Q2 2023 Southwest Airlines Co Earnings Call
Good morning, and welcome to the Southwest Airlines second quarter 2023 conference call.
My name is Anthony I'll be moderating today's call.
Is being recorded and a replay will be available on southwest Dot com in the Investor Relations section.
I suggest for his remarks, there'll be an opportunity to ask questions.
To ask a question you Press Star then one on your telephone keypad.
To withdraw your question. Please press Star then two.
At this time I'd like to turn the call over to Mr. Julien Landrum, Vice President of Investor Relations.
Please go ahead ma'am.
Thank you operator, and welcome everyone to our second quarter 2023 conference call in just a note that we will share our prepared remarks, and then jump into Q&A on the call with me today, we have our president and CEO Bob Jordan.
Executive Vice President and CFO Tammy Romo.
Executive Vice President and Chief Commercial Officer, Ryan Green, and Chief operating Officer, Andrew Watterson and.
Correct reminder, that we will make forward looking statements, which are based on our current expectation of future performance and our actual results could differ materially from expectations.
Also we will reference our non-GAAP results, which exclude special items that are called out and reconciled to GAAP results in our press release.
So please refer to the disclosures in our press release from this morning and visit our Investor Relations website for more information with that.
I will turn it over to you.
Thanks, Julia and good morning, everyone. I appreciate you joining us for our second quarter 2023 earnings call I am very pleased to report a solid quarter with net income of $693 million, excluding special items and all time record quarterly revenue of just over $7 billion.
The environment, especially for leisure travel continues to be resilient as we have seen solid bookings throughout the busy summer travel season as.
Further we continue to expect one to $1 5 billion of pretax profit contribution and full year 2023, four strategic initiatives that we outlined at our Investor Day last December based on our current outlook. We continue to expect record operating revenue and solid profits in third quarter 2023 and year over year margin.
Expansion for full year 2023.
I, especially want to thank our people for doing such a fantastic job. They helped us get a record number of customers and a record number of bags on a record number of flights successfully to their destinations as we experienced the lowest second quarter flight cancellation rate in the past 10 years.
It wasn't without trials, we had a lot going on in the operation related to weather and weather has continued to be a challenge here in July despite that our employees have continued to deliver a very solid performance from our network ops control center to the frontline are people who've worked together extremely well to minimize cancellations and produce a <unk>.
Reliable operation and I'm, just so proud of them for getting our customers where they need to go despite a challenging operational environment.
While our cost outlook has increased for the year. The change is primarily driven by updates to our market wage rate accruals for open collective bargaining agreements and while fluid, we're making progress. It's obviously very hard work and I'm, just very appreciative of the dedication of everybody involved in the negotiation process.
Now thinking about where we are with the business. Since 2018, we have seen very significant swings due to the grounding of the Max demand falloff of course from Covid than the stress from the resurgence of demand disruptions from post pandemic supply chain issues challenges with employee staffing and most recently uncertainty.
With our Boeing aircraft deliveries the challenges we have faced since 2018 have made planning difficult. So smoothing out fluctuations as a must in the best way to do that is with smooth and predictable capacity growth.
We told you back in April that we were re flowing our order book to allow for orderly and measured growth and we're still finalizing the details of that with Boeing but we remain confident that we will get the 70 deliveries in 2023 that are assumed for our published schedules and we're working to build a 2024 plan that should be much.
More stable. We currently are planning to be flying the Max seven at some point next year, but if not we'll take Max eights instead, just as we're doing now.
Where that leaves us for full year 2023 capacity is unchanged for this year at up 14% to 15% year over year.
As we shared this morning in our release, we are revamping our 2024 flight schedules.
Our network is largely restored at this point it is not optimized, especially for post pandemic shifts in business travel.
Those adjustments to the network will be largely complete by the March 2024 flight schedules and we expect those efforts and the continued maturation of development markets to generate an incremental 500 million in pretax profit in 2024. The changes will also reduce the percentage of system capacity.
Development by more than half returning to normal pre pandemic levels by the end of next year.
I already have our scheduled published through March six 2024, and currently expect first quarter 2024 capacity to be up in the range of 14% to 16% on a year over year basis now keep in mind that nearly 90% of that year over year growth is carryover from 2023.
For the remainder of 2024, we are planning for a sequential deceleration in year over year growth in each quarter next year as you work our way back to our long term goal of mid single digit growth year over year we've.
We've made a lot of progress in the first half of 2023, completing several major milestones. We quickly developed and are on track for our winter operations plan. We have the staffing plan in place to fully utilize our fleet by the end of the third quarter and have the network restored by the end of the year again to be clear, it's restored but not you.
Get optimized and Ryan will share more on how we're going to adjust the network based on post pandemic travel patterns, but we have a lot of exciting things in the works that we believe are going to contribute to our 2024 financial results and help us deliver another year of margin expansion next year.
In closing our accomplishments in 2023 lay a foundation for us to shift our focus to restoring our industry, leading financial and operational performance.
Boost our operational realigned our resilience and make advances in our industry, leading customer service through a focus on digital hospitality.
I just can't say this enough I'm just so proud of our people. They are the hardest southwest airlines and they deliver day in and day out for each other and for our customers and with that I will turn it over the Tami.
Thank you, Bob and Hello, everyone.
First I'd like to extend another thanks to our employees for their commendable effort this quarter, resulting in solid operational and financial performance.
Hard are an improvement from where we began the year.
Overall, we had a really solid quarter.
Operationally, we had a great completion factor despite many weather challenges.
Financially bottom line profits were in line with our expectations despite pressure from market driven labor it cool.
We produced an all time quarterly operating revenue record.
We also generated double digit operating margin each month during the quarter.
All of this was made possible by the drive and hard work of our incredible employee I just can't thank them enough.
Brian and Andrew will speak to our revenue trends and operational performance. So I will jump right to cost suite and then balance sheet.
Beginning with our second quarter jet fuel price was $2.60 per gallon slightly above our previous guidance.
Second quarter critical oil prices stayed within a reasonable range hovering for the most part around $80 per barrel we are.
49% hedged for third quarter and estimate our third quarter fuel price to be similar to our second quarter fuel price.
And that includes an estimated eight cents of hedging gains.
We now estimate our full year 2023 fuel price to be in the $2 75 $2 80.
Per gallon range, including nine cents of hedging gains.
