Southwest Airlines Company (LUV) — Q4 2024 Earnings Call Transcript

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

Thank you, Julia. Before we jump into our results, I want to take a moment upfront to acknowledge the tragic accident near Reagan DCA Airport last night. Our hearts go out to all those loved ones who are among the passengers and the crew, and we also extend our sympathies to our friends at American Airlines and their subsidiary PSA Airlines as they process this event themselves. Finally, I want to thank the first responders who worked tirelessly throughout the night. While we are all competitors, we are one airline community and will do everything that we can to support our friends at American and at PSA. Now turning to the business. 2024 was a foundational year for us. We further invested in the operation, finalized our labor contracts, and laid out a comprehensive plan, our Southwest Even Better plan. The plan, which is the most transformational in the history of the company, includes initiatives to boost our efficiency and lower costs, including the ability to fly redeye to turn our aircraft faster. It also significantly improves our customer experience and expands what we offer customers by reducing things like partnerships and introducing new vacation products, all of which enhance the rapid rewards in our co-brand ecosystem. Ultimately, the plan provides a path to financial prosperity, opening exciting growth opportunities ahead. We are already seeing the benefits of the work we did last year and the plan is well underway. I am very pleased with the momentum we are carrying into 2025 as a result of that effort. Starting with the operation, we saw improvements in nearly every key metric demonstrating success from our multi-year investments. In fact, we finished the year with an industry-leading completion factor and just last week, we were recognized by The Wall Street Journal as one of the top two U.S. carriers that have, and I quote, 'separated themselves from the pack.' We finished with a mere one-point gap to first place, a gap that we will work very hard to overcome in 2025. We also finished the year with a strong year-over-year unit revenue improvement. Unit revenues for the fourth quarter came in 8% higher than fourth quarter 2023, well above the improved expectations we provided in early December. Nominally, fourth quarter RASM was also 7% higher sequentially relative to third-quarter RASM and that is 5 points ahead of the historical third-quarter to fourth-quarter trend. The hard work of our teams helped drive this acceleration as they implemented tactical improvements. In addition to improvement from tactical actions, we experienced benefits from a constructive industry backdrop, driven by continued demand strength and capacity moderation. We're making great progress with our strategic initiative portfolio, our fleet monetization strategy, and our capital allocation plan. The team will walk through the details to provide you with execution proof points and share how we are hitting key milestones. While I see improvement in our pace of execution, the focus on driving speed and agility will continue. We're focused on execution, but we will keep a pulse on trends and be open-minded as we consider ways to continually improve the business. Moving to our cost performance, we are experiencing above-normal unit cost inflation, most notably in market-driven wage rates, airport costs, and healthcare. We outlined a multi-year $500 million cost plan back at Investor Day to help mitigate cost inflation and become more efficient, and we will be relentless in pursuing cost takeout. While we haven't yet shared the cadence of how the $500 million comes online, the focus will be on achieving that rate as quickly as possible. We are committed to the efficiency work, including corporate overhead. The fact is corporate overhead has grown at a faster rate than the rest of the airline as we staffed up for initiatives. We must be the leader in terms of efficiency, and you'll see us being aggressive as we work to become a leaner and more agile organization. Our imperative in 2025 is to deliver improved financial results and build further momentum to hit the milestones required to deliver on our 2026 and 2027 Investor Day targets. We debuted a scorecard last quarter and updated it again this morning detailing our progress, which is available on our Investor Relations website. For the core business initiatives, we expect to deliver at or exceed the $1 billion 2025 EBIT contribution target, which excludes any benefit from fleet transactions. Moving to the fleet, there is a lot going on at Boeing. I was just there last week visiting with the leadership team and walking the factory floor. They have clearly been hard at work, and I was pleased with the progress that I saw. Everyone was engaged and focused. While they still have much work to do, they appear to be on a good path, and we're feeling more optimistic. Regardless, we think it's prudent to hedge our bets. We are planning with a conservative 38 delivery assumption for 2025 to de-risk the operation. We conservatively adjusted our plans back in March of 2024, and we haven't had to republish the schedule since. Therefore, we are doing the same thing this year. That's very different from our contractual number, which for 2025 is now 136. We aren't going to get 136 aircraft, but we believe Boeing is on pace to exceed 38 this year, and over the next couple of years, there will be opportunities to do plenty of transactions as Boeing ramps up their production. Tammy is going to go into much more detail, but my point is that the opportunity is large. Despite the questions about fleet timing, we still aim to deliver the $1.5 billion of targeted total 2025 incremental EBIT from our Investor Day initiative portfolio. We're seeing our tactical actions yield benefits faster than planned and expect to hit all key milestones for our strategic initiatives. To wrap up, we're in a great position to capitalize on our momentum and continue making progress toward our goals. We have a comprehensive plan, a detailed set of initiatives, a constructive industry backdrop, and we are executing with urgency and purpose. We will not let up for even a moment as we move forward and deliver the Southwest Even Better plan. I want to thank our employees for their dedication and commitment for the exceptional operation they've been running despite a wave of winter weather. It's truly exceptional. And I will now turn it over to Andrew to cover the operations and tactical initiative performance in more detail. Andrew?

