Q2 2022 Southwest Airlines Co Earnings Call
Good day and welcome to the Southwest Airlines second quarter 2022 conference call.
My name is Shannon and I will be moderating today's call.
Call is being recorded and a replay will be available on southwest Dot com.
The Investor Relations section.
After today's prepared remarks, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad.
To withdraw your question. Please press Star then two.
At this time I would like to turn the call over to Mr. Ryan Martinez Vice President of Investor Relations. Please go ahead Sir.
Thank you all for joining us for our second quarter earnings call in just a moment, we will share some prepared remarks, and then open it up for Q&A.
With me today, we have our CEO Bob Jordan.
Executive Vice President and CFO , Tammy Romo Executive Vice President and Chief Commercial Officer, Andrew Watterson, and President and Chief Operating Officer, Mike Van de Ven.
A quick reminder, that we will make forward looking statements, which are based on our current expectation of future performance and our actual results could differ substantially from these expectations.
Also we had a few special items in our second quarter results, which we excluded from our trends for non-GAAP purposes, and we will reference our non-GAAP results as well.
So please refer to our press release from this morning, and our Investor Relations website for more information and with that Bob I'll turn it over to you.
Well, thank you Ryan and I appreciate everybody joining us this morning.
What a difference a quarter can make coming off first quarter's net loss you will recall that we were encouraged by the positive trend change in travel demand in March and we're optimistic about summer travel revenues.
I don't make any of us expected demand to surge to the levels, we experienced in the second quarter, particularly in June .
Andrew will cover the revenue details, but Q2 operating revenues increased 13, 9% versus Q2 2019 to an all time quarterly record of $6 7 billion. Despite Q2 managed business revenue is still down 24% and capacity that was still down about 7%. We also produced an all time record.
Quarterly net income excluding special items of 825 million. It is all because of the people in southwest Airlines that I wanted to just a huge thank you to them for a job very well done and I want to congratulate them on the progress that we've made together, it's just an incredible turnaround from last year not to mention just a quarter ago.
Looking forward demand continues to be strong we continued to experience, both inflationary pressures and headwinds from lower productivity and efficiency.
Energy prices have moderated a bit recently, but remain high and we expect to have another meaningful fuel hedging gain here in Q3, but most importantly, we remain largely on our planned for this year. Our 2022 capacity remained stable we remain on our cost plan. We're slightly ahead of our overall staffing plan and are off.
Operational reliability is much improved we've made tremendous progress and our people have a lot to be proud of I am just extremely thankful for all of their efforts in getting us to this point and the pandemic recovery.
Our third quarter guidance is based on our current outlook and excludes any significant unforeseen events, but I'll admit that there's a lot of noise out there right now it seems that all of US know someone who has this latest random COVID-19 inflation pressures are real and they are worried about a potential recession consumer and business sentiment is down and there are data.
<unk> out there that could indicate early signs of a slowdown, but so far demand remains strong and we haven't seen material impacts to our business.
As always we will continue to monitor the environment and be ready to respond if needed. It's helpful to remember that we have historically lagged in terms of impact of revenues going into a recession and we've typically lagged the recovery coming out.
Well you've heard me mentioned our list of key priorities for 2020, too many times I would like to share our midyear progress on each of them.
First getting properly staffed and focusing on our people I'm really proud to report that we reached pre pandemic staffing levels in May 2022, which is just a huge milestone.
We continue hiring in specific areas, particularly for pilots and we expect to add over 10000 employees. This year net of attrition.
We're pleased to be seeing the impact of our hiring in airports, especially given the busy travel season that we're in now that thousands of new employees have been through training and are contributing on the frontline.
Second making progress towards our historic operational reliability and efficiency.
Our operational performance since April has been very strong and our flight cancellations in May and June were less than 1%, which means that 99 plus percent completion factor Mike will cover the operations in more detail, but we are benefiting from getting better staffed getting new employees through training and all of the frontline, adding more short haul flying to provide better.
Network stability and adding more flying between crew basis.
Although we've got work to do on the efficiency side as we focus on 2023, and we're laser focused on locking down fleet and capacity plans are moderating our overall hiring optimizing staffing to flight schedules are ringing out cost inefficiencies and returning to our historic efficiency levels by the end of next year.
But again I just want to thank our amazing people for their hard work as we continue to improve our operational reliability and I want to thank our partners at the FAA and the administration for working to overcome challenges and continuing to improve the aerospace as travel demand returns.
Third providing legendary hospitality I'm very proud of our people our employees for restoring our customer service advantage this year for.
For January through May we are number one in customer service per the Dot's ranking for marketing carriers I continue to be out in the field on a regular basis that I get to experience firsthand our terrific employees, taking great care of our customers I get the emails I see the stories and I truly appreciate what they all do each and every day for our custom.
Mers and for each other.
I'm also very pleased to announce that we continue to make traveling on southwest airlines, even easier by adding yet another customer benefit our new flight credits don't expire policy.
As an industry, leading flight credit policy and when you combine that with no change fees no bag fees rapid rewards points that don't expire and transferable flight credits. It's just a powerful low fare brand combo. That's all about winning more customers. While there is a cost it's really the onetime cost of extending the COVID-19 related.
<unk> that would have expired this September and we expect the impact to be immaterial beyond this quarter.
And finally, returning to consistent profitability, we just reported record earnings for Q2, and this is the most stable revenue environment that we've had in over two years.
We remain well protected with our fuel hedge and we are currently expecting to be profitable for Q3, and Q4 and for the full year 2022.
Our main gating factor to future growth as pilot hiring despite delays in aircraft deliveries, we feel good about our ability to fly our flight scheduled as planned which are currently published through March eight our current outlook for first quarter 2023 is for capacity to be up about 10% versus first quarter 2022, and you know if we find.
Ourselves in a position to need republished schedules are trimmed capacity, we can certainly do that but I'm optimistic that we can continue to avoid that going forward. It is still very early for 2023. So we're just going to take it one quarter at a time beyond our currently published schedules, but we are turning our focus to 2023 planning and in particular <unk>.
Gaining historic efficiency levels and will share our 2023 outlook with you at Investor Day, which is currently planned for December the server.
Last I, just want to stop and acknowledge the assailant incident event that we had at love field earlier this week.
Luckily all of our employees and customers are safe and I just wanted to say a huge thank you to employ to our employees for taking great care of our customers and each other I want to thank law enforcement for their Swift and professional action. Thank the TSA for managing the fallout and just thank you to everybody involved for keeping this from being worse I'm just.
<unk> very very grateful for that.
And with that I will turn it over to Tammy.
Thank you, Bob and Hello, everyone.
I'd like to thank our employees for their outstanding efforts this quarter, which resulted in solid operational and record financial performance. The demand surge coupled with constrained capacity resulted in a strong yield environment and record quarterly operating revenues of $6 7 billion.
The record revenue performance trends record quarterly net income excluding special items of $825 million.
Despite higher fuel and inflationary cost pressures.
We have also posted a strong operating margin excluding special items of 17, 4%, which exceeded second quarter 2019 level Ali.
All around this was an impressive quarter and an important milestone among our pandemic recovery.
Andrew will speak to our revenue trends in a minute, including while we made a policy change regarding flight credits that don't expire, but I want to make a few comments regarding the timing of revenue recognition for breakage revenue for tickets you expect it to go and use.
The pandemic caused an extremely high number of customer flight cancellations during 2020 and to a lesser degree last year and even the beginning of this year with the omicron weight as.
