The Southwest Airlines Second Quarter 2024 Conference Call is being moderated by Gary and recorded for replay on southwest.com. Julia Landrum, Vice President of Investor Relations, will begin the discussion with an overview of the company's performance and strategy. She is joined by President and CEO Bob Jordan, COO Andrew Watterson, and CFO Tammy Romo. Forward-looking statements will be made and non-GAAP results will be referenced. A press release with second quarter 2024 results and select strategic initiatives was issued this morning and is available on the Investor Relations website. Bob Jordan will provide an overview of the company's performance and strategy, as well as discuss the strategic initiatives announced this morning.

The speaker briefly mentions the company's quarterly results and then discusses plans to make changes to improve performance in a competitive market. They highlight the success of frontline employees and the company's ability to recover quickly from operational challenges. The speaker also acknowledges investments made to improve operations and customer service, which have been recognized by J.D. Power.

Southwest Airlines has been recognized for their customer satisfaction and is focused on maintaining reliable operations and customer service. However, their revenue performance has declined due to challenges with a new revenue management system. The company is taking steps to improve performance, including hiring a Chief Revenue Officer and making strategic changes to their seating, cabin, and boarding procedures. These changes are part of a larger transformation plan that will be outlined at their upcoming Investor Day.

Southwest Airlines has decided to switch to an assigned seating model after conducting thorough research and finding that the majority of customers prefer it. This change is expected to drive value for shareholders and will still retain the positive elements of the Southwest experience. The new cabin layout will include one-third of seats with extended legroom and a boarding process that maintains efficiency. The decision was made after conducting live tests and digital simulations to ensure a smooth transition.

The company is using digital boarding simulations to understand the impact of different passenger mixes on boarding times. They plan to implement new seat configurations on new aircraft and retrofit existing aircraft with existing seats to minimize costs. Bookings for the new model will be available next year, but it will take time to retrofit the entire fleet. The change from open seating to assigned seating will be a complex and transformational change, and the Chief Commercial Officer will lead this effort. The officer has previous experience in transforming the company's loyalty program and digital customer experience.

The company is implementing a new schedule that includes red-eye flights and aims to increase efficiency and funding for new capacity through initiatives rather than additional aircraft purchases. These initiatives are part of a larger strategic transformation aimed at driving shareholder value and achieving a high return on invested capital. The company will provide more details on these initiatives at an upcoming Investor Day. The speaker acknowledges the efforts of the company's employees and then hands over to Andrew for an update on revenue performance. The company has faced challenges in managing demand and experienced revenue dilution from selling too many seats too early in the booking curve. This was due to the transition to a new revenue management system in 2023.

The new revenue management system is superior to the previous one and was chosen after extensive testing. It considers customer willingness to pay and differentiates between business and leisure customers. The transition to the new system has been complicated, but efforts are being made to recalibrate and outside experts are supporting employees. The estimated impact on third quarter performance is already factored in, but as expertise in the system improves, a positive impact is expected starting in September. The company is committed to a successful implementation of the new system.

The company's plan for the back half of the year includes improved revenue management, network optimization, and capacity moderation. They expect a decline in capacity and an increase in revenue in the fourth quarter. They also plan to pursue opportunities for incremental revenue and thank their employees for their contributions. In terms of cost performance, the company's CASM-X increased 6% year-over-year and is expected to continue increasing in the range of 7% to 8% for the full year. This is primarily due to market-driven labor cost pressure and a moderation of capacity growth.

The company is actively working to reduce costs, including addressing overstaffing due to Boeing delivery delays. They have implemented voluntary leave and time off programs and have halted hiring. They expect to end the year with a reduced headcount and plan for further reductions in 2025. The company's fuel prices and hedge portfolio are in line with expectations. They have adjusted their 2024 delivery expectations to mitigate risk and remain committed to fleet modernization and capacity discipline. The company plans to increase capacity in the third quarter and decrease in the fourth quarter, with overall capacity for 2024 expected to be up 4%. They also plan to maintain long-term financial goals by keeping future growth in line with economic trends until they consistently exceed their cost of capital.

The company's expected capital spending for 2024 is $2.5 billion, which is lower than initial expectations due to ongoing discussions with Boeing. They have a strong balance sheet and investment-grade credit ratings, with a net cash position and plans to repay debt and maintain liquidity levels. Their long-term financial goals include maintaining a strong balance sheet, growing earnings and capital returns, and paying off debt maturities. They are also committed to returning capital to shareholders.

The speaker, Tammy, discusses the company's financial performance and plans for the future. They have returned a significant amount of money to shareholders through dividends and share repurchases, and are actively reviewing their return of capital policies. The goal is to restore shareholder returns to historic levels. Despite challenges, the employees remain dedicated to the company's mission. Tammy is excited about upcoming plans and initiatives to secure a bright future for the company. The company is committed to executing a plan to restore returns on invested capital. The call is now open for questions from analysts.

