Southwest Airlines Q3 2022 Earnings Call Transcript

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Provided by Quartr
October 27, 2022

Key Takeaways

  • Southwest reported a Q3 net profit of $316 million (excluding special items) or $0.50 per share, coming in slightly above July guidance thanks to a more stable operating environment.
  • Revenue trends remain robust, with Q3 operating revenues up 10.3% versus Q3 2019 and Q4 revenues guided to grow 13–17% year-over-2019 on strong leisure and recovering business bookings.
  • Operational reliability has improved markedly, with on-time performance around 71% (81.7% within one hour), a completion rate of 98.6%, and schedule stability supported by over 10,000 new hires year-to-date.
  • Fuel costs are well-managed through hedges at 61% for Q4 (implied price $3.15–$3.25/gal including a $0.37 hedging gain) and 50% for all of 2023, yielding an estimated $1 billion benefit this year.
  • Looking to 2023, the airline expects CASM-ex to decline as capacity grows 10% in Q1 and 14% in Q2 versus 2022, with network restoration on track (90% by summer) and pilot staffing as the primary gating factor.
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Earnings Conference Call
Southwest Airlines Q3 2022
00:00 / 00:00

There are 15 speakers on the call.

Operator

Day, everyone, and welcome to the Southwest Airlines Third Quarter 2022 Conference Call. My name is Jamie, and I'll be moderating today's conference. 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 At this time, I'd like to hand the conference over to Mr. Ryan Martinez, Vice President of Investor Relations.

Operator

Sir, you may begin.

Speaker 1

Thank you, operator, and welcome, everyone, to our Q3 earnings call. In just a moment, we will share some prepared remarks and then open it up for Q and A. And on the call today, we have our CEO, Bob Jordan President, Mike Vandevan Chief Operating Officer, Andrew Watterson and Executive Vice President and CFO, Tammy Romo. We also have a few other senior leaders in the room today, including Ryan Green, our new Executive Vice President and Chief Commercial Officer. A quick reminder that we will make forward looking statements, which are based on our current expectation of future performance and our actual results could differ.

Speaker 1

Also, we had a few special items in our Q3 results, which we excluded from our trends for non GAAP purposes, And we will reference our non GAAP results today. So please refer to the press release from this morning and our Investor Relations website for more information. And with that, Bob, I'll turn it over to you.

Speaker 2

All right. Well, thank you, Ryan, and I appreciate everybody joining us this morning. I'm just really pleased to report another solid profit In the Q3 of $316,000,000 excluding special items or $0.50 a share. All in all, 3rd quarter's bottom line results came in almost Right in line with our expectations back in July, slightly better in fact, and that really speaks to the more stable environment that we are operating in today versus Where we were just 2 quarters ago. While not fully recovered yet, it makes a big difference in our ability to more effectively plan, Set our flight schedules and avoid revising them and deliver a more reliable operation both for our customers and our employees.

Speaker 2

That's exactly what we're doing in the second half of twenty twenty two, and that's what we plan to do going forward. Given the significant progress we've made thus We do not intend to republish or materially change our future flight schedules, as was necessary to do during most One of our primary goals for this year is returning to consistent profitability, and we are well on our way and continue to expect a solid For 2022, we're coming off a record 3rd quarter revenues and bookings appear strong as far as we can see in our booking curve. Demand trends, both volumes and yields, are robust. We want to get properly staffed, and that's going very well. We remain on track with adding over 10,000 new employees this year, net of attrition, and we are getting much better staffed in key areas, with exception of pilots, Where our aggressive hiring efforts continue and we are on track to hire 1200 pilots this year and 2,100 pilots next year as planned.

Speaker 2

We wanted to restore our operational reliability, and we are headed in the right direction, having A lot of solid progress. As we shared previously, we restored some of our short haul flying in the 3rd quarter, Which was a little early and at the expense of revenue, now knowing where business demand has ended up. But the goal was to help the operation, and I believe we got the desired results in the Q3. Going forward, we believe we have capacity better matched seasonally to demand in the 4th quarter, And you can see the benefit in our sequential revenue improvement from 3Q to 4Q based on our guidance. And as Mike will cover, our on time Performance this month has been very strong with high completion rates.

Speaker 2

And the thanks, of course, goes to our people who have Softly restored our customer service advantage this year, another one of our top priorities. For January through August, the most recent data available, We remain number 1 in customer service per the DOT's ranking for marketing carriers. I'm just so thankful for our employees and how they have worked Tirelessly together as a team no matter the obstacle and they have us solidly back on top of the industry. Again, our employees are The central proof and essence here at Southwest Airlines and I'm just so very proud of them and all that they have done. Jet fuel prices remain high, but we are 61% hedged in the 4th quarter and continue to expect healthy hedging gains.

Speaker 2

We continue to expect both inflationary cost pressures and cost headwinds from lower productivity and efficiency in 4th quarter. This is all anticipated in our full year guidance and other than some timing of costs between 3Q and 4Q, our cost trends have been very stable. We've been executing well on our full year 2022 cost plan since we provided our full year CASM ex guidance back in January and but for the Hurricane Ian impact to capacity, we are also executing on our full year 2022 capacity plan. Specific areas of focus for 2023 are to maintain adequate staffing and get caught up in pilot staffing, Get new contracts with all labor groups currently in negotiations, fully utilize our aircraft and optimize staffing to The fleet and flight activity, bring out cost inefficiencies and improve efficiency levels and operating leverage as we fully restore the network. Our primary gating factor to growth next year continues to be pilot hiring and I don't We will be fully utilizing the fleet until late 2023.