As a result, we have had more flight credits outstanding than normal.
<unk> policy change to eliminate the expiration dates for unused funds will result in lower breakage revenue for third quarter.
And we weren't required under our previous policy and large part due to the Covid related travel times that were set to expire in September .
Andrew will cover the sequential impact to revenue in a minute that we expect the policy change to result in significantly lower breakage revenue and third quarter, which we factored into our third quarter revenue guidance.
Currently expect that impact to be and the 250 million to $300 million range.
As we look beyond third quarter, we expect breakage as a percentage of revenue to normalize back to pre pandemic levels and any ongoing impact from this policy change.
<unk> to be immaterial beyond this quarter.
Our people did a great job managing costs in second quarter, and our fuel hedge performed very well.
Market prices have moderated a bit lately, they are still elevated and volatile given the current geopolitical climate.
Regardless of the continued uncertainty surrounding the market our fuel hedge significantly offset the market price increase in jet fuel in second quarter, 2022, saving us $330 million in fuel expense.
We are 59% hedged for third quarter and estimate our third quarter fuel price to be in the $3 25 to $3 35 per gallon range slightly below our second quarter fuel price.
That includes an estimated 46 cents of hedging gains, which represents cost savings of more than $230 million in third quarter alone.
Of course this is a snapshot of our fuel guidance at a point in time and market oil prices and jet fuel cracks can move materially on a daily basis.
We continue to seek opportunities to expand our 2023 and 2024 portfolio.
The fair market value of our fuel hedge for the second half of this year is approximately $430 million, which would bring our full year 2022 fuel hedge benefit to roughly $1 billion based on price assumptions outlined in our earnings release.
And the fair market value of our fuel hedge in 2023 and beyond is estimated at roughly $580 million.
Taking a look at non fuel cost second quarter CASM ex was favorable to our previous guidance range and up 13, 1% compared with second quarter 2019, due to lower than anticipated benefit costs and the shifting of some maintenance costs into the second half of this year.
Our third quarter, we currently estimate non fuel CASM ex to increase in the range of 12% to 15% when compared with 2019 levels.
More than half of that increase continues to be driven by inflationary pressures primarily in higher rate for labor benefits and airports.
The remainder of the CASM ex increase is attributable to headwinds from operating at suboptimal productivity levels. As we continue to work to get adequately staff and our new employees trained while third quarter capacity levels are expected to be roughly in line with 2019 level.
Overall I am pleased that we remain on track with our 2022 cost plan, especially in this environment and our full year CASM ex guidance remains unchanged at 12% to 16% compared with 2019.
As a reminder, this include labor accruals for all work groups beginning April 1st taking into account, our best estimate and this labor environment.
Turning to our fleet, we have revised our expectations for aircraft deliveries. This year due to supply chain challenges that Boeing is dealing with as well as the current status of the dash seven Max certification.
Through the first half of this year, we took delivery of 12 dash eight Max aircrafts and.
And we now expect to take delivery of 23 aircraft in the third quarter and 31 aircraft in fourth quarter, all dash eight Max aircraft for a total of 66 deliveries this year.
We do not expect to take delivery of any dash seven Max aircraft. This year we.
We plan to retire a total of $29 700 aircraft. This year and currently estimate will end the year with 765 aircrafts in our fleet, which supports our currently published flight schedules through March eight of next year.
We have additional information in our press release, so I won't reiterate all of the fleet detail.
You will see that our contractual order book still reflects 114, Max deliveries, including options. This year, but we are providing you our best estimate for what we think we will receive this year based on recent discussions with Boeing.
We will continue working with Boeing with a focus on this year and next.
Based on our updated planning assumption that we will receive a total of 66 dash eight Max aircraft. This year, we have lowered our 2022 capex guidance to approximately $4 billion.
$1 billion lower than our previous guidance that assumed the delivery of 114 Max aircrafts.
On our balance sheet, we ended the quarter with cash and short term investments of $16 4 billion.
<unk> also recently extended our $1 billion revolving line of credit by two years with no change to our covenant and it remains undrawn and fully available to us.
We are in a net cash position and leverage is at a very manageable 53%.
We continue to be the only U S airline with an investment grade rating by all three rating agencies, which remains one of our key competitive advantages.
We have modest scheduled debt payments for the remainder of this year. However, we have been opportunistic and have repurchased some of our convertible notes.
$302 million, so far this year and $505 million in total with $1 8 billion still outstanding.
As a reminder, the payroll support restrictions on dividends and share repurchases remain in place until the end of this quarter.
As always we will be evaluating our capital plans with our board as we begin planning for 2023.
Throughout the pandemic, we've been surgical and our capital allocation decisions to drive future growth and value.
And in terms of priority as we move forward, we intend to continue investing in the business as we scale for future growth.
We will continue paying down debt and we will continue to be opportunistic where we can and we may have opportunities to reduce our leverage at a faster pace.
As ever we are committed to generating returns on capital well in excess of our cost of capital and intend to outline our future capital plans at our Investor Day later this year, so more to come on that.
In closing I am very pleased with our second quarter results as Bob mentioned, we remain on track with our plans. This year have better stability and have good momentum heading into the second half of this year.
With that I will turn it over to Andrew.
Thank you Tammy.
Some additional color on our Q2 revenue trends in Q2 outlook and point you to our earnings release for more detail.
Looking first at Q2, we experienced a significant change in revenue trends compared to Q1 as travel demand began to surge in March.
Each month of Q2 was stronger than the prior in terms of load factor and yield and revenue.
June represented the strongest monthly revenue performance in our history.
And we had all time quarterly record operating revenues in Q2 of $6 7 billion.
Which was up 13, 9% versus Q2 2019 in line with our guidance.
Leisure demand was robust and we also saw a notable improvement in business demand.
Managed business revenues improved from down 36% in March down 19% in June .
Both business passengers and overall management business revenues remained below 2019 levels managed business fares.
2019 throughout Q2.
Our Q2 royalty program revenue also represented an all time quarterly record, which is assisted by incremental revenue from our co brand credit card agreement with Chase that we secured at the end of last year.
Q2, retail sales spend per cardholder, and our overall portfolio size continued to grow versus 2019 and.
And we continue to be very pleased with the performance of our loyalty program and its significant revenue contribution.
Our new cities in development markets performed well as did Hawaii, which was aided by the modifications, we made to our Hawaii flight schedule and mainland fly.
Our revenue initiatives also performed well and we launched our new fare product.
Wanted to get away plus in May.
I want to congratulate our teams on a successful rollout and customers are responding well to our expanded fare offerings.
All told Q2 was strong across all geographies and metrics, we were very pleased with the results.
As you saw in our release this morning, beginning today any flight credit the results from our flight change or cancellation no longer will expire in the future.
Previously southwest flight credits had to be flown within one year from the data customers originally purchased their tickets.
We also eliminated the exploration date on any flight credits that are currently valid in unexpired incur.
Including those travel credits that were issued as customers change their travel early independent Mick and would've expired this coming September .
We're famous for offering industry, leading flexibility across the board.
Customers tell us it is one of the key differentiators of our brand.
Repeat purchases by engaged customers is a cornerstone of our business model and our success.
Our customers our customer research and feedback tells us that flexibility has become even more important to customers over the past two years.
Therefore, it is important to us to deepen our commitment to flexibility and the ease of doing business with southwest Airlines.
And with this move we are clearly the industry leader and unmatched in this regard.
The value proposition for our customers is greater than it has ever been.
Now looking at Q3, we're coming off of June peak performance, but current demand trends remained strong.
