Great. Let's keep the airlines content going, and next up, we have Southwest Airlines CEO, Bob Jordan. Bob, thanks so much for being here at Laguna.
Thank you for having me. Appreciate it.
Absolutely. So it's been an interesting few weeks in the airline industry. But first, let's start with Southwest. Obviously, you came into the year with a fairly challenging end to last year and kind of with maybe a little bit of show me story on the operating side. And I think you have shown people that kind of you've taken the steps to kind of-
Yeah
- You know, improve the operating resilience of the network. So maybe talk about what 2023, the journey has been like for you guys.
You bet. On the operating side, yeah, we had a rough December, obviously, the last two weeks, and there's no way around that, and not trying to hide from that. I think we were very transparent about what went wrong. It was a weather event, but then we just struggled to recover post the weather event.
Yep.
A lot, a lot written about technology was not technology, but technology, to some extent, wasn't helpful.
Mm-hmm.
So, it just, we just can't do that again. So we have been very, very focused on a robust plan to ensure that that doesn't happen. So, big investments in winter operations preparation, so de-icing trucks and more de-icing capacity. We've got a new set of weather technology that helps us better understand on airport exactly what the weather is and how much de-icing holdover time we have. I can go on and on and on, but a lot of preparation, buying a lot of de-icing trucks and staffing. So I feel very, very prepared for this winter, and all that will be in place by October.
Right.
Second, we brought the group that designs the network, Network Planning, together with the group that operates the network, Network Operations Control. So they're under one group.
Mm-hmm.
And you just get a better feedback loop, and it really puts the design and execution together, and it's going to really help the playbooks that we developed to deal with the regular operations. And it's paying off. I mean, our completion factor this year is running at 99%.
Absolutely.
So it's really a really strong operations year. A lot better understanding of early indication warningsc when things begin to go off till. We've invested in crew scheduling-
Mm-hmm
... staffing. We've invested in technology. Even though it wasn't technology, we've invested in technology, the ability to contract and deal with our crews. Last, one of the big things that's coming here in the next month that I'm very excited about is a new piece of technology that will work to solve, when we have irregular operations, it will work to solve the repairing the movement of the aircraft-
Mm-hmm
- with the movement and preparing the movement of the crews.
Mm-hmm.
So one of the things that happens today, happened with us in December, is you repair the flow of the aircraft, then that's done, and then you take that, and you repair the flow of the crews.
Mm-hmm.
A lot of times those two solutions fight against each other.
Right.
But we got a new set of technology coming in here in about a month that will solve them together, and I'm just, I'm very optimistic about what that will do for the operation.
Got it. Just to follow up on that, you obviously had a much more reliable July 4th weekend than-
We did
- many of your peers did. Labor Day looks like it went off without a hitch. So you are confident that going into holiday season, like, you're well prepared?
I am. I think we performed two things very, very well during high holiday travel, as you described, but then we have had operational days that were a struggle, and what we saw before was that you would have a very tough day, like the NOTAM day, where the-
Mm-hmm
... there was a ground stop because of some-
Right
- FAA issues.
Yep.
Or a hurricane that drives a very high level of cancellations. We had our own. There was a network, a switch issue that caused a ground stop. What we saw is that in addition to that issue, you would see a hangover in terms of the next day and maybe two days.
Mm-hmm.
It would take a long time to work your way out. What we're seeing now with all the changes that we put in place is that you may have a tough day like this NOTAM issue from the FAA. It does not hang over to the next day. I think back there, I think we had one of the best operating days in the industry following that NOTAM day.
Mm-hmm.
No, I have a lot of confidence that we're going to operate well this winter.
Got it. So let's shift gears and talk about the demand environment. Obviously, there was, it was an interesting day yesterday,
I'm glad I'm presenting today.
That's great timing. Very, very appreciative of you. But, what are you seeing out there? Obviously, we've heard from many airlines presenting so far that, you know, September has been fine, the summer was pretty good. Obviously, there are a couple of other ULCCs have been saying that there's been a fairly dramatic drop-off in traffic in the last few weeks. What are you guys seeing?
