At the Southwest Airlines Second Quarter 2023 Conference Call, Anthony moderated the call while Julia Landrum, Vice President of Investor Relations, gave an overview of the call. Bob Jordan, President and CEO, reported a successful quarter with net income of $693 million and record quarterly revenue of $7 billion. The demand for leisure travel has been strong throughout the summer season.

The company has experienced a record number of customers and bags on a record number of flights, resulting in a low second quarter flight cancellation rate. Despite the challenges of weather and cost outlooks, employees have worked hard to minimize cancellations and deliver a reliable operation. Since 2018, the company has experienced significant swings due to the grounding of the MAX, COVID, and supply chain issues, as well as uncertainty with Boeing aircraft deliveries.

In April, the company announced that they were reflowing their order book to allow for measured growth and they are confident they will get 70 deliveries in 2023. They are revamping their 2024 flight schedules to optimize for post-pandemic shifts in business travel and expect it to generate an extra $500 million in pre-tax profit in 2024. The changes will reduce system capacity and development by more than half and return to pre-pandemic levels by the end of next year. They plan for year-over-year growth in the range of 14-16% in the first quarter of 2024 and a sequential deceleration for the remainder of the year.

Southwest Airlines had a successful third quarter in 2023, with an all-time quarterly operating revenue record and double-digit operating margins each month. The company was able to achieve these results due to the hard work of their employees. They are on track for their winter operations plan, and have the staffing plan in place to fully utilize their fleet by the end of the third quarter. They are looking forward to restoring their industry-leading financial and operational performance, boosting their operational resilience, and making advances in their customer service through a focus on digital hospitality.

In the second quarter, jet fuel prices were slightly above previous guidance at $2.60 per gallon, with crude oil prices hovering around $80 per barrel. The company is 49% hedged for the third quarter and estimates their full year 2023 fuel price to be in the range of $2.70 to $2.80 per gallon, including $0.09 of hedging gains. The total fair market value of the fuel hedge portfolio for third quarter through 2026 is $373 million. In the second quarter, CASM-X increased 7.5% due to adjustments to market wage rate accruals for open labor agreements. Third quarter estimates are in the 3.5% to 6.5% range, largely driven by higher labor costs.

In the second quarter of 2021, Southwest Airlines received 21 aircraft deliveries and retired 11 -700 aircraft, bringing the total fleet to over 800 aircraft. The company's capacity guidance for 2023 and first quarter 2024 remains unchanged, with a full year 2023 capacity increase of 14-15% year-over-year and a first quarter 2024 capacity increase of 14-16% year-over-year. The estimated 0.5 increase in CASM-X for 2023 is due to higher labor cost pressures. The company's CapEx outlook for the year remains at approximately $3.5 billion, with cash and short-term investments of $12.2 billion at the end of the second quarter. Southwest Airlines is the only U.S. airline with an investment-grade rating by all three rating agencies.

Tammy is proud of the accomplishments of the company in the first half of the year and expects to see further success with the management of inflationary cost pressures, reflowing orders with Boeing, rebalancing and optimizing their network, and maturation of development markets. Ryan Green then discussed second quarter revenue which was an all-time record of $7 billion and that overall demand for leisure travel has been resilient.

In the second quarter of 2023, unit revenue or RASM decreased 8.3% year-over-year despite a capacity increase of 14.1%. This was due to a 5-point headwind from higher-than-normal breakage revenue in the second quarter of 2022. Despite this, revenue came in at the favorable end of expectations due to strong close-in leisure travel and improved managed business revenue. In the third quarter, leisure booking and yield strength is continuing throughout the summer travel season and is expected to be a record. There is also strong response to the June fare sale for off-peak fall travel, suggesting continued leisure demand.

Southwest Airlines had record bookings in the fare sale week, with more passengers booked for the third quarter than the second quarter. Corporate travel demand is expected to remain lower than leisure, and Southwest Airlines has an opportunity to adjust their network to adapt to the new travel patterns from their mix of business and leisure customers. This will lead to a 3-7% decrease in year-over-year unit revenue, but a record for operating revenue in the third quarter.