We continue to experience strong passenger bookings yields and load factors.
Leisure bookings are trending in line with seasonal expectations.
This demand is also trending well and we expect Q3 business managed business revenues to improve the down 17% to 21% compared with Q3 2019.
July is the second weakest month for business travel and August is a mix of leisure and business as leisure summer demand seasonally cools off the back half of the month.
If we look at post labor day bookings on hand at this point, we are encouraged by both leisure and business bookings.
Although it is still pretty early in the booking curve, especially for business travel.
I'd be remiss, if I Didnt mentioned, there are quantitative anecdotes from external data indicate industry yields are softening off of the peak of June and we are watching our bookings very closely.
That said, we're overall pleased with the trends. We are currently seeing and expect Q3 operating revenues to increase 8% to 12% versus Q3 2019.
Included in our Q3 guidance are two headwinds as we look at sequential revenue expectations compared with Q2.
First we have a five point sequential headwind due to a policy change to remove exploration dates from our flight credits.
Which Tammy mentioned as a one time impact.
And secondly, we have a two point headwind due to our network restoration with focus in short haul markets in Q3.
Our network restoration is important to getting back to full utilization of our assets, but is already providing benefits in terms of operational reliability and.
And we believe this revenue headwind is temporary until business demand recovers more fully.
Our Q3 capacity is roughly flat with Q3 2019, and our Q4 capacity is expected to be down 1% to 2% versus Q4 2019.
Our flight schedule is currently published through March eight and based on current plans January and February 2023 capacity is flat to January and February 2019.
On a year over year basis, we expect Q1 2023 capacity to increased 10% versus Q1 2022 wells.
We are still early in our 2023 planning process, but that gives you an idea of where we expect to begin the year in terms of capacity.
In terms of network restoration and based on our full year 2022 capacity guidance of down 4% versus 2019, we continue to expect to be roughly 85% restored by the end of this year.
While capacity levels are in line with 2019 in the second half of this year, our network won't be fully restored until at least the end of 2023 as we continue to rebuild the vast majority of flight we cut during the pandemic to fund new city growth.
And with that I'll turn it over to Mike.
Well, thank you Andrew and Hello, everyone.
We are in the middle of the busy summer travel season, we experienced in several years and we're making significant progress in delivering stable and reliable travel experience to our customers and our employees.
Our hiring momentum began to build in the first quarter and Thats continuing those additional employees are beginning to impact our day to day operating environment as they complete their initial training and move into their respective roles. Our new hires combined with the scheduled reductions that we made earlier in the year as well as our ongoing operational modernization effort.
It has stabilized the operation as we continue forward.
From the beginning of May through the busy fourth of July travel period that I know you all heard about on the news.
Our cancellation rate was less than 1% and that's the best performance for southwest since 2017.
Our on time performance over that same period as measured by the <unk> was 74, 3% and while that is certainly below our expectation. It is primarily an operating tempo problem.
Our tempo is being impacted by the sheer number of new hires just starting work.
Heavy load factors the airport environment as well as air traffic control challenges from weather and staffing.
If on time performance was measured within 30 minutes that 74, 3% would improve to 85, 3% and Thats in line with our historic pre pandemic levels. So in practical terms that means that in today's environment.
Almost 90% of our nearly 4000 flights a day or operating just like they were pre pandemic, but about 10% of our flights have.
15 minute delay that wasn't there and pre pandemic period. So we've made solid progress towards the historical operating results and we're doing that at nearly pre pandemic capacity levels.
We've accomplished all of that by balancing our flight schedule for staffing staffing our active staffing is up over 7000 employees since the end of last year, and we surpassed 2019 levels of ACA staffing in May.
75% of this hiring was in our airport operations and about 20% were in flight crews, we're going to continue hiring it's imperative that we remain adequately staffed to support both our customers and our employees were focused on improving the experience of our flight crews in terms of rerouting deadhead and any unplanned.
Overnight some extra flying.
And finally, we've improved the quality of the scheduled for operation with more depth and more nonstop flights. We've added short haul flights in the business of Oregon markets.
Provides us more options when we have weather or ATC delays and we also have more flying between our crew basis and all of those things and all of those changes support a more stable operational environment.
As we continue our network restoration I believe that our operational performance will continue to improve.
Believe that those improvements combined with our other operational initiative.
We're going to provide the foundation to recapture our overall efficiency and returned to historic levels of productivity.
And just a couple more thoughts on hiring and training.
As travel demand began to rebound last year, our first step was to rebuild and restore our hiring machine and we had staffing shortages and bottlenecks throughout the organization from recruiters to the frontline to supporting positions.
We've been running at a record pace this year.
And from a company wide perspective, we've augmented our staffing in most of the critical areas and Thats, leaving just our pilot hiring and training as the pacing factor for the company as we move forward.
So as Bob mentioned, we still expect to add over 10000, new employees. This year net of attrition and we're now at a point, where we can begin to transition those hiring efforts into more targeted and focused locations and groups, where our network restoration is occurring.
The majority of these hires will be to cover our published schedules and capacity plans. This year, but we also intend to build some buffer so that we're ready to resume growth in the near future and then get ahead of our spring and summer of 2023 staffing needs with a more seasoned workforce.
We're still being impacted by Covid illnesses and a higher level of inactive employees are sick rates are still elevated in some of our work groups. So we believe that it's just prudent to build from staffing cushioning buffer in the aviation environment that we all find ourselves in and none of that's unique to southwest it's a work in progress.
Getting back to historical levels of productivity by the end of next year remains one of our top priorities.
So on a separate note I was able to be at our Grand opening of our new 130000 square foot aircraft maintenance hangar in Denver during the second quarter and Thats going to be very helpful to the operation with the addition of Denver, We now have seven hanger locations, Dallas, Houston, and Phoenix, Chicago Atlanta Orlando.
<unk> and now Denver.
Pickups team does a tremendous job and I want to thank them for managing through a changing flight schedule in our fleet plan over the past several years.
And last but certainly not least our people have solidly restored our customer service advantage year to date through May southwest is back in the top spot for customer satisfaction for the.
Air travel consumer report and my sincere thanks to all of our employees, especially all of those on the frontline that are taking care of our customers and of each other.
Are simply the best and I have my deepest respect and.
Admiration.
So with that I'll turn it back over to Ryan.
Thank you, Mike 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.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
Withdraw your question. Please press Star then two.
The first question will come from Savi <unk> from Raymond James. Please go ahead.
Hey, guys good afternoon.
Just in terms of the kind of the Max delays here I know you're talking about really working on one quarter at a time as you plan 2023, but was curious if the delays I know pilot hiring.
You talked about being the long pole in the tent but.
Does it have delays that youre seeing today kind of give you pause about your ability to kind of plan.
2023 capacity.
Hey, Savi, it's Barb and then I'll, let you know.
Damian and Mike jump in.
Obviously, the change is a big one from $114 66 in 2022 here.
But Boeing and GE and others are suffering supply chain issues, just like like everybody. So I'm not sure that it is completely unexpected. The good thing is if you look into our to our published schedules through March which I think go through March the age right now because we did have excess aircraft that we've talked to you about that reduction.
Doesn't compromise those scheduled so we'll be able to fly the schedule is as plan, which is good news for our customers. Good news for our employees. It's a big number though so if you think about well how long is it going to take to recover the catch up in terms of the delivery plan.
I suspect again this is all kind of gas, we're going to schedule the schedule quarter to quarter.
