Southwest Airlines Company

Hello, everyone, and welcome to the Southwest Airlines third 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 Southwest Airlines' third quarter 2024 earnings call. I'm joined today by our President and CEO, Bob Jordan, Chief Operating Officer, Andrew Watterson, and Executive Vice President and CFO, Tammy Romo. Bob will start us off by reviewing the key points from our Southwest Even Better Framework. introduced last month at Investor Day, and cover how our third quarter results reflect initial progress against our plan. He will then turn it over to Andrew to share updates on our revenue and our industry-leading operational performance. Tammy will follow to discuss our cost performance, balance sheet, and capital allocation before turning it back over to Bob, who will provide a brief statement on Elliott Investment Management, after which we will move into Q&A. Brian Green, EVP of Commercial Transformation, is also in the room with us today to support Q&A. A quick reminder that we will make forward-looking statements, which are based on 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 earnings press release. Our press release with third quarter 2024 results and a supplemental presentation that includes additional details on the expected EBIT contributions of our planned initiatives, as well as a draft initiative scorecard, were both issued this morning and are available on our Investor Relations website. And now, I'm pleased to turn the call over to you, Bob.

Thanks, Julia, and thanks, everyone, for joining us today. As you know, we laid out our Southwest Even Better transformational plan a few weeks ago at Investor Day. It's a plan designed to deliver increased value for our shareholders and our customers. And since then, we've engaged with many of our shareholders, and I truly appreciate the constructive feedback. The message is simple. Now that we have set out a clear path, it's all about executing, and that's exactly what the team and I will be discussing today. But before turning to that, I want to recognize the widespread devastation caused by recent hurricanes in communities across the southeast. While we were able to quickly recover our operation, we know that for so many, it will take much longer. We're leaning on our national disaster response partners, providing financial donations, and offering complimentary travel to aid in the recovery efforts. And our employee catastrophic assistance charity is currently assisting all employees requesting support to ensure that they're cared for and receive immediate relief. Our hearts are with our employees and our communities as they recover and rebuild. Returning to the business, I'll start by reiterating the path we laid out and how our third quarter results reflect initial progress against our plan. As we shared at Investor Day, our plan is detailed, actionable, and highly intentional. We are fully committed to delivering the robust set of tactical and strategic initiatives we presented and restoring the financial prosperity that our plan supports and that Southwest and our shareholders expect. That includes a steady march to delivering ROIC of 15% or higher, well above our cost of capital in 2027, even without tailwinds from our fleet strategy. As part of the plan, we provided specific targets for capacity, operating margin, ROIC, leverage, and free cash flow in 2027. While we have work to do, all actions to achieve those goals are well underway and progressing as planned. The team and I are accountable for delivering on the plan results and being transparent regarding our progress. To that end, we included a scorecard and supplemental detail this morning that we will use to report on progress against initiative development and expected financial results, including updates on critical milestones and the status of meaningful value capture going forward. We also included additional detail this morning on the composition of the initiative-driven EBIT contributions and how that builds between now and 2027, including additional clarification on the contribution from our fleet strategy. At the highest level, our plan builds as follows. Value in 2025 is driven by improving the base business, executing tactical and efficiency initiatives, and building the capabilities to launch our strategic initiatives. Value is created in 2026 through strategic initiatives coming online, with the most significant value being unlocked through the introduction of assigned and premium seating options. Finally, value in 2027 is created by the initiative portfolio hitting run rate, where initiatives aimed at the core operation are sized at roughly $3.5 billion of cumulative incremental EBIT contribution, and this includes full realization of the cost plan. When you add the estimated benefit from the fleet strategy, you get a $4 billion of total incremental EBIT that we shared in Investor Day. Importantly, we do not view the fleet monetization strategy as part of our core business. While the combination of a favorable secondary market and our attractive aircraft pricing provides a unique and lucrative opportunity to both significantly reduce our aircraft CapEx and drive earnings accretion, We feel confident that we can achieve all of our 2027 targets, even without the benefits expected from our fleet monetization strategy. Looking at the second half of 2024, we're encouraged by both positive results from our recent actions and by recent industry trends. We are highly confident in our ability to deliver on our plan. In terms of tactical initiatives, everything is progressing in line with what is needed to hit our 2025 commitments. We had third quarter record operating revenues of nearly $7 billion and a unit revenue increase of 2.8% compared to last year. The improvement in unit revenue reflects both a more constructive industry backdrop and a proof point of our effective execution. Improvements resulting from our revenue management actions are particularly encouraging. The team is focusing on improving yields on our best performing flights, while achieving a non-dilutive load strategy on our lower demand itineraries. While not yet in the run rate, we saw better than expected improvement in 3Q, and we are pleased to see all months in 4Q tracking as expected. Our strategic initiative work is also progressing as planned. On the seating and cabin front, we are working actively with both regulatory agencies and vendor partners towards successful approval and certification of our new premium cabin configurations. That would allow aircraft retrofits to begin early next year. We will start with our larger aircraft and the 700s will follow. We are planning to retrofit 50 to 100 aircraft per month, completing the work late next year. We're also announcing today that we have signed our first three direct lodging partners for our Getaways by Southwest product that is planned to launch mid-next year, and that includes Caesars Properties in Las Vegas. And finally, we are narrowing the launch date of our previously announced partnership with Icelandair to the first quarter of 2025. Looking at cost and efficiency of initiatives, we continue to expect to end this year with headcount down 2,000 as compared to year in 2023. Improved turn times are reflected in the existing schedules starting in November, and red-eye service will begin next February. We're also very proud of our industry-leading domestic operational reliability. We had the best completion factor and on-time performance of any major airline this quarter, and Andrew will share additional highlights shortly. Regarding progress on our fleet monetization strategy, we're already starting actively exploring the market and are encouraged by what we are seeing. All that said, while our financial results are demonstrating improvement, I recognize that we still have a lot of work to do to fulfill our commitment to return to prosperity. We have a great plan, and I'm confident in our ability to execute and deliver, and we will be transparent about progress and results along the way. It's a really exciting time at Southwest. I want to take a moment to recognize all the efforts by our incredible employees who are committed to making this plan a reality. Thank you for all your extraordinary dedication, Our continued transformational progress would not be possible without all of you. And with that, I will turn it over to Andrew.