Southwest Airlines Company

Good day, everyone, and welcome to the Southwest Airlines third quarter 2022 conference call. My name is Jamie, and I'll be moderating today's conference. 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 and then one using your telephone keypad. To withdraw your questions, you may press star and two. At this time, I'd like to hand the conference over to Mr. Ryan Martinez, Vice President of Investor Relations. Sir, you may begin.

Thank you, Operator, and welcome everyone to our third quarter earnings call. In just a moment, we will share some prepared remarks and then open it up for Q&A. And on the call today, we have our CEO, Bob Jordan, President Mike Vandiven, Chief Operating Officer Andrew Watterson, and Executive Vice President and CFO Tammy Romo. We also have a few other senior leaders in the room today, including Ryan Green, our new executive vice president and chief commercial officer. 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. Also, we had a few special items in our third quarter results, which we excluded from our trends for non-GAAP purposes, and we will reference our non-GAAP results today. So please refer to the press release from this morning and our investor relations website for more information. And with that, Bob, I'll turn it over to you.

All right. Well, thank you, Ryan, and I appreciate everybody joining us this morning. I'm just really pleased to report another solid profit in the third quarter of $316 million, excluding special items, or $0.50 a share. All in all, third quarter's bottom line results came in almost right in line with our expectations back in July, slightly better, in fact. And that really speaks to the more stable environment that we are operating in today versus where we were just two quarters ago. While not fully recovered yet, it makes a big difference in our ability to more effectively plan, set our flight schedules, and avoid revising them, and deliver a more reliable operation, both for our customers and our employees. That's exactly what we're doing in the second half of 2022, and that's what we plan to do going forward. Given the significant progress we've made thus far, we do not intend to republish or materially change our future flight schedules, you know, as was necessary to do during most of the pandemic. One of our primary goals for this year is returning to consistent profitability, and we are well on our way and continue to expect a solid profit for 2022. We are coming off a record third quarter revenues, and bookings appear strong as far as we can see in our booking curve. Demand trends, both volumes and yields, are robust. We want to get properly staffed, and that's going very well. We remain on track with adding over 10,000 new employees this year, net of attrition, and we are getting much better staffed in key areas, with the exception of pilots, where our aggressive hiring efforts continue. And we are on track to hire 1,200 pilots this year and 2,100 pilots next year as planned. We wanted to restore our operational reliability, and we are headed in the right direction, having made a lot of solid progress. As we shared previously, we restored some of our short-haul flying in the third quarter, which was a little early and at the expense of revenue, now knowing where business demand has ended up. But the goal was to help the operation, and I believe we got the desired result in the third quarter. Going forward, we believe we have capacity better matched seasonally to demand in the fourth quarter, and you can see the benefit in our sequential revenue improvement from 3Q to 4Q based on our guidance. And as Mike will cover, our on-time performance this month has been very strong with high completion rates. And the thanks, of course, goes to our people who have solidly restored our customer service advantage this year, another one of our top priorities. For January through August, the most recent data available, we remain number one in customer service for the DOT's ranking for marketing carriers. I'm just so thankful for our employees and how they have worked tirelessly together as a team, no matter the obstacle, and they have us solidly back on top of the industry. Our employees are the central proof and essence here at Southwest Airlines, and I'm just so very proud of them and all that they have done. Jet fuel prices remain high, but we are 61% hedged in the fourth quarter and continue to expect healthy hedging gains. We continue to expect both inflationary cost pressures and cost headwinds from lower productivity and efficiency in fourth quarter, This is all anticipated in our full year guidance. And other than some timing of costs between 3Q and 4Q, our cost trends have been very stable. We've been executing well on our full year 2022 cost plan since we provided our full year Chasm X guidance back in January. And but for the Hurricane Ian impact to capacity, we are also executing on our full year 2022 capacity plan. Specific areas of focus for 2023 are to maintain adequate staffing and get caught up in pilot staffing, get new contracts with all labor groups currently in negotiations, fully utilize our aircraft and optimize staffing to the fleet and flight activity, bring out cost inefficiencies, and improve efficiency levels and operating leverage as we fully restore the network. Our primary gating factor to growth next year continues to be pilot hiring, and I don't expect that we will be fully utilizing the fleet until late 2023. As of today, our flight schedules are published through July 10, 2023, and we feel good about our ability to fly those schedules as published and planned, despite some uncertainty around aircraft deliveries. While we expect a healthy amount of capacity growth next year, it is nearly all going back into key Southwest markets. These are markets that we borrowed from to fund new airport expansion during the pandemic. And as business demand improves, we have opportunities to build those back up. And this is lower risk growth, primarily in markets where we have the number one share and a strong Southwest customer base. So we don't believe the capacity additions carry near the risk of adding a new market. Our goal is to have the network fully restored by the end of 2023. And by summer 2023, we should be about 90% done. In closing, we've made tremendous progress this year. Barring any significant unforeseen impacts, we should finish this year very strong, given our fourth quarter outlook. While there's noise regarding whether we are headed into a recession or not, or whether we may even be in one now, we have not seen any noticeable impact on our booking and revenue trends. There's also been a lot of discussion about the blending of business and leisure. Why? and where those trends may ultimately end up. But regardless, our overall revenue trends are strong and well above 2019 levels. Our work continues on developing a strong financial plan for next year, and we will share more about that at our upcoming investor day meeting in December. And I'm extremely proud of our employees for their dedication to the cause at Southwest Airlines. They're our greatest asset, and they're our secret weapon. They're the best in the business, and I know I can count on them to rally together and help us improve further in 2023. And before I turn it over to Tammy, I just want to say a big thank you to Mike. Mike has overseen the operation here at Southwest for over 16 years, and that is just a huge job and a huge task. He's a tremendous leader. I'm just very grateful, Mike, for all that you do, and I'm very grateful that you will continue to work as an advisor to me and others in the future. And I also want to say a big congrats to Andrew, to Linda, and to Ryan for taking on even more. I really appreciate that. And today, Mike will report on operations and Andrew will report on commercial. And then beginning at our December Investor Day, Andrew will speak to operations and you will hear from Ryan regarding our commercial plans. And with that, I will turn it over to Tammy.