Southwest Airlines Company (LUV) — Q3 2022 Earnings Call Transcript

Thank you, Operator. And welcome everyone to our third quarter earnings call. In just a moment, we will share some prepared remarks and then open it up for Q&A. On the call today we have our CEO, Bob Jordan; President, Mike Van de Ven; Chief Operating Officer, Andrew Watterson; and Executive Vice President and CFO, Tammy Romo. We also have a few other senior leaders in the room today including Ryan Green, our new Executive Vice President and Chief Commercial Officer. A quick reminder that we will make forward-looking statements today which are based on our current expectation of future performance. Our actual results could differ. We had a few special items in our third quarter results which we excluded from our trends for non-GAAP purposes. We will reference our non-GAAP results today. Please refer to the press release from this morning and our Investor Relations website for more information. And with that, Bob, I'll turn it over to you.

All right. Thank you, Ryan, and I appreciate everybody joining us this morning. I’m pleased to report another solid profit in the third quarter of $316 million, excluding special items were $0.50 a share. Overall, third quarter’s bottom line results came in almost right in line with our expectations back in July, slightly better in fact. This really speaks to the more stable environment we are operating in today versus where we were just two quarters ago. While we're not fully recovered yet, it makes a big difference in our ability to effectively plan, set our flight schedules and avoid revising them, delivering a more reliable operation both for our customers and employees. That's what we're doing in the second half of 2022, and we plan to continue doing going forward. Given the significant progress we've made thus far, we do not intend to republish or materially change our future flight schedules, as was necessary to do during most of the pandemic. One of our primary goals for this year is returning to consistent profitability, and we continue to expect a solid profit for 2022. We're coming off a record third quarter in revenues, and bookings appear strong in our booking curve. Demand trends, both volumes and yields, are robust. We want to get properly staffed, and that's going very well. We remain on track with adding over 10,000 new employees this year, net of attrition. We are getting much better staffed in key areas, with the exception of pilots where our aggressive hiring efforts continue. We are on our track to hire 1,200 pilots this year and 2,100 pilots next year as planned. We wanted to restore our operational reliability, and we are headed in the right direction, having made a lot of solid progress. As we shared previously, we restored some of our short-haul flying in the third quarter, which was a little early, and at the expense of revenue without knowing where business demand would end up. But the goal was to help the operation, and I believe we got the desired result in the third quarter. Going forward, we believe we have capacity that is better matched seasonally to demand in the fourth quarter, and you can see the benefit in our sequential revenue improvement from 3Q to 4Q based on our guidance. Our on-time performance this month has been very strong with high completion rates. The thanks goes to our people who have solidly restored our customer service advantage this year, another one of our top priorities. From January through August, the most recent data available, we remain number one in customer service according to the DOT's ranking for marketing carriers. I am just thankful for our employees and how they have worked tirelessly together as a team, no matter the obstacles. They have us solidly back on top of the industry. Again, our employees are central proof and essence here at Southwest Airlines, and I am just proud of all that they have done. Jet fuel prices remain high, but we are 61% hedged in the fourth quarter and continue to expect healthy hedging gains. We do expect both inflationary cost pressures and cost headwinds from lower productivity and efficiency in the fourth quarter. This is all anticipated in our full-year guidance. Other than some timing of costs between 3Q and 4Q, our cost trends have been stable. We've been executing well on our full-year 2022 cost plan since we provided our full-year CASM-X guidance back in January. For the Hurricane Ian impact to capacity, we are also executing on our full-year 2022 capacity plan. Specific areas of focus for 2023 are to maintain adequate staffing and catch up on pilot staffing, get new contracts with all labor groups currently in negotiations, fully utilize our aircraft and optimize staffing to the fleet and flight activity, reduce cost inefficiencies and improve efficiency levels and operating leverage as we fully restore the network. Our primary gating factor to growth next year continues to be pilot hiring, and I don’t expect that we will be fully utilizing the fleet until late 2023. As of today, our flight schedules are published through July 10, 2023, and we feel good about our ability to fly those schedules as published and planned, despite some uncertainty around aircraft deliveries. We expect a healthy amount of capacity growth next year, but it is nearly all going back into key Southwest markets. These are markets that we borrowed from to fund new airport expansion during the pandemic, and as business demand improves, we have opportunities to build those back up. This is lower risk growth, primarily in markets where we have the number one share and a strong Southwest customer base. We don’t believe the capacity additions carry near the risk of adding a new market. Our goal is to have the network fully restored by the end of 2023, and by summer of 2023, we should be about 90% done. In closing, we've made tremendous progress this year. Barring any significant unforeseen impacts, we should finish this year very strong given our fourth quarter outlook. While there is noise regarding whether we are headed into a recession or not, or whether we may even be in one now, we have not seen any noticeable impact on our booking and revenue trends. Discussions about the blending of business and leisure travel, and where those trends may ultimately end up are ongoing. Regardless, our overall revenue trends are strong and well above 2019 levels. Our work continues on developing a strong financial plan for next year, and we will share more about that at our upcoming Investor Day meeting in December. I am extremely proud of our employees for their dedication at Southwest Airlines. They are our greatest asset and our secret weapon. They are the best in the business, and I know I can count on them to rally together and help us improve further in 2023. Before I turn it over to Tammy, I want to say a big thank you to Mike. Mike has overseen the operations here at Southwest for over 16 years, and that is a tremendous task. He is a tremendous leader, I am grateful, Mike, for all that you do. I also want to say a big congratulations to Andrew, Linda, and Ryan for taking on even more. I appreciate that. Today, Mike will report on operations and Andrew will report on commercial. Beginning at our December Investor Day, Andrew will speak to operations, and you will hear from Ryan regarding our commercial plans. With that, I will turn it over to Tammy.