Well, you know, we modified our RASM guidance-
Correct
modestly. We basically pulled it in.
Mm-hmm.
Really, that was due to just being a little off track with our close-in August demand expectations. I think August is changing as a month for us. This is about the fourth year in a row where August just hasn't been what we expected.
Mm-hmm.
I think it's a combination of things like schools are going back much earlier-
Sure
... where typically we saw that shoulder period show up in the third week of August. Last year, it was kind of the second week of August. This year, kind of the first week of August.
Mm.
I think that's a lot of what's going on, is that close-in demand was different simply because the travel patterns are different.
Mm-hmm.
So to sort of put that aside, looking past August, where we're seeing very strong leisure demand and strong business demand.
Right.
We had our best Labor Day performance, revenue performance in our history-
Mm-hmm
Across those four days. So as you look forward, I mean, obviously, business is trailing leisure in terms of demand, but even on the business side, we're seeing a sequential improvement in business from the second quarter to the third quarter on a year-over-year basis. So, you know, things can change, but as far as we can see, looking forward with bookings, leisure demand looks strong and business demand looks strong.
Got it. This whole close-in comment was something that one of your peers made as well. They're also seeing kind of close-in demand kind of drop off in recent weeks, although the longer-term booking curve looks pretty robust. Is that just a function of, like, I think it was a very interesting comment you made about, you know, some of the travel patterns are changing with the schools being early and such, but is it just a case of that little idiosyncratic adjustment, or is there some kind of fundamental change in sales and behavior coming out of the pandemic that's going to be different going forward?
I think for us, especially sort of right now, it's really an August phenomenon-
Okay.
for different reasons. We're, we're not seeing it spread in other months.
Mm-hmm.
Now, we, we have two things going on as well, which is you have, businesses just not fully restored.
Mm-hmm.
You know, I think the last 10-15 points or so of business restoration are going to be stubborn. That, that's not unusual. It happened post-9/11. I wouldn't be surprised. So business obviously drives close in strength, especially on the fare side. So that may be a piece of it that is not unique to Southwest, and that may persist for a while. But even, even that aside, we're seeing close in strength. We've also put in a new revenue management system, and very, very pleased with the performance of the system. And one of the things that it does, it is, it has a bias to take a close in to see and manage close in strength.
Mm-hmm.
So I think you'll see performance there. We saw it during the testing. No, but get to the chase, I think the close in strength, softness, if you want to call it that issue, really is isolated to August. We're just not seeing that forward. Now, things can change, but we're not seeing that as you know in September and forward.
Got it. Let's follow up on corporate a little bit. We had Delta just before you, obviously, major corporate airlines saying that they are seeing the impact of return to work in September, potentially in October as well. Are you guys seeing anything as well? Kind of obviously, it's a shorter season on the leisure side, but corporate does pick up in 3Q. What does the corporate outlook look like?
We are seeing, again, we're basically right on our expectations for business travel. We are seeing a modest sequential improvement Q2 to Q3-
Mm-hmm
... on a year-over-year basis. Again, you've got a percent of that business, you know, I keep saying sort of 10%-15%, that is going to be stubborn.
Yep.
Which is hard, very hard to predict how fast that comes back. I think the thing that's very helpful to us, too, is we made a big investment in GDS.
Yep.
The GDS revenue initiative is bringing market share our way. We have seen market share improvement all along the way. If you go back to what we said at Investor Day, December of last year, we have seen market share improvement between then and today.
Mm-hmm.
We're definitely... The GDS investment is definitely picking up business share for Southwest Airlines.
Got it. Can you give us a little more detail, like, what was your share before? What is your share now?
We-
Where do you want to go? What is the path look like? If you don't want to share numbers, fine.
We haven't, we really haven't shared the numbers, but I-
What innings are you in with that ramp?
Excuse me?
What innings are you in with that ramp?