This is off the dime from our previous guidance due to higher refining margin.
Of course market oil prices and heating cracks can be volatile, which is why we hedge.
We are currently 54% hedged in 2024 and over the last few months, we've added meaningfully to our 2025 portfolio and began building our 2026 portfolio. The total fair market value of our fuel hedge portfolio for third quarter through 2026 and $373 million.
We will continue to seek cost effective opportunities to expand our hedging portfolio with a continued goal to get to roughly 50% hedging protections each year.
Moving to non fuel costs, our second quarter year over year CASM ex increase of seven 5% with towards the unfavorable end of our guidance range due to incremental adjustments to market wage rate accruals for our open labor agreements.
We have said this from the beginning but our labor accruals are based on market and this environment market has obviously been dynamic.
Our planning and eager to award our work groups with well deserved compensation increases.
Looking ahead our.
Our nominal third quarter cost trends remain fairly consistent with second quarter.
We currently estimate our third quarter CASM ex to increase in the three five to six 5% range year over year.
This increase is again largely driven by higher labor cost.
We are also continuing to incur additional maintenance expense relative to 2022 four hour Dash 800 fleet as more engines come due for heavy maintenance.
Adding further pressure to our second half cost inflation.
For full year 2023, we now estimate CASM ex fuel decreased and the range of 1% to 2% year over year compared with our previous guidance of down 2% to 4%.
The estimated point and a half increase is due primarily to higher labor cost pressures as I've already covered.
Turning to our fleet during the second quarter, we received a total of 21 aircraft deliveries and retired 11 700 aircraft ending the quarter with over 800 aircraft.
We are working to re flow our order book with Boeing However for this year, we continue to plan for approximately 70 dash eight deliveries in 'twenty six dash 700, retirements, which takes our fleet to 814 aircraft at year end.
Likewise, our capex outlook remains unchanged at approximately $3 5 billion, which assumes approximately $2 3 billion in aircraft capital spend.
Our 2023 capacity guidance also remains unchanged.
We continue to expect full year 2023 capacity to be up approximately 14% to 15% year over year.
And we have tightened our third quarter capacity guidance to be up approximately 12% year over year.
As Bob mentioned, we are planning for first quarter 2024 capacity to grow 14% to 16% year over year.
Now keep in mind, we are growing 14% to 15% in 2023.
And that alone drives nearly 90% of that first quarter year over year growth. So the primary driver of that first quarter year over year growth is annualizing. The additional capacity, we're adding this year.
But our long term goal remains mid single digit year over year growth.
Lastly, our balance sheet remains pristine and we remain the only U S airline with an investment grade rating by all three rating agencies.
We ended second quarter with cash and short term investments of $12 2 billion net of 67 million and debt repayments for the first half of the year.
We continue to be in a net cash position and expect a modest 16 million and scheduled debt repayments for the remainder of the year.
And currently 2023 interest income is still expected to more than offset 2023 interest expense.
We declared another dividend in second quarter, which was paid just a couple of weeks ago.
I am proud of what we have accomplished through the first half of the year that said, we still have work to do to return to industry, leading financial performance, which is our priority as we work on our plans for next year.
This includes managing the ongoing inflationary cost pressures.
Slowing our order book with Boeing to support orderly measured and profitable growth.
And rebalancing and optimizing our network.
We believe these plans combined with our existing initiatives and the maturation of our development markets will help us expand margins and return on invested capital in 2024 as compared with this year.
Let me close by saying my confidence in our ability to achieve our financial and operational goals is anchored by my belief and the people of southwest airlines and their ability to create and inspire success.
And with that I will turn it over to Ryan.
Thanks Tammy.
You through our second quarter revenue results provide context for our third quarter outlook and update you on some of our commercial priorities and for additional detail on our revenue performance I'll point you to this morning's earnings release.
Starting with second quarter demand continues to be resilient, especially for leisure travel overall trends have remained steady with operating revenue for the first half of 2023 consistently well above 2019 pre pandemic levels.
Operating revenue for second quarter was an all time quarterly record of just over $7 billion and in fact, we had record operating revenue in every month of the quarter.
Second quarter, 2023 unit revenue or RASM decreased eight 3% on a year over year basis on a capacity increase of 14, 1%.
And while it's a year over year decline, it's still our second highest second quarter RASM to date, which points to the tough comp we were up against from last year and.
And as a reminder year over year RASM was impacted by a five point headwind from approximately $300 million.
A higher than normal breakage revenue that was recognized in the second quarter of 2022, resulting from flight credits issued during the pandemic that were set to expire prior to our later policy change to eliminate flight credit exploration dates.
Overall second quarter revenue came in at the favorable end of our expectations as closely and leisure held strong.
Second quarter revenue from corporate travel came in largely as expected as we realized sequential and year over year improvement in managed business revenue.
And while travelers from some of our largest segments have reduced their frequency of their business trips from pre pandemic levels. We're very pleased with the gains we continue to make in the managed business space.
The medium businesses government and education of our strong points for us and we are growing the number of accounts we have under contract.
All of this has allowed us to continue to grow our share of the managed business space in the industry and as a result of our revenue initiatives and corporate travel.
We gained additional passenger market share in the second quarter and exited the quarter seeing more unique travelers flying for business then we saw pre pandemic.
Moving to the third quarter, we're seeing leisure booking and yield strength continued throughout the summer travel season with July revenue, which is essentially booked expected to also be a record of course much of the post labor day booking curve comes in closer, but we're very encouraged by the response to our June fare sale for off peak fall travel and what Thats. So.
<unk> for continued leisure demand, we had all time record bookings the week of our fare sale with three booking days that were top 10, all time records and included a record day for the most bookings ever taken.
In fact, we have more passengers booked for third quarter travel at this point in the curve than we did at the same point in time for second quarter of course on a revenue basis nominal yields are typically weaker sequentially third quarter versus second quarter, but the strength in passengers points to the continued demand for southwest Airlines.
We currently expect overall corporate travel to have a modest underlying trend improvement and we expect to continue our gains in industry market share. Overall, however, we expect corporate travel demand will remain lower than leisure for the foreseeable future, particularly compared with pre pandemic.
So with a higher leisure mix and as the number of business trips taken per traveler remained down for our most frequent customers. It gives us an opportunity to look at our current network design prepay.