Thank you, Bob. I want to start by thanking our frontline employees for all their hard work and for helping Southwest have an outstanding year operationally. As Bob mentioned, last week we were recognized in The Wall Street Journal's 2024 annual airline rankings, moving up to a very close second place this year while taking into consideration seven key metrics. Among the nine major U.S. airlines, we were the leader in completion factor with less than 1% of flights canceled during the year. We also had the lowest rate of tarmac delays and the fewest DOT customer submissions, and we didn't come in below fourth in any category, which is a testament to both our people and investments in the operation. Turning to our revenue performance, we are pleased with how we finished 2024. Our fourth-quarter RASM was up 8% year-over-year, which exceeded our prior guidance range of up 5.5% to 7%. In fact, we saw a nice trend in year-over-year RASM growth as we closed out 2024, realizing tailwinds from our internal initiatives and capacity adjustments, as well as the benefits of a healthy industry backdrop. While there was noteworthy pressure from supply-demand imbalance in the first half of 2024, we saw a pivot to capacity moderation across the industry with continued healthy demand in the latter part of the year. As you know, we took deliberate steps to recalibrate and better optimize our revenue management systems and processes. The benefits of that work materialized faster than expected. As we shared at Investor Day, the revenue management initiative is comprehensive and supported by a range of capabilities and advancement activities. For example, we reorganized the revenue management team to manage demand for customer itineraries rather than managing demand for individual flights. This change aligns our teams more closely to our system. On the tool side, we invested in improving our ability to predict demand patterns both by booking window and by flight. We have also launched new proprietary dashboards to help our team better optimize the revenue performance of our highest demand seats. We are seeing yield benefits from our RM advancement efforts across the board. The flights with greater than 90% load factor are seeing the strongest close-out performance as a result of better management of the booking curve. Our flights with lower than 90% load factor are also seeing sequential improvements as we better optimize fares further out in the booking curve. As we look into 2025, we will maintain the same intensity and focus on delivering value from our tactical initiatives while also remaining committed to closely managing capacity. We have made great progress improving yield in the fourth quarter, and our focus now is on maintaining yield performance as we work to close the load factor gap. We expect current demand strength to continue in 2025, and our first-quarter RASM is projected to be up in the range of 5% to 7% year-over-year. As the year progresses, we expect positive year-over-year RASM growth driven by tactical initiatives. In the second quarter, we expect to see benefits from the next phase of our network realignment. This includes reductions to Atlanta and Oakland that were previously discussed, with that capacity being redeployed to points of strength like Nashville and Sacramento. We also expect to see revenue contributions from partnerships, Getaways, and loyalty initiatives, most notably in the fourth quarter. So while we are pleased with our progress, we are far from satisfied. We have a plan and we will be urgent and deliver our execution. As I close, I want to thank our people for running a great operation and delivering unparalleled Southwest hospitality. And with that, I will turn it over to Ryan to go over the progress of our strategic initiatives.

