Q4 2022 Southwest Airlines Co Earnings Call

Good day, and welcome to the southwest Airlines fourth quarter and full year 2022 conference call.

My name is Chad and I will be moderating today's call.

This call is being recorded and a replay will be available on southwest Dot com in 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 operator, and welcome everyone to our fourth quarter and full year 2022 conference call in just a moment, we will share our prepared remarks, and then leave plenty of room for Q&A joining.

Joining me on the call today is our president and CEO , Bob Jordan, Chief Operating Officer, Andrew Watterson, Executive Vice President and CFO , Tammy Romo Executive Vice President and Chief Commercial Officer, Ryan Green.

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 from expectations.

Also we had special items in our fourth 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 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.

Alright, Thank you Ryan and I appreciate everybody joining us this morning, while we're disappointed to report a Q4 net loss as we were on track to produce a healthy fourth quarter profit prior to December 21.

We provided an 8-K investor update earlier this month that quantify the preliminary estimate of the financial impacts subway Q4 loss is likely not a surprise, but I would like to take a few minutes to talk about the operational disruptions.

First and foremost I want to apologize again to our customers and our employees for the impact of the operational disruption head on them and on their holiday plans. We are intensely focused on reducing the risk of repeating that type of an operational event again like we had last month and we are highly focused on our customers and our plan going forward and customer refunds.

Reimbursements remain a top focus.

I'm proud of what happened I am very proud of our people and all that they have done to take care of our customers and their needs.

Well in terms of the events themselves, we canceled more than 16700 flights from December 21, the December 31.

The first few days due December 23rd were specific to the winter storm and we began to have additional disruptions in the operation on December 24th and the largest carrier in roughly half of the top 50 U S. Travel markets, we were impacted by rolling storms to an extraordinary degree we experienced gridlock in many of our largest airports along with a high <unk>.

Quincy of short notice cancellations, which created urgent and repeating efforts to repair the aircraft routing and then our pilot and flight attendant schedules given the overwhelming volume of flight cancellations over multiple days combined with manual work streams, we determined that the best course of action to get back on track operationally was to reduce.

Our December 27 through December 29th flight activity by roughly two thirds and that allowed us time to reset the operations of normal flight levels beginning on December 30.

But based on what we know at this point our processes and technology generally worked as designed we were hit by an overwhelming overwhelming volume of closing cancellations, which put us behind in creating crew solutions, which in turn pushed us to manual efforts in solutions and Andrew will cover that.

Detailed more here just a minute.

So we've got several streams of work underway immediately following the disruption we move swiftly to put mitigation efforts in place to reduce the risk of future operational disruptions and help fortify our operational resilience. We created an early indicator dashboard that closely monitors operational health and signals an alert if we approach freedom.

Find operational thresholds, we established supplemental operational staffing that can quickly mobilized to support crew recovery efforts at the first sign of a potential workload backlog.

We enhanced our existing tools for crew members to communicate electronically to crew scheduling during irregular operations and we're in the process of swiftly updating and upgrading our crew recovery tools and system to solve the backlog repair of crew members schedules, which was one of the key issues during the disruption.

With a short term risk mitigation steps in place or underway, we're taking additional steps to review the events and determined any additional changes to our plans.

We worked early on with our board of directors and they've established an operations review Committee is working with our management to understand the events and help oversee the company's response, we've engaged a third party global aviation firm Oliver Wyman for a third party assessment of the event and help make recommendations of additional mitigation elements for us to consider.

And that work will conclude here over the next several weeks and with that assessment at our own we will reassess our 2023 plans keeping in mind that we already had a robust robust operational modernization plan in place for 2023, and Andrew will walk you through that in greater detail as well.

I want to reiterate that southwest has a very long history of innovation and continuous improvement we've been investing up to $1 billion per year on technology, both recurring and investment spend included and we have implemented numerous large scale technology and business projects over the past five years, including things like the first implementation of the Amadeus reservation system.

North America co developing and innovative network planning system that is now part of the Amadeus product portfolio Etops certification and processes for Hawaii flying New aircraft maintenance systems, a GDS platform capabilities and connection to three other platforms, our new fare product and automated ancillary services.

Capabilities and we're in the process of wrapping up the replacement of our revenue management system, which actually involves three RM systems simultaneously in production, which is an absolute technical feat.

This does not meant to be comprehensive, but hopefully it gives you an idea of what we've done and what's underway. We're also currently budgeted to spend $1 3 billion of our 2023 annual operating plan on investments upgrade and maintenance of our it systems, which is higher than what we spent in 2022.

The recent disruptions will likely accelerate some of our plans to enhance our processes and technology.

Suspect that the operational modernization opportunities that Andrew outlined at Investor day have largely captured the key work streams, and we will dedicate the capital needed to execute in a timely and efficient manner.

We currently plan to stick with our 2023 growth plans, we were properly staffed for our 2022 flight schedules, including the holidays and we continue hiring this year to be properly staff for our 2023 flight schedules.

Our plans call for adding over 7000, new employees in 2023, which is actually a decrease of nearly 40% from 2022 hiring levels. We have the order book from Boeing that we need in 2023 and with the short term mitigation elements that we put in place. We believe we are well prepared to execute our network rests.

<unk> planned for this year.

Nearly all planned 2023 capacity additions will go to restoring the network and adding breadth and depth in existing southwest markets and that network restoration should significantly help our operational resilience efforts over the long term Andrew will also cover that in more detail.

Finally, we continue to work hard on labor agreements for our people and I'm very proud of the fact that we were able to reach agreements with several of our unions recently, including our flight instructors our facilities maintenance techs are customer service agents and just earlier this week a tentative agreement with our dispatchers.

We continued negotiations with the unions, representing our ramp in ops employees and mediation with unions, representing our pilots and flight attendants and we intend as always to have competitive market compensation packages for our people.

In closing, we still made tremendous progress in 2022 and despite some impact here in Q1, we believe we still have a solid plan for 2023, we are holding ourselves accountable to the plan that we outlined at our early December Investor Day, and it is still our goal to achieve the long term financial targets that we outlined and I know that <unk>.

People are up to the task I'm, just extremely proud of them for their dedication to the cause that to southwest Airlines.

And they remain absolutely our greatest asset the heart and soul of the company and a tremendous source of pride for me personally and with that I will turn it over to Andrew.

Thank you, Bob and Hello, everyone I will focus the majority of my comments on the operational disruptions will provide some additional color to what Bob shared.

We experienced historic event with a combination of challenges we hadn't experienced before.

However, as Bob mentioned, our crew scheduling software didn't stop working during the disruptions, but a combination of our processes and the technology Couldnt keep up with the pace of cancellations at the height of the weather disruption.

That fourth crew scheduling and to fully manual mode to develop solutions and they simply couldn't keep up with the volume changes.

Based on what we know today it appears that the last Domino to fall was when we can no longer use automation for crew scheduling.

Automation works very well for us, but when a problem. Good stated the automation doesn't have the ability to look backward as it tries to solve future problems.

To simplify the decision support tool helps us solve two issues.

One repair the assignments of individual crew members and to solve crew coverage problems for individual flights by reassigning crew members and using reserve crew members.

If a crew members individuals' schedule is not repair before the next assignment begins then we arent able to use the automation to repair the individual schedule.

Consequently, without updated crew members schedules the software can't reassigned crew members to solve for flights with crew coverage issues.

So the disruption uncovered a functional gap, but our technology.

However, this issue was in the process of being addressed.

In terms of the moving parts of our point to point network. You can think of it in three buckets you have the flight network.

Aircraft network and the crew network.

We feel very confident in the flight network and schedule as we have published for sale and we're very adequately staffed to operate our fourth quarter flight schedules.

We feel very confident in our aircraft network and we have a sophisticated technology product that we call. The Baker that produces new aircraft solutions during irregular operations.

At no time during the disruption to the point to point journeys of the aircraft present us with an unsolvable problem.

For our crude network the functional gap that was revealed in our crew scheduling software is in the process of being addressed and should be updated in a matter of weeks.

Which represents quick work by GE digital and our teams to address the most notable cause of the event that we are currently aware of.

So in terms of where we go from here, but it doesn't happen again, our assets fall into three buckets.

Mitigation efforts ended the last Domino to fall.

What level of assessments and actions and a systemic review supported by a third party.

