Q4 2023 Southwest Airlines Co Earnings Call
Hello, everyone and welcome to the Southwest Airlines fourth quarter 2023 Conference call. My name is Gary and I'll 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'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad.
Gary: To withdraw your question. Please press Star then two.
Gary: At this time I'd like to turn this call over to MS. Julie Landrum, Vice President of Investor Relations. Please go ahead ma'am.
Julie Landrum: Thank you so much and welcome everyone to southwest Airlines fourth quarter 2023 conference call.
Just a moment, we will share our prepared remarks, after which we'll be happy to take your questions on the call with me today, we have our president and CEO Bob Jordan.
Julie Landrum: And our vice President and CFO Tammy Romo.
Julie Landrum: Executive Vice President and Chief Commercial Officer, Ryan Green, and Chief operating Officer, Andrew Watterson.
Tammy Romo: 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 materially from expectations.
Tammy Romo: 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.
Bob: 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'm pleased to turn the call over to you Bob.
Robert Silk: Thank you Julian and thank you everyone for joining the call today.
Robert Silk: As we close the books on 2023, I want to take a moment to reflect on how far we've come and more importantly, I want to thank the people southwest airlines for their dedication their warrior spirit their heart and ultimately for their incredible resilience at this time last year, we were getting back on our feet from the disruption following winter storm Elliot we quickly mobilized to put immediately.
Julie Landrum: <unk> efforts in place while simultaneously building a robust plan to prepare us for future extreme winter weather disruptions. We are also working to restore our network address our staffing needs and return of aircraft to full utilization and of course, we were in the middle of negotiations with the majority of our labor unions.
Robert Silk: I'm incredibly pleased to be on the other side of 2023 and to be able to share all of the progress. We made last year, we completed a comprehensive winter weather action plan, which has already been successfully tested in multiple weather winter weather events, including the extended nationwide winter storms, we experienced this month, but also what other types of.
Robert Silk: <unk> such as Hurricanes severe fog in Chicago in the Maui fires through all of those events our aircraft and crew networks remained stable. We recovered quickly and we were able to minimize the impact on our customers.
Robert Silk: We also got fully staffed restored our network and reached full utilization of our fleet.
Robert Silk: Our network is in a healthy place and it shows in our operational improvement in fact, we improved in nearly every operational metric our completion factor performance in particular was fantastic at 99% for the full year with fourth quarter being our best quarterly performance in more than a decade at 99 six.
Robert Silk: <unk>.
Robert Silk: We also made significant progress on our labor agreements, including ratification earlier. This week of an agreement that secures industry, leading pay for our best in class pilots. We have now successfully reach ratification on nine contracts in little over a year, demonstrating our commitment to providing competitive market compensation pack.
Robert Silk: Just for people. This is a huge accomplishment and I would like to thank all those who have tirelessly supported those negotiations.
Robert Silk: Of course all of this was in addition to a host of other accomplishments the rollout of a new revenue management system. The launch of multiple customer experience improvements and the negotiation of a very cost effective order book with Boeing the <unk>.
Tammy Romo: Order book allows us to continue the modernization of our fleet and provides the opportunity to flex our growth plans up or down over the long term.
Tammy Romo: We also made rapid adjustments to capacity for about 2023, and 2024 and put in place significant network adjustments in response to changing demand patterns. These changes reduced our planned 2024 year over year capacity increased to roughly 6% all of which is carryover from 2023.
Tammy Romo: Network restoration, so there'll be no net new additional capacity in 2024, as we work to mature our route network moving.
Tammy Romo: Moving to our performance we continued to be very pleased with the core demand for our product. We saw close in performance strengthened in November and December for both leisure and corporate travel. This led fourth quarter 2023 to be yet another record at just over $6 8 billion in operating revenue.
Tammy Romo: And we are seeing that strength to continue into 2020 for this.
Tammy Romo: This demand strength combined with about $1 5 billion in incremental year over year pre tax profit from our network optimization efforts and the contributions from our portfolio of strategic initiatives is driving us to expect additional revenue records and year over year operating margin expansion, despite cost pressures from new labor agreements.
Tammy Romo: And increased aircraft maintenance expense.
Tammy Romo: Our network changes are materially in place with the March schedule, where we expect to hit a profitability inflection point.
Tammy Romo: While still early in the quarter, our initiatives are delivering towards our revenue target and we expect to exit the quarter with a strong operating margin for the month of March.
Tammy Romo: While we have significant inflationary pressures from our new labor agreements, we have initiatives underway that will begin to help counter these pressures with efficiency improvements. These include everything from scheduling techniques. The digital modernization and we planned in 2024 with head count flat to down as compared with year end 2023.
Tammy Romo: Hi.
Tammy Romo: As we slow hiring to levels that are at or below our attrition rate that will drive efficiency gains in 2024 with more to come in 2025. All of this supports a solid plan with a line of sight to improve our financial returns and earn our cost of capital in 2024.
Tammy Romo: While this represents notable progress I want to be clear.
Tammy Romo: Turning adequate and consistent returns ROIC well in excess of whack as our financial North Star and its not negotiable, we will be relentless in executing against our plans and we will continue to make adjustments, including capacity adjustments if needed until we deliver those results adequate and consistent returns is.
Tammy Romo: How we have created decades of shareholder value and it continues to be our key focus our current set of initiatives is tracking nicely and will provide you a lot more detail later this year at Investor Day. In addition, we're working on a next set of initiatives to support in support of sustainable returns over time in closing we made tremendous.
Tammy Romo: This progress in 2023, and we finished the year a much stronger company, we will finish this year stronger again.
Tammy Romo: We're fully committed to improving the customer experience and delivering on our long term financial targets, including generating returns for our shareholders as always I have confidence in our people at our business model and I am, particularly proud of our people for their dedication and their resilience they remain our absolute greatest asset.
Tammy Romo: The heart and soul of our company and the ultimate source of Pride for me and with that I will turn it over to Tammy.
Tammy Romo: Thank you, Bob and Hello, everyone as Bob mentioned 2023 wasn't without its challenges, but we are.
Tammy Romo: Our stronger and ready to take on another year and that is all thanks to our incredible employees.
Tammy Romo: We delivered $996 million in profits for the year and our fourth quarter net income of 233 million when excluding special items with on the better side of our expectations.
Tammy Romo: We prioritize the restoration of our network and operational reliability in 2023, which has taken a lot of resources and focus.
Tammy Romo: Our operations now stable and the network fully restored we can direct much more focus and energy to consistently delivering a strong financial performance along with delivering operational excellence.
Tammy Romo: We have incredible strengths to build upon and the levers we need to optimize and regain our position as an industry leader.
Tammy Romo: We will be steadfast in our efforts to make meaningful progress. This year in support of our long term goal of generating consistent return well in excess of our cost of capital.
Speaker Change: Brian and Andrew will cover the headway, we've made with our revenue and operations performance in detail. So I'll start with our cost performance before moving to sleep and balance sheet.
Speaker Change: Overall, our unit cost excluding special items were down 16% year over year in the fourth quarter.
Speaker Change: Our fourth quarter average fuel price of $3 per gallon was right at the low end of guidance, primarily due to jet fuel prices and the L. A market steadying after significantly spiking in mid November.
Speaker Change: Market prices dropped as we moved into this year and our fuel price guidance of $2 70 to $2 80.
Speaker Change: A gallon for the first quarter and $2 55 to $2.65 per gallon for the full year.
Speaker Change: Welcome reduction in fuel cost compared with 2023.