Thanks, Andrew. As Bob mentioned, I am going to provide you with updates on our strategic initiatives as we continue to execute against our Southwest Even Better plan. Earlier this month, we signed our first commercial agreement with Icelandair, making them our first partner carrier. Starting February 13, we will begin connecting customers and bags crossing the Atlantic on Iceland Air into the Southwest network at our Baltimore station. This is an important milestone in our plan to expand how and where our customers can travel. We will continue to evolve this partnership and plan to also connect Icelandair into our network in Denver and Nashville later this year, which provides even more connection opportunities through shared gateways. Also, earlier this month we received our ISO certification for successfully completing the IATA operational safety audit. This serves as the industry benchmark in safety auditing, and we are proud of this achievement that reaffirms our commitment to the highest safety standards. It's also an important milestone in our transformation journey as it sets the stage for future growth through additional airline partnerships. We continue to pursue partnership agreements with other global carriers and still plan to announce at least one additional partner carrier later this year. Our Getaways by Southwest product is also expected to launch later this year, and we are excited to announce today that we will add MGM Resorts International to our list of partners in Las Vegas. This represents a significant milestone from one of our focus markets for Getaways by Southwest, and along with our existing partners there, this will give us access to a substantial portion of the hotel inventory in Las Vegas, with more partners to come. We continue to make progress and move forward on our assigned and premium seating product and continue to expect to meet the financial targets and timelines we communicated at Investor Day to begin selling seat assignments in the second half of this year and operate flights with assigned and premium seating in the first half of next year. As we finalize our cabin layout and work towards FAA certification, we plan to begin retrofitting aircraft midyear, starting with our larger -800 aircraft, with the smaller -700 to follow later in the year. By beginning retrofits midyear, it allows us to meet our planned operate date. It minimizes the amount of time we have a mixed fleet and keeps the 700 aircraft flying with their current seat count for more of this year. We believe our tech ops facilities, employees, and vendors are well-equipped to update our entire fleet within our timeline. Technology development is also going well. Our technology employees and vendors are hard at work coding the necessary technological changes and will soon begin a rigorous testing phase before we begin selling assigned seats. Another key milestone reached just this month is our amended co-brand agreement with Chase. As we've discussed before, we needed to update our agreement to provide our card members with new benefits related to our assigned and premium seating products. We'll share more information on the details of those benefits soon, but we are excited to get these new card products into the market as we're confident customers will value these benefits and they will drive co-brand card acquisitions in the future. This agreement supports the multi-year financial targets we announced at Investor Day. Within the operation, we continue to focus on efficiency and modernization by reducing the time it takes to turn an aircraft and increasing our aircraft productivity. We've made meaningful progress toward our goal of removing paper-based processes from the day-to-day operation and have digitized crew paperwork. Our November 2024 schedule was the first that implemented a five-minute reduction in turn times in 12 of our stations, and I'm happy to report that it's working as planned with no operational impact. Later this quarter, we plan to introduce a digital communication tool that will allow pilots, flight attendants, and operations agents to chat live with each other while they're working to turn the aircraft between flights, further enhancing our efficiency. We continue to expect our turn time initiative to create the equivalent of roughly 16 free aircraft by the end of November this year. While we are already a leader in turn time, we are confident this will further our competitive advantage in the day-to-day operation. In addition to reducing turn time, we will also launch redeye flying in five key markets next month, with the first flights arriving on Valentine's Day. This will ramp up to a total of 33 redeye markets in the June 2025 base schedule, including Hawaii routes. We're pleased with how redeye flights are booking today, with nearly 75% of passengers on a connecting itinerary either before or after the redeye flight. Redeye flights capitalize on peak seasonality and maximize network connectivity while generating incremental load factor. Remember, our turn and redeye initiatives aid our modest capacity growth plans for this year above 1% to 2% year-over-year. Finally, I am pleased to share that our service modernization efforts to drive operational efficiencies and improved experience for employees and customers are also paying off. As a result of the digital capabilities we provided to our customers, enabling them to self-serve, we've seen call volumes decrease even further than what was assumed in our plans. These digital enhancements have enabled a significant increase in efficiency within our call center. As you can see, we are working hard and making continued progress on our transformational plan. We are committed to continued execution and delivering on our Southwest Even Better plan. And I want to thank the hard work of our incredible people who are making this happen. With that, I will turn it over to Tammy.

