Southwest Airlines Company (LUV) — Q1 2023 Earnings Call Transcript

Thank you, operator, and welcome, everyone, to our first quarter 2023 conference call. In just a moment, we will share our prepared remarks and then jump into Q&A. On the call with me today, we have our President and CEO, Bob Jordan; Executive Vice President and CFO, Tammy Romo; Executive Vice President and Chief Commercial Officer, Ryan Green; and Chief Operating Officer, Andrew Watterson. A quick reminder that we will make forward-looking statements, which are based on our current expectation of future performance, and our actual results could differ materially from expectations. Also, we will reference our non-GAAP results, which exclude special items that are called out and reconciled to our GAAP results in our press release. So, please refer to the disclosures in our press release from this morning and visit our Investor Relations website for more information. With that, Bob, I’ll turn it over to you.

Thank you, Ryan, and thank you, everyone, for joining us this morning. We incurred a first quarter net loss that was in line with our expectations, driven by a $380 million pretax negative financial impact related to the December operational disruption, roughly $325 million of that was from lower revenue in January and February, much of that comprised of cancellations of holiday return trips. We saw a strong rebound in revenue trends in March, resulting in record first quarter revenues despite the impact of the December disruption. Travel demand remained strong thus far, but we remain mindful of the uncertain economic environment, given all the headlines and trends we have seen across many industries. We have tough year-over-year revenue comparisons here in the second quarter with last year’s domestic revenue environment receiving a boost from international closures. Considering that demand, particularly leisure, continues to show strength as we head into the busy summer travel season. Our cost outlook is higher this year due to several moving parts, as we are making additional investments in the operation based on our learnings from December. I won’t go through all of our key findings regarding how we shore up our winter preparedness, as we have covered that multiple times now. I am very proud of our people for the operation they have delivered this year and for their relentless focus on executing our plan to fortify operations in preparation for winter 2023. Despite the near-term cost pressures, we have not lost focus on our goal to effectively manage the real inflationary cost increases we are seeing and equally as important, maintain our competitive cost position. Looking ahead, we currently expect solid profits here in Q2 and continue to expect solid profits for the full year with the goal to grow full year margins and return on invested capital year-over-year while restoring our route network roughly by year-end. We are reducing our full year 2023 growth plans due to a lower planning assumption for Boeing MAX deliveries this year. This relates to the recent news of further supply chain challenges at Boeing. Consequently, we have adjusted our 2023 capacity and capital expenditures outlook, and we are currently reevaluating our hiring needs relative to our most recent expectation to hire more than 7,000 net new employees this year. We will moderate our overall hiring plans as we transition into the second half of 2023. Meanwhile, we are most focused on revisions to our second half 2023 flight schedules to accommodate for fewer aircraft, which Andrew will cover in more detail. I am very proud of the progress we are making on our customer experience enhancements. As a reminder, we are investing in three onboard initiatives: enhanced Wi-Fi, in-seat power, and larger overhead bins. In early March, our first new aircraft with hardware from our new Wi-Fi provider, Viasat, entered revenue service. By the third quarter, we expect all of our existing aircraft to be flying with upgraded Wi-Fi and Anuvu hardware, offering increased speed and reliability. We’re also very focused on mobile and other enhancements on our technology roadmap to offer more self-service options for our customers to give them added flexibility and ease during their journey. Highlighting one of our stronghold markets, Southwest is the number one airline in Kansas City, growing from 6 flights in 1982 to 75 flights today. I’m proud to say that our service in Kansas City has now fully restored to pre-pandemic levels. We recently celebrated the opening of the new Kansas City Airport in February, and we cherish the opportunity to partner with the airport to deliver a beautiful new terminal that will serve us and the community well for a long time. It was a great partnership all around, and it is a beautiful facility. We continue to work hard on labor agreements for our people and have made progress. We just reached a tentative agreement with TWU 550, which represents our Meteorologists, and I want to commend both negotiating committees for the spirit of cooperation that led to that agreement. We remain focused on negotiations with the union representing our ramp and operations employees and mediation with unions representing our pilots and flight attendants. We are committed to providing competitive market compensation packages for our people. We’re eager to finalize new contracts and have accrued a significant number of wage rate increases we expect to reward those groups soon. In conclusion, I am immensely proud of our people. They are the hardest working at Southwest Airlines, and they deliver every day for one another and for our customers. Despite the negative impacts in Q1, we still believe we have a solid plan for 2023. We are carefully managing the business in the near term and continue to believe in our long-term strategy and set of initiatives. With that, I will turn it over to Tammy.