Speaker Change: We are currently 60% hedged here in first quarter and 57% hedged for the full year with more meaningful hedge protection kicking in at Brent prices around that $90 per barrel.
Speaker Change: That's a higher strike price than where our 2023 hedges began to provide meaningful protection, which was closer to $70 per barrel.
Speaker Change: This is reflective of the current market conditions and elevated cost of hedging.
Speaker Change: We continue to prudently add to our fuel hedge position for 2026 nearing 20% hedged and are currently 46% hedged in 2025 in line with our goal to be roughly 50% hedged in each calendar year.
Speaker Change: While we are not fully immune to the volatile energy market I am grateful that our hedging positions provide meaningful protection against catastrophic increases.
Speaker Change: I'll also allowing us to participate fully when market prices decline.
Speaker Change: Moving to non fuel costs, our fourth quarter year over year CASM ex decrease of 18, 1% was on the favorable side of our guidance range, driven primarily by elevated operating expenses and lower capacity level in fourth quarter 2022, as a result of the operational disruption.
Speaker Change: This was partially offset by general inflationary cost pressures, including higher labor rates for all employee work grid as well as elevated maintenance expense.
Speaker Change: Both of which are sticky as we move into 2024.
Tammy Romo: I also want to congratulate our pilots on their newly ratified contract obviously the market for pilot wages has increased significantly and it is important that we keep pace to reward our employees appropriately.
Tammy Romo: As a result of the new agreement, we recorded a change in estimate for the pilots' ratification bonus and you can find the detailed breakout of the accounting treatment and this morning's press release.
Tammy Romo: Looking to first quarter 2024, we currently estimate our CASM ex to increase in the range of 6% to 7% year over year Ross.
Tammy Romo: Roughly three to four points of this estimated increase is driven by higher overall 2020 for labor cost and market wage rate accruals.
Tammy Romo: The remainder of the first quarter CASM ex increase is primarily due to year over year pressure and maintenance expense driven by rate increases.
Ross: Well as an increase in maintenance activity as our eight hundreds are coming off their honeymoon period.
Ross: Speaking to full year cost, our CASM ex guidance of a 6% to 7% increase year over year is also essentially driven by labor and maintenance cost pressures.
Ross: Roughly four to five points is attributable to labor and roughly two point is from maintenance for the reasons I previously covered.
Tammy Romo: While we accrue for a market wage rates. The recently ratified pilot contract contribute a majority of the labor CASM ex increase this year due to a step up in wage rates work rule changes and enhanced benefits.
Tammy Romo: As Bob mentioned, we are steadfastly focused on regaining efficiencies to help counter some of the structural cost pressures as we look to control what's controllable.
Robert Silk: We are not satisfied with our current financial performance and we will work relentlessly until we produce the financial strength and returns you should expect from southwest Airlines.
Robert Silk: We have a solid 2024 plan, which includes the benefit of roughly $1 5 billion in incremental year over year pre tax profits from our strategic initiatives.
Robert Silk: The vast majority of the initiatives delivering value in 2024 are revenue related contributed well over $1 billion of the one 5 billion total expected incremental benefit.
Robert Silk: And our network optimization and market maturation efforts are providing the bulk of that revenue lift.
Robert Silk: The balance of the revenue generating benefits come from incremental managed business initiatives, primarily increased GDS participation.
Robert Silk: The incremental cost benefit relates primarily to sleep monetization and early yield from other operating efficiency efforts, such as digital service Manav modernization and our current initiatives.
Robert Silk: We will go into a lot more detail on our initiative portfolio at Investor Day later this year.
Robert Silk: While early our plan provides significant progress toward our long term goal to generate ROIC well in excess of our cost of capital.
Again more details to come at our 2020 for Investor Day.
Robert Silk: Now turning to our fleet. During 2023, we received a total of 86 eight deliveries one more than planned and retired 39 dash seven hundreds to less than planned ending the year with a total of 817 aircraft. We consistently mentioned this.
Robert Silk: Flexibility in our fleet modernization efforts being a key competitive advantage.
Robert Silk: The minor shifting of deliveries and retirements throughout 2023 validates our ability to thoughtfully plan and execute given the continued supply chain challenges facing Boeing.
Robert Silk: Moving into 2024, there is continued uncertainty around the timing of expected Boeing deliveries and the certification of the Max seven aircrafts.
Robert Silk: Our fleet plans remain nimble and currently differs from our contractual order book with Boeing.
Robert Silk: We are planning for <unk> 79 aircraft deliveries this year and expect to retire roughly 45 dash seven hundreds and four dash 800, resulting in a net expected increase of 30 aircraft. This year.
Robert Silk: Taking our current plan into consideration, we expect our 2020 for capex to be in the range of three $5 billion to $4 billion.
Robert Silk: After finalizing our 2024 plans and refining capacity levels to better reflect the current environment. We now expect full year 2024 capacity to be up about 6% year over year.
Robert Silk: And our 2024 capacity plans do not currently include any Max seven flying so as certification of that aircraft continues to push out our 2024 capacity plant will not be impacted.
Robert Silk: In addition, we are also reducing our total fuel expense with our fleet modernization initiatives as we continue to bring on more fuel efficient dash eight aircraft and retire dash seven hundreds.
Robert Silk: We saw a nearly 3% year over year improvement in fuel efficiency in 2023, and expect continued improvement this year.
Robert Silk: In addition to fuel savings our fleet modernization initiatives is a key component and reaching our environmental sustainability goals.
Robert Silk: Lastly, I am proud to report at our balance sheet strength continues to be a financial backbone as we move into another year.
Robert Silk: We remain the only U S airline with an investment grade rating by all three rating agencies.
Robert Silk: We ended the year with $11 5 billion in cash and short term investments.
Robert Silk: We returned $428 million to our shareholders through dividend payments in 2023.
Robert Silk: Paid 85 million to retire debt and finance lease obligations in 2023 and continue to be in a net cash position.
Tammy Romo: We expect to pay a modest $29 million in debt payments. This year and continue to expect interest income to well exceed our expected interest expense of $249 million in 2024.
Tammy Romo: So we are pleased to have a plan for significant financial improvement to be made this year.
Tammy Romo: With some major milestones behind us such as restoring our network, becoming fully staffed fully utilizing our fleet and so much more our sights are set on expanding margins and covering our cost of capital in 2024.
Tammy Romo: And at that close.
Tammy Romo: Like to sincerely. Thank our people for another year of hard work and dedication to the mission and vision of southwest Airlines I am so grateful for each and every one of you.
Tammy Romo: We're truly my heroes.
Ryan Martinez: And with that I will turn it over to Ryan.
Ryan Martinez: Thank you Tammy and Hello, everyone. Let me start by sharing that I am very pleased with the overall demand for our business the execution from our amazing people and the engagement of our loyal customers.
Ryan Martinez: Fourth quarter unit revenue finished slightly better than expectations at down eight 9% year over year. The improvement was driven by a strengthening of close in revenue performance in November and December for both leisure and corporate business travel as well as the continuation of overall strong holiday performance and market share gains from our managed business.
Ryan: This initiatives.
Ryan Martinez: I am pleased to report that we saw no bookings impact from last year's operational disruption. During this past holiday season, which speaks to the operational improvements we have made over the last year as well as the enduring loyalty from our customers.
Ryan Martinez: In addition, fourth quarter was another quarter with multiple records set including record fourth quarter operating revenue and passenger revenue as well as an all time quarterly record for passengers carried.