Bob covered the immediate mitigation efforts implemented our dashboard supplemental staffing crew communication tool enhancements et cetera.

He also cover the third party review of the events, the board's involvement and working with management to oversee our response.

I want to briefly cover the second bucket, which is department actions.

Each department is undertaking its own analysis to identify additional measures the departments can make to improve its management of significant disruptions.

While leaving the cross departmental improvements to the systemic analysis conducted with a third party.

Some examples of the apartment efforts include implementing a new crew scheduling phone system target for Q1 of 2023.

Create a network disruption part and the NOC or network operation control center to better integrate CRU data and a flight cancellation decisions.

The number of crew schedulers.

Evaluate our cold weather preparedness in items, such as assessing the ICL procedures protocols and tools to increase throughput.

Ensuring we have sufficient ground support equipment fuel that is viable in subzero temperatures.

This list is it meant to be comprehensive either just assure you. We have shared with you that we have already identified some smaller scale opportunities for improvement.

And we will have taken actions, even before we get to the third party recommendations.

But in terms of the review by Oliver Wyman, We think there is a viable exercise to understand how the accumulation of events led us to the final result.

And we still want to see if there are opportunities to improve performance on bad weather days to integrate into our modernized the operation efforts.

We recently had an opportunity to test some of the new mitigation efforts implemented recently joined the FAA technology outage earlier this month with a notice to air emissions are nodal system.

Our knock worked around the clock in constant contact with the FAA and the industry to make sure. The noted <unk> was restored and valid before we pushed any of our flights. We took the time to ensure verra case verification safety and compliance which is why we had not dispatch flights before the FAA ground stop.

There is another example that we will not sacrifice safety.

We did not sacrifice safety during the December event, but notable event and we simply won't going forward safety is paramount and we use our new warning indicators, we deployed additional head count to assist crew scheduling, even though we didn't end up meeting them.

And we execute target cancellations that help protect how we ended that day to assure a good start the following morning. So while we had a difficult start to that day thinks the swift actions taken and enhanced processes in place. We were number one in the industry on on time performance. The next day.

Part of the organizational changes when I stepped into the Chief operating officer role, what's the combined network planning with the operations functions in order to further align commercial and operational objectives.

And we recently announced the related or changed by promoting Adam to care, former VP network planning to SVP network planning and network operations control.

The goal of this move is to create a tighter feedback loop between scheduled design and schedule execution.

Order to add resiliency and reliability to our network.

This is another action that I believe will help us tremendously.

Since the disruptions in late December our operational performance has been solid.

<unk> of January is seeing several ATC outages historic precipitation in California, where we're the largest carrier and multiple snowstorms in Denver.

Through Monday, the 23rd we are number two in on time performance at a 10 airlines truly an American airlines by less than one percentage point.

As a reminder of what we shared at Investor Day, I want to recap two areas our operations focus areas and our capacity plan.

First much of what we're talking about in terms of operational improvement and technology upgrades I address our December 7th Investor Day.

In particular in the areas of operating quality and frontline staff and tools.

In the area of operating quality I noticed the focus area called network design recovery.

While it was not planned as part of our 2023 delivery at that point, we had begun work in that area at the time of Investor Day, We had already selected Oliver Wyman to assist US beginning this January .

As part of our reevaluation of our 2023 priorities will accelerate this work.

In the area of frontline staff in tools I noted focus areas of mobility slash digital tools and continuous improvement.

Again, these won't specifically slated to deliver by the end of 2023, but will be evaluated again as part of the reassessment of our plans given the challenges with crude communications we experienced.

I want the third part of your review to conclude before I opined on what exactly needs to be done and over what timeline. We have good line of sight to potential improvements in several operations areas spanned multiple years, including 2023.

Now we need to finalize our plan for 2023 and determine what sequence of improvements are most appropriate in terms of technology and tools investment.

And secondly, our 'twenty three capacity growth is now up to 60% to 70% year over year.

But this is apples to apples in line with the old 15% that we outlined at Investor day.

Nothing that's materially changed in our capacity plans for this year. The increase is simply due to lower capacity in Q4 2022 due to the flight cancellations.

We were headed all along towards network restoration in the December events had nothing to do with staffing levels or our capacity plans.

Speaking of trying to really speaking of 2023 capacity plans as nearly all going back into key southwest markets and adding market depth.

These are markets that we borrowed from the fund New airport expansions in the pandemic and as leisure demand remained strong in business demand improves we have opportunities to build this back up.

And this is lower risk capacity growth primarily in markets, where we have the number one or number two share at a strong southwest airlines customer base.

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

And in doing so it should help fortify the operation with better itineraries depth and re accommodation options for customers crews and aircraft and we do have weather or delays that create regular operations.

So we plan to continue our investments in the network this year.

And on the topic of 'twenty three schedules last month, we extended our flight schedule for sale from July 11th August 14th. This include the depth in the southwest points of strength as well as bringing back longer haul markets.

All part of our continued network restoration and accounts for anticipated travel demand for the peak summer travel period.

Denver growth of just over 300 flights a day, our highest ever daily total account for any southwest Airport and Baltimore hits, approximately 220 daily departures, which is higher than some of our 2019.

We will peak with total daily flights of nearly 4400 in July 2023.

Our next scheduled through October 4th will be published on February nine.

I want to wrap up by reiterating that we are intensely focused on reducing the risk of repeating the type of operational event, we had last month.

We're also focused on moving forward in running a great operation each and every day.

So while there will be lessons learned we arent, losing focus on the back of the blocking and tackling necessary to efficiently operate our network I.

I am confident that our people will continue to do just that I'm thankful for their focus on running a safe and reliable operation and providing excellent customer service to our customers.

Finally, I would be remiss, if I didn't amend and negotiating teams of Tw 557 represent our flight instructors and amp up represents our facilities maintenance technicians.

These negotiating teams worked tirelessly to reach agreements for their memberships and I am pleased we can reward these employees with well deserved pay increases in quality of life enhancement.

I'm also pleased that we reached just recently reached a tentative agreement with Tw 550, who represents our flight dispatchers and they will be voting on their th soon.

We continue negotiations with the unions, representing our other work groups.

Under the agreement to vote on and we intend to continue to pay competitive market compensation packages to our employees.

So with that I will turn it over to Tammy.

Thank you, Andrew and Hello, everyone I will provide a quick overview of our financial results and share some additional.

I'll comment on our 2023 outlook.

As a result of the operational disruptions in late December driving a 620 million negative after tax net impact we reported a fourth quarter net loss of $226 million, excluding special items.

These results are clearly disappointing and not where we expect it to be.

Our quarterly performance, leading up to December 21st with strong and trending in line with our previous guidance expectation aside from CASM X, which I will cover in a minute.

As Bob mentioned, we still made tremendous progress in 2022, despite the operational set back in late December generating full year 2022, net income of $723 million, excluding special items.

Despite the negative revenue impact from the flight cancellations in December we generated record fourth quarter operating revenues.

Brian will speak to our revenue performance and outlook here shortly.

Turning to our cost performance and outlook.

Beginning with fuel or fuel hedge performed well last year, especially in a volatile market environment in total our full year 2022, you'll hedge benefit, which roughly $950 million with roughly $170 million in fuel expense savings in fourth quarter alone.

For 2023.

6% hedged in first quarter.

1% hedged in second quarter, and 47% hedged in second half 2023, which equates to 50% hedged for the full year.

Based on the January 20th forward curve, we now estimate our first quarter fuel price to be in the $3 and 25%.

The $3 35 per gallon range up 25 from our previous guidance.

And our full year 2023 fuel price to be in the $2 90 to.

The $3 per gallon range up a nickel from our previous guidance.

Our first quarter guidance includes <unk> 16 of hedging gain and a hedging premium expense of six cents per gallon.

We recently added to our 2024 fuel hedge portfolio and are now 39% hedged with a <unk>.

Fair market value of nearly $561 million in total for 2023 and 2024.

We will continue to seek cost effective opportunities to expand our hedging portfolio in 2024 with the goal to get to roughly 50% hedging protection.

Moving to our non fuel costs.

Experienced a significant cost increase in fourth quarter, primarily as a result of the December operational disruption.

<unk> lower capacity from the flight cancellation fee.

The year over a three year negative impact to fourth quarter CASM, excluding special items fuel and profit sharing our CASM ex was 23 point.

