Q3 2022 Southwest Airlines Co Earnings Call

Good day, everyone and welcome to the Southwest Airlines third quarter 2022 conference call.

My name is Jamie and I'll 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 todays prepared remarks, there will be an opportunity to ask questions.

Ask a question you May press Star and then one using your telephone keypad.

To withdraw your question you May press Star two.

At this time I'd like to hand, the conference over to Mr. Ryan Martinez, Vice President of Investor Relations, Sir you may begin.

Thank you operator, and welcome everyone to our third quarter earnings call.

In just a moment, we will share some prepared remarks, and then open it up for Q&A and on the call today, we have our CEO , Bob Jordan President, Mike Van de Ven, Chief Operating Officer, Andrew Watterson, and executive Vice President and CFO Tammy Romo.

We also have a few other senior leaders in the room today, including Ryan Green, our new Executive Vice President and Chief Commercial Officer.

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.

Also we had a few special items in our third quarter results, which we excluded from our trends for non-GAAP purposes, and we will reference our non-GAAP results. Today. So please refer to the press release from this morning, and our Investor Relations website for more information.

Bob I'll turn it over to you.

Alright, well, thank you Ryan and I appreciate everybody joining us this morning.

I'm just really pleased to report another solid profit in the third quarter of $316 million, excluding special items or 50 cents a share all in all third quarter's Bottomline results came in almost right in line with our expectations back in July slightly better in fact and that really speaks to the more stable environment that we're operating in.

Today versus where we were just two quarters ago.

On a fully recovered yet it makes a big difference in our ability to more effectively plan set our flight schedules and avoid revising them and deliver a more reliable operation both for our customers and our employees that's exactly what we're doing in the second half of 2022, and that's what we plan to do going forward.

Given the significant progress we've made thus far we do not intend to republish or materially change our future flight schedules.

It was necessary to do during most of the pandemic.

One of our primary goals for this year is returning to consistent profitability and we are well on our way and continue to expect a solid profit for 2022, we're coming off a record third quarter revenues and bookings appear strong as far as we can see in our booking curve demand trends both volumes and yields are robust.

Yeah.

We wanted to get a properly staffed and that's going very well we remain on track with adding over 10000 employees. This year net of attrition and we are getting much better stabbed in key areas with the exception of pilots, where our aggressive hiring efforts continue and we are on our track we are on track to hire 200 pilots.

This year and 'twenty one.

'twenty 100 pilots next year as planned.

We wanted to restore our operational reliability and we are headed in the right direction, having made a lot of solid progress as we shared previously we restored some of our short haul flying in the third quarter, which was a little early and at the expense of revenue now knowing where business demand has ended up but the goal was to help the.

And I believe we got the desired result in the third quarter.

Going forward, we believe we have capacity better matched seasonally to demand in the fourth quarter and you can see the benefit in our sequential revenue improvement from <unk> to <unk> <unk> based on our guidance and as Mike will cover our on time performance. This month has been very strong with high completion rates and.

And the thanks of course goes to our people well solidly restored our customer service advantage. This year. Another one of our top priorities for January through August . The most recent data available. We remained number one in customer service per the dot's ranking for marketing areas.

I'm, just so thankful for our employees and how they have worked tirelessly together as a team no matter the obstacle and they have us solidly back on top of the industry again.

Our employees are the.

The.

The central proof in an essence yourself most airlines that I'm, just so very proud of them and all that they've done.

Jet fuel prices remain high, but we are 61% hedged in the fourth quarter and continue to expect healthy hedging gains. When can you continue to expect bolt inflationary cost pressures and cost headwinds from lower productivity and efficiency in fourth quarter. This was all anticipated in our full year guidance and other than some.

Timing of costs between <unk> and <unk>, our cost trends have been very stable, we've been executing well on our full year 2022 cost plan since we will since we provided our full year.

CASM ex guidance back in January and but for the hurricane impact. The capacity. We are also executing on our full year 2022 capacity plan.

Specific areas of focus for 2023 or to maintain adequate staffing and get caught up in pilot staffing get new contracts with all labor groups. Currently in negotiations fully utilize our aircraft and optimize staffing to the fleet and flight activity wring out costs inefficiencies and improve efficiency levels in <unk>.

<unk> leverage as we fully restore the network.

Our primary gating factor to growth next year continues to be pilot hiring and I don't expect that we will be fully utilizing the fleet until late 2023 as of today. Our flight schedules are published through July 10, 2023, and we feel good about our ability to fly those schedules as published and plan. Despite some uncertainty around.

Aircraft deliveries.

While we expect a healthy amount of capacity growth next year. It is nearly all going back into key southwest markets.

These are markets that we borrowed from to fund New airport expansion during the pandemic and as business demand improves we have opportunities to build those back up.

And this is lower risk growth primarily in markets, where we have the number one share and a strong southwest customer base. So we don't believe the capacity additions carry near the risk of adding a new market.

Our goal is to have the network fully restored by the end of 2023 and by summer 2023, we should be about 90% done.

In closing we've made tremendous progress this year barring any significant unforeseen impacts we should finish this year very strong given our fourth quarter outlook. While there is noise regarding whether we are headed into a recession or not or whether we may even be in one now we have not seen any noticeable impact on our bookings and revenue.

Trends. There has also been a lot of discussion about the blending of business and leisure why and where those trends may ultimately end up but regardless of our overall revenue trends are strong and well above 2019 levels.

Our work continues on developing a strong financial plan for the for next year, and we will share more about that at our upcoming Investor Day meeting in December and I'm extremely proud of our employees for their dedication to the cause of the southwest Airlines. They are our greatest asset and their our secret weapon, they're the best in the business and I know why.

Not all of them to rally together and help us improve further in 2023.

And before I turn it over to Tammy I just wanted to say a big Thank you to Mike Mike has overseen the operation here at southwest for over 16 years and that is just a huge job and a huge task. He's a tremendous leader I'm just very grateful Mike for all that you do and I'm very grateful that you will continue to work as an.

Pfizer to me and others in the future.

And I also want to say, a big congrats to Andrew to Linda and Orion.

For sure.

Taking on even more I really appreciate that and today, Mike will report on operations and Andrew reported on commercial and then be getting at our December Investor Day, Andrew will speak to operations and you will hear from Brian regarding our commercial plans and with that I will turn it over to Tammy.

Thank you Bob and thank you Mike My theory would you frame.

Decades.

Yeah.

Thanks.

All of our employees for their remarkable job throughout the quarter. In addition to delivering a high quality.

Our customers their efforts led to the solid third quarter apartments.

Demand trends from summer continued in third quarter resulted in record third quarter revenue and record third quarter revenue passenger cars.

Our third quarter operating revenues grew a healthy 10, 3% versus 2019.

By a very strong other revenue performance.

Andrew will speak to our revenue trends in a minute.

I will turn to our cost performance and outlook.

Our people get another great job managing costs in the quarter, our fuel hedge continues to perform well in this environment.

Market prices remain volatile and elevated saving the company about $220 million and fuel expense in third quarter alone.

Our 61% hedged for fourth quarter, and we currently estimate our fourth quarter fuel price to be in the $3 15 to $3.25 per gallon range, which would be a sequential improvement from third quarter steel price based on current prices.

That estimate includes 37 cents of hedging gain which equate to cost savings of more than $185 million in fourth quarter, which would put our full year 2022 fuel hedge benefit at roughly $1 billion.

We recently added to our 2023 fuel hedge portfolio and are now 50% hedged with a fair market value of around $390 million for full year 2023.

The fair market value of our fuel hedge portfolio through 2024 and $685 million.