Ryan Martinez: Fair has also performed well in fourth quarter with our average passenger fare up about two 5% year over year.
Ryan Martinez: And all in all our fourth quarter operating revenues were up over $1 billion relative to fourth quarter of 2019, and while we still have work to do on our revenue performance I remain very pleased with our progress.
Ryan Martinez: Looking to our full year results. We grew 2023 operating revenues nearly 10% year over year to a record $26 billion.
Ryan Martinez: Accompanied by record passengers record rapid rewards revenue and record ancillary revenue.
Ryan Martinez: And speaking of records, we set operating revenue records in each quarter of the year and for the full year of 2023.
Ryan Martinez: As we move into 2024, we are seeing the momentum continue and we're seeing early but highly encouraging benefits from our network optimization efforts and we expect first quarter unit revenue growth of two five to four 5% when compared to the same period last year.
Ryan Martinez: This represents a solid sequential improvement in year over year unit revenue performance, even when normalized for the five point tailwind from the prior year disruption impact.
Ryan Martinez: In fact, our guide would imply first quarter 2020 for nominal RASM to be about five points higher than our normal seasonal sequential average when compared with nominal fourth quarter of 2023 RASM.
Ryan Martinez: We currently have about 60% of expected bookings for first quarter already in place slightly above normal and we are seeing better than normal sequential RASM performance further demonstrating that our network optimization efforts are working as we refined our capacity plans for this year, we've been able to pull in even more flying out.
Ryan Martinez: The shoulder periods, which we believe will be a tangible contributor and boosting our performance.
Tammy Romo: While our forecast doesn't assume any material increase in demand for domestic air travel in 2024, we do have a line of sight to double digit operating revenue growth year over year, driven largely by the network and initiatives driven revenue that Tammy detail.
Tammy Romo: Included in that of course is our efforts to drive managed business. We are very pleased with the performance of our managed business initiatives and the success of our southwest business team.
Tammy Romo: In the past year, we had a solid increase in market share more than three points in the managed business space and I'm very proud we improved our business travel news ranking from fourth place in the industry in 2019 to second place in 2023, we were the only carrier on the survey to receive an increased total score two years in a row while.
Ryan Martinez: Each of our competitors scores have declined over that same period. It's another example of the progress we're making against the industry and the managed business space.
Tammy Romo: Of course, we're also continuing our efforts to improve our customer experience and our rapid rewards program. We are seeing improved customer satisfaction scores with our Wi Fi product as we proceed with our infrastructure investments there.
Tammy Romo: And more aircraft are joining the fleet everyday with NC power and larger bins onboard.
Tammy Romo: We've made several enhancements to our award winning rapid rewards program, including making it easier to reach our a list and a less preferred levels and we will soon be rolling out the ability to book travel with a combination of cash plus rapid reward points later this spring.
Tammy Romo: We introduced customer backtracking to reduce friction in our customers' travel experience and we look forward to sharing more on our larger digital hospitality modernization plan in the coming months.
Tammy Romo: All of this is designed to make it easier to fly with us and give customers even more reasons to choose southwest.
Tammy Romo: As we enter 2024, we have a very solid plan that leverages the unparalleled strengths of our people our products our loyalty program and our route network and we look forward to delivering on continued progress towards our long term financial goals.
Andrew Watterson: With that Andrew over to you.
Andrew Watterson: Thank you Ryan and Hello, everyone I would like to start out by recognize our people for their efforts in successfully managing through four different named winter storms, which was spread over 11 days and impacted a wide portion of our route network with intense weather conditions and frigid temperatures this month.
Andrew Watterson: These overlapping winter systems definitely put our winter operations Paredis plans to the test.
Andrew Watterson: Overall, I'm very pleased with how well we manage the storms.
Andrew Watterson: The sheer magnitude of these weather systems resulted in significant cancellations.
Andrew Watterson: The majority of which were proactive on our part.
Andrew Watterson: Our cancellations were made 14 hours in advance on average at 70% were canceled with at least six hours and events.
Andrew Watterson: As you can imagine providing that much notice improves the customer experience and.
Andrew Watterson: In fact, we have found that it can result in NPS scores that approximate those of customers with no disruption to their itinerary.
Andrew Watterson: Overall, our cancel rate cancellation rates were in line with the industry or primary isolated to the operations directly impacted by the storms.
Andrew Watterson: With fewer than 2% of our cancellations tied to crew scheduling challenges. This is a significant contrast to what we experienced with winter storm Elliott in December 2022.
Andrew Watterson: The improvement is directly the result of last year's winter operations investments and protocols.
Andrew Watterson: I Echo Bob's sentiment that we are in a much better spot today than a year ago and.
Andrew Watterson: In the past year, we not only completed the winter operations preparedness plan. We also delivered a long list of initiatives to modernize our operation with benefits for both our customers and our employees.
Tammy Romo: Our people at the staffing equipment tools and infrastructure to operate safely and at pace and winter weather.
Robert Silk: The good news is that all the hard work show up in our operational performance. We closed out 2023 was about 1% of our total flights canceled and we improved in basically every metric.
Andrew Watterson: Our completion factor on time performance early morning, originators turn compliance in turn differential and Mishandle bag rate all showed substantial year over year improvement, which in turn led to a year over year improvement in our triple net promoter score.
Andrew Watterson: As we enter 2024, we will focus on continuing to build on our 2023 priority of operating quality.
Andrew Watterson: We ranked fourth place in the 2023 Wall Street Journal airline quality metrics.
Andrew Watterson: Spike several of the metrics covering the winter storm Elliott period.
Andrew Watterson: Our goal is to move up this ranking and ultimately be ranked number one.
Andrew Watterson: We're also double down on three additional priorities wringing out operating inefficiencies increasing asset productivity.
Andrew Watterson: Creating operating leverage by reducing structural costs.
Andrew Watterson: These are multi year initiative based efforts, which will begin yielding material benefits in 2025, we will share more on these in the coming months.
Andrew Watterson: Finally, I'd like to close by congratulating our pilots on a new contract.
Andrew Watterson: I'd also like to thank all of the negotiating teams who have worked so hard to reach nine agreements since October of 2022.
Andrew Watterson: These teams worked tirelessly and I am pleased we can reward employees with well deserved pay increases and quality of life enhancements.
Andrew Watterson: We remain in negotiations with two union represented groups Tw 555, GW of 556, and we look forward to reaching agreements that rewards those employees for their contributions.
Julien: So with that I'll turn it back over to Julien.
Julien Fournier: Thank you Andrew this completes our prepared remarks, and we'll now open the line for analyst questions.
Julien Fournier: I'd like to speak with as many of you as possible. So we ask that you limit yourself to one question and a brief follow up if necessary.
Julien Fournier: Please go ahead with the first question.
Julien Fournier: Yeah.
Julien Fournier: We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Julien Fournier: If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
Julien Fournier: The first question comes from Ravi Shanker with Morgan Stanley. Please go ahead.
Thanks, Good afternoon, everyone.
Ravi Shanker: Maybe we can start with the.
Ravi Shanker: The one 5 billion.
Ravi Shanker: Initiatives.
Ravi Shanker: Any chance you can share more detail there.
Ravi Shanker: Details on what the different contributing items are and also how much visibility do you have into that I'm trying to get a sense of how much of that maybe in the bag so to speak.
Ravi Shanker: Hey, Ravi it's Bob I'll start and then maybe Brian can jump in.
Ravi Shanker: Sure.