But it feels like it will take 23 could leak into 'twenty four in terms of how long it takes to catch the catch back up to the fleet. The original contractual fleet delivery plan now.
Now to your question, which is will be.
What about constraints, which has been pilot hiring.
If you and I think a chance that if you look into that.
This continues to delay into late 'twenty, three you could get to the point, where the constraint becomes actually the aircraft deliveries versus pilots.
So I think that would be late in 2003 and not earlier so again.
You don't it's all speculation today.
For now.
We'll still stay really close with Boeing and that's late in the year and 23. So we will keep after our pilot hiring plan.
That's helpful and then if I might on that pilot hiring topic just.
Thank you were saying last quarter that you're kind of hiring or training around just over 1000 this year.
Is the and Youre getting capacity that you can kind of do the hiring and training for maybe 2300 next year is is that I know thats. The top end is that what you think youre going to need to do or how should we think about pilot hiring and training costs and levels as we as we kind of move through the second half of this yen into next.
Yes.
This doesn't change.
If you're tying that to the Boeing issue doesn't change that at all so yes, we're looking to hire.
The 1100 this year, we're roughly on plan there I'm very proud of everybody. We for a while we told you we were short flight instructors.
<unk>.
We've hired all of our flight instructors as of I think may so the.
The training and assume it's all running at full capacity I think the plan is to hire about 200 pilots next year.
So that will remain our plan because its full capacity and then we will get these aircraft even if they are slightly delayed as we talked about it late 'twenty three so this doesn't change our pilot hiring plan.
I appreciate that thank you.
Youre welcome.
<unk>.
And the next question is from Jamie Baker from Jpmorgan. Please go ahead.
Hey, good morning, everybody.
Builds on Sami's question, I mean, given the Boeing issue.
It doesn't seem like southwest will ever catch up to where you would have been in terms of overall size had COVID-19 not occurred. So if we think about 2025, but I don't see a path where Boeing could accelerate to make up for lost time. So it seems that in.
<unk> that you'll be.
<unk> 25 in new ones planned smaller in 2026, then you once plant.
And so forth if you agree with that.
Why not take more substantive steps to shed surplus costs now instead of just one.
Waiting for.
Passenger you accelerate from from here.
Hey, Jamie this is Mike.
Just maybe one way to kind of think about the Boeing delays.
And thinking about them there are production issues that are supply chain related.
And then there are delivery issues that are based on the certification issue with the Max seven so Boeing has.
Produced through the production line Max seven so just not able to deliver them yet. So I think that you will find a when the Max 7% certified we will be able to catch that up quickly in 2023, and then we're just struggling with.
Production delays that arent long theyre, probably no more than a month or so as they deal with our supply chain and I think that will get better in 2023 as compared to where it is today.
Okay.
And Jamie Tony here, just add on to my comments back to you.
Question on the cost side.
Yes.
Bob has already taken you through the pilot hiring, but we do intend to.
Optimize here as we move forward best we can on the best based on the best information that we have from Boeing.
We will continue to hire pilots, but moderate and other grades around what our best guess is for capacity as we close out this year and into.
Next year so.
Kicked off our planning efforts for next year. So obviously.
All the information that we shared with you today will be inputs into that and clearly.
We want to come up with a unit cost performance that makes sense relative to the capacity that we're flying yes, Jamie we got plenty, we have plenty of time, if youre thinking about 2425, we have plenty of time to adjust along the way here if things change, we just now and I'm very proud of is we just now.
Our 2019.
Capacity here in the third quarter will be about flat and we just now call our 2019.
Employees were slightly over about 600 here at the same time. So we've just caught up to 2019 at this point.
And as Tammy said, we will begin to moderate our.
We will begin to moderate our hiring really ex pilots here in the back half of the year and our goals for 'twenty three haven't changed which is.
Now at some point Youre just running at all of this to get stable now, we really begin to pivot to.
Moderate the hiring.
Begin to wring out inefficiencies and get to our goal that we've talked about in Investor day, which is get back to our historic efficiencies by the end of next year.
Okay very helpful. I appreciate you jumping in.
Thanks, Tommy as well and just as a follow up on the pilots raising the 65 year rule doesn't.
It really seem to have any.
Traction to speak of and obviously for airlines with multiple fleet types, it's a nonstarter because of the training costs that it would drive but.
With only a single fleet type.
Does this imply southwest might be in favor of relaxing the rule.
Jamie.
It would be basically what our pilot you would want.
We're not going to have an opinion on that and at this point in time, I don't think that theres much energy around doing that at all.
Okay. So totally agree was just curious as the single fleet operator appreciate it take care everybody.
Thank you Jamie Thanks, Jamie.
And the next question is from Duane <unk> from Evercore ISI. Please go ahead.
Hey, Thanks for the time I appreciate it.
Just just on the <unk>.
Flight credits is there any way you can help us think about.
What a clean sequential underlying revenue would look like kind of <unk>.
Excluding the credits in both periods. This is not just a southwest issue, but you've.
You brought it up clearly and I'm wondering can you can you disclose what credits were like as a percentage of revenue and in the <unk>.
Do you expect that to pick back up in the fourth quarter.
Yes, Duane I'll take that I hope you're doing well.
Well first of all yes, as Youre aware, we don't disclose our breakage revenue.
But.
Even during the pandemic.
And it's been elevated it still represents a really small percentage of overall revenue.
So in terms of the underlying trends, we expect the ongoing impact of total operating revenue beyond third quarter to be immaterial.
And it shouldn't be a material driver of sequential trends.
And just to note on the second quarter, even without the elevated breakage revenue in second quarter. We would have still had record revenue and the underlying business trends were very strong so but in terms of what is your start starting point in terms of.
Of our core business trend it would be.
It would be the results that we reported to you. This morning in terms of revenue for our second quarter oven.
Almost 14% so.
And just in terms of trying to help you sort through through the trends so again.
The third quarter impact of $215 million to $300 million, you really should look at that as kind of a one time impact here related to the policy change.
And do you want to add.
To add sort of 50000 feet.
On the on this.
Because of this change in flight credits is a big deal.
Obviously, it's a terrific consumer benefit customer benefit and it matches perfectly with bags fly free no change fees.
Rewards points Sedona don't expire all of the things that you know about the separate southwest Airlines. So it's a terrific added benefit and.
Absolutely confident it's going to win more customers and improve customer loyalty and retention just like bags fly free did for us on the timing side. We were up against you had a big pile of Covid travel funds from especially that early period of Covid, where there were so many changes.
<unk> that were set to expire in September and we felt like we need to address that which is.
A big piece of the why now on the timing on the cost.
This one time isolated to the third quarter 250 to 300.
Amy mentioned, we think it's immaterial beyond that that's really primarily.
The revenue impact and timing of recognizing.
The revenue.
Slash breakage on these COVID-19 funds ultimately.
Theyre going to be used they could break is going to come back to us is going to come back to you over time. So it's to me a lot of this is a timing issue.
But it's the right thing to do if it's terrifically with our brand.
Again, it's a onetime third quarter thing here.
And.
I am convinced absolutely like bags fly free that is going to it's going to be not just a customer positive it's going to it's going to be a financial and shareholder positive as wells, we win more customers and we retain more customers.
Thanks for that detail and then just a quick follow up and apologize if you mentioned it already but.
Your 22, Capex is a bit lower do you see that as a shift into 'twenty, three or 'twenty, three potentially be lower as well. Thanks for thanks for taking the questions.
Yes, Duane it is a shift into next year now.
