Southwest Airlines - Q2 2023

Transcript

Operator (participant)

Good morning, welcome to the Southwest Airlines Q2 2023 conference call. My name is Anthony, I will be monitoring today's call. This call is being recorded, and a replay will be available on southwest.com in the Investor Relations section. After today's prepared remarks, there will be an opportunity to ask questions. To ask a question, you press star, then one on your telephone keypad. To withdraw your question, please press star then two. At this time, I'd like to turn the call over to Ms. Julia Landrum, Vice President of Investor Relations. Please go ahead, ma'am.

Julia Landrum (VP of Investor Relations)

Thank you, operator, and welcome everyone to our Q2 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 GAAP results in our press release. 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.

Bob Jordan (CEO)

Thanks, Julie. Good morning, everyone. I appreciate you joining us for our Q2 2023 earnings call. I am very pleased to report a solid quarter with net income of $693 million, excluding special items, and all-time record quarterly revenue of just over $7 billion. The demand environment, especially for leisure travel, continues to be resilient as we have seen solid bookings throughout the busy summer travel season. Further, we continue to expect $1 billion-$1.5 billion of pre-tax profit contribution in full year 2023 for a strategic initiative that we outlined at our Investor Day last December. Based on our current outlook, we continue to expect record operating revenue and solid profits in Q3 2023 and year-over-year margin expansion for full year 2023. I especially wanna thank our people for doing such a fantastic job.

They helped us get a record number of customers and a record number of bags on a record number of flights successfully to their destinations as we experienced the lowest Q2 flight cancellation rate in the past 10 years. You know, it wasn't without trials. We had a lot going on in the operation related to weather. Weather has continued to be a challenge here in July. Despite that, our employees have continued to deliver a very solid performance. From our Network Ops Control center to the front line, our people have worked together extremely well to minimize cancellations and produce a very reliable operation. I'm just so proud of them for getting our customers where they need to go despite a challenging operational environment.

While our cost outlook has increased for the year, the change is primarily driven by updates to our market wage rate accruals for open collective bargaining agreements. While fluid, we're making progress. It's obviously very hard work, and I'm just very appreciative of the dedication of everybody involved in the negotiation process. Thinking about where we are with the business, since 2018, we have seen very significant swings due to the grounding of the MAX. Demand falloff, of course, from COVID, then the stress from the resurgence of demand, disruptions from post-pandemic supply chain issues, challenges with employee staffing, and most recently, uncertainty with our Boeing aircraft deliveries.

The challenges we have faced since 2018 have made planning difficult, smoothing out fluctuations is a must, the best way to do that is with smooth and predictable capacity growth. We told you back in April that we were reflowing our order book to allow for orderly and measured growth, we're still finalizing the details of that with Boeing, we remain confident that we will get the 70 deliveries in 2023 that are assumed for our published schedules. We are working to build a 2024 plan that should be much more stable. We currently are planning to be flying the MAX 7 at some point next year, if not, we'll take MAX 8 instead, just as we are doing now.

Where that leaves us, for full year 2023, capacity is unchanged for this year at up 14%-15% year-over-year. As we shared this morning in our release, we are revamping our 2024 flight schedules. While our network is largely restored at this point, it is not optimized, especially for post-pandemic shifts and business travel. Those adjustments to the network will be largely complete by the March 2024 flight schedules, and we expect those efforts and the continued maturation of development markets to generate an incremental $500 million in pre-tax profit in 2024. The changes will also reduce the percentage of system capacity and development by more than half, returning to normal pre-pandemic levels by the end of next year.

We already have our schedule published through March 6, 2024, and currently expect Q1 2024 capacity to be up in the range of 14%-16% on a year-over-year basis. Keep in mind that nearly 90% of that year-over-year growth is carryover from 2023. For the remainder of 2024, we are planning for a sequential deceleration in year-over-year growth in each quarter next year, as we work our way back to our long-term goal of mid-single digit growth year-over-year. We've made a lot of progress in the H1 of 2023, completing several major milestones. We quickly developed and are on track for our winter operations plan.

We have the staffing plan in place to fully utilize our fleet by the end of the Q3 and have the network restored by the end of the year. To be clear, it's restored but not yet optimized, Ryan will share more on how we're going to adjust the network based on post-pandemic travel patterns. We have a lot of exciting things in the works that we believe are going to contribute to our 2024 financial results and help us deliver another year of margin expansion next year. In closing, our accomplishments in 2023 lay a foundation for us to shift our focus to restoring our industry-leading financial and operational performance, boost our operational resilience, and make advances in our industry-leading customer service through a focus on digital hospitality.

I just can't say this enough, I'm just so proud of our people. They are the heart of Southwest Airlines, and they deliver day in and day out for each other and for our customers. With that, I will turn it over to Tammy.

Tammy Romo (CFO)

Thank you, Bob, and hello, everyone. First, I'd like to extend another thanks to our employees for their commendable efforts this quarter, resulting in solid operational and financial performance, a hard-earned improvement from where we began the year. Overall, we had a really solid quarter. Operationally, we had a great completion factor despite many weather challenges. Financially, bottom line profits were in line with our expectations, despite pressure from market-driven labor accruals. We produced an all-time quarterly operating revenue record. We also generated double-digit operating margins each month during the quarter. All of this was made possible by the drive and hard work of our incredible employees. I just can't thank them enough. Ryan and Andrew will speak to our revenue trends and operational performance, so I will jump right to cost, fleet, and then balance sheet.

Beginning with fuel, our Q2 jet fuel price was $2.60 per gallon, slightly above our previous guidance. Throughout Q2, crude oil prices stayed within a reasonable range, hovering for the most part, around $80 per barrel. We are 49% hedged for Q3 and estimate our Q3 fuel price to be similar to our Q2 fuel price. That includes an estimated $0.08 of hedging gains. We now estimate our full year 2023 fuel price to be in the $2.70-$2.80 per gallon range, including $0.09 of hedging gains. This is up $0.10 from our previous guidance due to higher refining margins. Of course, market oil prices and heating cracks can be volatile, which is why we hedge.

We are currently 54% hedged in 2024. Over the last few months, we've added meaningfully to our 2025 portfolio and began building our 2026 portfolio. The total fair market value of our fuel hedge portfolio for Q3 through 2026 is $373 million. We will continue to seek cost-effective opportunities to expand our hedging portfolio with a continued goal to get to roughly 50% hedging protection each year. Moving to non-fuel cost, our Q2 year-over-year CASM-X increase of 7.5% was towards the unfavorable end of our guidance range due to incremental adjustments to market wage rate accruals for our open labor agreements. We have said this from the beginning, our labor accruals are based on market, and in this environment, market has obviously been dynamic.