Brian Andrew: Really a lot of the year over year improvement counts on the initiatives delivering and I feel very confident about that I mean, some of this is our <unk>.
Brian Andrew: Investor day initiatives continuing to perform.
Brian Andrew: And then on top of that you have new things a lot of which the majority of which are the network improvements, which as you know are in place.
Materially beginning in March and then fully in place by early summer.
Brian Andrew: So we have a lot of confidence in though certainly the investor day initiatives delivering and while it's early in the quarter. We have some line of sight into obviously March and how well the network change in optimization.
Brian Andrew: Is delivering and we're on track.
Brian Andrew: There.
Brian Andrew: It's things like.
Tammy Romo: It's basically adjusting for new demand patterns, it's adjusting what they are the Tuesday Wednesday shoulder flying those kinds of things, but no I feel like we're on track to hit that incremental $1 5 billion again most of that is revenue about two thirds of that is revenue related.
Brian Andrew: Brian you want anything yes.
Brian Andrew: The revenue initiatives, they're a lot more.
Brian Andrew: Or that is the network optimization, and then continuing maturation of some of our development markets develop a market percentage of mix continues to get.
Brian: More back to normal ranges by the end of 2024, so that certainly will help but obviously, we've been able to watch those development markets mature throughout their curve here.
Brian: Over the last few years.
Brian: As it relates to the other revenue initiatives that are in place. They will continue to mature and then also provide additional benefit as we as the airline grows.
Brian: A significant portion of that is the managed business initiatives that we've been talking about.
Brian: And I'm very confident.
Brian: How.
Brian: That those set of initiatives continued to perform we're definitely on track.
Brian: Managed business got better in the fourth quarter from what how was performing in the third quarter and then we're expecting another sequential improvement here in the first quarter with managed business. We can see that in place and how bookings are coming in in January and as we begin to get into the February booking curve here.
So yes, everything that we can see how we finished the fourth quarter and then what we can see here in the first quarter and going forward.
Ryan Martinez: Makes me very confident.
Ryan Martinez: Very helpful and maybe as a quick follow up would love to get your thoughts on the apparent premium amortization of the domestic product.
Ryan Martinez: You guys are committed to a single cabin, but does that give you more room to raise RASM.
Ryan Martinez: Across the product.
Ryan Martinez: What's your response to that would be.
Ryan Martinez: Well premium certainly is a hot topic in the industry and it's something that we watch.
Ryan Martinez: But we're watching closely we also talk to our customers on a regular basis. This is one of the things that we continue to get their feedback on.
Ryan Martinez: And I think we've talked about it some of the last call.
As you think about premium historically in the industry premium revenue has been highly cyclical.
Ryan Martinez: This is one of those times, where carriers are adding premium seats into the cabin.
Ryan Martinez: But when the economic cycle shifts there pulling seats premium seats out of the cabin.
So.
Ryan Martinez: As we see kind of the recovery here from the pandemic and we will have to see how how these trends.
Persist and go forward I think overall RASM.
Ryan Martinez: Obviously.
We followed that and how we compare relative to the industry.
Ryan Martinez: And we're working on.
Ryan Martinez: Working on improving that as we go forward here I will say that ancillary revenue. The majority of which is boarding products are early board are early.
Andrew Watterson: Bird product as well as our upgraded boarding product.
Andrew Watterson: Is doing very well, we're having record ancillary revenue.
Performance and so I think.
Andrew Watterson: Yes, we have a single cabin, but were able to improve RASM and grow ancillary revenues through some of those boarding products as well.
Andrew Watterson: Very helpful. Thank you.
Andrew Watterson: The next question is from Jamie Baker with Jpmorgan. Please go ahead.
Andrew Watterson: Oh, Hey, good morning, everybody.
Jamie Baker: Lots of discussion about the best path.
Jamie Baker: Oh, no sorry, I'm still there right.
Jamie Baker: Youre there.
Jamie Baker: Jamie.
Jamie Baker: Hey, sorry about that.
Jamie Baker: It's probably the payments expletive that I've ever said.
Jamie Baker: Lots of discussion about domestic capacity cuts your own and others.
Jamie Baker: Just curious that with markets, where you overlap with lower cost competitors.
Jamie Baker: Have you seen any changes in how they're competing other than just the capacity cuts I mean, there has been.
Jamie Baker: Circulation of lower OE pricing in some of those airlines try to regain profitability I'm not seeing any of that but it's.
Jamie Baker: That sort of thing that I'm asking you about.
Jamie Baker: Yeah, Jamie obviously, there are I mean, there are probably as many moving parts right now as I've ever seen you.
Jamie Baker: You've got as Ryan talked about you've got a focus on parts of the cabin that are outperforming our route network that are outperforming you've got.
Jamie Baker: You've got a lot of capacity moving around in the industry right now you've got mergers. So so it's tough to tell.
Jamie Baker: And on top of that obviously, you've got capacity impacts due to.
Jamie Baker: Aircraft delivery the GTS issues, all those things so I think it's tough to tease out my guess would be.
Ryan Martinez: That all of those factors.
Ryan Martinez: Get worse across the year the impact of those are going to continue to increase, especially as you see more impacts on capacity and aircraft do too.
Potential Boeing impacts obviously, the geared turbofan so more to follow.
Ryan Martinez: On our end.
Ryan Martinez: Obviously, we're focused on southwest Airlines I'm really pleased with 2023 and all of that we got accomplished that we talked about we ended the year a much better carrier than we were.
Tammy Romo: The year before the area of course, where I am not satisfied as our financial performance, we're running roughly four points under our cost of capital right now.
Tammy Romo: And that is our focus here at southwest and.
Tammy Romo: We've got a really good plan here in 'twenty four.
Tammy Romo: Pardon me. This is the conference operator, we seem to have lost.
Tammy Romo: And with the speaker's location. Please standby what we tried to reach okay. Thank you.
Tammy Romo: [music].
Tammy Romo: Yes.
Tammy Romo: Pardon me. This is the conference operator, we regained the audio from the speaker's location. Please continue.
Jamie: Jamie My apologies there I don't know, where we left off but my point is.
Jamie: We are focused on southwest we're focused in 2004 year on expanding margins covering our cost of capital that sets us up for a lot of momentum to then even make even more progress in 'twenty five.
Jamie Baker: And thinking about capacity for southwest Airlines.
Jamie Baker: <unk>.
Jamie Baker: Our capacity our Capex as we plan forward will obviously taken it.
Jamie Baker: Into consideration the progress we are making against.
Jamie Baker: Those financial goals I, just want you to know that the backdrop of the industry. I think is going to play out here across 2024, and we will just have to see.
Jamie Baker: Okay helpful and then second.
Jamie Baker: You've disclosed in the past that you have.
Jamie Baker: Seriously considered a second fleet type, but decided not to go down that path.
Tammy Romo: I don't have to tell you that industry animosity toward your sole provider is obviously Chris.
Chris and the wing would it be unreasonable to assume you're single.
Chris: Single fleet conviction.
Chris: Finally begin to wane from here or that putting words in your mouth.
Chris: Yes, well, let me just back up a second obviously theres a lot going on with Boeing.
Chris: I mean, the Max eight is a great aircraft, we're very satisfied with it and like Boeing we support the work of the FAA.
Chris: And the oversight to improve quality address any issues because at the end of the day a better Boeing is good for southwest Airlines.
Chris: We periodically look at aircraft manufacturers and aircraft types, that's something we take up routinely yourself was airlines, we've done that in the past.