We will continue to seek opportunities to expand our hedging portfolio in 2024 and beyond but we are in good shape headed into next year, especially given the volatile energy market.

Last year that made it tough to materially expand our positions at historical premium cost.

Taking a look at non fuel cost third quarter CASM, excluding special items and profit sharing was towards the favorable end of our previous guidance range and up 12, 2% compared with third quarter 2019, due to lower than anticipated health and benefit costs as well.

Higher favorable airport settlements that we expected to receive this quarter it shifted earlier to third quarter.

We currently estimate fourth quarter CASM ex to increase in the range of 14% to 18%.

Paired with fourth quarter 2019.

More than half of that increase continues to be driven by headwinds from operating at suboptimal productivity levels.

Founded by decrease capacity levels here in the fourth quarter relative to third quarter.

The remainder of the CASM ex increase continues to be primarily attributable to inflationary pressures primarily in higher rates for labor benefits and airports.

All of that said I'm very pleased that we remain on track with our 2022 cost plan as Bob mentioned.

In this environment.

As we close out the year, our full year 2022, CASM ex guidance has been narrowed to at 14% to 15% compared with 2019.

As a reminder, this includes labor accrual for all contract labor groups, beginning April 1st of this year.

Andrew account, our best estimate for wage rate increases.

Looking ahead to 2023, we continue to estimate full year CASM ex to decrease compared with this year.

We now have our first half 2023 flight schedules published for sale and we currently expect first half 2023, CASM ex to be in the range of flat to up 2% compared with first half 2022.

Given the level of first half capacity growth and a pre pandemic period, we would have expected CASM ex to be solidly down year over year. However, we expect to continue experiencing unprecedented cost headwind.

Higher than expected inflation and as part of that keep in mind that we are accruing for all open labor contract and further wage rate increases in 2023. So that is fully included in our guidance based on our best estimation of market rate.

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On top of wage rate inflation, we expect to continue hiring at a healthy pace next year to support our 2023 capacity and scale our 2020 for growth.

Our productivity has not returned to pre pandemic levels, which has required additional hiring to support the operation.

It seems that most industries and company, including our peers are experiencing a similar workforce dynamic.

Based on our assumption that fleet utilization will be limited by pilot staffing constraints with the majority of 2023.

These cost headwinds will persist throughout next year.

That should improve somewhat in second half relative to first half 2023.

We haven't finalized our second half 2023 capacity plan, but our current estimation is that second half 2023, CASM ex will decrease in the low to mid single digit range compared with second half 2022.

We continue to be focused on better optimization of staffing levels to our flight activity and improving our efficiency metrics and operating leverage.

That work will begin in 2023 and continue into 2024.

Turning to our fleet, our planning assumption for Boeing aircraft deliveries this year.

Unchanged from what we shared in July .

While our contractual order books still reflects a 114 aircraft in 2022, we continue to expect 66 dash eight Max deliveries. This year due to supply chain challenges that Boeing is dealing with as well as uncertainty regarding the timing of the dash seven Max certification.

Yes.

However, we are encouraged to have received all 23 dash eight Max aircraft in the third quarter as expected and continue to expect 31 dash eight Max aircraft deliveries here in the fourth quarter.

We do not expect to take delivery of any dash seven Max aircraft. This year.

We continue ongoing discussions with Boeing and just recently made some modifications to our order book and short we converted more of that seven Max aircrafts to dash eight Max aircraft in the near term.

We outlined the specific changes in our press release. This morning, So I won't reiterate all of the sleep details here.

In terms of retirements, we now plan to retire a total of 26700 aircraft. This year a few less than previously expected.

Ending the year with an estimated 768 aircrafts in our fleet.

And our full year 2022, Capex guidance remains unchanged at approximately $4 billion.

Turning to our balance sheet, we ended the quarter with cash and short term investments of $13 7 billion after paying $1 9 billion to retire debt and finance lease obligations during the third quarter.

This included the full $1 2 billion outstanding amount of our core.

475% notes due 2023 and $184 million in principal of our convertible notes.

We have now repurchased a total of $699 million of our convertible note roughly 30% of the original issuance and have $1 6 billion currently outstanding we.

We remain in a net cash position with leverage at a very manageable 48%.

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 long term competitive advantages and.

In good times and in challenging times.

With our strong balance sheet and continued financial strength, we will soon discuss our 2023 capital plans with our board of directors.

Our capital allocation priorities remain unchanged, we have a longstanding dividend history and reinstating a dividend remains a high priority. We will also continue to look for opportunities to reduce debt.

We will continue investing in the company and our people.

And we are focused on wrapping up negotiations with all of our open contract labor.

Last but not least and at the right time, we intend to resume share repurchases as part of our shareholder return equation as we have in the past.

And all of these intentions and seen that the travel demand environment remain steady and we continue producing consistent quarterly profit.

We are mindful of the economy, and recessionary risk and we would like to monitor the environment to see if there is any noticeable impact on travel demand as we move into 2023.

Again, we are not seeing any noticeable impacts today, but we would like to preserve a higher than normal cash balance for some period of time into next year before we materially reduced our cash reserves.

So while I can't commit to anything today I hope that gives you an idea of how we are evaluating our capital allocation choices.

In closing third quarter represented another profitable quarter in our recovery.

Our momentum is building here in fourth quarter supported by a strong revenue outlook and I am encouraged with the progress we have made as we look to close the year strong and turn our focus to 2023.

We are committed to generating healthy returns on invested capital and I am very pleased with the direction we are headed.

With that I will turn it over to Andrew.

Thank you Tammy I'll provide some additional color on our Q3 revenue trends in Q4 outlook and point you to our earnings release for more detail.

Overall Q3 operating revenues came in right in line with the midpoint of our original guidance range of 10, 3% versus Q3 2019.

Our path there.

The anticipated, but a solid result nonetheless.

We had an 85, 4% load factor and yields increased five 3% versus Q3 2019.

In July and August we saw a step back and close end business demand, but that was coupled with stronger advanced purchase leisure demand.

September we saw a nice sequential improvement and managed business revenues and leisure demand remained stronger than anticipated and was particularly robust for a typically weak weaker leisure shoulder months post labor day.

September managed business revenues finished down 25% versus Q3 2019.

Well Q3 took a bit of a step back on business trends. We finished the quarter on a strong note and revenue momentum is picking up steam.

As anticipated we had a five point sequential headwind from Q2 to Q3 for our travel credit exploration policy change in July .

Which resulted in lower breakage revenue in Q3 as.

As Bob mentioned, we also increased our short haul flying in Q3 in order to help with our operational stability.

Mike will cover operational results in a moment.

We over index on short haul flying in Q3 relative to where business demand ended up which created a roughly two point drag to Q3 operating revenue.

As business demand rebound in September the additional short haul flying helped overall revenues and our revenue trends in medium and long haul segments were very strong throughout Q3.

Our Q3 loyalty program revenue was exceptionally strong and the primary driver of the increase in the other revenues.

We saw strong growth in retail sales, which was aided by incremental revenue from our co brand credit card agreement with chase that we see.

Cured at the end of last year.

Even so Q3 retail sales spend per card holder in our overall portfolio size continued to grow versus 2019.

We continue to be very pleased with the performance of our loyalty program and its significant revenue and EBIT contribution.

Our ancillary products also performed well in Q3 in particular, our upgraded boarding product.

This allows customers to purchase any unsold business select boarding positions and the $1 15 boarding group on the day of travel.

We recently rolled out a new digital self service option to purchase this product, which was previously only available to purchase at the airport gate.

Our portfolio of new cities in developed markets performed in line with expectations in Q3.

Hawaii outperformed our expectations, primarily due to stronger mainland to Hawaii performance as we further invested in re optimized our Hawaii franchise.

