Southwest Airlines Company

Hello, everyone, and welcome to the Southwest Airlines second quarter 2024 conference call. I'm Gary, and I'll be moderating today's call, which is being recorded. A replay will be available on southwest.com in the investor relations section. After today's remarks, there's an opportunity to ask questions. To queue up for an opportunity to ask a question, press star, then one. To withdraw your question, the command is star, then two. Now, Julia Landrum, Vice President of Investor Relations, will begin the discussion. Please go ahead, Julia.

Thank you so much. Hello, everyone, and welcome to our second quarter 2024 earnings call. I am joined today by our President and CEO, Bob Jordan, Chief Operating Officer, Andrew Watterson, and Executive Vice President and CFO, Tammy Romo. Bob will get us started with an overview of the company performance and strategies. and will also provide color on the strategic initiatives announced this morning. Andrew will provide an update on the revenue, and Tammy will cover our costs and balance sheet. Brian Green, EVP of Commercial Transformation, is also in the room with us today, as well as other executives, to support Q&A. A quick reminder that we will make forward-looking statements, which are based on our current expectation of future performance, and 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 on our earnings press release. Our press release with second quarter 2024 results and a separate press release announcing select strategic initiatives were both issued this morning and are available on our investor relations website. And with that, I'm pleased to turn the call over to you, Bob.