Thank you, Ryan, and hello, everyone. I am pleased by the level of execution Ryan just covered and the realization of early benefits from our Southwest Even Better plan. As we laid out, our plan provides a roadmap to transform Southwest and importantly, to restore our financial prosperity and drive sustainable shareholder value. While we have more hard work ahead to hit our multi-year financial targets, our fourth quarter performance exceeded expectations, and we ended the year with improved year-over-year margins in the fourth quarter. Much of this improvement has already been covered, so I'll pick up with color on our cost performance and we'll close with a few comments on the balance sheet and an update on capital allocation, including more insights on our fleet monetization strategy. Our fourth quarter 2024 CASM-X increased 11.1% year-over-year, and full-year 2024 CASM-X increased 7.8% year-over-year, both inclusive of a $92 million gain from a sale-leaseback transaction in the fourth quarter 2024. The year-over-year increase was primarily the result of elevated operating expenses associated with inflationary pressures, including contractual market-driven wage rate increases. In the fourth quarter specifically, the decline in capacity growth resulted in additional unit cost pressure. We are urgently working towards implementing the $500 million cost initiative announced at Investor Day in September with an intense focus on exceeding that number and accelerating as much of the benefit into this year as possible. Our efforts are focused on mitigating cost inflation by minimizing hiring, optimizing scheduling efficiency, capitalizing on supply chain opportunities, and aggressively improving corporate overhead. Looking forward, we currently expect this quarter's CASM-X to increase in the range of 7% to 9% year-over-year, driven primarily by continued general inflationary pressures from wage and work rule headwinds from labor contracts ratified last year and from continued capacity moderation efforts. As 2025 progresses, our year-over-year unit cost inflation is expected to ease as we lap labor contract anniversaries, deploy initiative-driven capacity growth, and aggressively pursue benefits from our cost initiative. Our cabin retrofit efforts associated with our premium seating initiatives are expected to result in approximately $150 million in incremental costs, primarily in the second half of the year. But these will be one-time and will not carry forward into 2026. Taking all these variables into account, excluding potential gains from any future fleet sale or sale-leaseback transactions, we expect to exit 2025 with fourth quarter year-over-year CASM-X growth in the low-single-digit range. Moving to fleet, as we highlighted in third quarter earnings, we saw the prudent planning of our conservative fleet delivery expectations pay off. As a reminder, we entered 2024 expecting to receive 79 Boeing aircraft deliveries. In March, Boeing informed us we would receive 46. After going through a detailed process, we conservatively adjusted our plan to 20 deliveries to reduce the risk of further operational impact. We closed out 2024 with a total of 22 deliveries, essentially in line with our internal estimation. Now in terms of how we are thinking about managing our fleet this year, we have a modest capacity plan of 1% to 2% year-over-year growth, and that growth is fully funded by our efficiency initiatives. This sets us up to reduce our total aircraft count by year-end. However, we still want as many deliveries as possible to modernize our fleet and reach our goal of an all -7, -8 fleet in 2031. To that end, we are planning to retire 51 aircraft this year, and in addition, we are contemplating the sale of an additional 10 -800 NGs. To support this, we need 38 deliveries from Boeing. However, as Bob shared, all incremental deliveries beyond 38 offer an opportunity to accelerate the execution of our fleet monetization strategy. I will remind you that we view our fleet monetization strategy as incremental to base business improvement. This strategy is a highly idiosyncratic opportunity to monetize our fleet through a portfolio of sales and sale-leasebacks to fund fleet monetization and support shareholder returns. The fleet opportunity is uniquely available to Southwest due to current industry aircraft supply constraints, which are driven by OEM challenges creating strong demand in the secondary market, the embedded value in our -8 from Boeing compensation and favorable pricing creating a meaningful value gap relative to the strong secondary market, and access to aircraft provided by contractual order books that exceed our modest capacity plans. As a reminder, the 1% to 2% growth over the next three years does not require additional aircraft as it is funded by efficiency initiatives. The -800 and -8 aircraft play different roles in our fleet strategy initiative. I'll start with the -800. These are midlife aircraft that currently have highly favorable market valuations. The current market setup, along with our order book economics, creates an opportunity to replace these midlife -800s with new -8s. This creates value for Southwest, and we plan to realize lower maintenance, fuel costs, enhanced customer experience, and better reliability associated with -8 aircraft, all with reduced capital spending. With the -8 aircraft, the opportunity to realize value comes from the ability to sell excess aircraft in our order book and pull forward the significant embedded value that comes from favorable pricing in the current market value. However, to fully execute this strategy, we must receive sufficient deliveries from Boeing. While we feel very good about where Boeing is headed, we will need to gain confidence in their production capabilities before we move forward with sales. You can understand that our strong preference is to execute sales. The -800 sales facilitate capital-efficient fleet modernization, and for the -8, the opportunity is to harvest significant embedded value. We will, however, be opportunistic with sale-leasebacks and pursue them as a mechanism for an orderly exit of the -800s from our fleet. Now that we have completed our first transaction, you have a better idea of the economics of the -800 sale-leaseback. Sale-leasebacks allow us to lock in the certainty of today's strong secondary pricing while simultaneously bridging our operation until we are confident that we will receive our contractual replacement -7s and -8s from Boeing. Essentially, these sale-leasebacks are functioning as forward sales, and again, we will pursue them opportunistically only where it makes financial sense, while also taking into account overall fleet modernization goals, financing needs, and capital allocation considerations. Moving to CapEx, full-year 2024 gross capital expenditures were $2.1 billion in line with previous guidance. Including proceeds of $871 million from the sale-leaseback transaction in fourth quarter 2024, full-year 2024 net capital expenditures were $1.2 billion. We currently expect 2025 gross capital spending to be in a range of $2.5 billion to $3 billion. This includes approximately $1.2 billion in aircraft capital spending and $1.6 billion in non-aircraft capital spending. Again, there is an opportunity to lower net capital spending from our fleet monetization strategy. As we look to the future, we remain committed to maintaining a strong balance sheet and are proud to have an investment-grade rating by all three rating agencies. We also remain committed to providing significant returns to our shareholders through dividends and share repurchases. In 2024, we returned $680 million, consisting of $430 million in dividends and $250 million of share repurchases to our shareholders. The $250 million ASR was the first repurchase program of the $2.5 billion share repurchase authorization announced at our September Investor Day. The company continues to plan for the launch of an additional $750 million ASR program later this quarter. Assuming performance trends continue as expected, we plan to complete repurchases of the remaining $1.5 billion available under a share repurchase authorization in 2025. Before I hand it back to Bob, I want to send out LUV's love to my Southwest family and to all of you in the investment community for your support and camaraderie over the past 33-plus years. With that, I will turn it back to Bob.