In addition to the impact from lower ASM. The majority of this headwind was driven by the estimated redemption value of rapid reward points offered to customers impacted as a gesture of goodwill and travel expense reimbursements to customer.

There was also a premium pay and additional compensation for employees that made up a much smaller portion of the 23 point CASM ex impact.

Excluding the impact from the operational disruption our fourth quarter CASM ex was roughly four points higher than the high end of our previous guidance range of up 14% to 18% compared with fourth quarter 2019.

This was primarily due to additional labor accruals at year end.

As a reminder, we had been accruing for all open labor contract since April two.

<unk> 2022, and these accruals are dynamic and we continuously evaluate market compensation.

Looking forward, we continue to experience year over year inflationary cost pressures as well as cost headwinds to operating at suboptimal productivity level.

We now estimate first quarter CASM ex to increase in the range of 2% to 4% year over year, which is approximately two points higher than our previous guidance of flat to up 2%.

Fifth two point increase is due to the continuation of premium pay for a portion of January relating to the December operational disruption as well as an increase in labor accruals for open contracts.

For full year 2023, we now estimate CASM ex to decrease in the range of 6% to 8% year over year compared with previous guidance of down 1% to 3%. The vast majority of the change in guidance is related to the year over year impact from.

Lower fourth quarter, 2022 capacity as well as higher fourth quarter 2022 cost attributable to the December 2022 operational disruption.

We have also increased our labor accrual this year, which results in a slight offset year over year.

Putting aside the effect of the December operational disruption, we continue to expect our second half 2023, CASM ex trends to improve from first half 2023 year over year.

Turning to our fleet. We ended 2022 with 770 aircrafts, which is net of 26 dash 700 retirements.

Received a total of 68 aircraft deliveries from Boeing Max Eights, which with two more than our previous expectation of 66 aircrafts.

However, we are still short 46 aircraft from me 114, contractually scheduled 2022, Max deliveries due to Boeing supply chain challenges and the timing of the dash seven certification.

The 46 orders are reflected as 2023 deliveries in the order book included in our press release this morning.

However, we don't expect to be caught up on Max deliveries by the end of this year.

We continue to expect 100, Max that dash eight this year, which remains our planning assumption.

And we continue to expect to retire 27 Dash 700 aircraft, which will bring our fleet count to 843 at the end of this year.

We have also recently exercised options for delivery in 2024 as outlined in our press release.

Our full year 2022, Capex was $3 9 billion relatively in line with our previous guidance.

In regards to our Capex plans for this year, we continue to estimate spend to be in the range of four to $4 5 billion, which includes $1 2 billion in non aircraft capital spending.

Bob and Andrew touched on our current thoughts regarding technology spend this year in light of the operational disruption.

But I want to reiterate that we are focused on executing our operational modernization plan outlined at Investor Day, which includes our current expectation to spend approximately $1 3 billion this year, including both the capital and recurring spend on technology investments upgrades and system maintenance.

And our total Capex range should allow for additional capex investments as needed.

Moving to our balance sheet, we ended the year with cash and short term investments of $12 3 billion. After paying a total of $3 1 billion to retire $2 9 million in principal of debt and finance lease obligations during 2022.

Includes the $1 2 billion principal prepayment of our 2023 note, which leaves a modest $85 million of scheduled debt repayments this year.

Our leverage is at a very manageable, 47%, which we expect to decline over the next several years.

Our balance sheet remains strong and we continue to be the only U S airline with an investment grade rating by all three rating agencies.

In closing.

Im immensely proud of the progress our people made throughout 2022 and their continued resiliency through numerous unexpected challenges.

While the last several weeks have been tough we have not lost sight of the priorities and focus areas that we outlined at Investor day.

In addition to the operational modernization plans, we already mentioned, we are eager to wrap up negotiations with all of our open contract labor grid.

Although it's disappointing we expect another loss in first quarter. This year due to a carryover revenue drag from the operational disruption we remain steadfast in our focus to generate consistent quarterly profitability.

And even with the first quarter headwinds. Our 2023 plan continues to support solid profit with year over year margin expansion for full year 2023.

Furthermore, we remain determined to achieve our long term financial targets to grow our profit margins and returns while delivering on our commitment to provide outstanding customer service and reliable operation that has been a source of tremendous pride over our 51 year.

Our history.

And with that I will turn it over to Ryan.

Thank you Tammy I'll provide a bit more detail on fourth quarter trends and our revenue outlook for first quarter first as Bob mentioned, we are very focused on taking care of our customers impacted by the operational disruptions last month, we've said gestures of goodwill we processed all bags for returned to customers, we processed nearly all customer <unk>.

<unk> and have completed more than 80% of the reimbursement requests we have received from customers for reasonable expenses related to alternative transportation. We're processing the remaining requests as quickly as possible and plan to have those largely completed by next week.

We will continue working hard every day until all rep requests are resolved.

Turning to our trends at our Investor day in early December we shared that our fourth quarter revenue outlook remained strong.

Leisure revenue trends were strong both in load factors and yields and for both holiday and non holiday time periods managed business revenues also continued to be strong.

And all of that held true right up to the operational disruptions that began on December 21, and we were tracking right in line with our operating revenue guidance to that point.

But in the last 10 days of the month, we incurred an estimated $410 million revenue penalty due to the operational disruptions.

At the end of December is typically a low demand period for business travel we experienced less of an impact on business travel trends then with leisure we still came in at the better end of our managed business revenues fourth quarter guidance range and down 20% compared with fourth quarter of 2019.

And despite the $410 million impact, we still generated record fourth quarter revenues of $6 2 billion and a record passenger yield of $17 seven.

We saw other positive contributors in fourth quarter for our loyalty program with fourth quarter Records and new card co brand card acquisitions and retail sales in.

In addition, we benefited from the continuation of increased take rates for upgraded boarding and our portfolio of new cities and development markets also performed in line with expectations in fourth quarter absent the event.

In all there was plenty to be encouraged by in terms of underlying trends in the fourth quarter.

We continue to feel good about our 2023 revenue plan.

Admittedly, we're starting off first quarter with a $300 million to $350 million headwind, which we assume is attributable to the operational disruptions in December .

However, booking trends have improved sequentially. This month and we believe the vast majority of the first quarter impact is isolated to January and February travel for.

For March 2023, leisure booking and yield trends appear strong and in line with what we would expect from a high demand travel month.

And based on recent improvements in close in booking trends. We expect March 2023 managed business revenues to be roughly restored to pre pandemic 2019 levels.

And that we expect that our GDS in southwest business initiatives will provide the opportunity to grow managed business revenues sequentially beyond March.

So we are optimistic about both the improving sequential trends, we're seeing as well as the early read on March bookings and based on these trends. We currently expect first quarter operating revenues to increase in the range of 20% to 24% year over year.

And then finally, while we have limited visibility further out on the booking curve. We continue to see no noticeable signs of a slowdown in macro travel demand and our booking trends.

Our commercial focus areas and initiatives that we outlined at Investor day remain unchanged. We continue to focus on driving value from network restoration, new market maturation southwest business in GDS are new fare product revenue management system modernization and in flight customer experience enhancement.

In closing I want to acknowledge that we are mindful that we have a few new headwinds in 2023, both on the revenue and the cost side and as a result, we will continue to work even harder on our revenue plans and revenue generation. This year ultimately, we need to offset higher costs and revenue as part of that equation. We still believe there is strong demand.

Ahead of Us and we're encouraged by the revenue trends. We currently see in March so with that I'll turn it back over to Ryan Martinez.

Thank you Sir.

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

Thank you we will now begin the question and answer session.

Ask a question you May press star 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 two.

And the first question will be from Ravi Shanker with Morgan Stanley . Please go ahead.

Thanks, Good morning, everyone.

Thanks, Dave and the team for all the detail again, there wasn't a lot of details there, but if you just take a step back and look at the bigger picture here.

They're having a few operating issues for I'd say the last 18 months or so is this just a series of unfortunate events given unprecedented circumstances or do you just take a step back and say hey, we have not invested in tech and systems and things that we should have no we are catching up.

Kind of going forward.

I think.

That kind of realisation understanding sort of.

Determine response and maybe also kind of.

If the regulators are focusing on this kind of how they will react to it.

Thank you so much I think I separate it into three pieces number one.

We invest a lot in technology, we've invested roughly $1 billion, a year and that will be even higher here in 2023.

