Southwest Airlines Company (LUV) — Q3 2021 Earnings Call Transcript

Thank you, Rocco. And thank you all for joining us today. In just a moment, we will share some brief remarks and then open it up for Q and A. On our call today, we have our Chairman of the Board and CEO, Gary Kelly; Executive Vice President and Incoming CEO, Bob Jordan; Executive Vice President and CFO, Tammy Romo; Executive Vice President and Chief Commercial Officer, Andrew Watterson; and President and Chief Operating Officer, Mike Van de Ven. Just a few quick notes here. First, we will make forward-looking statements based on our current expectations of future performance, and our actual results could differ substantially from those expectations. Second, we had a few special items in our first-quarter results that we excluded from our trends for non-GAAP purposes, and we will reference our non-GAAP results in our remarks today. Please see our press release from this morning and our IR website for more information on both topics. Just a reminder that we are hosting our Investor Day in New York on December the 8th, so stay tuned for more details on that, and we will go ahead and get started. So, Gary, over to you.

Ryan, thank you very much, and good morning, everybody. Welcome to our Third Quarter 2021 Earnings Call. After five quarters of pandemic weakness, we saw a dramatic recovery in terms of passengers, fares, and revenues. This was very encouraging. It could have been even better, but for the delta variant surge that began affecting us in early August. The balance in revenues came with a lot of bumps in operation though as our historic staffing models left us short and caused us to miss our reliability plan for the quarter. This required immediate attention and action for future schedules, which we have taken. I would be the first to admit that things are messy. It is also very encouraging to see the earnings potential, especially considering business travel is far from recovered to 2019 levels, and our capacity is not fully restored with 24 airplanes still sitting on the ground. This illustrates that this virus and its effects on our business can be unpredictable and volatile. The burden to manage through all of this falls to our people. We've gone from not enough to do to too much to do in a very short period of time. Just as a perspective, I think we'd all take the latter scenario any day. It has been a huge challenge for our people, so I want to thank them. They are warriors. They have performed exceptionally well, and especially considering the challenging circumstances. I am very proud of them, and they remain and always will be my top priority. And with that, I'd like to turn the call over to our incoming CEO, Mr. Bob Jordan, who will give us a quick overview.

Thank you, Gary, and hello, everybody. It's good to be with you again. I'll touch on a few items before I turn it over to Tammy. The transition continues to go really well. As part of the leadership changes announced last month, our full senior team now reports to me. They are the finest leaders in the industry, and it's an honor to work with them. We are working together on long-term priorities and specific plans for '22, and we will share those in December. One of my highest priorities is being with our people, and it is energizing to see their heart, dedication, and witness the incredible job that they do every single day despite the challenging operating environment. They are my heroes, and it's an honor to stand beside them as we emerge from the pandemic and take advantage of our opportunities. As Gary said, we had terrific momentum at the beginning of the third quarter, especially with leisure demand, as traffic was actually above 2019 levels. We were also on a good trend on the corporate side, though it was just off of a lower bottom. The resurging COVID cases cost the quarter about 300 million, and that aside, the quarter would have been solidly profitable. As cases have subsided, booking trends have recovered nicely on both the leisure and business front, and booking trends for the holidays are in line with 2019. As you know from the release, the key headwind for the fourth quarter, aside from inefficiencies, is a significant increase in jet fuel prices. I do want to address the issues we experienced starting October 8th. Our challenges began with a widespread ATC ground stop and ground delay program that effectively shut down our Florida operation from that afternoon through the end of the day. Mike is going to talk more about this, but that caused a significant number of crews and aircraft to be out of position, and it took several days to recover. As a result, we inconvenienced thousands of customers and further challenged our stellar employees, and I want to apologize to both our customers and our employees; we simply did not live up to your expectations. Before this, we were seeing very positive trends in our operational performance, and the key to continued improvement is getting staffed and continuing to invest in our operation, and we are absolutely laser-focused on both of those. Looking forward, our media goals are really basic. One, bulk up our staffing. We made tremendous progress, but remain short of what is needed, especially when we dip into staffing reserves. Therefore, we've continued to modestly trim our fourth and first quarter schedules. Two, get back to our historic operational reliability and efficiency. The ramp-up of the business and the fits and starts caused by the COVID waves have made both of those very tough, as has the lack of network. Three, restore our customer service advantage, which starts with our people and the unrivaled hospitality that they deliver. Again, that is tough under current operating conditions. Fourth, maintain focus on our people and our culture. Our people are our advantage, and the last 20 months have challenged them collectively and individually. Our culture has sustained us through the pandemic, and it will power our advantage as we emerge from it. While we have short-term issues to manage, I am very positive about our long-term opportunities. I'd like to talk briefly and highlight our sustainability plans. Earlier this week, we announced a set of specific 10-year plans supporting our overall goal of becoming carbon neutral by 2050. It's important to our people, our customers, and above all, our planet that we're good stewards. As we grow over the next decade, that growth is planned with no incremental carbon emissions compared to 2019, and carbon emissions per available seat mile will fall by at least 20% by 2030 as compared to 2019. This progress occurs through several initiatives, chiefly a commitment to the more fuel-efficient Boeing 737 MAX 7 and MAX 8, and accelerated retirements of our older, less fuel-efficient aircraft; a commitment to 10% sustainable aviation fuel by 2030, and in the near-term, a carbon offset program that partners with customers who are passionate about this. Our offset program will be the only one that provides both loyalty points and a dollar-for-dollar match. I am particularly proud of the work our team has done to pull this plan together so quickly and especially proud that our commitments are specific and time-bound. In conclusion, while we've made considerable progress from a year ago and are pleased with the recent improvement in travel demand trends, it is clear that 2022 will be another transition year in the pandemic recovery. The restoration of the network is a top priority in '22 and '23, but it will take time and will largely depend on the pace of recovery in business travel and our ability to staff. Even with the anticipated cost headwinds in '22 related to significant inflation and productivity shortfalls, our primary goals next year are to deliver increased operational reliability, generate solid profits and margins, and restore and grow the route network while reducing our carbon emissions intensity. I look forward to sharing a lot more about all this and our ‘22 plans at our Investor Day on December 8th. With that, I will turn it over to Tammy.

