Southwest Airlines Company

Good day and welcome to the Southwest Airlines first quarter 2023 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, Operator, and welcome everyone to our first quarter 2023 conference call. In just a moment, we will share our prepared remarks and then jump into Q&A. On the call with me today, we have our President and CEO, Bob Jordan, Executive Vice President and CFO, Tammy Romo, Executive Vice President and Chief Commercial Officer, Ryan Greene, and Chief Operating Officer Andrew Watterson. 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 materially from expectations. Also, we will reference our non-GAAP results, which exclude special items that are called out and reconciled to our GAAP results in our press release. So, please refer to the disclosures in our press release from this morning and visit our investor relations website for more information. With that, Bob, I'll turn it over to you.

Thank you, Ryan, and thank you everyone for joining us this morning. We incurred a first quarter net loss that was in line with our expectations, driven by a $380 million pre-tax negative financial impact related to the December operational disruption. Roughly $325 million of that was from lower revenue in January and February, much of that cancellations of holiday return trips. We saw a strong rebound in revenue trends in March, resulting in record first-quarter revenues despite the impact of the December disruption. Travel demand remains strong thus far, but we remain mindful of the uncertain economic environment. You have to be, given all the headlines and trends we are seeing across many industries. We have tough year-over-year revenue comparisons here in the second quarter, with last year's domestic revenue environment getting a boost from international closures. Taking that into consideration, demand, particularly leisure, continues to show strength as we head into the busy summer travel season. Our cost outlook is higher this year due to a few moving parts as we are making additional investments in the operation based on our learnings from December. I won't go through all of our key findings and work to show off our winter preparedness because we've done that a few times now, but I am very proud of our people for the operation they have delivered this year and for the relentless focus on executing our plan to fortify the operation in preparation for winter 2023. Despite the near-term cost pressures, we have not lost focus on our goal to effectively manage the real inflationary cost increases we are seeing, and equally as important, maintain our competitive cost position. As we look ahead, we currently expect solid profits here in Q2. We continue to expect solid profits for full year with a goal to grow full-year margins in ROIC year-over-year, as well as have our route network roughly restored by year-end. We are reducing our full-year 2023 growth plans due to a lower planning assumption for Boeing MAX deliveries this year. This relates to the recent news of further supply chain challenges at Boeing. The outcome is a reduction to our 2023 capacity and CapEx outlook, and we are currently reevaluating our hiring needs relative to our most recent expectation to hire more than 7,000 net new employees this year. We will be moderating our overall hiring plan as we get into the second half of 2023. In the meantime, we are most focused on revisions to our second half 2023 flight schedules to account for fewer aircraft, which Andrew will cover in more detail. I'm very proud of the progress we are making on our customer experience enhancements. As a reminder, we are investing in three onboard initiatives, enhanced Wi-Fi, in-seat power, and larger overhead bins. In early March, our first new aircraft with hardware from our new Wi-Fi provider, Biasat, entered revenue service. By third quarter, we expect all of our existing aircraft to be flying with upgraded Wi-Fi and new hardware, offering increased speed and reliability. So just great progress on that front. Our new MAX 8 deliveries are coming into service with in-seat power and larger overhead bins, so those are already entering service as well. We're also very focused on mobile and other enhancements on our technology roadmap to offer more self-service options for our customers to give them more flexibility and ease during their journey. Highlighting one of our stronghold markets, Southwest is the number one airline in Kansas City, growing from six flights in 1982 to 75 flights today. And I'm proud to say that our service in Kansas City is now fully restored to pre-pandemic levels. We recently celebrated the opening of the new Kansas City Airport in February, and we serve as the chair of the Airport and Airlines Affairs Committee. We really appreciated the opportunity to partner with the airport to deliver a beautiful new terminal that will serve us and the community well for a very long period of time. It was a great partnership all the way around, and it is a beautiful facility. We continue to work hard on labor agreements for our people, and we continue to make progress. We just reached a tentative agreement with TW 550, which represents our meteorologists, and I want to commend both negotiating committees for the spirit of cooperation that led to that agreement. We remain focused on negotiations with the union representing our rampant ops employees and mediation with unions representing our pilots and flight attendants, and remain committed to competitive market compensation packages for our people. We are very eager to get new contracts and have a significant amount of wage rate increases that have already been accrued and set aside, and we look forward to rewarding those remaining groups soon. In closing, I'm just so very proud of our people. They are the heart of Southwest Airlines, and they deliver day in and day out for each other and for our customers. And despite the negative impacts in Q1, we believe we still have a solid plan for 2023 We are carefully managing the business in the near term, and we continue to believe in our long-term strategy and set of initiatives. And with that, I will turn it over to Tammy.

Thank you, Bob, and hello, everyone. Our first quarter loss is disappointing and not how we hoped to start 2023. However, the quarter was not without notable accomplishments. Our on-time performance year-to-date through March was solid. Our operations team navigated through a string of difficult weather conditions successfully with no material impact to our network performance. And despite the negative revenue impact from December operational disruption, we still had record first quarter passenger revenues and record other revenues. We also ended the quarter with strong double-digit margins for the month of March despite high fuel prices. All of this was made possible by the drive and hard work of our incredible employees. Ryan and Andrew will speak to our revenue and operations performance and outlook, so I will jump right into our cost performance and outlook. Beginning with fuel, our first quarter jet fuel price was $3.19 per gallon, which was on the high end of our guidance range. Throughout first quarter, crude oil prices stayed within a reasonable range, While prices dipped to about 65 per barrel in mid-March, they primarily hovered around $80 per barrel throughout first quarter. On the other hand, refining margins remained volatile during first quarter after hitting a 10-year high last year. Thankfully, market prices have fallen over recent weeks, in particular, cracks for us, which is a welcome relief. We are 51% hedged for our second quarter, and estimate our second quarter fuel price to be in the $2.45 to $2.55 per gallon range, which is roughly 69 cents lower than our first quarter fuel price. That includes an estimated 13 cents of hedging gains, which equates to cost savings of roughly $70 million in second quarter alone. We now estimate our full year 2023 fuel price to be in the $2.60 to to $2.70 per gallon range, down a nickel from our previous guidance, and still including 10 cents of hedging gains. Of course, this is a snapshot of our fuel guidance based on the April 19th forward curve, and market oil prices and heating cracks can be volatile, which is why we hedge. We recently added to our 2024 fuel hedge portfolio and are now 51% percent hedged next year as well. We began building our 2025 portfolio and are about 10 percent hedged. The total fair market value of our fuel hedge portfolio for second quarter 2023 through 2025 is $418 million. We will continue to seek cost-effective opportunities to expand our hedging portfolio with the continued goal to get to roughly 50 percent hedging protection each year. Moving to non-fuel costs, our first quarter year-over-year CASM-X increase of 5.9% was in line with our guidance range. As expected, we experienced inflationary cost pressures, primarily higher labor costs, including market wage rate accruals for all employee groups, as well as increased technology spending and higher rates for airport and benefit costs. The remainder of the increase was primarily driven by operational disruption-related expenses. Looking ahead, we currently estimate our second quarter CASM-X to increase in the 5 to 8 percent range year-over-year, largely driven by general inflationary cost pressures that we expect to persist and are not unique to Southwest. In addition to higher labor rates, we continue to accrue for market wage rate increases for the remaining open labor contracts. And as we further refine our multi-year maintenance planning, we have additional maintenance expense this year for our Dash 800 fleet as more engines come due for heavy maintenance, and this is adding further pressure to our second quarter cost inflation. For full year 2023, we now estimate CASM-X to decrease in the range of 2% to 4% year-over-year, compared with our previous guidance of down 3.5% to 5.5%. Approximately one point of this year-over-year increase is due to lower capacity as a result of Boeing delivery delays, and the remainder of the change in guidance is driven by the timing of maintenance expenses for our Dash 800 fleet. a continuation of what we are experiencing here in second quarter. As a reminder, our full-year CASM-X guidance continues to include higher labor rates, including market wage rate accruals for the remaining open labor contracts, as well as the estimated tens of millions of dollars of additional investments we expect to incur towards our operational resiliency. Turning to our fleet, We received a total of 30 aircraft deliveries during first quarter, as expected, ending the quarter with 793 aircraft, which is a net of 7-700 retirements, two more than previously planned, as we shifted up a couple of retirements from the second half of this year. Looking at the full year, based on the recent production issues at Boeing, we feel it's prudent to have a more conservative planning assumption and are now planning around 70-8 aircraft deliveries in 2023 compared with our previous assumption of approximately 90-8 deliveries. As a result, we have lowered our full year 2023 capacity guidance by roughly one point to up 14 to 15% year over year, which impacts our second half capacity assumption mostly in fourth quarter. As a reminder, we have a surplus of underutilized aircraft in our fleet due to pilot hiring constraints. Therefore, the reduction in our deliveries should not impact our summer flight schedule. We continue to expect our second quarter capacity to be up 14% year over year. Our planned deliveries continue to differ from our contractual order book In addition to the recent aircraft delivery delays, which are not reflected in our contractual order book, we continue to reflect 46 undelivered 2022 contractual aircraft deliveries as 2023 deliveries in the order book further outlined in our press release. But to be very clear, we are currently planning our published schedule around the delivery of 70-8 aircraft this year and we intend to solidify our order book with Boeing soon. In regards to our current CapEx outlook for this year, we now estimate to spend approximately $3.5 billion, reflecting our updated delivery assumption of 70 aircraft this year, compared with our previous guidance of approximately $4 billion, which assumed roughly 90 aircraft deliveries. Lastly, a quick note on our balance sheet. We ended first quarter with cash and short-term investments of $11.7 billion after paying $59 million to retire debt and finance lease obligations in first quarter. We continue to expect a modest $85 million in scheduled debt repayments for full year 2023, including roughly $10 million in scheduled debt repayments here in second quarter. We also paid $214 million in dividends in first quarter as our pre-pandemic dividend is fully restored. And based on our current expectations, we continue to expect 2023 interest income to more than offset 2023 interest expense. We continue to be in a net cash position, and we continue to be the only U.S. airline with an investment-grade rating by all three rating agencies. In closing, this was not the first quarter performance we had planned back at Investor Day. However, I am immensely proud of our people and their perseverance. There is still work to be done to fully recover, but we are currently forecasting a substantial improvement sequentially to the bottom line with solid profitability this quarter. We are laser focused on managing the ongoing inflationary cost increases regaining better operating leverage, and maintaining our competitive cost advantage. We have not lost sight of our goals, are the warrior spirit of Southwest Airlines, and I'm eager to move forward along our path of success for many years to come. And with that, I will turn it over to Ryan.