I think we still, if you look at our network, and this is why we did the project, if you look at our network and our opportunities, so what would be the right share for Southwest Airlines? We lagged-
Mm-hmm
... and we lagged considerably. So the investment in GDS was meant to go after that.
Yep.
I mean, we have the network to support business, and we get a lot of business travel, but, but we do or did lag our share. So, I'm very pleased. We're, we're on track.
Mm-hmm
... you know, with, with where we thought we would be with the, the GDS initiative. I'm very pleased with the market share gains. If you think about what inning we're in-
Mm-hmm
... I do think that initiative has considerable room to continue to run.
Mm-hmm.
Similar to that, it wasn't your question, but if you think about the RM system, the revenue management system-
Yep
... that we put in place, we made the decision, put it in place earlier this year. It really was October, September, October, before it's really managing the whole network.
Mm-hmm.
It is very different. It, the old system sort of worked to fill up a flight.
Yep.
It did not have an understanding of the itineraries. So people on that flight may be going, they're connecting, they're going on to the places. So the new system really works to manage across all itineraries, and it works to manage and build to a maximum revenue number more than load. It's new, though.
Okay.
It works in a different way. The history sets are different. So I think we have in 2024, we have opportunity to really continue to mature the revenue management system as well and continue to drive benefit from that initiative.
Got it. Going back to the macro, kind of just given that spread between what some airlines are seeing and what others are not seeing, there's some speculation as to whether it is a, it's something that's impacting one end of the market versus not. Kind of you're the strongest airline franchise out there, but you're a low-cost carrier, kind of, you know. Is it or do you think that there might be weakness at the low end of the consumer spectrum, which is not showing up at the high end? And kind of where do you guys fall in that?
Again, we're just not seeing the weakness.
Okay.
Given the size and breadth of our network, we serve everybody.
Yep.
We serve. You know, we serve. We have great fares because we have great costs, and so we serve the sort of all of America.
Mm-hmm.
We're not seeing weakness in any pockets.
Right.
The only place, again, is that you can see in the data that you had... Pre-pandemic, we had business travelers that had a certain frequency, and they're flying.
Mm-hmm.
It's just their frequency is down from what it was.
Yep.
That's that last bit of travel that's going to take a while. But no, we do not see. We just don't see weakness across, across, you know, any of those, any of that spectrum. We're continuing to see demand for our product.
Got it. Switching gears, talk about pricing. We, one of the factors influencing pressure on domestic yields all year has been the fact that jet fuel has been coming down a fair bit, but now it's kind of gone up again.
Right.
Do you think the industry will be successful in kind of passing on this higher fuel on to the customers?
Well, yields have held up. I mean, you sort of start there. I'm pleased with yields. The our again, our second quarter fares were up year-over-year. And despite all the discussion of that you heard yesterday around weakness, I mean, our yields are holding up for us-
Uh-huh
... which I'm very pleased with. There's no doubt that costs are up, whether it's fuel, obviously, you know, there, you've got labor.
Yep.
If you go back to pre-pandemic, so sort of fuel aside, and you take labor costs and some other costs, and you play them through as if the pandemic never happened, they're not up significantly from where we would be if we had had sort of year-to-year increases.
Mm-hmm.
What's happened is they're coming all in a lump here.
Yep.
And you've got fuel on top of that. We have work to do on the efficiency and cost side-
Yep
... well, I'm very pleased with our cost position coming out of the pandemic. We actually stayed stable or improved our relative cost position, both the ULCCs and the legacy. Very, very, very pleased with that.
Mm-hmm.
But we've hired a lot of folks. We have, again, I'm very pleased that we're the, I think, we're the first airline to get all the, all the fleet flying again here in September, but that is not optimal.
Yep.
So having the right, all, all the folks that we need and having all the aircraft flying doesn't mean that the network is optimized or the efficiency of our, of our people and our procedures and our proficiency is where we want it to be. So we have a lot of work to do there in 2024, really, to push on efficiency. But long-winded answer to your question.