Thank you, Bob, and hello everyone. I'll provide a quick overview of our overall financial results and some color on our outlook. On a GAAP basis, we generated a $446 million profit in the third quarter, or $0.73 per diluted share. This was driven by the $763 million of PSP proceeds that offset a sizable portion of salary, wages, and benefits expenses. Excluding this temporary PSP benefit and other smaller special items, our net loss was $135 million, or a $0.23 loss per diluted share. Our third quarter results are clearly not where we need them to be, and we are disappointed by this step-back in revenue trends due to the Delta variant. Even so, we are pleased our bottom line came in above expectations and improved sequentially from the second quarter. We currently have $16.2 billion of cash in short-term investments on our balance sheet. This is well in excess of our outstanding debt and relatively in line with where we were at the time of July earnings before the impact of the Delta variant began. Overall, travel demand has proven to be more resilient today, and the overall impact of this variant has been much less than what we previously experienced since the pandemic began. Before I get into the specifics, I want to offer my thanks and appreciation to our employees. Their spirits have been high since the pandemic began, and I commend them for continuing to work together to combat this pandemic. I am also pleased for them that we were able to accrue additional profit sharing in the third quarter as a result of our GAAP profits. In the third quarter, available seat miles and non-fuel unit costs were within our guidance ranges, and I am pleased with our overall cost control throughout the quarter. Operating revenues were better than guidance, primarily due to improving revenue and booking trends in the second half of September, soon after our last investor update, as COVID-19 cases began to decline. Fuel cost per gallon was slightly better than guidance. We provided a lot of color for you in our press release regarding revenue and cost trends as well as fleet plans, so I will add a few additional thoughts. We had four notable points of cost pressure in the third quarter, primarily driven by premium pay and other ramp-up costs. In terms of premium pay going forward, we anticipate that we will need less in the fourth quarter as we have reduced our flight schedules to provide a more staffing cushion; the reduction in premium pay will provide a roughly two-point unit cost tailwind from the third to the fourth quarter. Our two largest ongoing inflationary cost categories are salary, wages, and benefits, and airport costs. These two categories alone are driving three to four points of unit cost inflation in the fourth quarter on a year-over-year basis. First, on salary, wages, and benefits, which represents roughly three points of unit cost pressure. We have higher-than-normal wage rate inflation, including the recent increase in the minimum hourly wage. The tight labor market is also putting pressure on wages. Additionally, we should have nearly everyone back from extended leave by year-end, and we are hiring across all workgroups to support the current operation. Second, on airport costs, by year-end we will have 18 new airports in our network, thus increasing our overall properties footprint, and we are experiencing rate pressure across the board. The rate increases we are anticipating continue to be much higher than inflation, especially in this environment. Our fourth-quarter trips are expected to be down 13% compared to the fourth quarter of 2019, which underutilizes our space and exacerbates the inflation we are currently seeing. I expect better operating leverage from our airport facilities in the future as we can add depth and frequency back to our network over the next few years. In fourth quarter, we have four to five points of notable cost pressure above and beyond general inflation, attributable to hiring, our vaccination incentive pay program, and lower productivity than historical norms. We expect cost pressures from lower productivity to persist in the near-term but to subside as we can restore the majority of the network. Even with these inflationary pressures, our fourth quarter bottom-line outlook is better than third quarter, except for higher fuel prices. Fuel prices, even after factoring in higher hedging gains, are $0.26 higher in the fourth quarter than in the third quarter, which is roughly $120 million more in fuel expense sequentially. That said, our strong fuel hedge is currently expected to provide $0.18 of hedging gains in the fourth quarter, and underlying revenue trends have ticked up, which is encouraging even though we expect a loss for the fourth quarter in this high fuel price environment. Our flight schedules are currently published through April 24. We have reduced our fourth quarter capacity by 8% on a year-over-year basis and currently expect our first quarter 2022 capacity to be down 6% compared to first quarter 2019. We have 72 firm orders and 42 options for next year, and we will continue to evaluate option exercises as decision points arise. Regardless of our capacity plans for next year, we believe that taking the additional 2022 options will yield a positive net present value on aircraft replacement if we do not deploy them in the network. As for other commentary on 2022, we will share more about our fleet, capacity plans, and financial outlook at Investor Day, and I'm looking forward to seeing you all there. So with that, I will turn it over to Andrew.