Thank you, Bob, and hello, everyone. Our first quarter loss is disappointing and not how we hoped to start 2023. However, the quarter was not without notable accomplishments. Our on-time performance year-to-date through March was solid. Our operations team navigated through a series of difficult weather conditions successfully, with no material impact on our network performance. Despite the negative revenue impact from December's operational disruption, we still had record first quarter passenger revenues and record other revenue. Additionally, we ended the quarter with strong double-digit margins for the month of March, despite high fuel prices. All of this was made possible by the drive and hard work of our incredible employees. Ryan and Andrew will discuss our revenue and operations performance and outlook, so I will jump right into our cost performance and outlook. Beginning with fuel, our first quarter jet fuel price was $3.19 per gallon, which was on the high end of our guidance range. Throughout the first quarter, crude oil prices remained within a reasonable range. While prices dipped to about $65 per barrel in mid-March, they primarily hovered around $80 per barrel throughout the first quarter. Refining margins remained volatile during the first quarter after hitting a ten-year high last year. Thankfully, market prices have fallen over recent weeks, particularly crack spreads, which is a welcome relief. We are 51% hedged for our second quarter and estimate our second quarter fuel price to be in the $2.45 to $2.55 per gallon range, which represents approximately $0.69 lower than our first quarter fuel price. This includes an estimated $0.13 of hedging gains, which equates to cost savings of roughly $70 million in the second quarter alone. We now estimate our full year 2023 fuel price to be in the $2.60 to $2.70 per gallon range, down a nickel from our previous guidance and still including $0.10 of hedging gains. Of course, this is a snapshot of our fuel guidance based on the April 19th forward curve and market oil prices, and heating cracks can be volatile, which is why we hedge. We recently added to our 2024 fuel hedge portfolio and are now 51% hedged for next year as well. We began building our 2025 portfolio and are about 10% hedged. The total market value of our fuel hedge portfolio for second quarter 2023 through 2025 is $418 million. We will continue to seek cost-effective opportunities to expand our hedging portfolio with the goal to maintain roughly 50% hedging protection each year. Moving to non-fuel costs, our first quarter year-over-year CASM-X increase of 5.9% was in line with our guidance range. As expected, we experienced inflationary cost pressures, primarily higher labor costs, including market wage rate accruals for all employee groups, increased technology spending, and higher rates for airport and benefit costs. The remainder of the increase was primarily driven by operational disruption-related expenses. Looking ahead, we currently estimate our second quarter CASM-X to increase in the 5% to 8% range year-over-year, largely driven by general inflationary cost pressures that we expect to persist and are not unique to Southwest. In addition to higher labor rates, we continue to accrue for market wage rate increases for the remaining open labor contracts. As we further refine our multi-year maintenance planning, we are incurring additional maintenance expenses this year for our -800 fleet as more engines come due for heavy maintenance, adding further pressure to our second quarter cost inflation. For full year 2023, we now estimate CASM-X to decrease in the range of 2% to 4% year-over-year compared with our previous guidance of down 3.5% to 5.5%. Approximately 1 point of this year-over-year increase is due to lower capacity as a result of Boeing delivery delays, with the remainder driven by the timing of maintenance expenses for our -800 fleet, a continuation of what we are experiencing in the second quarter. As a reminder, our full year CASM-X guidance continues to include higher labor rates, including market wage rate accruals for open labor contracts and the estimated tens of millions of dollars in additional investments we expect to incur towards our operational resiliency. Turning to our fleet, we received a total of 30 aircraft deliveries during the first quarter, ending the quarter with 793 aircraft, resulting in a net of seven -700 retirements, which is two more than previously planned as we moved up a couple of retirements from the second half of this year. Looking at the full year, based on recent production issues at Boeing, we feel it’s prudent to have a more conservative planning assumption and are now forecasting around 70 -8 aircraft deliveries in 2023, compared to our previous assumption of approximately 90 -8 deliveries. Consequently, we have lowered our full year 2023 capacity guidance by roughly one point to an increase of 14% to 15% year-over-year, affecting our second half capacity assumptions and the fourth quarter. As a reminder, we have a surplus of underutilized aircraft in our fleet due to pilot hiring constraints. Therefore, the reduction in delivery should not impact our summer flight schedule. We continue to anticipate our second quarter capacity will be up 14% year-over-year. Our planned deliveries continue to differ from our contractual order book. In addition to the recent aircraft delivery delays, which are not reflected in our contractual order book, we continue to reflect 46 undelivered 2022 contractual aircraft deliveries as 2023 deliveries in the order book, which is further outlined in our press release. To be very clear, we are currently planning our published schedules around the delivery of 70 -8 aircraft this year, and we intend to solidify our order book with Boeing soon. In regards to our current CapEx outlook for this year, we now estimate spending approximately $3.5 billion, reflecting our updated delivery assumptions of 70 aircraft this year compared with our previous guidance of approximately $4 billion, which assumed roughly 90 deliveries. Lastly, a quick note on our balance sheet. We ended the first quarter with cash and short-term investments of $11.7 billion after paying $59 million to retire debt and finance lease obligations in the first quarter. We continue to expect a modest $85 million in scheduled debt repayments for full year 2023, including approximately $10 million in scheduled debt repayments here in the second quarter. We also paid $214 million in dividends in the first quarter as our pre-pandemic dividend is fully restored. Based on our current expectations, we expect 2023 interest income to more than offset 2023 interest expense. We continue to be in a net cash position and remain the only U.S. airline with an investment-grade rating from all three rating agencies. In closing, this was not the first quarter performance we had planned back at Investor Day. However, I am immensely proud of our people and their perseverance. There is still work to be done to fully recover, but we are currently forecasting a substantial sequential improvement to the bottom line with solid profitability this quarter. We are laser-focused on managing ongoing inflationary cost increases, regaining better operating leverage, and maintaining our competitive cost advantage. We have not lost sight of our goals or the warrior spirit of Southwest Airlines, and I’m eager to move forward along our path of success for many years to come. With that, I will turn it over to Ryan.