Thank you, Tammy. I'll take a minute to expand on the commentary. And our press released this morning and provide more color on our first quarter results and second quarter outlook. Our first quarter revenue trends remain steady and within expectations throughout the quarter, with first quarter revenue growth of 21.6% year over year. This was right at the midpoint of guidance going back to our January earnings call. And as a reminder, we had two competing storylines in first quarter that played out as we anticipated. First, we incurred an estimated $325 million negative revenue impact that was isolated to January and February. This was the result of cancellations for return holiday travel and a slowdown in bookings following our operational disruptions in late December. We believe these negative revenue impacts have subsided and are now behind us. We saw the reverse over the second half of the quarter and witnessed strong revenue trends throughout March. That showed up in terms of overall demand, rapid reward redemptions, and yields. And so even with the negative revenue impact at the beginning of the quarter, we had record first quarter operating revenues of $5.7 billion and record first quarter RASM of 15 cents. Managed business revenues also improved significantly throughout the quarter, and by March were nearly restored to March 2019 levels, just shy of 100%. That is tremendous progress, and it feels like we're very close to full corporate revenue recovery at Southwest. Our managed business revenues have trended ahead of the industry due to our revenue initiatives in the corporate space, and this is driving new corporate accounts, which of course opens up access to incremental new pools of corporate passengers. And while the managed business recovery still isn't consistent across traveler sector or size of accounts, we expect further sequential improvement in managed business revenues from first quarter to second quarter. How the demand comes in may be a bit choppy with more volumes further out in the booking curve, but this doesn't seem to be unique in the industry based on ARC data. Regardless, we expect to continue making market share gains in the managed business space as we gained another point of market share in first quarter, while we expect to grow passenger volume from our initiatives on very solid yields. In terms of the leisure booking curve, it has moved further out from what we saw last summer and fall and seems to have more or less normalized to pre-pandemic levels. Leisure demands and yields, which are well above pre-pandemic levels, continue to be strong heading into summer, and we're currently seeing the sequential improvements in operating revenue and yields that we would expect in the seasonally strong second quarter. All in all, the overall domestic revenue environment remains strong, and our initiatives are performing in line with our expectations. So, in short, we're pleased with what we're currently seeing. Our second quarter RASM guidance range of down 8% to 11% contains a 4.5 point year-over-year headwind. As a reminder, second quarter 2022 operating revenues included approximately $300 million of additional breakage revenue, a higher than normal amount related to flight credits issued during the pandemic that were soon set to expire, as well as our later policy change to eliminate flight credit expiration dates. Adjusting for this headwind, our second quarter RASM guidance would be down around 5%, and we're pleased with the core trends we're seeing. This year-over-year headwind will not persist in second half of 2023. We're also pleased with the performance of our rapid rewards program, co-brand credit card, and all ancillary products in first quarter, and we're expecting another strong year-over-year performance in second quarter. We saw a first quarter record of new rapid reward members added to the program, and also had a first-quarter record of ancillary revenue per passenger. And finally, our portfolio of new cities, including Hawaii, continued to mature. I am also proud to announce that we have completed the selection and rollout of our new revenue management system, which is the Amadeus Network Revenue Management product. Our implementation timing is slightly ahead of our previous timeline of mid-2023, and we're very pleased with the revenue results we saw from Amadeus during the production pilots. We are encouraged about the future opportunity for incremental revenue, which really starts in earnest in third quarter, as the new Amadeus product is now fully implemented and is currently managing all future booking and departure dates. This is just an excellent job by our revenue management team to skillfully manage multiple revenue management systems as we recovered from the pandemic, and which ultimately led to this selection. I'm just very proud of the team. In closing, I want to mention that we have watched our brand metrics very closely since the disruption, and our scores have improved significantly throughout the first quarter. We are very fortunate to have a loyal customer base at Southwest that we do not take for granted, and we'll continue to communicate to them about our remediation plans and aim to consistently deliver the hospitality, customer service, and operational reliability they are accustomed to from us at Southwest.