Thank you, Tammy. I'll provide some additional color on our revenue trends and outlook and point you to our earnings release for more detail. Regarding our third quarter revenue performance, it was disappointing to take a step back on the revenue recovery trends we experienced from March through July. The impact of the Delta variant began to affect revenues around the beginning of August, resulting in slowing and inconsistent passenger traffic and bookings, along with a rise in trip cancellations through about mid-September. In terms of overall revenue loss, September bore the brunt of the impact, and we saw that across all geographies for both leisure and business travel. As with prior waves, when we have a step-down in demand, especially with the decline we witnessed in business demand in September, yields are challenging to manage. However, we had better success in terms of maintaining load factors in the low 80% range for the third quarter. The silver lining is that the overall impact of the Delta variant is estimated at 300 million in Q3, and another 100 million in Q4, which was less severe than what we experienced from prior COVID waves. As you may recall, operating revenue stalled down in the mid negative 60% range from September through February. Thus, travel demand is much more resilient today than at this time last year. While there is a lingering impact on fourth quarter operating revenues from the Delta variant, revenue trends have improved significantly since mid-September. Trip cancellations have decreased and stabilized, and we've seen an increase in bookings across all geographies for both leisure and business. We currently expect operating revenues to improve sequentially throughout the fourth quarter. The booking curve has normalized, and bookings thus far for the holidays in November and December are healthy and supported by increasing leisure demand. In fact, our overall booking curve is presently trending in line with 2019 levels for the holidays, which is encouraging. Regarding business travel trends, our managed business revenues were down in the lower 60% range in both July and August year-over-year, but took a step back in September to down 73%. However, this trend has reversed as we are experiencing steady improvements in business bookings thus far in October. Based on current trends, we expect managed business revenues to continue improving modestly in November and December and to end at down roughly 60% by year-end. This estimate is less optimistic than what we previously shared prior to the impact from the Delta variant, as many corporations pushed back their office openings until after the New Year. Still, we remain cautiously optimistic about overall business travel improvement by year-end, and we believe there is some pent-up demand, with a chance of seeing a faster pick-up as we get into early 2022. We are now live on all three of our planned GDS platforms: Amadeus, Travelport, and Sabre. We have successfully removed friction from businesses working with Southwest, providing them a full array of distribution channels to choose from. Early indications from our GDS launch show that we are gaining incremental volumes through this channel, yielding a positive response for Southwest fares. As anticipated, we are also observing a channel shift from our direct connect channels to GDS, which is perfectly fine and positions us well for broader fuel to corporations choosing their preferred channels. Our new markets continue to perform well and are in line with expectations in the third quarter. Hawaii markets were impacted more severely due to travel warnings against entering the islands. However, all of these growth markets have shown recent improvement in line with the broad-based improvement we’re seeing across the rest of our network. Lastly, our Rapid Rewards program continues to show progress in the third quarter, with other revenues up 10% on a year-to-year basis. We are convinced about the growth opportunities of Rapid Rewards and our program portfolio, which we recently expanded in terms of credit card offerings. With that, I'll turn it over to Mike.