Pre pandemic those travelers had a skew of short haul travel with more frequent trips and also more midweek travel and our current network is designed assuming those travel patterns would return.
Moving forward there is a revenue opportunity to adjust the network to adapt to the new travel patterns. We expect to continue to see from our mix of business and leisure customers.
Ultimately this leaves us with third quarter unit revenue expected to be down 3% to 7% year over year on capacity up roughly 12% again on a year over year basis. The decline in year over year unit revenue is driven by capacity growing faster than seasonally seasonally typical as we restore the network and normalize the utilization.
Our fleet as well as tough prior year comparisons from the post pandemic domestic demand surge. So while there is still room to optimize our unit revenue efficiency.
This guide implies a third quarter record for operating revenue.
So again, we are in the process of adjusting our network to support our imperative of industry, leading financial performance starting with the January 2024 schedules. We've made changes to the composition of the network such that it supports the customer travel behavior changes I. Just mentioned, we made changes that reflect where our customers are travelling and when they're traveling.
Including time of day and day of week and this optimization will be largely complete in spring of 2024 in.
In addition, we have more than 10% of our markets under development, which will normalize closer to pre pandemic levels over the next 12 months to 18 months.
So as we said in the release and as Bob mentioned earlier. The go forward revenue opportunity from the network is substantial and of course. We also expect continued revenue contribution growth from our existing and fully implemented revenue initiatives.
Finally, we've always worked hard to consistently deliver the best hospitality and customer service here at southwest our customer service is of course legendary and our customer policies are industry leading.
And we are on track and deploying our onboard product initiatives, including Wifi upgrades larger overhead bins and NC power. We are now focused on widening our customer service advantage through up through prioritization over a series of initiatives that will improve our digital hospitality and allow our customers to serve themselves in most cases.
We aren't ready to provide you all the details there, but the initiatives will help us achieve our goal to deliver the best and most efficient hospitality with next generation tools airport layouts and more.
And now with that I'll turn it the Tam.
Thank you Ryan and Hello, everyone I'm going to provide some additional details on our operational performance and a brief update on our winter operations compared to plan.
Well have to start by commending our employees for their warrior spirit and a solid operational performance they delivered in an operationally challenging quarter.
As Bob mentioned, we had record flight activity record customers and record bad counts.
But we were ready we were staffed up and we were prepared.
Our completion factor in the second quarter was really pretty remarkable we reliably achieved a flight completion factor of more than 99% in the second quarter.
It was the highest second quarter performance in the past 10 years.
And that is despite the challenging environment June in particular had tough operating conditions.
Issues across the entire system with pretty much continuous weather disruptions.
Safety is always our first priority. So we couldnt avoid some flight delays, but we're really excelled in getting customers to their destinations and with their bags.
And when we had weather events, we managed to reset and be right back on track. The next morning, which is a sign of good management through irregular operations by our people.
Underneath that headline we saw broad based improvements in our operating metrics as on time performance long delays.
Good morning, originators turn compliance floated booked.
And Triple net promoter score all showed solid year over year improvements.
This was against the backdrop of runway closures in Las Vegas, and Denver, which are two of our largest operations.
Another drag was our block time hit rate, which dropped over four points relative to the second quarter of last year as our pilots had to take more secured as Rudy because of weather.
The broad based improved performance against these headwinds is a testament to solid execution by our people.
Looking forward. We're also really pleased with our progress on the implementation of our winter preparedness plan.
Just a reminder that the plan as detailed in our micro site, which is available on our website the.
Our plan is on track to be fully implemented in fourth quarter 2023 in advance of our winter storm season.
Walk you through all the detail today since it is a little micro site, but I will say that everything is going really well and we're already accepting delivery of new equipment and infrastructure.
As well as completing software implementations.
We are conducting summer school to trade new ramp agents on the IC and train all ramp agents on new equipment.
Obviously, the other thing we have going on is labor negotiations, where we continue to work diligently and we continue to make progress.
I do want to thank all of the parties on both sides, who work hard to negotiate these collective bargain agreement.
I am grateful that we've been able to get so many ratified in the last nine months, but.
But we still have work to do with a couple that have been amendable for awhile.
We know that negotiations can be emotional as well as complicated, but we are committed to good faith negotiations to get new agreements in place as quickly as possible and to compensate our employees with market wage rates.
So in closing I'd like to thank all of our employees for their hard work.
Honored to be part of this team had the opportunity to support them in.
And with that I'll turn it back over to Julia.
Thank you Andrew we have analysts queued up for questions. So 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.
We will now begin the question and answer session.
I'll ask the question you May Press Star then one on your Touchtone phone.
Using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
Our first question will come from Scott Group with Wolfe Research.
You May now go ahead.
Hey, Thanks. Good afternoon. So wondering if you have any color on the <unk>.
Sure on load factors in the quarter and then guy.
<unk>.
A lot of pressure on RASM in Q3 as capacity accelerates.
Q4 capacity expected to accelerate further do you think we should expect.
Further RASM pressure and given that do you think about maybe moderating some of the capacity growth.
Yes.
Hey, Scott it's Ryan.
Thank you.
Stepping back and just taking a look at second quarter overall.
I think it was it was a really really good performance record operating revenue for the quarter record operating revenue for each of the months in the quarter.
And I think when you think about that relative to the.
The compare period from the prior year.
With the pent up demand in the second quarter plus the.
The headwind that we're facing there on the breakage adjustment of about five points, which by the way does not persist going forward that is.
That comparison is isolated to the second quarter there.
I think that the performance is really really good.
The fare environment second quarter year over year.
If you adjust because that breakage benefit or breakage comparison from the second quarter of 2022 gets booked into passenger revenue that gets spread out over all of the other revenue there in the quarter and if you isolate that average fares in the second quarter are actually up year over year, 2%.
So we are in an environment here, where we're managing we're optimizing revenue and a really strong fare environment, which does.
Typically have a little bit of pressure on loads.
And the.
And I think if you look at our domestic low fare low factor compare.
Second quarter, that's in line with.
The compares are the load factor performance that our competitors saw in the second quarter as well so all of that taken into account on the second on the second quarter I feel really good about that.
As you think about the fare environment going forward.
Ally here is almost booked I think that the fare environment as far as we can tell continues to persist here in July I think we expect another record revenue in July again on a tough compare.