Thank you, Bob. And thank you, Mike. My very dear friends for three decades of incredible leadership. Thanks also to all of our employees for their remarkable job throughout the quarter. In addition to delivering a high-quality experience for our customers, their efforts led to a solid third-quarter performance. The strong demand trends from summer continued in the third quarter, resulting in record third-quarter revenue and record third-quarter revenue passengers. Our third-quarter operating revenues grew a healthy 10.3% versus 2019, aided by a very strong other revenue performance. Andrew will speak to our revenue trends in a minute, so I will turn to our cost performance and outlook. Our people did another great job managing costs in the third quarter. Our fuel hedge continues to perform well in this environment where market prices remain volatile and elevated, saving the company about $220 million in fuel expense in the third quarter alone. We are 61% hedged for the fourth quarter, and we currently estimate our fourth-quarter fuel price to be in the $3.15 to $3.25 per gallon range, which would be a sequential improvement from the third quarter's fuel price based on current prices. That estimate includes $0.37 of hedging gains, which equates to cost savings of more than $185 million in the fourth quarter, putting our full-year 2022 fuel hedge benefit at roughly $1 billion. We recently added to our 2023 fuel hedge portfolio and are now 50% hedged with a fair market value of around $390 million for the full year 2023. The fair market value of our fuel hedge portfolio through 2024 is $685 million. We will continue to seek opportunities to expand our hedging portfolio in 2024 and beyond, but we are in good shape heading into next year, especially given the volatile energy market over the past year that made it tough to materially expand our positions at historical premium costs. Taking a look at non-fuel cost, third-quarter CASM excluding special items and profit-sharing was towards the favorable end of our previous guidance range at 12.2% compared with the third quarter of 2019 due to lower than anticipated health and benefit costs, as well as higher favorable airport settlements that were expected to receive this quarter but shifted earlier to the third quarter. We currently estimate fourth-quarter CASM-X will increase in the range of 14% to 18% compared with the fourth quarter of 2019. More than half of that increase continues to be driven by headwinds from operating at suboptimal productivity levels, compounded by decreased capacity levels here in the fourth quarter relative to the third quarter. The remainder of the CASM-X increase continues to be primarily attributable to inflationary pressures, particularly higher rates for labor, benefits, and airports. All of that said, I am very pleased that we remain on track with our 2022 cost plan, as Bob mentioned, especially in this environment. As we close out the year, our full-year 2022 CASM-X guidance has narrowed to up 14% to 15% compared with 2019. As a reminder, this includes labor accruals for all contract labor groups beginning April 1 of this year, taking into account our best estimate for wage rate increases. Looking ahead to 2023, we continue to estimate full-year CASM-X will decrease compared with this year. We now have our first-half 2023 flight schedules published for sale, and we currently expect first-half 2023 CASM-X to be in the range of flat to up 2% compared with first-half 2022. Given the level of first-half capacity growth in a pre-pandemic period, we would have expected CASM-X to be solidly down year-over-year. However, we expect to continue experiencing unprecedented cost headwinds due to higher than expected inflation and keep in mind that we are accruing for all open labor contracts and further wage rate increases in 2023, which is fully included in our guidance based on our best estimation of market rates. On top of wage rate inflation, we expect to continue hiring at a healthy pace next year to support 2023 capacity and scale for 2024 growth. Our productivity has not returned to pre-pandemic levels, which has required additional hiring to support the operation. Most industries and companies, including our peers, are experiencing a similar workforce dynamic. Based on our