Thank you, Tammy. I’ll take a minute to expand on the commentary in our press release this morning and provide more color on our first quarter results and second quarter outlook. Our first quarter revenue trends remained steady and within expectations throughout the quarter, with first quarter revenue growth of 21.6% year-over-year. This was right at the midpoint of guidance set during our January earnings call. As a reminder, we faced two competing storylines in first quarter that played out as anticipated. First, we incurred an estimated $325 million negative revenue impact isolated to January and February. This resulted from cancellations for return holiday travel and a slowdown in bookings following our operational disruptions in late December. We believe these negative revenue impacts have subsided and are now behind us. We saw the reverse during the second half of the quarter, witnessing strong revenue trends throughout March. This was evident in overall demand, rapid reward redemptions, and yields. Even with the negative revenue impact at the beginning of the quarter, we achieved record first quarter operating revenues of $5.7 billion and record first quarter revenue per available seat mile (RASM) of $0.15. Managed business revenues also improved significantly throughout the quarter and by March were nearly restored to March 2019 levels, just shy of 100%. That progress is tremendous, and it feels like we’re very close to full corporate revenue recovery at Southwest. Our managed business revenues have trended ahead of the industry due to our revenue initiatives in the corporate space, driving new corporate accounts, which opens access to incremental new pools of corporate passengers. While the managed business recovery isn’t consistent across traveler sectors or account sizes, we expect further sequential improvement in managed business revenues from first quarter to second quarter. Demand may be somewhat choppy with more volumes further out in the booking curve, but that doesn’t seem to be unique in the industry based on ARC data. Regardless, we expect to continue making market share gains in the managed business space and gained another point of market share in the first quarter while expecting to grow passenger volume from solid yield initiatives. In terms of the leisure booking curve, it has moved further out from what we observed last summer and fall, and seems to have returned to pre-pandemic levels. Leisure demand and yields, which are well above pre-pandemic levels, continue to show strength heading into summer, and we anticipate sequential improvements in operating revenue and yields that we would typically expect in the seasonally high second quarter. Overall, the domestic revenue environment remains strong, and our initiatives are performing in line with expectations. In short, we’re pleased with what we’re seeing. Our second quarter RASM guidance range is down 8% to 11%, which reflects a 4.5-point year-over-year headwind. As a reminder, the second quarter of 2022 operating revenues included approximately $300 million of additional breakage revenue, a higher-than-normal amount related to flight credits issued during the pandemic that were set to expire soon and our later policy change to eliminate flight credit expiration dates. Adjusting for this headwind, our second quarter RASM guidance would indicate a 5% decline, and we are pleased with the core trends we are witnessing. This year-over-year headwind will not persist into the second half of 2023. We also remain pleased with the performance of our Rapid Rewards program, co-brand credit card, and all ancillary products in the first quarter, and we anticipate another strong year-over-year performance in the second quarter. We saw a first quarter record of new Rapid Rewards members added to the program and achieved a first quarter record of ancillary revenue per passenger. Finally, our portfolio of new cities, including Hawaii, continues to mature. Additionally, I'm proud to announce that we have completed the selection and rollout of our new revenue management system, which is the Amadeus Network Revenue Management product. Our implementation timing is slightly ahead of the previous timeline of mid-2023, and we’re excited about the revenue results we observed from Amadeus during the production pilot. We are optimistic about future opportunities for incremental revenue, which will begin in earnest in the third quarter as the new Amadeus product is now fully implemented and managing all future bookings and departure dates. This was an excellent job by our revenue management team, skillfully managing multiple revenue management systems as we recovered from the pandemic and ultimately led to this selection. I’m very proud of the team. In closing, I want to mention that we have closely monitored our brand metrics since the disruption, and our scores have improved significantly throughout the first quarter. We are fortunate to have a loyal customer base at Southwest that we do not take for granted and will continue to communicate with them regarding our remediation plans, aiming to consistently deliver the hospitality, customer service, and operational reliability they expect from us at Southwest. With that, I’ll turn it over to Andrew.