Thanks, Andrew, and hello everyone on the call. We've had a challenging quarter operationally, and it's clear that our industry ecosystem is still fragile. We're facing headwinds with hotel services, including food and transportation, airport services like wheelchairs and concessions, customer mass requirements, and still have a very challenging supply chain and hiring environment; all these factors are impacting the travel experience for our customers and employees. Our third quarter operational results reflect that environment, and we have several employees making significant sacrifices to help navigate through it. I am extremely grateful to them for their support in this difficult situation. They are our special warriors. We finished the quarter with 71.7% on-time performance which was 6th in the industry. Those delays were generally less than 45 minutes, and our on-time performance at 60 minutes was 90.4%, which was 4th in the industry. We had our best third quarter bag handling performance in our history, with the exception of last year when bag volumes were slightly less than half of this year. We continue to lead the industry with the lowest customer complaint ratio to the DOT. While I am not satisfied with our overall results, and we can and will do better, our people worked very hard to take care of our customers. Moving forward, we are focused on a couple of targeted actions. First, our on-time performance has been impacted all summer by high load factors, especially flying into and out of our largest cities, alongside a reduction in frequencies from our typical network. Our largest cities experience full airplanes coming in and out nearly every day, with much more extensive connecting activities, including bag volumes than we had seen pre-COVID. These activities took more time to complete than scheduled for our turns. Given the heavy load factors, we tended to hold flights for connections due to reductions in frequencies and our inability to accommodate customers otherwise, which put pressure on our on-time performance. In fact, our on-time performance averaged roughly 66% from July through mid-August. As customer volumes declined from mid-August through September, our on-time performance improved to 80%. This improvement was welcome, but still below our historical performance for that period. So, in the near-term, we are focusing our hiring efforts on increasing staffing at airports to give us more resources to handle these activities when our load factors increase over the holiday periods. Additionally, we are better utilizing our staffing tools to more accurately match scheduled shifts with activities. I expect that both those additional resources and focused staffing execution will enhance our on-time performance going forward. For future schedules, we are evaluating scheduling opportunities to rearrange ground times in areas where they are most needed, maintaining our on-time performance as the connection activity is expected to continue. A separate, but related issue to on-time performance is balancing our schedule with crew resources. All of our employees should expect to bid their shifts, arrive at work, do what they planned, then go home as scheduled. I've mentioned before that staffing plans are based on various models with assumptions for vacation, sick leave, open time, and other factors affecting shifts. Although we adjusted those assumptions for the summer to provide more staffing cushion, this adjustment was not enough to match our operational reality. This was especially impactful on our flight crews. Our sick trends were much higher than expected, and our open time pick-up rates were also affected, particularly on weekends, exhausting our reserves to cover impacted flights. That spiral is something we must break. Therefore, we have adjusted our fourth quarter flight schedules downward and have new hire flight attendants and pilots returning from extended leaves coming back online in the fourth quarter. Those measures will boost our crew reserves to 20% for pilots and around 26% for flight attendants. We expect our sick trends, including COVID impacts, to decline as the Delta variant wanes. In summary, we are continuing to add staffing and have made schedule adjustments to improve on-time performance and add more staffing cushion navigating through the current environment. As our environment, staffing, and schedules stabilize, we will be in a good position to restore our network frequencies in 2022. In closing, we have had our share of operational headwinds this year. I know the environment is full of stressors and distractions, and I want to express my continued appreciation to all employees who have made significant sacrifices to serve our customers and support their colleagues. I know they take tremendous pride in our company, and the company is incredibly proud of them. With that, I’ll turn it back to Ryan.

Thank you, Mike. I believe we have analysts queued up. Just a reminder to please keep your questions to one and a follow-up if needed. Rocco, please go ahead and begin our analyst Q&A.

Good afternoon, everybody. Gary, notwithstanding the PSP-related prohibition, could you opine on the milestones you hope to achieve before dividends and buybacks reemerge as part of the Southwest story?

