The Southwest Airlines Third Quarter 2023 Conference Call is being moderated by Jamie. Julia Landrum, Vice President of Investor Relations, introduces the speakers and reminds listeners that forward-looking statements will be made. President and CEO Bob Jordan acknowledges recent natural disasters and expresses pride in the support provided by Southwest Airlines.

The company had a successful third quarter with operating revenues increasing by 5% and net income of $240 million. The strong revenue was due to solid leisure demand and managed business as expected. The company has also made significant accomplishments, including reaching labor agreements and completing a network restoration plan. They are now focusing on optimizing their business and have announced a new order book with Boeing.

The company's plan for growth involves careful evaluation of the current macro environment and post-pandemic travel behaviors. They are planning for a decline in capacity in the first quarter of 2024 and a nominal decline in seats in the back half of the year. Their focus is on optimizing operations and generating value for employees, customers, and shareholders. The company has a strong team of employees who have worked effectively during the pandemic.

The speaker discusses the cost trends for the company, focusing on fuel prices and non-fuel costs. They mention that the third quarter fuel price was higher than expected due to rising crude oil prices and refinery margins. However, the company has hedging positions in place to mitigate some of the pressure. Non-fuel costs increased in the third quarter, but are expected to decrease significantly in the fourth quarter due to operational disruptions in the previous year.

The company's guidance range includes wage rate increases and they plan to adapt their network and capacity to improve returns on investments. They received 18 new deliveries and retired 4 aircraft in the third quarter, leaving them with a fleet of 817 total aircraft. They have finalized a new order book with Boeing which will fund their long-term growth plan and allow for the phase out of the -700 fleet. Their 2023 CapEx outlook remains at $3.5 billion and they expect 2024 capacity to be up 6% to 8% year-over-year. The new order book provides flexibility for a disciplined financial plan that can be adjusted to the current environment.

In the third quarter, Southwest Airlines expects to spend $4 billion per year on capital, has a strong balance sheet with an investment grade rating and $11.7 billion in cash, and has returned over $400 million to shareholders. The company is focused on building plans for 2024 and beyond. In terms of revenue, demand remains strong with a record operating revenue of $6.5 billion, a 5% increase from last year, and a 16% increase from 2019.

The paragraph discusses the financial performance of Southwest Airlines in the third quarter of 2023. Despite challenges with unit costs, the company saw a 5% increase in operating revenue and a 2.6% increase in average fares. Bookings for peak travel times met expectations, but bookings for non-peak months were lower than expected due to schools starting earlier. The company also saw record numbers in ancillary revenue and loyalty program activity. Overall, consumer spending on travel experiences remains strong, indicating a resilient consumer and high engagement with the Southwest brand.

The fourth quarter is expected to see an increase in operating revenue, with strong performance in October and strong bookings for the upcoming holidays. However, RASM (revenue per available seat mile) will continue to be impacted by higher capacity and lower business travel levels. The company is working to address this through fare sale campaigns to fill low demand flights without impacting higher demand flights.

In 2024, Southwest Airlines plans to address RASM by moderating capacity and optimizing schedules. They also have strategic initiatives in place, such as GDS participation and a new revenue management system, which will contribute to profits. The company is also focused on improving the customer experience and has made updates to their Rapid Rewards program to make it easier for customers to earn and redeem points. They have also launched a new product for corporate customers and introduced customer bag tracking. These efforts are aimed at winning more customers and increasing loyalty.

The speaker is discussing recent improvements in operational performance and plans for the future. They commend the negotiating committees for reaching a tentative agreement with flight attendants and highlight the industry-leading compensation and quality of life enhancements included in the agreement. They also mention improvements in operating metrics and customer satisfaction, but note that performance could have been even better if not for external factors like congestion, weather, and runway construction.

Southwest Airlines saw a nearly 4 point increase in their trip Net Promoter Score, driven by their proven reliability and customer experience initiatives such as improved Wi-Fi. They are optimistic about 2024 and have taken steps to improve their winter preparedness after last year's disruption caused by an unprecedented storm. Their action plan includes investing in winter operations, cross-team collaboration, and accelerating operational investments, including technology. They have also invested in key stations and equipment to ensure their crew network can operate through bad weather.