And with that, I'll turn it over to Andrew. Thank you, Ryan, and hello, everyone. I will provide some color on the operation before we jump into Q&A. Following our event in late December, I am proud of the quick rebound we had in early January and the strong operational performance that our employees delivered in Q1. While Q1 was tough weather-wise, our people did a tremendous job quickly recovering from irregular operations. In the days following each event, we had no material hangover in our aircraft or crew networks, and we maintained solid operational metrics and completion factors. This is evidence that our processes for irregular operations are solid and working as designed. For the quarter, we finished number two out of ten airlines in on-time performance, which reflects well on our people. Most recently, on April 18th, we experienced a double firewall failure that resulted in an unexpected loss of connection to some operational data. While our technology teams worked quickly to resolve the issue that morning, out of abundance of caution, we temporarily ground-stopped the airlines. It was a pretty quick fix by the Southwest team, and in a little more than an hour, we lifted the ground stop and were back safely operating flights. While this type of event drives flight delays across the network, we canceled only 22 flights on April 18th. We had no material impact on our operation the following day. Even with the delays that day, we ran 75% on time within an hour, scheduled departure times, and 95% within two hours. While we don't like those delays, this represents an admirable recovery by our people, all things considered. Regarding our operational disruption remediation plan, Bob covered that in detail at the J.P. Morgan Conference in mid-March, and that presentation is available on the Investor Relations website. Since then, we also provide greater detail on our microsite and emailed our customers with a readout of the key findings and remediation items we want in place by winter 2023. Therefore, I'm not going to walk through it again today. I just want to reiterate that we have a solid plan and our work is on track. Turning to capacity, our lower aircraft delivery expectations this year is driving lower capacity expectations in second half 2023. As a result, our full year 2023 capacity growth is now expected to be in the range of 14% to 15% year over year. We're in the process of refining our published flight schedules post-summer as we are reevaluating our flight schedule plans for our yet-to-be-published November-December flight schedules. We expect to have those schedules published in the next month or so, but our current estimates are that we will trim planned capacity from September through December in the post-summer travel period. This now puts us roughly two points lower than our original capacity plan for this year, with Q3 being one point lower and Q4 being six to seven points lower on a year-over-year basis. Despite the lower capacity growth, nearly all of the capacity growth is still going back into key southwest markets and adding market depth. There was no material change in our capacity allocation approach this year, and we continue to expect to have our route network roughly restored by end of this year. I want to wrap up by commending the negotiating team of TW550, who represents our meteorologists, and it just reached a tentative agreement that will be voted on by our employees soon. We have now come to agreement with nine of the 12 workgroups covered by a collective bargaining agreement. We continue negotiations with the unions representing our other work groups, and we are eager to get these deals wrapped up so the remainder of our employees can begin receiving the increased compensation we are eager to pay them. We continue to accrue market and competitive wage rates for our employees, which means our financial results and guidance already reflect their estimated raises. And with that, I will turn it back over to Ryan Martinez.

Thank you, Andrew. We have analysts queued up for questions, so a quick reminder to please keep your questions to one and a follow-up if needed. Operator, please go ahead and begin our analyst Q&A.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. And the first question will come from Dwayne Fenningworth from Evercore ISI. Please go ahead.

Hey, thanks. Just on costs, I totally appreciate you have a business to run and there's moving pieces, but the slow drip of these chasm revisions has been painful for your investors. And so my question is, do you feel like the Band-Aid is finally being ripped off today and And, you know, what are the circumstances that would cause you to raise your CASM expectations again this year?

Hey, Dwayne. Yeah, I'll start, and Tammy can clean up here. But, you know, most of what you've seen are revisions. I mean, there's real inflation out there. Some of it is that. A lot of it is continuing to revise for labor accruals as the market changes. If you take our pilots, for example, the best marker out there is, is delta in terms of rates and benefits, and so you can assume that we're fully accrued for all open contracts to those rates. We've got a little more inflation here that showed up around maintenance on our 800s. Some of that is just timing, pulling some 24 into 23 around engine visits, for example. It's hard to know on the inflation front. But, yeah, I think you can expect that for the most part we're pretty clean at this point. I don't expect, I mean, the other driver obviously would be if we had a further change in our capacity expectation for 2023. I don't expect that. I think this move from 90 down to 70 will help us get a real clean view on our capacity set and, therefore, any impact on, you know, the one-point impact on chasm for the year. But now, Tammy, what else would you add?

Yeah, no, I think you covered it, Bob. Yeah, the primary cost pressure is salary, wages, and benefits, and that's clearly driven by inflationary pressures here. So certainly not unique to us, and capacity, you know, as always, is going to have an impact on our CASMX at the end of the day. But Our second quarter costs here, at least the profile, should be pretty fully loaded, so to speak. That said, we're always going to look for opportunities to improve. We have our ongoing operations modernization plan, so we've incorporated that best we can. And, of course, as we move forward, we have opportunities as we gain operating leverage with the network. So, understand the question, but when we have capacity changes, you know, that typically does drive some change in CASMEG. So, that's the primary culprit here, you know, as we look at 2023.

Duane, I think the other thing that's helpful too is the, you know, we've been pretty forthcoming that we're, especially on the hiring front, we're hiring ahead to prepare for growth. A lot of that, you know, this year coming in 24, I think this, you know, this further revision with Boeing from 90 down to 70 is going to help us go back through, look at our hiring plans, moderate our hiring plans, At this point, between the 46 aircraft that were undelivered from last year, now you've got an additional 20, that's 66, that are stacked up forward. We're not taking 152 aircraft next year, so we have the opportunity to go back, work with Boeing, reflow the order book. I mean, we want all of the aircraft in the book here because we've got a good deal, but reflow the order book in a way that is smooth, It is orderly growth, and I think that'll help us with wring out this pre-hiring, advanced hiring to prepare for growth as well and regain efficiency as we move through the rest of the year.

I appreciate those thoughts, and then maybe just for a quick follow-up on breakage, I hope this is the last quarter we hear about it, but given the dynamics in 2Q and Do you think the June quarter will be your weakest year-over-year down-RASM quarter, and what RASM outcome are you managing the back half of the year to? Thank you for taking the questions.

Yeah, sure. Thanks, Dwayne. Yeah, obviously we had challenging comparisons here in the second quarter given breakage last year. So we do expect that to be the last quarter with that headwind. And aside from that, you know, we also had, I would say, difficult compares here. You know, as you're aware, Dwayne, last year the domestic revenue environment was very robust, benefited, just not specific to Southwest, but just in general benefited from international closures last year, making comparisons here in the second quarter. challenging. But as Ryan covered very thoroughly in his remarks, we're seeing demand strength here in the second quarter. And at this point, trends look strong.

Yeah. The only thing I'll add there, Duane, is that it'd be tough. I think clearly the financial headlines and the macro environment, we've got to be mindful of that and what's happening around us here. But so far, we've seen no impact On air travel, the revenue looks good here for the second quarter. And what we can see, it's probably tough to speculate beyond second quarter and into the second half of the year. We'll just have to, as we get kind of mid-July timeframe and get a view into mid-August and into the fall, you know, we'll have a better idea of how things are shaping up beyond the sequentially strong second quarter. But, yeah, nothing – nothing but strong trends here as we look forward and out into the summer. Okay, thank you.

And the next question is from Scott Group from Wolf Research. Please go ahead.

Hey, thanks, afternoon. So, Andrew, I want to follow up on the capacity cuts. When you were talking through the point of capacity, you said some, maybe I misheard, but I thought you said a a point out of Q3 and then like six points or something out of Q4. I didn't really understand it. And then more importantly, what does this mean for capacity next year? Is there now more growth next year to catch up? Is there less growth because we're just going to continue this? How do I think about that?

Well, I'll start off and then Tammy and Bob can chime in. But the The impact to the delivery book from the Boeing quality escape means that effectively it's the kind of fourth quarter where you'll be short the aircraft. And then for those schedules, we'll bear the brunt. Probably from September through December, those schedules will be less than originally projected. So we will modify those schedules to make sure they reflect the lower aircraft count. September and October will be modest revisions to what was already published. We actually published those schedules with some easily removable aircraft to hedge our bets in case something did happen, so that will be fairly clean. And then we were about to publish November, December. Now we're going to go back and redevelop November, December with a lower aircraft count to reflect this. And so that's what's going to drive the capacity lower during that period of time versus the original plan. And then for next year, I think Bob touched on that when he talked about reflowing the order book because these aircraft that were not delivered last year, not delivered this year, you can't just assume they're bunching up and they're all coming one slug next year because that would be looking for an orderly growth, as Bob said. So as we reflow that order book, then we can look to what that means for 24-25.

