The Southwest Airlines Fourth Quarter 2023 Conference Call began with the operator introducing the speakers and explaining the purpose of the call. Julia Landrum, Vice President of Investor Relations, then gave a reminder about forward-looking statements and non-GAAP results. CEO Bob Jordan expressed gratitude for the company's employees and reflected on the challenges they faced in the previous year. He also mentioned the disruption caused by Winter Storm Elliott.

The company quickly responded to the extreme winter weather disruptions and successfully tested a comprehensive winter weather action plan. They were able to recover quickly and minimize the impact on customers, while also improving in nearly every operational metric. The company also made significant progress on labor agreements, including ratification of an agreement for industry-leading pay for pilots. This is a huge accomplishment and demonstrates their commitment to providing competitive compensation packages for their employees.

The airline has achieved many accomplishments, including implementing a new revenue management system, launching customer experience improvements, and negotiating a cost-effective order book with Boeing. They have also made adjustments to capacity and network in response to changing demand patterns. The airline has seen strong demand and record-breaking revenue in the fourth quarter of 2023 and expects continued growth in 2024, despite cost pressures. The network changes are expected to lead to profitability in the March schedule.

The company has implemented initiatives to counter inflationary pressures and improve efficiency. This includes slowing hiring and making adjustments to capacity if needed. The company's main focus is on earning consistent and adequate returns for shareholders. They have made progress in 2023 and are committed to improving the customer experience and meeting long-term financial targets. The CEO expresses confidence in the company's people and their dedication. The CFO will now give further details.

In 2023, the company faced challenges but was able to deliver strong profits thanks to their dedicated employees. They focused on restoring their network and operational reliability, and now that those are stable, they can focus on financial performance and regaining their position as an industry leader. The company's unit costs were down 16% in the fourth quarter, and their fuel prices were lower than expected due to a drop in market prices. They have hedged 60% for the first quarter and 57% for the full year, providing protection against higher Brent prices.

In the fourth quarter of 2022, the company's cost per available seat mile (CASM-X) decreased by 18.1%, mainly due to lower capacity and operational disruptions. However, there were also inflationary cost pressures, such as higher labor rates and maintenance expenses, which will continue into 2024. The company has recently ratified a new contract with its pilots, reflecting the current market for pilot wages. This has resulted in a change in estimate for the pilot ratification bonus. For the first quarter of 2024, the company anticipates a 6-7% increase in CASM-X, with about 3-4 points attributed to higher labor costs and market wage rate accruals.

The increase in first quarter CASM-X is primarily due to maintenance expense and labor costs. The company has a plan to regain efficiencies and improve financial performance, with a goal of $1.5 billion in incremental pre-tax profits by 2024. Most of these profits will come from revenue-related initiatives, including network optimization and increased GDS participation. The remaining benefits will come from fleet monetization and other operating efficiency efforts. More details on these initiatives will be provided at Investor Day later this year.

The company's long-term goal is to generate a high return on invested capital, and they plan to provide more details at their 2024 Investor Day. They received more aircraft deliveries than planned in 2023 and retired fewer aircraft, ending the year with 817 aircraft. They mention the flexibility of their fleet modernization efforts as a competitive advantage and expect to receive 79 aircraft deliveries and retire 45-700 and 4-800 in 2024. They also expect a 6% increase in capacity and a reduction in fuel expenses due to their fleet modernization initiatives. These initiatives are also important for the company to reach their environmental sustainability goals.

The company's balance sheet remains strong, with a net cash position and investment-grade rating. They have returned money to shareholders, paid off debt, and expect financial improvement in the upcoming year. The demand for their business is strong, and they have seen improvement in revenue due to holiday performance and market share gains. The CEO thanks the employees for their hard work and dedication.

The company had a successful holiday season with no impact from previous operational disruptions, thanks to operational improvements and loyal customers. The fourth quarter saw multiple records set, including operating revenue, passenger revenue, and passengers carried. Average passenger fare also increased by 2.5% compared to the previous year. The full year results showed a 10% increase in operating revenue and record numbers for passengers, Rapid Rewards revenue, and ancillary revenue. The momentum is expected to continue in 2024, with early benefits from network optimization efforts and a projected 2.5-4.5% unit revenue growth in the first quarter. The company currently has 60% of expected first quarter bookings in place and is seeing better than normal sequential RASM performance, indicating the success of their network optimization efforts.