Thank you, Ryan, and hello, everyone. I’ll provide some color on our operations before we jump into Q&A. Following our incident in late December, I am proud of the quick rebound we had in early January and the strong operational performance our employees delivered in Q1. While Q1 was challenging weather-wise, our team did a tremendous job quickly recovering from regular operations. In the days following each event, we experienced no material hangover in our aircraft or crew networks. We maintained solid operational metrics and completion factor – evidence that our processes for irregular operations are solid and function effectively as intended. For the quarter, we finished number two out of ten airlines in on-time performance, which reflects positively on our employees. Most recently, on April 18th, we encountered a double firewall failure resulting in an unexpected loss of connection to some operational data. While our technology teams worked quickly to resolve the issue that morning, we temporarily grounded the airline out of an abundance of caution. It was a quick fix; within an hour, we lifted the ground stop and resumed safe flight operations. Although this scenario typically drives flight delays across the network, we canceled only 22 flights on April 18th and had no material impact on operations the following day. Even with the day's delay, we ran 75% on-time within one hour of scheduled departure times and 95% within two hours. While we don’t like those delays, it represents commendable recovery by our team. Regarding our operational disruption remediation plan, Bob provided detailed coverage of that at the JPMorgan conference in mid-March, and that presentation is available on the Investor Relations website. Since then, we also provided greater detail on the microsite and emailed our customers with a readout of the key findings and remediation items we want in place by winter 2023. Therefore, I won’t reiterate that today but instead want to reaffirm that we have a solid plan, and our work is on track. Turning to capacity, our lower aircraft delivery expectations this year are causing lower capacity expectations in the second half of 2023. Therefore, our full year 2023 capacity growth is now expected to be in the range of 14% to 15% year-over-year. We’re in the process of refining our published flight schedules post-summer as we reevaluate our flight schedule plans for our yet-to-be-published November-December flight schedules. We expect to publish those schedules in the next month or so, but our current estimates suggest we will trim aircraft capacity from September through December in the post-summer travel period. This results in a reduction of approximately two points from our original capacity plan for this year, with Q3 being one point lower and Q4 being six to seven points lower on a year-over-year basis. Nonetheless, nearly all of the capacity growth is still being allocated to key Southwest markets, adding market depth. There has been no material change in our capacity allocation strategy this year, and we continue to expect our route network to be roughly restored by the end of this year. I want to conclude by commending the negotiating team of TWU 550, who represent our Meteorologists, who just reached a tentative agreement that will be voted on by our employees soon. We have now reached agreements with nine of twelve work groups covered by collective bargaining agreements. We will continue negotiations with the unions representing our other work groups and are eager to finalize these deals so that the remainder of our employees can begin receiving the increased compensation we are eager to provide them. We continue to accrue market and competitive wage rates for our employees, which means our financial results and guidance already reflect their estimated raises. With that, I will turn it back over to Ryan Martinez.

Thank you, Andrew. 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.

Hey. Thanks. Just on costs, I totally appreciate that you have a business to run, and there are moving pieces. But the slow drip of these CASM revisions has been painful for your investors. Do you feel like the band-aid is finally being ripped off today? What are the circumstances that would cause you to raise your CASM expectations again this year?

Hey Duane. I’ll start, and Tammy can provide additional details. Most of what you’ve seen are revisions. There is genuine inflation occurring, and a lot of it is related to ongoing adjustments for labor accruals as the market evolves. If we look at our pilots, Delta serves as the best benchmark for rates and benefits. So, you can assume we’re fully accrued for all open contracts at those rates. We’ve also encountered some additional inflation related to maintenance on our -800s, which is partly due to timing as we’ve moved some engine visits from 2024 into 2023. It's challenging to forecast inflation accurately. However, you can expect that we are mostly clear at this point. I don't foresee further adjustments, although a significant factor would be if we see any changes in capacity expectations for 2023, which I don't expect. I believe reducing capacity from 90 to 70 will give us a better understanding of our capacity levels and the effect of the one-point change in CASM for the year. But Tammy, what else would you like to add?