Thank you, Tammy. As we wrap up, I want to emphasize a few points. First, the team is intensely focused on meeting and exceeding our targeted performance improvement trajectory. Second, our core business initiatives are performing ahead of expectations outlined just four months ago, and we expect to deliver or exceed the $1 billion 2025 EBIT contribution target. This excludes the benefit from any fleet transactions. Nonetheless, our goal remains to deliver $1.5 billion of targeted total 2025 incremental EBIT. Third, we are taking a hard look at our cost structure. Our cost performance, including in the first quarter, is not where we want it to be. We are taking immediate actions to accelerate as much of the $500 million of targeted cost savings into 2025 as possible, and we will report on our progress as we go. Finally, we have tremendous confidence in the plan and are excited about the future of Southwest. We plan to repurchase $2.25 billion of stock this year, or approximately 12% of our market cap at current prices. We expect this to be very accretive for our investors as we work to deliver our Southwest Even Better plan, including our North Star goal to achieve after-tax ROIC of at least 15% in 2027. The pace of those share repurchases does not depend on the progress of our fleet monetization strategy. Now before I turn it over to Q&A, I want to say a few words about Tammy. As you all know, Tammy will be retiring as our CFO at the end of this quarter after 33 years with the company. She has served in many roles and has the distinction of being our first Head of Investor Relations. She's been our Chief Financial Officer since 2012. Over the years, she's led us through times of great prosperity that provided for lucrative shareholder returns. She is an innovative leader who was instrumental in the success of countless endeavors. She leaves Southwest with a fortress balance sheet, investment-grade rated by all three credit agencies, and Tammy is a humble, generous, and inspirational leader. She is a tireless mentor and leaves a strong legacy. You won't find a nicer, kinder, and tougher person anywhere. So I'd like to thank Tammy for her deep commitment to our employees, the investment community, and our shareholders. And Tammy, congratulations on all you have accomplished. Thank you for your leadership and, more importantly, your friendship. You will be missed. On that note, I will pass it back to Julia to start our Q&A.

Thank you, Bob, and congratulations Tammy. We love you too. This completes our prepared remarks. We will now open the line for analyst questions. We’d like to get to as many of you as possible, so please limit yourself to one question and a brief follow-up if required. We will now take the first question.

Hey, good morning. And if I may, Tammy, congratulations on the impending retirement. One of your competitors described Southwest's balance sheet as being something from another planet relative to the industry. I know that doesn't happen accidentally. So, congrats. For my first question, maybe to Tammy: unit costs here in the first quarter are moderating by about 3 points or perhaps closer to 5 if you consider that you don't have the sale-leaseback gain in the quarter. In your opening remarks, you mentioned a 1.5 point headwind in the second half from the cabin retrofit. Given all the moving parts, I was hoping you could discuss the cadence of unit cost growth for the rest of the year. Just to clarify that low single-digit exit rate, what type of capacity growth that exit rate is based on?