So theres been no lack of investment you've seen us implement things recently like Ace.

Industry, leading aircraft routing and maintenance system that just this year.

We put it in an entire new people and human capital management system and the ongoing technology is always a journey.

And so there are always things to work on.

Ed.

Again, as we've gotten larger and more complex.

There are continued investments in things like backtracking and software that's used in the stations and transfer.

Transfer driver applications that could go on and on and on so that's why you heard us at Investor day in prior lay out one of our foundational strategies was modernized the operation.

Again.

Not because of <unk>.

We're radically behind but because we need to invest in the operation just as we continue to grow and continuing to remain efficient.

I think if you take this event this event was different.

We saw just a historic level.

Weather activity across the country that hit so many cities continued for days again, I don't want to blame this on weather because it continued well after that that caused an historic level of cancellations that turned into an historic level of aircraft rerouting that led to an historic level of crew.

Rerouting or rescheduling.

Ultimately.

It's something we've never seen at that level and it just overwhelmed the technology and the processes and the technology by the way increased scheduling there has been some.

<unk>.

Bad information it worked as designed we just never had seen this level of activity and so ultimately all of that coming at crew scheduling put us to the point, where rather than solving future problems in other words, new writings for Korea with solving past problems and Thats. What the software was really not designed to do because we have.

Never seen that before it's never been a requirement.

I'm glad to say that.

Our folks technology working with GE digital have very quickly identified a an enhancement and upgrade to deal with that and that upgrade to the sky solver is actually complete and in test right. Now so they've moved very quickly. So I don't know that I think this event was very different.

I would acknowledge that there are things that we need to work on as we continue to grow the operation and become even more efficient and use technology and Andrew If you want to have anything you want to add there no I'd say that's functional gap was also other airlines use the software and they have not asked for that got to the company there. So.

Is new for us it's new for this tool achieved digital so it's not just us so.

It's not a common practice to get so far behind on the issues are resolved in this situation that did we have a lot of medium sized cities that are in this.

The swap of the weather and we saw we got increased stress on the operation because of the cold weather. It led to incremental cancellations, we've talked about we pre canceled as we always do in large weather events, but then the larger that impacted largely unexpected distress in the operation from the weather led us to more cancellations close.

Rent and that's what gave US a problem, which manifested in this kind of past past issue the sulfur could not take care of and Robert the only other thing not to go on that I'll add is just the this was a significant.

<unk> event.

We disrupted.

Thousands and thousands of customers at a critical point in time, and really made a mess here for our employees and our customers and I cant apologize enough for that and I own that and we will do everything it takes to ensure that we don't have an event like that again, which is why we're doing short term things that Andrew talked about we've got.

This assessment coming here in weeks from Oliver Wyman, and we will take the learnings there and implement those.

So.

But.

Just at the end of the day that kind of disruption cannot happen again.

Got it that is very clear. Thank you for the additional color maybe it's a quick follow up.

I think you said that the 2023 revenue impact seems to be isolated to Jan and fab.

What was the driver of that is that just kind of recovering the scheduled a normal or did you see a buyer strike.

And do you have any indication that from a reputation standpoint, because obviously, we know that.

Southwest one of the most beloved like airline Brandon the country kind of are you seeing any eroding of customer questions. Thank you.

Yes, sure I'll, let Brian jump in here too, but I think we had you had a couple of things you had obviously the review for you.

Return portion of trips that were affected during the holiday period that were then.

Cancel that led into January you would have.

Low period of the year to start with and so.

So bookings and travel are generally low I think.

You had a period of time, there we weren't just weren't taking as many bookings as we would typically I am sure you had some book away. The good thing is our customers are very loyal and we're seeing that our March and forward.

Our booking trends in leisure look really strong and they look normal they look.

In line with the plan that we presented at Investor Day, our managed business. It looks like it will roughly at currently get current trends will be roughly in line with 2019 and restored. The 2019, we had we had a sale recently that sell went really well and we gave our customers affected.

Over over $2 million.

Basically codes are 25000 rapid rewards points and we're seeing our customers redeem those quickly at an even faster than typical rate for something like that in this gesture of goodwill. So so while we disrupted our customers that I am very sorry for that we are seeing our customers be loyal to southwest Airlines and we're seeing.

Kind of normal trends March and beyond Brian Yes.

Yes.

I will just give some additional color here.

The first quarter is a tale of two halves in the first quarter. The first half of the quarter is very low demand time period end.

That was impacted by the cancellations like Bob mentioned.

And then it's just very tough with a hangover from the operational event kind of the first couple of weeks in January to get real traction.

We did not want if you go out and look at the fares that we have published for this time period.

There are regular kind of routine promotional fares, we didn't think it would help to be overly promotional in this time period.

But then when you get into the second half of the quarter, and Presidents' day, and beyond and kind of into March.

As Bob mentioned.

Both loads and yields look like we are we're on plan.

March right now is roughly 40% booked so that's enough to give us a good read on the month and if you just kind of take the.

Load and yields where they sit today and project that out forward and kind of what we would expect from here and what that implies for March overall, I think we're going to be very pleased with the performance in the <unk>.

<unk> of March so, we're not seeing any sort of elevated cancellation rates for March as Bob mentioned March performed very well responded very well to the sale.

And so it just.

It feels like it's we're kind of back on plan here in March.

And then if you look at managed business travels it's very early in the managed business travel.

Booking curve, but.

What we can see those also look.

Encouraging so.

Yes, so the second half of the quarter I think we're going to hopefully get back to the momentum we were seeing in the fourth quarter before the event.

And.

And we will continue to monitor customer sentiment as we go forward here, but yes.

Customers expect us to do the right thing here, but largely.

They are loyal and sticking with us.

Thank you.

Thank you and the next quarter. The next question will be from Scott Group from Wolfe Research. Please go ahead.

Hey, thanks.

So I know you guys don't have.

Revenue or RASM guidance for the year, but it seems like the industry is moving at this flattish.

Yes.

Metric for the year.

Would you expect to keep pace with the industry view.

You sort of rebuild credibility customer loyalty or whatever you want to call. It if you will.

Placing any differently than maybe the overall market.

It was a little hard to hear was a little hard to hear there but I.

I think the question was really relative to the.

The industry performance do we expect to price any differently.

I think we're not going to comment on forward pricing here.

Beyond what's kind of out there on the shelf and what you all can see.

But what I will say is that the go to market and promotional plan that we have executed thus far and thus far in this year is the exact same go to market and promotional plan that we had.

Relative to before the event, so we're approaching things kind of per normal here.

And I would expect as we kind of get back on the plan in March and beyond I expect that it will be just a.

Normal year here.

In terms of how we manage things going forward yields loads and yields have been very strong going back to the postal mccrone environment last year, we had record yields in the fourth quarter, even despite the event and those yields would have been higher without the event. So.

It's a strong fare environment now and.

I expect that to continue.

Obviously, we have the in one of our strategic initiatives as the.

The new Chase agreement and we're seeing we're seeing strong rapid rewards redemptions year right now.

As well which is helping.

Okay, and then hopefully this sounds better.

I understand you don't.

I think we need to cut capacity, but as you talk about kind of reduce risk why not.

A little bit maybe more prudent and got some capacity and get through.

The period of.

Better operate completely really ramp up the capacity.

And Scott I think the.

I mean, you would do that if you felt like there was a reason that it helps.

So we actually feel the opposite number one the events in December really had nothing to do with staffing we were fully staffed in fact, we hit our we beat our hiring goals in 2022, a lot of that as a setup for our 2023.

<unk>, we're having no trouble hiring including having no trouble hiring.

Highlights.

Almost all of the capacity in 2023 is going into restoring the network its going into.

Existing city pairs, adding depth and breath and all of that is not just good for our customers. It's good for the operation and operational reliability. So we actually feel the reverse which is a restoration of capacity will be helpful. In terms of operational reliability not hurtful. So then the only other reason would be because you don't believe.

If you can execute your hiring plans, which we are having no issue executing our hiring plans were actually a little ahead here in terms of staffing up for 2023.

Andrew if you want to add anything else to say if you. If one was worried about can you operate this level of capacity you would expect that to show up in your operating performance and I mentioned that we were number two through Monday.

As we sit here the updated numbers through yesterday, and we're number one in the industry and otp for the month of January for the month of December we were number 510 airlines, even with the disruption and we're number four going into the disruption. We're number three during Thanksgiving number three to the month of November . So it's obvious that we're able to operate the capacity that we have out there.