Yes. No, I think you covered it, Bob. The primary cost pressure is salary, wages, and benefits, which are clearly driven by inflationary pressures here. So, it’s certainly not unique to us. And capacity, as always, will significantly impact our CASM-X ultimately. However, our second quarter cost profile should be relatively fully loaded, so to speak. That said, we will constantly seek opportunities for improvement. We have our ongoing operations modernization plan. We’ve incorporated that as effectively as we can. Of course, as we advance, we will have opportunities to improve as we gain operating leverage with the network. I understand the question. But anytime we modify capacity, that typically causes some changes in CASM-X, which has been the primary driver here as we assess 2023.

Duane, I think it’s also useful that we’ve been transparent about preparations to hire ahead looking towards growth. Many of our plans this year are based on growth anticipated in ‘24. Reducing our aircraft delivery this year from 90 down to 70 will allow us to achieve a clearer perspective regarding our hiring plans and moderate our hiring throughout the remainder of the year, considering the reduction of 46 undelivered aircraft from last year and the extra 20. There will be no more than 66 stacked up for next year. Therefore, we are not absorbing 152 planes the following year. We’re aiming to work with Boeing while maintaining an orderly and smooth growth framework, ensuring we can maximize efficiency as we progress through the year.

I appreciate those thoughts. Then maybe just a quick follow-up on breakage. I hope this is the last quarter we hear about it. Given the dynamics in Q2, do you anticipate June quarter being your weakest year-over-year RASM quarter? What RASM outcome are you managing for in the second half of the year?

Yes, sure. Thanks, Duane. Given the difficult comparisons from last year, we do expect the second quarter to be the last quarter with that headwind. Additionally, we had, I would categorize, challenging comparisons here. As you know, last year, the domestic revenue environment was robust, benefiting from international closures, contributing to difficult comparisons in the second quarter. However, as Ryan has thoroughly addressed in his remarks, we’re seeing strength in demand this quarter, and at this point in time, trends look solid.

I’ll add that considering the financial headlines and macroeconomic environment, we need to be cautious about this year. Thus far, air travel has shown no signs of weakness. Revenue outlook here for Q2 appears strong as we can see; it’s challenging to speculate beyond Q2 into the back half of the year. We’ll need to wait until about mid-July to provide a more complete outlook into late summer and fall, but again, so far, we see very strong trends.

Andrew, I want to follow up on the capacity cuts. When you were talking through the point of capacity, you mentioned some specifics, but I didn’t quite understand it. What does this mean for capacity next year? Is there now more growth next year to catch up, or will it be less growth since we are assuming the same delivery timeline? How do you think about that?

I’ll start, then Tammy and Bob can jump in. The impact of the delivery book from Boeing quality issues means that the fourth quarter will experience a shortfall of aircraft, affecting our schedules. We want to ensure that these schedules reflect the lower aircraft count. September and October will see modest revisions to what was already published. We publish these schedules with some flexibility to hedge our bets in case something does happen, so those changes will be straightforward. However, we will readjust the November and December schedules to represent lower aircraft capacity. This is what will lead to a reduction during this period compared to our original plan. As for next year, Bob touched on the necessity of reflowing the order book because we cannot assume that undelivered aircraft from this year will suddenly show up next year, which would lead to inconsistent growth rates. We want smooth and predictable growth.

Another factor worth noting is the current constraints restraining our airline, primarily pilot hiring poses ongoing challenges. We’ve yet to achieve total capacity due to pilot constraints. As we approach late third quarter or early fourth quarter, we expect to transition from being pilot-constrained to aircraft-constrained. This situation needs to be considered when planning and accommodating Boeing and ensuring we have sufficient aircraft to meet demand moving forward.

Okay. Thank you. Additionally, regarding the second quarter RASM guide, if I add back the $325 million book away from Q1, it implies a notable deceleration in RASM, suggesting less of a sequential bump from Q1 to Q2. What trends explain this?

Yes, Scott. We’ve looked at this from multiple angles. The first quarter data demonstrates considerable variability, affected by, for instance, Omicron last year and our own disruptions this year. There are also significant international tailwinds affecting the industry, and while international demand remains strong, Southwest has comparatively lower exposure relative to some competitors. Therefore, isolating the domestic performance and referencing pre-pandemic measures, the overall outlook is solid. Regardless of how one interprets these metrics – fourth to second quarter versus first to second – we’re satisfied with where we land in both comparisons.

Moreover, as Ryan highlighted, ongoing business demand is a senior focus. In March, we nearly restored ourselves to 2019 levels, a notable achievement that was ahead of our competitors. So while there may be variances here and there in Q2, we expect sequential improvement from Q1 to Q2 regarding business and managed business bookings.