Bob Jordan explains that the decision to offer extra leg room and red-eye flying was based on changing demand patterns and customer preferences, especially after the pandemic. Extensive research showed that 80% of Southwest customers and 86% of customers who fly other carriers prefer assigned seating, making it the number one reason for defection from Southwest. Jordan is confident that now is the right time to make these changes, as the company is focused on meeting customer demand.

Bob Jordan, CEO of Southwest Airlines, discusses the company's decision to make changes in their seating and operations. He mentions that the changes will be shared at their Investor Day in September and believes it is the right thing to do for customers, employees, and shareholders. Brandon Oglenski asks about the criticism the company has faced for being an "insular culture" and not discussing these changes earlier. Bob Jordan responds by saying they are focused on transformational change and have already implemented changes such as red-eye flying and improving operational systems. He also mentions their commitment to capital allocation discipline. Jamie Baker from JPMorgan then asks a question.

Bob Jordan, Southwest's Executive Vice President and Chief Commercial Officer, confirms that they plan to maintain their efficient boarding process even with the introduction of assigned seating. They want to do this in a way that aligns with their brand and values, without adding complexity. He also mentions that Hawaii is an important destination for Southwest and plays a significant role in their Rapid Rewards program, particularly in terms of driving brand loyalty and profits. Andrew, another executive, will provide more details on this.

Andrew Watterson and Jamie Baker discuss the importance of Hawaii as a redemption destination for Southwest Airlines customers. Watterson explains that while it is not as high as Aruba, it is still a popular choice for their Western US customers who are closer to Hawaii geographically. The airline has made adjustments to ensure profitability and customer satisfaction with this destination. Savi Syth asks about the recent revenue management system changes and Bob's comment on CNBC about selling too many seats at low prices. Ryan responds by acknowledging that there are still low fares available, which may contradict the idea of selling too many seats at low prices.

Bob Jordan and Andrew Watterson discuss the challenges of revenue management in the current market, citing factors such as complex O&D systems and demand fluctuations. They acknowledge that Southwest Airlines has sold too many seats for the peak summer travel period, resulting in lower booking classes and fewer seats available later in the booking curve. They have taken steps to address this issue, including bringing in third-party experts and implementing an action plan. Additionally, they mention that there is currently more capacity than demand on the domestic side and Southwest is actively working to reduce capacity in the third and fourth quarters. They caution against focusing too much on the fare sale activity, as it may not fully reflect the complexities of revenue management.

The company distributes directly to consumers and uses promotional activity to attract them to their website. The frequency of sales does not hold a special meaning, but the depth of the sale indicates the level of discounts being offered. The company expects to continue promoting to customers through their website. The process of changing seating on planes will take some time, as it involves design, certification, and modification of 800 aircraft. The company plans to start selling the new seating arrangement in 2025.

The speaker discusses plans to add premium seating to Southwest's fleet of 800 aircraft. They mention that the modifications are not complex and will be approved soon. They also address questions about the inclusion of premium seats on the 700 aircraft and assure that they will not lose any seats in the process. The speaker also mentions that they are still working on specific layouts and want to maintain their customer-friendly policies.

The company is focusing on providing consistent value to customers by offering extra legroom seats on every flight, regardless of aircraft type. They are also committed to managing capital expenditures and growing at or below macro trends in 2025. The demand environment is currently being monitored closely and the company is also announcing the addition of red-eye flights.

The company's customers want the red-eye flights and turn compression, which allows them to increase capacity without buying more aircraft. This, combined with their focus on low fares and high quality, has led to growth in business travel. However, there is some choppiness in off-peak leisure spending.

The decrease in leisure travel due to COVID has led to a surplus of capacity in the airline industry. The customer base of the company is more similar to legacy carriers than low-cost carriers. The company's CASM guide for the year has been maintained, with a healthy improvement in the fourth quarter due to anniversarying contracts and cost inflationary items. There are no one-time items or credits that would significantly impact the progression.

The company's specific numbers for the third quarter and fourth quarter are $0.1067 and $0.1097 respectively, bringing the full year to $0.1109. They are mostly anniversarying contracts and experiencing labor pressure and impacts from Boeing. As these extraordinary items come off, it will be helpful for margins. The company is also implementing network changes and aiming for margin improvement before product enhancements are implemented.

Bob Jordan, CEO of Southwest Airlines, discusses the company's focus on yield improvements and increasing load factor through marketing initiatives and network changes. He also mentions the company's bag policy, which allows for 2x more bags per flight compared to the industry standard, and states that they have no plans to change this customer-friendly policy.