It's not something that Oregon sign the fact were above average in the industry with regard to that so not showing that as a root cause.

Does it tend to make adjustments given that we think it could also be helpful. As we go forward, but once again, we're going to get down to the root causes and then when they show up we will take actions based on the root causes theres lots of solutions that people want to throw out there to us, but when you kind of.

Take actual and potential solution and you'll understand it addresses the problem all youre doing is wasting resources and not necessarily addressing the problems. So we werent bottom out the problem, even though it takes a little longer than people would like and then address those problems. So it doesn't happen again.

All makes sense. Thank you guys appreciate it.

Thank you.

The next question will be from Brandon of Glinski with Barclays. Please go ahead.

Hey, good afternoon, and thanks for taking my question. So Andrew maybe if I can follow up there I mean, if I listen to this call. It sounds like you guys were properly staffed the technology really wasn't the problem apart from this GE digital issue.

You guys are talking about the network not being the issue.

Cost guidance Capex guidance all of that really hasnt changes here. So the outlook just kind of missed a beat but keeps going on the problem is you guys did cancel a lot more flights than your competitors and if I look at your completion factor. This month I think you will be trailing your competitors just look at yesterday I think.

About a 6% cancel right. So I guess, what confidence can you give investors and your customers and your other stakeholders here that this was really just a one off issue and not something that is more structural within the company.

Yes, I wouldn't call. It GE digital issue that software they sold to us and others performs well in normal times. This is a use case that nobody defined for them and their defense. The software worked fine no. We did we did get.

Bad spot there with regards to our cancer.

Cancellation percentages yesterday with 6% there was snow in midway so midway of specific operational restrictions, it's very tight quarters and so when you have dicing and when it comes to the wrong direction, it's prudent to be a little more.

Cautious and we cancel a little bit more because it was a low time of season as Ryan talked about a low time of year. So we could re accommodate all of those customers that were canceled out of mid way on the subsequent slides because we canceled the day before so we ended up beating our competitors by 20 points of Otp yesterday, they canceled less but they've delayed than hundreds of thousands of customer.

But I can't say fewer we made hundreds of thousands of customers on time and a handful have their flight cancelled but will re accommodated. So overall, we believe we gave with superior customer service yesterday.

Before that that same store and system incinerated severe thunderstorms in Houston, including tornadoes near Houston hobby that even put the atc's how were down for a while we had zero percent cancels in Houston for that as a hobby for that date, because we have the infrastructure there to handle it up north to carry the operates out of Intercontinental cancel 20% other.

Flights in that day to handle it so in that situation very flattering compare but once again I imagine they would say they have infrastructure issues are different that hobby. So a lot of times those percentages.

Look the CBD if its about a specific airport in particular.

And so you have to look at the environment. That's caused you to cancel you have to be safe understand how you come to your customers net debt resulted in a very flat and on time performance for us yesterday and puts us over the edge to be number one for the industry. So I think that's a quality product that customers love that NPS scores good for that kind of stuff and so I think thats what.

Our customers want to see.

And if you take the.

Data in January is very way down in the weeds here, but it's very polluted by the the.

January 11th Notum issue, where there were all kinds of issues as well.

For most of prior to the day you were talking about here most of the day I think the 15 days or so prior to that we were we were 99 and the 99 plus couple of several days and the 99, 9% completion factor range several days canceling one flight so.

Have to watch the aggregate because if you have an anomaly and a data thats very different like the.

Andrew described are the note them day.

So that throw it off obviously you know that.

The notice date as I mentioned my remarks, we didn't push before the ground stop.

So basically that means we got much later start because we were being safe and we wanted to FDA to tell us that that was validated before we pushed assesses how we read the regulations. Therefore, we ended up with more cancellations that day significant number more than some of our competitors there and so that inflates numbers for January overall, once again was safe and we ended up being set up nicely for them.

The next day.

And then lastly, when you look at our competitors don't forget they outsource 40 or 50% of the departures to some low wage regionals on behalf customer doesn't realize that so when they when they give you a number that says we cancelled this many make sure you're including all of their branded operations not just their mainline.

Andrew I appreciate that and for sure we do look at seats and flights impacted but I guess coming off this call where is the urgency to ensure that specific to you guys. This doesn't happen again.

Does it come in the form of more urgency on our pilot contract do you need to look at more non aircraft Capex I mean, just help investors get their arms around it. Please.

I think the urgency is across the board there.

Nothing everything's on the table.

And as Andrew pointed out we went through in his remarks, we have things that we're doing right now early warning dashboards staffing up crew scheduling.

We're looking at it.

The icing procedures top to bottom we're buying more engine covers for extremely cold weather, we're looking at.

Fuel mixes for ground equipment, when you have sub zero temperatures on and on and on we're also waiting patiently here and it will be weeks not months to get the Oliver Wyman report to understand root causes and what we need to do there, but we will do everything that it takes whether that is.

By an engine covers technology changes.

Whatever that list may be to ensure that this kind of event doesn't happen again a disconnect contracts because the we've had we've made great progress. We've got we've gotten five agreements here in the last couple of months with our unions I'm very very proud of that our negotiators and I am very proud of our Union partners we have.

A couple more to go we are we're making I think really good progress we have two of those that are in mediation.

Our pilots and flight attendants that mediation process has a defined process control by the mediators immediate or controls the scheduled the meeting times meeting dates.

We're making progress in both of those as well.

<unk> to finish those up.

Our employees are terrific.

We're gonna, we've always paid well and we're going to pay well, we're going to have market.

<unk> compensation.

You know that we know that and our employees know that so I am eager to wrap those up but mediation is a process.

I would say that we know what happened the last Domino to fall as I call that we've put in place with urgency and that was the industry had make sure. The same thing doesn't repeat itself. So we have the safeguards for that same thing not to repeat itself, but we think there could be common root causes and thats why we went to the time between the weather starting in us getting to that kind of position with our crew scheduling.

Software lots of decisions.

Made lots of coordination between our ground operations are in our control center our crew scheduling.

Lots of equipment that was used to handle a cold weather something in there in that sequence of events.

At a spot where we were at the end and so immediately protect that situation will not happen again, and then fall the string string upstream defined the series of actions that led us to there and resolve those so that's why we're taking the time to do it a couple of weeks I think it's worthwhile to take a few weeks since you have the kind of emergency yourself done.

Define those root causes you can address and that may require incremental spending or maybe it's more incremental management effort, we shall see but we certainly have intention and plans to have that startup right away. After that reports done and then I know, we're going on and on it's just so important and the last thing I would add is that we.

While this event was something significant and something we are absolutely not proud of.

We've got a 51 year history of operating really really well we were operating really well prior to this is that we had.

Good performance in 'twenty, two leading up to December 20, <unk>. Good performance at the holidays Thanksgiving Labor day et cetera.

So never forget that we are.

We haven't always.

I always will be a terrific operator.

The main point here is we we will attack this at all.

Whatever we need to work on here.

Actually once we understand the OWS report, we will attack it with a sense of urgency.

We will boost our spending if that technology, if we need to but we will do everything to double down to make sure that this does not happen again, it's critical.

Thank you.

Thank you and the next question will be from Jamie Baker with Jpmorgan. Please go ahead.

Oh, Hey, good afternoon.

Interlining off the table.

No.

And I think interlining.

Changes, if we had interlining there then.

And then there may be in some.

Subset of customers. So we could've re accommodated.

But other airlines are full time here as well. So we would have still had the same event, we still wanted to having this discussion even if we had interlining now domestic interlining is prohibited the scope agreement with our pilots. So we'd have to get scope relief to do that but should they accommodate if there we put it in an airline that may at the margin help with some level of disruption but.

It would still had the large large majority of people would not have been accommodated to address interline.

And second Tammy thanks for including the fact that you've updated your labor cost accruals just to clarify the industry convention seems to be to exclude any planned retro pay or signing bonuses I assume that's also true for southwest.

Jamie we're doing our best to include the total cost.

To get the labor agreement.

Over the finish line here.

So.

And.

As we shared back in December and the environment is dynamic and we're continuously evaluating that but our estimates our estimates include.

I think that total cost I guess is a better way to say that.

Q.

To wrap up our contracts.

Sure.

As well as recently of.

Of course ratified contracts.