assumption that fleet utilization will be limited by pilot staffing constraints for the majority of 2023, these cost headwinds will persist throughout next year but should improve somewhat in the second half relative to the first half of 2023. We haven't finalized our second-half 2023 capacity plans but our current estimation is that second-half 2023 CASM-X will decrease in the low-to-mid single-digit range compared with second-half 2022. We continue to focus on better optimization of staffing levels to our flight activity and improving our efficiency metrics and operating leverage. That work will begin in 2023 and continue into 2024. Turning to our fleet, our planning assumption for Boeing aircraft deliveries this year remains unchanged from what we shared in July. While our contractual order book reflects 114 aircraft in 2022, we continue to expect 66-8 MAX deliveries this year due to supply chain challenges Boeing is dealing with, as well as uncertainty regarding the timing of the -7 MAX certification. However, we are encouraged to have received all 23-8 MAX aircraft in the third quarter as expected and continue to expect 31-8 MAX aircraft delivery during the fourth quarter. We do not expect to take delivery of any -7 MAX aircraft this year. We continue ongoing discussions with Boeing and just recently made some modifications to our order book. In short, we converted more -7 MAX aircraft to -8 MAX aircraft in the near term. We outlined specific changes in our press release this morning, so I won’t reiterate all the fleet details here. In terms of retirements, we now plan to retire a total of 26 -700 aircraft this year, a few less than previously expected, ending the year with an estimated 768 aircraft in our fleet. Our full-year 2022 CapEx guidance remains unchanged at approximately $4 billion. Turning to our balance sheet, we ended the quarter with cash and short-term investments of $13.7 billion after paying $1.9 billion to retire debt and finance lease obligations during the third quarter. This included the full $1.2 billion outstanding amount of our 4.75% notes due 2023 and $184 million in principal of our convertible notes. We have now repurchased a total of $689 million of our convertible notes, roughly 30% of the original issuance, and have $1.6 billion currently outstanding. We remain in a net cash position with leverage at a very manageable 48%. We continue to be the only U.S. airline with an investment-grade rating by all three rating agencies, which remains one of our key long-term competitive advantages in good times and in challenging times. With our strong balance sheet and continued financial strength, we will soon discuss our 2023 capital plans with our Board of Directors, but our capital allocation priorities remain unchanged. We have a long-standing dividend history, and reinstating a dividend remains a high priority. We will also continue to look for opportunities to reduce debt. We will continue investing in the company and our people, and we are focused on wrapping up negotiations with all our open contract labor groups. Last but not least, and at the right time, we intend to resume share repurchases as part of our shareholder return equation as we have in the past. All of these intentions assume the travel demand environment remains steady and we continue producing consistent quarterly profits. We are mindful of the economy and recessionary risk and would like to monitor the environment to see if there is any noticeable impact on travel demand as we move into 2023. Again, we are not seeing any noticeable impact today, but we would like to preserve a higher-than-normal cash balance for some period into next year before we materially reduce our cash reserves. While I can’t commit to anything today, I hope that gives you an idea of how we are evaluating our capital allocation choices. In closing, the third quarter represented another profitable quarter in our recovery. Our momentum is building here in the fourth quarter, supported by a strong revenue outlook, and I am encouraged with the progress we have made as we look to close the year strong and turn our focus to 2023. We are committed to generating healthy returns on invested capital and am very pleased with the direction we're headed. With that, I will turn it over to Andrew.