Southwest is in the process of adjusting their network to support their financial performance. They have made changes to the composition of their network that reflect customer travel behavior and have more than 10% of their markets under development. They are also focused on widening their customer service advantage through prioritizations of a series of initiatives that will improve their digital hospitality. Andrew Watterson then provides additional details on their operational performance and a brief update on their Winter Operations Preparedness Plan.

In the second quarter, the company's employees achieved a flight completion factor of more than 99%, the highest performance in the past 10 years, despite operational challenges. On-time performance, long delays, early morning originators, turn compliance, flown as booked and trip Net Promoter Score all improved year-over-year. Block time hit rate dropped due to circuitous routing caused by weather, but overall performance improved due to solid execution by employees. The company is making progress on its Winter Preparedness Plan.

Andrew is providing an update on the plan to be fully implemented in fourth quarter 2023, which includes delivery of new equipment and infrastructure, summer school to train new ramp agents, and labor negotiations to get collective bargain agreements in place. He thanks the employees for their hard work and then turns the call back over to Julia for questions.

Ryan Green believes the second quarter performance was very strong, with record operating revenue and average fares up 2%. He also notes that the domestic load factor is in line with competitors and that July is expected to be another record revenue month. He attributes this to the strong fare environment and pent-up demand from the prior year.

Bob Jordan discusses how the new revenue management system and the quick return of capacity have impacted load factor. He also mentions the large percentage of the network in development, which is causing the average fare to be lower than normal. He states that this effect should be normal by the end of next year.

Bob Jordan and Tammy Romo explain that the network optimization will be beneficial to both revenue and cost. They are committed to driving their unit cost down and the network redesign will help them do this. The 90% of growth in the first quarter is due to carryover from 2023, and the travel patterns post-pandemic are not the same as pre-pandemic. They are reducing flights on Tuesdays and Wednesdays more aggressively to accommodate the changes.

Andrew Watterson explains how Southwest Airlines is optimizing their network with changes in frequency, Tuesday-Wednesday reductions, shifting earliest and latest flights, and adjusting city pairs in Hawaii. This is to match the post-pandemic demand and travel patterns. Midway is an example of this, with the frequency of flights to Columbus, Phoenix, Sarasota, and Tampa changing. The changes are a mix of leisure and business, and each city pair is kept their departure.

Tammy Romo explains that the company is working on a detailed 2024 plan to get back to pre-pandemic levels of profitability. The first priority is to optimize the network and staffing levels. In addition, they will get contributions from their fleet modernization plans and ongoing initiatives. Finally, they are working to produce year-over-year margin expansion for 2024. Savi Syth then asks a question about labor accruals, including ratification bonuses.

Tammy Romo and Bob Jordan explain that Southwest Airlines has been adjusting their market rates to current market rates and have factored this into their third quarter cost guidance. They are fully accrued for the most recent market and have updated their accruals across the quarter due to the market moving. They recently had good news with the ratification of a new four-year agreement with their mechanics and related employees in AMFA.

Ryan Green discussed the performance of the Hawaii franchise, noting that load factors and yields are improving. He also mentioned that Intra-Cal is performing well, and leisure-based markets such as Florida are doing well in the current environment. He noted that there are opportunities to make changes to the network in different geographies as they bring cities back.

Southwest Airlines is working to absorb capacity growth and has the advantage of a diverse domestic footprint. They are making adjustments to their network, such as reducing Monday-Thursday capacity by 8% on Tuesdays and Wednesdays, and are committed to not making wholesale changes in the fall due to the disruption it causes customers.

Tammy Romo addressed a question about the magnitude of the excess training and reliability investments that are unlikely to reoccur or wind down next year, estimating that the costs incurred this year related to operational disruptions are between $100 million and $150 million. Jamie Baker then asked a modeling question about the third quarter X fuel CASM guide and full year guide, and Romo responded that the capacity is the primary driver for the fourth quarter outcome being similar to the third quarter.

Bob Jordan and Ryan Green discussed how the Southwest brand was impacted by the pandemic, and how there may have been a hangover effect. They noted that despite this, there was still record operating revenues, record passengers, record flights, and their highest booking day in their history. They also mentioned that they have seen significant market share gains in terms of their piece of the business since December, showing strong demand for the brand and product.