We are planning and eager to award our work groups with well-deserved compensation increases. Looking ahead, our nominal Q3 cost trends remain fairly consistent with Q2. We currently estimate our Q3 CASM-X to increase in the 3.5%-6.5% range year-over-year. This increase is again, largely driven by higher labor costs. We are also continuing to incur additional maintenance expense relative to 2022 for our Dash 800 fleet as more engines come due for heavy maintenance, adding further pressure to our H2 cost inflation. For full year 2023, we now estimate CASM-X to decrease in the range of 1%-2% year-over-year, compared with our previous guidance of down 2%-4%.

The estimated point and a half increase is due primarily to higher labor cost pressures, as I've already covered. Turning to our fleet, during Q2, we received a total of 21 aircraft deliveries and retired 11 Dash 700 aircraft, ending the quarter with over 800 aircraft. We are working to reflow our order book with Boeing. However, for this year, we continue to plan for approximately 70 Dash 8 deliveries and 26 Dash 700 retirements, which takes the fleet to 814 aircraft at year-end. Likewise, our CapEx outlook remains unchanged at approximately $3.5 billion, which assumes approximately $2.3 billion in aircraft capital spend. Our 2023 capacity guidance also remains unchanged.

We continue to expect full year 2023 capacity to be up approximately 14%-15% year-over-year. We have tightened our Q3 capacity guidance to be up approximately 12% year-over-year. As Bob mentioned, we are planning for Q1 2024 capacity to grow 14%-16% year-over-year. Keep in mind, we are growing 14%-15% in 2023. That alone drives nearly 90% of that Q1 year-over-year growth. The primary driver of that Q1 year-over-year growth is annualizing the additional capacity we are adding this year. Our long-term goal remains mid-single digit year-over-year growth. Lastly, our balance sheet remains pristine, and we remain the only U.S. airline with an investment-grade rating by all three rating agencies.

We ended Q2 with cash and short-term investments of $12.2 billion, net of $67 million in debt repayments for the H1 of the year. We continue to be in a net cash position and expect a modest $16 million in scheduled debt repayments for the remainder of the year. Currently, 2023 interest income is still expected to more than offset 2023 interest expense. We declared another dividend in Q2, which was paid just a couple of weeks ago. I am proud of what we have accomplished through the H1 of the year. That said, we still have work to do to return to industry-leading financial performance, which is our priority as we work on our plans for next year.

This includes managing the ongoing inflationary cost pressures, reflowing our order book with Boeing to support orderly, measured and profitable growth, and rebalancing and optimizing our network. We believe these plans, combined with our existing initiatives and the maturation of our development markets, will help us expand both margins and return on invested capital in 2024 as compared with this year. Let me close by saying, my confidence in our ability to achieve our financial and operational goals is anchored by my belief in the people of Southwest Airlines and their ability to create and inspire success. With that, I will turn it over to Ryan.

Ryan Green (Chief Commercial Officer)

Thanks, Tammy. I'll walk you through our Q2 revenue results, provide context for our Q3 outlook, and update you on some of our commercial priorities. For additional detail on our revenue performance, I'll point you to this morning's earnings release. Starting with Q2, demand continues to be resilient, especially for leisure travel. Overall trends have remained steady, with operating revenue for the H1 of 2023, consistently well above 2019 pre-pandemic levels. Operating revenue for Q2 was an all-time quarterly record of just over $7 billion. In fact, we had record operating revenue in every month of the quarter. Q2 2023 unit revenue, or RASM, decreased 8.3% on a year-over-year basis on a capacity increase of 14.1%.

While it's a year-over-year decline, it's still our second highest Q2 RASM to date, which points to the tough comp we were up against from last year. As a reminder, year-over-year RASM was impacted by a 5-point headwind from approximately $300 million of higher than normal breakage revenue that was recognized in the Q2 of 2022, resulting from flight credits issued during the pandemic that were set to expire prior to our later policy change to eliminate flight credit expiration dates. Q2 revenue came in at the favorable end of our expectations as close in leisure held strong. Q2 revenue from corporate travel came in largely as expected, as we realized sequential and year-over-year improvement in managed business revenue.

While travelers from some of our largest segments have reduced their frequency of their business trips from pre-pandemic levels, we're very pleased with the gains we continue to make in the managed business space. Small and medium businesses, government, and educations are strong points for us, and we are growing the number of accounts we have under contract. All of this has allowed us to continue to grow our share of the managed business space in the industry and as a result of our revenue initiatives in corporate travel. We gained additional passenger market share in the Q2 and exited the quarter seeing more unique travelers flying for business than we saw pre-pandemic. Moving to the Q3, we're seeing leisure booking and yield strength continue throughout the summer travel season, with July revenue, which is essentially booked, expected to also be a record.

Much of the post-Labor Day booking curve comes in closer, but we're very encouraged by the response to our June fare sale for off-peak fall travel and what that suggests for continued leisure demand. We had all-time record bookings the week of our fare sale, with three booking days that were top 10 all-time records and included our record day for the most bookings ever taken. In fact, we have more passengers booked for 3rd quarter travel at this point in the curve than we did at the same point in time for 2nd quarter. On a revenue basis, nominal yields are typically weaker sequentially, 3rd quarter versus 2nd quarter, but the strength in passengers points to the continued demand for Southwest Airlines....

We currently expect overall corporate travel to have a modest underlying trend improvement, and we expect to continue our gains in industry market share. Overall, however, we expect corporate travel demand will remain lower than leisure for the foreseeable future, particularly compared with pre-pandemic. With a higher leisure mix, and as the number of business trips taken per traveler remain down for our most frequent customers, it gives us an opportunity to look at our current network design. Pre-pandemic, those travelers had a skew of short-haul travel, with more frequent trips and also more midweek travel, and our current network is designed assuming those travel patterns would return. Moving forward, there's a revenue opportunity to adjust the network to adapt to the new travel patterns we expect to continue to see from our mix of business and leisure customers.

Ultimately, this leaves us with Q3 unit revenue expected to be down 3%-7% year-over-year on capacity up roughly 12%, again on a year-over-year basis. The decline in year-over-year unit revenue is driven by capacity growing faster than seasonably typical as we restore the network and normalize the utilization of our fleet, as well as tough prior year comparisons from the post-pandemic domestic demand surge. While there is still room to optimize our unit revenue efficiency, this guide implies a Q3 record for operating revenue. Again, we are in the process of adjusting our network to support our imperative of industry-leading financial performance. Starting with the January 2024 schedules, we've made changes to the composition of the network such that it supports the customer travel behavior changes I just mentioned.

We've made changes that reflect where our customers are traveling and when they're traveling, including time of day and day of week. This optimization will be largely complete in spring of 2024. In addition, we have more than 10% of our markets under development, which will normalize closer to pre-pandemic levels over the next 12-18 months. As we said in the release, as Bob mentioned earlier, the go-forward revenue opportunity from the network is substantial. Of course, we also expect continued revenue contribution growth from our existing and fully implemented revenue initiatives. Finally, we have always worked hard to consistently deliver the best hospitality and customer service here at Southwest. Our customer service is, of course, legendary. Our customer policies are industry-leading.