No, no.
There is work-
Yeah
... there is no doubt, especially if fuel sticks, because costs are up, there is work to do on the revenue side.
Sure.
How you think about pricing is not in a vacuum.
Mm-hmm.
Some of these things are industry questions.
Mm-hmm.
But there's no doubt that we have work to do on the revenue side to, in addition to cost, to adapt to the new cost environment.
Got it. Let us talk about cost. Again, I think this industry tends to lower its CASM- ex by growing capacity. One way of doing it.
Yep.
I'll get to capacity in a second. But just, you know, ex-capacity growth, I mean, you said there's still work to do here in terms of efficiencies. A, do you feel like you have a full handle on inflation and the inflationary items in your cost structure? And B, kind of, can you elaborate on some of the things that you can do on the absolute cost side to maybe drive some efficiency in the system?
I feel like we have a handle on it. One of the things I'm pleased with, many things I'm pleased with is that we have been fully accrued to market for our labor costs all along the way.
Yep.
So when you've looked at our guidance and our performance, we have had our best guess of market rates in everything that you've seen.
Mm-hmm.
When you look at our cost, at our CASM guide, it's fully loaded. That doesn't mean as we close out our last two contracts here, that there won't be changes. There could be.
Yep.
But it's in the guide, and just a side note there, I'm really proud of our labor and other teams that work on all that, because we have 11 contracts. We have closed 9 of them-
Mm-hmm
... in 10 months. I think it's a record for Southwest Airlines. I'm very pleased. I mean, 9 agreements in 10 months is, is huge. We have two to go, two big ones with our flight attendants and our pilots, but we will get there.
Mm-hmm.
But, again, we're fully accrued to the extent that we understand where the negotiations are today and where the market is today.
Yep.
Back to, back to your point about cost, again, I think we have, we have two things to do. We have sort of normal... Three things maybe normal wringing out efficiency, inefficiencies, that just came into the system as we hired rapidly coming out of COVID. We have a lot of folks that are still in training-
Mm-hmm
so that'll come down. We have folks who are arguably not all the way proficient yet, and there's just work to do to get back to our so-called fighting weight-
Yep
... 2019 fighting weight.
Yep.
We will work on that. There's work to do as we haven't talked much about the huge effort in the first quarter to sort of re-rack the network-
Sure
... which is very important. But a piece of that will be pushing flights into the periods of time, not just there's higher demand, but where we have dips in a station, dips in the schedule.
Mm-hmm.
So you have all the people at the gates, the costs there, we just don't have enough flights. So there's work to do on the operating leverage side, especially in our big stations, driving all operating leverage. Now, beyond this, and we'll be sharing a lot more, you know, as we get into 2024, we have a lot of opportunities as we continue to digitize the customer experience. So there are still a lot of transactions that are handled on the phone.
Yep.
We are a low user, arguably a low user of bots and chat and those kinds of things.
Mm-hmm.
If you look at our lobbies at the airports, we're bag-checking machines-
Sure
... because bags fly free on Southwest Airlines. And there's an opportunity to really wring out costs that occur because of that. So as we get into 2024, you'll see a lot more from us around how we streamline those experiences, which is good for our customers and our costs. Digitize a lot of those experiences. There'll be a lot of use of AI-
Mm-hmm
... in terms of understanding how we answer customer transactions. So we'll be sharing more in the future, but I think we have, we have opportunities with, with new initiatives to continue to drive out cost as well.
Got it. Just follow up on that point. Is that a 12-month initiative? Is that a multi-year initiative? And how, how long do you think it-
It really depends on what you're talking about. And again, I'm not quite ready to share the detail, and it varies. Some of these things, like lobby redesign, are more complex. Using generative AI-
Mm-hmm
And, in things like an understanding of handling a customer transaction, you know, I think there's an opportunity to go a little faster, but we're just not ready to share that.
Got it. Look forward to the December investment.
But there will be a lot of push on that, though.
