Southwest Airlines Company (LUV) — Q4 2021 Earnings Call Transcript

Thank you, Chad. And thank you to everyone for joining us today. In just a moment, we will share some brief remarks and then open it up for Q&A. And 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. First, we will make forward-looking statements today which are based on our current expectations of future performance and our actual results could differ substantially from these expectations. And second, we had a few special items in our fourth quarter results, which we excluded from our trends for non-GAAP purposes, and we will reference these non-GAAP results in our remarks today. So, please see our press release from this morning and our IR website for more information and our cautionary statement which covers these topics in more detail. So, with that, I have the pleasure of turning it over one last time to my friend, Gary Kelly.

Thank you, Ryan. And good morning, everybody. And thank you for joining us for the Southwest Airlines fourth quarter 2021 earnings call. First and foremost, I’m delighted to say there were earnings and better than we thought at Investor Day last month. It’s obviously a great way to end a tough, but much improved year, and a great way to start a new year. We’re, of course, finding our way through the Omicron surge in January, February, and looking forward to a strong rebound in March and thereafter. As always, barring any unforeseen events, I expect we’ll make great progress in 2022 and will enjoy another much improved year. As we all know too well, it will not be without its challenges. But our people and our leadership are more than up to the task. I’m enormously proud of all of them. And I thank them profusely for their resilience and perseverance through these myriad challenges over the last two years. They’ve just done a phenomenal job. Southwest is on top because our people deliver great service, low fares, and our business model delivers consistent profits and handsome returns on capital. We’ve emerged from two years of pandemic with our balance sheet strength and liquidity intact. We are perfectly positioned to restore, expand and compete aggressively in the coming years. I could not be more enthused and excited about our future. So, with that, I’m going to turn it over to our outstanding CEO and waiting for five more days, Mr. Bob Jordan.

Well, thank you, Gary, and hello, everybody. We were last together on December 8th at Investor Day, and a lot has happened since then. But before I get to that, I want to thank my friend Gary Kelly. Gary is a phenomenal leader and has done so much for Southwest and for me personally. There’s no way to say thank you enough for his 18 years of leadership as our CEO. I’m thrilled that he will be our Executive Chairman. I’ll take over the CEO responsibility for investor meetings going forward. So, this is Gary’s last earnings call, and my friend, I just want to stop and say a huge thank you, and I love you. Well, 2022 has had a challenging start, but that doesn’t change our goals for the year: getting properly staffed, focusing on our people, making meaningful progress returning to our historic operational reliability and efficiency, providing our legendary hospitality, and returning to consistent profitability. We made significant progress in '21, including a profitable fourth quarter despite the pandemic, and saw strong demand. 88% of 2019 revenues restored and managed business demand ahead of our expectations for December. While we don’t expect to be profitable this quarter, the Omicron impact does appear to be isolated to January and February. We expect a profit in March and to be profitable in the remaining quarters for the full year 2022 based on our current plans. Our people performed just really well during the fourth quarter, as they always do, particularly during the holidays, and demand held up well through the year despite the Omicron variant. Beginning in early January, we experienced a very difficult environment due to rapidly rising COVID cases and a decrease in available staffing levels. In the first three weeks, we had roughly 5,000 employees test positive for COVID, which is roughly 2.5 times what they were during the Delta variant. The resulting staffing shortage combined with winter weather caused a spike in flight cancellations and significant disruption to the operation. I’m pleased to report though that over the last few weeks, the operation and staffing have stabilized, and we’ve seen performance even better than during the holidays. Just yesterday, we were 95% on time, which I’m truly proud of. To maintain sufficient available staff, we extended incentive pay programs for Ops Employees through early February. While that does add temporary cost pressure, it’s imperative that we have sufficient staff to operate our schedule and minimize our flight cancellations. COVID case counts are on a downward trend and we intend to normalize our staffing and pay structure as a result. Hiring is part of the equation, of course, and we met our 2021 hiring goals and are on track to add at least 8,000 employees this year. We’re also raising our starting wage rates to be competitive in the market due to the impacts from Omicron and recent staffing challenges. We’re further moderating our first half 2022 capacity plans to provide additional buffer for the operation. We’re encouraged by the recent improvement in bookings across the booking curve, especially in the March timeframe, and we are hopeful that business travel resumes to the 2021 trend. It appears that Omicron impacts are pretty well contained to January and February from a revenue perspective, and we believe our temporary approach to boost available staffing is working. We will stay flexible, of course, and will be willing to further adjust our plans if needed. Several things have transpired since Investor Day, all driven by the pandemic, though. But for Omicron, we would be on our Investor Day Q1 and full year 2022 guidance. However, I want you to know, make no mistake, we are laser focused on preserving our low-cost position in the industry and returning to 2018 productivity and efficiency levels by the end of 2023. We believe Q1 CASM-X is at a peak, and our plans call for unit costs to ease from here into 2023. Looking at 2023 based on current growth plans, we expect CASM-X to be down compared to 2022. Restoring both the network and our fleet efficiency are key to returning to historic efficiency levels. Beyond that, I’m really excited about opportunities that continue network growth as we add gates in key cities such as Denver, Phoenix, Las Vegas, Baltimore, and Nashville. Beyond 2023, we see opportunities to meet and then beat our historic productivity and efficiency levels as we continue to grow the company and focus on modernizing our operational tools and processes. Mike will talk more about that. I want to repeat my main message from Investor Day: despite the near-term noise, we have a superb business model and substantial underlying competitive advantages. We have a great five-year strategy and a strong set of initiatives that will drive significant value. Our new co-brand credit card agreement is in place with our partner Chase, our GDS expansion is complete, and our Southwest business team is armed with the tools they need to grow our business customer base. We continue to work on our new fare product and revenue management system optimization, so more to come there. Both should begin producing value this year. As we continue retiring older 737-700 aircraft and taking the MAX aircraft, this is in support of our fleet modernization initiatives as well. All combined, these initiatives are expected to deliver incremental EBIT of $1 billion to $1.5 billion in 2023, and we continue to expect roughly half of that value this year, given the initiatives in place. Like Gary said, last but not least, I just want to thank our amazing people. There have been all kinds of challenges and they have performed just superbly, continuing to do an incredible job managing through all these challenges. Together, we will emerge from the pandemic and seize the opportunities in front of us. And with that, I will turn it over to Tammy.