We are on track in deploying our onboard product initiatives, including Wi-Fi upgrades, larger overhead bins, and in-seat power. We are now focused on widening our customer service advantage through prioritizations of a series of initiatives that will improve our digital hospitality and allow our customers to serve themselves in most cases. We aren't ready to provide you all the details there, but the initiatives will help us achieve our goal to deliver the best and most efficient hospitality with next-generation tools, airport layouts, and more. Now, with that, I'll turn it t Andrew.

Andrew Watterson (COO)

Thank you, Ryan, and hello, everyone. I'm going to provide some additional details on our operational performance and a brief update on our winter operations preparedness plan. We'll have to start by commending our employees for their warrior spirit and the solid operational performance they delivered in an operationally challenging quarter. As Bob mentioned, we had record flight activity, record customers, and record bag counts. We were ready, we were staffed up, and we were prepared. Our completion factor in the Q2 was really pretty remarkable. We reliably achieved a flight completion factor of more than 99% in the Q2. It was the highest Q2 performance in the past 10 years. That is despite the challenging environment. June, in particular, had tough operating conditions. We had issues across the entire system with pretty much continuous weather disruptions.

Safety is always our first priority, so we couldn't avoid some flight delays, but we were really excelled in getting customers to their destinations and with their bags. When we had weather events, we managed to reset and be right back on track the next morning, which is a sign of good management through the regular operations by our people. Underneath that headline, we saw broad-based improvements in our operating metrics as on-time performance, long delays, early morning originators, turn compliance, flown as booked, and trip Net Promoter Score all showed solid year-over-year improvements. This was against the backdrop of runway closures in Las Vegas and Denver, which are two of our largest operations. Another drag was our block time hit rate, which dropped over four points relative to Q2 last year, as our pilots had to take more circuitous routings because of weather.

The broad-based improved performance against these headwinds is a testament to solid execution by our people. Looking forward, we're also really pleased with our progress on the implementation of our winter preparedness plan. Just a reminder that the plan is detailed on a microsite, which is available on our website. The plan is on track to be fully implemented in Q4 2023, in advance of our winter storm season. I won't walk you through all the detail today since it's on the microsite, but I will say that everything is going really well, and we are already accepting delivery of new equipment and infrastructure, as well as completing software implementations. We are conducting summer school to train new ramp agents on de-icing and train all ramp agents on new equipment.

Obviously, the other thing we have going on is labor negotiations, where we continue to work diligently and we continue to make progress. I do want to thank all the parties on both sides who work hard to negotiate these collective bargaining agreements. I'm grateful that we've been able to get so many ratified in the last 9 months, but we still have work to do with a couple that have been amendable for a while. We know that negotiations can be emotional as well as complicated, but we are committed to good faith negotiations to get new agreements in place as quickly as possible and to compensate our employees with market wage rates.

Bob Jordan (CEO)

In closing, I'd like to thank all of our employees for their hard work. It's an honor to be part of this team and to have the opportunity to support them. With that, I'll turn it back over to Julia.

Speaker 19

Thank you, Andrew. We have analysts queued up for questions, so 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.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Our first question will come from Scott Group with Wolfe Research. You may now go ahead.

Scott Group (Managing Director)

Hey, thanks. Good afternoon. Wondering if you have any color on the pressure on load factors in the quarter, and then, you know, guiding to, you know, a lot of pressure on RASM in Q3 as capacity accelerates. You know, with Q4 capacity expected to accelerate further, do you think we should expect further RASM pressure? Given that, do you think about maybe moderating some of the capacity growth?

Ryan Green (Chief Commercial Officer)

Yes. Hey, Scott, it's Ryan. You know, I think just stepping back and just taking a look at the Q2 overall, you know, I think it was a really, really good performance. Record operating revenue for the quarter, record operating revenue for each of the months in the quarter. I think when you think about that relative to the compare period from the prior year, you know, with the pent-up demand in Q2, plus the, you know, the headwind that we were facing there on the breakage adjustment of about 5 points, which, by the way, does not persist going forward. That is, that comparison is isolated to the Q2 there. You know, I think that the performance is really, really good.

The fare environment, Q2, year-over-year, if you adjust, because that breakage benefit or breakage comparison from Q2 of 2022 gets booked into passenger revenue, that gets spread out over all the revenue there in the quarter. If you isolate that, average fares in the Q2 are actually up year-over-year, 2%. We're in an environment here where we're optimizing revenue in a really strong fare environment, which does typically have a little bit of pressure on loads. You know, I think if you lo.k at our domestic load fare, load factor compare, Q2, that's in line with the compares or the load factor performance that our competitors saw in the Q2 as well.

All of that taken into account on the Q2, I feel really good about that. As you think about the fare environment going forward, you know, July here is almost booked. I think the fare environment, as far as we can tell, continues to persist here in July. I think we expect another record revenue in July, again, on a tough compare from prior periods with the pent-up demand last year. I think we're just in an environment here where we are managing, where we're optimizing revenue in a very strong fare environment, and that typically comes with a couple of points of load factor adjustment there.

Bob Jordan (CEO)

Scott, hey, it's Bob. You know, the other thing we obviously, we're in this new revenue management system as well that we're, I think will be fully you know, taking over the network in terms of pricing this fall. Number one, I'm happy that we've been able to get it in. We got it in on time, but it thinks about your whole itinerary, and one of the things that happens, too, is it maximizes close-in demand. It wouldn't be a surprise doing that, that you might see a little bit of a lower load here, especially as we learn the new system. Again, all that was known as we did, you know, testing.

Second thing is we know we're in a suboptimal environment. We brought capacity back quickly as we restored our flying. I'm very proud of the team here. We'll get all of our aircraft in the air and be unconstrained at flying everything here in at the end of the Q3, which is actually ahead of our plan, but it's not optimized. That's why we're doing all the work in the Q1 of next year around the network to optimize. The last thing, just Ryan talked about this, as you associate this to average fare, we have a large percent of our network in development. It's over 10%. You know, we added new cities, we added Hawaii, we grew Hawaii during the pandemic.

We, you know, we put kind of a 100 aircraft or more into those investments, and those are still in development. That'll mature across 2024, and I expect that percent of our total system in development to be normal, to fall across, you know, each quarter next year and to be normal, sort of pre-pandemic normal by the end of next year. I think, Tammy, the... just if you just think about fares, the, you know, the, the average fare drag from that, sort of those excessive development markets compared to normal is about $2 right now. It just gives you a, a ballpark in terms of thinking about average fare as well.