If we adjust for the January and February book away and then take the midpoint of your second-quarter demand guide, does it seem clear that the June quarter will have the weakest year-over-year RASM? Do you envision any additional RASM outcomes for the second half of the year?

That would be a valid representation of how we’d summarize our expectations as well, in terms of sequential performance overall. We believe the revenue impact from operational disruptions predominantly stemmed from holiday return travel cancellations, which primarily affected January and February. As we move to March, the demand rebounded solidly. Looking into the second quarter, the prevailing trends demonstrate considerable resilience, even if we remain cautious regarding the broader economic landscape moving forward.

We have confidence because we’re tracking well. Our metrics regarding trust and confidence for future travel have substantially improved. By early in the second quarter, we’ve secured nearly 75% of bookings already made in advance for the quarter ahead. With all signs currently pointing positive, we anticipate strong trends carried into this quarter.

I would like to follow up on Duane’s earlier question about the CASM-X guidance increases. Can you elaborate on how much of these costs are fixed and expected to carry through to 2024? Given that capacity cuts are focused on late 2023, I would assume more variable costs should help offset that. Why is that not the case? Any additional clarity would be appreciated. Thank you.

Certainly, Matt. Let me share my insights. Firstly, the cost pressures being experienced are not exclusive to Southwest. Even amidst these inflationary pressures, we are working to drive CASM-X down this year while still feeling confident in our competitive position. We have labor contracts accrued, which are reflected in our long-term targets, and we are dedicated to bending these costs down for 2024. Specifically, we have one-time costs associated with operational disruptions this year, estimated at $100 million to $150 million, which we do not expect to repeat next year. As Bob noted earlier, we need to solidify our fleet plan and capacity plan for next year. Overall, our commitment remains focused on driving down unit costs and achieving our objectives.

When considering growth and where flights are allocated, we have emphasized that this year is about restoring the network. Although we have made reductions in our aircraft delivery projections, we still aim to achieve a fully restored network by the end of the year. Revenue growth will occur primarily in more mature markets, which should help propel revenue increases considerably. For 2024, our intention is to leverage operational leverage by aiming to position new capacity where we have existing gaps in our network day-to-day, allowing us to manage costs effectively while maximizing growth opportunities.

To follow up on your point about 2024, originally, at your Investor Day, it appeared that this growth was independent of aircraft deliveries, and the initial guidance provided then was firm despite delays. What has changed? Is it simply that, in light of the current environment, you feel the need to scale back, or is it something else altogether?

This is Andrew. In the past year, we’ve dealt with three elements constraining our growth potential for the second half of this year: flight instructors, pilots, and aircraft. At the time of our Investor Day, we were pilot-constrained, but we anticipated that by the latter part of this year, we would flip from pilot constraints to aircraft constraints. With the recent changes in delivery assumptions from Boeing, we have accelerated that transition. These delivery delays are the key components leading us to revise our forecasting for the year.

On the Net Promoter Score, is that something that you focus on? How does it currently compare to where it stood back in January?

Yes, Helane, it's Ryan. We frequently measure Net Promoter Score, focusing on it weekly, if not daily. We track two types of Net Promoter Scores: one as an overall brand measure, which is longer term, and another based on recent trips taken by customers asking if they would recommend Southwest Airlines. On the longer-term brand measures, our numbers have significantly improved over the course of the first quarter. As Bob mentioned, we also need to consistently deliver reliable operations and work on reinforcing our brand channels if we expect to make positive strides in the future. The trip-based Net Promoter Scores have also been favorable in recent weeks. Customers feel satisfied with how we operated during the first quarter. Enhancements like improved Wi-Fi and better overhead bins for our aircraft have also shown benefits. We have observed increased scores for each of those areas as well. As we make enhancements and streamline our operational executions, we can expect those numbers to continue to trend positively.

That’s really helpful. As a follow-up, I wanted to ask about runway construction in Las Vegas. I understand you have a significant operation there, and I am curious how those issues impact your network.

I didn’t call it out, as we have a large and complex network, which means we handle operational challenges regularly. While we’ve discussed delays in other markets, we are certainly facing challenges in Vegas regarding reduced runway capacity. We are working closely with the FAA and ATC to manage this, but it is one piece of our day-to-day operations. Those obstacles have indeed affected on-time performance on certain days. Andrew, do you have further details?