Right. Hello, everyone, and thank you, Bob. I’ve worked with Bob for a long time, and I agree with Gary. He is going to be a great CEO. And my friend, Gary Kelly, you are amazing, and I just want to thank you for all that you’ve done for our company, for all of us, and for all of our shareholders. And I’m not going to say anything else because I will get choked up. So, instead, I’m going to provide a quick overview of our financial results and share some additional color on our outlook beyond what we provided in our press release to you all this morning. I also just want to thank our employees for their incredible resilience as we manage through this dynamic environment. It is their hard work, dedication, and focus that enabled us to achieve an important milestone in our recovery with our first quarterly profit since the pandemic began. We reported a $68 million profit in the fourth quarter or $0.11 per diluted share. Excluding special items, we reported an $85 million profit or $0.14 per diluted share. As Bob mentioned, our fourth quarter profit was driven by strong leisure demand during the holidays, business travel momentum, and incremental revenue from our new co-brand credit card agreement with Chase. Our fourth quarter results were all within the guidance ranges provided last month at Investor Day. For the full year 2021, our net income was $977 million or $1.61 per diluted share, driven by $2.7 billion of payroll support program proceeds. Excluding this temporary benefit to salary, wages, and benefits expense and other smaller special items, our full year net loss was $1.3 billion or a $2.15 loss per diluted share. Andrew will cover our revenue trends and outlook here in a minute. Taking a look at cost, we continue to experience inflationary cost pressure during the fourth quarter, primarily in salary, wages, and benefits, and airport costs as expected. A portion relates to hiring, as we made great strides toward our hiring efforts in 2021 and remain on track with plans this year. The labor market continues to be a challenge, which continues to pressure wage rates across the board. Since Investor Day, we have experienced additional cost pressures related to Omicron and winter weather. As a result, our first quarter unit cost inflation compared with the first quarter 2019, excluding fuel special items and profit sharing, has increased about 10 points. Roughly half of that increase is driven by the $150 million of additional incentive pay we are offering to operations employees through early February, and the other half is associated with flying fewer ASMs than we were planning. In light of the significant impact from the Omicron wave on available staffing, extending the temporary incentive pay and further reducing our capacity were necessary steps to stabilize the operation. Aside from these impacts, we would be on track with our previous unit cost outlook. Market fuel prices have continued to rise, resulting in a $0.10 increase in our fuel cost per gallon guidance. Our estimated first quarter fuel price in the $2.25 to $2.35 per gallon range is roughly $0.25 higher than our first quarter 2019 fuel price, inclusive of an estimated $0.35 of hedging gains here in the first quarter. Turning to our full year guidance. At Investor Day, we planned for capacity to be roughly flat versus 2019 levels with no material impact from the Omicron variant on either revenues or costs at that time. Fast forward to today, the impact from the Omicron variant on available staffing has led us to reevaluate our first half 2022 capacity plans, particularly March through May. Our planned flight schedule adjustments take some capacity upside optimism off the table for this year and reduce our full year 2022 capacity outlook by about 4 points from roughly flat to down 4% versus 2019. I’ve already covered the $150 million of additional incentive pay in the first quarter. In order to be more competitive on the hiring front, particularly for ground operations, we are raising starting wage rates from $15 per hour to $17 per hour, which is estimated to have a $20 million to $25 million total impact this year. Of course, we have contemplated labor rate inflation in our guidance as best we can for this year, understanding that the market is somewhat uncertain. This is clearly not where we hope to be along our recovery curve nearly two years into this pandemic, but we are making great progress. While we must remain nimble in this environment, we take the necessary actions to care for our employees and provide a reliable product for our customers. We are very focused on the long term and determined to return to 2018 levels of productivity and efficiencies as we shared with you all at Investor Day. As Bob said, our goal is to get there by the end of next year. Although it is early, based on our current plan for 2022 and preliminary plan for 2023, we expect 2023 CASM-X will decline year-over-year compared with 2022. Longer term, our framework that we provided at Investor Day remains unchanged, which includes a post-pandemic target of mid-single-digit ASM growth accompanied by low single-digit CASM-X growth. I want to be clear that our longer-term CASM-X framework includes an estimate for labor rate increases as best we can estimate today. Turning to fleet, we currently have 77 MAX firm orders and 37 MAX options with Boeing this year. While our plan assumes we will exercise the remaining 37 options this year, we maintain the flexibility to evaluate that intention as decision points arise. We continue to believe that taking the additional options this year will yield a positive NPV on aircraft replacement if we don’t deploy them in the network. As I mentioned before, we won’t incur a material CASM-X penalty from holding extra aircraft if we temporarily park some of our -700s while capacity is moderated this year. As we work our way back to an efficient utilization of the fleet, we remain in the fortunate position to have the flexibility needed with our retirement plans without a financial penalty. I’ll wrap up with a quick note on our balance sheet strength. We ended 2021 with liquidity of $16.5 billion, and our leverage is at a very manageable 54%. We continue to be the only U.S. airline with an investment-grade rating by all three rating agencies, which I believe is one of our key competitive advantages. We have ample liquidity that allows us for a further cushion in the event of further COVID waves. Overall, our balance sheet strength puts us in a category of one in terms of our ability to withstand shocks and remain financially healthy. With that, I will turn it over to Andrew.