I think, Jamie, it’s pretty much a stock answer. We'll want to ensure that earnings support that. We'll want to balance that against our capital plans and ensure the balance sheet supports it. The litmus test we've used for decades will continue to apply. In the past, during high growth phases, we had a modest dividend and used share repurchases sparingly because we were investing in the company. I think we all are hopeful that's what we have in front of us. I pushed a little too hard there in the third quarter with capacity, but the encouraging thing is demand is there. We have a line of sight to airplanes and airport capacity; our constraint is simply to ensure we have the people resources to balance everything. That will be a priority: repairing the balance sheet to some degree is certainly one of our objectives. You have two levers: paying down debt may generate earnings, and both work in tandem. Our long history of providing returns to shareholders has not changed. It will need to feather in with the very different environment we're currently experiencing; it's an interesting growth opportunity over the next five years. So, Bob, I don’t know if you or Tammy have anything to add?

No. I think you've covered it all, Gary.

Yeah. Okay. That's very helpful. And then a follow-up on that; this one might show my age and hopefully not cause anybody there to laugh. I'm thinking back to the infamous ten-minute turn. What prevents that today?

I'll give you a historical answer, and Mike is going to make both of us look old here. But Mike, his team, and technology just rolled out some solutions this week to help. The ten-minute turn—my first flight on Southwest was back in 1972, with two other passengers on board. It did not take long to turn an airplane around when there were just three customers. I asked Lemar Muse when I first became CEO about who designed the open seating concept. He humorously told me that you don’t need assigned seats when planes are empty. The passengers are really the gating factor with the turn. However, with more connecting bags, the calculus can change. But I will tell you, back in the day, we actually pushed the airplane before everyone was seated or buckled in with their seatbelts. Those were quaint stories now. But realistically, we focus on the turn and break it down into components: inflow, cleanup, and loading up. There are several reasons why turns take longer today than they did in the days you remember.

Yes, all these points are true that Gary mentioned. One significant item today is ensuring wheelchair accommodations for passengers, adding three to five minutes to the turn as they require additional time to get onboard. More travelers are also bringing bags onboard. New airplanes have larger overhead bins, making storage take longer than normal. Additionally, our operations agents now need to navigate longer jet bridges, which takes time. We recently rolled out new technology allowing our operations agents to be closer to the plane doors, which should help expedite the process.

This is very interesting and enlightening. Thank you for letting me ask that question. Take care.

Hey, good afternoon, everyone. I know in the past you've mentioned that given the number of new airports you've added, you're increasing your breadth but not your depth, and that most of the capacity growth going forward will be to build back depth. Tammy, in your comments about getting back to that, can you clarify at what capacity level you think you'll be able to drive better productivity across the network and increase recoverability?

Andrew, I'll start off and let you weigh in. We've added 18 new cities and Hawaii; we've deployed around 92 airplanes into either new cities or Hawaii service. This means 92 fewer aircraft in our pre-pandemic network. To restore productivity and depth, we need to backfill that number of aircraft. As we look ahead to 2022, we're making adjustments to our near-term capacity and want to add capacity quickly, but demand will pace that alongside staffing levels.

To build on that, if you look at the aircraft numbers that Tammy is discussing, it implies it’ll take us over a year to fully restore our network. This speaks to the longer-term play, and while we talk about restoration, a significant part of it is about depth, primarily restoring business-oriented markets. We expect that, with business travel returning, the depth markets will be added over next year. These same depth markets are essential for facilitating day-to-day recovery, as Mike was illustrating. Our March through summer schedules anticipate a notable step change in density and depth in our network; we won’t be fully restored again for over a year, but what will become evident is a much stronger mix between business and leisure classes aiding our recovery.

That's super helpful. Thank you. If I might quickly follow up on some of the GDS comments, could you discuss channel shifts you've observed and how those line up against your expectations?

We are seeing incremental benefits from the GDS; we launched Sabre just before the Delta variant hit. Given the Delta turmoil, it’s hard to assert clear trends, but it’s definitely incremental as planned; some of our largest corporations use all three GDS channels, varying use by demographics. The volume going through each channel depends on who is traveling at these corporations. So while it’s difficult to make definitive statements, we see it is clearly incremental and we planned for a substantial shift.

That makes sense. Thank you.

Hey, good afternoon, everyone. Thank you for taking my questions. I don't know if this is for Bob or Tammy, but how do we think about ongoing costs, especially relating to capacity recovery and getting back to some of those shorter-haul frequencies? Longer-term, Tammy, you mentioned projects back in 2018 and 2019 concerning technology investments. Are we back to an environment where benchmarking previous cost structures may not be the right approach, or can we get back to those unit costs?