Southwest Airlines has seen strong demand post-disruption, with record revenue and Rapid Reward acquisitions in the second quarter, as well as an increase in market share in the managed business space. Additionally, travel patterns have not changed in terms of frequency of travel on Southwest Airlines since prior to the disruption event.

Tammy Romo explains that Southwest Airlines has invested in developing new markets and that they are pleased with the progress of those markets. She states that based on their assessment of growth opportunities, mid-single-digit ASM growth is the right number for Southwest right now. However, they have a flexible order book and fleet plans, so they can adjust if needed. Ultimately, they are determined to drive returns on invested capital.

Bob Jordan is proud of the fact that Southwest was able to get all their aircraft open and flying in the third quarter and will have their network restored by the end of the year. However, they still need to optimize their resource usage and efficiency. There is a lot of demand for the Southwest product in places like Denver, Austin, and Nashville, and there are coming gates available. The goal for 2024 is to optimize the airline, reduce costs, increase revenues, and boost returns.

Bob Jordan and Tammy Romo of American Airlines discuss the company's goals for 2024. They anticipate that the carryover from this year to next year will have a 7-point impact on the company, and they are aiming for margin expansion in the upcoming year. They also note that they have initiatives in place that could add up to $1.5 billion in EBIT, as well as a $500 million benefit from network optimization. They are still working on the plan and will share it in the fall.

The operator introduces Linda Rutherford, the Chief Administration and Communications Officer, and begins the media Q&A. An unidentified analyst brings up the conversation earlier about the pilot contract and asks if Southwest is committed to meeting the new pay standards and benefits. Bob Jordan responds that negotiations are complex and they are meeting regularly with SWAPA, but there is no imminent strike. He emphasizes that they want to make progress ahead of any steps leading to a strike, and they have a desire to get all of their contracts closed up, including the pilot contract, as pilots do a fantastic job. Andrew Watterson adds that it is a strong pilots market.

Andrew Watterson and Tammy Romo are discussing the timeline and costs associated with the disruption caused by winter storms. Watterson has given October as a deadline to have everything in place, and Romo clarified that the estimated cost of $100 million to $150 million is for everything post-disruption.

Tammy Romo and Bob Jordan of Southwest Airlines discuss the one-time costs the airline has incurred as a result of the disruptions, such as gratitude pay and customer reimbursements. Romo also mentions that the airline had plans to modernize operations before the event. Dawn Gilbertson asks about the demand for upgraded boarding, EarlyBird boarding, and Business Select seats, as well as the strategy for pitching A-List status. Ryan Green responds.

Ryan Green from Southwest Airlines discussed the impact of premium revenue on their RASM performance, noting that their business model does not participate in the same degree as some of their competitors. He also reported that ancillary revenue was a high point for Southwest in the second quarter, with EarlyBird and upgraded boarding both performing well. Additionally, Southwest has run campaigns to allow customers to buy A-List status. Finally, Green reported that Southwest generates hundreds of millions of dollars annually from their boarding products.

Ryan Green from Southwest Airlines discusses the RASM decline for the third quarter, attributing it to capacity growth being above seasonal norms. He states that he is encouraged by the demand in place and anticipates a record third quarter revenue. He notes that the June fare sale was a success, with more bookings taken in a single day than any other day in Southwest's history, and that the strong fare environment from the second quarter has persisted into July.

Andrew Watterson and Bob Jordan of an airline company both agree that the pilot market is at a record high, causing more pilots to job hop around the industry. This has caused a slight uptick in attrition, but it is still not enough to affect their plan to hire 1,700 pilots net this year. They understand why pilots are looking for the best airline for them and don't begrudge them for it.

Ryan Green discusses the strong demand for leisure travel and the strong fare environment for July. He states that yields are normally weaker in the third quarter compared to the second quarter, but that it is normal. He does not have much visibility into the fourth quarter, but expects the strong demand and fare environment to continue into the third quarter.

The executives of Southwest Airlines discussed the fare performance for the second quarter, which was down 2.7% year-over-year, but when adjusted for the breakage change from last year, the fares were actually up 2.2%. They also discussed their outlook for the third quarter, expecting a strong quarter ahead. They concluded the conference by inviting any follow-up questions to their communications team.

This summary was generated with AI and may contain some inaccuracies.