Chris: Our focus right now is on.
Chris: Our own fleet plan, our fleet planning with Boeing obviously, working with Boeing to get the Max seven certified.
But but we do take that up periodically you also have to understand everybody I know you know this but there isn't.
Chris: There is no such thing as being able to Derisk all of this even if you have multiple aircraft providers say, we were 50 50 you.
Chris: You'd have 400 aircraft of one time 400 of another type and so an issue still creates great risks for the company. So the best thing that we can do is work with Boeing.
Andrew Watterson: To make them, an even better company, which is exactly what's happening we've got great confidence again in the <unk> and the Max eight.
Andrew Watterson: We are eager to get the Max seven we're not in charge of that certification date.
Andrew Watterson: But no.
Andrew Watterson: Confidence that Boeing will get all of this figured out what the FAA will come out a better company.
Andrew Watterson: <unk> the color he can everyone hear me. Thank you.
Andrew Watterson: The next question is from Catherine O'brien with Goldman Sachs. Please go ahead.
Catherine O'brien: Hey, good morning, everyone and thank you for your time.
Catherine O'brien: Maybe just a couple quick ones on.
Catherine O'brien: On unit revenue going forward underlying.
Catherine O'brien: Your double digit topline forecast for the year can you just help us think about where we go from from the <unk> unit revenue forecast I'm, assuming based on the full year.
Catherine O'brien: Capacity outlook growth's going to slow from the first quarter into the remaining quarters of the year. So that'll be a sequential tailwind you'll be lapping some of that easy comp from the book away as we move through the year, how does that all impact where you think unit revenue trends quarter to quarter any anything else lumpy, we should be considering.
Catherine O'brien: Yes.
Ryan Martinez: I'll start off and then Ryan if you want to jump in with any thoughts that you have really there.
Ryan Martinez: As you pointed out there.
Ryan Martinez: A bit of noise year over year, so probably the best way to kind of help you think too that is sequentially.
As you as you are aware the first quarter is seasonally a tougher quarter just in general for the airline industry and.
Ryan Martinez: We will have our network changes materially in place in March or so.
Ryan Martinez: And then following on.
And to the summer, we expect to have that fully completed with our summer schedule.
Ryan Martinez: And then just as we continue to go through the year, we would expect our development markets continue to mature.
Ryan Martinez: You were at 10% of our system is development market and by the end of the year, we expect that to be more in line with our historical percentage of about.
Ryan Martinez: Call it 5%.
Ryan Martinez: And then on top of that as Ryan covered.
Ryan Martinez: We are we believe we will continue to grow our managed business.
Ryan Martinez: We've been pleased with our GDS initiative.
Ryan Martinez: And we would expect those benefits to steadily improve as we go through the year.
Ryan Martinez: So we would expect we've got a lot of momentum coming into this year, we would expect that to continue.
Pardon me. This is the conference operator, we've again lost audio from the Speaker location. Please standby as we tried to regain it. Thank you.
Okay.
Ryan Martinez: [music].
Ryan Martinez: This is the conference operator, we've regained audio from the speaker's location. Please continue thank you.
Speaker Change: Yes, and everybody sorry about you were having some form of conference call issue here My apologies, but I would just pile on simplicity simply maybe talk to cover what Tammy data, which is you have decelerating capacity across the year, 10% Q1, eight to 10 in the second quarter or three to five.
Speaker Change: In the third quarter and then the back half of the year really is all.
Speaker Change: Stage length trips are down seats are down on top of that the initiatives and particularly the.
Speaker Change: Network related revenue initiatives and the development market related initiatives accelerate because they start they really started march accelerate through the summer. So you have decreasing capacity.
Speaker Change: Across the year and do you have an accelerated contribution from the network initiatives across the year.
Speaker Change: That's an indirect answer to your question, but that's how I'm thinking about it.
Speaker Change: Yes, and I wouldn't add anything else other than to say that the revenue initiatives that component of the plan. Those are there is very little lumpiness in those as well those are pretty evenly spread throughout the year. So it's really about the decelerating capacity in the back half of the year and the network Badger.
Speaker Change: Maturation and optimization efforts coming on.
Speaker Change: It makes a lot of sensor and then maybe just for my second question.
Speaker Change: We just like to talk about the cost side for this year and I know very early.
Speaker Change: Firstly it was 25.
Speaker Change: Can you talk to us just about sort of like some of the incremental headwinds headwinds you're expecting for 2024 versus what you were thinking back earlier in 2023, when you're targeting unit costs were down year over year of course at least a couple of points that floor capacity. The pilot contract came in higher.
Speaker Change: It'd be great. If you could just walk us from that down year over year to up six to seven and then again early but into 2025, if we lap the big step up in wages are back filling more inflationary plus.
Speaker Change: Guessing youre going to get more efficiency back as you go into year two of kind of the network recovery and are in the optimization phase is that when we get the down year over year any color there would be great. Thanks, so much.
Jamie Baker: Thank you and I'll start and then I'm sure Jamie will pile in.
Jamie Baker: We were accrued for our for our labor contract increases here and we've got.
Jamie Baker: 99, two to go.
Jamie Baker: It's really for the most part it's right it's rate increases here in 2024. So if you take the pilots for example, they've got a 4% rate increase we've got some benefit increases thats. The majority of the six to seven on top of that.
Jamie Baker: You have maintenance pressure that was known as really the 800 engines coming off holiday and that's a couple of points.
Jamie Baker: Those are going to be things wage rate pressure maintenance pressure that most of the industry shares.
Jamie Baker: Now on the efficiency side as we go across the year.
Jamie Baker: We've peaked our hiring and we will our target is to end the year in 'twenty four with fewer heads than we ended the year 2023, which will of course naturally make us more efficient with a 7% growth. It's too early to talk about 2025.
Jamie Baker: But as you maybe think about a forecast there yes.
Jamie Baker: You would.
Jamie Baker: Naturally decelerate from the unit cost pressure this year and our goal we're not ready to give you a number of course for 'twenty five but our goal will be to <unk>.
Jamie Baker: Dramatically control that head count growth again in 2025, and we will be sharing a lot more about that at our Investor day later in the year.
Jamie Baker: Tim if you want to add.
Jamie Baker: You really covered it all but.
Jamie Baker: The story is actually quite simple.
Jamie Baker: Labor and labor costs labor rate cost, obviously, the inflation and there is more than we would have anticipated initially.
Jamie Baker: So we've done with the pilot contract.
Jamie Baker: Behind us.
Jamie Baker: We've adjusted our accruals sale.
Jamie Baker: As 2024 is associated with those steps with the step up in scale.
Jamie Baker: Increases.
Jamie Baker: Wage rate increases and enhanced benefits and Bob covered the maintenance.
Robert Silk: And we'll we'll share more on Investor day, but obviously, we're focused on wringing out those efficiencies as we move through 2024 and to a greater degree in 2025.
Robert Silk: Thanks, so much.
Robert Silk: Thank you.
Robert Silk: The next question is from Duane <unk> with Evercore ISI. Please go ahead.
Robert Silk: Hey, Thanks, I appreciate the time.
Robert Silk: So.
Robert Silk: Maybe just one more shot at this can you give us your best guess as to the contributors to the sequential improvement here.
Robert Silk: How much of that five points would you attribute to these network.
Robert Silk: Realignment initiatives and how much would you attribute to just better underlying demand it's been challenging.
