Southwest Airlines Company

Good day and welcome to the Southwest Airlines fourth quarter and full year 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 would like to turn the call over to Mr. Ryan Martinez, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Operator, and welcome everyone to our fourth quarter and full year 2022 conference call. In just a moment, we will share our prepared remarks and then leave plenty of room for Q&A. Joining me on the call today is our President and CEO, Bob Jordan, Chief Operating Officer, Andrew Watterson, Executive Vice President and CFO, Tammy Romo, and Executive Vice President and Chief Commercial Officer Ryan Green. 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 from expectations. Also, we had special items in our fourth 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 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.

All right, thank you, Ryan, and I appreciate everybody joining us this morning. Well, we're disappointed to report a Q4 net loss as we were on track to produce a healthy fourth quarter profit prior to December the 21st. We provided an 8K investor update earlier this month that quantified the preliminary estimate of the financial impacts, so a Q4 loss is likely not a surprise, but I would like to take a few minutes to talk about the operational disruptions. And first and foremost, I want to apologize again to our customers and our employees for the impact the operational disruption had on them and on their holiday plans. We are intensely focused on reducing the risk of repeating that type of operational event again like we had last month, and we are highly focused on our customers and our plan going forward, and customer refunds and reimbursements remain a top focus. While I'm not proud of what happened, I am very proud of our people and all that they have done to take care of our customers and their needs. Well, in terms of the events themselves, we canceled more than 16,700 flights from December the 21st to December the 31st. The first few days through December the 23rd were specific to the winter storm, and we began to have additional disruptions in the operation on December the 24th. As the largest carrier in roughly half of the top 50 U.S. travel markets, we were impacted by rolling storms to an extraordinary degree. We experienced gridlock in many of our largest airports, along with a high frequency of short notice cancellations, which created urgent and repeating efforts to repair the aircraft routings and then our pilot and flight attendant schedules. Given the overwhelming volume of flight cancellations over multiple days, combined with manual work streams, we determined that the best course of action to get back on track operationally was to reduce our December 27th through December 29th flight activity by roughly two-thirds. And that allowed us time to reset the operation to normal flight levels beginning on December the 30th. But based on what we know at this point, our processes and technology generally worked as designed. But we were hit by an overwhelming volume of close-in cancellations, which put us behind in creating crew solutions, which in turn pushed us to manual efforts and solutions. And Andrew will cover that in detail more here in just a minute. So we've got several streams of work underway. Immediately following the disruption, we moved swiftly to put mitigation efforts in place to reduce the risk of future operational disruptions and help fortify our operational resilience. We created an early indicator dashboard that closely monitors operational health and signals an alert if we approach predefined operational thresholds. We established supplemental operational staffing that can quickly mobilize to support crew recovery efforts at the first sign of a potential workload backlog. We enhanced our existing tools for crew members to communicate electronically to crew scheduling during irregular operations, and we're in the process of swiftly updating and upgrading our crew recovery tools and system to solve the backlogged repair of crew member schedules, which was one of the key issues during the disruption. With these short-term risk mitigation steps in place or underway, We're taking additional steps to review the events and determine any additional changes to our plans. We worked early on with our board of directors, and they've established an operations review committee that is working with our management to understand the events and help oversee the company's response. We've engaged a third-party global aviation firm, Oliver Wyman, for a third-party assessment of the event and help make recommendations of additional mitigation elements for us to consider, and that work will conclude here over the next several weeks. And with that assessment and our own, we will reassess our 2023 plans, keeping in mind that we already had a robust operational modernization plan in place for 2023. And Andrew will walk you through that in greater detail as well. I want to reiterate that Southwest has a very long history of innovation and continuous improvement. We've been investing up to $1 billion per year on technology, both recurring and investment spend included. and we have implemented numerous large-scale technology and business projects over the past five years, including things like the first implementation of the Amadeus Reservation System in North America, co-developing an innovative network planning system that's now part of the Amadeus product portfolio, ETOPS certification and processes for Hawaii flying, new aircraft maintenance systems, a GDS platform capabilities and connection to three other platforms, a new pair product, and automated ancillary services capabilities. And we're in the process of wrapping up the replacement of our revenue management system, which actually involves three RF systems simultaneously in production, which is an absolute technical feat. That list is not meant to be comprehensive, but hopefully it gives you an idea of what we've done and what's underway. We're also currently budgeted to spend $1.3 billion of our 2023 annual operating plan on investments, upgrades, and maintenance of our IT systems. which is higher than what we spent in 2022. The recent disruptions will likely accelerate some of our plans to enhance our processes and technology, but I suspect that the operational modernization opportunities that Andrew outlined at Investor Day have largely captured the key work streams, and we will dedicate the capital needed to execute in a timely and efficient manner. We currently plan to stick with our 2023 growth plans. We were properly staffed for our 2022 flight schedules, including the holidays, And we continue hiring this year to be properly staffed for our 2023 flight schedules. Our plans call for adding over 7,000 new employees in 2023, which is actually a decrease of nearly 40% from 2022 hiring levels. We have the order book from Boeing that we need in 2023. And with the short-term mitigation elements that we put in place, we believe we are well prepared to execute our network restoration plan this year. Nearly all planned 2023 capacity additions will go to restoring the network and adding breadth and depth in existing Southwest markets. And that network restoration should significantly help our operational resilience efforts over the long term. Andrew will also cover that in more detail. Finally, we continue to work hard on labor agreements for our people. And I'm very proud of the fact that we were able to reach agreements with several of our unions recently, including our flight instructors, our facilities maintenance techs, our customer service agents, and just earlier this week, a tentative agreement with our dispatchers. We continue negotiations with the unions representing our ramp and ops employees and mediation with unions representing our pilots and flight attendants. And we intend, as always, to have competitive market compensation packages for our people. In closing, we still made tremendous progress in 2022. And despite some impact here in Q1, we believe we still have a solid plan for 2023 We are holding ourselves accountable to the plans that we outlined at our early December investor day, and it is still our goal to achieve the long-term financial targets that we outlined. And I know that our people are up to the task. I'm just extremely proud of them for their dedication to the cause that is Southwest Airlines, and they remain absolutely our greatest asset, the heart and soul of the company and a tremendous source of pride for me personally. And with that, I will turn it over to Andrews.