Yes. Las Vegas has ongoing airfield construction, including a shutdown of one of the primary south-runways along with 19L and 19R. The capacity reduction operationally alters our throughput rates, thus leading to delays and cancellations at times. At present, this affects our operations about 20% of the time, predominantly left on the runways, which has driven cancellations and delays. Over the last few weeks, there has been an unexpected spike in cancellations industry-wide as we have operated primarily in north flow. We’re adapting by adjusting our connection times and crew strategies to offset that. We have made multiple adjustments to how we allocate spare aircraft and modify the through trip to keep things operating smoothly. Collaboration with the FAA exists, compelling us to find tolerances that could help enhance our operational flow during this period, allowing us to utilize the configuration more efficiently. Though there will be an impact through August if a high number of north winds occur, coordinating on these efforts remains essential as we strive for seamless operations.

I was curious about adjustments you’re making over the full year as you mentioned being on track for network restoration. Where will this capacity come from? Is it geared toward new markets, or have you altered your capacity deployment strategies overall?

Restoration indicates the need to return to previous service levels, meaning we want to ensure our key cities return to pre-COVID levels. This falls into the first category. We also have 18 new cities in the expansion to Hawaii. The third aspect involves locations we currently service where we could potentially expand given increased demand. This is the case in regions such as Denver and Phoenix, where we’re adding growth above pre-COVID levels, utilizing our resources more effectively. Those locations see even greater market depth, and this growth opportunity depends heavily on our remaining aircraft deliveries. There’s a fine balance between restoring existing networks and adding new ones to help support our overall expansion efforts. Therefore, as we spread our resources throughout our journey to restoring the network, we are balancing these three areas carefully.

That’s helpful context. Now thinking about 2024, how much of the growth is dependent on Boeing? Additionally, regarding CASM-X, could we expect declines next year? I'm trying to understand the general outlook.

The carryover impact of deliveries will add to next year's growth as we secure aircraft moving forward. Beyond that, we will analyze how other dependent factors like Boeing affect our overall growth roadmap. What Bob mentioned earlier about reflowing the order book is critical; with scheduling and contextual insights, we envision achieving a balanced growth trajectory.

Ultimately, our approach is to establish a plan that helps us meet both our financial objectives and operational goals. Given the inputs, we’ll partner with Boeing to establish an effective fleet plan. Regardless of the delivery schedule, our flexibility enhances our fleet modernization endeavors, providing ongoing value.

It is still early to delve into 2024 discussions, primarily due to pending negotiations with Boeing. Our goal remains firm to manage growth predictably. The pandemic's overall impact has created unpredictability, and we seek to stabilize these numbers year over year. We want smooth and orderly growth adjusted to delivery schedules rather than emotional fluctuating expectations. It’s essential for our operations, cost management, and customer service commitment.

Ryan, can you share what kind of load factors are embedded in your second-quarter guidance? It appears that when comparing to other airlines, their load factors are somewhat ahead of where Southwest concluded the first quarter. Additionally, given the need for network restoration, if demand isn’t there and load factors remain under pressure, why wouldn’t we reconsider that restoration plan?

Sure, David. While the first quarter presented challenges due to operational disruptions and their associated impacts on carried capacity, we have made adjustments. The demand in March was solid, and we have observed strong performance for both load factors and pricing. Although our peers may have higher load factors, we prioritize providing quality service and maintaining customer experience. We continue to manage volume and yield effectively, identifying strong yields yielding a slight downward pressure on loads. We’re confident in our ability to recover load factor numbers in the future as capacity normalizes.

It’s essential to consider our approach in this environment. In the past, we've employed republishing schedules due to demand fluctuations, which often led to artificially inflated load factors. We previously committed that we’d no longer pursue that path. Therefore, looking at the current dynamic should provide a clearer comparison. Additionally, our updated revenue management system allows careful consideration for load balancing alongside yield optimization. The increased flexibility with the aircraft will yield more efficient capacity management, driving our load factors more positively.

Regarding hiring moderation for this year, will this mainly affect pilots, flight attendants, or other workgroups? Can you specify how many positions are likely to be altered? Also, in relation to your strategy, will you ever consider a differentiated product in the cabin to generate additional revenue, such as larger seats or extra legroom?

These are two very distinct matters. On hiring, as we reevaluate our forecasts, it's clear that changing delivery schedules merits reflection on our hiring plans, especially in reference to sustained pilot constraints. Today, the need for moderation is clear; however, I cannot specify exact adjustments as we continue to assess our current and projected headcount needs. Given existing aircraft deliveries and planning in accordance with our operational realities, I anticipate a careful and timely revision of our hiring processes. The growth trajectory must remain efficient.