Got it.

Sure you are looking forward to locking down the contracts. So I'll stop hounding you about it.

I appreciate it. Thank you everybody that's it for me.

Thank you.

And our next question is from Duane <unk> from Evercore ISI. Please go ahead.

Hey, Thank you.

I wanted to ask you about work rules and if they are modernized and aligned with operational recovery. There's been so much written about technology gaps.

Fairly or unfair fairly the media has really run with those talking points.

Not sure if you're willing to go there but.

For example, do your pilots need to call into a call center.

To verbally confirm re assignment it seems like the numbers that would have been required in this event would overwhelm any call center.

And it feels like maybe there could be an app for that any any thoughts on that would be great.

Yes, Duane this is Bob I'll, just start and then.

And we've got a lot more detail than I do but I think I'd break it into two pieces we have.

Electronic notification in place for our crews.

And there is more work to do there in terms of there's all kinds of things you have to use electronic notification for.

But yes, there has been some report the best thought in place it's absolutely in place what we need to work on is the and it's a contractual change electronic acknowledgment.

Which I believe Andrew is not required in other words to know that that that that.

Has been acknowledged for example, AI accepting accrue reroute.

That's a contractual change to do that but obviously for the.

Asian, you'd have to known not simply that it was delivered electronically, but it was acknowledged and is going to happen. So there is work to do there is some work to do on the electronic notification, but we do have that capability, but there's also I think even more work to do on the on the contractual piece of this which is the acknowledgment.

And obviously those two contracts are open and Thats a piece of what our negotiation teams are working on but Andrew if you want to add yes, I think crew communication was a problem during the event not the problem.

So we definitely want to improve that we have some means consistent with the current contracts that have some level of electronic communication with our flight crews.

Both have learned from this I think we will incorporate that into our negotiations.

I think we will wait until we finish the negotiations before we kind of design. The next generation of electronic communication tool with or without crews because it must respect the contractual agreement so I think.

This event will get us all aligned on the need for improving that and once we get that ironed out in the open contracts. Then we will go and develop the next generation of that electronic communications.

That's helpful. And then just on my follow up I'll stick with you Andrew can.

Can you comment on what percent of your network is out and back flying and.

I know, it's too early to priest.

Prescribed the medicine here, but any thoughts on your ability to increase out and back or if that might be a potential solution.

I can't recall the top of my head I don't want to give you a number for fear of being wrong.

We have on the past this comes up a lot.

Put into our schedules and like test areas of the region Outbox. We did this in midway I think three years ago four years ago, and so we've put us around the system to see if that improves anything by increasing outback to surface and we haven't found that to be.

The case, we've done other things, we can put into our schedule to help with on time performance and part of the move actually with a moving network planning and our controls that are under one roof is because it is difficult to nail down how to incorporate recoverability into your schedule, even though everyone seems to have an opinion. We know we can incorporate crew needs overall, we've gotten very good at that.

That maintenance needs Groundouts needs, we can model to a good level of detail the predicted over on time performance for schedule, but how does one define what's recoverable schedule is actually more difficult to quantify design that you might imagine so bringing the two groups together, we can create a tighter feedback loop.

Through smaller continuous improvement efforts.

To test and learn smaller iterations of Recoverability built into the network is the design the desire behind this idea of moving them under one organization and they've already started that we'll see cross pollination of people who work in our controls and are now working on network planning to help design schedules people design schedule is doing a tour and the control center to learn what is like to operate it and so.

We think that tighter linkage should help us incrementally improve.

Recoverability and into the schedules or.

Definitely.

All ears about doing that.

Outback is something that gets thrown around it.

Really we haven't seen how that can have a direct cause and effect improvement.

I appreciate the thoughts.

Thank you Sir.

And the next question will come from Savi <unk> from Raymond James. Please go ahead.

Hey, good morning.

Good afternoon, just on the hiring you talked about.

<unk> was not the issue I was just kind of curious if you could provide a little bit more color on that.

Hiring plans this year and the cadence because if you look at your capacity growth. There is a lot more capacity growth in the second half and I think that's something that kind of causes some concern given just a lot of growth coming and even having to address some of these operational issues. So can you talk a little bit of the hiring cadence here.

<unk>, Bob Absolutely and then if you want to chime in just in terms of where the.

Yes, there is.

Obviously timing to hire and their timing to train and become proficient, especially in certain areas like the ramp and so that's a piece of why we actually came in above our targeted hiring for 'twenty. Two is to get ahead of that for 'twenty. Three so some of that will be frontloaded a bit in 'twenty three as we prepare for capacity in the back half.

Or.

Hiring in 'twenty three the plans right now I think we are just over 11022 net.

It's roughly 7000 net in 'twenty three so.

It actually.

Roughly 40%.

Again because.

There is a piece of the 22 hiring that was a setup for 'twenty three and again, we don't there's no evidence that we were not staffed.

For the holidays or that we're not currently staff, we are well staffed.

The one exception.

In terms of.

The change from year over year pilots, we hired net roughly I think just under 1000 pilots in 'twenty. Two the plan is to hire net roughly 17 100 I think in 2003, so that actually is increasing our classes.

Every single day.

Which is down.

Meeting with.

Potential new hires.

Earlier this week, we're having no trouble.

Attracting terrific pilots to southwest Airlines, no trouble filling classes.

There's been some discussion of attrition.

Are you seeing higher attrition in our pilot area.

We are attracting.

<unk> last year I think.

Our flight Ops group was under 1%, we've got a lot more new hires.

As you would expect it to be a little bit elevated there, but it's.

Again under 1% and roughly normal so we're not seeing any issue attracting pilots of southwest Airlines.

But Andrew Allen, if you want to talk any more detail about just where.

In aggregate, we will have less hiring this year than last year.

<unk>.

That's true for every work group except for pilots.

And so as we've mentioned before we are pilot constrained and are flying so we're not flying all the aircraft. We could are producing all the ASM, we could right now because of the number of pilots about the productivity of pilots and so as we run our training plan here. This year by the end of next excuse me the back.

After this year, we've told you before that we will no longer be pallet constrained and thats. When we will start using our full fleet, which is why you see the kind of pop up in capacity there in the back half of the year.

The group's we've kind of pre hired they don't have as long as the training footprint as pilots do so therefore, the proficiency they get on the job so to speak for some of them and Thats why you see if you ever look out the window and airport to see different color vests and those are people who are still in training.

Trade ins of those who are fully proficient so you want them to be out in the network now taken getting some repetitions. If you will so that when we the capacity comes later in the year they've had more experience so thats why youll see.

The numbers coming down as capacity goes up later in the year.

That's super helpful and if I may just on that.

Sounded like from the Capex standpoint, if you needed to kind of increase in spend on some systems to expedite.

Some of the changes it would fall within that Capex, but that was kind of curious from a resource standpoint, do you have that ability taken or would you kind of pivot what would you be able to kind of increase the amount of time.

Activity that you do this year.

Yes, we have.

For your first question, Yes, I think thats captured in the ranges that we provided number one and two the the technology spend in total was already increasing from 2022.

Then three your technology support is always a mix of employees.

And contractors and third parties that we use in terms of development. So yes, we have the we have the ability to flex as needed. It may not just be it it could be equipment.

So were not Prejudging. This all of the extra spend would be it.

It could be the case that we need new or different deicing.

Trucks or some other infrastructure at the airports. There is non tech work that is likely to come out of this is not just tech there was some tech shortcomings that we've addressed and there could be more tech, we do to get ourselves, even better but I think on daily there'll also be some other equipment and other kind of operating changes, we make that don't fall in the other.

Technology realm, and again I think the range is wide enough I think all of that would be captured in the.

And the Capex range that we've provided.

Okay Alright, thank you thank.

Thanks Tommy.

Ladies and gentlemen, we have time for one more question and we will take our last question from Conor Cunningham from Melius Research. Please go ahead.

Yes.

Everyone. Thank you for the time just on the book, we estimate that you gave for the first quarter.

Curious if you could parse out just how the corporate side of that.

When I think about your selling your network and what southwest coast great domestically.

The operations are obviously going to be a big debate. There. So just curious on how that commentary has gone so far that conversation has gone so far.

Yeah, Conor it's Ryan.

Of course immediately following the event.

In the days following the event, we were out there talking to kind of general consumers, but also talking to corporate travel managers.