Airlines to really make a read about the macro based on what airlines are doing in any given quarter just like in the third quarter of last year I didn't think that was a particularly good read on the macro but if you just look at this revenue outlook here.
Robert Silk: What is your business, telling you about the macro and are you seeing acceleration and if so where.
Robert Silk: Yes Duane.
Robert Silk: It's Ryan I think the macro environment for demand overall is very strong I mean, the way that we closed the fourth quarter. We saw close in performance kind of accelerate in the holiday time period.
Ryan: Which had us.
Ryan: We came in above our expectations at that point.
Ryan: So I think that that.
Ryan: That was a good sign as we got into the year and as you sit here in the first quarter at the beginning of the first quarter. We've got about 60% of bookings on hand, that's plenty for us to get a good read on how the macro trends are performing I think demand looks very strong.
Ryan: In January and February which are typically trough periods here.
Ryan: We are performing just fine as you look into the stronger periods into March.
Ryan: Spring break travel and the Easter travel period.
Ryan: Booking very well and then probably also.
Ryan: As it relates to the overall macro environment. If you just look at managed business.
Ryan: I think I mentioned this earlier fourth quarter was better than third quarter and first quarter is expected to be better than the fourth.
Ryan: We've got <unk>.
Ryan: Very strong bookings in place for on a managed business side here for February as we begin to get into that part of the curve. So I think the overall macro environment.
Ryan: Sets up well for us having a really good year.
Ryan: And just just to follow up there any any focus cities or parts of the country that are kind of waking back up for you.
Ryan: Well I would say.
Ryan: Destination based markets are doing very well international is doing very well, Hawaii, we beat our expectations in the fourth quarter.
Ryan: Phoenix Orlando Vegas.
Ryan: Those markets are doing very well for us I think when you look at California was slower to come back it's doing.
Ryan: It's improving for sure.
Ryan: So.
Ryan: It's definitely pockets across.
Ryan: The network, but.
Ryan: Again.
Ryan: Think overall things continue to improve.
Ryan: Okay. Thank you.
Ryan: The next question is from Brandon <unk> with Barclays. Please go ahead.
Ryan: Hey, good afternoon, and thanks for taking my question. So can I come back I think to the first Q&A here of which was about the premium <unk> of the industry because I think what we did observe through 2023 was some growing yield differential between yourself and maybe some low cost competitors relative to the network Airlines.
Brandon Oglenski: And I guess I just wanted to ask the question maybe more bluntly are directly does products matter and it doesn't matter as you go further and distance and longer in flight and I guess, specifically ask about your experience in Hawaii as well and I guess, how do these initiatives that you guys are talking about in the commercial side start to try to address that.
Brandon Oglenski: Thank you.
Brandon Oglenski: Yes.
Ryan Martinez: Well first of all I would say absolutely product matters.
Ryan Martinez: I think that.
Certainly from a coach product southwest Airlines as the best coach product in.
Ryan Martinez: In the industry.
Ryan Martinez: I would just echo what I said on the premium component of this is highly cyclical and I think that we want.
Ryan Martinez: Before we would take up that question.
Ryan Martinez: You would want us to or we would want to study that very closely as we as we think about that.
Ryan Martinez: Your question on how do we do relative.
Ryan Martinez: And our long haul market like Hawaii.
Ryan Martinez: As I mentioned we.
Ryan Martinez: Beat expectations, we beat our own expectations for Hawaii in the fourth quarter.
Ryan Martinez: I think our yields continue to improve on the mainland.
Andrew Watterson: Mainland to Hawaii.
Andrew Watterson: Component of that franchise.
Andrew Watterson: And we will continue to.
Andrew Watterson: To develop those yields further but no I think that our product.
Andrew Watterson: Fares very well even in long haul markets, but yes on the whole.
Andrew Watterson: I think product matters and I think when you look at the industry.
Andrew Watterson: Together I think that there is at least some evidence.
Andrew Watterson: Out there today that.
Andrew Watterson: Sure.
Robert Silk: Demand for fares on the bottom end and lower product products on the lower end of the segment there may not be as much demand for those types of products today as what there once was and Brandon. This is Bob the only thing I would add is and this is no prediction that don't read more into this than is there.
Brandon Oglenski: You've got to meet your customers demand.
Brandon Oglenski: And their expectation so as those change over time, you want to understand that you wanted to be you want to carefully understand that and we.
Robert Silk: We have a history of demonstrating that so you go back 10 years.
Robert Silk: We wouldn't have been talking about Wi Fi, we would not have been talking about power on the aircraft.
Robert Silk: And when you can go on and on and on there was a time when we didn't even have a loyalty program here at southwest Airlines, so as consumer demands and expectations change.
Robert Silk: And you've got different generations of Flyers coming into the system as well.
Robert Silk: We will we will constantly look at that understand what our customers want and then if.
Andrew Watterson: That warrants a change we will look at that and we will make the right decisions again, we have a history of doing that.
Andrew Watterson: With our with our product to you on our customer experience. That's no predictor of regarding premium in the cabin I'm just I'm just trying to make sure that.
Andrew Watterson: That you know that we arent stubborn in this area that as you see demands change will understand that and we will react if needed.
Tammy Romo: Alright, I appreciate that and then maybe if I can just get a quick follow up for Tammy.
Tammy Romo: Any ability to tell us where you view your weighted cost of capital today.
Tammy Romo: Yes sure.
Tammy Romo: Sitting.
Tammy Romo: Probably.
Tammy Romo: Eight.
Tammy Romo: High eights.
Tammy Romo: 8%, 99% so.
Tammy Romo: We view it as at about 8687.
Tammy Romo: Okay I appreciate that Jeremy, but one thing Brian just to add on over the over our longer term.
Tammy Romo: It's been closer to 9%, we certainly look we certainly take a view a longer term view when we're planning in terms of our returns on invested capital.
Tammy Romo: Thank you.
Tammy Romo: Yes.
Tammy Romo: The next question is from Helane Becker with TD Cowen. Please go ahead.
Tammy Romo: Thanks, very much operator, hi, everybody. Thank you for the time.
Helane Becker: As I look at your numbers for the fourth quarter. Your revenues were up 12, 5% or something in your costs were up 10 happened yet you weren't able to see significant margin improvement because of the things you already talked about where you have inflationary pressure.
Helane Becker: We look forward to the next one year.
Helane Becker: How should we think about the seasonality of your business now because.
Helane Becker: It seems like you said everything was great for the fourth quarter and yet you didn't perform significantly better than you did last year and I would've thought that last year given all the issues.
Helane Becker: You would have performed a lot better. So maybe you can help me bridge.
Helane Becker: Beyond just the obvious labor cost inflation.
Helane Becker: And and.
And the other inflationary pressures how do you get back to those margins you used to report and then do you expect and then my other question is do you expect any book away from the flight attendants.
Helane Becker: Okay.
Asking for strikes out.
Helane Becker: Yes.
Helane Becker: Thank you and maybe I can start timing adjustments.
Helane Becker: Yeah, I'll try to remember everything.
Helane Becker: Just generally.
Helane Becker: I think the biggest impact sort of tearing everything aside in the fourth quarter as we did choose to restore capacity quickly. So basically that was a choice to.
Helane Becker: Number one get our aircraft.
Helane Becker: Back to normal utilization fly all of our aircraft hire pilots all of that and so our capacity.
Helane Becker: Our ramp up was greater than normal and therefore.
Helane Becker: We did have you can see it we had a we had a drop in load factor I think that's the biggest contributor in terms of the performance right. There that's different than normal and our 24 plan obviously is to get it.