Yeah, I think the other thing just to point out is maybe related is the – We talked a lot about what's constraining the airline, and right now that is pilot hiring. So we have aircraft effectively that we are not producing capacity out of today because the constraint is just pilots. A lot of carriers are dealing with this, and that was going to true up roughly at the end of the year. Now with the order book dropping, the deliveries this year dropping from 90 to 70 that's the point at which the pilot constraint turns into an aircraft constraint is we'll definitely be earlier. It'll be post-summer, late third quarter, early fourth quarter. But we'll flip the aircraft constraint from pilot constraint. And we'll just take that into account, again, as we think about hiring and planning for this year and then planning again for next year. Because, again, a lot of the hiring is planning for growth next year. So number one, the constraint will flip to aircraft constraint. And then second, we want, again, as Andrew said, we want orderly growth. We don't want 152 aircraft next year. We want to grow. We have a lot of opportunities, but we want that growth to be orderly and measured and as consistent as we can be year to year to year. So hopefully that helps with just thinking about capacity next year and how that relates to the order book. We have work to do with Boeing, obviously. The news is still pretty fresh, about 10 days or so old. We have work to do with Boeing to just think about how to reflow the order book here, and we'll get through that and keep you informed as we do that.

Okay, thank you. And then just more near-term question. When I look at the second quarter RASM guide, if I add back the $325 million book away back to Q1 note, it implies a pretty meaningful deceleration in RASM, at least for versus 2019 levels, or maybe less of a sequential uptick in RASM than we typically see 1Q to 2Q. Any thoughts on why we're seeing that trend show?

Yes, Scott. I think if you look here, and we've looked at this a lot of different ways, and you think about what the guide and what revenue performance is looking like here as we go into the second quarter. The first quarter's got a lot of noise in there, whether you've got Omicron last year or you've got, you know, our disruption this year. And, you know, also, in addition to that, there is a lot of international tailwinds out there in the industry that, while international is strong for us, we have as much exposure to that as some of our peers in the industry. And so when you isolate to the domestic performance and you go back to pre-pandemic, whether you're looking at 2018, 2019, and kind of projecting that forward in terms of growth and revenue performance, when we look at fourth quarter, no matter really how you cut it, fourth quarter to second quarter, first quarter to second quarter, we're pleased with how that – you know, ends up what that comparison looks like. And it looks to us like it's relatively in line with what else is out there.

I think the other thing just to... Thank you, Doug. The other thing I think I would add is just we are seeing, as Brian pointed out in his remarks, we're seeing strong business demand here. You know, we were just right at restoring the 2019... levels in March, which I think is a remarkable accomplishment. And I think industry leading in terms of our ability to get there that quickly. It's going to be choppy a little bit here in the second quarter, but we do expect sequential improvement from the first quarter to the second quarter in terms of business bookings and managed business. And I'm just really proud of that. On top of that, you've got, obviously, The investments we've made in business, GDS, those are showing up. We've got, and Ryan can talk to this, we've got, we've made our selection around a new revenue management system with Amadeus. Actually made that selection earlier than we talked about in Invest Your Day. That system is now managing all forward bookings, all forward travel periods, and we expect good revenue results from the system as well. So, A lot of other positives that will come on here as you move forward across the year.

Thanks, guys. Appreciate it.

Thanks, Scott.

The next question is from Jamie Baker from J.P. Morgan. Please go ahead.

Oh, hi, everybody. Oh, Jamie. Hey, how are you? So if we adjust for the January and February book away and then take the midpoint of your second quarter demand guide, You know, it looks like sequential revenue from the first to the second quarter is, you know, pretty much in line with, you know, ordinary pre-COVID seasonality. So is the takeaway that the book away has fully ceased and the brand is intact?

Yeah, I think that's a really good way to summarize how we're thinking about it as well, just in terms of those sequential, the thing about the sequential trend there. But, yeah, we feel like the revenue impact from the ops disruption, most of it was holiday return travel that obviously was canceled because the outbounds weren't there. And we had some book away. It feels like it was isolated to January and February. March was really strong. We had double-digit margins in March, very strong demand. As Ryan pointed out, we had record additions in terms of Raptor Award members in the first quarter. So there's a lot of evidence of strength. As you look into the second quarter, we don't see any evidence of Bookaway at this point. The trends are strong. Now, we have work to do. Let me just acknowledge that. When you look at just we do a lot of brand surveys, and as we look at all of that, There is work to do across the year to continue to restore some of our brand health as completely expected following what happened in December. The numbers are improved tremendously from December through April here. We're seeing that moves up very, very quickly. But we need to run a reliable operation for our customers. We're doing that. We were number two in the first quarter and had completion factors that were up two points year over year. on top performance that I think was up three points quarter over quarter. We are focused on delivering a wonderful product with great hospitality from our employees. We need to execute, but no, there's no evidence at this point that the focal way is continuing. Trends are strong, but we do have work to do on the brand front.

Yeah, the only thing I'd add on to that, Jamie, is that we have confidence in that because we have really good visibility. Not only are we watching the scores in confidence and trust and consideration for Southwest for their next trip, but like Bob said, those scores have improved dramatically over the first or significantly over the course of the first quarter here. And when you look into the second quarter, we've got really good visibility. About 75% of the quarter is booked at this point. We've got 50% of June booked at this point. And so, you know, all signs look really good and strong for the second quarter. Leisure demand is strong. Managed business is going to sequentially improve here, what looks like in the second quarter from where we were in the first. You know, assuming we continue on plan here and what we're forecasting, we're set to turn in another record revenue performance in the second quarter. So, like Bob said, we have work to do. We just need to continue to execute and be the Southwest Airlines that customers have grown to know and love. But in terms of bookings, no evidence of any sort of hangover.

So that's kind of a good segue, I guess, into my next question. So from a passenger perspective, or let's say a new passenger, so somebody that's just starting to fly, they've reached that, you know, economic level, or they're just, you know, entering the workforce, whatever. Somebody that's not already loyal. What's the value proposition for flying Southwest these days? I mean, I get it in a point to point, For point-to-point operations, many instances where you're going to be up, your only competitors are connecting flights, so that's a no-brainer. But in truly competitive markets, if the price is equal and if a passenger isn't already wed to your brand or your credit card ecosystem, what does Southwest do to attract that first-time buyer?

I think the brand strengths that have been in place for 52 years are still there. And even better, we have a tremendous network. Again, far more nonstop direct flights. We have terrific service, our on-time performance. All those things are improving as well. We're continuing to work on the customer experience. We have new deliveries are coming now with power on the aircraft. We have the larger overhead bins. We have improved Wi-Fi. We have our terrific employees in service. And, of course, we have really good everyday low fares. So those brand strengths have not changed. If you look at something like the larger overhead bins, And again, it's a small sample size. We have it on a relatively small number of aircraft at this point, but we're watching the data. It's reducing, Andrew checked me, but in what we've seen so far, it's reducing gate check bags by 60%. That's a huge win for our customers. It's a big win for us as well. It certainly helps with cost. It's, again, a modest amount of data, but it's reducing turn times as well on our aircraft. But Back to your question, I mean, the value proposition that has always existed for Southwest Airlines for over 50 years is still true today. When you look at one of the things we look at constantly before the ops disruption and after is consideration. Where do we sit in the consideration set, both for customers of Southwest and customers that are, for the first time, considering Southwest Airlines? And those numbers are really strong. They dipped, of course, during the disruption, but they've come back quickly and tells me that we don't have a hangover from the ops disruption.