To make sure we had a really good handle on sentiment and what they were needing to hear from us and so and those conversations have continued we're getting direct feedback from them as well and.

From a corporate travel standpoint, as you would expect.

Outline the need for us to be open and transparent about our mitigation plans, what we're doing to ensure that this doesn't happen again.

Sure that we have plans in place to take care of customers.

That we keep them regularly updated.

And of course, we're doing all of those things were out in the field talking to them all the time to making sure that they understand what we're what we're doing.

When we ask them about their plans for 2023, the vast majority of those corporate travel managers say that they do not plan to reduce the level of flying on southwest.

This year, which I think is a positive positive sign there and then when you just look at the bookings from the managed business side as they've come in here in the first quarter for sure there was an impact in January .

It was those first couple of weeks of the year those are big booking months. The hangover was real given the proximity to the DNA events. So there was definitely a hangover or there was an impact.

In January and some into the first part of February as well, but when I look at February bookings and kind of where were what were trending towards here and we're kind of getting into the meat of the booking curve for managed business travel. So we've got a good a good look at it.

Curious is much better than January in fact, I think February is sequentially better.

Will likely turn out to February is going to be sequentially better than where we ended in the fourth quarter.

And then of course as we get to March we're expecting that.

We're roughly back to pre pandemic levels on the managed business side. So.

We've got.

We're certainly focused on that market, that's a big part of our plans for the year.

We'll keep after it but.

As we get further into the quarter here.

Hi.

I'm encouraged by how resilient.

Resilient they have been.

Okay I appreciate that and then just on the you talked about the crude network issue in your prepared remarks that youre rolling out a new system in the next couple of weeks.

Just curious on how much collaboration you have with your pilots and maybe your other in flight crew members.

When looking for a fix there did they have an influence at all or where you're not allowed to talk like could you just maybe talk a little bit about the overall culture there.

With them and talking about the fixes.

Well I think.

I'm not quite sure.

Getting your question, but I'll if I don't please redirect me so the system is.

What we call Sky solvers called something else about that.

Manufacturer.

It had a functional golf.

I talked about we are putting in.

Our fixed to that as we call. It Patrick upgrade you will now have the functionality to be able to solve the past crew member problems such that they don't hamper us in the future now this is not something.

That we our crew members would be in their units be happy that we fixed this problem because they didn't like the result of not having to fix or there and so I think from that perspective, they would like they wanted to get the job done so to speak as far as the culture. We're in mediation. We're in negotiations with final stages and so that's always noisy if you will.

They would like certain changes in where it's coming down to is a lot of the changes are asking for on the scheduling side and this was a scheduling issue and so it kind of a dovetail nicely for them to be able to kind of give input on it and I think all those things we can improve upon and we're happy to take those suggestions and we actually have.

A big contract with them coming up here in a couple of weeks, where they're going to come in.

Get our subject matter expertise together experts together and not talk about how we can improve on the scheduling front and I haven't sat down another one of the other union is us.

Yesterday day before for the same reason so we welcome their input we want to establish a good professional relationship with them, how we can jointly improve and so.

Maybe this is a silver lining as though we can we can start down that path.

Yes, I would just add that <unk> seen a lot in the news that there are things that are <unk>.

<unk> said that we have asked for for years quote unquote and.

Things like to notice work on notification and we agree there is work to do on notification I. Just wondered you know yeah, we agree with them and that work is going on in negotiations here.

Im.

Optimistic that we'll get there.

Second we've got this Oliver Wyman report that will wrap up here quickly and it's a comprehensive review and it's a wide ranging collaboratively review with a lot of parties parties that were involved including the frontline in Denver for example.

The NOC and leaders that were involved but we're also including our union leadership.

And that work to gather their feedback as well because they're there.

They are valued partners and we want to listen and understand and then as Andrew said, you've got things that are more wrapped up a negotiation like scheduling rules that I don't know that I attached to the event and the operational disruption that's a normal part of negotiations just like.

Just like compensation.

But we will be moving through that as we continue to move through mediation.

Our Union partners and we're listening to them certainly in terms of their viewpoints of what happened in our December issues.

Already said for this I want to report comes out and that will identify areas, we need to improve upon we will work with them to jointly develop solutions and they put all areas for them. So I think we are.

<unk> committed to.

Them being part of the solution as we look to it.

Take advantage of the lessons learned report.

I appreciate it thank you.

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

Thank you.

Ladies and gentlemen, we will now begin with our media portion of today's call.

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

Thank you Chad and welcome to the members of the media on today's call. We can go ahead and get started for the Q&A portion Chad if you'll then get them queued up for us.

Certainly the.

A question you May Press Star then one on your Touchstone Tom.

Youre using a speakerphone please pick up your handset before Chris in Q2.

To withdraw your question. Please press Star then two.

And at this time, we will pause momentarily to assemble our roster.

Okay.

Thank you and our first question will be from Dawn Gilbertson from the Wall Street Journal. Please go ahead.

Alright good.

Morning afternoon, everybody I have two questions. The first one is for Bob or Andrew or both.

Second one for Ryan.

First one is you guys seem to be sending some mixed messages here.

Clearly still the second Brian issue, Andrew just on clear communication was a problem, but the problem and then you mentioned this functional gaps instead other airlines didn't also can have this gap.

Addressed but isn't it because the scope of your issues here were so large.

That's why it exposed this thing in the system. So I guess, what I'm asking here is how much.

How much does it without waiting for the Oliver Wyman report how much of this was bad decision, making on southwest airlines or what was the problem.

Please.

Well. The reason you do the work to find the problem I know what we'd like to know it now not later, but that's the point of it respectfully.

But we know that the win with this kind of functional gaps showed up was because you had a lot of close and cancels.

As I mentioned earlier, we frequently for seeing a storm coming do you do.

Cancel in advance so I cancelled today for tomorrow, just like we did yes.

The reason with midway and so that we had done for the storm than we got ourselves in a position, where we're making lots of cancels close in and as Bob mentioned, the 23rd which was still a weather event and towards the 24th were transitioned to accrue event sometime in that timeframe.

<unk>.

This level of close and cancels led us to get behind and then we lost to use of the automation and when we lose use the automation theres just not enough hours in the day for the crew schedules of catch up manually. They almost did a couple of times, but ultimately we didn't and so then the question becomes what would the sequence of events that led you to that point, we had a loss of <unk> closing.

Cancels that is what we're trying to get to the bottom of so we can address that and so we don't know that right. Now. So that's why we don't give you a very clear answer on that specific thing, even though we understand where ultimately that led to.

Okay. That's helpful. So so you are saying that you guys had obviously a lot more last minute cancellations and others since they recovered much more quickly even though you don't know why that was at this point is that is that correct.

I'm, not necessarily saying versus others.

For ourselves we have a lot of close in cancels and Thats, what led to our problem is what we believe at this point in time.

I have not done a comparative.

I have in front of me, but I can tell you what the what the others do the same time that will also be part of the work that we will look at it as well, but as far as what I can see right now what I'm suspecting at this point in time is that was the sequence, but once again you need to kind of dig into it with both interviewing people understand who did what win so to speak with interviews and then.

So with the data Thats corroborate that was actually what happened.

I will call it tedious, but its detailed water to fit that picture altogether and come out with a timeline.

Those with good fidelity.

And backed up with data.

It happened and what that led to.

Okay. Thanks, very much and just the second question is for Ryan or somebody or maybe Tammy can you guys attached them I know you've given the total dollar figure, but can you attach some dollar figures too.

Sure.

The dollar figure of refund the dollar number I know youre on the 80% through on.

Reimbursement, but also on reimbursement I'm curious did you guys because of the scale and scope of this and the damage to your reputation did you broaden the definition of reasonable as you're going through all of these expenses. Thanks very much.

Yes, I'll take the I'll take the first part and then let Tammy take the financials.

Throughout through out the event.

Right away we promised.

We knew it was the right thing to do that we had significantly impacted.

Holiday travel Pan plans here, we knew it was the right thing to do to to offer refunds and then to offer reasonable.

To reimburse for reasonable expenses related to alternative transportation.

And the direction that we gave the teams were to be generous in that regard and leaned towards the customer and so I think.

A lot of these decisions are subjective but.

But I think the team did a really good job of balancing.

Understanding what is reasonable and leaning towards the customer in order to do the right thing by them. So I think it was admittedly it's a subjective element that you've got to kind of find where the where the line is there, but I think our teams leaned into the customer.