Yes. First of all, thank you for your kind words, Savi. It's been a true pleasure, and you are wonderful, so thank you. Just to give you some color on the bridge from the midpoint of our guidance in the first quarter to the low single-digit exit rate in the fourth quarter, it's coming from a couple of different buckets. We have about 3 to 4 points coming from the turn and redeye initiatives, so a big chunk of that's coming from just capacity. Hopefully, that helps answer your question. It's probably 3 points if I had to peg that and another point just from absorbing the overstaffing we've discussed in previous calls. Then there's another 2 to 3 points that is split fairly evenly between the lapping impacts from labor contracts that were ratified last year and the overall benefits from the cost plan initiative kicking in. As Bob and I both mentioned in our remarks, we are very focused on our cost reduction efforts and they will ramp up as we progress through the year. We're feeling good about the exit rate, and while some of that comes from capacity, it's also coming from the incredible amount of hard work from the team.

That's helpful, Tammy. Just following up on that: those types of redeye initiatives, I'm guessing they will have a fairly consistent impact through the second and third quarters, especially since you have the step-up in cabin retrofit in the second half?

Yes. It ramps up with the biggest impact hitting in the fourth quarter.

Thanks. Tammy, congrats. Good luck on the next phase of your career. I know you're going to miss all this fun.

I'm going to miss you, Duane.

I wanted to ask you possibly a longer-term question. There's a lot of symmetry right now between the industry backdrop and the renaissance that kicked off in 2012. Southwest was really a big part of that renaissance. Looking at that period, you had a multi-year growth of margin expansion, RASM growth over CASM growth, not just a quarter or two of timing shifts here and there, but a multi-year margin expansion. Some of that was macro growth and benign fuel prices, but CASM growth for Southwest was modest despite the fact that capacity growth was also modest and fairly tight over that period. Do you see the potential to enter a similar multi-year period where you have modest unit cost growth on modest capacity growth, or does better CASM really depend upon getting back to a period of higher growth?

Yes, Duane, it's Bob. I'll take a shot, and then Tammy can chime in. We're not ready to guide ‘26 and ‘27 CASM-X, but the exit rate for ‘25 at least gives you some indication of what we're striving for. It’s not unreasonable that we can have CASM in that low-single-digit range. Obviously, we have labor rate surety with the contracts closed out. We really don't have any openers of magnitude for ‘27, so yes, I think that’s absolutely doable.

Thanks. For my follow-up, can you provide an update on the certification process for your new seating configuration? What have you learned since last quarter or since Investor Day? When does this really start in earnest?

Yes, Duane. We finalized our cabin layouts, which allows us to finish up weight and balance certification with the FAA and get our STC certification. We are planning to get the weight and balance certification here in the first quarter, of course dependent on FAA timelines, but we are pretty confident we'll achieve that. Then, the STC certification in the second quarter will allow us to begin retrofits following at that point. That goes along with Tammy's note on the retrofit costs being in the second half of the year. We'll start the retrofits mid-year, and that will ramp through the remainder of the year. We are confident that we've got the vendors in place and our employees are ready to get the fleet retrofits completed before our operate date.

Yeah. Good morning, everyone. I echo the comments of what everybody has said about Tammy. It’s been a lot of fun working with you, and I think I’ve been here for the majority of those 33 years, so good run. Anyway, just a question for you, Tammy. About the sale-leaseback transaction you guys took in the fourth quarter. That was 35 airplanes for around $90 million, I know that in the past you've indicated that you could see a margin boost upwards of maybe 2 points from that strategy. When I think about your revenue base for 2025 and 2026, I realize not every transaction is going to be sized this way. But it seems like we could be looking at maybe upwards of 100 airplanes on a sale-leaseback basis. Is that number too high? How should I think about it? What are you targeting for 2025 with respect to sale-leasebacks? I know there was an RFP for 30 outright divestitures. Where does that sit?