Hopefully, we will catch up here on the Boeing deliveries.
But it does shift a bit into 2024 then.
We'd see some shifting.
Into 2024 on the Capex side as well.
Okay. Thank you.
And the next question is from Andrew the Dora from Bank of America. Please go ahead.
Hi, everyone. Thanks for the time today.
As Tammy.
Delivery program keeps getting pushed out and sort of limits your ability to fly your anticipated schedule what types of levers do you have in order to help kind of maintain your longer term.
Cost structure that you outlined at Investor Day, and then.
Just kind of heading into 2023, I know, it's early but anything out there that.
Not to drive 2023, CASM below 2022.
Yes on certainly our goal for next year remains to have.
<unk> are down.
From this year's level. So we haven't given up on that goal and obviously capacity is.
As an input into all of that is as you're well aware.
But going.
Going back to our discussion a little bit earlier.
As we move forward we will.
Work to optimize our staffing.
Round are.
Expected capacity plans.
No.
Again, just trying to get back to our historical.
Call efficiency level. So we're very focused on getting back to our historical efficiency and.
We've got a lot of initiatives underway to help improve efficiencies and those range from over the over the longer term anything from self service.
For our customers.
And airport modernization other efforts along along those lines.
I think the.
And then of course, just the continued restoration of the network.
So we'll.
Even if we have to grow at a lower rate than maybe we were otherwise hoping for.
Should be able to continue to restore our network, which will help us get back to those historical efficiency levels.
So.
As of June we were.
Probably about 80% are restored and we expect to be about 85% restored by the end of.
This year and we're going to work really hard to be fully restored by next year, which of course will give us operating leverage and help our cost performance next year.
Thanks Tommy.
Second question just for.
Bob in your prepared remarks, you said that you werent seeing any material impacts to your business, which leads me to believe you're maybe seeing some anomalies out there.
Anything that you are keenly focused on watching right now.
Maybe are you seeing any discrepancies and among your different income cohorts in the way they book or travel or anything you'd want to call out there. Thanks.
Al.
Good.
I will also defer to the master year at Andrew to add a whole lot of color, but it's just.
Nothing specific because it's more the.
The surrounding data so if you look at our.
Booking strength.
It continues I mean, obviously June June was the peak as it is typically across the sequentially across the year, but the booking strength is there.
You got strength post labor day.
It's really just looking at the other factors so as I mentioned.
Business and consumer sentiment is down you've seen some peaks here.
Rates are rising just all the things that typically lead you.
We expect a bit of a slowdown so it's really nothing more than that color because we arent seeing it.
In our bookings yet, it's just to call out and Andrew Please add color to that.
I guess I'd add to that.
Bob.
We see still substantial demand potential visits to the website central volumes, but we saw a peak of yields in June and all the industry data, we look at whether thats.
Our data, whether that's credit card data, whether thats adobe or Hopper CPI. They all point to the same kind of peak in June . So loads are fine and yields are generally on a year of a three year basis, they're not up as much as June thats, all so its kind of sequentially softened a little bit but at a level.
Still well above 2019 levels that gives us a lot of encouragement going forward also rotated out of a high leisure period into a high business periods and so you expect that business to hold up more of your capacity so to speak and so that'll be the big question. We've obviously guided to a sequential five point improvement in <unk> business in Q3.
And how that evolves through Q3, because thats the prime business travel season is kind of back half of August through October .
We see good improvement there I think.
We'll be really meaningful for trends when you take all of that thank you would you take all that in context.
I mean always we want to guide appropriately.
Appropriately and so.
You take all that into account as you think about your guidance as well.
Great. Thank you.
Okay.
And the next question.
Next question is from David Vernon from Bernstein. Please go ahead.
Hey, Andrew I wanted to ask you about.
The headwind you're expecting from the return of short haul business flying that 200 basis points or whatever you're calling out there.
When you think about the driver of that is that just some of these these these high density markets youre going to be flying at a lower load factor or I'm trying to just kind of square that call out you're making from a headwind perspective with the bullishness in terms of recovery and managed business travel.
So I'll start off but we've put that in there.
Research and development teams from network planning worked with Mike's research and development teams from our operations planning and we looked at what would be.
Way to improve the operability of our summer into fall schedules and so we joined the evaluated innumerable schedule concepts and we came up with this return of some specific short haul.
Comparability might talked about more crude.
Flying between crew basis.
More crew based originators from like the low 30 percents to high 38%.
And then looking at the mid day, peaking that was stressful ground operations all of that together made for a more operable summer now because short hauls.
Is really powered by business travel return of business travel will make the kind of revenue impact of that mitigated. So.
Corporate travel did kind of see through our data.
Total volume basis in mid June so as we come out of the summer and people burn off their PTO, they had accumulated and COVID-19 and get back on the road you would expect that short haul that was put there to help recoverability would get additional travel from corporate travelers so that.
It shows up.
As yield a load factor.
Insufficient demand for that level of short haul capacity and so in some months you may you may see the yield was higher in LOE was lower and vice versa.
It shows you there was insufficient business demand for that level of short haul at this point in time, but as we go into a more heavy business travel season that can be mitigated through the return of business travel.
I think I understand the driver of putting it in there when you think about the go forward in the look ahead right. If we do end up in a softer period.
Can you just talk talk talk us through how you'd think about.
When the decision to keep that capacity up maybe isn't the right one or how flexible are you on that in terms of the sensitivity to that demand recovery.
Besides the demand recovery the second thing.
As a note restoration you can think of this as short haul being restored and longer haul is not being restored creates an imbalanced network and so even though we are predominantly a point to point carriers as many situations, where you have a higher flow content and you can look at our short haul as on average besides having higher business content they have higher flow content.
And so by not having the kind of medium and longer hauls and that same geography, where you find the short hauls youre starving them or the flow that normally have so as we go through and add in medium and long.
Long hauls <expletive>.
Billet supply allows that will then kind of help balance the system and allow those flights will be full or if not with as much business travel as one might imagine at least more flow, which right now we're seeing is carrying a pretty high yield.
Alright, Thank you guys for the time.
Thank you.
And the next question is from Scott Group from Wolfe Research. Please go ahead.
Hey, Thanks afternoon. So.
Im sorry, I just wanted to go back to this breakage issue to make sure I understand it so.
If we're thinking about fourth quarter revenue should we just assume normal seasonality from this lower third quarter run rate or do we take the third quarter.
About $2 50 to 300, and then assume normal seasonality from there I'm just trying to understand what this could mean for fourth quarter.
Hugh.
You would just take our.
Reported results and adjust for normal sequential trending.
From from what we reported to you.
Or what our guidance is for third quarter or so.
You just simply take out that onetime impact.
And then it's just maybe just elaborate <unk> I mean as those as those funds that we've now extended our used over time, that's going to play out over a period.
That's not a forecast it's going to play out over a period of time as they are used in revenues recognized that's right. It's just simply a timing of the Rev.
Revenue recognition as we move forward and then the.
<unk>.
Our trends as we go forward should really revert back closer to pre pandemic levels in terms of the percentage of breakage to revenue.
So this would have been if I'm thinking about this would've been the final sort of big quarter of breakage, and then you would have seen a drop off in fourth quarter had you not made this change you are making this change do you see the drop off in breaker, starting this quarter and then you sort of go normal from here is that right yes.
Yes, I think Thats, a fair way to look at that's very fair.
Okay, and then just just.
Lastly.
I know you've got the 10% planned for January February next year would you would you think or hope that full year 'twenty three is more or less in that 10% on capacity.