These actions are paying off.

Our Hawaii Interisland service will take longer to development and our primary goal at this point is to generate awareness among local travelers and incentivize them to try southwest experience our product.

This is not uncommon with introduction of foodservice.

Now looking at Q4 travel demand is strengthening and we expect both leisure and business revenue trends to improve sequentially from Q3 and bookings for the holidays are strong.

We expect Q4 operating revenues to increase in the range of 13% to 17% versus Q4 2019.

We expect sequential improvement in Q4 business revenue trends compared with September is down 25% and we expect Q4 managed business revenues to be down 20% to 25% versus Q4 2019.

The sequential improvement we are seeing in operating revenues is from base business improvement in particular on the yield side as we continue.

As well as continued ramp of benefits from revenue initiatives.

Our Q3 capacity decreased slightly down <unk>, 3% versus Q3, 2019, which was in line with our guidance Despite flight cancellations from Hurricane Ian.

Our Q4 capacity is a little lower than previously guided due to hurricanes in flight cancellations and is now expected to be down approximately 2% versus Q4 2019.

Dave length is increasing a bit as we move through Q4, and we continue to expect to be about 85% restored from network expect perspective by this December .

Looking ahead to next year, we expect Q1 2023 capacity to increase around 10% year over year in Q2, 2023 capacity to increase around 14% year over year.

While we aren't ready to provide full year 2023 capacity guidance, yet that should give you an idea of the rate of capacity growth next year.

When we talk about being fully restored from network perspective that means restoring the key southwest markets. So we barred from to fund the new airport growth during the pandemic.

So our year end 2023 capacity goal would be network restoration, plus our 18, new airports in recent Hawaii expansion.

In closing this will be my last earnings call covering the commercial update as our new Chief Commercial officer, Ryan Green will take over going forward.

I've worked with Orion for a long time is very prepared and will qualify for his expanded role.

Some of you have met Ryan in the past, but he was most recently our chief marketing officer.

As I'm transitioning to Chief operating officer, our retained the network planning function as we strive to increase leverage operating leverage as we move past the pandemic and reconstruct the network.

And being conscious that I'm standing on his shoulders for my new job. Thank you, Mike and turn it over to you.

Thank you Andrew.

Hello, everyone.

We're now through the busy summer travel season, and aside from some weather that the industry had to deal with.

I'm very pleased with the reliability of the operations that our employees delivered in the third quarter. They are working very hard to take great care of each other and our customers.

And we've made tremendous progress in several areas, including getting properly staffed and most work groups and we have more employees that have completed their initial training and are now contributing on the frontline so over 95% of our hiring has been in frontline and operations groups second flying our published schedules.

Making material material posted revisions as Bob mentioned, our third quarter schedules were much more stable for our employees and our customers.

And third just as with last quarter, we have improved the quality of the schedule with more depth and more non stop flight Andrew mentioned, we've added short haul flights and business foreign markets and that provides more options. When we have weather or ATC delays. We also have more flying between all of our crew bases in all of those.

Changes support a more stable operational performance.

From Memorial day through Labor day, the heavy summer travel season, we improved year over year across nearly every operational metric, including our on time performance.

And our flight completion rate was 98, 6%, which means we cancelled slightly more than 1% of our scheduled flight and that's in line with our prepaid been pre pandemic performance and Thats really where we aimed to be.

Digging into on time performance for the third quarter. Our on time performance was 71, 2%, which was referred to as <unk> by the department of transportation or getting customers to their destination within 14 minutes of their scheduled arrival time.

So if you look at getting our customers to their destinations within 30 minutes. Our on time performance increased to 81, 7% and it was 94% within an hour, where we always want to be on time, but my point is that we are currently canceling very few slides and we're consistently getting the vast majority of our customers.

To their destinations within a reasonable amount of time.

We are focused on improving our <unk> and we know that the primary challenge is operating tempo.

And I talked about this last quarter, but I think it's worth repeating our.

Our operating tempo is being impacted by the sheer number of new hires starting work, we've got more leisure customers that are in our load factors.

The airport environment as well as air traffic control challenges from both weather and staffing and all these things tend to require more time and they are causing us some delays it just didn't exist pre pandemic.

However, we have made solid progress towards our historical operational results.

And we're doing that at nearly pre pandemic capacity levels.

Need to continue improving we've got great momentum here in October with our on time performance running in the low 80% range.

We continue to hire and train new employees, I mentioned had us well prepared for the upcoming holiday season.

And we should continue to just to get better as we continue our network restoration through next year and get even more employees through training.

And just a couple of more thoughts on hiring and training.

We continue to hire in most work groups and focus locations and we still expect to add over 10000 employees. This year net of attrition.

We just we arent just hiring for this year, though we're hiring to support the spring and the summer of 2023, so that we have a more seasoned workforce in place.

Our pilot hiring and training continues to be the pacing factor for growth as we move forward.

We continue to attract high quality pilot candidates and the training programs to onboard a new pilot to southwest Airlines are robust.

We're operating at our maximum training capacity for pilots and that will continue well into 2023.

And then just last but certainly not least I do want to congratulate my friend, Andrew Watterson for his new role as Chief operating officer.

Been doing that role for almost 17 years and I know Andrew is well prepared to take on this role I know what youre going to continue driving to modernize the operation is going to bring a new perspective and energy that will serve our company well.

And I'm looking forward to transition into an executive advisor role early next year and our system Bob in the southwest team on a variety of matters as needed.

I would like to thank all of our employees for their hard work.

I, especially want to say, thank you to the entire operations team that I've been a part of and I've had the pleasure to support all these years.

Southwest is truly a championship team.

I am grateful.

Sure.

To be a part of it so.

So with that Ryan and I will turn it back over to you.

Well. 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.

Okay.

Ladies and gentlemen, we will now begin the question and answer session.

To ask a question you May press Star and then one on your Touchtone phone. If you are using a speaker phone we ask that you. Please pick up the handset.

Before pressing the keys to ensure the best sound quality.

Australia Your questions you May press star two.

Our first question comes from Andrew <unk> from Bank of America. Please go ahead with your question.

Hi, good afternoon, everyone.

Jimmy two quick questions on costs here.

I know you've been accruing for labor most of this year, but do any of the does the recent deal from one of your peers changed in any way how you would how you accrue for your agreements going forward and then second on costs does that low single digit CASM growth that you outlined at last Investor day, after 2023 still seem reasonable.

In the current environment.

Yes. Thank you Andrew for your question.

And yes, we've taken into consideration all of that current labor deals as we contemplated our accruals here.

So all of that has been baked in to the guidance that we shared with you.

And in terms.

<unk>.

Our investor.

The goal is that our longer term goals that we laid out with you at Investor day.

I think we're in line still in line with those longer term goals. So clearly we've had some choppiness here in terms of the rate that we're bringing back aircraft and employees and restoring the network. So.

And that created some lumpiness in our cost trend.

But we've done our very best here at least looking ahead for 2023 to <unk>.

<unk> revenues inflationary pressures.

And the guidance that we provided to you this morning.

Andrew This is Bob Yes, I agree with Tammy.

The gold standard.

If you think you saw that we noted that deliveries as an example, only.

Some of this delivery.

These delivery issues with Boeing could persist into 24, so you could still be.

Some extent wringing out some of the inefficiencies that are caused by some of that in and.

Just still folks that are in training going back going out on the line some of that could persist early into 'twenty four but no absolutely all of the gold standard.

Got it understood.

Then the second time in nearly a $14 billion in cash on the balance sheet.

With the move in rates. So just how are you investing this cash.

How should we think about interest income going forward into <unk>, because it looks like it's reaching a level where it offsets your interest expense.