The cost of handling bags is not affected by the number of bags per flight, but rather by the volume of bags at individual airports. Southwest Airlines is working on technology and processes to reduce turn time and make better use of aircraft, and they do not currently have a large issue with cabin overhead bags slowing down operations. It is important to consider the trade-off between checked bags and overhead bags, as checked bags can potentially save time and increase efficiency.

In the paragraph, Bob Jordan discusses the upcoming changes to Southwest Airlines' seating policy, which will include more assigned seating options and extra legroom. He mentions that these changes will likely generate hundreds of millions of dollars in ancillary revenue and that there will be minimal additional CapEx required. He also notes that a third of the seats in the fleet will be in the extra legroom configuration and that they are already working on other cabin improvements.

The speaker discusses the company's plans to offer extra legroom on flights, clarifying that it will not be a first-class option and that they are still finalizing the details. They emphasize that any changes must be beneficial for customers, employees, and shareholders. The next question is about the company's growth in 2025 and how it will be impacted by the delivery of 70 new aircraft and the retirement of older ones. The speaker mentions flexibility in their order book from Boeing.

The company is not ready to share all of their plans yet, but they will do so at Investor Day. They have flexibility to adjust their order book and will balance their objectives, including CapEx and fleet renewal. They are still working with Boeing on delayed deliveries. The red-eye flights will not require additional headcount. This concludes the analyst portion of the call. The media portion is now beginning, led by the Chief Communications Officer.

The speaker, Bob Jordan, responds to a question from Alexandra Skores about Southwest's recent policy changes. He mentions the company's willingness to adapt and change and views the changes as a strategic transformation. He also discusses the company's investments in operational capabilities and technology, which have resulted in improved performance during difficult situations such as hurricanes and a global tech outage.

Southwest Airlines is making transformational investments to improve their resilience and reliability. This includes changes to the seating and cabin, as well as upgrades to their digital approach. However, they will still maintain their core values of hospitality and transparency. Many Dallas passengers are concerned about how the changes will be implemented, particularly in regards to family boarding, but specific details have not yet been announced.

In the new world of assigned seating, families no longer have to worry about sitting together on long-haul flights, reducing stress and anxiety. This change also addresses friction points and anxiety caused by the current open seating process, making it easier for families to check in and sit together. According to Ryan Green, almost 60% of customers check in within the first 30 seconds of the 24-hour check-in window, causing anxiety for busy families. With assigned seating, this issue will be resolved and families will love the change.

Bob Jordan, CEO of the company, discusses the issues faced by employees and customers due to the current boarding process. He also mentions that there have been no meaningful conversations with Elliott, a shareholder, who has been publicly attacking the leadership and the Board. Bob and his team are focused on moving the company forward and improving financial returns. They plan to share more details about the premium seating and assigned seating initiative at an upcoming Investor Day.

Southwest Airlines is shifting to assigned seating in a capital efficient way and will have a value share in the fall. This decision was made after extensive surveying of customers and non-customers to understand their preferences, as well as considering the operational impacts. The change is not seen as the "demise" of open seating, but rather a shift. The airline hopes that this change will also benefit employees and reduce stress for customers during the boarding process.

Bob Jordan, the CEO of Southwest Airlines, explains that customers' preferences and travel patterns have shifted over time, leading to a change in their demand for assigned seats and premium products. He believes this is a result of customers taking fewer short-haul trips and spending more on experiences, as well as the growth of corporate business travelers who prefer assigned seats. While some may see this as a fickle trend, Jordan does not believe it will change in the near future.

Bob Jordan discusses the changing preferences of customers over time and the importance of understanding data to adapt to these changes. He mentions that Southwest Airlines has periodically surveyed assigned seating and has seen a shift towards it over the years. He also notes that as different generations emerge and spend more on travel, their preferences may be different. However, he is confident that Southwest is moving towards the customer and their desires will not shift. He also mentions that Southwest is implementing changes in a way that is consistent with their brand and customer needs.

The speaker, Bob Jordan, emphasizes the importance of safety and discusses recent incidents and efforts to improve safety procedures. He also mentions speaking with the FAA and their full support for their work.

The company noticed some concerning issues and set up a joint team with their pilots union, FAA, and certificate management office to investigate the root causes and take short-term and medium-term actions. These actions included enhanced communication and transparency. The company has increased their focus on safety and the FAA has also increased their evaluation process for the company. This process will continue and both sides can bring in additional resources if needed.

The speaker explains that their airline has a multilayer approach to safety and has a good relationship with the FAA. They are currently looking at human factors in their internal communications and have brought in external help. The April review was triggered by a specific incident and the FAA's review is focused on flight operations and pilot training, but there are a few other items as well.

In April, Southwest Airlines noticed similarities in two flights that caught their attention and prompted them to start the ASAP program. The program was launched in collaboration with the FAA and the pilots union, but specific details cannot be disclosed due to voluntary disclosure and confidentiality agreements. Further information can be found on the Southwest Airlines website.

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