Yes, thank you, Mike. The overarching theme here is we have a lot of levers we can pull to hit our targeted EBIT contribution from our fleet strategy. The sale-leasebacks will depend on our -800 exit strategy. That's really a technique to help us manage that, and the extent the proceeds will go towards our fleet modernization efforts, ultimately replacing the MAX 8 as we gain EBIT benefit from that as well. The bulk of the benefit would come from sales of the excess aircraft that we do not need to hit our moderated capacity plans. That is dependent on Boeing deliveries and market conditions. The main constraint is Boeing deliveries, and Bob reported on Boeing in his remarks. They are ramping up, and we had a conservative estimate for our deliveries this year at 38. We could potentially see up to 50 to 55 deliveries, which would support our fleet modernization efforts. The takeaway is that we have various levers, and we'll manage this very carefully. The goal with the Dash 800 is to exit the NG fleet by 2031, which will set us up well for future growth in terms of CapEx requirements.

Yes, just to add, the sale-leaseback is just a pull-forward sale. Our strong preference is sales of the -800s to replace and lower operating costs. For the -8, we look to maximize the embedded value against the market's going to be in our fleet order book. The more Boeing can deliver, the more we can execute our strategy in 2025. I was in Seattle last week and am optimistic about where Boeing is headed. We have long to go, but pending something we don't know about, I'm strongly optimistic they can exceed the 38. We probably have upside to 50 or 55. That will certainly help execute the fleet strategy on the sales side. A lot to be seen here, and I think we’ll know a lot once we see if Boeing breaks the rate of 38 in March or early April.

Yes, and I just want to be really clear on this. We are targeting our 2027 target without fleet. Our core base business is what we're aiming for with a return on invested capital of at least 15% and operating margins of greater than 10%, excluding special items. We are talking a lot about the fleet, but I don't want that to be lost in the conversation.

Good afternoon, everyone. I haven't been here for all of the 33 years like Mike, but Tammy, it's truly been a pleasure to work with you. Congratulations on your storied career and happy retirement. I have one quick revenue question and one quick fleet question for you, Tammy. On revenue: the 4Q RASM result mentioned that the beat was driven in part by stronger holiday peak and the ramp of revenue management. Can you help us think broadly about how much each of those buckets contributed? How do we think about the pacing of that $1 billion in tactical revenue-driven initiatives in 2025? How much of your 1Q guidance does that drive versus the general industry environment? And how does that build for the year?

It's always hard to completely break apart accurately. If you look at how our RASM went from Q3 to Q4 and how that compares to our norms, along with how other airlines have progressed, you see a level of outperformance with Southwest Airlines moving through to Q1 as well. This indicates that some company-specific things are happening and gives us confidence that we’re seeing the RASM reversion we need to hit our plan. Now within that, breaking them apart by design elements of our tactical initiatives, they are self-reinforcing: the network changes, the revenue management changes, the marketing changes, all work together. Revenue management did have a stronger impact in Q4 and into Q1 than the other two, which is why we called it out in our prepared remarks, but they're all contributing. Going forward, we expect to get back to normal yield levels to hit those initiatives.

That’s great. Lastly, on the fleet strategy, you've called out expecting that to contribute about $500 million in EBIT on average per year. Should we think of sale-leasebacks as offsetting the positive sale impact? Just with the first leaseback, does the increased rent over three years offset the gain on the decrease in depreciation and amortization? Or should we be considering additional items like lower maintenance and dispatch reliability? Are you expecting the net gain from the aircraft and D&A for these sale-leasebacks to also be EBIT positive?

Yes. Great question, Catie. When we look at our sale-leaseback opportunities, our goal and our intention is to achieve NPV positive returns. While yes, you recognize a gain when you sell the aircraft and there is increased rents exceeding depreciation expense, these are short-term sale-leasebacks to manage the exit from the -800 fleet. When we evaluate that in total, it's intended to be NPV positive, and that's how we've constructed our fleet strategy here. We consider all the points you've mentioned, like maintenance, etc. We've got a lot of levers we can pull to achieve this in an NPV positive way.

Tammy, I have to join in and say huge congrats on such an extended run as CFO and at Southwest, of course. I have a couple of questions here. When everything is said and done, how much cash could potentially be unlocked from the balance sheet from these sales? How many aircraft fall into that attractive mid-age bucket, and over how many years could these sales potentially occur if you were to pull the trigger?

Yes. First of all, thank you, Dan. It’s been a pleasure working with you over the years. We aren't providing specific guidance on total proceeds. We have excess aircraft in our order book, and I shared this at Investor Day. We have aircraft above what we need over the next three years, to achieve our 1% to 2% capacity growth target. The proceeds would obviously be significant, and again, we're focused on hitting our operating margin targets as shared at Investor Day. I'm not prepared to give specifics today because it really does depend on the market. We will only do transactions that are financially sensible. We're also managing our invested capital base with those proceeds while working towards exiting our NG fleet by 2031, setting us up for future growth.