Thank you very much, Tammy. I’ll also start by extending my gratitude to Gary. I’ll be forever grateful for all that he taught me with his words and actions. I’ll provide some additional color on our revenue trends and outlook, and point you to our earnings release for more detail. Looking back to our last earnings call in October, we were dealing with a Delta variant. The negative revenue impact to Q3 was $300 million. At that time, we estimated a negative revenue impact to Q4 of $100 million. Revenue trends began to pick back up and stabilize in mid-September, and our outlook called for a sequential monthly improvement in revenues throughout Q4. We reaffirmed this in our early December investor update, and we closed the quarter strong. Our operating revenues finished within guidance, down 11.8%. Managed business revenues came in better than guidance, down 50% in December. We saw solid leisure demand for Thanksgiving and Christmas, and business demand held up well with positive momentum from GDS and Southwest business. The negative revenue impact from the Delta variant came in lower than we thought at around $60 million as we saw a continued rebound in demand and yields throughout the quarter. However, we saw some choppiness in late December from decelerating bookings and increasing cancellations, and we had a $30 million negative revenue impact from the Omicron variant due to increased COVID cases. Combined, this $90 million COVID impact in Q4 was slightly less than our original estimate of $100 million from COVID as we were able to mitigate some of the load factor decrease through higher yields. The most notable item in Q4 was incremental revenue from our new credit card agreement with Chase, which we covered at Investor Day and included in our most recent revenue guidance. While we can’t share specifics about the incremental revenue from our new credit card agreement, you can see that other revenues in the fourth quarter 2021 increased 20% compared with Q4 2019 while outpacing the recovery in passenger revenue. We are on track for expected benefits in 2022. Our new markets continue to develop and perform overall in line with expectations aside from the impacts from the Delta and Omicron waves. Looking at the first quarter, we estimate the weather-related and staff-related flight cancellations in January resulted in a $50 million negative impact to operating revenues. Additionally, bookings have slowed for January and February, which are seasonally low travel periods for leisure. Trip cancellations were running quite high, beginning in early January but have moderated and are back to normal trends. We expect the Omicron-related negative revenue impact to January and February combined to be roughly $330 million. Like the Delta variant, the impact of Omicron-related trip cancellations has been mainly focused in the close-in window, and we remain optimistic about the likelihood of demand recovery in time for spring break travel. On the corporate travel side, the business demand we experienced in December has slowed, but we continue to believe there is pent-up demand for business travel. We are hearing from many of our corporate customers that they intend to ramp up travel post-President’s Day. I think that will depend on where we are with COVID case counts and hospitalizations, but we are encouraged by what we are hearing from our customers regarding their future travel plans. We expect first quarter managed business revenues to be down 45% to 55% versus 2019, and to improve sequentially from January through March. Our Southwest and GDS business initiatives are also on track for expected benefits in 2022. When you put all these moving parts together, we reach our first quarter operating revenue guidance of down 10% to 15% versus the first quarter 2019. This outlook is in line with where we were in the fourth quarter, but we are currently expecting a step change in improvement in March. As for our other initiatives, our new fare product remains on track for deployment by midyear, and the new revenue management system continues its progressive rollout. We are also adjusting our published flight schedules in March through May to further support operations and adjust to available staffing trends. The result of this exercise, combined with the flight cancellations we've experienced so far this month, is a three-point reduction in first quarter 2022 capacity from down 6% to down 9% compared with the first quarter of 2019. For the full year 2022, as Tammy mentioned, it’s a 4-point reduction from roughly flat to down 4% compared with the full year 2019. Our flight schedules remain subject to further adjustments if needed. While this is a slight delay to our previous capacity plan, we still have time to get back on track. As of March 2022, we are roughly 75% restored based on trips and continue to expect to restore the vast majority of our route network by the end of 2023. With that, I’ll turn it over to Mike.