From prior periods with the pent up demand last year.
So I think we're just in an environment here, where we.
Managing where we're optimizing revenue and.
And a very strong fare environment and that typically comes with a couple of points of load factor.
Adjustment there.
Scott, It's Bob the other thing.
Obviously, the new we've got we're in this new revenue management system as well that were.
I think it will be fully.
<unk> taken over the network in terms of pricing this fall.
And number one I'm happy that they've we've been able to get it in we got it in on time.
It thinks about your whole itinerary and one of the things that happens too is it maximizes close in demand. So it wouldn't be a surprise doing that that you might see a little bit of a of a lower load here, especially as we as we learn the new system.
And again all of that was known as we did testing second thing is we know we're in a sub optimal environment. We brought capacity back quickly as we restored our flying I am very proud of the team here, what we will get all of our aircraft in the air in the unconstrained and flying everything here.
At the end of the third quarter, which is actually ahead of our plan, but it's not optimized that's why we're doing all the work in the first quarter next year around the network to optimize.
The last thing just that Brian talked about this.
You Associate this to average fair, we have a large percent of our network in development. It's over 10%. We added new cities. We added whole we grew Hawaii during the pandemic, we put kind of a 100 aircraft or more into those.
Those investments and those are still in development.
And that will mature across 2024, and I expect that percent of our total system in development to be normal.
Fall across each quarter next year and to be normal sort.
Sort of pre pandemic normal by the end of next year and I think Tammy.
Just thinking about fares.
The average fare drag from that so those excessive development markets compared to normal was about $2 right. Now. So that just gives you a ballpark in terms of thinking about average fare as well.
Helpful. So I guess, just a quick follow up to that.
And then the network optimization is that more of a cost opportunity or revenue opportunity I guess ultimately I'm trying to figure out like if capacity is up high single next year do we think CASM is up or down next year.
Alright.
Alright.
We'll tag team.
On that note.
<unk>.
But we believe that the <unk>.
Network.
Right.
Redesign.
It will be beneficial to both revenues as well.
As on the cost side.
And as we look ahead to next year, we are absolutely committed to driving our unit cost down.
And certainly the.
The network and our opportunities there too.
<unk>, our staffing at our fleet to <unk>.
Network.
Our network design.
The helpful and helping us to achieve that goal.
And I think I would just add too you talked about the.
The large capacity in the first quarter that we've just talked about 14 to 16.
It's still capacity, but just as a reminder.
With the restoration of getting all the aircraft flying this year, it's going to produce a lot of capacity just doing that because we were so we were so constrained, particularly on the pilot side, which again goes away in the third quarter.
So it produces a lot of carryover, especially into early next year, so 90% of that growth in the first quarter is is simply carryover from from adds back here.
Here in 2023, and as you think about the network optimization as Tammy said, it's a play on both sides, but the travel patterns. It's clear the travel patterns post pandemic are not what they were pre pandemic.
Thats leisure a lot of that is.
That business I expect business to continue to come back, but I think it's going to trail the restoration of leisure year for awhile, So Brian talked about this but it's things like.
A much more aggressive reduction into debt.
On a Tuesday, and Wednesday for example, normally that schedule would fall about two points from a Monday I think it's going to fall about eight points.
The rest with the optimization of the network.
We're managing.
Much much better management of really early and really late flights, which obviously have a RASM penalties on those so anyway.
It's definitely a revenue play, but it is really meant to just match the post pandemic demand and travel patterns.
What we're seeing to the network.
Give some color on this as kind of I've put into four buckets of network changes. We're doing the first is a frequency shift from mostly short haul business heavy routes to more medium and long haul routes with a lower business mix. The second is Tuesday, Wednesday Wednesday reductions.
<unk> are down 7%, 10% versus Monday, Thursday Friday, depending on the season. The third is the shoulder of the day. So moving the latest in earliest flights, which are typically a worst performers a little bit and then the fourth is we're adjusting to the new city and Hawaii.
Markets as we've understood the seasonality in demand patterns, we will be shifting them.
As a result now to give you some a little bit color on that first one about how we're shifting the frequencies, let's take midway.
March of 'twenty four we will have 225 departures in March of this year. We had 229. So just down four trips underneath that you have 26 city pairs that are changing frequencies.
You say midway to Columbus down.
Down two frequencies from six 6% Forex midway to Phoenix.
Up two frequencies.
Place it.
And then the same thing.
And Columbus, Theyre, not losing two frequencies.
Those figures as you've gone from midway to Sarasota and Tampa.
Everyone kept their departure so to speak for the composition moved a little bit now so sort of as a pure play leisure, but Tampa and Phoenix is a combination of leisure and business. So it's kind of a mix shift at the margin not like a growing together guardrails. So to speak. So all of these you go do this through all of our network. It leads up to a substantial change.
Wanted itself is modest.
Thank you guys.
Our next question will come from Savi <unk> with Raymond James You May now go ahead.
Hey, good.
Good afternoon.
Can I ask maybe a high level question kind of tying in all the different things that you're working on.
Yes.
Do you think you can they can get back to 2019 level of profitability not necessary EPS, but just kind of pre tax income type level.
Does it take to get there and how long does it take to get there.
Hi, Yes, hi, Savi.
We are in the midst of working on our detailed 2024 plan and certainly getting back to prepay the next levels of profitability.
Is is our goal.
And.
And as we've shared with you.
Adjusting our network to that current.
The demand environment in current business environment.
It.
Is a part.
A significant part of that plan.
Not ready obviously to provide guidance for next year.
It certainly.
Getting back to those levels of profitability as a goal.
So the first order of priority is to fly all of our fleet.
And optimize our staffing levels.
To that flying and to the.
The network adjustments that we've taken you through.
And in addition to that.
We've got ongoing contribution.
From our initiatives as we continue to grow the network.
And certainly we will continue to get contributions from our ongoing.
Fleet modernization plans.
So certainly a lot of moving parts here as we free as we've worked to rebuild rebuild following the pandemic.
It's obviously been a little messy here.
But the good news is is that we are almost fully restored and will be soon and we will be certainly pivoting and.
Our efforts on producing.
Year over year margin expansion for 2024.
Okay. That's helpful and I was just wondering if I could ask a question on the labor accruals.
Does that include what.
It has historically.
