Southwest Airlines Company

Good morning and welcome to the Southwest Airlines second quarter 2023 conference call. My name is Anthony 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 can 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 Ms. Julia Landrum, Vice President of Investor Relations. Please go ahead, ma'am.

Thank you, Operator, and welcome everyone to our second 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 Green, 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 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.

Thanks, Julie, and good morning, everyone. I appreciate you joining us for our second quarter 2023 earnings call. I am very pleased to report a solid quarter with an income of $693 million, excluding special items, and all-time record quarterly revenue of just over $7 billion. The demand environment, especially for leisure travel, continues to be resilient as we have seen solid bookings throughout the busy summer travel seasons. Further, we continue to expect $1 to $1.5 billion of pre-tax profit contribution in full year 2023 for strategic initiatives that we outlined at our investor day last December. Based on our current outlook, we continue to expect record operating revenue and solid profits in third quarter 2023 and year-over-year margin expansion for full year 2023. I especially want to thank our people for doing such a fantastic job. They helped us get a record number of customers and a record number of bags on a record number of flights successfully to their destinations as we experienced the lowest second quarter flight cancellation rate in the past 10 years. You know, it wasn't without trials. We had a lot going on in the operation related to weather, and weather has continued to be a challenge here in July. Despite that, our employees have continued to deliver a very solid performance. From our network ops control center to the front line, our people have worked together extremely well to minimize cancellations and produce a very reliable operation. And I'm just so proud of them for getting our customers where they need to go despite a challenging operational environment. While our cost outlook has increased for the year, the change is primarily driven by updates to our market wage rate accruals for open collective bargaining agreements. And while fluid, we're making progress. It's obviously very hard work, and I'm just very appreciative of the dedication of everybody involved in the negotiation process. Now, thinking about where we are with the business, since 2018, we have seen very significant swings due to the grounding and the max. Demand fall off, of course, from COVID, then the stress from the resurgence of demand, disruptions from post-pandemic supply chain issues, challenges with employee staffing, and most recently, uncertainty with our Boeing aircraft deliveries. The challenges we have faced since 2018 have made planning difficult, so smoothing out fluctuations is a must, and the best way to do that is with smooth and predictable capacity growth. We told you back in April that we were reflowing our order book to allow for orderly and measured growth, and we're still finalizing the details of that with Boeing. but we remain confident that we will get the 70 deliveries in 2023 that are assumed for our public schedules. And we are working to build a 2024 plan that should be much more stable. We currently are planning to be flying the MAX 7 at some point next year, but if not, we'll take MAX 8 instead, just as we are doing now. Where that leaves us for full year 2023, capacity is unchanged for this year at up 14 to 15% year over year. As we shared this morning in our release, we are revamping our 2024 flight schedules. While our network is largely restored at this point, it is not optimized, especially for post-pandemic shifts and business travel. Those adjustments to the network will be largely complete by the March 2024 flight schedules, and we expect those efforts and the continued maturation of development markets to generate an incremental $500 million in pre-tax profit in 2024. The changes will also reduce the percentage of system capacity and development by more than half, returning to normal pre-pandemic levels by the end of next year. We already have our schedule published through March the 6th, 2024, and currently expect first quarter 2024 capacity to be up in the range of 14 to 16% on a year-over-year basis. Now, keep in mind that nearly 90% of that year-over-year growth is carryover from 2023. For the remainder of 2024, we are planning for a sequential deceleration in year-over-year growth in each quarter next year as we work our way back to our long-term goal of mid-single-digit growth year-over-year. We made a lot of progress in the first half of 2023, completing several major milestones. We quickly developed and are on track for our winter operations plan. We have the staffing plan in place to fully utilize our fleet by the end of the third quarter and have the network restored by the end of the year. Again, to be clear, it's restored but not yet optimized, and Ryan will share more on how we're going to adjust the network based on post-pandemic travel patterns. But we have a lot of exciting things in the works that we believe are going to contribute to our 2024 financial results and help us deliver another year of margin expansion next year. In closing, our accomplishments in 2023 lay a foundation for us to shift our focus to restoring our industry-leading financial and operational performance, boost our operational resilience, and make advances in our industry-leading customer service through a focus on digital hospitality. I just can't say this enough. I'm just so 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 with that, I will turn it over to Tammy.