The company has improved its capacity plans for the year and expects double-digit operating revenue growth, driven by network and initiative-driven revenue. They have also seen success in their managed business initiatives and have improved their ranking in the industry. The company is also working on improving the customer experience and their loyalty program, with enhancements such as easier qualification for elite levels and the ability to book travel with a combination of cash and points. They have also introduced customer bag tracking and have plans for a larger digital hospitality modernization.

The paragraph discusses Southwest's efforts to improve their services and make it easier for customers to fly with them. They have a solid plan for 2024 and are leveraging the strength of their people, product, loyalty program, and route network. The company also acknowledges their employees for successfully managing through winter storms and improving their winter operations protocol, resulting in fewer cancellations and better customer experiences. The cancellation rates were in line with the industry and only 2% were due to crew scheduling challenges. Overall, Southwest is in a better position compared to last year.

In the past year, we have completed our winter operations plan and implemented various initiatives to modernize our operations for the benefit of our customers and employees. This has resulted in improved performance metrics and a higher Trip Net Promoter Score. Our goal for 2024 is to continue improving our operating quality and move up in the Wall Street Journal Airline Quality Metrics ranking. We also have ongoing efforts to increase efficiency, productivity, and reduce costs. Additionally, we have recently reached a new contract agreement with our pilots and are still negotiating with two other union groups.

Julia Landrum thanks Andrew and opens the line for analyst questions. She asks that each person limit themselves to one question and a brief follow-up if necessary. The first question comes from Ravi Shanker who asks about the $1.5 billion initiatives and how much visibility they have into it. Bob Jordan responds, saying that they have confidence in the initiatives delivering, especially with the network improvements in place by early summer. He also mentions that the majority of the $1.5 billion is revenue related and that they are on track to hit that goal. Ryan Green adds that they have line of sight into March and are adjusting for new demand patterns.

The company has implemented revenue initiatives to optimize their network and increase the percentage of development markets. They are confident in the performance of these initiatives and have seen improvement in their managed business segment. The company is also monitoring the trend of premiumization in the industry and regularly seeks customer feedback on the topic.

The airline industry has historically seen a cyclical trend in premium revenue, with carriers adding and removing premium seats based on the economic cycle. As the industry recovers from the pandemic, it remains to be seen how these trends will continue. The company is focused on improving its RASM and has seen record ancillary revenue from products like early bird and upgraded boarding. In markets where they compete with lower-cost carriers, there have been discussions about changes in competition, but the situation is complex and constantly evolving.

The speaker discusses the challenges faced by the airline industry, such as mergers, capacity issues, and aircraft delivery problems. They also mention their focus on improving financial performance and reaching their cost of capital, which will help them make progress in the future. The speaker reassures the audience that their capacity and CapEx will be considered in relation to their financial goals.

Bob Jordan, CEO of Southwest Airlines, discusses the current state of the airline industry and the potential impact on their business. He mentions the company's satisfaction with the Boeing MAX 8 aircraft and their support for the FAA's oversight. Jordan also reveals that Southwest periodically considers other aircraft manufacturers and types, but their focus is currently on their fleet plan with Boeing. He explains that having multiple aircraft providers does not completely eliminate risk and expresses confidence in Boeing's ability to resolve any issues with the FAA.

Catherine O'Brien from Goldman Sachs asks about unit revenue going forward and how it will be impacted by the first quarter, capacity growth, and lapping easy comps. Tammy Romo and Ryan discuss the noise year-over-year and how it will affect unit revenue sequentially. They also mention the completion of network changes in March and the expected growth of managed business revenue through their GDS initiative. Overall, they are optimistic about the momentum going into the year.

Bob Jordan and Ryan Green discuss the expected trends for the company's capacity and revenue initiatives for the year. They address a technical difficulty that occurred during the conference call and apologize for the inconvenience. They mention that capacity will decrease throughout the year while revenue initiatives will accelerate. They also mention that there will be little lumpiness in the revenue initiatives and discuss the unit cost for the year.

The speaker discusses the incremental headwinds expected for 2024, including labor contract increases and maintenance pressure, which will result in a $6-7 million increase in unit costs. However, the company plans to end the year with fewer employees and hopes to control headcount growth in 2025 to improve efficiency and reduce unit costs.