Scott Group (Managing Director)

Helpful. I guess just quick follow-up, like, to that. As the network optimization, is that more of a cost opportunity or revenue opportunity? I guess, ultimately, I'm trying to figure out, like, if capacity is up high single next year, do we think CASM is up or down next year?

Bob Jordan (CEO)

I, go ahead, Tammy.

Tammy Romo (CFO)

Sorry. No, yeah, we'll, we'll tag team on that. No, I, we believe that the network redesign it will be beneficial to both our revenues as well as on the cost side. You know, as we look ahead to next year, we are absolutely committed to driving our unit cost down, and certainly the, the network and our opportunities there to align our staffing and our fleet to our network design should be helpful in helping us to achieve that goal.

Bob Jordan (CEO)

Yeah, I think I would just add, too, you talked about the, you know, the large capacity in the Q1 that we've just talked about, 14%-16%. It's still capacity, but just, you know, as a reminder, with the restoration, getting all the aircraft flying this year, it's gonna produce a lot of capacity just doing that because we were so constrained, particularly on the pilot side, which again, goes away in the Q3. So it produces a lot of carryover, especially into early next year. 90% of that growth in the Q1 is simply carryover from adds back here in 2023. As you think about the network optimization, yeah, as Tammy said, it's a play on both sides.

The travel patterns, it's clear the travel patterns post-pandemic are not what they were pre-pandemic. some of that's leisure, a lot of that is business. I expect business to continue to come back, but I think it's gonna trail the restoration of leisure here for a while. Ryan talked about this, but it's things like a much more aggressive reduction into, you know, on a Tuesday and a Wednesday, for example. Normally, that schedule would fall about 2 points from a Monday. I think it's gonna fall about 8 points with the optimization of the network. We're managing better management of really early and really late flights, which obviously have a RASM penalties on those.

Anyway, it's definitely a revenue play, but it's really meant to just match the post-pandemic demand and travel patterns to what we're seeing to the network.

Andrew Watterson (COO)

To give some color on this, it's kind of, I put it in 4 buckets, the network changes we're doing. The first is a frequency shift from mostly short-haul, business-heavy routes to more medium and long-haul routes with a lower business mix. The second is Tuesday, Wednesday reductions that are down 7%-10% versus Monday, Thursday, Friday, depending on the season. The third is the shoulder of the day, moving the latest and earliest flights, which are typically your worst performers, a little bit in. The 4th is we're adjusting the new city in Hawaii markets. As we've understood their seasonality and demand patterns, we'll be shifting them as a result.

To give you some a little bit of color on that first one about how we're shifting the frequencies, let's take Midway. In March of 2024, we'll have 225 departures. In March of this year, we had 229, just down 4 trips. Underneath that, you have 26 city pairs that are changing frequencies. You'd say Midway to Columbus, down 2 frequencies from 6X to 4X, Midway to Phoenix, up 2 frequencies, and replace it. The same thing in Columbus, they're not losing 2 frequencies. Those frequencies are going from Midway to Sarasota and to Tampa. Everyone kept their departure, so to speak, the composition moved a little bit.

Sarasota is a pure play leisure, but Tampa and Phoenix is a combination of leisure and business. It's kind of a mixed shift at the margin, not like a going together guardrail, so to speak. All these, you go do this through all of our network, it leads up to a substantial change, but each one in itself is modest.

Scott Group (Managing Director)

Thank you, guys.

Operator (participant)

Our next question will come from Savi Syth with Raymond James. You may now go ahead.

Savi Syth (Managing Director and Senior Equity Analyst)

Hey, good afternoon. Can I ask maybe a high-level question, kind of tying in all the different things that you're kind of working on? When do you think you can get back to 2019 level of profitability? Not necessarily EPS, but just kind of pre-tax income type level. What does it take to get there, and how long does it take to get there?

Tammy Romo (CFO)

Yes. Hi, Savi. We are in the midst of working on our detailed 2024 plan, and certainly getting back to pre-pandemic levels of profitability is our goal. As we've shared with you, adjusting our network to the current demand environment and current business environment is a significant part of that plan. We're not ready, obviously, to provide guidance for next year, but certainly getting back to those levels of profitability is a goal. The first order of priority is to fly all of our fleet, and optimize our staffing levels to that flying and to the network adjustments that we've taken you through.

In addition, to that, I, you know, we've got ongoing contributions.

... from our initiatives as we continue to grow the network. You know, certainly we'll continue to get contributions from our ongoing fleet modernization plans. We've certainly a lot of moving parts here as we've worked to rebuild following the pandemic. You know, it's obviously been a little messy here. You know, the good news is, is that we are almost fully restored and will be soon, and we will be certainly pivoting and putting our efforts on producing, you know, year-over-year margin expansion for 2024.

Savi Syth (Managing Director and Senior Equity Analyst)

That's helpful. I was just wondering if I could ask a question on the labor accruals. Does that include, you know, what has historically been part of the kind of the ratification bonuses, in your case, anything kind of prior to April 2022, or any catch up to kinda last year's, where you might be lower? Is that also included in kind of this year's labor accrual, or is it just getting kind of labor costs to what you think the market rates are?

Tammy Romo (CFO)

It, Savi, it is our best attempt to adjust our market rates to current market rates. Obviously, there's been changes as we've been moving along here, and we've been adjusting as we go. Certainly for the Q3, we have factored all of that into our Q3 cost guidance, you know, as best we can estimate. I think that's an important point, Savi. We've been accruing all along, as you know, you know, just keep that in mind as you compare Southwest to maybe some of the other guides in the industry.

Ryan Green (Chief Commercial Officer)

Yeah, I mean, just in short, though, yeah, we are fully accrued for what is the most recent market, and as you know, market's been moving. And in fact, you know, the change that we made for full year costs down 2-4, we guided down 1-2. That change was basically entirely updating our accruals across the quarter because the market moved.

Savi Syth (Managing Director and Senior Equity Analyst)

That's pilots and that's all labor groups?

Tammy Romo (CFO)

It's, it's all.

Ryan Green (Chief Commercial Officer)

It's all.

Savi Syth (Managing Director and Senior Equity Analyst)

I mean, the driver of that increase, was it kind of all labor groups driving it up, or this quarter more because of pilot? We've seen some pilot trends.

Ryan Green (Chief Commercial Officer)

It's anywhere we saw an increase on it. If you have an open contract that we're still in negotiations, it's anywhere where the market moved, we updated our accrual. Just, I mean, just on that note, just a little side, we just had some good news this morning. We got a notice that we had ratification of a new agreement with our mechanics and related employees in AMFA. They just ratified a contract extension 4 years through 2027 this morning. A little bit of good news there. Another one, I think that makes 7 in the last 9 months, so.

Savi Syth (Managing Director and Senior Equity Analyst)

Great. Thank you.