Well I think.
Start with Jan Fab is flat to 2019, I think we will get first quarter being up 10%. So once we kind of get March out there, you'll see the first quarter versus 22 being up 10% and so that's a good starting point I don't want to get over my skis with the back half of the year.
As Bob mentioned, you have both either pilots or aircraft can be configured straining element, but at least to start the year through at least the beginning of summer I think it's a good place to start it.
It gives you. It gives you a good sort of indicator of where we're headed I think but yes. There is so much noise in 'twenty three right now.
And again now to critical fronts pilot hiring and availability and then availability of aircraft. So we're just going to have to take it schedule the schedule.
Okay. Thank you guys. Appreciate the time, thank you Scott for pleasure.
And the next question is from Brandon of Glinski from Barclays. Please go ahead.
Hey, good afternoon, and thanks for taking my question I.
I guess following up on that conversation about capacity starting off in 2023.
Tammy how.
How should we think about unit cost inflation, because obviously youre going to be hiring in front of that network restoration, so should investors be braced for still elevated.
<unk> CASM back maybe in the first half of 'twenty three.
Well, we we are incurring inflationary costs as you are aware which is.
Primarily higher rates for labor benefits and airports.
And but I do want to remind everyone that we are accruing for higher labor rates and that accrual began.
<unk>.
The second quarter on April one or so.
That's.
<unk> fully loaded in the second half and incorporated in the guidance that we share for you for third quarter.
So we do have cost pressures from lower productivity.
Sure.
And.
A key for us will be to really work to continue optimizing our staffing levels around the capacity set that we come up with with <unk>.
For 2023, which.
As Andrew.
Took you through.
We're just kind of out there now and through the first quarter with pretty healthy cat pretty healthy capacity growth.
Double digit capacity growth. So obviously that is going to help for the first quarter.
So were the main thing that we're going to have to work through our inefficiencies as we continue to restore the network and just right size. Our staffing. So we're working really hard to do that and our priority is to regain our historical productivity and.
We maintain a healthy unit cost advantage to our peers.
So it's a little early to give you guidance.
For <unk>.
First quarter for CASM ex.
We'll lay out our full 2023 planned for you.
When we get together in December for Investor Day.
But those are really those are really the key.
Drivers of the inflation that we're feeling here. This year. So we're going to work real hard to optimize and hit our goal for 2023 to have down CASM ex year over year.
And just sorry to keep adding but a little 50000 foot color again.
We're coming out of Covid.
With all of the early retirements and leaves and everything that we all did.
Rebuilt youre hiring teams you just ran at the staffing so we were all hiring.
We've been on the sort of 500, a month pace here for a while overall.
Youre going to hear US talk a lot about now we're going to moderate our hiring.
Because there was a lot of getting trying to hire ahead of the demand because there was so much gap between resources and the availability of the aircrafts so that tightens up.
Obviously ex pilots because pilots is really the gap at this point youre going to youre going to see us.
Work to get our hiring closer to the need versus hiring ahead that makes any sense, it's going to take as well to do that but you are going to hear us talking an awful lot about moderating our hiring plans again ex pilots.
Yes, and just one more thought I don't want to lose it again going back to the network restoration as we do.
Bringing back on the.
More of our longer haul flights and that will certainly ease somewhat.
CASM ex pressure as well.
I appreciate that guys I guess tell me to follow up on that I mean is there.
As the limitation here really pilots or is it commercial constraints is it Boeing order book.
With the completion of all three.
Today as part of its pilots we have this we need to fly our schedule through.
Through March so.
Yeah.
Going back to what we shared with you last quarter.
We had.
More aircrafts.
Then we really need it and so with the the adjustments that we walked through.
That we have agreed upon with Boeing.
We believe that we can fly our schedule here through the end of the year.
And so so today it is pilots and as we move into 2023, we're hopeful that will.
And begin to catch up here on the deliveries, but it is possible that as we get to the end of 2023. The constraint could go from pilots to the fleet. So we just it's just too early to give you any more precision than that today.
Thank you.
And the next question is from Sheila <unk> from Jefferies. Please go ahead.
Good afternoon, everyone. Thank you.
I wanted to ask about the managed business revenues improving from I think down 30% in April 2019, and June is there any way to think about the breakout of how much of that improvement with volume versus better pricing.
And you pointed that there's about 2019, so what are sort of volumes today and how you think about it going back to 2019 levels.
We had.
Volumes, improving faster than fares fares are still elevated versus 2019, but volume has really picked up some.
It really started in March through the through the end of <unk>.
Jude I will say that it was skewed towards smaller businesses and government and education were traveling our largest corporates are the ones that are lagging particularly of banking.
Consulting and technology, who previously were amongst our top tier travelers now or on the lower side and then if you kind of look at our all of our accounts are our largest accounts theyre all traveling youll have activity.
Hey, guys have less unique travelers per account, but those travelers who are traveling or traveling just slightly less than they are trailing before so it's more about these large companies don't have the same number we bought theyre traveling right now, which we think varies by company of what that reason is but that's the.
You kind of hope for benefit as we get into the travel season here post summer as you get more travelers per account out on the road.
Got it that's Super helpful. And then I just wanted to follow up on some of the RASM question.
If we exclude the headwind from more short haul corporate and breakage. There was a five point deceleration in you mentioned pricing kicking in June , but as we think about that deceleration and how we.
GAAP late that towards the pricing environment retracting slightly versus restoring the network I guess, how do you think about potential scenarios.
Q4.
I'm not quite sure I got the last part of that but I'll start off with the first part which is about the deceleration I think to have.
Year over three year RASM be flat from Q2 to Q3, one would have to have.
Load factor would be flat sequentially and that certainly is a reasonable assumption.
Secondly, you have to have yields be flat sequentially from quarter to quarter as I mentioned earlier, we're seeing through all of our external data as well as our internal yields peaked in June and so.
And Thats, a leisure heavy period, where they peaked so essentially you couldn't push leisure travelers beyond a certain fair level. It seemed like it in that same highest fair level also seem to.
Hurt our redemptions as well because the point volume got Super high, but now youre rotating in a period, where there's less leisure travel and you certainly can't push for leisure travel the same fare levels as the summer and then we have the kind of composition issue of how much business travel will be back who are paying the higher fair. So you have a composition headwind.
As we go from Q2 to Q3, because its business and leisure and you have the point of business travelers are excuse me leisure travelers have a price loss of Titties elasticity effect, we can't go much higher and so thats really whats driving this kind of change it's not an abrupt change or a free fall as just a moderation from the Hay day of June .
Okay sure. Thank you so much.
Pleasure.
We have time for one more question, we'll take our last question from Ravi Shanker from Morgan Stanley . Please go ahead.
Thanks, everyone.
Just following up on that last comment on the yield.
Is the message sure that what Youre seeing is just normal seasonality or is it better or worse than that and also do you have a sense of what percentage of the June yield growth versus 2019.
The new normal or it can be built as part of the baseline going forward. If you have a sense of that.
So my personal opinion is that June leisure travel reflected part trend part pent up demand that was kind of a onetime effects so to speak and so we're still seeing leisure yields up.
July August September so leisure yields are still up and look like they'll continue to be up as far as we can see it in our booking curve and then yes. You do then have on top of that.
Compositional effects, so you have that.
That pent up demand that will not persist.
You still have an elevated leisure trend any rotate that into a time of year, where leisure is a lower composition of business is higher and then then begs the question of how much business will there be so a lot of that kind of ultimate yield for Q3 will turn on how much business demand comes back and if we see a return to that kind of acceleration we had in the spring of business travel.