Well, thank you, Andrew, and hello, everyone. Our people faced quite a bit of adversity in 2021, and I’m really proud of their tremendous finish to the year, and they’ve built quite a bit of momentum thus far into 2022. As we’ve all said, we began moderating our capacity in the fourth quarter to provide more staffing cushion in this environment. But we knew we had some peak holiday travel periods over Thanksgiving and Christmas and through the New Year’s timeframe, so we really ramped up our daily trips. We needed all hands on deck during those periods, and we incentivized folks who were willing to pitch in and pick up extra shifts or work on their off days with premium pay. Our people really responded. Excluding the day of Thanksgiving, we averaged about 3,500 trips a day over the Thanksgiving holiday period, which was up roughly 320 trips a day compared to the weeks leading into Thanksgiving. Our on-time performance for that period was 87%, which was better than our five-year average. We ran similar operations over the Christmas holiday, which increased our daily trips to roughly 3,600 a day. Our people responded well again. Normally, during the Christmas holiday, we deal with weather, but this year, we also confronted the beginning of a sudden and surging spike in COVID cases. Thanks to our staff stepping in during Christmas, we achieved a completion factor of 99.2%, and we had less than 1% of our flights canceled despite that COVID surge. In total, we ended up the fourth quarter with an on-time performance of 72.6%, mainly due to some challenges we faced in October. While not up to our standards, we must do better, and we will. Our holiday performances were very good, and we know that we can operate on peak travel days when everyone is available. So, we really have momentum to build on. As opposed to those previous holiday periods, January started under the severe weather and the Omicron variant spreading rapidly. As Bob mentioned, we had roughly 2.5 times the number of COVID cases for Omicron than we did with Delta, leading to around 5,000 employees sick during the first three weeks of January. The biggest impacts were visible in flight cancellations for the week of January 1 through January 7, and during that week, we canceled roughly 3,800 flights—about 1,900 due to weather and 1,600 due to staffing problems. Our on-time performance for that period was just 41.5%. However, we reinstated the incentive pay program to motivate those who could pick up extra shifts and help keep the flight schedule intact. Once again, the response was superb, and we implemented it effectively. From January 9th through the 25th, our on-time performance jumped to almost 87%, leading the industry for marketing carriers. The incentive pay program remains in place through February 8. We’re also benefiting from a decline in employees sidelined due to COVID. Our case counts peaked in that first week of January. For instance, we had over 700 pilots and 1,500 flight attendants able to work during that timeframe. COVID numbers have dropped significantly since then to around 100 to 150 people for each group, much closer to what we originally expected. Next, we continue to hire aggressively. Bob mentioned that getting staffed is one of our key objectives for 2022. We want to progress toward our historic operational reliability and efficiency metrics. In many ways, those are interlinked, as we’re not operating at optimal levels today, nor is our network restored to where we want to be relative to 2019. Of the more than 8,000 employees we plan to hire this year, around 40% will be for flight crews, while about 40% will be for ground operations. That’s heavily focused on operations to support our schedule this year and beyond as we resume growth. As we return our route network this year into 2023, it should create a foundation for better operational leverage. We’re also working on various other initiatives to improve efficiencies. Beyond our fleet modernization cost initiatives, we're enhancing our turn times, which are already industry-leading; expanding self-service options for customers; and investing in daily schedule management tools to better manage our regular operations efficiently. We have numerous items in our technology and process improvement pipeline to support our low-cost position within the industry and enhance our overall efficiency and resilience. Lastly, as we move forward into 2022, we have an exceptional order book for the fleet, boasting its economics and flexibility. We have new technology foundations in place for our maintenance and airport systems. We’re laser-focused on staffing and running a reliable operation, while also building an operations modernization portfolio of initiatives I touched on. Our employees have sacrificed and worked hard through this challenging and ever-changing environment, positioning us well to carry this January momentum through the first quarter and beyond. With that, Ryan, back to you.