Thank you, Tammy. I’ll provide additional color on our Q3 revenue trends and Q4 outlook, and point you to our earnings release for more detail. Overall, Q3 operating revenues came in right in line with the mid-point of our original guidance range, up 10.3% versus Q3 2019. Our path there was a bit different than anticipated, but a solid result nonetheless. We had an 85.4% load factor, and yields increased 5.3% versus Q3 2019. In July and August, we saw a step back in close-end business demand, but that was coupled with stronger advanced purchase leisure demand. In September, we saw a nice sequential improvement in managed business revenues, and leisure demand remained stronger than anticipated and was particularly robust for a typically weaker leisure shoulder month post Labor Day. September managed business revenues finished down 25% versus Q3 2019. While Q3 took a bit of a step back on business trends, we finished the quarter on a strong note, and revenue momentum is picking up steam. As anticipated, we had a 5-point sequential headwind from Q2 to Q3 due to our travel credit expiration policy change in July, which resulted in lower breakage revenue in Q3. As Bob mentioned, we also increased our short-haul flying in Q3 to help with our operational stability. Mike will cover operational results in a moment. But we over-indexed some short-haul flying in Q3 relative to where business demand ended up, creating roughly a 2-point drag to Q3 operating revenue. As business demand rebounded in September, the additional short-haul flying helped overall revenues, and our revenue trends in medium and long-haul segments were very strong throughout Q3. Our Q3 loyalty program revenue was exceptionally strong and the primary driver of the increase in other revenues. We saw strong growth in retail sales, aided by incremental revenue from our co-brand credit card agreement with Chase that we secured at the end of last year. Even so, Q3 retail sales spend per cardholder and our overall portfolio size continue to grow versus 2019. We continue to be very pleased with the performance of our loyalty program and its significant revenue contribution. Our ancillary products also performed well in Q3, particularly our upgraded boarding product, allowing customers to purchase any unsold business select boarding positions on the day of travel. We recently rolled out a new digital self-service option to purchase this product, previously available only at the airport gate. Our portfolio of new cities and development markets performed in line with expectations in Q3. Hawaii outperformed our expectations, primarily due to stronger Mainland to Hawaii performance as we invested further and optimized our Hawaii franchise. These actions pay off, but our Hawaii interisland service will take longer to develop. Our current goal is to generate awareness among local travelers and incentivize them to try Southwest and experience our product. This is not uncommon with the introduction of new service. Now looking at Q4, travel demand is strengthening, and we expect both leisure and business revenue trends to improve sequentially from Q3, with strong bookings for the holidays. We expect Q4 operating revenues to increase in the range of 13% to 17% versus Q4 2019. We expect sequential improvement in Q4 business revenue trends from September's down 25%, and we expect Q4 managed business revenues to be down 20% to 25% versus Q4 2019. The sequential improvement we're seeing in operating revenues comes from base business improvement, particularly on the yield side, as we continue – along with continued ramp of benefits from revenue initiatives. Our Q3 capacity decreased slightly, down 0.3% versus Q3 2019, which was in line with our guidance despite flight cancellations from Hurricane Ian. Q4 capacity is a little lower than previously guided due to Hurricane Ian flight cancellations and is now expected to be down approximately 2% versus Q4 2019. Stage length is increasing slightly as we progress through Q4, and we expect to be about 85% restored from a network perspective by this December. Looking ahead to next year, we expect Q1 2023 capacity to increase around 10% year-over-year and Q2 2023 capacity to increase around 14% year-over-year. While we aren’t ready to provide full year 2023 capacity guidance yet, that should give you an indication of the rate of capacity growth next year. When we talk about being fully restored from a network perspective, that means restoring key Southwest markets we borrowed from to fund new airport growth during the pandemic. Our year-end 2023 capacity goal would be network restoration plus our 18 new airports and recent Hawaii expansion. In closing, this will be my last earnings call covering the commercial update as our new Chief Commercial Officer, Ryan Green, will take over going forward. I’ve worked with Ryan for a long time, and he’s very prepared and well qualified for his expanded role. Some of you have met Ryan in the past, but he was most recently our Chief Marketing Officer. As I transition to Chief Operating Officer, I will retain the network planning function as we strive to increase operating leverage after the pandemic and reconstruct the network. Being conscious that I’m standing on his shoulders for my new job, I thank you, Mike, and I turn it over to you.