Operator (participant)

Our next question will come from Duane Van Ahem with Evercore ISI. You may now go ahead.

Duane Van Ahem (Senior Managing Director of Equity Research)

Hey, thanks. I mean, you noted some of the reasons that you need to kinda tweak the network, but could you comment on maybe geographically, and I don't know how you look at it internally, maybe Hawaii, Midwest, West Coast, East Coast. How much variation is there across the U.S., as we think about that Q3 guidance? You know, what is stronger versus what is weaker? Then just on the network changes broadly, why start in January? If you've identified changes that need to happen, why not start in September or the Q4? What are the practical reasons not to do that?

Ryan Green (Chief Commercial Officer)

Yeah. Hey, Duane, it's Ryan. Just on the geographic element, kinda what's stronger versus what are we seeing that's weaker. The Hawaii franchise itself, now that is, that's part of our markets that are under development. You know, there is the development element of that, but we've been very pleased with the Hawaii franchise overall, especially the mainland to Hawaii, you know, element of that franchise. Load factors are very high, yields are improving, we're very happy with how Hawaii is performing.

You know, to your comments on why, you know, network changes, we have made some changes to the network in Intra-Cal. That Intra-Cal itself, despite the West Coast being a little bit slower to come back in the recovery, Intra-Cal itself is performing well. Leisure-based markets, Florida is performing well. You know, just typically strong leisure markets in this environment continue to perform very well for us in, in this strong leisure environment. That kind of gives you a flavor for, for what's going well. The opportunities, you know, there are markets as we brought back the network and restored the network, there are different geographies that have different levels of capacity, kinda as we bring those cities back. Obviously, you have to work to absorb the capacity as it comes into the market.

We're working on those markets, where there's kind of been outsized capacity growth, and we'll continue to focus there.

One of the things that Southwest Airlines benefits from is we have largely a relatively diverse domestic footprint. As different parts of the country respond differently and go through different economic cycles, we're able to kind of weather that a little bit better maybe than some of our peers. That's an, you know, that's an inherent advantage for us as, as we go forward.

Andrew Watterson (COO)

I'd.

Duane Van Ahem (Senior Managing Director of Equity Research)

Okay, I mean, Go ahead, sorry.

Andrew Watterson (COO)

Sorry, Duane, it's Andrew. I'd also add that we want to when you make changes to your network, you want to kind of understand before you make fulsome changes. We have been making adjustments. September is the first schedule where we have a modified Tuesday, Wednesday capacity versus Monday, Thursday, Friday. We, it's not as aggressive as what we have been starting in January. We wanted to have that out there and see how both to understand that before we started making changes. Some of the network changes that we're doing, we also stepped into them over the course of September through Q4. We like what we saw in the forward bookings, we made the kind of full adjustment starting in Q1.

It's essentially done by March, except for the seasonality type adjustments I talked about, will obviously happen as that season rolls around.

Ryan Green (Chief Commercial Officer)

Well, Duane, also, if you think about just more for our customers, you know, just the example, the change on the Tuesday, Wednesday, move into an 8% reduction from a typical Monday. Changing schedules that are already published, especially for the holidays, it's super disruptive to our customers. If you were going to go in there and make wholesale changes to the fall, we're committed to not doing that. Obviously, we tweak our schedules now and then, but in terms of wholesale changes, we committed coming out of the pandemic to not do that to our customers. January, really, but obviously, we did some things, as Andrew described, but January was really the first opportunity in a new published schedule to enact a lot of the changes.

Duane Van Ahem (Senior Managing Director of Equity Research)

Okay, great. Just for my follow-up, I wonder if you'd be willing to kind of quantify the excess training investment and I think the reliability investment, which I guess is actually bigger, you would know. Can you give us a sense for the magnitude of those that are unlikely to kind of reoccur or maybe wind down next year?

Tammy Romo (CFO)

Hey, Duane. I'll take that. In terms of the training, you know, we'll provide more details once we have our plan fully baked here and solidify our capacity plans, et cetera. I can help you with regard to costs that we've incurred this year that we believe are one-time related to the ops disruptions, and that's about $100 million-$150 million. That's kind of one-time cost that won't repeat next year. Beyond that, we'll share additional details once we lay out our 2024 plan for you.

Duane Van Ahem (Senior Managing Director of Equity Research)

Okay, thank you.

Tammy Romo (CFO)

Thank you.

Operator (participant)

Our next question will come from Jamie Baker with JP Morgan. You may now go ahead.

Jamie Baker (Managing Director of Boston Head of Investments and Advice)

Hey, good afternoon, everybody. First question is of a modeling variety. Tammy, if we look at the Q3 ex-fuel CASM guide and then the full year guide of down 1%-2%, and I realize there's, you know, some wiggle room here, but it implies a Q4 outcome that's pretty similar to the Q3 in terms of absolute ex-fuel CASM, at least, you know, closer than what's usually the sequential case. Q4 is usually higher than Q3. Just wondering how you'd address that?

Tammy Romo (CFO)

Well, keep in mind, Jamie, that, you know, capacity is gonna be a factor, in that as we continue to add back, capacity. I think that's the primary driver.

Jamie Baker (Managing Director of Boston Head of Investments and Advice)

Okay. Okay. Then second, this sort of builds off what I asked you about last quarter. You know, you mentioned the stagnant corporate demand, revamping schedules next year to reflect post-pandemic changes to how customers are flying. I don't, you know, dispute that those changes have taken place. Other airlines have spoken to this. I'm just curious, you know, how do you separate changes in travel patterns from the possibility that maybe the Southwest brand was somewhat damaged last December? I mean, you make it sound like it's all the fault of, you know, shifting consumer preference, it may very well be, but have you at least considered that maybe something about the overall value proposition of Southwest might also be a contributing factor?

Bob Jordan (CEO)

Yeah, I'll let Ryan talk to the specifics as you think about, you know, markets and trying to tease that apart. You start at the top, and you mentioned a lot of this early on. I mean, we are just. Obviously, we track customer trust and all those things, preferences, and they're all heading in the right direction and look really good. To me, the top-line factor is just thinking about demand for the brand, and is there any hangover effect? I mean.

Jamie Baker (Managing Director of Boston Head of Investments and Advice)

Mm-hmm.

Bob Jordan (CEO)

We had tremendous strength in the quarter. We had, again, record operating revenues, record passengers, record flights, you know, all those things. We had our fall sale, and I believe each of those days was a record in terms of our highest booking day in our history. We haven't talked a lot about, Ryan can talk more about demand on the business side. We're seeing, I would say, significant market share gains in terms of our piece of the business. We talked about that at Investor Day in December, and since that time, we're seeing really meaningful shifts in market share our way on the business side.

As you think about demand for the brand, demand for the product, that shows up obviously in bookings, we're just not seeing any sign of weakness. Ryan?

