Southwest Airlines Company

Hello, everyone, and welcome to the Southwest Airlines fourth 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. Hello, everyone, and welcome to Southwest Airlines' fourth quarter 2024 earnings call. I'm joined today by our President and CEO and Vice Chairman of the Board, Bob Jordan, Chief Operating Officer, Andrew Watterson, Executive Vice President and Chief Transformation Officer, Ryan Green, and Executive Vice President and CFO, Tammy Romo. Bob will start us off by providing a high-level update on the fourth quarter and full year 2024 performance, as well as a strategic update on our Southwest Even Better plan. He will then turn it over to Andrew to discuss our revenue momentum and our industry-leading operational performance. Ryan will provide a progress update on our portfolio of strategic initiatives, highlighting key milestones achieved. Tammy will follow to walk through cost performance and outlook. She will also discuss our fleet strategy and cover balance sheet and capital allocation. Bob will wrap us up with a few comments, after which we will move to Q&A. As a reminder, we will make forward-looking statements, which are based on current expectation of future performance. Our actual results could differ materially from expectations. Also, we will reference non-GAAP results, which exclude special items and are called out. and reconciled to GAAP results in our earnings press release. Our press release with fourth quarter 2024 results and a supplemental presentation that includes our updated 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.

Thank you, Julie. And before we jump into our results, I want to take a moment up front to acknowledge the tragic accident near Reagan DCA Airport last night. Our hearts go out to all those loved ones who are among the passengers and the crew, and we also extend our sympathies to our friends at American Airlines and their subsidiary, PSA Airlines, as they process this event themselves. Finally, I want to thank the first responders who worked tirelessly throughout the night. And while we are all competitors, we are one airline community, and we will do everything that we can to support our friends at American and at PSA. Now turning to the business, 2024 was a foundational year for us. We further invested in the operation, we finalized our open labor contracts, and we laid out a comprehensive plan, our Southwest Even Better Plan. The plan, which is the most transformational in the history of the company, includes initiatives to boost our efficiency and lower costs, including the ability to fly red eyes and to turn our aircraft faster. It also significantly improves our customer experience and expands what we offer customers by introducing things like partnerships, and an all-new vacations product, all of which enhance the rapid awards and the co-brand ecosystem. Ultimately, the plan provides a path to financial prosperity, which we believe will open exciting growth opportunities ahead. We are already seeing the benefits of the work we did last year, and the plan is well underway. I am very pleased with the momentum we are carrying into 2025 as a result of that effort. Starting with the operation, we saw improvements in nearly every key metric, demonstrating success from our multi-year investments. In fact, we finished the year with an industry-leading completion factor, and just last week, we were recognized by the Wall Street Journal as one of the top two U.S. carriers who have, and I quote, separated themselves from the pack. We finished with a mere one-point gap to first place, a gap that we will work very hard to overcome in 2025. We also finished the year with strong year-over-year unit revenue improvement. Unit revenues for the fourth quarter came in 8% higher than fourth quarter 2023, well above the improved expectations we provided in early December. Nominally, fourth quarter RASM was also 7% higher sequentially relative to third quarter RASM, and that is five points ahead of the historical third quarter to fourth quarter trend. The very hard work of our teams helped drive this acceleration as they executed tactical improvements. In addition to improvement from tactical actions, we experienced benefits from a constructive industry backdrop driven by continued demand strength and capacity moderation. We're making great progress with our strategic initiative portfolio, our fleet monetization strategy, and our capital allocation plan. The team will walk through the details to provide you with execution proof points and share how we are hitting key milestones. While I see improvement in our pace of execution, the focus on driving speed and agility will continue. And while we are focused on execution, we will keep a pulse on trends and be open-minded as we consider ways to continually improve the business. Moving to our cost performance, we are experiencing above-normal unit cost inflation, most notably in market-driven wage rates, airport costs, and healthcare. We outlined a multi-year $500 million cost plan back at Investor Day to help mitigate cost inflation and become more efficient, and we will be relentless in pursuing cost takeout. While we haven't yet shared the cadence of how the $500 million comes online, the focus will be on achieving that rate as quickly as possible. We are committed to the efficiency work, including corporate overhead. fact is corporate overhead has grown at a faster rate than the rest of the airline as we stepped up for initiatives. We must be the leader in terms of efficiency, and you'll see us being aggressive as we work to become a leaner and more agile organization. Our imperative in 2025 is to deliver improved financial results and build further momentum to hit the milestones required to deliver on our 2026 and 2027 investor day targets. and we're committed to transparency and routine updates. We debuted a scorecard last quarter, and we updated it again this morning, detailing our progress, and it's available on our investor relations website. For the core business initiatives, we continue to expect to deliver or exceed the $1 billion 2025 EBIT contribution target, which excludes any benefit from fleet transactions. Now moving to the fleet, there's a lot going on at Boeing. I was just there last week, visiting with the leadership team, and walking the factory floor. They have clearly been hard at work, and I was pleased with the progress that I saw. Everyone was engaged and focused, and while they still have much work to do, they appear to be on a good path, and we're feeling more optimistic. Regardless, we think it's prudent to hedge our bets. We are now planning with a conservative 38 delivery assumption for 2025 to de-risk the operations. We conservatively adjusted our plans back in March of 2024, and we've not had to republish the schedule since. So we're doing the same thing this year. That's very different from our contractual number, which for 2025 is now 136. We aren't going to get 136 aircraft, but we believe Boeing is on pace to exceed 38 this year and over the next couple of years that there will be an opportunity to do plenty of transactions as Boeing ramps up their productions. Tammy's going to go into a lot more detail, but my point is that the opportunity is large. And despite the question of fleet timing, we still aim to deliver the $1.5 billion of targeted total 2025 incremental EBIT from our Investor Day initiative portfolio. We're seeing our tactical actions yield benefits faster than planned and expect to hit all key milestones for our strategic initiatives. As a wrap-up, we're in a great position to capitalize on our momentum, and continue making progress towards our goals. We have a comprehensive plan, a detailed set of initiatives, a constructive industry backdrop, and we are executing with urgency and purpose. We will not let up for even a moment as we move forward and deliver the Southwest even better plan. I want to thank our employees for their dedication and commitment and for the excellent operation they've been running despite a wave of winter weather. It's just truly exceptional. And I will now turn it over to Andrew to cover the operations and tactical initiative performance in more detail. Andrew. Thank you, Bob.