Any color there would be great. Thanks, yes.

Yes, no great question and you're absolutely right.

We saw.

An improvement in our other expenses as we've seen.

Rates improve here.

So yes nowhere.

We are investing that cash in.

Obviously.

What we consider to be secure investments, but we do expect.

Interest income to continue to outpace interest expense.

Thank you.

Our next question comes from Scott Group from Wolfe Research. Please go ahead with your question.

Hey, Thanks afternoon, I wanted to ask about the <unk> RASM acceleration.

Different than others, but I guess your third quarter deceleration was different than it is this just noise around breakage from Q3 or is there some real underlying.

Acceleration strengthening in the RASM trend Q4 versus Q3.

Hey, Scott I'll, just start for just a second any outlet.

Andrew Chime in here there is a little noise between the quarters, but I think really its just its under law.

The continued strengthening in the underlying business you get leisure trends, which are really strong and there's been all kinds of talk about what's going on there.

The blending of leisure and business and everything we are seeing leisure strength and we will have would have been typically off peak periods. As just an example, only.

In a typical period or a typical year September .

Would have been two to three load factor points under the summer just sequentially.

And this year, we didn't see that so they were about two to three points above that sequential trend. So the leisure traffic is really really strong coming off we did have a dip in business in July and August .

And then we got.

Are those trends reversed in September and we expect to see strengthening in the fourth quarter from septembers.

Down 25%, so now youre seeing.

It's more about the continued strength in leisure and business revenues in the fourth quarter than it is noise.

Andrew what I would add is yes, we had some company specific drags in Q3 that have either gone away or attenuated.

And at the same time, we saw some business travel weakness there during the summertime, which is unexpected but then as we exit the summer we saw business travel pick back up in business travel in general has had a nice line trend.

The trend line of restoration from post vaccine still today, but it had some kind of ups and downs that unexpected times and it took a kind of a down as Tammy said during early Q3, and now it's kind of ticked back up and so that combined with some of the actions we took on a little bit less short haul that.

We send out I think those things combined the show is good both volume and yield.

Acceleration from Q3 to Q4.

Okay, and then Tom in your comments about wanting to keep elevated cash is that sort of.

As signaled don't expect much in terms of buyback dividend or don't expect much in terms of size of buyback dividend. If there is any sort of more color you want to share there.

Yes, I'll cover that.

Pretty well.

In my remarks.

Obviously, we want to get back to our long standing.

Tradition of healthy shareholder return.

And we continue to be thoughtful in our capital allocation decisions clearly, we want to drive future growth and value.

As Youre aware.

The PSP restrictions on dividends and share repurchases.

Just expired at the end of the third quarter.

And we'll as we look ahead to December we will discuss our.

2023 plans with you in more detail, but I would just say that our.

Our capital allocation priorities.

Really haven't changed.

And as I said earlier, we have a longstanding dividend history. So reinstating a dividend continues to be a high priority for us.

As we've been doing here this year, we've been looking for opportunities to reduce our debt and we will continue to look for opportunities that make sense for us there.

And importantly, we continue to invest in our company and our people and are certainly focused on wrapping up a negotiation.

All of our open labor contracts.

And.

And at the right time.

We do.

<unk> share repurchases.

Yes.

Part of our shareholder return.

Equation, just like we have done in the past. So we're just trying to balance all of that and.

Again.

<unk>.

Two I think it is important to repeat we just.

All of this assumes that the demand environment remains steady and certainly we haven't seen any snapback here as we are talking to you today.

But we want to continue to monitor the environment, but so far so good on that front and we'll just keep you apprised of our plans as we update them.

Super helpful. Thank you.

Our next question comes from Jamie Baker from Jpmorgan. Please go ahead with your question.

Hey, good afternoon, everybody. So Tammy a follow up to Andrew's question, just so I understand the accrual mechanism.

Statically, if American and United ratified Contra pilot contracts tomorrow, with a 30% date of signing increase.

Okay.

Deliberate tier.

You would upwardly adjust your accrual to reflect that.

Or is it just a set it and forget it metric in your model.

I'm not going to speculate with you Jamie on any.

Particular percentages.

But we certainly take.

Labor contracts and what market rates in as an input and to our accruals. So.

We do monitor those and do our best job to estimate.

Labor rates.

Obviously, there are estimations involved with that but it's not.

We don't we evaluate that every quarter and update as we fill.

As necessary, which is what we've been doing really.

Starting back in.

Alright, so beginning of the second quarter.

But the percentage I was just being.

Dramatically the data has done it.

But I did Miss that you say you do or you don't upgrade or update it every quarter to reflect what's going on in the market.

Okay perfect.

And then second when listing priorities both in your prepared remarks, and then the last question.

You tend to emphasize labor deals.

You bring up the topic of capital returns is that deliberate or put differently should we view labor deals as one of the criteria you need to achieve before reinstating capital returns or am I reading too much into it.

Yes.

Jamie It's Bob and again, we're going to be talking with our board in the next months about.

Capital returns and there will be sharing a lot more of this with you at our Investor Day in December I don't know that you can be that prescriptive in terms of the exact order.

But it's very important for us to get the labor deals done.

I think.

We have great employees, we want to reward them.

Paid today, we want them to be even more.

Even better paid you.

You're starting to see deals.

The others, you're starting to see us get some tas out there.

I think it's clear.

The high priority would be the dividend restoration and then as you've seen as we've had opportunities to take.

To reduce debt, which we've done.

No.

Getting our labor deals done is a very high priority for our people.

Okay, that's great the bump it sounds obviously like your answer as well so sorry about that thank you.

You may have a package on the porch.

Yeah.

Our next question comes from Ravi Shanker from Morgan Stanley . Please go ahead with your question.

Thank you for everyone.

Great to see the traction on the operational reliability there.

Obviously.

Whenever you're trying so just wanted to get a sense of.

How robust are.

That is.

Given like if we had a really bad winter storm or there was a huge surge in travel like for like one or two days of doing Thanksgiving or something do you feel like there is enough slack in the system to be able to support some of that.

Robert This is Bob I wanted to just add one couple of top side things then Mike can talk about the details, but I think there are several things in here that are just macro helping drive the operational improvement number one just getting staffed.

When you understand that affects everything you don't have margin to deal with any kind of issue and we are so much better stab today than we were even three to four months ago. Obviously, we have ways to go with our pilots.

But really what's happening there is we just we are just under flying our aircraft because of that.

The other big thing is we committed.

I think late in the spring early in the summer, we committed to not republishing, our schedules any longer.

Because thats really hard on our employee is very hard on our customers and that Republishing, just and it's part of what adds operational difficulty. So post the summer we are committed to not republishing schedules and <unk> seen improvement operationally in September and real improvement here in October I think are.

Otp in October as low Eighty's in our NPS scores are in the <unk>.

So, yes, youre always going to have <unk>, but I think the base stability of the operation is much better for those reasons, but Mike.

Yes, Ravi I don't have much to add there, but we've been very purposeful in trying to make sure that we match our resources to our schedules.

For the whole year and we've had.

Really good experience over the summer and <unk>.

Difficult weather conditions with high load factors.

All kinds of things that would be.

An operational challenge during the holidays, and we were we navigated through all of them very stably. So I feel like we're really set up to perform well over the holidays as we go into Thanksgiving and the Christmas season.

Maybe just a follow up I apologize if I missed this but you guys introduced a new fare class structure.

A few months ago, what's the update on that what the takeaway at lake and how much of a boost could that'd be too trasimene now how much are you seeing already and how much could be intuitively.

