Southwest Airlines Company

Hello, everyone, and welcome to the Southwest Airlines fourth quarter 2023 conference call. My name is Gary, 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 Mrs. Julia Landrum, Vice President of Investment Relations. Please go ahead, ma'am.

Thank you so much, and welcome everyone to Southwest Airlines' fourth quarter 2023 conference call. In just a moment, we will share our prepared remarks, after which we'll be happy to take your questions. 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, Brian 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, I'm pleased to turn the call over to you, Bob.

Thank you, Julie, and thank you everyone for joining the call today. As we close the books on 2023, I want to take a moment to reflect on how far we've come. And more importantly, I want to thank the people of Southwest Airlines for their dedication, their warrior spirit, their heart, and ultimately for their incredible resilience. At this time last year, we were getting back on our feet from the disruption following winter storm Elliott. We quickly mobilized to put immediate mitigation efforts in place while simultaneously building a robust plan to prepare us for future extreme winter weather disruptions. We were also working to restore our network, address our staffing needs, and return our aircraft to full utilization. And, of course, we were in the middle of negotiations with the majority of our labor unions. I'm incredibly pleased to be on the other side of 2023 and to be able to share all the progress we made last year. We completed a comprehensive winter weather action plan, which has already been successfully tested in multiple winter weather events, including the extended nationwide winter storms we experienced this month, but also in other types of disruption, such as hurricanes, severe fog in Chicago, and the Maui fires. Through all of those events, our aircraft and crew networks remain stable. We recovered quickly and we were able to minimize the impact on our customers. We also got fully staffed, restored our network and reached full utilization of our fleet. Our network is in a healthy place and it shows in our operational improvement. In fact, we improved in nearly every operational metric. Our completion factor performance in particular was fantastic at 99% for the full year, with fourth quarter being our best quarterly performance in more than a decade at 99.6%. We also made significant progress on our labor agreements, including ratification earlier this week of an agreement that secures industry-leading pay for our best-in-class pilots. We have now successfully reached ratification on nine contracts in a little over a year, demonstrating our commitment to providing competitive market compensation packages for our people. This is a huge accomplishment, and I would like to thank all those who have tirelessly supported those negotiations. Of course, all this was in addition to a host of other accomplishments. The rollout of a new revenue management system, the launch of multiple customer experience improvements, and the negotiation of a very cost-effective order book with Boeing. The order book allows us to continue the modernization of our fleet and provides the opportunity to flex our growth plans up or down over the long term. We also made rapid adjustments to capacity for both 2023 and 2024 and put in place significant network adjustments in response to changing demand patterns. These changes reduced our planned 2024 year-over-year capacity increase to roughly 6%, all of which is carryover from 2023 network restoration. So there'll be no net new additional capacity in 2024 as we work to mature our route network. Moving to our performance, we continue to be very pleased with the core demand for our product. We saw close-end performance strengthened in November and December for both leisure and corporate travel. This led fourth quarter 2023 to be yet another record at just over $6.8 billion in operating revenue. And we are seeing that strength continue into 2024. This demand strength, combined with about $1.5 billion in incremental year-over-year pre-tax profit from our network optimization efforts and the contributions from our portfolio of strategic initiatives, is driving us to expect additional revenue records and year-over-year operating margin expansion, despite cost pressures from new labor agreements and increased aircraft maintenance expense. Our network changes are materially in place with the March schedule where we expect to hit a profitability inflection point. While still early in the quarter, our initiatives are delivering towards our revenue target, and we expect to exit the quarter with a strong operating margin for the month of March. While we have significant inflationary pressures from our new labor agreements, we have initiatives underway that will begin to help counter these pressures with efficiency improvements. These include everything from scheduling techniques to digital modernization And we planned in 2024 with headcount flat to down as compared with year-end 2023 as we slow hiring to levels that are at or below our attrition rate. That will drive efficiency gains in 2024 with more to come in 2025. All of this supports a solid plan with a line of sight to improve our financial returns and earn our cost of capital in 2024. While this represents notable progress, I want to be clear. Earning adequate and consistent returns, ROIC well in excess of WAC is our financial north star, and it's not negotiable. We will be relentless in executing against our plans, and we will continue to make adjustments, including capacity adjustments if needed, until we deliver those results. Adequate and consistent returns is how we have created decades of shareholder value, and it continues to be our key focus. Our current set of initiatives is tracking nicely, and we will provide you a lot more detail later this year at Investor Day. In addition, we're working on a next set of initiatives in support of sustainable returns over time. In closing, we made tremendous progress in 2023, and we finished the year a much stronger company. We will finish this year stronger again. We are fully committed to improving the customer experience and delivering on our long-term financial targets, including generating returns for our shareholders. As always, I have confidence in our people and our business model, and I am particularly proud of our people for their dedication and their resilience. They remain our absolute greatest asset, the heart and soul of our company, and the ultimate source of pride for me. And with that, I will turn it over to Tammy.