Thank you, Andrew, and hello everyone. We’ve now made it through the busy summer travel season. Aside from some weather challenges the industry faced, I am very pleased with the reliability of the operations that our employees delivered in the third quarter. They worked very hard to take great care of each other and our customers. We’ve made tremendous progress in several areas, including getting properly staffed in most workgroups. More employees have completed their initial training, and they’re now contributing on the front line. Over 95% of our hiring has been in frontline and operations groups. Second, flying our published schedules without making material posting revisions has also been successful. Our third quarter schedules were much more stable for our employees and our customers. Just like last quarter, we improved the quality of the schedule with more depth and non-stop flights. Andrew mentioned that we added short-haul flights in business or end markets that provided more options when we had weather or ATC delays. We also have more flying between all of our crew bases, supporting a more stable operational performance. From Memorial Day through Labor Day, during the heavy summer travel season, we improved year-over-year across nearly every operational metric, including on-time performance. Our flight completion rate was at 98.6%, meaning we canceled slightly more than 1% of our scheduled flights, which is in line with our pre-pandemic performance. That is where we aim to be. Delving into on-time performance for the third quarter, our on-time performance was at 71.2%, referred to as A14 by the Department of Transportation, meaning we got customers to their destination within 14 minutes of their scheduled arrival. In getting customers to their destination within 30 minutes, our on-time performance increased to 81.7%, and it was 90.4% within an hour. Although we always strive to be on time, my point is that we currently cancel very few flights, and we’re consistently getting the vast majority of our customers to their destinations within a reasonable timeframe. We focus on improving our A14, knowing that the primary challenge is operating tempo. I discussed this last quarter, but it’s worth mentioning again. Our operating tempo is impacted by the sheer number of new hires starting work. More leisure customers are in our load factors, coupled with challenges in the airport environment and air traffic control due to both weather and staffing. All of these factors tend to require more time and are causing delays that just didn’t exist pre-pandemic. However, we are making solid progress towards our historical operational results and doing that at nearly pre-pandemic capacity levels. We aim to continue improving. We have great momentum here in October with our on-time performance running in the low 80% range. We continue to hire and train new employees, positioning us well for the upcoming holiday season, and we expect to continue improving as we restore our network through the next year and onboard more employees. On the topic of hiring and training, we continue to hire in most workgroups and focused locations, and we still expect to add over 10,000 employees this year net of attrition. We aren’t just hiring for this year; we’re hiring to support the spring and summer of 2023, ensuring a more seasoned workforce in place. Our pilot hiring and training remains the pacing factor for growth as we move forward. We continue to attract high-quality pilot candidates, and our robust training program for onboarding new pilots continues. We’re operating at our maximum training capacity for pilots, and that will continue well into 2023. Lastly, I want to congratulate my friend, Andrew Watterson, on his new role as Chief Operating Officer. I’ve been in that role for almost 17 years, and I know Andrew is prepared to take it on. I look forward to transitioning to an executive adviser role early next year and assisting Bob and the Southwest team on various matters as needed. I would like to thank all our employees for their hard work. I especially want to thank the operations team that I’ve had the pleasure to support over the years. Southwest is a championship team, and I am grateful to remain a part of it. With that, Ryan, I’ll turn it back over to you.