Hi, Andrew the new fare product Wanna get away plus one we talked about at Investor day last year, and we rolled out in Q2 was part of the bundle of initiatives. We said next year. It was about two one and $1 5 billion of EBIT. So we didn't break out the line item for that nor do we breakout.

Great.

I've said and will say again is that the large majority of our customers will still buy the anchor Wanna get away. So this allows us to have more bite sized fill ups for additional features that customers. When we pay for and don't have a huge cost of delivery for it. So some intangible costs, but don't have a big cost for delivery and we have a cross functional team whose job it is.

Is it the take that product, which was delivered exceptionally well from a technical perspective.

And move it to our inside target take rate for our customers, we're making great progress on that they've already done it.

<unk>.

Significant actions on merchandising on price and how they communicate to customers and so we are seeing really good progress on its track to hit the business case, and we couldnt be happier with it.

Very helpful. Thank you.

Pleasure.

Our next question comes from Duane <unk> from Evercore. Please go ahead with your question.

Hey, thanks.

Andrew since this is your last call on commercial I want it to.

I ask you a revenue question.

So just just longer term how do you think about.

So the stickiness of yields in the context of an inflationary environment do you think people should still be indexing.

Our thinking to 2019.

Or has the world change and how much of the yield environment would you attribute to capacity deficiency.

How are you thinking about the new normal here.

Well I appreciate the philosophical question on my last revenue call.

But.

I think I am.

Tier 2019 comp so hopefully next year, we'll start talking about 2019.

You do have a supply demand mismatch right now in the industry.

And you have a bounce back from this recession that was stronger than any other recession that kind of I recall.

Going back maybe one of the Eighty's early double desk recessions.

We like this but it was extraordinary so it's unusual do you have demand quickly out stripping supply like this so it's going to take a while I think for the industry to have supply.

Back up because whether you have economic softness for next quarters next year, whatever it will keep chugging, along and generating more demand and given that some airlines are having trouble getting pilots and the air framers or having trouble kind of meeting their target delivery dates it's going to suppliers.

It'd be hard to come by industry level for a couple of years now. So I think we have a couple of years, where demand supply may not be as aligned as it was pre pandemic, which I think will have these yield tailwind for a while.

That's about as far as I think one could reasonably see in this industry, but definitely a couple of years of supply headwinds and demand tailwind.

I appreciate those thoughts and then maybe for Bob or whoever wants it.

Southwest is a margin focused company in our opinion, but in any given year you might have different priorities. So what is your guiding light for 2023 growth are you solving for margin expansion next year.

Or has this COVID-19 recovery bin so unique that the goal is sort of capacity restoration and we'll worry about margin expansion beyond this 2023 transition year.

Duane I think they all hang together. So we have got several goals we need to continue to restore our ops reliability. We've got against staff. That's really pilots next year. So that we can apply our whole fleet that enables the ability to restore the network in other words to get all the stuff that we flew pre pandemic back into the network.

We'll be sort of 90% restored the summer we think a 100% fully restored by the end of next year 2023, why that's important is because that capacity is going back into markets that we were in so that they are going into markets that we are very strong and we have a strong customer base. So it comes on at much less risk than opening.

A new market so that ties into the revenue performance of the margin discussion.

Because it helps.

But no the goal on top of those goals in 2023. The goal is to grow revenues to grow profits to grow margins and overall returns.

I appreciate the thoughts.

Thank you.

Our next question comes from Conor Cunningham from <unk> Research. Please go ahead with your question.

Hi, everyone. Thank you for your time.

Can you talk a fair bit about just.

Training in general and it seems like that's one of your biggest problems from a from a pilot standpoint.

Is there anything you can do to bolster the throughput there.

I feel like this has been an issue for a while and I'm just surprised that it hasn't been.

Fix but like there hasnt been a better solution in the near term that could could drive some efficiencies there.

I just want to clear up.

Sometimes there is confusion between hiring and training.

We're having we're having I just want to point this out we're not having any trouble hiring pilots.

We're getting all the pilots great pilots that we need we're overbooking classes as an example.

Thats different than getting everybody through the training process or its just a max capacity, we have a lot of simulators. We have 23, 26% were adding three here. So we've got a lot of simulators, but the training pipeline is full.

Andrew we're talking about the whole industry being constrained I think that's really what's going on in the industry is constrained to the.

Some to some extent hiring for some carriers, but really the training processes. So.

If you're asking about what can you do about it.

It's really difficult because.

The lead time on a simulator is years as an example, so by the time you get that and you don't need it any longer in terms of managing this bubble so but the main point is the <unk>.

Hiring is going great.

Training is for our plan this year was the higher 200.

Pilots and we will hit that the plan next year is to hire 2100 pilots and we will hit that and then the plan is to have sort of the pilots catch the aircraft.

Late next year, so that we're flying the whole fleet and that will be our plan.

Mike you want to anything I'll just jump in counter so yes, our training throughput were at maximum training throughput was all of the infrastructure that we have so we've got I think 26 days, we will have 26 simulators in there at the beginning of the year. We're fully staffed on slide instructors to go do that we've got enough check airman.

To go do that so we're just hearing a lot of new pilots, we got a lot of cabin upgrades and then we have the normal recurrent training. So we will be at maximum training capacity in 2023, and then it falls off as Bob mentioned in 2024 and beyond there. So we're not.

We're we're putting as many pilots through our system as we can.

As a complement my contango this in the middle of the pandemic. What people are focused on day to day, they've made the decision to expand our training facility, but I put in more base to order stimulators, but no. One else is doing either so when we came out we actually have more training capacity now that we had pre pandemic by quite a bit and so even though we're at capacity this was <unk>.

It was added during the pandemic what everyone else was thinking about that today they were thinking about tomorrow.

Good point.

I appreciate that detail.

And just sorry to like piggyback ongoing margin question, but.

So you still have a fair bit of inefficiencies in the 'twenty three and some of your hedge benefits probably roll off so we're kind of banking on revenue being really strong and I am not really asking about for pricing, but is there any other.

Levers out there outside of revenue that could drive sustained profits higher next year, but just people aren't thinking about and I. Appreciate it. Thank you.

Well, you've got you got it.

Again strong revenue performance.

That's for a number of reasons the other thing.

You've got our initiatives coming fully online as Andrew pointed out so the contribution is sort of one to $1 five EBITDA.

In 2023, and we've been right on track.

Hitting the contributions that we told you about in terms of our revenue initiatives.

We have work to do on the cost front some of our cost pressure.

Pressures are what everybody is seeing their inflation.

Particular wage inflation some other categories.

Another piece of that or inefficiencies that again I would argue almost everybody is seeing there just folks and training not flying all your fleet just thought back to the efficiency levels that you were pre pandemic.

So we've got an opportunity to work on.

We've talked to you about this.

Especially on the operations areas tools.

<unk>.

Ways to take cost out of our of the operation in particular, and we will be sharing a lot of that at Investor day here in December .

Okay. Thank you.

Thank you.

Our next question comes from Savi <unk> from Raymond James. Please go ahead with your question.

Hey, good afternoon.

Can I ask on the managed business revenue decline.

The decline that you saw from June is that a function of pricing or is that volumes as well because I know you gave revenue kind of outlook here.

And I'm guessing pricing has been softer just generally from kind of the earlier in the summer.

Yeah, sorry, it's Andrew.

We did see coming out from June to July and August boats.

<unk> and yield softness and managed business, which then turned around in September and in October and so it was clearly different behavior as I mentioned before theres been kind of the start stop start stop with managed business from kind of post vaccine rollout and it's hard to be super clear on exactly the drivers are but we do hear lots of anecdotes over there.

A summary of our company's reinstating PTO caps, therefore people had to take.

