Southwest Airlines Company

Good day and welcome to the Southwest Airlines second quarter 2022 conference call. My name is Chad and I will be moderating today's call. This call is being recorded and a replay will be available on southwest.com in the investor relations section. After today's prepared remarks, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. At this time, I'd like to turn the call over to Mr. Ryan Martinez, Vice President of Investor Relations. Please go ahead, sir.

Thank you all for joining us for our second quarter earnings call. In just a moment, we will share some prepared remarks and then open it up for Q&A. And with me today, we have our CEO, Bob Jordan, Executive Vice President and CFO, Tammy Romo, Executive Vice President and Chief Commercial Officer, Andrew Watterson, and President and Chief Operating Officer Mike Vandiven. A 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 substantially from these expectations. Also, we had a few special items in our second quarter results, which we excluded from our trends for non-GAAP purposes, and we will reference our non-GAAP results as well. So please refer to our press release from this morning and our investor relations website for more information. And with that, Bob, I'll turn it over to you.

Well, thank you, Ryan, and I appreciate everybody joining us this morning. Well, what a difference a quarter can make. You know, coming off first quarter's net loss, you will recall that we were encouraged by the positive trend change in travel demand in March and were optimistic about summer travel revenues. That said, I don't think any of us expected demand to surge to the levels we experienced in the second quarter, particularly in June. Andrew will cover the revenue details, but Q2 operating revenues increased 13.9% versus Q2 2019 to an all-time quarterly record of $6.7 billion, despite Q2 managed business revenue still down 24% and capacity that was still down about 7%. We also produced an all-time record quarterly net income, including special items, of $825 million. It is all because of the people of Southwest Airlines, and I want to just say a huge thank you to them for a job very well done. And I want to congratulate them on the progress that we've made together. It's just an incredible turnaround from last year, not to mention just a quarter ago. Looking forward, demand continues to be strong. We continue to experience both inflationary pressures and headwinds from lower productivity and efficiency. Energy prices have moderated a bit recently, but remain high, and we expect to have another meaningful fuel hedging gain here in Q3. Most importantly, we remain largely on our plan for this year. Our 2022 capacity remains stable. We remain on our cost plan. We're slightly ahead of our overall staffing plan, and our operational reliability is much improved. We've made tremendous progress, and our people have a lot to be proud of. I'm just extremely thankful all of their efforts in getting us to this point in the pandemic recovery. Our third quarter guidance is based on our current outlook and excludes any significant unforeseen events, but I'll admit that there's a lot of noise out there right now. It seems that all of us know someone who has this latest strand of COVID. Inflation pressures are real, and there are worries about a potential recession. Consumer and business sentiment is down, and there are data points out there that could indicate early signs of a slowdown. But so far, demand remains strong, and we haven't seen material impacts to our business. But as always, we'll continue to monitor the environment and be ready to respond if needed. You know, it's helpful to remember that we have historically lagged in terms of impact revenues going into a recession, and we have typically lagged the recovery coming out. Well, you've heard me mention our list of key priorities for 2022 many times, and I'd like to share our mid-year progress on each of them. First, getting properly staffed and focusing on our people. I'm really proud to report that we reached pre-pandemic staffing levels in May 2022, which is just a huge milestone. We continue hiring in specific areas, particularly for pilots, and we expect to add over 10,000 employees this year out of attrition. We're pleased to be seeing the impact of our hiring in airports, especially given the busy travel season that we're in, now that thousands of new employees have been through training and are contributing on the front lines. Second, making progress towards our historic operational reliability and efficiency. Our operational performance since April has been very strong, and our flight cancellations in May and June were less than 1%, which means a 99-plus percent completion factor. Mike will cover the operation in more detail, but we are benefiting from getting better staffed, getting new employees through training and on the front line, adding more short-haul flying to provide better network stability, and adding more flying between crew bases. We know that we've got work to do on the efficiency side as we focus on 2023, and we're laser focused on locking down fleet and capacity plans, moderating our overall hiring, optimizing staffing to flight schedules, wringing out cost inefficiencies, and returning to our historic efficiency levels by the end of next year. But again, I just want to thank our amazing people for their hard work as we continue to improve our operational reliability. And I want to thank our partners at the FAA and in the administration for working to overcome challenges and continuing to improve the airspace as travel demand returns. Third, providing legendary hospitality. I'm very proud of our people and our employees for restoring our customer service advantage this year. For January through May, we are number one in customer service for the DOT's ranking for marketing carriers. I continue to be out in the field on a regular basis, and I get to experience firsthand our terrific employees taking great care of our customers. I get the emails, I see the stories, and I truly appreciate what they all do each and every day for our customers and for each other. I'm also very pleased to announce that we continue to make traveling on Southwest Airlines even easier by adding yet another customer benefit, our new flight credits don't expire policy. It's an industry-leading flight credit policy, and when you combine that with no change fees, no bag fees, rapid rewards points that don't expire, and transferable flight credits, it's just a powerful, low-fare brand combo that's all about winning more customers. While there is a cost, it's really the one-time cost of extending the COVID-related funds that would have expired this September, and we expect the impact to be immaterial beyond this quarter. And finally, returning to consistent profitability. We just reported record earnings for Q2, and this is the most stable revenue environment that we've had in over two years. We remain well protected with our fuel hedge, and we are currently expecting to be profitable for Q3 and Q4 and for the full year 2022. Our main gating factor to future growth is pilot hiring. Despite delays in aircraft deliveries, we feel good about our ability to fly our flight schedules as planned which are currently published through March 8th. Our current outlook for first quarter 2023 is for capacity to be up about 10% versus first quarter 2022. And, you know, if we find ourselves in a position to need to republish schedules or trim capacity, we can certainly do that, but I'm optimistic that we can continue to avoid that going forward. It is still very early for 2023, so we're just going to take it one quarter at a time beyond our currently published schedules. but we're turning our focus to 2023 planning, and in particular, regaining historic efficiency levels, and we'll share our 2023 outlook with you at Investor Day, which is currently planned for December the 7th. Last, I just want to stop and acknowledge the assailant incident event that we had at Love Field earlier this week. Luckily, all of our employees and customers are safe, and I just want to say a huge thank you to our employees for taking great care of our customers and each other I want to thank law enforcement for their swift and professional action. Thank the TSA for managing the fallout. And just thank you to everybody involved for keeping this from being worse. I'm just very, very grateful for that. And with that, I will turn it over to Tammy.