Absolutely.
Sure.
Let's switch gears, talk about capacity. I think there's a lot of debate in the industry as to whether domestic capacity should be growing as much as it is, given the current macro environment. Again, you're saying you're not seeing any weakness, which, again, your peers have backed up as well, but it's not exactly a robust-
Right
-macro environment, right? So, what's your response to that? Kind of, how do you balance growth versus, what the, the market can handle?
Yeah, maybe separate those. Again, I, I probably said this before, but there is a lot of focus on capacity. But if you go back to 2019 and play forward, sort of normal growth-
Mm-hmm
The industry, Southwest Airlines, is not off of where we would have been sort of but for the pandemic.
Sure.
It just sort of went through a down and an up.
You've got a chain, right?
But, but it's not like the industry is way ahead. In fact, arguably, the industry is behind where we would have been capacity-wise, had the pandemic never occurred.
Mm-hmm.
If you look at our own capacity, we're growing 14%-15% here in 2023. But the majority of that, 10+ points, is simply due to getting aircraft that were here. We just could not fly them because we didn't have enough pilots, and getting them off the ground and restoring the network.
Mm-hmm.
So that's not really incremental capacity, sort of a choice with deliveries and all that. So that will help efficiency just to move, get the assets moving. So the majority of the 2023 capacity really is getting the assets up and productive. If you play forward to 2024, and it's still capacity, but you play forward to 2024, seven points of 2024 capacity is simply the carryforward of 2023.
Mm-hmm.
So you take what we've done in 2023, roll it forward, it's gonna produce a seven. The incremental capacity above that, sort of the net new, will be small. So our desire is to take, you know, for the seven that's carryover, really, really grow into that. That's a lot of the network optimization work, which we can talk about.
Mm-hmm.
Then the sort of discretionary net new above that, we're not ready to share the exact number, but it'll be a small number. The other thing, too, I mean, obviously, we have a lot of work here. The network restructure going on in the first quarter, that ends in March, is significant.
Mm-hmm.
It's a recognition of where demand is today-
Mm-hmm
and post-COVID, and so our business is down. So our short-haul traffic, our short-haul percent of the network will come down from roughly 41% to about 38%.
Mm-hmm.
The ends of the days are short, the deep shoulder flying are tough to fill up, so those will come in two-three points. And then where you have weaker days, especially Tuesday, Wednesday, if you go back to this January, the step down from a Monday to a Tuesday was about two points.
Mm-hmm.
The step down in 2024 will be about eight points.
Mm-hmm.
So we're working hard to get capacity to where obviously the demand is. And then just last, sort of nobody knows where... Nobody has pure sight, line of sight in terms of where we're headed.
Sure.
We have plans, like the network restructure, but we're not slavish to a growth plan. So if we—you know, well, I'm very optimistic about the network restructure, and we expect that to generate over $500 million in value. But if things change, that's not enough. We'll continue to work, but just, we're—don't think of Southwest Airlines as slavish to the things that I'm telling you. If we need to adapt, we'll adapt.
Sounds good. Just on that network, reorg, sounds like you're trying to reduce the, not the seasonality of the business, but just the kind of improved utilization through the week, through shoulder seasons. Kind of, is, is that where we'll see it the most?
Really, what we're trying to do is say, you've got a... post-COVID, we have a new demand environment.
Yep.
The demand is just in different places. There's not as much short haul. I think it's because of the lack of business trips, or that dip in business trips. The dip from Monday to a Tuesday is much lower. It... For whatever reason, it is more difficult to fill up those late flights.
Mm-hmm.
A lot, again, I think is probably business travel, and so you're just moving capacity out of where it's those flights are just tougher to perform, and into places where we know we're performing. But a lot of that is the heart of the day. So a lot of this is just matching. You've you're restored, you've got everything flying, but not optimal. Now we need to optimize it to what the post-COVID demand environment looks like. The other thing is, as we do add incremental capacity, I don't think all capacity is the same.