Ryan Green (Chief Commercial Officer)

You know, like I think we mentioned last quarter, of course, following the event, we have brand tracking research in place where we're tracking sentiment on a weekly basis. Those scores in terms of trust in Southwest Airlines, their confidence in our ability to get them where they want to go, all of those have rebounded past post-disruption. I would say we're, you know, those are back to normal ranges, certainly. I'd echo what Bob said, the biggest single indicator is demand for Southwest Airlines overall. I think as you look forward to the Q3, expecting another record revenue in Q3, just came off a record revenue performance in Q2.

We had record Rapid Rewards acquisitions in the Q2, record co-brand spend, you know, which is an indication of customer engagement in the Q2. I think all of that points to the fact that there is continued strong demand for Southwest Airlines, and the disruption is in our past. I will also just point to the fact, the travel patterns changing. If you look at an individual customer basis, and you look at the frequency of their travel, especially for business trips, that began to plateau prior to last December. There's been no step down in terms of frequency of travel on Southwest Airlines, post-disruption event. Those trends were beginning to emerge last year and prior to the event overall.

On the whole, as Bob mentioned, we're continuing to pick up market share in the managed business space. We're winning more business, and we're winning, we're earning the business of incremental passengers. We're going out and adding more accounts under contract. We're winning more of their business as we move forward. It's just the structural impact of the pandemic on the frequency of business trips on an individual traveler, that again, persists or that was taking place prior to the disruption in December.

Jamie Baker (Managing Director of Boston Head of Investments and Advice)

All of that commentary is very, very helpful. Thanks for taking the questions.

Bob Jordan (CEO)

Thank you, Jamie.

Operator (participant)

Our next question will come from Conor Cunningham with Melius Research. You may now go ahead.

Conor Cunningham (Director of Travel and Transports Analyst)

Hey, everyone. Thank you. 10 years ago, you guys established a plan that was centered around minimal capacity growth until your return on invested capital hit, like, 15%. During that time frame, your, you know, slow growth, your earnings exploded. I realize today is not exactly the same. You know, you have a large order book, open labor contracts, all that stuff, but you do have a lot of planes that you could retire. I'm just trying to understand why you're not taking a step back and slowing capacity into 2024, accelerating your fleet plan. Like, why is mid-single digit growth the right number for Southwest right now? Thank you.

Tammy Romo (CFO)

I'll start. Well, first of all, we do believe we have growth opportunities. I'll just remind you again, that we did make investments during the pandemic to grow our route network. As we've reported, we have a larger than normal amount of our capacity in development markets. Those are progressing and they're trending in line, if not higher than our expectations. We're pleased, we're pleased with that growth, and based on what we've seen so far, we have no plans to pull back on the development of those markets, because we believe those are really good markets for Southwest over the long term. We believe we have additional opportunities in our strong hold markets.

Now that said, based on our assessment of our growth opportunities, we believe that supports mid-single digit ASM growth. Now, as always, I remember that plan very well. At the end of the day, we are determined to drive the returns on invested capital that we can all be very proud of. As always, one of the wonderful things about Southwest Airlines is we build our plans with ample opportunity. To your point, we have a flexible order book and flexible fleet plan, and you're exactly right.

We don't have, we've given you our plans, should we need to adjust, we've got the levers that we could, we could do so. At this point, based on everything that we've seen, we believe with these network changes, that we can drive the revenue performance next year that, you know, we all desire. A lot of moving parts here, and we're busy at work on our 2024 plan. Again, as we look ahead to next year, we are very focused on delivering a 2024 plan that, you know, will deliver margin expansion and as well as expansion and a return on invested capital.

Bob Jordan (CEO)

Conor, you're just in a period here where we're not optimized to. I'm really proud of the fact that we got all the aircraft, you know, up and flying here in the Q3, and we'll have our network restored by the end of the year. Again, it doesn't mean optimal. It's not just the network, but it's not optimal in terms of how we think about our resource usage and our efficiency. So we'll attack that very aggressively, just like we're attacking the network here in the Q1 of 2024. Past that, to me, the biggest question would be: Do you have opportunities for the aircraft that we're talking about, the mid-single-digit growth supporting?

We have significant opportunities in just name a place, Denver and Austin and Nashville, and on and on and on, where there's huge demand for the Southwest product. We have gates coming online. I would be worried if you're sitting here going, "I don't know where to put the next aircraft." That's not the case. We have tremendous demand for the brand. We have tremendous demand in our focus cities, in our large cities and others, and a lot of brand strength here. Again, yeah, absolutely, there's work to do to optimize the airline, wring out costs, continue to boost revenues through things like the network actions, and then obviously boost our returns. As Tammy said, we have a lot of flexibility.

Conor Cunningham (Director of Travel and Transports Analyst)

Okay. Okay, that's helpful. Maybe just to put a finer point on 2024, or as we just think about what you've added so far, the implications for 2024. If you just pull Q4 capacity through 2024, I think it's, the implied capacity growth is 6% year-over-year. Is that the low water mark that we should expect next year? I'm just, again, just trying to understand the context of this American Ordinal and all these other moving parts you have that's going on with your network right now. Thank you.

Tammy Romo (CFO)

The impact of just the carryover to next year is probably I would say 7 points.

Bob Jordan (CEO)

Yeah.

Conor Cunningham (Director of Travel and Transports Analyst)

Okay, thank you.

Tammy Romo (CFO)

You're welcome.

Operator (participant)

We have time for one more question. We'll take our last question from Sheila Kahyaoglu with Jefferies. You may now go ahead.

Sheila Kahyaoglu (Managing Director)

Hi. thank you, everyone. just, you know, lots of moving pieces on RASMs and obviously a very hot topic. You know, as we look out to 2024, you gave us a lot of moving pieces. How do we think about earnings growth for 2024, given you have $500 million benefit from network optimization, but RASM will be down, most likely, and CASM could be up? Is there possibility for flat earnings or revenue, EBIT growth next year?

Bob Jordan (CEO)

Well, Sheila, obviously, we have the, as we talked about at Investor Day, we've got the contribution from our initiatives that we described there, which is $1 billion-$1.5 billion in EBIT. You've got on top of that, you have the $500 million that we've described in the value of the network changes that occurred during the Q1 and are in place again by March. We have some other things that we're talking about here relative to opportunities. All that is obviously the desire to lead you to margin expansion again in here in 2024. We're working on our plan. We don't have a plan to share with you yet. That's coming later, obviously, in the fall. Yeah, margin expansion is absolutely the goal.

Tammy, obviously, do you want to add anything?

Tammy Romo (CFO)

No. I think you covered it.

Sheila Kahyaoglu (Managing Director)

Great. Thank you.

Bob Jordan (CEO)

Thank you.

Tammy Romo (CFO)

That concludes the analyst portion of our call. I appreciate everyone joining. Have a great day.