I'll start, Bob, and then you can add your thoughts. Our CASM ex was up about 3.5% year-over-year in Q3, mainly due to ramp-up cost pressures. Without those impacts, our third quarter CASM ex would have been slightly below the third quarter of 2019, showing about a 2% decline. We’ve implemented several cost-cutting measures during the pandemic leading to substantial savings, but benefits are temporary as all those team members will return by year-end. As we're hiring 5,000 seasonal employees by year-end and reinstating more network capacity, it changes our competitive position. We've talked about our 18 new cities and the Hawaii investments that drew from short and medium-haul routes. This highlights how our network is now noticeably different compared to the pre-pandemic period. We've also been facing wage inflation and increases in airport costs, so there's uncertainty in pricing structures moving forward. As we move ahead, our focus will inevitably be on regaining our historical productivity edge, and we aim to enhance operational leverage through restoring previous capacities.

From a macro standpoint, nothing is normal right now. There are inconsistent trends in the business with multiple fits and starts leading to cost inefficiencies. Staffing remains a variable as we work through training and onboarding amid recovering demand, while changes in behavior have added complexities around excess sick leave and total leave numbers. Achieving the stability we want will rest on restoring productivity to pre-pandemic efficiencies and then generating further cost-saving measures. The primary goal is to improve productivity and stabilize what’s left of our crew networks while focusing on restoring productivity levels.

To add to that point, if you consider airplanes, airports, and people, we have a clear plan for airplanes that remain in our control. Airports are relatively similar. Our objective is to enhance crew productivity to what it was prior to the pandemic, and we will have to navigate through that process. This outcome will influence our hiring as we have excess aircraft that are currently non-operational. We have targets for growth and hiring, ensuring our staffing and capacity matches demand.

Is incremental hiring needed to restore those productivity levels?

Yes and no. It currently takes more people per departure than before. The analogy would be the participation rate in the US; our operational participation rate is lower than historical pre-pandemic levels. As we move beyond the pandemic, I believe that to return should revert back to historical standards. Increased hiring will certainly help meet this goal, especially since we have grounded aircraft waiting to be utilized that could add to the productivity you mentioned.

Thank you.

Hey, thanks for the time. I’m curious if you could share what you've learned from a network perspective that strained operations. Every carrier has adjusted their networks to deal with the current demand environment. You’ve lengthened stage length; you talked about how much of your capacity touches Florida. What are the lessons learned, and what types of markets are you now moving away from to improve operations?

To start, in summer, we had to curb schedules based on staffing; we cut down trips from October through year-end, so capacity versus staffing was the initial issue. The second lesson is that recovery becomes more challenging with fewer options for reaccommodating customers, crews, and aircraft, so restoring depth is critical to help manage day-to-day operation while needing employee resources to support recovery. There is a strategic focus to restore key performance benchmarks, ensuring a robust business travel-focused network for future stability.

The learning is more about ensuring a balanced network, primarily between leisure and business markets. The previous design favored higher short-haul, higher-frequency business markets that were trimmed as capacities changed. While adjustments have been necessary, we haven't dismantled the network built over 50 years, and we will look to restore the deep structure alongside the recent expansion to leisure-focused markets.

I endorse our strong overall operational analytics team, which understands all of this and has been diligent in utilizing historical data to improve current systems. Changes in labor availability and crew management have been particularly critical during this transition. Restoring our robust operational productivity must align with our business requirements as we work to support customer satisfaction.

Thank you for those insights. To pivot to labor availability: in your ability to hire ground and airport staff, are you seeing any relief in the hiring environment? Are more people applying for positions?

On the hiring front, the labor pool across the US is smaller than it was prior to the pandemic. Southwest is a premier employer, offering terrific benefits, thus we do not struggle to get applicants; however, our applicant rates have been lower due to the number of open jobs nationwide. We spent approximately 18 months hiring no one; therefore, it takes time to put our hiring team back together as we ramp up. It’s challenging, but we’re working hard on bonding.

The vaccination mandates have created a competitive environment, but we’ve successfully engaged long-standing techniques, like instant interviews and offers, to hire and onboard employees quickly. While this remains a challenge, we are optimistic, looking to hire thousands this fall and next year.

Thank you for providing those insights.