The airline has been taking tangible steps to prepare for extreme weather events, including conducting de-icing summer school and forming a special operating group. They have also conducted multiple operations wide tabletop exercises and upgraded their systems to address previous issues. The airline is confident in their preparations for the upcoming winter holiday travel season and is committed to orderly and measured growth in the future.

The company is focused on stable growth to improve efficiency and operational performance. They are considering demand levels and travel patterns as they plan for 2024, and are moderating capacity to absorb growth. They are also taking steps to optimize their schedules and accelerate the maturation of developing markets. The company is committed to delivering value for employees, customers, and shareholders. Inflationary headwinds may impact unit costs in 2024, and the company typically does not adjust capacity once schedules are loaded.

The quarter was strong for the company, with record revenues and passengers. They are seeing changes in travel patterns for leisure and business, but are still working on restoring capacity. They plan to reduce capacity in the first quarter and are currently working on their 2024 plan. This will result in nominal seats being down compared to 2022. They are focusing on maturing and absorbing the capacity they have stored in 2023 and 2024, and will work on both cost and efficiency to offset the effects of reducing capacity.

The company is focused on driving efficiencies and reducing costs in response to slowing growth and hiring. They are also working on increasing revenue. Labor and maintenance costs are expected to increase, but the company is still committed to their long-term goal of growing CASM-X in the low single digit range. They plan to take delivery of new aircraft and offset it with retirements, but there may be uncertainty with Boeing's ability to meet the delivery schedule.

The company has restructured its fleet order book with Boeing to achieve orderly and steady growth. They are planning to take 85 aircraft this year and next year, with the flexibility to adjust based on demand trends. The new order allows for attractive pricing and a solid financial trade by offsetting retirements. The company is not able to provide guidance for 2024, but they are committed to driving costs down year-over-year. Labor inflationary pressures are expected to continue into next year and have already been accounted for in this year's financials.

Tammy Romo explains that there are two main factors contributing to the increase in wage rates at the company: moderated capacity growth plans and labor rate pressure. Despite structural cost increases, the company still maintains a cost advantage over the industry. However, there are still inflationary pressures, particularly from labor costs, and the company is working to improve efficiency and productivity to mitigate these costs.

The company is focused on managing costs and has a good track record in doing so. They are aware of the increasing labor costs and are taking actions to adapt to the higher cost structure. They have announced a network restructuring that will yield profits in the future. There is a focus on premium products in the current market, but it is hard to predict their demand and how they will fare in a future downturn.

The speaker acknowledges the outperformance in long-haul international and premium travel, and notes that trends tend to moderate over time. They mention Southwest Airlines' attractive coach product and their focus on customer preferences. The other speaker adds that premium revenue has historically been cyclical, but they will continue to evolve their product based on customer demand. The next question is from an analyst who has asked similar questions in the past.

The speaker asks about the plan to increase margins in 2024 and mentions investor concerns about unit revenue. The response states that improving margins in 2024 is the plan and that they are committed to returning to industry-leading margins. They mention adapting to new cost levels, increasing operating leverage, and managing headcount as ways to reduce costs. They also mention working on a 2024 plan and promise to provide more details later.

The speaker reminds the audience that the company's network optimization efforts and development markets are expected to generate over $500 million in pretax profits next year. However, if the margins do not improve, the company will consider alternative strategies such as adjusting product and service offerings. The company is currently working on a 2024 plan that includes initiatives to drive operating leverage, generate revenue outside the cabin, and increase aircraft utilization. The full plan is not yet ready to be shared.

The speaker responds to a question about changes in the cabin and boarding process by stating that they will follow the lead of their customers. They are constantly evaluating customer preferences and will make adjustments accordingly. The speaker also mentions their commitment to improving margins and efficiency. The next question asks about the decision to move international service from Fort Lauderdale to Orlando, and the speaker explains that this was part of a larger network restructuring and was based on capacity and demand.

The company has made moves to increase connectivity in Orlando, which has a larger number of northbound flights and a significant customer base. This allows for a good combination of local and connecting flights, making it a more sensible location for international destinations. The presence of a crew base in Orlando also helps to lower costs. This decision aligns with the company's previous focus on increasing connectivity and may serve as a trial for implementing similar strategies in other gateway cities.