PTO during the summer also many companies put in place kind of hybrid hybrid work, but then had remote july's, where you can kind of work remotely for the month of July and therefore, you don't travel for.

For business reasons, so lots of these anecdotes fit with the summer slowdown in travel, but then resumed post labor day.

With a nice tick up post labor day, and that trend continued to accelerate from September into October so.

Not putting too much about why there was clear this is what happened.

Both volume and fare or improving now for managed business as we exit the summer.

That's helpful and if I might I know that there's a lot of uncertainty around delivery, but I was wondering if you could put a guardrail around 2023 capacity plans are or just even a guardrail around maybe what you could see in terms of what you think is realistic in terms of kind of.

Delivery from a low end than the high end.

I think what Bob said earlier, we were.

We're pilot constrained until the end of next year. So a lot of what we're doing for the bulk of next year is really paced by our pilot training capacity not by Boeing deliveries. Obviously these are much more efficient aircraft fly.

But it's not the delivery rate, that's really constraining 'twenty <unk> three for the bulk of the year.

You also got.

This is the way to think about the capacity that we've given you. So we gave you the 10% in the first quarter and the 2014 in the second quarter, probably gives you some guidance.

We're not ready to offer 2023 full year capacity, but gives you some way to maybe think about that another just.

Wasn't exactly your question, but just to tie to that when you think about the capacity for the first half of the year. The vast majority of that is just carryover from capacity that was implemented.

In 2022, I think Andrew it's upwards of 90% around 90%. So you've got about 90% of that capacity is just stuff. That's carried over from things that were added back as we restore the network in 2022.

That helps the I agree with Andrew on the delivery front I don't we don't see a scenario right now where.

The Boeing deliveries are reduced to the point, where somehow that limits our ability to manage to put into place the capacity that we want because they gave where pilot constrained in all likelihood to the end of the year. So.

Again, our intent is republished schedules our intent through that through the middle of the summer. Our intent is to fly those I don't think those will be affected by any delivery issues and not to expect too.

Like all companies as the year moves along next year.

I want to speak for Boeing but as you continue to work on supply chain, whether that's engine or parts or whatever.

I would assume they'll begin to stabilize those deliveries and.

So no I don't think you will have an impact on 2023.

That's helpful color. Thank you.

Youre welcome.

And our next question comes from Brandon <unk> from Barclays. Please go ahead with your question.

Hey, good afternoon, everyone and thanks for taking the question I guess can we stay on this topic of being constrained by pilots network recovery, because I think if we're reading your op stats correctly, yes, we have.

Lower average stage length now than you did in the past so I get it maybe the composition of the city pairs is not the same as the past, but it would seem some of that long haul flying that was challenging you in the past maybe is coming out of the mix here.

So can you just help us understand.

Where are you scale from a pilot perspective today, if you could have everyone trained like how large of a fleet could you fly and how much more could you scale capacity from here.

So I think it's really it's not a we've changed the network is the driver is.

Have we picked an order in which we have restored capacity and so we chose to restore some of the short haul earlier.

This year.

A little bit of a bit on business recovery a lot of event that that helps the operational reliability, which is what we're seeing here in the last few months, which is different than we've got a different network post pandemic and so I think it's really the order of restoration.

And I'm not sure. This is exactly answering your question, but if.

If we could fly all of our aircraft that is we had enough pilots to fly the aircraft on property.

We would be roughly 5678.

Higher.

Capacity or <unk>. This year right now that's about how much more we could fly is really more of thats. The factor than it is the mix of the flying short haul medium haul long haul, but Andrew.

That's true.

From last summer.

Through last winter.

We had a much longer stage length, because we have fewer short haul that did hurt we determined the network stability.

Dave can become a very bad day, and so to hedge against that we've restored the short haul sooner than we would've otherwise paced it based on demand in starting in Q2 of this year and that has proven.

Our robust.

This decision because when we've had bad days with a lot of bad days of summer. We operated just fine got through them.

Contrast to some of our competitors now that does lead to a kind of imbalanced network with stage length is much shorter as you pointed out and so when we talk about restoration were essentially talking about added than longer haul medium to longer haul departures from now through the end of next year to fully restore the network. It will bring it back a balanced but well, let's say we will have every.

City pair how the same number of frequency had before we will every city will have its kind of pre pandemic network as far as what it is.

Serving customers, who want to fly for business building from the relatives and holidays. So I think youll see it kind of regular southwest network stays linked and composition by the end of next year.

Okay I appreciate.

The response and just maybe a quick follow up for Tammy.

The outlook for improved full year CASM ex in 'twenty, three I guess thats really not that contingent on Boeing deliveries done right. It sounds like it's more of the pilot training issue is the biggest constraint.

Yes, I think that is a fair assessment.

And our.

Our ability to bring on that capacity, so, yes, I would agree with that.

Okay. Thank you.

And our next question comes from Chris <unk> from <unk>. Please go ahead with your question.

Sure.

Good afternoon.

Bob I was wondering if you could give some color on how your strategy.

Hawaii has evolved now over the last three or so years and.

You mentioned in your prepared remarks about incentivizing travelers to try southwest.

And I realize that the fair special is in place through the end of the year, but is should.

Should we think that that level.

Pricing, which is clearly unsustainable could persist, perhaps not at that absolute level, but as you talk about incentivizing or.

Making travelers aware of southwest at that level of pricing could persist.

Into next year.

Andrew I'll start off and then Bob can correct me, where it needs to obviously, we won't talk about forward pricing.

We'll say is the current pricing is we have a special in effect since really the end of summer, where we have a low price and then we guarantee that low price for customers. This is not a long comment you look back over southwest history, and we've done this many many times. So it's not unusual although we do this to Incent trials.

Kind of work backwards here.

Bob and I were there this past summer met with a lot of customers lot of stakeholders and we saw they were aware of southwest they knew us know about US two months had not tried us as much and so.

We kind of Incent that trial, we had this low fare and we had it available all the time just to make it really easy for people to try it and we've seen a kind of explosive growth in use by by the comment I know the local customer onto Flyers for <unk>.

Travel with premium islands.

Travel between the islands is much reduced from what it was before because the mainland travel off on vacation or has come back to its pre pandemic levels, but had not come back in our island in general when we were visiting people, we're not traveling as much as they used to back before was no monopoly and so we wanted to go to get people back in the habit.

Of travelers the neighbor island.

It was a family to go to football games for all the reasons one might in the mainland get in your car and drive and so it was really about getting people used to a different behavior, which is you can count on low prices between the islands and once you got.

Get them back to knowing that they can adjust how they're going to allocate their budget, what they're going to do on the weekends, but we think that ultimately ends up having a more robust inter island market compared to before when it was characterized by high prices of monopoly service. So we think this is a pathway onto that now our schedule. It also at the same time been changed.

Our entry into Hawaii, we view as a franchise and franchise includes mainland offline as well as our neighbor Island flying and we.

Dimensionalize up based on customer feedback. So we went out to Hawaii, well before we start flying and we heard from people, yes, great unit fly from the mainland southwest, but can you. Please give us inter island travel we've got all kinds of sad stories of not be able to visit friends and relatives and so we came in we put that back into our business plan, we figured out a good network they will provide.

Good robust reliability and customer options to have some very short mainland very short interisland flying and some long haul mainland fine and the combination looks good on paper to us.

We've kind of adjusted that based on feedback we heard from a lot of the local customers. Please fly to Vegas, So we added Vegas to it.

Said, hey, southwest is great. They are offering options, but I need more a better schedule. So I can get back home because if you've ever been to Maui, the very nice hotels for the quite expensive. So if you're a business traveler you won't stay over you come back home.