The company will provide more information about their financial outlook at their Investor Day later in the year. The recent increase in labor costs has affected their projections for 2024, but they are working on improving efficiency. The company believes the macro environment for demand is strong and saw an acceleration in performance during the holiday season.

The speaker discusses the current state of bookings and demand for the company, noting that they have a strong outlook for the upcoming months. They also mention specific markets that are performing well, such as destination-based and international markets. The overall macro environment is expected to lead to a successful year for the company. In a follow-up question, they address the premiumization of the industry and the yield differential between the company and low-cost competitors.

The speaker is asked about the importance of product quality in relation to distance and flight length, particularly in the case of Hawaii. They respond by stating that product does matter and that Southwest Airlines has the best coach product in the industry. They also mention that their yields in Hawaii have exceeded expectations and that they will continue to improve. The other speaker adds that they want to meet their customers' expectations and understand any changes in demand. They mention their history of adapting to customer demands, such as offering Wi-Fi on flights.

Southwest Airlines is constantly adapting to changing customer demands and expectations, as seen in their history of making changes to their product and customer experience. The company is not stubborn and will react to changes if necessary. The weighted cost of capital is currently between 8% and 9%, but the company takes a longer-term view in planning for returns on invested capital. In the fourth quarter, revenues increased by 12.5% and costs by 10.5%, but margin improvement was limited due to inflationary pressures. It is unclear how seasonality will affect the business in the next year.

During the fourth quarter, Southwest Airlines did not perform significantly better than the previous year, despite reporting everything was great. The main reason for this was the quick restoration of capacity, resulting in a drop in load factor. This was not due to any issues such as book away or a potential strike by flight attendants. Southwest's labor team is handling these potential issues well.

The speaker discusses the progress made in ratifying agreements with employees and the potential for a strike vote. They also mention customer sentiment and the company's efficiency goals for 2025.

The company is focused on restoring efficiency and achieving a return on invested capital above the weighted average cost of capital. They have been rapidly hiring to get all aircraft flying, but are now focused on decelerating hiring and reducing headcount by the end of the year. They have cross-functional teams working on efficiency initiatives, and are managing both FTE per aircraft and squib CASM to achieve their goals. More details will be shared at the Investor Day later this year.

The block hours for an aircraft can affect pilot pay and the overall CASM. The FTE per aircraft is a useful measure, but it is difficult to compare across airlines and can give a false signal. Southwest has shifted almost 50% of its systems to the cloud and has a goal to shift more. This shift will not only result in cost savings but also improve reliability and resiliency of the systems.

Andrew Watterson, Bob Jordan, and Dan McKenzie discuss the cost benefits of using micro services in the cloud for new products and supporting existing ones. The speed to market and reduction of issues are more powerful in terms of cost reduction than the technology itself. This concludes the analyst portion of the call. The transcript and replay will be available on the Investor Relations' website. The media portion of the call will now begin, led by Whitney Eichinger, Chief Communications Officer. Instructions for queuing up for questions will be given by Gary.

The operator introduces a question from a Wall Street Journal reporter about a recent call from a senator to deny a waiver for Boeing's MAX 7. The CEO of Southwest Airlines and another executive respond, stating that they want the MAX 7 as soon as possible and that they have already increased oversight of their planes at the production line. They also support the FAA's decision and do not want to speak for Boeing.

The speaker talks about the inspection process at the factory and the oversight provided by their quality assurance team. They also mention their robust maintenance program and the data they provide as the largest operator of the 737. The speaker then addresses potential mergers and acquisitions in the industry and emphasizes their focus on improving Southwest Airlines.

The speaker states that it is impossible to speculate on what might happen in the industry, but Southwest Airlines has a plan and controls their own destiny. They are currently waiting for the certification of the MAX 7, which was expected by April but could potentially be delayed due to recent events with Boeing. The company will adapt their plan accordingly and has confidence in Boeing's ability to address any issues they may be facing.

Bob Jordan expresses confidence in Boeing's ability to address quality issues and become a better company through their partnership with the FAA and personal conversations with their leadership. Rajesh Singh thanks him for his response. The conference call concludes with Whitney Eichinger providing the company's contact information and thanking everyone for joining.

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