Good afternoon, everyone. Tammy, you've discussed inflationary pressures on labor extensively. Switching gears slightly, how do you anticipate higher fuel prices affecting your route expansion plans?

Fuel costs historically account for about a third of our overall cost structure, presenting an important consideration. When we analyze expansion pace, it factors into our overall cost mix. Thankfully, we are hedged well to protect against further price rises; the fair market value of our hedge book is over EUR900 million. While there will be increased inflation associated with rising fuel costs, we will account for this alongside our overall cost structure while planning future capacity.

Great. Thank you so much.

Thank you very much, Operator. Hi everyone, thanks for your time. Two questions; one, Gary, is this your last earnings call? Will you be back next year? I assume you will be at Investor Day.

Yes, I’ll be there for Investor Day and my transition date is February 1, so I plan to come back and haunt you one more time. See you in January.

Okay. Fair enough. I guess we will see you in December. Secondly, you spent a significant amount on technology over the last few years as you prepared for increasing business demand and more GDS exposure. What's next on that front?

At this point, every company is somewhat a technology company. Investing in technology is crucial to our operation, and we have numerous priorities for technology that require ongoing development. The significant need right now is enhancing our operational tools. Our workforce is talented, but they need modern tools to manage daily complexities. Investing in operational tools is at the forefront, enabling our employees to be successful.

We’ve rolled out a key improvement to maintenance systems, and our upgraded platform launches in November. We have additional technology priorities in flight planning, crewing systems, coordination tools, and decision support technologies. We will discuss further in the Investor Day on how we plan to utilize these advancements.

That’s very helpful. Thanks, everyone.

Thank you all for joining us.

Thank you, Rocco, and welcome to members of the media on our call today. We can go ahead and get started with the Q&A portion. Rocco, please provide instructions for how to queue for questions.

Thank you. Gary, during an interview today, you mentioned you don’t support forcing employee vaccinations and are doing the bare minimum to comply with the federal mandate. Are you concerned that this approach might lose travelers to competitors that state high employee vaccination rates?

I think it’s two different issues. The executive order mandates vaccinations and we are complying with that directive. We are encouraging vaccinations, but I empathize with those who choose not to. It is not our role to enforce this as a company. I don’t foresee us being in a different position relative to other airlines regarding health safety.

Would disclosing the percentage of vaccinated employees help attract travelers to Southwest?

We may do that after our deadlines and as we gather more responses. Until then, it is still speculation. Our vaccination reporting is ongoing as we approach the compliance date of November 24.

Thank you very much.

Hi, thanks so much. Reflecting on strategies to broaden your network and take depth out, do you believe this still makes sense going forward, or have challenges indicated a need to reassess that approach?

I disagree with the notion that this created complications. Our main challenge is staffing resources rather than network structure. The demand is pushing forward, and we’re eager to match it. The reality is that our earlier transition has served us well, and we’re looking forward to supporting traditional business flying that will enhance our performance as we return to a strong operational rhythm.

The data supports our performance; when schedules were reduced in September, we markedly improved our on-time performance. Our performance during that period was commendable and indicates we genuinely want to restore optimal balance. The high demand confirms we have room for potential recovery by further restoring our business-oriented routes over the next year.

We recognize that we have not dismantled the existing network for decades and the target remains to enhance the network we have while adapting to new conditions.

Thank you.

Hi, good afternoon. What prompted the pullback on your plan for unpaid leave for employees whose exemption requests haven’t yet been resolved? Do you foresee any challenges for your network next year, especially given the resurgence of international competition?

We won’t allow the pandemic to disrupt our busy holiday travel. There’s good alignment with the White House on travel management and accommodating employees caught in the process. Our accommodations are structured based on the guidance we adhere to as government contractors. Therefore, we will assure employees that their jobs are secure as we align with said mandates and work towards potential accommodation. To clarify further about the process: we are urging employees to choose between being vaccinated or seeking an exemption for various reasons, and we’ll assist them in this effort.

Good afternoon. Can you assure employees that adequate accommodations will be made without penalty regarding vaccination testing to maintain employment?

We will create a favorable environment for compliance matching employee accommodations, but the executive order doesn't outline specifics on vaccination versus testing acceptance. We're aware of the anticipated OSHA regulation but we’ll navigate our own guidelines for consistent alignment with those standards.

Thank you.

Thank you for joining our call today. We will now begin the media Q&A portion. Rocco, please provide the queue instructions.