So you look at that and you think of business travelers as Youre white collar workforce, which is true in Hawaii, but we also have a blue collar workforce that travels for business construction workers dockworkers trades people and so they need to be able to get back home each night when they go neighbor Island too.

Serve their customers, so that led us to having a bit more of a schedule offering that kind of spend the days people are going to have that.

That round trip ability and because we had started off a little bit more of a of a looser schedule in Hawaii, because it was very new to supply such long stays like we're able to kind of tighten up our scheduling parameters and really didn't use a whole bunch more new aircraft for new crew time, because both are there and just not as productive so we're able to kind of increase.

Offering without a lot of cost. So this all fits down to I think a franchise that's maturing we love it and I think our product fits with the local customers and they're responding in droves by our introductory offer.

I would just say, yes, Andrew and I had the pleasure of spending a week in Hawaii in May and it was it's clear that people love us, but they don't all Lewis.

And this gives us a chance to introduce ourselves. It was also really clear a much better.

<unk> Island schedule was something they really wanted and needed.

And the last thing I would just say southwest 34 years and we've gone in my time here, we've gone into lots and lots of new markets New cities.

<unk> grown some of those to what they are what we would call mega stations and <unk>.

Using introductory pricing to really introduce ourselves to the market and drive traffic.

It's a.

A tactic that we've used very successfully here for years and years and years and this is very similar.

Okay. Thank you and my follow up so if we look at U S domestic capacity in the first half of next year.

Narrow bodies. This is for the U S. As a whole now narrow bodies are up low double digits wide bodies up a few points RJ is down obviously not completely relevant to you, but as we think about the <unk>.

Capacity plans that you outlined for the first half, but also the yield environment for next year.

Base case scenario that this mix of equipment.

For U S domestic travel as a whole normalizes or perhaps just sit in an easier way that these narrow and wide bodies return to their more natural markets. Thank you.

I really can't speak to the industry and what their plans are I think if you look ahead it.

Especially with aircraft you look if you look ahead at and then sort of the intermediate term in terms of capacity as Andrew noted a lot of carriers capacity will mate.

We will remain moderated for a while here.

We suspect thats because of the same pilot constraints that we have but it does look like it will remain moderated.

For for a while and I'll go back to what I said in terms of arc, so how that how that interacts with the yield environment.

We'll just have to see.

First guess would be that for a while you do have moderated.

Overall capacity if you look at US we've got more capacity growth a lot of that is carryover, but it is nearly all back into markets that we serve to pre pandemic served successfully have an established customer base and so we see that is very different than going putting all of the service into.

The new markets that then has to be developed.

So those will.

That's.

Why.

<unk> next year include a continued expansion of the revenue plan continued expansion in our margins continuing expansion of the profits.

Yeah.

So I see those things a little bit differently, but no. We can't we can't manage the industry environment. All we can do is manage southwest airlines.

I would say that.

Bob says, we're going back into markets for them before we know those travel demand. We know that we normally would service that travel demand. Yes. We are unable to at this point in time. So we know the demand is there right. So we'll put the supply up against that demand, we think that makes us.

Quite low risk it's clear that.

Other carriers are having trouble.

Scheduling or servicing all of their rj's and so theyre regional flying.

Is down right now you can afford schedules it kind of pops back up so obviously, they're not going to get regional pilots and a clear cliff.

Cliff change here.

Next year, so it's unlikely that the capacity is kind of out there and regional flying Ken can actually service. So you imagine that would come down as a true up their plans.

Okay. Thank you.

And we have time for one more question, we'll take our last question from Sheila <unk> from Jefferies. Please go ahead with your question.

Thanks, so much and good afternoon, everyone I just have two questions on labor if that's okay.

First when we think about your net new hires for 2022, it's about 10000 folks or 15% of the workforce.

We will have less than one for one year of experience. So how do we think about the timing of getting those employees up to speed and is there a CASM impact associated with that for 2023.

Yes.

We thought about all of that as we.

Shared our guidance with you this morning.

Yes, there is certainly.

And impact.

As we hire new employees there is.

Some dilution as a result of that.

That offset somewhat some of the inflation that we're seeing and of course, but on the other hand, there is a penalty if you will because we are.

We're continuing to hire to fund future growth so.

That probably washes itself out a bit as we look ahead into 2023.

And I think some of the that proficiency question, which we've been asked a lot is probably different by workgroup. So you take violet.

They come out of training and you've got two pilots in the cockpit and your provision in other words you are not.

Youre not becoming more productive over time, you are flying the aircraft and you are fully proficient other jobs.

Yes.

On the ramp for example.

<unk> trained.

But it takes a long time to understand.

The nuance of the job you paired with somebody else.

<unk> uses the word get our tempo back.

You are just slow at first scan and bag that kind of thing so you've got other jobs that overtime, we will gain efficiency.

And his folks in those.

Job skin their tempo or their or their full proficiency back. So I think it does vary by workers.

But there is opportunity for sure opportunity for sure in 2023 to begin to ring those efficiencies.

Out of the operation.

Okay. That's helpful. And then just another follow up on Labor I think.

Analyst day in 2021, you targeted.

80 employees per aircraft and we've seen that step up to 86 per aircraft today granted that's hiring ahead of the aircraft coming in so how do we think about that level normalizing.

We will be sharing a lot of this in December at Investor Day.

I think that a normalization of that number is being affected by a number of things. It's just against the inefficiency in the system that will take I think all of 2023 to wring that out it will take flying all of our aircraft that will take becoming proof.

Proficient it's also going to take.

Modernization of some of our tools and processes taking paper.

And again, we're going to share a lot of this stuff using new tools and processes, taking paper out of the turn so that.

It takes.

Less labor in some areas as an example to perform the same task. We also have to take a look.

On the other side of things like.

If we're going to continue to take I'm, just making this up but the Max eight for a while like we have been in lieu of.

Seven will it takes an extra flight attendant to manage that aircraft and so we're going to have to just think about the <unk> in that context, but the goal remains to be efficient in terms of employees per aircraft and we will share an update on our thinking and then how to close that gap.

At our December Investor Day.

Okay awesome. Thanks.

<unk>.

Okay, well that wraps up the analyst portion of our call today I appreciate everyone, joining and have a great day.

And ladies and gentlemen, we will now begin the media portion of today's call.

To first introduce MS, Linda Rutherford, Chief Administration, and Communications Officer.

Thank you Jamie and welcome to the members of the news media to our call today and we can go ahead and jump right into our Q&A. So Jamie if you would just give them some queuing instructions we'll get started.

And ladies and gentlemen at this time to ask a question you May Press Star and then one on your Touchtone phone.

We are using a speaker phone we do ask you. Please pick up your handset before pressing the keys to withdraw your question you May press Star two.

Once again that is star and then wanted to join the question queue.

Cause momentarily to assemble the roster.

And our first question today comes from Alison Sider from Wall Street Journal. Please go ahead with your question.

Hi, good afternoon.

I guess on the Max seven certification curious if you could share anything when did it become clear to you that that sort of a piece of it wasn't going to happen this year and sort of how did you find out about it.

Anything you can share about kind of your reactions.

Hey, Paul.

Yes Allison.

This is Mike we talked to Boeing continuously and Theyre working diligently with the FAA to provide the information they need to get the airplane certified and at this point in time Boeing believes that there's a chance they get certified at the end of this year early next year and so.

I don't have anything other than add anything more to add other than that.

And I guess has there been any surprises or frustration.

Regarding reports that Boeing has sort of gotten behind in some of the certification paperwork or some of the submissions were incomplete.

Reaction to that.

Well, there's just there's a lot of I mean, it's a new process for both Boeing and the FAA to go through and so when you just think about trying to go through the process with all the information.