No, you know, I largely would say the same exact thing. The things that have made Southwest Airlines great historically, in my mind, are only better today. And I think customers understand that. And, you know, despite... what happened in December, and Bob said many times that that's not going to define us going forward, and it doesn't. When you look at our brand scores, customers, new and existing, give us a whole lot of credit. We're by far the most customer-friendly and business-friendly airline in terms of great service at a great price with the most rewarding frequent flyer program. We win time and time again. More seats are redemption seats on Southwest Airlines than any of our competitors, not even close. So we're by far the most rewarding airline. And when you look at our stable of customer-friendly policies with bag fly-free, no change fees forever regardless of the fare that you fly, and we're even making it more flexible with flight credits that don't expire. I think the value proposition is only getting better.

If you look, Jamie, at the use case you talked about, a new flyer, the entry-level product is where we shine. So we have, I would assert, the highest quality economy product. Others offer a basic economy or other type of product, which is stripped down, penalizing, whereas you fly us, you're flying a regular economy that's got ample legroom. 50% of our aircraft now are 800s or maxes, which has 32-inch of pitch. So you have a much better physical product. You have much better policies and procedures. Our people are a joy to deal with rather than the opposite. So a new flyer would come aboard us and go, oh, wow, this is great. This is so much better than the other airlines. And that's when they say, well, I'll fly them again. So our level of repeat purchase is really high. We don't disclose it, but other airlines disclose theirs. and we know that our repeat purchase is much higher. So we give them that first experience, and they come back. Thanks for the call, everybody. Take care.

And the next question will come from Savi Sith from Raymond James. Please go ahead.

Hey, good afternoon, everybody. This is Matt on for Savi. If I could just follow up on Dwayne's question earlier regarding the COSMEX guidance increases. Could you elaborate on how much these costs are fixed and expected to carry through to 2024? And also, given that the capacity cuts are weighted so late in 2023, I think there's more of a variable cost component helping to offset that. So, why is that not the case? Or any additional quality there would be great. Thanks.

Yeah, sure, Matt. And just sharing a few thoughts. So, again, First of all, the cost pressures are not unique to Southwest. But even with those inflationary pressures, we are bending our CASA-MECs down this year, and we still feel good about our competitive position. So, you know, we've got the labor contracts accrued. We've got those accrued in our long-term or reflected in our long-term targets. And we, you know, are very focused on bending our costs down again in 2024. Specific to your question, we do have some one-time costs here this year related to the operational disruptions, and that's probably in the $100 million to $150 million range. range, and that shouldn't repeat next year. So as Bob covered very thoroughly, you know, what we need to focus on now is solidifying our fleet plan and our capacity plan for next year. But, you know, as we look ahead, driving our unit cost down is certainly our goal. And as we get further in our planning, you know, obviously we'll provide more guidance there.

As you think about, too, related to how we're thinking about growth and where flights are going, we've been very upfront that this year is about restoring the network. And despite the reduction in aircraft deliveries, we will still get back to getting back to right at fully restored by the end of this year. So the revenues that come on, are into more mature markets, and so it should contribute at a much faster rate. As you think about 2024, where I was going with cost related to that, it's our intent to really push, as we talked about it yesterday, push on operating leverage. That is, put the majority of our new capacity in flights into stations where we have gaps during the day, And so the costs are there. We have people who are paying for gates, we're paying for other airport costs, and put flights into points in the day where we know we have demand. We already have the cost, and so those will come online. that revenue comes online at a significantly lower cost profile. So that development of additional operating leverage really is the focus for 24, and Andrew, I would say, and Ryan, I would say 25 growth as well.

That's very helpful. Thank you both, Bob and Tammy. And then, sorry to elaborate on one question that was asked earlier as well, but in terms of the capacity plan, At the investor day in December, it seemed like it was not dependent on aircraft deliveries and that the initial guide provided then was firm despite any delivery delays. So what's the difference now? Is that based on the current environment and outlook that you feel the need to scale back, or is there something else?

This is Andrew. For the last year, we've had like three elements that constrain our potential growth as we look in the back half of this year. They were flight instructors, pilots, and aircraft. And so at the time we spoke yesterday, at that moment in time, we were pilot constrained and knew that sometime towards the back half of this year we would flip from pilot constrained to aircraft constrained. And so we're on our pilot trajectory of hiring and training the number of pilots we forecast, and so we knew that would flip over sometime at the end of the year. With the Boeing reductions, now it pulls it forward. So kind of what changed is this reduction, which is I think the second reduction we've made to our assumptions for deliveries next year, has pushed us from pilot to aircraft constraint now, and that now is roughly the post-summer period, which is why you'll see us adjusting schedules post-summer through the end of the year.

Okay. Thanks for the clarification, Andrew. Appreciate it.

My pleasure.

And the next question will be from Helene Becker from TD Cowan. Please go ahead.

Thanks very much, Operator. Hi, everybody, and thank you very much for the time. Just on a follow-up question on Net Promoter Score, is that something that you focus on? Can you share with us how that's looking sort of now versus where it was maybe in January?

Yeah, Helene, it's Ryan. We measure net promoter score and focus on it on a weekly basis, if not on a daily basis. We track actually two types of net promoter scores. One is more as a brand overall and is a longer-term measure, and then the other is based on the customer's trip that they just took. Based on the trip you just took, would you recommend Southwest Airlines? And, you know, on the longer-term brand measures, we've got trackers in place, and like we've said, some of those scores have improved as we've gone through throughout the quarter here. And, you know, Bob mentioned overall we're going to have to continue to focus on those longer-term measures and just continue to execute to see continued upward momentum on the brand net promoter score. When it gets to the actual TRIP Net Promoter Score, which is a little bit more near-term in terms of how are we performing today, those scores have improved over the course of the first quarter, really as a function of how well we have been operating over the course of the first quarter. So we continue to operate well. Those scores should continue to improve over time. In addition to the enhancements that we're making in the product, and you see those show up in net promoter scores, as an example, on the aircraft where we have improved and enhanced Wi-Fi, the investments are paying off, net promoter scores are up. The scores on the aircraft where we have the larger overhead bends, those net promoter scores on those aircraft are also up. as we make improvements and enhancements to the product and as we continue to execute and operate reliably, those scores should continue to come up over time.

Okay, that's really helpful. Thank you. And just to follow up briefly, earlier today one of the other airlines that reported talked about runway construction at Las Vegas and the issues that they're experiencing in terms of delays. And, Bob, you didn't mention that. And yet you have a pretty big operation there, as I recall. So I'm just kind of wondering, you know, how you're seeing those issues kind of around your network contribute to any delays or disruption.

Yeah, and I'll let – Elaine, thank you so much for the question. I'll let Andrew weigh in in detail, but – Yeah, I didn't call it out specifically because we have a large and complex network, and, of course, we work issues every single day. So we've talked about Florida before. You obviously are very aware of the issues that have been discussed for carriers that serve New York. But, yeah, we're experiencing issues in Vegas with the reduction in available runway capacity, and we're working with the FAA and the ATC to deal with that. But it's one component of things that happen every single day. But, no, it absolutely is impacting, on certain days, our on-time performance. But, Andrew, you want to add to that detail?