Thank you, Mike. We have analysts queued up for questions. A quick reminder to please keep your questions to one and a follow-up if needed. Operator, please go ahead and begin our analyst Q&A.

Hi, good afternoon, everyone. Tammy, two quick questions on cost here. I know you’ve been accruing for labor most of this year. But do any of the recent deals from one of your peers change how you accrue for your agreements going forward? And then second, on costs, does the low single-digit CASM growth that you outlined at the last Investor Day after 2023 still seem reasonable in the current environment?

Yes. Thank you, Andrew, for your question. Yes, we’ve taken into consideration all the current labor deals as we contemplated our accruals here. All of that has been baked into the guidance that we’ve shared with you. In terms of our investor day goals, I think we’re still in line with those longer-term goals. We've had some choppiness in terms of rate in bringing back aircraft and employees and restoring the network, which created some lumpiness in our cost trends. But we’ve done our best to account for inflationary pressures in the guidance we provided today.

Hey, Andrew. This is Bob. Yes, I agree with Tammy. The goals stand. Some delivery issues with Boeing could persist into 2024, so you could still be wringing out some inefficiencies caused by that and still waiting on staff training. But no, absolutely, all the goals stand.

Got it. Understood. Tammy, nearly $14 billion in cash on the balance sheet. With the move in rates, how are you investing this cash? And how should we think about interest income going forward into Q4? Because it looks like it’s reaching a level where it offsets your interest expense. So any color would be great. Thanks.

Yes, great question. You’re spot on. We saw improvement in our other expenses with rates improving here. Yes, we are investing that cash in secure investments, and we do expect interest income to continue to outpace interest expense.

Hey, thanks. Good afternoon. I want to ask about the 4Q RASM acceleration. It’s different than others, but I guess your third-quarter deceleration was different too. Is this just noise around breakage from Q3? Or is there some real underlying acceleration in the RASM trend in Q4 versus Q3?

Hey, Scott. I’ll just start for just a second, then let Andrew chime in. There is some noise between the quarters, but it’s really the continued strengthening in the underlying business. You’ve got very strong leisure trends. There's been all kinds of talk about the blending of leisure and business and everything. We are seeing leisure strength in what would have been typically off-peak periods. In a typical year, September would have been two to three load factor points lower than summer, but this year we didn’t see that. Leisure traffic has been strong. We did have a dip in business in July and August, but that has since reversed in September. September and October are showing revenue momentum, which is greater than we would usually see this time of year. Andrew?

What I’d add is, we had some company-specific drags in Q3 that have since either gone away or attenuated. While business travel has had a nice trend line of restoration post vaccines, it hasn’t followed a straight path. The balance of business and leisure demand continues to evolve, and we expect to see more ups and downs as trends stabilize. But we’ve clearly seen improvement as we exit the summer and are now seeing revenue strengthening in Q4.

Okay. And then, Tammy, your comments about wanting to keep elevated cash, is that a signal that we shouldn’t expect much in terms of buyback or dividend size? I just wanted to clarify that.

Yes, I covered that in my remarks. Obviously, we want to get back to our long-standing tradition of healthy shareholder returns. We continue to be thoughtful in our capital allocation decisions. We want to drive future growth and value. PSP restrictions on dividends and share repurchases expired at the end of Q3. We’ll discuss our plans for 2023 in more detail in December, but I would say that our capital allocation priorities haven’t changed. We have a long-standing dividend history, so reinstating a dividend remains a high priority. We are looking for opportunities to reduce debt while also investing in our company and our employees. At the right time, we do intend to resume share repurchases as part of our shareholder return equation, but all this assumes the demand environment remains steady. We haven’t seen any step back, but we’ll continue monitoring the environment and keep you updated.

Hey, good afternoon everybody. So Tammy, a follow-up to Andrew’s question. Just so I understand the accrual mechanism. Hypothetically, if American and United ratified pilot contracts tomorrow with a 30% signing bonus, would you adjust your accrual to reflect that? Or is it just a set-it-and-forget-it metric in your model?

We evaluate that every quarter and update as we feel is necessary, which is what we’ve been doing since the beginning of the second quarter.

Got it. Understood. And then second, you emphasize labor deals in your prepared remarks, then bring up capital returns. Should we view labor deals as a prerequisite for reinstating capital returns?

We’re discussing capital returns with our Board next month, and we’ll share more at our Investor Day in December. I don't know that you can prescribe the order, but obviously, getting the labor deals done is a very high priority for us. Our employees are very important to us, and we want to reward them.

Thank you, everyone. Great to see the traction on operational reliability after a year of trying. How robust or fragile is that given a bad winter storm or a huge travel surge? Is there enough slack in the system to absorb that?

Ravi, several things are driving operational improvement. We’re better staffed than we were a few months ago, which affects everything. We also committed to no longer republishing our schedules, making our operation more stable, and you’ve seen improvement in our operational metrics. I believe operational stability overall is much better. Mike, anything to add?

We’ve matched our resources to our schedules planning for the year. Our experience over the summer in challenging conditions has been proactive and stable. I feel we are well prepared to perform well over the holidays as we continue to restore our network through 2023.