Well, thank you, Mike. I believe we have analysts queued up. So Chad, if you please go ahead and begin our analyst Q&A.

Hey. Good morning, everybody. Just quickly, Gary, when I first met you back at Kidder Peabody, I could not have been less relevant, but you showed me just as much respect as you did to the Glenn Angles and Kevin Murphys and Sam Buttricks of that era. And it really meant a lot to me, and it gave me the confidence to continue on my career trajectory. I will sincerely miss speaking to you on these calls, but I do look forward to hopefully being a thorn in Bob’s side.

I would expect nothing less.

Okay, good. I’ll start with Tammy, though. So, Tammy, you emphasized that your cost outlook does envision higher wage rates, but I had asked you about that at Investor Day. At that time, you said you weren’t accruing for new labor contracts. I think I probably got my wires crossed. Could you clarify that there’s something for new union contracts in your forward cost guide? Is that accurate?

Yes. And thanks, Jamie, and I appreciate the question there. So yes, we are not currently accruing for open labor contracts today. So, we are not accruing for that, so there is nothing in our first quarter guidance. Longer term, though, we have incorporated our best estimate of annual labor rate increases into all of our targets. So, hopefully, that clears that up for you.

It does. Thank you very much. And any update on the fourth fare rung that you intend to load this spring? Are you still on track? If you’re not ready to disclose what it includes, could you share any ideas that maybe you ruled out from a pricing perspective?

Hi Jamie, it’s Andrew answering your question. We’re still on track for a midyear rollout of that. We’re currently going through the technology user acceptance, and it’s all going well. We expect this to be above 'Wanna Get Away', so we’ve ruled out taking away features from customers and charging them more. These will be features that are in addition to 'Wanna Get Away', for which we believe customers will happily pay a little bit extra. We also believe these features will be relevant to business travelers, especially small and medium-sized business travelers. So, that’s how we want to position it versus, say, the fare product just above and just below it. Does that answer your question?

It does indeed. Thank you very much. Yes, that will be it. I’m sure a lot of accolades coming for Gary. So, I get the punch here. Take care.

Hey. Thanks. I don’t actually have any ancient Wall Street history. But I did want to ask you, Gary, if you received any calls from music producers since you dropped your recent tribute.

We’ve always been very circumspect about confidential information here, so I’m going to have to decline to answer your question.

Fair enough. I wish you well on that journey. Regarding the 4-point cut to full-year capacity, is that all about the rate of demand improvement in the first half? Or was any of that a function of kind of looking at operations and deciding you needed an even bigger buffer on staffing?

Yes. I’ll jump in, and Andrew and others may want to chime in. But no, it really was more about adjusting, being a little more cautious with regard to our operations. Obviously, Omicron had a significant impact on us here in the first quarter, so we just felt that it was prudent to take some capacity out. We’ve stabilized operations, and we’ve performed well in that respect.

The only thing I’d add to what Tammy said is it was designed to make it more offerable and provide cushion to the operation, so that’s both how much we’re flying, but also where we’re flying, given some of our ground-based staffing shortages. Both of those were the crux of it. When we make those adjustments, we consider demand; but the motivation was operational reliability.

Yes. The only thing I'd add is that it's really focused on staffing right now. We have solid staffing plans in place, and I'm confident we will meet those in 2022. If we exceed those, we will have the flexibility to adjust our capacity later in the year. At this stage, it all hinges on our staffing levels. We need to ensure we are running a reliable operation and have sufficient staff available.

And then, you mentioned it with ground handling, but I wonder if you could provide some anecdotes of where you know today—you’re obviously overstaffed from a longer-term perspective. What are some of the functions beyond ground handling where you’re keeping an actively higher buffer, and where predictability is just not there yet?

Yes, I might separate the experience at the beginning of January from the rest of the year as we had a rapid rise in COVID cases in the first couple of weeks of January. We had an overall Southwest Airlines impact operationally, then we had specific locational impacts. An example would be the Denver ramp. We had a rapid rise in our Denver cases, and we had to quickly moderate the Denver schedule to be able to operate there. But the overall adjustments to capacity impact all groups. We need pilots, flight attendants, ramp staffing, and we need the appropriate buffer in all those areas until we see what a more normalized staffing environment looks like. So, it's really not confined to one group. We have buffers across all those groups.

Yes. Reiterate to you, Gary, you’re a legend, man. It’s been a pleasure. Thank you for keeping it interesting over the years. I had a question for you. I’d love to get your parting thoughts on the industry’s outlook over the next two to three years. It’s not a question about Southwest. I’m sure you’ll say you’re leaving the Company in a good position. But as someone that’s made a lot of good predictions over the years, what is your view on how the industry unfolds competitively and growth-wise over the next two to three years?