And largely did the right thing there Jamie.

And on the financial impact as we shared in the release the total cost impact was $390 million for the fourth quarter and the lion's share of that.

Was a customer.

And the rapid rewards points that we offer to our employees and that we expect to be redeemed.

So Darren.

A much smaller portion that related to.

Premium paid.

That we pay to our employees. So the lion's share of that was the customer again.

<unk> and rapid rewards points.

We havent given the specific dollar amount of that but it was probably roughly 50 50 between those two categories and Don I'll just add one more thing here.

No.

And those customers that were most severely impacted that we issued the gesture of goodwill for we issued those rapid reward points roughly three weeks ago.

And when we look at those customers today, 25% of them already have future travel booked on southwest Airlines. So.

Then three weeks, that's really that's really pretty good so I.

I think it is a.

I take that as a sign of confidence that customers.

Understand they understand that we messed up there we did everything that we could to make it right and that.

Fourth of them already have future travel booked on southwest and Tom <unk> point.

Not necessarily with those points some of them with those points and some of them paying cash.

Just future travel.

John just with just the fact.

Changes day to day, but on the reimbursements, which are obviously the most complicated thing around I think our goal.

Tracking to be 95% complete by Tomorrow, and then have them all wrapped up by probably early next week. So we're.

Moving to them very quickly.

Thank you all very much.

And the next question is from Kyle Arnold with Dallas morning News. Please go ahead.

Hey, guys. Thanks for taking my question I was curious could you talk a little bit more about that $1 $3 billion in technology spending at that.

Backend infrastructure and does that include.

Things like upgrades to Wi Fi in the in flight.

Movements that youre, making this year.

The technology then yes it would include.

Al.

Everything that Jim referenced.

And again, the one three and clean.

The one three and clean.

Technology upgrades.

And.

The ongoing maintenance of the system.

But the Wi Fi piece of that it does not it does not include so that would be incremental.

It's really our investment and ongoing support of the.

Our technology infrastructure, including our investments, but it's not the customer investments like the Wi Fi on the aircraft.

Thanks are there any specific upgrades like you guys have worked on the maintenance systems anything.

But you are actively working on those probably in.

In place before the December event.

Any other systems that we will get an upgrade this year as part of your plans.

A couple of that are.

Ongoing at different levels of maturation. If you will so we just finished up with.

The maintenance replacement just recently that there was a big event or the middle of upgrading our ground ops infrastructure. So one of our.

First you may have seen it from Investor day is called Paperless turn so we're upgrading.

And that comes in so many releases all of which are already deployed and that'll allow us to.

Eliminate all of our paper and our turn as part of Bob's modernizing operation within our.

Control Center.

We have an operation system in a flood plain system. Both of those have rfps have been completed and the.

Work has been awarded and then in our crude system. We have just completed our Fi, which is what you do before you exited or do an RFP and so we will get the results of that integrate lessons learned from this event and then proceed with the next step of the crew stuff. So each of the big operating areas has tech work is underway.

As you would expect summer further has and others.

Yes.

And kind of that $1 $3 billion across the enterprise. There is a lot of commercial systems that are being upgraded and invested in as well so.

It's across it's across the enterprise.

Thanks.

Thank you.

The next question is from Laurie Aratana with Washington Post. Please go ahead.

Hi, Thank you all for taking the time.

We know that the DLT yesterday had announced a little more detail about some of the issues that they are looking into in regards to.

Your December issues, and they mentioned that they are examining whether youre scheduled.

Let's stick I wanted to give you guys had any comment on that.

We saw that and we know as Bob said, we messed up and that will include scrutiny from regulators elected officials. So we understand that we will cooperate fully as I mentioned in one of the analysts reviews. If you. If one were worried about was your schedule operable than you would expect to see.

Poor on time performance for reliability and to the contrary really well before Christmas vacation, including Thanksgiving vacation in November we've been running.

Above average in the industry, culminating in being number one this month. So you don't see the signs of a schedule.

Whack with our resources and ability to operate given our strong operating performance over the last three months and just generally I know theres a lot of talk about hearings in court and obviously the coordination with the Doj.

And.

We're obviously coordinating and cooperating with our oversight committees in.

I mean, we welcome the discussion we welcomed the focus on the resiliency of the aviation system.

<unk> had several personal conversations with the secretary.

Just in terms of how we're doing and our focus on our customers and.

And his focus on.

Customers as well and we're aligned obviously there so we would we will support.

All of this as you would expect.

Great. Thank you. Thank you. Thank you Laurie.

The next question is from Chris Isidore with CNN. Please go ahead.

So I'm wondering if you think that the.

The computer system used for crew scheduling can be repaired or if your intention is to replace it entirely as part of this process.

And would you ever solution as you do you have any estimate for how much it will cost to either fix or repair it and how long it will take before.

The repair it or new system is fully in place.

Thank you.

I mentioned earlier, there is a upgrade already in our test system from GE digital.

Upgrades in their goodness, we havent, even talked call. So I'm not sure if it's a costly thing or not.

It'll be upgraded here.

And the production in a few weeks' time, and we think this addresses.

The shortcoming, we have this specific instance.

And just again a reminder that this.

G system Sky solver.

It's an industry tool that many airlines use it.

It performs well and it performed as it should even in our event. The what was revealed was this.

This requirement that no one no one has ever seen we'd ever seen where the you have this need to solve past problems because theres. So many problems coming in just volume coming out of the system and working with GE. They have put a fix in place and now in test in weeks I've had a record time so.

The software again, it's industry standard.

Crew scheduling and rescheduling software that we and others use and it did perform as intended during the event.

So just to be clear.

Sure.

Problems with crew members letting you know, where they were and where things stood having to call in rather than having an app to notify you you don't see a need to change the system fundamentally two to have a more electronic formal notification.

Different.

As I mentioned earlier that was a problem.

And it's a problem it wasn't the problem.

The situation it was a symptom of the problem and so our contracts with our crews right now require telephone calls in many situations.

In other situations, we have some level of electronic communication available now we will make incremental improvements to that some have already been deployed now and some will be deployed in the next few months, but to have a more comprehensive.

Electronic communication requires changes to the contract with the crew members. Those are open right now and we're discussing it with our unions and should they agree.

Then we will develop new crew communication tools consistent with the contract.

For development as soon as practical have you have you raised the possibility of.

Opening the contract for that one issue and having the because as we understand it from the statements from the unions during the.

Remember they were not.

The current system.

Having the.

The agreement on a new application and new electronic crew notification system now before you get to the entire contract itself because the entire contract itself could obviously take months.

Entire contracts they have been for a while or we're in mediation, which hopefully as Bob said means we're towards the tail end of it and it's not.

We would certainly be open to that if they want to do that they have not told us that they want to do that but if they want a signed agreement before based on just the communications, we will certainly do that but right now the approach has been to have that incorporated into the.

Is this final push of the current contracts and I think thats wide and practical for us to work on so we're happy either way, but right now we've seen no indication that the current path.

Okay. Thank you thank.

Thank you.

And at this time, we have time for one more additional question and that question will be from Richard Valera from Las Vegas Review Journal. Please go ahead.

Thank you and good day.

You indicated that added capacity by southwest do several destinations will not be curtailed. Despite what happened in December but we're hearing that Harry Reid International is starting to have internal capacity problems and that airlines might not have much choice in terms of when their operations occur.

Southwest had any problems scheduling their times of operations as the airlines scheduled grows in Las Vegas, and do you think the future capacity issues in Las Vegas could curtail flights in the future.

Right now we've seen no general capacity constraint store operation and.

Harry Reid International it's normal as an airline and airport grows that you work on expanding capacity in different areas you work on taxi ways, where comeback systems. These are all normal course of business and Harry Reid seems to have a good plan and execute.

Upon that in coordination with the with the airlines. So we're happy about that I will note that Las Vegas has been so successful attracting new attractions, we do see a lot of general aviation or private aircrafts on the weekends.

As a surge of demand, but other than that.

We see no changes to the environment.

And this is Andrew.

Thank you.

Good day, thank you.

Ladies and gentlemen, 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 Chad. Thank you won't have any other questions or follow up our communications group is standing by Q1 479 to 44 seven or of course through our media newsroom at Www Dot SWA media Dot com. Thank you all very much for joining us.

Yes.

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

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