First of all you want to have a format that information to flow to the FAA with and.

And they need to agree on that they need to gather all of that information and submitted theirs.

Analysis is needed to be done in numbers questions and I think all of that just takes time and it's brand new and they haven't had to do it before.

Thank you.

And our next question comes from Robert <unk> from travel Weekly. Please go ahead with your question.

Yes, thanks for taking my call.

So some of the other carriers have been talking about this a little bit of.

Narrowing of demand the variation in demand across days of the week.

Even across hours of the day due to.

Hybrid hybrid work.

Schedules and believes your travel are you all seeing any of that.

I think every after every recession business travel demand changes of behavior changes a little bit. So we should expect this time to change as well so.

We did see during during Covid with business travel was much reduce we did see leisure travel in periods, where you often didn't see before so you still have more leisure travel in July that you do in September .

The surprise finding is there is more leisure travel in September than there used to be.

And now during Covid that led to kind of.

More.

Yes.

You have peaks and valleys that were kind of more prevalent code because of the absence of business demand now as business demand comes back as we discussed earlier and that leisure demand as state and Thats a surprise its not the case that as as we rotate out of the pandemic and go back into the office.

Did.

Leisure demand goes away and the off period of time as tours to stick and so that's quite welcome and so that does tend to dampen some level of seasonality, but youre still going to have that seasonality is a welcome development.

And but there's still going to a peak season in off peak season.

And Robert the only thing I would add I do think it's interesting.

These are these are new phenomenon right. So.

<unk>.

Some of this.

The leisure strength has been with us for a long time now coming out of Covid, we've had very strong leisure, but the sort of this shifting.

Leisure and to some of the prior off peak.

Periods in strength.

Typically off month like September and day of week and all of those things are there noticeable you could see them and they're real what I think we want to be careful with is trying to decide that this is forever.

As we continue as the business travel continues to restore.

As People's work habits of budget call. If that's a piece of this as they continue to move I think it's going to take a while for all of this to settle down and I do think it continues to change.

So.

I've personally been slow to decide that we have a new trend.

And thats the trend for a long period of time, what's really.

We're focused on is.

Whatever the why.

And this idea of blending business and leisure trends are really good the leisure trends are really strong the business trends.

Come out of that dip in they are strengthening so our revenue trends overall are really strong. They are strengthened further in the fourth quarter I think we think those strengthened further in 2023.

So.

That's the focus versus trying to understand in exact detail whether some of these things are forever.

Okay. Thank you.

Thank you Robert.

And our next question comes from David Slotnick from TPG. Please go ahead with your question.

Hi, all thanks very much for the question.

Thinking about next.

Kevin.

Are you do you have a contingency plan for it.

It's not certified this year and as Congress chooses not to test the <unk> extension.

Well, David the Boeing is very confident that they've got a path to certification Orden extension.

And.

I believe that that's going to happen as well, but if for some reason by chance. It doesn't happen of course, we have planned these but we're just not publicly discussing them at this point.

As Bob talked about we can easily tolerate that next year in fact, our our network plan a business plan for next year assumes no Max seven deliveries and so.

And you've already figured out that we can operate 223, just fine with all Max Eights and 700, we have today so.

Beyond that.

We can continue to take <unk> for a period of time as well the benefit of having such a decentralized network it and kind of really good offices around the country is that up.

We can we can rejigger, our network without kind of.

Unwinding, it because you're a big hub and spoke it's pretty fragile you have to operate the hub and spokes just like the hubs both operated wise connectivity for US we have a lot of flexibility in moving our assets around so that gives us a much bigger tolerance in some.

Deal with us.

And just just one last thought just to emphasize again and our order book that we have with Boeing gives us tremendous flexibility and.

There is a lot of detail in our release today.

And we've been converting as you can see there too.

Dash eights, along the way here, so we've been able to manage through.

Really without any issues so far.

Sure thing and then just.

Looking at holiday travel coming up forgive me. If you said before are you planning.

Just given the extended holiday period for Def incentives or any other kind of staffing plan.

Just.

Avoiding the issue that some carriers have blessed here.

Well, David last year, because of where we were in the staffing we did have incentive plans to try to incent people to come in on their other days off but our staffing.

Level is significantly enhanced this year.

And then we spent quite a bit of time, making sure that the schedules that we published we've got matched to our resources. So we feel well prepared to go into the holiday travel.

Just like we did this summer.

I think we are in so much better shape.

The other thing just to remember, especially Christmas and new years last year, we were dealing with omicron.

So in addition to being a little tighter than we would like on staffing generally we.

When in two to three weeks, we suddenly had thousands of employees that were out with omicron at the tail end of December and early January which made which made that staffing. It's just really compounded the staffing question. So that's really what you saw last Christmas and new year's.

As Mike mentioned.

Had focus on.

Always on managing the summer really well and then managing these holiday periods like the fourth of July .

Really well because obviously they are important to our customers and our mic I think are our cancel rate was well under 1% I mean, we had terrific operations. During those summer holiday period, then we will focus on the operation overall, and then of course the holiday period. The same way this fall.

Bottom line, we are so much better staffed and again we.

I know I mentioned, three or four times, we've not republished our schedules and then schedule stability.

It just makes our staffing even more efficient because our crews haven't been moved around just like our customers who moved around if we have to republish this schedule.

Thank you appreciate it.

Yes.

And our final question today comes from.

Leslie Joseph from CNBC. Please go ahead with your question.

Hi, everyone. Thanks for taking my question.

Just curious on the pilot negotiations.

<unk> had another negotiations as well how much do you think those contracts are going to add to your cost.

2023, if you do reach a deal soon because.

<unk> much higher than when you started negotiating and then on the pilot shortage issue in general are you in favor of any.

Increase in the pilot retirement age or changes to training from the 1500 hour rule I know Republic had some trouble with that how do you think about that and do you think there is a need for any legislative or regulatory changes there.

Luckily up.

You don't mind I'll talk about the rates and then you've talked about.

On the rates as Tammy pointed we constantly update those.

And I'm not going to talk about negotiations.

Here, obviously, we're in mediation with both our pilots and flight attendants and I'm hopeful that helps and it helps some moves to a to a deal sooner because again I want to get contracts and again, we'd love to get them soon with our awesome employees.

But we are.

As you look at when you look at both inflation and then as you look at deals that are occurring in the industry and Alaska just had a pilot deal last week for example.

Tammy you mentioned, we are we look at those and then we manage our accruals accordingly, and I would say.

You never know till you get there, but I would say right now it feels like where we are.

Were adequately accrued for all of our groups beginning last April of course, but.

I think our accruals look really reasonable to me.

Now the market is really movie.

Who knows but in terms of what we've seen happen so far our accruals are very reasonable.

And Michael I'll, just the changes too.

The pilot requirements.

No. We're not I don't think we're interested in the pilot age going up further than what it is and then the power requirements are fine with us where they are today.

I think we are an employer of choice we have I think really all of our labor contracts. When you look at the.

The scheduling and the quality of life the compensation that benefits. The retirements I think we have best in class contracts.

We had that coming into the pandemic I expect we'll have those going out of the pandemic and as a result, we're able to recruit all the people that we need.

We haven't had a problem recruiting pilots.

Or any other <unk>.

We're groups for that matter.

Thank you.

And this concludes today's question and answer session I would like to turn the floor back over to Mrs. Rutherford for any closing remarks.

Thank you Jamie and thanks to the members of the media for joining US today. If you all have any other questions you can reach out to our rock Star Communications group at two one for 792 447 or you can visit us on our media website at Www Dot SWA media Dot com. Thank you so much.

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

Okay.