Operator (participant)

Ladies and gentlemen, we will now begin our media portion of today's call. I'd like to first introduce Ms. Linda Rutherford, Chief Administration and Communications Officer.

Linda Rutherford (Chief Administration and Communications Officer)

Thank you, Anthony, and welcome to the members of our media on our call today. We'll go ahead and get started with our media Q&A. Anthony, if you would, queue folks up to begin asking questions.

Operator (participant)

Thank you. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question will come from Alexandra Skores with The Dallas Morning News. You may now go ahead.

Alexandra Skores (Aviation Reporter)

Hi, everyone. Thank you so much for the time today. I wanted to revisit the conversation earlier about the pilot contract, because obviously we saw United come out with their tentative agreement, and that ultimately brought American back to the negotiating table to try and meet those pay standards and benefits. Wanted to ask if there's an update there and if Southwest is committed to kind of meeting those new pay standards and benefits and where y'all are at with that?

Bob Jordan (CEO)

Thanks for the question, Andrew, you can chime in, too. Obviously, we are, you know, negotiations are complex. We are eager to reach agreements with all of our groups that have open contracts right now. We're meeting very regularly with SWAPA and very hopeful for progress there, nothing new to report. You've, you know, you've heard about the strike authorization vote. Obviously, that is an NMB defined process. Mediation is a defined process. There is no strike or an imminent strike.

There are a lot of steps that would lead up to that, and obviously, we, we want to make progress well ahead of any of those, but there's no, there's no threat of an imminent strike or anything like that. There are many, many steps that would have to occur first. No, we have a desire to get all of our contracts closed up, obviously, including that with our pilots, to get them, taken care of. They do a fantastic job, and, but, we certainly want progress there.

Andrew Watterson (COO)

I'd say that, if you look, it's a strong pilots' market, so it's a great time to be a pilot. You see that reflected in the wage rates, which often get the headlines. What I think is characterized by all the agreements I've seen so far is it's not so much the wage rates, it's the other non-wage portions or the scheduling rules and such, which increases the quality of life for the pilots, can also increase costs for the company. Those rules can be complex and difficult. You spend lots of time then to go through it. Wage rates is a defined matter, you know that, but the scheduling rules implications take longer to write out and to model out and to agree upon it.

In my opinion, that's what makes the timeline longer than either side would like with regards to our current negotiations.

Alexandra Skores (Aviation Reporter)

Thank you.

Operator (participant)

Our next question will come from Mary Schlangenstein with Bloomberg News. You may now go ahead.

Mary Schlangenstein (Correspondent covering airlines)

Thank you. Good morning. I just wanted to clarify, when will you have everything under your winter plan, everything that was planned as a result of the disruption, when will you have all of that in place? The $100 million-$150 million costs you mentioned earlier, that was for everything, post-disruption, is that right?

Andrew Watterson (COO)

I'll handle the timeline. We have October is the deadline we've given ourselves to get everything ready. We expect winter storms to actually be after that, but our internal deadline is October, and that will be when we report our Q3 earnings. It'll be later in October, and we'll make sure to go through and have a comprehensive review and status update of where we are on that. So far, things are on track, and we're taking delivery and encouraged by the results.

Tammy Romo (CFO)

Yeah. Mary, your question on, the $100 million-$150 million, would you mind repeating that?

Mary Schlangenstein (Correspondent covering airlines)

Yes. I was asking if that's the cost for everything that you've put in place as a result of the disruptions, or if that was just related earlier to the mention of additional training costs for ramp workers.

Tammy Romo (CFO)

No, it didn't. It's our best estimate right now of what our one-time cost. There may some of those costs that some of the investments that we made this year may prove to be somewhat sticky into next year, including some of our and some of our technology investments. That's just our best guess of what the one-time costs are.

Bob Jordan (CEO)

Tammy, I think it also includes things like we did gratitude pay.

Tammy Romo (CFO)

Yeah, the gratitude.

Bob Jordan (CEO)

We did.

Tammy Romo (CFO)

It was a huge thing.

Bob Jordan (CEO)

We had some incremental, you know, customer reimbursements this year, things like that, that are really a one-time related to the disruption that don't show up again, you know, in 2024.

Mary Schlangenstein (Correspondent covering airlines)

Right. Okay, thank you very much.

Tammy Romo (CFO)

Mary, just one more thing. Just, you know, just wanna remind you that we, even before the event, we had plans to modernize our operations. You know, those are some of the investments that I referring to earlier. Those were already in place, and obviously, those will continue and all that's been contemplated in our guidance.

Mary Schlangenstein (Correspondent covering airlines)

Okay, thank you.

Operator (participant)

Our next question will come from Dawn Gilbertson with The Wall Street Journal. You may now go ahead.

Dawn Gilbertson (Travel Columnist)

Hi, good afternoon. Quick question here. You know, your competitors for more than a year now have been talking over and over again about, you know, how the leisure travel surge has everybody, you know, paying up for, for premium seats and so forth. You guys don't have anything really to upsell to, but I'm curious, how has this manifested itself, you know, if it has, at Southwest? I mean, can you share any details on demand for Upgraded Boarding, EarlyBird boarding, even leisure travel purchase of Business Select? Thanks. And one related question to that: I, I notice a lot of, you're making a lot of pitches now to buy A-List status. I could be wrong, but I don't recall that in the past, so I'm, I'm curious about the strategy there, too. Thank you.

Ryan Green (Chief Commercial Officer)

Hey, Dawn, it's Ryan. Good to talk to you. Yeah, you're right. The some of our competitors, for a while now have been talking about premium revenue and that being a tailwind to their RASM performance. I think that it probably has a material impact on their RASM performance, that our business model, just, you know, we don't participate in that premium revenue stream to any of the same degree that they do. However, having said that, our ancillary revenue in the Q2, as an example, was a record. It was a very good quarter for EarlyBird Check-In. EarlyBird Check-In had been lagging a little bit through the pandemic recovery, but EarlyBird Check-In, it performed very well in the Q2.

Upgraded Boarding, we added the ability in the Q3 of last year to purchase Upgraded Boarding on digital, on your mobile device. Take rates have tripled since that point. We've had very strong Upgraded Boarding revenue over the course of the last year. We've been able to maintain the price and grow the price, actually, some on Upgraded Boarding and EarlyBird Check-In as well. Ancillary revenue is definitely a high point for us in the quarter. It's just we don't participate at the same level from a premium revenue standpoint as some of our competitors do. Related to your last question on the ability to buy A-List status, we have historically...

We run campaigns, we call those Tier Qualifying Points, the ability to, kind of top off, pay your, pay a little bit and top off your Tier Qualifying Points to get to A-List, A-List Preferred. That's nothing new. We've recently run some of those campaigns, we've done those historically in the past as well.