Helane Becker: As to get back to normal in that area as we normalized capacity.
Andrew Watterson: So to me that's the biggest thing in <unk>.
Andrew Watterson: I don't attribute any of that I'll get to your flight attendant question. We don't I don't attribute any of that to book away and the holidays for example related to Elliott or something like that I think it really was the rate of capacity restoration as we look at our consumer our customer behaviors, we look at our customer metrics.
Andrew Watterson: Demand for southwest Airlines, there's no indicator or indications.
Andrew Watterson: We saw any hangover book away in fact, the holiday periods were the strongest periods of the quarter. Your question about the flight attendants and I'm really proud of our Labor force, we ratified nine agreements and just over a year. We have two years ago, one of those with tw by five 6% or flight attendants.
Andrew Watterson: We are in federal mediation and federal mediation, you follow the mediator in the mediator determines your dates and when you meet and.
Andrew Watterson: We're eager to get a contract done and just like our pilots who are in mediation I'm confident we can do that.
Andrew Watterson: The SMB or the strike vote.
Andrew Watterson: It does not mean you were headed to a strike.
Andrew Watterson: There are many many many.
Andrew Watterson: Things that have to occur before you would get to that point, so I am not worried about a strike despite the strike authorization mode.
Andrew Watterson: When we saw our pilots.
Andrew Watterson: Taken savi, our shrike authorization vote.
Andrew Watterson: We did not see any any very very little customer.
Even indicated that the customers were focused on it or aware.
No I don't expect any kind of hangover from that here in terms of customer our customer demand.
Andrew Watterson: Because of the flight attendant vote.
Brian Andrew: Brian you want to add anything there no. There is no evidence in anything that we track from a customer sentiment.
Brian Andrew: Perspective that would.
Brian Andrew: As concerned about that that.
Brian Andrew: Sentiment has fully recovered too.
Brian Andrew: At this point and our NPS scores as our customer satisfaction.
Have recently have been records.
Brian Andrew: Certainly back to pre pandemic levels.
Brian Andrew: Okay. That's really helpful. Thank you.
Speaker Change: We have time for one more question, we'll take that last question from Dan Mckenzie with Seaport Global. Please go ahead.
Dan Mckenzie: Oh, Hey, Thanks for squeezing me in.
Dan Mckenzie: I guess on efficiency and further improvement to come in 2025.
Dan Mckenzie: For investors that want or that would like line of sight on where ftes per aircraft could ultimately go what prior year could serve as a good benchmark I guess, that's first and then secondly is it reasonable to assume southwest's could get there fully in 2025.
Andrew Watterson: Yeah, I'll answer directly and Andrew if you want to chime in.
I think we're.
Andrew Watterson: Not ready to talk about it and maybe as much detail as you want until we get to our Investor day here later this year.
Andrew Watterson: But absolutely.
Andrew Watterson: Just like the goal of covering our cost of capital this year and getting back to our historic returns and ROIC well above whack restoring efficiency is right alongside in terms of.
Andrew Watterson: The key goal or a key goal.
Andrew Watterson: We ramped up our hiring quickly to be able to restore the network and get all of our aircraft flying that hiring peaked in October to November and we have been decelerating that rapidly here in the last 60 days.
Andrew Watterson: Plan is to again to grow.
Andrew Watterson: Or so percent this year and then to end this year with the same or fewer head than we began the year, which will obviously help our efficiency quite a bit not ready to discuss 25, but we would have.
Andrew Watterson: Certainly a directionally similar goal in 2025.
Andrew Watterson: We also have.
Andrew Watterson: A significant number.
Andrew Watterson: B you hate to tease here, we have a significant number of efficiency initiatives that we are planning around both efficiency of the aircraft.
Andrew Watterson: Patiency of our people.
Andrew Watterson: Processes, we think about things like the turn and we will be sharing a lot more about that again in RF.
Andrew Watterson: Our Investor Day later this year I'd say Bob.
Andrew Watterson: One element to that and that is the.
Robert Silk: The same kind of cross functional groups, we used to kind of rapidly accelerate our hiring that same team is now responsible for driving these efficiencies. So that is something that is literally every week kind of media to get to achieve what you just said about where the head count at the end of the year and I'll also say that while we are conscious of the FTE for aircraft, we're actually managing to more of a.
Lieber: Lieber with <unk>.
Andrew Watterson: CASM, because we think about an aircraft I could fly that different ways. You could say you could have two flights a day and my ground ops needs of different fluids six times a day.
Andrew Watterson: And then the block hours for the aircraft would change pilot if it was a longer block hours per aircraft or less it was less so.
Andrew Watterson: Ultimate CASM, you'll get out of your aircraft depends on how you are flying to and how Youre <unk>.
Andrew Watterson: Staff against it so the FTE per aircraft is a useful measure one can have but it's a hard to compare across airlines because of the outsourcing but be depending on how you fly the aircraft that can give some.
Andrew Watterson: Of a false signal, but you can really look at what we're going to try to force, our labor CASM and get that to a good order.
Andrew Watterson: Very good and if I had to squeeze one last one in here. It's a question on the shift to the cloud.
Andrew Watterson: Much of southwest has shifted to the cloud at this point.
Andrew Watterson: And once you complete that endeavor, what could the savings ultimately look like once that transition is completed as it.
Andrew Watterson: Tens of millions hundreds of millions.
Andrew Watterson: And is that an opportunity.
Andrew Watterson: Boy I'll tell you what youre stretching my.
Andrew Watterson: My technical abilities here, but.
Andrew Watterson: I believe.
Andrew Watterson: Like a lot of companies, we have a path to shift to the cloud, but again its the ship the appropriate things to the cloud.
Andrew Watterson: It is not as simplistic as it might sound.
Andrew Watterson: I think we have shifted something on the order of just below 50% is what Ive got in my head.
Andrew Watterson: We have a goal to shift a lot more.
Andrew Watterson: So some of that is cost savings absolutely.
Andrew Watterson: And.
Andrew Watterson: And.
Andrew Watterson: But I think that is more modest due a lot of what you gave us is reliability.
Andrew Watterson: And the ability to fail over systems.
Andrew Watterson: And obviously support operation support our system, which is which is critical here at an airline you have systems that can't be down 30 minutes before they cause you an operational problems. So a lot of the shift to the cloud.
Andrew Watterson: There is as much a resiliency effort and a modernization of the codebase and all of that effort as it is a cost savings certainly youll see cost savings.
Andrew Watterson: And.
Andrew Watterson: But I just don't I have not.
Andrew Watterson: My guess is it's more in the tens of millions that it is hundreds of millions I think Bob.
Andrew Watterson: That is a fraction size user base right and good progress, but when we talk about internally, we're not talk to most of the cost you can take a hosted bigger system break up into micro services or in the cloud. It allows you to then.
Andrew Watterson: Productivity and how you refresh and improve that.
Andrew Watterson: Hum.
Andrew Watterson: Our application over time, so it's really the speed to market for these new products and support for the products as we will drive the benefits. So it's elsewhere in the business you get the benefit not so much.
Andrew Watterson: Is it kind of hosted costs. If you will the other piece of that too and then we will.
Andrew Watterson: I will stop is the there is a it's not a tech cost, but there is a very high cost both revenue and expense and being down and having an issue.
Andrew Watterson: You saw issues earlier, this year or last year like the notum outage that really hurt the industry and so to the extent that you can reduce issues.
