software. Lots of decisions were made, lots of coordination between ground operations, our control center, our crew scheduling. Lots of equipment that was used to handle cold weather. Something in there in that sequence of events led us to the spot where we were at the end. And so immediately protect that situation to not happen again and then follow the string upstream to find the series of actions that led us to there and resolve those. And so that's what we're taking the time to do. It's a couple of weeks. I think it's worthwhile to take a few weeks since we have the kind of emergency stuff done to find those root causes that you can address, and that may require incremental spending or maybe incremental management effort, and we shall see. But we certainly have intention and plans to have that start up right away after that report is done.

Brandon Oglenski :

Thank you.