Then part of the kind of the ratification bonuses. So it can be in your case anything can that prior to April 2022, or any catch up to kind of last years, where you might be lower is is that also included in kind of this year's labor crude oil or is it just getting because of the labor cost of what you think the market.
Rates are.
Savi. It is our it is our best attempt to adjust our market rate too.
Current market.
And obviously, there's been changes as we've been moving along here and we've been we've been adjusting as we go.
And certainly for the third quarter, we had factored.
All of that into our third quarter.
Cost guidance.
As best as best we can estimate so.
So and I think thats, an important point savi. So we've got we've been accruing all along as you as you know here as you know.
And so just keep that in mind as you compare southwest team.
Maybe some of the other guys in the industry.
Yes, I mean, just to ensure though yes, we are fully accrued for what is the most recent market and as you know market has been moving.
And in fact, the change that we made for full year costs down two to four re guided down one to two that change was basically entirely.
Updating our accruals across the quarter because the market moved.
And Thats pilots and flight.
Labor groups.
It's all.
And the driver of that increase was it kind of.
All labor groups driving it up with this quarter or more because the pilot.
Seen some pilots.
Anywhere we saw an increase on it. So if you have an open contract that we're still in negotiations.
Where we are the market moved we updated our accrual so in my mind, we are fully accrued to the market.
And just I mean, just on that note just a little side. We just had some good news. This morning, we had or we got a notice that we have ratification of a new agreement with our mechanics and related employees and amphora. So they just ratified contract extension for years through 2027. This morning, so low.
The good news there and the other one so I think that makes seven in the last nine months. So.
Great. Thank you.
Our next question will come from Duane <unk> with Evercore ISI.
You May now go ahead.
Hey, thanks.
Just on the <unk>.
Did some of the reasons that you need to kind of tweak the network, but.
But could you comment on maybe geographically and I don't know how you look at it internally, maybe Hawaii Midwest West Coast East Coast, how much variation is there across the U S. As we think about that third quarter guidance.
What is stronger.
What is weaker and then and then just on the network changes broadly.
<unk> start in January if you if you've identified changes that need to happen why not start in September or the fourth quarter. What are the what are the practical reasons not to do that.
Yes.
Hey, Duane it's Ryan just on the geographic element.
And kind of what's stronger versus what are we seeing this weaker.
Hawaii franchise itself now that it's.
That's part of our markets that are under development.
So.
There is.
On the development element of that but we've been very pleased with the Hawaii franchise overall, especially the mainland to Hawaii.
Elements of that franchise load factors are very high.
Yields are improving so we're very very happy with how Hawaii is performing.
To your comments on what.
Network changes, we have made some changes to the network and inter Cal and that inter Cal itself. Despite the west coast being a little bit slower to come back in the recovery enter Cal itself is performing well leisure based markets.
Florida is performing well just typically strong leisure markets in this environment continue to perform.
Very well for us in this strong leisure environment. So that kind of gives you a flavor for whats going well the opportunities there are markets as we brought back the network and restored the network. There are different geographies that have different levels of capacity kind of as we.
We bring those cities back.
And obviously you have to work to absorb the capacity as it comes into the market and so we're working on those markets, where there's kind of been outsized capacity growth and we will continue to focus there.
But one of the things that southwest airlines benefits from as we have largely a relatively diversed domestic footprint and as different parts of the country respond differently.
That have go through different economic cycles, we're able to kind of weather that a little bit better maybe than some of our peers. So that's that's an inherent advantage for us as we go forward.
Okay.
Go ahead, sorry, sorry, Andrew I would also add that we want to make changes of your network.
You want to kind of understand before you make fulsome changes. So we have been making adjustments Southern September is the first schedule, we have a modified Tuesday Wednesday capacity versus a.
Monday Thursday Friday, so it's not us.
Aggressive as we have started in January so we wanted to have that out there and see how booked to understand that before we started making changes and then some of the network changes that we are doing we also stepped into them over the course of September through fourth quarter wed like we saw in the forward bookings and so we've made the kind of full adjustment starting in Q1, so it's a.
Essentially done by March it set for the seasonality type of adjustments I talked about we will obviously happened as that season rolls around.
The way. It also if you think about just more for our customers.
For example, the change on the Tuesday, Wednesday move into an 8% reduction from a typical Monday changing schedules that are already published especially for the holidays, it's super disruptive to our customers and so if you were going to go in there and make wholesale changes to the fall we are committed to not doing that obviously, we tweak our schedules now and then.
But in terms of wholesale changes, we committed coming out of the pandemic to not do that to our customers. So so January really but obviously, we did some things as Andrew described but January was really the first opportunity and a new public schedule to enact a lot of the changes.
Okay, Great and then just just for my follow up I wonder if you'd be willing to kind of quantify the excess training investment and I think the reliability investment, which I guess is actually bigger you would know but.
Could you give us a sense for the magnitude of those that are unlikely to reoccur or maybe wind down next year.
Hey, Duane.
Ill take that.
In terms of the training will provide more details.
Once we have our plan.
Fully.
Fully baked here and solidify our capacity plans et cetera.
But I can help you with regard to costs that we've incurred this year that we believe are one time.
Related to the off disruptions and that's about $100 million to $150 million. So that's kind of one time costs that won't repeat next year.
Beyond that <unk> will share additional details once we lay out our 2024 planned for NIM.
Okay. Thank you.
Thank you.
Our next question will come from Jamie Baker with Jpmorgan you May now go ahead.
Oh, Hey, good afternoon, everybody first question is of a modelling variety suit Tammy if we look at the third quarter ex fuel CASM Guide and then the full year guide of down 1% to 2% and I realize there is some wiggle room here, but it implies a fourth quarter outcome. That's.
Pretty similar to the third quarter in terms of absolute ex fuel CASM at least closer than what's usually the sequential case fourth quarter is usually higher than third quarter. Just wondering how you would address that.
Well keeping keep in mind.
Jamie that capacity and that being a factor.
And that as we continue to add back capacity. So I think that's the primary driver okay. Okay.
And then second.
It sort of builds off what I asked you about last quarter, you mentioned the stagnant corporate demand revamping schedules next year to reflect post pandemic changes to how customers are flying.
Dispute that those changes have taken place other airlines have spoken to this.
Just curious how do you separate changes in travel patterns from the possibility.