That’s encouraging. I apologize if I missed this, but you introduced a new fare class structure a few months ago. What’s the update on that? What’s the take rate like?

The new fare product, Wanna Get Away Plus, which we talked about at Investor Day last year, was rolled out in Q2. It's a part of our initiatives projected to yield an EBIT of about $1 billion to $1.5 billion next year. We haven’t broken out take rates for that just yet, but the majority of our customers will still buy the anchor Wanna Get Away product, allowing us to offer additional features without a high cost of delivery. Our cross-functional team has made great progress in merchandising this product and we are seeing good results. It’s on track to meet our business case, and we’re very pleased.

Very helpful. Thank you.

My pleasure.

Hey, thanks. Andrew, since this is your last call on commercial, I wanted to ask you a revenue question. How do you think about the stickiness of yields in an inflationary environment? Should people still be indexing their thinking to 2019? How much of the yield environment do you attribute to capacity deficiency?

I appreciate the philosophical question on my last revenue call. Yes, we are dealing with a supply-demand mismatch. It’s also unusual to have demand increase quickly following a recession. Supply in the industry will take time to catch up, and we likely have a couple of years ahead where demand outstrips supply. So I'd say people should be cautious in viewing yield environment baselines. But overall, the dynamic means there are yield tailwinds in the near term.

Appreciate those thoughts. What is your guiding light for growth in 2023? Are you solving for margin expansion or focusing on capacity restoration?

We have multiple goals: restoring operational reliability, hiring enough pilots, and restoring the network before aiming for revenue growth, profit growth, margin growth, and returns. We have plans to grow revenues and profits next year and to also grow margins. All the goals hang together.

Hey everyone, thank you for the time. You talked about training as one of your biggest problems from a pilot standpoint. Is there anything you can do to bolster throughput? I feel like this has been an issue for a while, and I’m surprised it hasn’t been fixed.

We’re actually hiring great pilots, but there’s a max capacity for getting everyone through the training process. The training pipeline is full, and we can’t increase simulation resources quickly enough to address that. Our plan is to hire 1,200 pilots this year and 2,100 pilots next year. The training process simply takes time, and that’s been a challenge. It’s industry-wide, just like other constraints on hiring.

Yes, we’re at maximum training throughput currently. We’re fully staffed with flight instructors and have enough resources to manage the process, but we’ve also had an increase in new pilots and captain upgrades. So we’re maximizing our training capacity in 2023.

In the middle of the pandemic, Bob and Tammy made a decision to expand our training facility and add more bays, buying new simulators. This expansion was a proactive measure that actually gives us more training capacity than we had pre-pandemic.

I appreciate that detail. Just a quick follow-up on Duane’s margin question. It sounds like we’re banking on revenue being strong. Are there any other levers outside of revenue that could drive sustained profits higher next year?

We have strong revenue performance sustained by new initiatives that Andrew pointed out. We also need to cut costs. We face similar inflationary pressures, and we will continue to work on tools and processes to take costs out of operations, especially in the operational area.

Hey, good afternoon. Can I ask about managed business revenue? The decline from June, is that due to pricing or volumes? I’m guessing pricing has softened since earlier in the summer.

Yes, Savi, it’s Andrew. We did see both volume and yield softness in managed business coming out from June to July and August, which turned around in September. There’s a lot of anecdotes regarding business travel behavior and PTO caps that impacted demand, but it has since resumed post-Labor Day and continues to improve.

That’s helpful. Can we put a guardrail around 2023 capacity plans or expectations regarding fleet delivery?

The bulk of 2023 will be limited by pilot staffing, not by Boeing deliveries. We are pilot-constrained through the end of 2023, but our intent is to publish schedules through the summer. The capacity for the first half of the year mainly comes from what we've implemented in 2022.

As Andrew noted, for next year's capacity, we are primarily restoring routes where we’ve previously seen demand and growth, which makes it less risky compared to launching entirely new markets. I hope that provides clarity on our plans moving forward.

Hey, good afternoon everyone, and thanks for taking my question. Staying on capacity related to the pilot issue, you actually have a lower average stage length now than before, which might be based on different network to deal with staffing challenges. How scaled are you today from a pilot perspective? If everyone was trained, how large of a fleet could you fly?