During the COVID pandemic, Southwest Airlines had to rely more heavily on connectivity to fill their bigger aircraft when demand was low. However, now that demand has increased, they have returned to their normal level of connectivity, which makes up about 25-30% of their customers. This type of connectivity helps them fill their flights and access certain geographies, such as Hawaii and international destinations. Additionally, Southwest has seen record performance in ancillary and loyalty revenue, with ancillary revenue outpacing passenger growth due to increased prices on upgraded boarding and EarlyBird benefits.

Southwest Airlines has seen success in their ancillary revenue, such as excess bag fees and pet fees, which is expected to continue to exceed passenger growth in the fourth quarter. Their loyalty program, Rapid Rewards, is the most preferred in the industry and recent changes have made it easier for customers to use their points, leading to increased engagement and spending. Southwest is also making it easier for customers to access benefits, which in turn drives value back to the company. They plan to continue investing in Rapid Rewards and ancillary revenue, expecting to see continued growth.

Helane Becker from TD Cowen asks a question about the changes in Rapid Rewards and if it will result in fare cuts across the board. Ryan Green explains that the loyalty program is designed to be indifferent whether customers are using points or paying cash. He also mentions that the change in threshold for achieving status is taking advantage of the fact that business travel is down and leisure travel is up. Tammy Romo adds that the company is delivering on its initiatives, including fleet modernization and investments in technology.

The flight attendants reached a tentative agreement and the pilots are picketing at headquarters. The NMB has meetings scheduled throughout November and there is no specific time frame for when a pilots' deal may be reached.

The speaker, Bob Jordan, expresses gratitude for reaching a tentative agreement with flight attendants and mentions that negotiations with other unions are also progressing well. He is confident that the remaining issues will be resolved in a timely manner with the help of mediators and leadership from both sides. He also mentions upcoming negotiations with the ramp union.

Southwest Airlines CEO Bob Jordan and Chief Revenue Officer Andrew Watterson discuss the status of negotiations with TWU 555 and the recent rejection of a proposed agreement. They plan to reconvene in November to discuss next steps. They also mention the company's current promotional activity, which is slightly higher than normal as they work to fill seats during the restoration period. They use strategic tactics to target specific flights for promotional fares without diluting yields.

The speaker discusses how the company's average fares have increased despite low fares in the market, indicating that their strategy is working. They also mention that they are adapting to current travel patterns and will be making network adjustments in the first quarter to further address these trends. A question is asked about specific adjustments being made, and the speaker mentions cutting frequencies and adjusting days and times of travel.

The airline is making capacity adjustments for the first quarter and throughout 2024 in nonpeak periods to match new business travel demand trends and patterns. Business travel is rising but not fully recovered to pre-pandemic levels. The adjustments are geared towards leisure and mixed leisure business, with a reduction in Tuesday and Wednesday capacity and replacement of routes with more leisure or mixed leisure and business demand. The lower-than-expected close-in bookings may be a result of a lengthening of the booking curve or a one-off occurrence related to the current environment.

Andrew Watterson discusses the current state of travel, stating that there is a slow and steady recovery in managed business travel and an increase in market share. However, close-in leisure travel is still not at pre-pandemic levels, but is beginning to return to normal as people start to go back to the office. He also mentions that there are other factors, such as changes in the school calendar, that are impacting close-in leisure travel. Overall, the company is making adjustments to their network and business to accommodate new demand trends and behaviors caused by the pandemic.

Southwest has been experiencing record operating revenues, passengers, and participation in its rewards program. The company expects to continue this trend in the fourth quarter, but acknowledges the need to align demand with new travel patterns and absorb rapid growth. They are slowing their growth rate in 2024 to allow time for this. However, the company is confident in its demand and holiday bookings are strong, with December already ahead of last year.

Bob Jordan and Tammy Romo discuss the new order book for Southwest Airlines, which includes over 200 additional aircraft. They explain that this decision was made to clean up delivery challenges, ensure access to aircraft in the tight market, and provide flexibility for future demand. They also mention their partnership with Boeing and the attractive pricing they have secured.

Southwest Airlines is focusing on fleet modernization and has a cost-effective order book to support their growth plan. They are excited to retire their -700 fleet in the coming years and have a dedicated communications team for media inquiries. The conference has now ended.

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