That maybe the southwest brand was somewhat damaged last December I mean, you make it sound like it's all the fault of shifting consumer preference and it may very well be but if you at least consider that maybe something about the overall value proposition of southwest might also be a contributing factor.
Okay.
I'll, let Ryan.
Brian talk to the specifics as you think about.
Markets and try to tease that apart, but I you started the top and you mentioned a lot of this early on.
We are just obviously, we track customer trust that all of those things preferences and they're all headed in the right direction and look really good.
To me the topline factories, just thinking about dim.
Demand for the brand and is there any hangover effect.
We had tremendous strength in the quarter, we had again a record operating revenues record passengers record flights all of those things we had our fall sale and I believe each of those days was a record in terms of our highest booking day in our history. We haven't talked a lot about Ryan can talk more about demand.
On the business side.
We are seeing.
I would say significant.
Market share gains in terms of our piece of the business, we talked about that at Investor day in December .
And since that time, we're seeing really meaningful shifts in market share our way.
On the business side. So as you think about demand for the brand demand for the product that shows up obviously in.
In.
And bookings were just not seeing any sign of weakness Brian .
Yes.
I think we mentioned last quarter of course following the event, we have brand tracking research in place, where we're tracking sentiment on a weekly basis.
Those scores in terms of trust in southwest Airlines their confidence in our ability to get them, where they are where they want to go all of those have reebok rebounded past.
Host disruption and I would say those are back to normal range is certainly I'd Echo what Bob said the biggest single indicator is demand for southwest Airlines overall, I think as you look forward to the third quarter expecting another record revenue and third quarter just came off a record revenue performance in.
Second quarter, we had record rapid reward acquisitions in the second quarter record co brand spend.
Which is.
An indication of customer engagement.
In the second quarter.
So I think all of that points to the fact that there is continued strong demand from for southwest Airlines.
And the disruption is in our past I'll also just.
Just point to the fact, the travel patterns changing if you look at it at an individual customer basis, and you look at the frequency of their travel, especially for business trips that began to plateau prior to last December .
So.
Theres been no step down in terms of frequency of travel on southwest Airlines post disruption event.
Those trends were beginning to emerge last year and prior prior to the event overall now on the whole as Bob mentioned, we're continuing to pick up market share in the managed business space. So we're winning more business and we're winning.
We're earning the business of incremental passengers, so we're going out and adding more accounts.
Under contract, we are winning more of their business as we move forward. It's just the structural impact of the pandemic on the frequency of business trips on an individual traveler that again persists.
What's taking place prior to the disruption in December .
Okay. All of that commentary is very very helpful. Thanks for taking the questions.
Thank you Jamie.
Our next question will come from Conor Cunningham with Melius research.
You May now go ahead.
Hey, Brian Thank you.
10 years ago, you guys established a plan.
Centered around minimal capacity growth until you return on invested capital at like 15%.
During that timeframe.
Slow growth your earnings exploded I realize today is not exactly the same you know you have a large order book open labor contracts all that stuff, but you do have a lot of things that you could retire.
Just trying to understand why youre, not taking a step back and filling capacity and the 24 accelerating your fleet plan like why is mid single digit growth the right number for southwest rate. Thank you.
I'll start and.
Well first of all we do believe we have.
With opportunities and I'll, just remind you again that we did make investments.
During the pandemic to grow our route network.
And as we've reported.
Have a larger than normal amount of our capacity and development market.
Those are progressing and.
And they are trending in.
In line, if not higher than our expectations. So we're pleased we're pleased with that growth.
And based on what we've seen so far we have no plans to pull back on the development of those markets because we believe those are really good.
Markets for southwest over the long term and we believe we have additional opportunities and are strong our strong home market. So.
Now that.
Third based on our assessment of our growth opportunities, we believe that support.
Mid single digit ASM growth.
Now as always and.
I remember that plan very well.
Good day.
We are determined to drive.
Right.
Return return on.
Invested capital that we can all be very proud of and as always one of the wonderful things about southwest Airlines as we build our plans with ample opportunity.
So to your point.
We have a flexible order book and flexible fleet plan.
And you're exactly right. If we if we're not we don't have we've given you our plans.
But should we need to adjust.
We've got the levers that we could.
We could do so but at this point.
Based on everything that we've seen.
We believe with these network changes that we can drive.
The revenue performance next year that we all we all desire so a lot of moving parts here and we're busy at work on our 2024 plan, but again.
As we look ahead to next year.
We are very focused on delivering a 2024 plan that will deliver margin expansion and as well as expansion in our return on invested capital when come to you just in a period here, where we're not optimized to I'm really proud of the fact that we got all of the aircraft.
Up and flying here in the third quarter.
We will have our network restored by the end of the year, but again it doesn't mean optimal and it's not just the network was not optimal in terms of how we think about our resource usage and our efficiency and so we will attack that very aggressively just like we're attacking the network here in the first quarter of 2024 pass that to me. The biggest question would be do you have.
<unk> for the aircraft that we're talking about the mid single digit growth supporting and we have significant opportunities in.
Just name a place Denver, and Austin, and Nashville, and on and on and on.
There is huge demand for the southwest product, we have gates coming online.
I would be worried if you're sitting here going I don't know where to put the next aircraft. That's not the case, we have tremendous demand for the brand we have tremendous demand.
In our focus cities in our large cities and others and.
A lot of brand strength here and again, yes, absolutely there's work to do to optimize the airline wring out costs.
Continuing to boost revenues through things like the network actions and then obviously boost our returns.
And as Tammy said, we gave a lot of flexibility.
Yes.
Okay.
Okay. That's helpful and then.
Maybe just to put a finer point on 2024 or how should we just think about what you've added so far that implications for 'twenty. Four if you just pull fourth quarter capacity through 'twenty four I think it's implied capacity growth is like 6% year over year. So is that the low watermark that we should expect next year I'm just again just trying to.
To understand the context of this American orderly and all these other moving parts you have that's going on with your numbers right now thank you.
So the so the.
Pact of just the carryover into next year, it's probably I would say seven point.
Okay. Thank you.
Outcome.
Sure.
Yes.
We have time for one more question, we'll take our last question from Sheila.
With Jefferies.
You May now go ahead.
Alright, Thank you everyone.
So against Watson.
Lots of moving pieces on RASM, but obviously a very.
Capex.