So there's a kind of longer-term airfield construction program in Las Vegas. From now through in August, they'll shut down the north-south. There's two north-south runways, one left and 19 and right. And so they will shut those down for periods of time. And so when we were in a north or south flow, that reduces capacity. So about 20% of the time when winds are such that you rely primarily on those two runways, one of them being out, will reduce the throughput rate, which means you'll have delays and cancellations to cover that. 80% of the time during this time of year, you don't rely on that configuration, in which case you should be able to operate roughly the schedule that all airlines have scheduled. This started up, and we've been in more north flow than usual, if you will, or north winds than usual. And so there has, over the last few days, there has been a spike in cancellations from the industry and from ourselves and delays in Las Vegas. So that is a drag. It has been bigger than it was originally forecasted when the construction plan was created, which did sort of catch the industry, I guess, off guard in the sense of you're so close in, it's hard to adjust. We've made some adjustments. As a result of the last couple weeks, we've changed our minimum connect times at Las Vegas. We were looking at changing in December our crew bid to make sure the crew connections are lower. We've changed how we set up our spares in Las Vegas to have different how we use our spares. We've broken our through trips, which means the aircraft that kind of is supposed to continue through with passengers on board, that creates a bit more rigidity. We've taken those out as well. So we've made a lot of changes to what we do that we can do in the short term. And then we're also working with the FAA regional and FAA in Washington to how we can best collaborate to see what the tolerances are for crosswinds. so we can use a better configuration more of the time. And so I feel like there's good collaboration there between the FAA and the airlines and that. So it will be a drag through August if you have more north winds than expected, but it's a normal process for airports to have to, you know, rehabilitate their runways and taxiways.

That's very helpful. Thanks, Andrew. Thanks, everybody.

My pleasure.

And the next question is from Connor Cunningham from Mellius Research. Please go ahead.

Hi, everyone. Thanks for the time. Just on the adjustments you're making for the full year, I realize a lot of this is out of your control, but I think you mentioned that you're still on track for network restoration. If that's the case, I'm just curious on where the capacity is actually coming out. Is it all new markets, or have you just changed how you think about capacity deployment in general? Thanks.

Within restoration, restoration would be like what we flew before. and that's one bucket, and say, okay, we want to restore our cities to the level of activity and the rough of the route network they had before COVID. So that's when we say restoration, we're doing that. We had the 18 new cities in the Hawaii expansion we did, and we modified that at the margin. And there's airports where we currently operate, and they've had expansions with gates and infrastructure, so we've added more growth into theirs. So that third bucket, so in Denver, Phoenix, where we had new gates and we're putting additional growth in, they're above what they were in pre-COVID. So they're more than restored. And so that kind of places where we were growing above restoration, because we had additional infrastructure, those will be less than they would have been if we had all these aircraft. I'm not saying they'll be in Phoenix and Denver, but I'll use those as examples. So I put in three buckets. the COVID expansions and the 18 new cities in Hawaii, the second bucket being restoring what we flew before, and the third being this newer stuff and the cities we already have a big customer base, that's where you'll see the flex then so that we can simultaneously keep the COVID stuff and restore our network.

Okay. Okay. That's helpful. And then as you think about 24, I'm just trying to parse out like how the growth may play out for you next year. So how much of, the growth in 24 is dependent on Boeing, and then what is Southwest dependent? And in the context of like a high single-digit growth rate, is the assumption going forward that a lot of these transitory costs are actually going to allow you to have CASMX decline next year? I'm just trying to level set where we're at in terms of all that stuff. I'm not asking for a number more directionally than kind of how you're thinking about it. Thank you.

On the growth, there will be carryover. There's stuff that we will start in the back half of the year with the aircraft that are coming. and that will be a carryover growth in the next year. So you'll quickly be able to calculate that. But then the additional growth next year, that's really dependent on what Bob was talking about with reflowing the aircraft. We've got the 152 mathematically that could come that would be too much to ingest. We want an early growth. And so that, in addition to the carryover, that's something that's yet to be determined. But it involves negotiating with Boeing of how the aircraft would flow in.

Yeah, and just at the end of the day is, I mean, we're going to work on a plan that allows us to achieve our objectives, our financial objectives and our financial objectives as well. So we're going to take all the inputs as usual and work with Boeing to come up with a fleet plan that allows for orderly growth. But just a reminder, we do have a lot of flexibility with the aircraft. We have ongoing efforts to renew our fleet, and there's value in those fleet modernization efforts. So we'll come up with a plan that works for Southwest as we solidify our delivery schedule with Boeing.

Yeah, and we're early. Obviously, it's really early to be talking about 2024, and it's early to be talking about the result of the discussion with Boeing because we're just now beginning the discussion because the impact is new. I think the argument is a couple of things. Just one, we all work with COVID, and the capacity bounced up and down and up, and so it doesn't help to move around so much up and down year to year because it's hard to manage that lumpiness or choppiness. You've seen our hiring numbers for last year and the planned hiring numbers initially for this year. That level of growth and hiring in advance for the level of deliveries we had originally planned, it just adds cost because you're constantly hiring ahead for anticipation of what's coming in the next year. So move into something that is much more predictable. Again, we want to grow. We've got a lot of opportunities. We want to grow. We just want that growth to be measured and orderly. And working with Boeing to come to a point where it's much more predictable year to year to year as we reflow the order book, I think will be very, very helpful. It'll be helpful in terms of how we manage ourselves here. It'll be helpful in terms of how we plan and manage our costs. It'll give us time to wring out inefficiencies. Again, I was talking about the advanced hiring is just one example, an example to prepare for high levels of growth. It'll give us time to settle that out, bring that out. It'll give us time to work on operating leverage where we can add capacity into places where we have gaps. We can add that capacity at much lower cost. So I think still good growth, but managed, measured, repeatable growth is much better for the company. And that's the intent is to just take the plan, reflow, and be much more predictable and less choppy year to year to year.

I appreciate it. Thank you.

Thank you, Connor.

And we have time for one more question. We will take our last question from David Vernon from Bernstein. Please go ahead.

Hey, good afternoon, guys. Thanks for putting me in here. Ryan, can you talk a little bit about what kind of load factor is embedded in the 2Q guide? It just seems like when looking across the other airlines, you know, they're running three, four basis points ahead of where Southwest finished first quarter in load factor. And maybe as a follow-up to that, you know, Bob and Andrew, we're talking about restoring the network and getting back to where we were. I mean, if the demand isn't there and the load factor is under pressure, why wouldn't we rethink that a little bit, especially if we're constrained in getting resources and, you know, and having difficulty kind of getting the operation up to that level, if there's a little bit of a sign of demand weakness, wouldn't we want to back away from that restoration plan a little bit?

Yeah, so I'll take the low factor question. You know, I think first quarter here, obviously, we had the disruption that played a role here. And, you know, all of – I think it's been widely talked about throughout earnings season here that the booking curve is moving out a bit and we're more normalizing, more or less normalizing to pre-pandemic trends. And so, and that's, you know, while there is more close-in leisure strength today than there was pre-pandemic, it is certainly less than what it was kind of last summer and last fall. And, you know, a lot of that became evident as we worked our way through the first quarter here and we had to adjust our revenue management techniques to kind of adapt for that. And so when you look at their stronger demand, kind of 45 days and out, there's more volume there. The good news is that the fares further out in the curve are healthy and we're getting a better mix of fares at that point in the curve than what we received, you know, than what we were getting pre-pandemic. And so it's a vantage for – you're always managing for volume and yield there. Yields are very strong, which may have – you know, that will have a downward pressure on loads, and so you're just kind of managing both of those things together. But as you look into the second quarter, you know, it – I think loads and yields are strong. And so, you know, that's what's rolled up there into our guide.