Got it sounds great and maybe as a follow up Bob maybe to summarize a lot of the detail on this on this call so far.
What do you think is the biggest risk facing southwest over the next six months is it a risk of a consumer recession kind of beefing up your top line or is it another.
Kind of operational snafu for the industry.
Late fall into the fourth quarter that kind of drives a little bit of CASM ex.
Yes.
<unk>.
Ravi the airline industry, there's always.
It's not for the faint heart rate Theres, all kinds of things in front of you I don't know that I tend to think of it. The same way we have kind of go into reverse here and then I'll come to your question. If you look at just the past six months.
And where we were so we've gotten we've gotten staffing.
Staffing stable we were on our hiring plans are obviously, we have work to do with pilots, but we are in so much better shape. We've got an operationally stable same thing we want to we want to do better but we are in so much better shape, our cancel rate in may and June was sub 1% better than 2019, we just had a record.
<unk> record operating revenue so it was just.
We're hiring 500 people how much is just so many things to be grateful for in terms of the pace of getting the airline from kind of <unk>.
Surviving to being really stable now we want to move into the next phase and really.
Move back into operational excellence and other things, but now to really answer your question, though I do think there is no one thing on the horizon.
There is just sort of click through them.
Risk and hiring enough pilots.
But we're filling our classes we have a lot of folks in the pipeline. The Sims are full of the classrooms are full.
Have all of our flight instructor, so Jack I feel good about that.
This new delay in deliveries.
From Boeing.
But we're working really closely with Boeing and I feel like we're on top of that and at the end of the day, we can fly our schedule. So it's not going to force a reduction to the schedule.
That's been published which is just terrific for our employees and our customers.
I guess the biggest thing is just not one thing, but it's just all the uncertainty on the horizon. So you've got <unk>.
Recession potential you've got.
A lot of variability in fuel prices huge variability and volatility in crack spreads on fuel.
You have.
Potential variability in demand because of all of those things supply chain issues still.
So who knows what whether those will materialize or not the good thing is we are extremely well positioned we have the people we need we have the aircraft we need we have.
Have a $6 billion net cash position, we have 53% leverage and lowering so we're well positioned to weather whatever comes our way.
I don't I didn't specifically I didn't name one thing, but I'm, just giving you a flavor for how I think about it.
Thanks, Bob It sounds like all of the above.
Sure Sir.
Well, thank you Ravi and thank you everyone for the questions Thats all the time, we have for the analyst portion of our call today I appreciate everyone joining and have a great day.
Ladies and gentlemen, we will now begin with our media portion of today's call.
I'd like to first introduce Linda Rutherford Executive Vice President people and communications.
Thank you Chad and welcome to the members of the media on our call. Today. We can go ahead and get started if youll just given some quick instructions on how to queue up.
Certainly to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press star two.
At this time, we will just pause momentarily to assemble our roster.
Thanks.
And our first question today will come from Alison Sider from the Wall Street Journal. Please go ahead.
Hi, Thanks, so much I wanted to ask about the report that the FAA released yesterday and specifically some of the allegations raised about how southwest has responded to them.
Investigations of certain flight incidents and accidents.
Could you talk a little bit about kind of.
What you made up of those allegations if you agree with those assessments and whether you've made any changes in the last couple of years.
To your approach to those investigations.
Hey, Allison I'll start and then Mike.
Give a lot better information in detail I'm sure but.
I think from what I've seen here there is nothing new it's a collection of old stories. So these are allegations that were raised I think in 2018 2019, all examined by the Dod.
E.
The others and I think a published report in February 2020, we cooperated with everyone.
<unk> Senate committees et cetera took this very seriously as we always do safety is number one we're very safe always improving safety.
So I think this was just in my mind. It was just a wrap up of that process. So I think in the special.
Council report our letter that came out even at the end of their <unk>.
This matter is now closed.
I think it's just essentially a closeout of what occurred in 2018 and 19 versus some new new so to me it's just.
It's a rehash of something that has been that has gone on before versus anything new but Mike do you want to anything yes.
Don't have anything to add there.
Allison we have participated with every group looking into it we have responded to everyone that is interested in it and every one of those issues have been.
Dressed.
Okay, Thanks, and if I can ask one more Mike you mentioned.
Sort of a connection between having all these new hires towards this new in their roles and kind of just the tempo of the operation. This summer can you talk a little bit about what the connection is like what.
Where you are seeing where you had seen things kind of get slowed down and if that's changed at all in the last couple of months.
Yes. So so just when you think about the typical so I think that we've hired about 3000 ground operations employees in the second quarter.
So if you think about the operating environment in the airport. So a lot of heavy equipment out there.
There is an operating tempo out there and you don't necessarily feel that.
Our experienced and.
In training and so when you're a new higher employee part of the on the job training process as the match you up with an experienced employee and so ramp agent at southwest Airlines that has been there a year.
You can work alone or she can work alone and.
Process all of the activity if you're a brand new hire you are paired up with someone so those are the kinds of things that just pace and slow down the operating tempo.
It.
And so we just have given all the hiring you just feel that as part of the company.
Great. Thank you.
Yes.
Yes.
And the next question is from Dawn Gilbertson from the USA today. Please go ahead.
Hi, all this paper.
Sure.
Andrew.
I would like I would like to if you could maybe go into some more detail on your policy change as it relates to credit.
I guess was it ever under consideration to just extend the Covid credit policy and not make this broader can you just talk about the pros and cons you away with this.
You get comment you get questions. All the time can I extend my credit I know you offered people they could pay $100 to get a credit just become kind of overwhelming trying to do this and this was outside from your brand promise. This was something that you thought would make things a whole lot easier for employees and travelers.
Hi, Don and I think Youre I think youre on the elements of this so we had this looming expiration of kind of COVID-19 funds that kind of brings us to the why now as Bob mentioned earlier, but the flexibility has always been important for customers for over Covid, it's become even more important and you see like an unwanted.
Plus we like to transfer flight credits, we now have discount refundable tickets because that becomes more important to people. So the desire for customers to have more and more flexibility has been increasing and now it has become the number one call driver for our customer relations department as people coming in a client and talk about their funds. We also added into the website into the mic.
Talent, we kind of put a prominently even before your point balance you have it there and so we the elevated desire of our customers for flexibility and concern about funds led us to this move which we think is consistent with our brand. So you can just extend some funds but.
Realistically that you really gives you nothing to go on promise customers. If you say well not only this extended forever. Then you can go out and now part of my marketing messages.
Giving you this.
As yours to begin with and it will never expired, we can market that and that can lower the hurdle for people to buy a ticket from southwest airlines because they know they can change it there'll be no fee. They know they can bring bags.
And on top of that.
Not worried about using it in a timely manner because it will always be there for you. So you put those things together and you might as well go all the way and have it never expire versus just a simple extension, which kind of gets lost in the shuffle.
One quick follow up on that do you have any stats or can you give any sense I mean, how many people. Obviously if you are a small credit it wouldn't have been worth it to pay $100, but how many people paid for that six month extension by having $100 saved up their credit.
Right.
I don't have it.
Maybe you can follow up I don't know if you even track it wasn't always a policy it was like a compromised sometimes or many times, we would just extend it for free.
And other times when it was clear that someone had long forgotten that we've extended it multiple times, maybe that was the last gap. So it was not a hard and fast policy from US. It was just an occasional practice.
But this shows you kind of.