Thank you, Julie, and thanks, everyone, for joining us this morning. We have a lot to cover today, so let's jump right in. In my comments today, I will touch briefly on our results for the quarter and then provide detail on the plans we announced earlier this morning to implement meaningful changes to our business and better position Southwest Airlines to produce higher returns in a more competitive, higher-cost environment. As Julia mentioned, Andrew will provide details on our revenue performance, including the work underway to calibrate our revenue management system and processes, and Tammy will discuss our cost, capex, and balance sheet. Starting with our overall results, they are not where we need them to be, and they are not reflective of what we are capable of delivering. We will cover where we fell short as well as our action plan in detail later on the call, but I'll hit on a few highlights first. Our frontline employees executed very well as we continued to improve in nearly every operating and customer metric. Once again, we ran a high-quality operation with a completion factor of 99.5% despite challenging weather. This was further evidenced by our performance following Hurricane Beryl earlier this month. We experienced an 8% cancel rate on July 8th as the storm moved through the Houston area, but had only a 0.3% cancel rate the following day as we recovered quickly with almost no operational hangover from the prior day. I am very proud of our team. And following the global technology outages, we were able to recover very quickly and experienced a near zero cancel rate. Investments made to advance core operations and modernize technology meant that we had redundancy in place for key systems that were experiencing issues. Time and time again, the purposeful investments we've made to improve our resilience and ability to recover from disruptions are demonstrating their value, and that investment will continue. Our exceptional customer service continues to improve as well and was recently recognized by J.D. Power where we were awarded the leading economy class customer satisfaction distinction for the third consecutive year. Reliable operational performance and customer service are and always will be cornerstones of our business model. Moving on to revenue performance, unit revenue for the quarter declined 3.8% year over year, primarily as a result of domestic capacity outpacing demand. The decline was also a result of Southwest-specific challenges as we fully mature our usage of a new OND-based revenue management system. Andrew will go into more detail later, but bottom line, we sold too many seats for the peak summer travel period too early in the booking curve. It's not unusual to have growing pains with these types of systems. We are working quickly to action opportunities to drive performance improvement, We're also adding additional leadership expertise and support, including our plan to hire a chief revenue officer to focus on revenue management and pricing. We continue to have confidence that the new revenue management system will be a driver of long-term revenue improvement. The management team and I, with the support of our board, are completely aligned on the imperative to produce results and ultimately deliver returns ahead of our cost of capital. Doing so requires an evaluation of all opportunities. and a willingness to evolve some longstanding Southwest policies while staying true to our values. With that in mind, I'll discuss some of the changes we are making to further evolve Southwest Airlines. These are part of an ongoing strategic transformation of the business, and we will share more details during our investor day where we will outline a comprehensive plan to deliver transformational commercial initiatives, improved operational efficiency, and capital allocation disciplines. As I shared back in April, our teams have been hard at work evaluating fundamental changes to our seating, cabin, and boarding procedures. It's clear that the open seating model that served us well for so many years is no longer optimal for today's customer. I want to stress that this decision was not made lightly. We have been very thorough and deliberate in how we approached the question, conducting multiple sophisticated research studies over many months that evaluated customer preference and looked at different types of cabin layouts and seating methods. Our research shows that 80 percent of our customers prefer an assigned seat and 86 percent of our potential customers prefer an assigned seat. Further, when a customer defects from Southwest to one of our competitors, our open seating policy is cited as the number one reason why. The answer is clear. There is more demand for Southwest Airlines with an assigned seating model and there is a significant ability to monetize the cabin more effectively with a premium seating option. By extension, these changes are expected to drive significant value for our shareholders. We feel confident that the solution we are implementing will retain the positive elements of the Southwest Airlines experience and enable us to evolve in a manner that's consistent with what today's air traveler is seeking. While specific cabin layouts are still being finalized, we expect roughly one-third of seats across the fleet to offer extended legroom. We're also designing a boarding process that retains the organized calm our customers enjoy today, but also complements an assigned seating model. We've been studying this in depth to preserve our operational efficiency and how quickly we turn an aircraft. We've conducted both live boarding tests to understand passenger movement in a real world environment, and also more than 8 million digital simulations to test different boarding options. These digital boarding simulations include data from real flights with real passenger manifests to understand differences in boarding times stemming from passenger mix, things like families traveling together, customers who may need more time to board, experienced versus inexperienced travelers, and more. The data clearly indicates that any operational impacts are neutral or an enhancement to current performance. We're also approaching this change in a capital-efficient manner, New aircraft will be delivered with our improved Recaro seats beginning early next year. For existing aircraft where we must retrofit to a new configuration, we plan to use existing seats within our fleet to avoid a large capital expenditure. We're working quickly to realize the value of this new model as soon as possible. New seat configurations require FAA certification, which typically takes several months, and only then can we begin the process of retrofitting the fleet. We therefore expect to make bookings available beginning next year. The aircraft downtime should be minimal to complete the cabin changes, but keep in mind that we have a fleet of roughly 800 aircraft to retrofit, and that will take time. Changing from an open seating model to an assigned seating model will be a complex and transformational change that cuts across almost all aspects of the company and is one of several commercial initiatives currently underway to be detailed at our investor day. Given the significance of the changes, I've asked our Chief Commercial Officer, Ryan Green, to take on leadership of this initiative on a full-time basis. As EVP of commercial transformation, Ryan will lead this effort along with other commercial initiatives already underway. Ryan has led the work to this point and is steeped in knowledge regarding customer trends and previously and successfully led efforts to transform our rapid rewards loyalty program and the digital customer experience. And Ryan will report directly to me. Additionally, today we are publishing schedules that incorporate red-eye flying, which will phase in rapidly by summer 2025, and combined with ongoing reductions in turn time through new technologies and procedures, will enable us to fund nearly all new capacity the next three years through initiatives rather than additional aircraft CapEx. These initiatives are part of a comprehensive strategic transformation and reflect a commitment, and my personal commitment, to deliver and implement a plan aimed at driving shareholder value and achieving ROIC well in excess of our cost of capital. We will provide more details around the timing and value of these initiatives and other tactical and strategic initiatives when we gather for Investor Day in late September, but we wanted to keep you up to speed on some of the decisions that we've made already and the deliberate plans we have in place to implement them. And before I close, I want to again recognize all the efforts from our incredible employees. Thank you all for the excellence and the dedication that you bring to work every single day. And with that, I will turn it over to Andrew to provide a full update on our revenue, performance, and outlook.