Dawn Gilbertson (Travel Columnist)

Can you, one follow-up, can you give any. It's been years, I think, since you guys have put any dollar figures on EarlyBird Check-In revenue and/or now that you have Upgraded Boarding revenue. Can you quantify that at all, please? Thanks.

Ryan Green (Chief Commercial Officer)

Yeah, we generate hundreds of millions of dollars from those boarding products, on an annual basis. Like I said, we just had a record here in the Q2, so those revenues continue to grow.

Tammy Romo (CFO)

Yeah. Just for Q2, just to give you a little, EarlyBird Check-In alone was in excess of $100 million.

Dawn Gilbertson (Travel Columnist)

Thank you.

Operator (participant)

Our next question will come from Leslie Josephs with CNBC. You may now go ahead.

Leslie Josephs (Airline Reporter)

Hi, everyone. Just curious on the RASM decline for Q3, is that just kinda like a return to seasonality and capacity going up? Are you seeing any sharp drop off after, say, like mid-August? How does that compare with 2022, when maybe more people were flying off season? Thanks.

Ryan Green (Chief Commercial Officer)

Hey, Leslie, it's Ryan. Certainly there is a RASM headwind with the capacity growth that's a little bit, or that's above seasonal norms in the Q3, so there's definitely a headwind there. If you take Q3 on balance and just look at the demand in place, I'm very encouraged by where the Q3 sits today. We are anticipating a record Q3 revenue. Over the next couple of months, we have more bookings in place, actually, at this point in the curve for Q3 than we had at the same point in time in the curve for Q2. We had an all-time record fare sale in June for our fall travel.

We had top 10 booking days during that fare sale and including our all-time record for bookings taken in a single day. That, you know, that compares to even when we open up schedules for the summer or for the holidays, we took more bookings for the fall during the fare sale than we have any other day in our history. We've got a tremendous base of bookings in place for the fall. I think that that shows a lot of demand for the Southwest Airlines product, like we've talked about on the call. From a fare standpoint, July is roughly booked at this point, and the strong fare environment from the Q2 has persisted here into July.

I think that while RASM is decelerating here in the Q3, we do have the capacity headwinds. When you compare that to some of the domestic RASM of our peers, I think, the way we're shaping up, looks favorable.

Leslie Josephs (Airline Reporter)

Okay, thanks.

Operator (participant)

Our next question will come from Alison Sider with Wall Street Journal. You may now go ahead.

Alison Sider (Reporter of air travel business)

Hi, thanks so much. I guess the pilots have been talking a lot about attrition in the last couple of months. I'm curious if, you know, if that's something you're seeing in your data, if it's at a level that's unusual or concerning, I guess, if so, like, do you have a sense of when in their careers are pilots leaving or a sense of why?

Ryan Green (Chief Commercial Officer)

It's definitely a hot pilot market, and so you, and I guess, hot employee market as well. You have to work extra to hire people and to keep people. It's a record year for our pilot hiring. It's also a record year for pilot attrition, but it's a modest number that is not sufficient to actually change our plan. We, you know, our amount of flying we have this year and the next-

Speaker 19

... is not at all affected by the, this kind of a little bit uptick in attrition this year. We do see pilots as a kind of a job hop around the industry, trying to maximize their personal gain, what airline appeals them the best. You know, I don't begrudge that to them because it's once you start with the mainline, it becomes, you're there for a little while, it's a kind of lifelong commitment because seniority system. We do see some people come and leave right away, but it's a, I think, it kind of spiked here in the Q2, and now it's kind of even started to tail off a little bit.

Ryan Green (Chief Commercial Officer)

I mean, it's definitely higher than normal. Again, as Andrew said, completely makes sense in the context of the hottest pilot market in history. I think where, you know, where that impacts the business, I mean, our plan was to hire 1,700 pilots net this year. We're still on that plan, that, of course, was intended to fly the whole fleet, get all of our aircraft back up in the year and in the air. We'll do that in the Q3, by the end of the Q3, actually ahead of our original plan, which was the Q4. I feel good about all of this.

Yeah, and yeah, I think, the fact that the attrition is up a bit is not a surprise, given this is the hottest market for pilots, I believe, in history.

Operator (participant)

Thanks.

Ryan Green (Chief Commercial Officer)

You're welcome.

Operator (participant)

We have time for one more question. We'll take our last question from David Slotnick with TPG. You may now go ahead.

David Slotnick (Senior Aviation Reporter)

Hi, everyone. Thanks for the question. Following up a little bit on what Leslie asked, it's, you know, I understand where the RASM headwind would be, but, you know, just considering that, considering the capacity growth, do you think that fares are gonna stay similar or come down? Do you think pricing power is gonna fall a little bit in the fall? Just secondary to that, are you expecting to see really any kind of return to the shoulder season seasonality that we had pre-pandemic, or are you really seeing just leisure travel staying at steady levels into the fall? Thanks.

Ryan Green (Chief Commercial Officer)

Hi, David. Yeah, I just characterized the demand environment, especially for leisure, as strong, and that it continues to be that way. You know, we don't have a ton of visibility into the Q4 at this point, so I wouldn't comment really too much for the Q4. Certainly, as you look ahead at the Q3, as I mentioned, we've got a very strong base of bookings in place, and the fare environment, as I look at what we're, you know, what we're taking here in July, and admittedly, we're still in the summer travel season here in July, but that strong fare environment continues. You know, as you look Q3 to Q2, yields normally give...

are weaker quarter-over-quarter, and I expect that to be the case, as we go, you know, as we look at Q3 versus Q2, but that's normal. All of this is setting up for another record revenue quarter for us in the Q3.

Speaker 19

I think we probably mentioned this several times, but if you look at our fare performance in the Q2 and sort of run that through, you just have to be aware of this breakage change from last year, about $300 million impact, that impacted year-over-year fare, the fare calculation. If you just look at average fares year-over-year, I think it looks like they're down 2.7%. If you normalize that for the breakage impact last year, they're actually up this year, 2.2%. They're actually up. I just would do it, as you think about our fares and extrapolating that, just wanna make sure you know that, because they are actually up year-over-year.

David Slotnick (Senior Aviation Reporter)

Thank you. Just from what visibility you do have, do you think that shoulder season is going to come back for this fall, or is that sort of a thing in the past?

Ryan Green (Chief Commercial Officer)

I just would characterize what we're seeing, in terms of, the demand, and the bookings that we have in place for the fall, that tells me that we've got a strong Q3, ahead of us here.

David Slotnick (Senior Aviation Reporter)

Okay, thank you.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to Ms. Rutherford for any closing remarks.

Speaker 19

Thank you, Anthony. If you all have any other follow-up questions, you can reach our communications team at 214-792-4847, or through our media website portal at www.swamedia.com. Thank you all so much.

Operator (participant)

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.