The increasing importance to customers so.
We'll just move to the other side of the ledger so to speak I say it is always yours and it'll be there for you.
Okay. Thanks very much.
We're always doing customer research around what do our customers want and that's how we arrived at we need to add recently, we need to add power on the aircraft.
The larger overhead bins.
And the desire for flexibility, especially post Covid, where there were lots of changes it rises right to the top.
And so our customers are telling us that at peace of mind around the ability to change is really really important and so again I know I've said. This many times you couple that with the peace of mind around no bag fees no change fees rapid rewards points that don't expire and now.
Transfer ability within the new Wanna get away plus fair and it's just it's a really powerful package because were taking all of that worry.
And.
Away from our customers and again I'm convinced.
Not only are we going to retain customers because of this policy change we are going to win new customers just like we did with bag fees.
Bob I'd also add on that.
We're really powered by repeat purchases right people buy us the experiences they love us they come back. Thank you to all for being a frequent flyer and so I think thats different lot of times Airlines look at is the one that done a smash and grab with like a basic economy or something like that people remember when they were treated well and so.
In this environment once again, we're getting more of the customer they will like this they will come back and repurchase is in fact, a travel credit by definition is a repurchase.
And so that repurchase behaviors, what powers, all consumer businesses, especially ours.
Thanks, so much for the color.
My pleasure.
The next question will be from David Slotnick from TPG. Please go ahead.
Hey, good afternoon, everyone and thanks for the question.
I'm wondering if you could just share any colors or numbers or anything on the number of individual credits you have.
Value of them.
Anything to that effect, maybe the number thats left unused since 2020.
Yes. This is tammy.
Can I help you with that.
<unk>.
In terms of.
In terms of the balance that represents.
Travel issues that have been issued.
What was in our air traffic liability balance.
At the end.
At the end of the second quarter, and then probably represented.
6% of that of that balance so call it.
Between 400 and $500 million that is.
Of course net of estimated breakage so.
So that gives you at least a ballpark.
Historically, Ben maybe close maybe a little bit lighter than that but it's not the most significant piece of our air traffic liability.
Okay. Thanks very much.
Thank you.
And the next question is from the Hood Reggiani from Axiom. Please go ahead.
Hi, everyone. Thank you so much for doing this I wanted to ask about talking to local news media.
The area that southwest will be able to extend service to DFW without having to give updates at love field starting in 2025.
Wanted to ask you directly is adding service to DFW Airport part of your long term plan why or why not.
Well the I mean.
First off dialysis or home.
And we we love serving Dallas, where we were born here.
Dallas, we put a lot of money to Dallas Love field.
Basically rebuilding the airport adding games.
Mofield, though over obviously.
Yes.
Is constrained and so we want to serve we want to continue to service the area and at some point.
That becomes difficult given the capacity at love field. So it's just a general comment that as we.
That will look to add capacity generally to the extent that we can there are a lot of there are a lot of potential ways to do that obviously DFW it could be a way to do that we don't have any anything in process.
It's really more comment about being able to serve the area.
And it is about a desire to go to DSW and at some point when you are constrained.
You have to find a way around that but really job one right now.
Is too.
Conserve.
To preserve access to.
Love Field and Andrew if you want to add anything to that I think it's common for us to serve multiple airports in a metro area. We do that in the Los Angeles Basin area Genesco Bay area, Washington, D C Houston and Chicago, So that's normal for us so it would be normal for us to have.
Another airport reserve and a large population both like Dallas.
One is our responsibilities is to create more opportunities we can prosecute but so.
We have lots of opportunities all around our system Dallas is one of them. So I think the point in time is not material, but it's an opportunity for us to prosecute when the timing and the facilities are right.
Well said.
The issue isn't.
DFW the issue is how do we continue to serve the area.
That's really that's really the issue.
I would say.
Thank you and if I may follow up Bruce Lee are you able to share some of the benefits that you've noticed operationally for having flights out of key airports and a major region. What are some of the things that can be a win win so not only can customers, but also for new southwest.
We generally want this for a customer reason because we want customers to go to the airports most convenient to them. So really when you get these big metro areas.
Traffic also becomes a big part of your travel plans and especially if you're flying shorter hauls that youre flying from across the country. You may not perceive the difference between <unk> and Burbank in long Beach in Orange County, and in Ontario, because Youre flying from Denver, or Northern California, Phoenix, then can become the traffic's a material part of your journey.
So you want to fly at an airport, that's closer to where you're going and so having these kind of neighborhood airports. If you will gives our customers a better value proposition for kind of.
Transit and so that's the biggest driver is that kind of convenience once you're on the ground to our customers.
Yes.
Thank you my.
My pleasure.
Thanks for the question.
We have time for one more question, we'll take our last question from Mirage truck seat from the New York Times. Please go ahead.
Okay. Thank you.
I apologize if you've already addressed this but I was just curious.
If you're able to say anything.
With the spirit Jetblue merger.
I guess I'd just be curious to hear your perspective on how that could affect the competitive landscape.
Yeah.
Just anything sort of generally about how you think it might affect the industry.
Hello, My answer which is we don't comment.
And acquisition.
But just generally obviously, we have experience with these things at southwest over time.
We purchased the Airtran Airways, we did some things with HCA, we had Morris over time. So we have we have experience about once a decade or so doing something here.
I'm not going to opine on spirit and.
What's happened with frontier and Jetblue I would just tell you how we think about it which is.
We're going to compete with antibody whoever that is we compete vigorously every single day.
In every location and so whether that's.
In this case spirit Standalone our spirit.
Merged with somebody else it doesn't change the way, we think about competition and what we need to do we need to serve our customers we need to have the best network, we need to have.
<unk>.
Efficiencies like a single aircraft type, we need to have low cost that enable low fares and I always go back to the beauty of southwest Airlines as we have the best employees, who wake up every day with a hard to serve others before they serve themselves and that's the beauty of southwest.
That's how we think about competition is deploying our strengths.
So that would be my answer which is no matter, who it is we're going to compete.
Add onto it you probably heard the call is talking about getting back to our efficiencies rolling out new products right restoring our network reinvigorating our culture. So we control our own destiny. So we just roll. This plan out we've talked about all call and we control our own destiny. So we don't really need someone to someone else in the industry to do something to avoid doing something we control our own destiny.
So we will prosecute that I think that's what benefits you when youre in a position of strength.
Yes, Thank you Andrew sort of adding back to the earlier question too about what.
What worries you out there like potential recession, we talk all the time internally about we can't control the externals.
But we can control our reaction to them.
And how we manage ourselves yourselves, most airlines and that is 100% of our focus.
Yeah and.
I just just one thought as you were all talking just to come back to.
Our second quarter results I'm truly were extraordinary to have a record performance and you just think about where we've come from two years ago. It's just it's just remarkable and we've talked a lot about our third quarter revenue performance and while there is certainly some noise in.
Some of the numbers.
Our guide was still up 8% to 12% relative to 2019.
And.
A lot of commentary on revenues, but I do want to make sure that I was clear that when modeling our revenues going forward you would want to use our third quarter guidance of that 8% to 12% just just to be really clear because I know we've done a lot of information out at you today. So.
It's really gratifying to think about how far we've come from 2019.
Sure.
Yes.
Thank you. This concludes our question and answer session I would like to turn the conference back over to MS. Rutherford for any closing remarks.
Thank you all so much for being with US today as usual you can follow up with our communications Department. If you have any other questions or you can visit us at Www Dot SWA media Dot com, Thanks, and have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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