I'd also add to the comp here. If you think about this time last year, what we did is we were, as we were in COVID, we would republish our schedules because demand was so vacillatory. And so what that means is you'd sell, sell, sell, and then you republish and you consolidate the customers already purchased onto a fewer number of flights, which kind of artificially pushes up your load factor. that is a poor customer experience. We committed to stop doing that about a year ago, and so we have not done that. And so that's going to make load factor like-for-like more difficult. So our competitors largely have continued that practice. But back to kind of Jamie's question about why people choose us, we want a good customer experience, and that means not changing the flight that we've already sold them. Secondly, I would say that Ryan talked about they put in a new revenue management system, and it's been – managing things for a while, I would not necessarily assume that the load factor would have been the right choice, so to say, for the RASM performance. And so it may make different decisions with regards to load factor compared to our old system, and therefore that element may be a little different. And the third element is we fly two different aircraft sizes, the 700 size and the 800, and we've been taking 800s because the 700 is not been delivered yet, and so that will, in many markets, or some markets, mean we have too big of an aircraft at the current level, if you will. As we get our network completely restored, you can fill those extra seats with extra connections, but to do the extra connections, you need that restoration. So a short haul today may not be as full because there's not an opportunity to connect to a longer haul that was there before. So as the network gets restored, that will help close some of that load factor gap on those shorter flights that are missing connectivity.

Yeah, I'll just put a finer point on that relative to the revenue management system. Our legacy system, the one that we just moved away from, was a load factor bias system, admittedly. And the new system makes better tradeoffs in terms of yield and load. And so, you know, that will be playing out here as we kind of move forward.

Okay, Dave, I'll assume you're done there. Thanks, everybody, for joining. That wraps up the analyst portion of our call today, and I will turn it back over to the operator.

Thank you, and ladies and gentlemen, we will now begin with our media portion of today's call. I'd like to first introduce Ms. Linda Rutherford, Chief Administration and Communications Officer.

Thank you, Chad, and I'd like to welcome members of the media to our call today. We can go ahead and get started with the Q&A portion if you will give them instructions for queue up.

Certainly. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. And at this time, we will pause momentarily to assemble that roster. Thank you. And the first question will come from Alexandra. Scores from the Dallas Morning News. Please go ahead.

Hi. Thank you for taking my question. I'm wondering, we talked a little bit, a lot about growth and demand over this call. I'm wondering if you could talk in relation to how that's affecting airfares and how you're looking at that going into the summer travel season.

Yeah. You know, yields, I think in general, this is a high-yield industry. environment, and I think airfares are strong. But if you look at airfares kind of going back to pre-pandemic or even earlier than that and look at them on an adjusted basis, you know, adjusting for inflation, airfares in the industry are actually down. And so, you know, I think both of those things are in play here. When we look at kind of how demand is coming in here into the second quarter and beyond, we are taking more volume further out in the booking curve. And of course, those fares further out in the booking curve are lower nominally than taking a lot of volume close in where the fares are higher nominally. And it's really about getting a good mix of fares across the entire booking curve, which is what's really driving our yield story here as we go forward. The other thing, too, is we're driving a higher average fare by offering customers things that they are happy to pay for. So an example of that is our Want to Get Away Plus fare that we introduced last year. That fare has a bundle of benefits that customers are choosing to pay for. It adds additional flexibility in terms of transferability, flexibility during the day of travel. And the more customers choose to buy things that they value, that drives fares overall higher without us kind of going in and filing higher fares across the board.

Thank you.

Ryan, I'm just looking for the fact. My memory is in the first quarter, bears were up roughly 5%, 5, 6, I think is the number I've got in my head. But again, this is not a direct correlation. But costs are up materially. We talked a lot about just regular inflation. You see it every day, everywhere. There's a lot of labor and wage inflation. We've talked a lot about our costs and accruing for labor contracts. We're happy to pay our people. We want to pay our people great. But there's real wage and supply chain and other inflation. Year over year, first quarter, 22 to first quarter, 23, our operating revenues were up 21.6%, which is awesome. Just the flip side of fares is you raise fares to manage your costs, and there are real cost increases there. So I just wanted to point that out as well.

Thank you. And the next question will come from Allison Sider from the Wall Street Journal. Please go ahead.

Hey, thanks so much. I guess on Boeing, on this latest delivery issue, I guess, you know, how has your experience been dealing with Boeing on this one? I mean, it seems kind of, it's not the first time you've dealt with an issue like this, and just curious to know if Boeing, if their communication, their ability to deliver, you know, if those things have improved.

Yeah, there have been a number of things. Obviously, the world has dealt with supply chain issues and continues to deal with supply chain issues, all companies. have and Boeing is not immune from that. We have had a number of items. Again, this is the latest. Boeing has been proactive, so Boeing was early in working with its suppliers multiple tiers down to shore up supply chain issues. They've been in front of the planning. Obviously, we produce schedules far in advance. Modifying those is difficult. Close-in is difficult on our customers. We've been able to work with Boeing on this one to, for the most part, isolate the changes to future schedules. We talked about primarily this is affecting the fourth quarter. That's very helpful compared to something that would affect next month or the month after. Our work with The cooperation with Boeing has been really good. Boeing has been forthcoming and transparent about the impacts and what it's going to take to correct the issues. Obviously, all of this is difficult. We don't want interruptions to planned delivery schedules, and we'll continue to work with Boeing on that as well. But they – I mean, Boeing is a great partner. The MAX aircraft is a great aircraft. We want our aircraft. But no, they've worked very proactively with us on issues we've seen before and on this issue as well.

And I guess turning to the sort of the state of near misses or runway incursions the last couple of months across the industry, you know, given that there doesn't seem to be a real clear single cause or single common denominator in all of these incidents, you know, does that – you know, what does that – are there things that you can do or you have been doing to kind of try and address those or prevent future incidents, sort of given that they haven't all been the same?

The aviation safety has gotten so good that you don't really see repeat occurrences. And so, therefore, the approach the FAA took a while back is have everyone develop safety management systems. And so this says you will have safety procedures, policies, and regulations you adhere to, so you maintain safety by being compliant to those rules, regulations, and standards. And so our approach then for safety is through compliance. And so we have a safety day actually going on right now. Safety week, our ground operations will be above the wing, then below the wing the next week. And so we continue all the activities outlined in our SMS as our way of making sure that we are safe. We are also participating when the FAA's forums, the runway incursion rate it looks to be not necessarily up, but the severity or potential severity does look to be up. So it is worthy of attention from the FAA and worthy of attention from us. And so the last thing we want to do is everyone do kind of go off in their own direction. We think it's best if we follow and participate in the FAA's lead of how the airspace overall becomes more safe. And so they have a blue ribbon panel they've just announced to help us lead this effort, we will participate with enthusiasm on that and do our part to make this even safer.

And thank you. The next question will be from Dawn Gilbertson from the Wall Street Journal. Please go ahead.

Hi. Good afternoon. I think this question is for Ryan. I know you guys are saying, as are other airlines, you're not seeing any signs of demand weakness. But as you're looking at summer travel booking so far, Do you see anything, any trends in the bookings that might indicate that people are choosing different destinations, you know, since ticket prices are high, hotel prices are high, car rentals and Airbnbs are high? And anything you can share there that, you know, maybe some destinations that you're like, whoa, why are the bookings so strong there? I'd appreciate any color you might have on that. Thank you.

Yeah, hey, Dawn. You know, I think... It's really what you would expect in terms of where customers want to go this summer. International demand is smoking hot for international destinations. I mean, obviously, we participate in that to a lesser degree than what some of our competitors do, but international is really strong. And then it's really the typical summer destinations that you would expect. Florida, you know, into the southwest, Hawaii mainland, our Hawaii franchise is performing very well. So there's no real huge surprises in the data when you kind of double-click as to where customers want to go. It's kind of per normal.

And the flip of that, there isn't anything that is sticking out as weak. You know, so I think our customers just want to travel. It's not as strong as 22 when you really saw this, quote, revenge travel come back, especially on the leisure side. But the demand is very strong, and it's strong across the board. Yeah, so I just wish I could give you a surprise. Yeah, something to hang on to, but we don't have one. So

What about in vacations? I know that that's done by an outside company, but are you seeing – is there a shift to vacation packages more or even on your own website? Anything you've noticed in the appetite for vacation packages?