Well, thanks, Hunter. I don’t know how good of a prognosticator I’ve ever been. I think if you compare the U.S. to other countries, the U.S. has left the commercial airline industry in pretty good shape. Were it not for the CARES Act, I think we’d be having a very different conversation. Having said that, there are still significant variations. When you talk about the industry, it’s hard to consider it that way because there are strong and weak segments. There are strong balance sheets and weak balance sheets. What we experienced in 2021 is really humbling; a year ago, I’d have never bet that this would be where we’d be in early 2022. I thought we’d have this pandemic beat and behind us, and it’s far from that. This presents an even bigger quandary regarding where we think we’re going to be with the pandemic two years from now. I know someone made the prediction that we could be dealing with this for 10 more years. That relates directly to travel, tourism, hospitality, restaurants, all of that. We just have to hope for the best and plan for the worst. It feels like business travel wants to come back, and that’s encouraging. We were hoping for stronger business travel in January and February than we’re realizing, but we all know why that hasn’t happened. The industry is well-capitalized; it's taken on a lot of debt, which we'll have to carefully manage. We’re going to have to be more heavily reliant on consumer travel in the near term. International travel will also likely be different in the future than in recent history, so we’ll need to prepare to be more successful domestically over the next couple of years. In my opinion, the best service and the lowest price will win. If you have that combination within the industry, you’re going to win. It's always been a low-cost game, but that’s even more crucial now, and it will be a laser focus for our leadership team for the next couple of years.

That’s very helpful. Thank you. I appreciate that. I asked you this question about a year ago, Gary, but you are a never-say-never guy. If there was anything you’d never say never to, that same question goes for Bob. Is there anything we can expect you would say you’d never do as CEO or anything Southwest would never do while you’re running the Company?

There are some easy things here. We’re not going to charge for bags. We’re not going to have change fees. We will always be transparent. We’ll be open and honest with our consumers. Things change over the years for sure. In my 34 years here at Southwest, we’ve changed our boarding, added WiFi, and established our Rapid Rewards program. But we’re always going to lean towards our customers, including no bag fees and no change fees. Another unwavering principle is we’ll treat our employees right; we’ll treat our customers right; and we’ll stand for service.

Gary, I’m going to miss you as well. I remember our first meeting when you and I were sitting in my office at Lehman Brothers. It seems like we’re too young to retire, and I wish you the best in whatever you decide to do going forward. My question is really about the credit card program. Is there a way for Chase to separate out the charges made for travel and airline versus charges made for goods? As you think about going forward, the percentage of goods should decline as people switch back to travel. Can Chase parse that out for you and do you gain any intelligence from that?

Helane, it’s Andrew. Yes, as part of our relationship with Chase, we do receive that information regularly and review it. Indeed, during the pandemic, we saw charges skewed towards goods and less towards services. Services mirrored the pandemic; we could see when restaurants were more active or flights increased. We can track it in a high-frequency manner, which helps us understand the pace and duration of these waves. We expect a shift towards services, which would benefit our industry as travel recovers.

So, would you expect that the rate of growth would accelerate for services?

I believe it would accelerate. Given the composition of people’s spending, services are underweight compared to 2019. With people sitting on good balance sheets and cash from stimulus programs, they have pent-up demand for expenditures beyond normal salary-based spending. Therefore, we expect the composition to revert back more to normal as we move past the pandemic, leading to increased services spending on our card, which would benefit the economy.

That’s very helpful. Thank you. And then about the constraints with spring capacity due to labor constraints, would you be able to offset that with pricing?

Helane, I’ll jump in on that. Obviously, we don’t comment on pricing. We’ll work hard to achieve our financial objectives, but we’ll decline to comment specifically on pricing.

But I would point you back to the fourth quarter in which our revenue and pricing were strong. We had about 92% of capacity restored and 88% of revenues restored, leading in our industry. Fare yield was just slightly below 2019 levels.

That’s helpful. Thank you, everybody. And goodbye, Gary. It’s very sad.

Hey. Good morning, everyone. Gary, it goes without saying—you’re going to be missed. And to be on a Southwest conference call without Gary Kelly, we’re going to get used to it, but Bob is the right guy. I do want to ask you one final question on a call. In your new role, or I should say, your continuing role on the Board, will you still dress up for Halloween?

I don’t think anybody can stop me. That was one of my pure joys in life, and I do have grandchildren who get a kick out of it.

That’s great to hear. So, Gene Simmons will live on through Gary Kelly.

Yes. He’ll live on, and he’s still my pal.

Alright, on to a more serious topic here. I want to go back to the capacity change for 2022. Tammy, this is to you. For the March quarter, you’re shaving 3 points, but for the full year, you’re cutting 4 points. It seems significant. You mentioned being cautious. Is that all due to demand, or is some of that based on the need for staff?

Sure. I’ll give some color here, and then we may have some other chime in. But yes, we haven’t given up on adding capacity in the second quarter. Our priority is on operations. We have stabilized, and really are performing outstandingly.