It’s primarily the order of restoration that drives capacity. We’ve restored short-haul flying to help operational reliability rather than focusing solely on length of flights. If we could use all of our aircraft, we could be flying roughly 5-8% more capacity right now. This is less about the composition and more about timing and staff availability.

We prioritized shorter flights to ensure operational stability, knowing they would perform well during challenges. While our stage length has changed, our intent is to return balance to our network over time. We’ll restore our longer-haul routes next, which will allow us to regain full capacity.

Thank you for the response. Just a quick follow-up for Tammy. The improved full-year CASM-X outlook in 2023, is that contingent on Boeing deliveries?

That is a fair assessment. The pilot training issue is the primary constraint, not the Boeing deliveries.

Good afternoon. Bob, could you give some color on how your strategy in Hawaii has evolved over the last three years? Should we expect pricing incentives to persist into next year?

We’ve rolled out a special price for the interisland market, similar to strategies we’ve used successfully in the past. Local customers weren't familiar with our offerings in Hawaii, and we are aiming to incentivize them to try us out. Clearance will not last forever, but this introductory pricing is an effective way to engage first-time customers and develop familiarity with our product.

This strategy has worked successfully before. Our aim is to widen the customer base and create a competitive interisland market. We are expanding our presence in these communities and building awareness. The results so far are encouraging.

Thanks, Bob. And as a follow-up, looking at domestic capacity in H1 next year, can we expect that U.S. domestic travel will normalize toward historical revenue and yields?

I can’t speculate on the entire industry’s future capacity plans, but I can assess the environment based on our strategy. Given the current supply constraints many airlines face, we can expect to see moderated capacity impacts for a while, while we focus on routes that we already have a strong presence in.

Thanks so much. I just have two questions on labor. First, when we think about your net new hires for 2022, how are we viewing the timing of getting employees up to speed, and is there a cost impact associated with that for 2023?

Yes, there is some cost dilution due to the new hires and some associated costs. However, that impact balances out a bit because we’re continuing to hire for future growth. We’ve taken all of this into account in our 2023 guidance.

The proficiency varies; for example, pilots might achieve full operational capability faster than those in other roles. It also depends on matching resources to flying schedules, which influences our overall efficiency levels and tempo.

Just a follow-up on labor. When we were at Analyst Day in 2021, you targeted 80 employees per aircraft but that has stepped up to 86 today. How do we view that level normalizing?

Normalization of that level is impacted by inefficiencies that we’re facing now in operations; we’ll be sharing more about this in December. Achieving a level of 80 employees per aircraft is still a priority, but the time to reach that will depend on how we efficiently manage training and operational processes moving forward.

Okay. That wraps up the analyst portion of our call today. I appreciate everyone joining and have a great day.

Thank you, Jamie, and welcome to the members of the news media to our call today. We can go ahead and jump right into our Q&A.

Hi, good afternoon. Thank you so much. I guess on the MAX 7 certification, when did it become clear that this wouldn’t happen this year? How did you find out about it, and what has been your reaction?

We’ve been in continuous discussions with Boeing as they work diligently with the FAA on certification. They believe there's a chance to get certified by the end of this year or early next year. No additional details on my part at this point.

Has there been any frustration regarding reports that Boeing has gotten behind on certification paperwork or some submissions were incomplete?

There are always challenges with the certification process, and it can take time to gather the necessary information for the FAA. It’s a complex process, but I believe we’re making headway.

Yes, thanks for taking my call. Have you seen any variation in demand across days of the week due to hybrid work schedules?

Post-COVID, we did see business travel demand behaviors change. There’s a more prevalent off-peak leisure travel load than pre-COVID times, with an overall strengthening of demand. The blending of leisure and business travel continues, leading to stable revenue growth.

Just on the pilot and flight attendant negotiations, can you give an estimate of how much those contracts could add to costs in 2023 if deals are reached soon? And the pilot retirement age or training changes - thoughts on those?

We’re evaluating the labor contracts actively and hope to finalize them soon. We are hopeful that the accrued rates we have already reflect the direction of the market. I’m neutral on most legislative changes related to pilots, and we see ourselves as a top-tier employer.