Andrew Watterson: Use the number of the issues.
Andrew Watterson: The length of time of an issue or reduce them completely.
Andrew Watterson: My guess is that is more powerful in terms of cost reduction than even the technology reduction because reducing IRA ops is very powerful.
Andrew Watterson: Hum very good thanks, so much for the time you guys.
Andrew Watterson: And thank you.
Andrew Watterson: Okay that completes the analyst portion of our call. A quick reminder, that the transcript and a replay of the call will be available on our Investor Relations website I appreciate everyone, joining and have a great day.
Andrew Watterson: Ladies and gentlemen, we will now begin with our media portion of today's call I'd like to first introduce Ms. Whitney I Concur Chief Communications Officer.
Andrew Watterson: Thanks, Gary I'd like to welcome members of the media to our call today before we begin taking questions. Gary could you. Please give instructions on how everyone's to queue up for a question.
Gary C. Kelly: To ask a question you May press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Gary C. Kelly: Our first question comes from Alison Sider with the Wall Street Journal. Please go ahead.
Alison Sider: Hi, Thanks, so much.
Alison Sider: Wanted to see what you made a senator Duckworth day, calling on the FAA to deny unbeliever Boeing or thoughts for the next seven.
Is that anti ACC do you think thats something volume should help to address before before they can start delivering those planes.
Andrew Watterson: I'll start and Andrew will pile in.
Andrew Watterson: Obviously.
Andrew Watterson: The certification of the Max seven.
Speaker Change: And the issue there that's really Boeing I don't want to speak for Boeing or get ahead here.
Speaker Change: Obviously.
Speaker Change: We want the Max of it and we wanted to on.
The best timing possible.
Speaker Change: So I don't want to talk for Boeing.
Speaker Change: But it is one more thing to consider here in the certification process and certification timeline I would say that the certification is a technical process between the FAA and Boeing I think they've been doing a good job, it's been slower than anybody would like but it's been typically base and itself a public comment. So it's an opportunity if people have commented that for <unk>.
Speaker Change: Analysis to be done and so we're not a party to that.
Speaker Change: We want the aircraft. It's a question of when we'll get it not if we'll get it so were.
Speaker Change: Pleased that they are taking their time to make sure it's safe and we support whatever way the FAA wants to go.
Speaker Change: And I mean do you have any plans to increase your own oversight of southwest claims on the Boeing production line.
Speaker Change: We have already done that.
Speaker Change: So in late 2022.
Speaker Change: We changed our posture.
Speaker Change: There previously we had for a long time ago Representatives.
The factory, we increased it to a team of A&P license mechanics, whose job is to provide oversight of our aircraft in the production process.
Speaker Change: Boeing provides customer quality.
Speaker Change: People that they are on their payroll, but our direction and so they.
Speaker Change: Inspect at places, where we asked in the factory and a few days at Boeing takes assemble aircraft from the wings being built to rolling out it's about roughly 80 areas, where we have our acquirements for things to be inspected all of those people inspect our people in spec and then several times a year our quality assurance team goes up and the specs are.
Speaker Change: Our inspectors to make sure everything is going well so that provides a really good oversight in the production process. Once it leaves the factory Theres, a customary acceptance inspections that happened the FAA overseas and gives a final certificate of airworthiness and so and then it comes onto R. R.
Speaker Change: Our off spec and we our maintenance program, which is quite robust and.
Speaker Change: Since we are the by far the largest offer the 737 provides lots of data and our continuing analysis.
Speaker Change: Surveillance system allows for us to really understand the aircraft and make sure that is performing and conforming as expected.
Okay.
Speaker Change: The next question is from Leslie Joseph with CNBC. Please go ahead.
Leslie Josephs: Hi, I was wondering if you have any thoughts about how a chapter seven of an airline in the United States would affect the industry are there.
Leslie Josephs: Jobs for those employees should that happen and then do you think that the Justice Department would ever let you buy another airline.
Leslie Josephs: Hey, Leslie Bob.
Leslie Josephs: We don't.
Leslie Josephs: Obviously like I said earlier, there is a lot going on in the industry there between.
Leslie Josephs: The merger potential mergers and acquisitions and issues with the.
Leslie Josephs: Sure.
Leslie Josephs: Aircraft deliveries the geared turbofan I don't know.
Leslie Josephs: Bye.
Leslie Josephs: 36 years in the industry I've seen more moving parts as you have right now.
Leslie Josephs: One thing is consistent here as we stick to our business. So we're focused on southwest airlines, improving southwest Airlines being the best carrier that we can be improving our returns and profit margins all of the things we've talked about.
Leslie Josephs: It is impossible to speculate on what might happen.
Leslie Josephs: Our history would say that as opportunities arise for southwest if they make sense.
Leslie Josephs: Take a look at that but I wouldn't want to speculate on anything going on in the industry certainly around any other carrier I think with the benefit first southwest Airlines Bob.
Leslie Josephs: Have a plan.
Leslie Josephs: And we control our own Destiny, we hit our plan, we get our returns that we need to be we don't need something to break our way a judge or anything else or only thing our plan delivers our results.
Leslie Josephs: Our next question comes from Rajeev <unk> with Reuters. Please go ahead.
Leslie Josephs: Hi.
Leslie Josephs: Andrew.
Leslie Josephs: Uh huh.
Leslie Josephs: Do you have.
Leslie Josephs: Any update on the timeline for the Max seven.
Andrew Watterson: I'll be adequate as expected by <unk>. So do you see in there this quarter.
Andrew Watterson: If we get some positive.
Andrew Watterson: Slow down.
Current Stevens: Current Stevens with Boeing.
Current Stevens: Well, we get a weekly updates on the status of the certification process. So we know what's been submitted and what Hasnt.
Current Stevens: Obviously, then the FAA is in one who oversees that inspects. It makes ultimate decision previously we've indicated that we had in our.
Current Stevens: Internal planning assumption that it would be certified by April and that we will then spend some time after that to get on and off spec on that could take us in the year and therefore wouldn't be flat until next year, but that is that was one of the latest assumption. We've had earlier assumptions all along this process and as Tammy mentioned, we will modify our plan based on.
Tammy Romo: The new information so should that change, we will move our assumptions and adapt our plans. So by taking this kind of a conservative approach and given ourselves. The lead time, we won't let any kind of short term ups or downs affect what we have planned for this year.
Robert Silk: And Bob.
Robert Silk: I have a question for you do you have confidence in Boeing's current leader to address based on scripts in the company.
Robert Silk: Hey, Raj Boeing has been.
Robert Silk: A partner with us for 52 years.
Robert Silk: I have absolute confidence that between the FAA oversight work that's going on the work that Boeing is doing that Boeing will.
Robert Silk: Working with the FAA will address the quality issues and we will obviously come out of this a better company I've talked personally to their leadership. They are committed to doing anything and everything it takes to be better and to address the problems.
Robert Silk: And as I said before.
Robert Silk: A a better Boeing is very good for southwest Airlines.
Current Stevens: Yes, I have absolute confidence that they will work their way through this and address the issues.
Current Stevens: Thank you thank.
Current Stevens: Thank you.
Current Stevens: This concludes our question and answer session I would like to turn the conference back over to MS. <unk> for any closing remarks.
Current Stevens: Thanks, Gary and news release on our contact information are available at SWA media Dot Com, we think that we thank everyone for joining.
Current Stevens: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Current Stevens: [music].
Current Stevens: Yes.
Current Stevens: Yes.
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Current Stevens: Yes.
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