But it’s really all about forecasting. If you look at Omicron and how quickly we have adjusted, I think our network planning team is making 2 to 3 times the adjustments they would typically make. We have a great plan for '22, but staffing is crucial. I’m pleased that we’re on our hiring plan for the fall and January. If we beat those, we have some upside.

Okay, so it’s very fluid. And just, Bob, as a quick follow-up, you have mentioned change fees. You talked about bags. I think I saw about a week or two ago, there was something about seat assignments. Anything to highlight with respect to that? Maybe it was misinterpretation.

No; it was just an illustration. I was going through the kinds of things you have to consider over time. We will probably want to resurrect the work we did there, understanding what our customers and business customers prefer.

I’m curious about the managed business revenues. You mentioned expecting a step change in March. How do current trends compare to how you exited the year? Any color on the impact from your GDS initiatives would be helpful.

Sure. This is Andrew. We see managed business travel fluctuating with COVID waves. There will be a period where cancellations surge and bookings slow, but as cases come down, we see cancellations decrease, and then bookings pick up. We are currently at that point for managed business. We see a slight shift of travel from previous channels to GDS, and that’s part of our business case although challenging to extrapolate precise numbers due to COVID’s disruption. We’re achieving our business case, which was all part of our plan to offer corporate customers a choice of channels to buy from Southwest Airlines.

Makes sense. Shifting gears a bit, on the regional airline side, you had some of your legacy competitors cut many small markets. Regional airlines are struggling with staffing and the 5G issues. Are you seeing any benefit here given that Southwest flies into some smaller markets than the ULCCs?

Well, I can read about their unfortunate situation. However, COVID is such a predominant force in bookings right now, it’s tough to tease out trends. We’re managing our network for our customers and employees, aiming for stability while navigating the current market.

Alright. And then, Gary, I’d like to echo many comments shared on this call and wish you the best. Thanks.

Could you provide an update on where you are with Boeing on getting the MAX 7 certified? As you look at the next 2-3 years, should we think about retiring expectations in relation to that? Will we see older classics retired as you bring in these aircraft?

Yes. We have about 450 737-700s, and at least half of our order book will probably focus on replacing those airplanes. Boeing is telling us they’re targeting ATC for the MAX 7 by the end of the first quarter, contingent on the FAA review process. Once they get that type certificate, it will take about 7 months for us to prepare to operate that airplane. We have a lot of flexibility in our order book, and we still expect to take the 114 airplanes, but we may not fly the MAX 7 until early 2023.

That’s very helpful. Andrew, assuming you’ve been working on corporate efforts through the pandemic, can you provide color on GDS enrollment? How has that impacted your traction with the number of corporate units or win rates in bid processes?

Certainly. You can refer to ARC data as we entered GDS, and settled into ARC—we provide sales there too. Even before GDS, we built up our corporate sales force. Our corporate clients have been steadily increasing their accounts. They buy through multiple channels, including SWABIZ, Direct Connect, and GDS. This depends on travel purpose and groups within companies. This allows smooth transitions between channels, leading to incremental volume as we’re hearing from corporate clients.

Thank you, Gary. Wishing you all the best. Congratulations.

Gary, I echo those comments. Congratulations. I wanted to ask about the bottleneck in ramping capacity from '22 and '23. It seems that a lot of the industry has faced supply constraints rather than demand constraints, especially domestically. How do you think about overcoming those challenges as we take on around 200 aircraft or so?

Well, I’ll jump in to start. We faced many challenges post-9/11, with our travel mix skewing towards longer-haul travel. Our approach in 2022 is to accept that the current environment might be here for a while. We're planning to staff our airline accordingly while being agile in our adjustments to capacity in terms of staffing.

We’re currently in a different phase. In terms of the pandemic, we’re in a position to manage down capacity because demand has rebounded. Demand was strong; this was evident in the fourth quarter, with strong revenue, strong yields, and strong fares, even with corporate travel down 50%. Leisure travel has restored to 2019 levels.

Alright. Any last thoughts before we wrap up?

Thanks, Ryan. I want to acknowledge all the kind comments from everyone. I appreciate that. Reflecting on my time, I started as CFO in 1989, and we never did this kind of call then. I was Investor Relations then, and, Tammy, I’m grateful you came to help me out. In those days, we had an auto-fax system for our press releases, and we had only one assistant for three of us. They’d get angry because they were at the bottom of the fax list. Over my tenure, I’ve done 134 quarterly calls and I'm grateful to each analyst. I’ve learned a lot from the questions and friendships formed over the years. I’m proud of our people; we have faced challenges admirably. I’ll continue to support Southwest in my new role on the Board.

That’s fantastic. Thank you for sharing. Of course, you are a legend, and I think you’re the greatest of all time. That wraps up the analyst portion of our call today. I appreciate everyone joining, and have a great day.

Thank you, Chad. We can go ahead and get started with the media portion of our call today. I just want to welcome everyone. If you want to go ahead, Chad, and if you can give them instructions to get queued up, we’ll get started.