Yep.
We have tremendous opportunity and performance in cities where you're seeing big GDP and population growth, like Denver and Phoenix and Nashville and Austin, and we have the gates and capacity or the ability to add capacity. So you'll see our incremental capacity, and then some of this re-rack flying in the first quarter, going to places where we know we have points of strength, we know the demand is there, and the macroeconomic backdrop tells you that GDP is growing, people are moving there, and there's demand.
Right. Got it.
Nashville is a great example.
Right.
Nashville is growing like crazy.
Yep. A great town, been there a few times. Any question in the audience?
... So obviously this past summer, there was a lot of long-haul international travel. I feel like everyone was traveling abroad.
Yep.
Southwest not having much exposure to that, but just curious, were you seeing some sort of impact from that, like some other carriers had mentioned? Do you think that the pendulum between domestic and international will kind of normalize back in 2024?
Yeah, I can't speak for others, but you know, the COVID sort of changed everything, and we're working our way back to normal-
Mm-hmm
Here. So, you know, you had these, this huge boom in travel in 2021. You had a lot of sort of revenge domestic travel in 2022. Now, that's happening on, especially on the far international, market basis. So I think logic would just tell you, at some point, it swings back to normal. A lot of those trips, in my mind, we've all taken, I, you know, some of these big trips, and you don't do that every couple of months. Well, maybe you do. I'm not sure. But you, so you save for those.
So I think you have a revenge international - far international travel thing going on, and you would expect that to come back to normal, and right itself, and our domestic trends will be normal, our international trends will be normal. Yeah, our exposure, we don't have a lot of exposure. No, no exposure to far international, modest exposure to near international, and we saw strength there, but I do expect it to normalize.
Any other questions? So Bob, maybe just to wrap us up here, it's been a tough three years for the industry. I'm not gonna catch myself saying 2024 is gonna be fine because, made that mistake twice now. But is 2024 gonna be the year where kind of you guys kind of have all the ducks in a row? I mean, obviously, unless if there's a big recession, all bets are off, right?
Right.
But if there's, if macro kind of holds stable, is 2024 the year when you can see the true earnings power of Southwest?
You know, if you go back through, you, no one has the crystal ball that tells you exactly what's gonna happen. And, you know, fuels are, to an extent-
Yep
A wild card here, which is why I'm so pleased that we are 54% hedged in 2024.
Of course.
Makes me feel really good. But if you sort of run your way across the last couple of years, you know, travel demand comes soaring back, and everybody is trapped with we, "Wow, we're not staffed. ATC is not staffed, we're not staffed." And so you just... You, you're just fighting to get enough staff-
Mm-hmm
to more efficiently operate the airline. You come into 2023, and it's all about keeping those staff, getting enough pilots now to fly our aircraft, getting all the aircraft off the ground, getting the whole fleet to be efficient, and restoring the network to pre-pandemic levels. And now as you go into 2024, to me, it's all about two things. It's about getting back to running the airline normally.
Mm-hmm.
Because we've got a lot of those things in place. It's about getting back... Really making progress on our back to our pre-pandemic efficiency levels. We hired. I feel really good about our staffing, but now we've got to wring out the excess, so to speak, to get back—'cause we're known for that, get back to the efficiency of our people, our aircraft, our gates, all of our assets. It's about getting the network adapted to what the post-COVID travel demand themes look like.
Yep.
We'll have that done by the end of the first quarter. I feel really good about that. Of course, it's about making progress on our long-term goals.
Mm-hmm.
So obviously, we've talked about. We will end the year at sort of a normal growth rate, mid-single digits. We'll end the year at a normal level of markets and development. Feel good about that. But again, it's about making progress on our returns, our returns on invested capital, our margins, and marching our way back to where we have been and will be, which is industry-leading operational performance and industry-leading financial performance.
Bob, we look forward to the Investor Day in December. Thank you so much for being here.
Thank you. Appreciate the time.
That was awesome. Thanks. Thank you.