Just to add, we're committed to extracting every dime out of the embedded value in the order book. We currently have 672 in our order book, and whatever the exact strategic approach for transactions, our intent is to pull every bit of value out for ourselves and our shareholders. The commitment is to run our fleet to an average age of 5, aiming for a very low age setup. There’s also work to determine what is optimal regarding fleet age and how many excess aircraft we have based on ongoing capacity.

Yes. The plan is to pay down the debt that’s due this year, approximately $2.9 billion in the first half. This will improve our balance sheet metrics and open the door for the Board to consider accelerating capital returns once we hit those metrics.

Yes, we're committed to maintaining a strong balance sheet and the appropriate level of leverage as we continue discussions with the board.

We wanted to also thank you, Tammy, for all your help over the past few years and congratulate you as well. I was wondering if you have thoughts on overall industry capacity, perhaps in Q2 through Q3, and if you're confident that may decrease from current schedules? Are you seeing any specific areas of pockets of overcapacity?

Yes, certainly. I would say schedules are really firm for Q1. Our schedules are relatively far out because we avoid republishing adjustments unless necessary. Many airlines modify capacity closer in, so we don't view the summer and beyond as complete yet. We'll wait until those schedules firm up before assessing overall capacity for the second half of the year. However, what's published and firm reveals a constructive backdrop.

Catherine, we often get asked how long the constructive backdrop can persist. While we're seeing improvements, there’s still a lot of work to do to get back into significant rates and to have a healthy supply chain. This situation might not change soon, but it's expected to remain constructive for quite a while.

I know you’ve discussed plans for retrofitting aircraft for the premium cabin. Could you provide an update on the progress made since Investor Day, maybe share something that excites you or something you've done since then?

Yes, Catherine. We covered the retrofits earlier in the call, which have been good progress. Also, we’ve finalized the amendment with Chase: another key step on the path toward selling and operating in an assigned and premium environment. This is important to make our new boarding benefits align with seating benefits that customers will appreciate. We’ll share details with our customers soon, but overall, the pace of execution and focus on this priority has been encouraging.

Additionally, we have started dynamically pricing the seats and the new products. We went live with dynamic pricing for our upgraded boarding product and this will provide us almost a full year to train our models and refine our operations prior to going live with our complete offering.

Thanks, Gary. Welcome to the media on our call today. Before we begin to hear your questions, could you remind everyone how to queue up for questions?

I just had a quick question on the amended credit card deal. With your forecast that it's going to really drive acquisitions of the card up, are you offering any kind of forecast in terms of how your remuneration from Chase may expand and some idea of what that could be on an annual basis going forward?

Mary, I'll start, and I'm sure Ryan will add. I just wanted to thank our team and our Chase partners for this big amendment we moved through with speed and pace. So, I'm very grateful. The new deal does include significant additional compensation, which you could think of as being competitive with recent deals in the market. It was contemplated in our Investor Day plan, but we cannot provide exact details on the financials. Ryan?

We are pleased to get it done. It's a proof point in our plan, and it’s competitive with legacy carriers in the market.

Two quick questions. Has there been a shift in Southwest's approach to DEI? There's been attention paid to the change in title from your Vice President of DEI to Chief Inclusion Officer. That's the first question. The second question is regarding how Southwest plans to work with travel advisers.

I will start with the second question. There are no changes to announce regarding working with the travel trade. As previously discussed, we operate a direct-to-consumer business. The majority of our business case focuses on selling to current customers who want packages that we offer. We believe we will benefit from that approach. If we engage with the trade, it will be at the margin in select situations, but the main focus remains on direct sales. As we get closer to going live, we’ll finalize our trade policies.

Robert, regarding DEI, whether it's today, five years ago, ten years ago, or twenty years ago, we have always worked hard to hire people who fit our culture. Our focus is on creating an environment that is inclusive where employees feel they belong. Promotions and hiring's always been merit-based. There are no changes in how we treat or reward people. We'll evaluate any executive orders and understand what we may need to do; please stay tuned.

This concludes our Q&A session for the media. If anyone has any further questions, our communications group is standing by. Their contact information along with today's news release are available at swamedia.com.