I was wondering with those 5,000 COVID calls you had in January—were all of those individuals sick themselves? Are you seeing fallout from family members or schools being closed, and similar issues affecting the economy?

Kyle, those were all people who tested positive for COVID themselves. They weren’t not coming to work because of some family issues.

The good thing is that different than Delta, cases came on quickly. The rise was alarming, but the fall in cases was similar, helping us get people back faster than with Delta.

It’s been an incredibly challenging time for everyone. Additional demands on households undoubtedly impacted that as they cared for a sick spouse, child, or dealt with closures. I’m sure that influenced our figures.

With your hiring for 2022, how many of those people are replacing other workers? And overall, do you expect salaries to be lower than 2019 before the pandemic?

The majority of the 8,000 number you hear will be the net increase in full-time active equivalent employees. Hiring brings the opportunity to average down scale increases. Approximately 40% of that group will be flight crews, 40% will be ground ops. All of these are covered workgroups, providing opportunities in wage rates as newer fares come in via competitive markets. We had about 55,000 active employees at the end of 21, and by adding the 8,000, we aim to finish 2022 with about 63,000 to 64,000 active.

Leslie, to add on that, we had modest but not alarming attrition during COVID. From my recollection, we ended 2021 with around 55,000 active employees. After adding the 8,000, our aim is to finish 2022 at about 63,000 to 64,000 active employees.

We’ve likely asked about this every quarter, but curious about what you're hearing regarding the mask mandate and its possible extension.

Alison, there’s currently no discussion about extending or terminating the mask mandate. It can be established that once onboard the aircraft, the environment is very healthy due to continuous air refresh. Adding masks enhances safety during the Omicron surge, and it’s not the right time to revisit this question.

If I could also ask about hiring in the challenging labor market, what else are you doing aside from the minimum wage increase? Are you utilizing creative tactics to bring in more talent?

In this tough environment, we’re using every lever we have. Raising our starting wage rates is just one part of the dynamics we’ve implemented. We've strategized to streamline our hiring processes—if it once took 30 days to move from interview to hire, we can reduce that to eight or ten. The longer the process, the higher the risk of applicants taking jobs elsewhere. We’re also doing instant offers and utilizing social media to identify candidates. We’re exploring every avenue for hiring since Southwest is a great company attracting lots of resumes, but the competitive market is challenging.

Gary, you mentioned 1989—I'm in possession of a Gary Kelly Vice President of Finance business card. I’m wondering, could I monetize it via NFT or something? I wanted to wish you well.

Thank you, Dawn. I remember all the rough interviews I had to endure with you.

Two questions on the traveler front. Quickly on March to May flight cuts—can someone provide that capacity decrease in terms of daily flights and how much business is already on the books? How many people will need to be notified about schedule changes? And more importantly, regarding the new fare category, are you willing to say whether you'll offer something like early boarding or charge for certain aspects you might take away?

The March flight counts have already been accounted for, and notifications have already been handled. The April through May counts haven’t yet been published, and we’re working to finalize those soon. It’s tough during COVID, which skews demand. We expect that advance timing will minimize disruption. Our plans are still underway.

No features will be taken away from 'Wanna Get Away'. We won’t compromise their offerings on boarding, services, or otherwise. The adjustments we’ve made in recent years were designed to offer consumer-friendly options, and we’ll continue that into the new fare structure.

Congratulations again, Gary. I wanted to know your plans regarding full onboard service returns, including alcohol.

We planned to reinstate full service around the middle of February but decided to delay that due to the ongoing Omicron virus. Now we are looking at using that sometime late in the first quarter or early in the second quarter.

You’ve previously mentioned hiring a total of 25,000 workers over three years. Is that realistic, or do you think you'll need to adjust that number?

The 8,000 communication for hiring in 2022 could persist in future years. We have many aircraft coming in and a lot of work to restore our back network to 2019 levels—about 75% restored already. We have ambitious growth opportunities with substantial gate acquisitions in several cities. Therefore, while we’ll likely exceed 25,000 over three years, it’s challenging to quantify exactly that.

Mary, I hadn’t thought of your question but it’s excellent. The company is much stronger today than when I took the role over 18 years ago. We had many challenges post-9/11, and we were not ready for the shift away from short-haul travel. The speed of change today is different than before, so I’ll hope that Bob has more efficient technology initiatives in place to react and grow faster than I could. Bob is impatient, and that’s a good quality for a CEO.

Thanks very much, Gary. Good luck moving forward.

Thank you, Chad. And Gary, you know you've worn many hats during the last 18 years. On behalf of the communications team, thank you for being our Chief Spokesperson. You’ve made our jobs easy, and we appreciate you. If you have any follow-ups, you can reach the communications team at (214) 792-4847 or via our media website at www.swamedia.com. Thank you.