Yeah, actually, our vacation business is doing well, and, you know – I think that over time we've actually got a lot of opportunity in the vacations space relative to where our network sits and, you know, kind of how we participate in that market. Today we participate in a large part through vacations with travel agencies, and I think over time there's an opportunity to do more merchandise vacation packages to the hundreds of millions of customers that are on our digital platforms every day. But, you know, back to your original question on kind of are there new patterns in terms of destinations that are emerging from a vacation standpoint. You know, Cancun is very strong. Hawaii is strong. But, you know, those are places that customers like to go in the summer.

Thanks very much.

And the next question is from Leslie Joseph from CNBC. Please go ahead.

Hi, everyone. On the moderation of hiring for this year, is that mostly pilots, flight attendants, or any other work groups? And do you know by how many jobs you're going to change your target? And then just broadly with your strategy, are you ruling out ever having a differentiated product in the cabin, either like a larger seat or extra leg room or or something like that, just to drum up revenue in the future?

Those are two very different questions. On the hiring, I would just tell you, again, we're really early in this process with Boeing to understand the impacts specifically, and we picked the 70 in terms of planning for deliveries for 2023, but in terms of understanding exactly where are they and then a lot of your hiring, again, is in advance, so we need to understand what 2024 looks like. I just wanted to acknowledge today that it's a significant enough change to the delivery schedule and then, therefore, the capacity as well that we are going to go back through our hiring plans, and they will be moderated. I can't tell you exactly where that is. Obviously, because we were pilot-constrained, for the year and now we're still likely pilot constrained through call it early fourth quarter is my best guess. It's the group that we probably continue to press to keep the hiring on at least in the near term here until we flip to aircraft constrained. But no, I don't have any specifics other than just acknowledging that As the capacity is coming down, we're going to go back and look at our headcount needs. I mean, it's prudent to do that. It's the right thing to do for cost. It's the right thing to do for efficiency. We're known for our efficiency, and we'll go back and do that, and we'll do that quickly. What was your second question? Premium. Premium. I forgot. My apologies. You know, we are always – I think we've talked about things like assigned seating before. It's just an example that we – we periodically study and survey our customers to understand what's important to them. What do they want in our products? That includes potential changes. And so we periodically do deeper studies on things like assigned seating. And so far, historically, that's always told us that our customers love our product, And you have seen us add things now like power and the larger bins and enhancing the Wi-Fi, and that comes from our customers telling us that's what they want. Now, flip into, well, what work is underway? I'll just tell you there is no work underway to think about assigned seating, to think about premium in the cabin. Doesn't mean we won't do that at some point. We are working, you know, we do work regularly on things like ancillary. So the upgraded boarding product that we, a few quarters ago, now allow you to buy on the mobile device, and it's worked really, really well. Those are enhancements that we're looking at and continue to look at service to our customers. But no, there's no work underway around premium cabin, assigned seating, those kinds of things. Our customers love our product. It's all about being reliable. It's all about providing terrific service and hospitality. It's all about putting into place the things that we've already committed to, like power, larger bins, enhanced Wi-Fi, continuing to push on digital self-service, and then really bring out efficiency here. We've grown quickly. We've added a lot of people. And we want to work very hard to regain our efficiency increase margins and ROIC and returns year over year, and get back in some cases to the work towards the goals that we laid out at Investor Day. But no, there's no work underway in the premium side.

Okay. Thank you.

Thank you.

The next question is from Holden Willen from Dallas Business Journal. Please go ahead.

Hey, thanks for taking my question, guys. I believe it was yesterday where you guys said that you'd added, like, more than 8,000 new corporate accounts last year. I'm just wondering, you know, as you continue to see the managed business travel recovery in the first quarter, how many more accounts you were able to add during that period? And, you know, if you can point to any specific factors as to why you think, you know, managed business travel is continuing to recover for you guys.

Yeah, I think largely the reason that managed business continues to recover for us is because of the initiatives that we put in place. You know, I think if you look at managed business travel sitting here today and kind of where it sits structurally relative to kind of where it's been historically, there's a couple of things at play that have reduced travel. managed travel kind of for the industry. The first of those is, you know, health scares of traveling, and I think that is well behind us, and I think any tailwinds from that just are unrealistic at this point. And so then the other structural component that I think has kind of depressed managed business travel for the industry, not for us necessarily, but for the industry, is some of these just the way consumers work today, their home versus office patterns versus remote, and some of the digital tools. And I think that kind of is what it is at this point. There may be marginal improvements in different parts of the country, but it largely is what it is. And when you look at how that manifests itself is the unique number of travelers who are traveling in corporate travel are actually, it's restored to where it was kind of pre-pandemic, what's down is the frequency of those travelers. And so, and that is largely, or I guess it's disproportionately impacts global and national accounts. And so we are after backfilling that volume by going out and acquiring new mid-market, small and medium business accounts, and back opening up access to new pools of corporate travelers. And that's what we're seeing. I think in March we had a record number of mid-market accounts active for us. I think if you look at April, you know, we may have another record here in April. And so we're going to be after the market share gain. We're going out to win new accounts, open up access to new pools of travelers. We gained a point of market share in the managed travel space over the last quarter. And so that's where we'll be focused going forward, and that's where the sales team is focused, and our efforts seem to be paying off.

Well, we put a lot of emphasis on building the team over years now, adding technology like the GDS access, and it will pay off over time. As Ryan said, I think that's the reason you've seen us restore or nearly restore ourselves in March here to pre-pandemic. first airline to do that. And, Rod, check me, but I think we've had nine of our ten best managed business booking days in the last two weeks in our history. Since April, yeah, in the month of April, yeah. In the month of April. So you're seeing that strength is continuing, and I do think it's because of our investments and winning share.

And we're focused on continuing to remove friction and being easier to do business with in the managed travel space. And there's some trends, you know, across the industry where others are making it harder to do business in the managed travel space. And so I think that, you know, you couple that, couple all of this that we've just been talking about with our business-friendly network, business-friendly policies, industry-leading frequent flyer program, you know, I like our chances going forward.

Thank you, guys.

And, ladies and gentlemen, we have time for one more question, and we'll take our last question from David Slotnick from TPG. Please go ahead.

Hi, guys. Thanks for the question. I was just wondering, you know, one of your competitors talked about with the current Mexican veteran, especially, and then with added flexibility that airlines have added, They've been taking a new look at their overbooking policies, where they overbook to, you know, what levels that could affect. I wondered if that was something that Southwest was doing as well, especially considering the want to get away plus fares, and if you've seen any, you know, recognizable patterns with that.

Yeah, David, I'm not sure that I caught all of the question there. You were breaking up a bit, but I think the question was, you know, others are maybe changing their overbooking policies and kind of what are we doing in that regard. We do not overbook our aircraft. We haven't overbooked. We have not done any of that since 2017, so we're going on, you know, five or six years here of not overbooking. It does happen occasionally when we have to down gauge an aircraft from an aircraft with more seats to fewer seats or if we're weight restricted, things like that. We may have an oversell that we have to deal with, but those are – few and far between. Going forward, we're not looking at dealing with any sort of materialization rates or any change in the booking curve by changing our overbooking policy.

We're going the other way. We're standing firm on the things that our customers want. Yeah, we're not overbooking. It's a bad experience for our customer. That's why we stopped it. we've added travel credits that never expire, just like our rapid route points that never expire. So, yeah, we're leaning to the customer here.

Okay.

Thank you. David, thank you.

And this concludes our question and answer session. I would like to turn the conference back over to Ms. Rutherford for any closing remarks.

Thanks, Chad, and we appreciate you all joining us today. If you all have any follow-up questions, you know our communications team is standing by at 214-792-4847, or you can visit our media website at www.swamedia.com. Thanks so much for your time today.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.