As we look out to 2024, you gave us a lot of moving pieces. How do we think about earnings growth for 2024, given your 500 million benefits from network optimization, but rather will be down most likely in CASM X could be up.
Is there possibility for flat earnings or revenue.
Next year.
Well Sheila obviously, we have the as we talked about at Investor Day, We've got the contribution from our initiatives that we described there which is one to one 5 billion in EBIT you got on top of that the.
500 million that we've described in the value of the network changes that occurred during the first quarter and our in place again by March we have some other things that we're talking about here relative to opportunities. So all that is obviously.
There to lead you too.
So to margin expansion again here in 2024, but.
We're working our plan, we don't have a plan to share with you yet that's coming later, obviously in the fall.
But yes margin expansion is absolutely the goal Tammy answer if you want to add anything.
Thank you.
Great. Thank you.
Thank you.
Okay that concludes the analyst portion of our call I appreciate everyone joining have a great day.
Ladies and gentlemen, we will now begin our media portion of today's call.
I'd like to first introduce MS, Linda Rutherford, Chief Administration, and Communications Officer.
Thank you Anthony and welcome to the members of our media on our call today.
We will go ahead and get started with our media Q&A. So Anthony if you would keep folks up to begin asking questions.
To ask a question you May Press Star then one you touched on phone.
The speakerphone, please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
This time, we pause momentarily to assemble our roster.
Okay.
Sure.
Our first question will come from Alexandra scores with Dallas morning News you May now go ahead.
Hi, everyone. Thank you so much for the time today I wanted to revisit.
Is it the conversation earlier about the pilot contract.
Obviously, we saw United come out with their tentative agreement and that ultimately brought American back to that.
As shown in table to try and meet those standards and benefits.
Wanted to ask if theres an update there in stop loss is committed to kind of meeting those.
Standards and benefits.
Where you all are at with that.
Hey, Thanks for the question Andrew can chime in too, but obviously we are in negotiations are complex.
Eager to reach.
Agreements with all of our groups that have opened.
I have up on contracts right now.
We are meeting very regularly with Swappa and.
Very helpful for progress there.
But nothing new to report you've heard about.
The strike authorization vote, obviously that is a <unk>.
And then b differ.
A defined process mediation is a defined process. So yes.
There is no strike or imminent strike there a lot of steps that will lead up to that and obviously, we want to make progress well ahead of any of those but theres no theres no threat of an imminent strike or anything like that there is there are many many steps that would have to occur one no. We have a desire to get all of our contracts closed up obviously, including that with our <unk>.
Let's get them.
Taken care of or they do a fantastic job.
We certainly want progress there I would say that.
If you look.
Strong pilots market. So it's a great time to be a pilot and youll see that reflected in the wage rates, which often get the headlines, but I think what.
It's characterized by all the agreements I've seen so far is not so much the wage rates. The other the non wage portions of the scheduling rules and such which increases the quality of life.
Alex can also increased costs for the company and so those rules can be called.
Flex a difficult. So you spend lots of time then it goes through it wage rates as defined as defined matter you would know that but the schedule rules implications take longer too.
To write out and to model out and the degree upon it so in my opinion, that's what makes.
It makes a timeline longer than we'd like with regards to our current negotiations.
Thank you.
Our next question will come from Mary slang in Stein.
Lindbergh news.
You May now go ahead.
Thank you good morning, I just wanted to clarify when will you have everything under your winter plan everything that was planned as a result of the disruption when will you have all of that in place and the $100 million to $150 million cost you mentioned earlier that was for everything.
Post disruption is that right.
Also for the <unk>.
Handle the timelines. So we have October is.
The deadline was getting ourself to everything ready, we expect winter storms to actually be after that but our internal deadline.
October and so that will be when we report our third quarter earnings will be later in October we will make sure to go through and have a comprehensive review and status update on where we are in that but so far things are on track and were taken delivery enough and encouraged by the results.
And Mary Youre question on the.
100, $150 million would you mind repeating that.
Yes.
If thats the cost for everything that you've put in place as a result of the disruption or if that was just related earlier to the mention of additional training costs for ramp workers.
No it didn't.
It's our best estimate right now of what our one time costs. There may some of those costs that some of the investments that we made this year.
May prove to be somewhat sticky into next year and including some of our.
And then some of some of our technology investments.
But.
So that's just our best guess of what the onetime costs are.
I think it also includes things like we did gratitude.
And we.
You had some incremental customer reimbursements this year and things like that that are really a one time related to this to the disruption that don't show up again.
24, alright, okay. Thank you very much.
Just one more Dave just us.
Just want to remind you that we even need for the event we had.
We had plans to modernize our operation so yes those.
Those are some of the investments that are referring to earlier those were already in place and and obviously that is all well.
Continue and all Thats been contemplated in our guidance.
Okay. Thank you.
Our next question will come from Dawn Gilbertson with the Wall Street Journal.
You May now go ahead.
Hi, good afternoon.
<unk> here.
Competitors for more than a year now <unk> been talking over and over again about how the leisure travel search everybody paying up for premium.
Seats, and so forth you guys don't have anything really to upsell to but I'm curious.
How is this manifested itself if it has at southwest I mean can you share any details on demand for upgraded boarding early bird boarding even leisure travel purchase business select and one related question to that I noticed a lot of you make it a lot of pitches now to buy a list status I could be.
But I don't recall that in the past so I'm curious about the strategy there too. Thank you.
Hey, Don it's Ryan good to talk to you, yes, Youre right.
Some of our competitors.
For a while now have been talking about premium revenue ended up being a tailwind to their RASM performance.
I think that it probably has a material.
Impact on their on their RASM performance that our business model.
We don't participated in that premium revenue stream to any.
Any of the same degree that they do.
However, having said that our ancillary revenue in the second quarter as an example.
Was a record.
It was a very good quarter for early bird early bird had been lagging a little bit through the pandemic recovery, but early bird.
Very well in the second quarter upgraded boarding.
We added the ability.
In the third quarter of last year to purchase upgraded boarding.
<unk> digital on your mobile device take rates have tripled since that point and so we've.
We've had very strong upgraded boarding revenue over the course of the last year.
And we've been able to maintain the price and grow the price actually some on upgraded boarding an early bird as well so.
Ancillary revenue is definitely a high point for us in the quarter. It's just we don't participate at the same level from our premium revenue standpoint, as some of our competitors do.