Regarding premium revenue, we have consistently maintained focus on providing our core product. Research shows that customers value the service and experience we currently offer, and while we remain open to exploring new opportunities and enhancements, no active work is ongoing regarding premium cabin options like assigned seating. Our emphasis is steadfast on delivering reliable service, enhancing customer experience, and promoting our ongoing improvements with features like onboard power and enhanced Wi-Fi, while ensuring we consistently deliver efficiency.

During your Investor Day, you noted adding over 8,000 new corporate accounts last year. As you observed the recovery in managed business for first quarter, how many additional accounts did you add? Can you point to any specific trends driving managed business travel for you guys?

The ongoing recovery in managed business travel is being driven by the initiatives we’ve undertaken. Presently, it’s important to acknowledge that while managed business travel has rebounded for the industry, structural aspects have led to shifts in overall demand. The partnerships and initiatives we've implemented have contributed to solid recoveries in traveler volume. In March, we set records for Mid-Market accounts. Each accounted for enhanced focus and effort in multiple markets, and we’re experiencing growing numbers, with ample opportunities still ahead of us.

Our sales team has greatly expanded, focused on identifying valuable industry opportunities to enhance our account base, while the technology investments like GDS access continue to bear fruit. Overall, growing sales and partnerships have positively influenced our growth in managed business accounts—highlighting our confidence in maintaining a competitive edge.

I wanted to ask about competitor overbooking policies in light of recent industry trends in runway incursions or near misses. Is Southwest examining or adjusting its policies related to overbooking in conjunction with these recent events?

Yes, David. Just to clarify, we do not overbook our aircraft. We haven’t engaged in overbooking since 2017 and have no reservations for changing that policy moving forward. If we have to downgrade aircraft, we will accommodate oversells, but those are few and far between. We’re committed to providing a high-quality service with our existing aircraft, and we won’t compromise customer experience.

We continue to enhance offerings, upholding our commitment to customer experience. We know there are many options in the air travel space, and we have dedicated ourselves to staying true to our values without pursuing overbooking. Our flexibility in ensuring customer satisfaction is essential to our service promise.

Thank you, everyone, for joining. This concludes the analyst portion of our call today, and I will turn it back to the operator.

Thank you, Chad, and I’d like to welcome members of the media to our call today. We can go ahead and get started with the Q&A portion if you will give them instructions to queue up.

We’ve discussed demand growth during this call; can you elaborate on how that’s affecting airfare trends? Additionally, what do you foresee for the summer travel season?

Generally, this remains a high yield environment with notable strength reflected across airfares. Historical inflation-adjusted pricing suggests that industry airfares may actually be down as a result of these dynamics. As we anticipate the second quarter, recent booking patterns indicate volume growth over time. Booking further out in advance is expected to yield better pricing, helping to maintain our market position.

It's important to emphasize that ticket pricing needs to be reflective of current economic conditions. Our operating revenues were up 21.6% against a backdrop where fuel prices rose 54%, indicating that there are real pricing pressures that we navigate. Furthermore, we manage costs while prioritizing customer experience, which is crucial as we move forward.

I wanted to ask about the Boeing delivery issue. How has your experience been working with Boeing, especially considering these types of recurring challenges?

Boeing has been proactive in planning and communicating regarding supply chain issues. The company has worked collaboratively with us to isolate changes to future schedules, affecting the fourth quarter predominantly. They’ve communicated transparently about implications, and we value the partnership as we work through these complexities. We are focused on completing our ordered deliveries as scheduled, as this is crucial to us moving forward.

About recent safety incidents in the industry, how are you approaching safety in light of these runway incursions and near misses?

Safety in aviation has substantially improved. Instead of focusing solely on past incidents, we’ve put emphasis on the development of internal safety management systems. As such, we host safety weeks for our teams and maintain continuous engagement with the FAA to ensure we’re aligned with their safety initiatives. We realize the need for cooperation as we work together to improve the safety of overall aviation.

Regarding summer travel, do you see shifts in destination bookings as consumers navigate higher prices for tickets, hotels, and car rentals?

Overall, demand for typical summer destinations is steady. Popular routes to Florida, southwestern cities, and Hawaii appear strong. International destinations have also returned to the forefront as demand persists. Booking patterns for both leisure and corporate travel indicate strength across the board, reinforcing confidence in the upcoming travel season.

Are you noticing any shifts toward vacation packages versus individual flight sales? If so, how is that affecting your performance?

Yes, our vacation business remains strong, and there's significant opportunity within this sector. We currently leverage partnerships with travel agencies, but there are ample avenues for internal marketing activities, including the promotion of vacation packages. Vacation destinations like Cancun have shown increasing popularity, and we intend to capitalize on these trends moving forward.

Thank you, Chad, and thank you for participating in today's event. Should you have further questions, please reach out to our communications team, as they are available to assist. Thank you, and have a great day.