Related to your last question on the ability to buy a list status we have here.
Historically, we run campaigns, we call those tier qualifying points the ability to.
Kind of top off pay you pay a little bit and top off your tier quality paying points to get to a list a list preferred.
That's nothing new we've recently run some of those campaigns, but we've done those historically in the past as well.
Can you one follow up can you give any it's been years I think since you guys have put any dollar figures on early bird.
Revenue and or now that you have upgraded boarding revenue can can you quantify that at all.
Thanks.
Yeah, we generate hundreds of millions of dollars from those boarding products on an annual basis.
And like I said, we just had a record here in the second quarter. So those those revenues continue to grow.
Yes, and thanks Jennifer.
For second quarter, just to give you a little.
<unk> alone with <unk>.
Excess of $100 million.
Thank you.
Our next question will come from Leslie Josephs with CNBC.
You May now go ahead.
Hi, everyone.
Curious on the RASM decline for Q3 is that just kind of like a return to seasonality and <unk>.
Capacity is going up and are you seeing any sharp dropoff.
After mid August .
And how does that compare with 2022 and maybe more people, where we're flying off season.
Yes, Hey, Leslie it's Randy.
So certainly there is a.
Some headwind with the capacity growth.
Little bit or that's above seasonal norms in the third quarter. So there is definitely a headwind there, but if you take third quarter on balance and just look at the demand in place I'm very encouraged by the way.
The third quarter sits today, we are anticipating a record third quarter revenue.
Here over the next couple of months, we have more bookings in place actually at this point in the curve for third quarter than we had at the same time same point in time in the curve for second quarter, we had an all time record.
Fair sale in June for our fall travel, we had top 10 booking days during that fare sale and including our all time.
Record for bookings taken in a single day.
And that <unk>.
That compares to even when we open up schedules for the summer or for the holidays, we took more bookings for the fall during the fare sale than we have any other day in our history. So we've got a tremendous.
Base of bookings in place for the fall I think that that shows a lot of demand for the southwest Airlines product like we've talked about on the call and from a fair standpoint July is roughly booked at this point.
The strong fare environment from the second quarter has persisted here into into July . So I think that while RASM is decelerating here in the third quarter, we do have the capacity headwinds.
But when you compare that to some of the domestic RASM of our peers I think the way we're the way we're shaping up.
It looks favorable.
Okay. Thanks.
Our next question will come from Alison Sider with Wall Street Journal.
You May now go ahead.
Alright, thanks, so much.
I guess the pilots have been talking a lot about the attrition in the last couple of months I'm curious, if that's something you're seeing or data. If it's at a level that's unusual or concerning and then I guess, if so like do you have a sense of when.
Their careers are pilots, leading or sense of Hawaii.
It's definitely a pilot market and so you.
I guess hot employee market as well you have to work extra to hire people to keep people and so it's a record year for all of our pilot hiring. It's also a record year for pilot attrition, but it's.
It's a modest number that is not sufficient to actually change our plan. So we.
Our amount of flying we have this year and next.
It's not at all affected by this kind of a little bit of uptick in attrition. This year, we do see pilots as they kind of.
Job hop around the industry is trying to maximize their personal gain airlines appeals on the best.
And I don't think <unk> because.
Once you start with the mainline it becomes there for a little while just kind a lifelong commitment because seniority system and so we do see some people would come in leave right away but.
I think.
It kind of spiked here and in the second quarter and now it's kind of even sort of tail off a little bit yes.
Yes.
It's definitely higher than normal and again as Andrew said completely.
Makes sense in the context of the hottest pilot market in.
History.
But I think we're.
Where that impacts the business I mean, we our plan was to hire <unk> 17, and <unk> hundred <unk> net this year, we're still on that plan and that of course was intended to fly the whole fleet at all of our aircraft backup of the year and in the area. We will do that in the third quarter by the end of the third quarter actually ahead of our original plan, which was the fourth quarter.
So I feel good about all of this and yes, and yes I think the.
The fact that the attrition is up a bit is not a surprise given this is the hottest market for pilots I believe in history.
Thanks.
You're welcome.
Okay.
We have time for one more question, we'll take our last question from David Slotnick with TPG.
You May now go ahead.
Hi, everyone. Thanks for the question.
Following up a little bit on what Leslie asked it.
I understand where the RASM headwind would be.
But.
Just considering that considering the cap capacity growth.
Do you think that fares are going to stay similar or come down.
We think pricing power is going to fall a little bit in the fall.
Then just secondary to that are you expecting to see.
Really any kind of return to the shoulder season seasonality that we had pre pandemic or are you really seeing just leisure travel staying steady levels into the fall.
Hi, David.
Yes, I think the demand environment I'd, just characterize the demand environment, especially for leisure as strong and that it continues to be that way.
We don't have a ton of visibility into the fourth quarter at this point, so I wouldn't comment really too much for the.
Fourth quarter, but certainly as you look ahead.
At the third quarter.
As I mentioned, we've got a very strong base of bookings in place.
And the fare environment as I look at what were what were taking here in July .
Admittedly we are still in the summer travel season here in July , but thats strong fare environment continues.
As you look third quarter to second quarter yields normally give our weaker quarter over quarter and I expect that to be the case.
As we go.
We look at third quarter versus second quarter, but thats normal, but all of this is setting up for another record revenue quarter for us in the third quarter.
We probably mentioned this several times, but if you look.
At our fare performance in the second quarter and sort of run that through you just have to be aware of this breakage change.
Change from last year about $300 million impact that impacted year over year.
Fair calculation. So if you just look at average fares year over year I think it looks like they were down two 7%. If you normalize that for the breakage impact last year. They are actually up this year to 2%. They are actually up so it has been.
Think about our affairs and extrapolating that just.
Just want to make sure you know that because they are actually up year over year.
Thank you and then just from what visibility you do have do you think that.
Shoulder season is going to come back for this fall or is that sort of thing in the past.
I think I just would characterize what we're seeing.
In terms of.
The demand.
And the bookings that we have in place for the fall that would that tells me that we've got a strong third quarter.
<unk>.
Ahead of us here.
Thank you.
Okay.
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 Anthony if you all have any other follow up questions. You can reach our communications team at two one for 790 24847 or through our media website portal at Www Dot SWA media Dot com. Thank you all so much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.