Speaker 2

As of today, our flight schedules are published through July 10, 2023, And we feel good about our ability to fly those schedules as published and planned despite some uncertainty around aircraft deliveries. While we expect a healthy amount of capacity growth next year, it is nearly all going back into key Southwest markets. These are markets That we borrowed from to fund new airport expansion during the pandemic and as business demand improves, we have opportunities to build those back up. And this is lower risk growth primarily in markets where we have the number one share and a strong Southwest customer base. So we don't believe the capacity additions carry near the risk of adding a new market.

Speaker 2

Our goal is to have the network fully restored by the end of And by summer 2023, we should be about 90% done. In closing, we've made tremendous progress this year. Barring any significant unforeseen impacts, we should finish this year very strong given our Q4 outlook. While there's noise regarding Whether we are headed into a recession or not or whether we may even be in one now, we have not seen any noticeable impact on our booking and revenue trends. There's also been a lot of discussion about the blending of business and leisure, why and where those trends may ultimately end up.

Speaker 2

But regardless, our overall revenue Trends are strong and well above 2019 levels. Our work continues on developing a strong financial plan for next year, And we will share more about that at our upcoming Investor Day meeting in December. And I'm extremely proud of our employees for their dedication The cause at Southwest Airlines. They are our greatest asset and they are our secret weapon. They are the best in the business and I know I can count on them to rally together and help us And before I turn it over to Tammy, I just want to say a big thank you to Mike.

Speaker 2

Mike has overseen the operations here at Southwest for over 16 years and that is just a huge job And a huge task. He's a tremendous leader. I'm just very grateful, Mike, for all that you do and I'm very grateful that And I also want to say a big congrats to Andrew, to Linda and to Ryan For taking on even more, I really appreciate that. And today, Mike will report on operations Andrew will report on commercial. And then beginning at our December Investor Day, Andrew will speak to operations and you will hear from Ryan regarding our commercial plans.

Speaker 2

And with that, I will turn it over to Tammy.

Speaker 3

Thank you, Bob, and thank you, Mike, my very dear friends for 3 decades of incredible leadership. And thanks also to all of our employees for their remarkable job throughout the quarter. In addition to delivering a high quality experience for Our customers, their efforts led to a solid Q3 performance. The strong demand trends from summer continued in 3rd quarter, 10.3% versus 2019 aided by a very strong other revenue performance. Andrew will speak to our revenue trends in a minute, so I will turn to our cost performance and outlook.

Speaker 3

Our people did another great job managing costs in Q3. Our fuel hedge continues to perform well in this environment where market prices remain volatile And Elevate is saving the company about $220,000,000 in fuel expense in 3rd quarter alone. We are 61% hedged for 4th quarter and we currently estimate our 4th quarter fuel price to be in the $3.15 to $3.25 per gallon range, which would be a sequential improvement from Q3's fuel price based on current prices. That estimate includes $0.37 of hedging gains, which equates to cost savings of more than $185,000,000 in 4th quarter, which would put our full year 2022 fuel hedge benefit at roughly $1,000,000,000 We recently added to our 2023 fuel hedge portfolio And are now 50% hedged with a fair market value of around $390,000,000 for full year 2023. The fair market value of our fuel hedge portfolio through 2024 is 685,000,000 We will continue to seek opportunities to expand our hedging portfolio in 2024 and beyond, But we are in good shape headed into next year, especially given the volatile energy market over the past year that made it tough to materially Excluding special items and profit sharing was towards the favorable end of our previous guidance range at 12.2% that we expected to receive this quarter, but shifted earlier to Q3.

Speaker 3

We currently estimate 4th quarter CASM ex to increase in the range of 14% to 18% compared with Q4 2019. More than half of that increase continues relative to Q3. The remainder of the CASM ex increase continues to be primarily attributable to inflationary pressures, primarily in higher rates for labor, benefits and airports. All of that said, I'm very pleased that we remain on track with our 2022 cost plan, As Bob mentioned, especially in this environment, as we close out the year, our full year 2022 CASM ex guidance has Narrowed to up 14% to 15% compared with 2019. As a reminder, this includes labor accruals For all contract labor groups beginning April 1 this year, taking into account our best estimate for wage rate increases.

Speaker 3

Looking ahead to 2023, we continue to estimate full year CASM X to decrease compared with this year. We now have our first half twenty twenty three flight schedules published for sale, and we currently expect first half Given the level of first half capacity growth in a pre pandemic period, we would have expected CASM ex Due to higher than expected inflation, and as part of that, keep in mind that we are accruing for All open labor contracts and further wage rate increases in 2023, so that is fully included and our guidance based on our best estimation of market rates. On top of wage rate inflation, We expect to continue hiring at a healthy pace next year to support 2023 capacity and scale for 2024 growth. Our productivity has not returned to pre pandemic levels, which has required additional hiring to support the operation. It seems that most industries and companies, including our peers, are experiencing a similar workforce dynamic.

Speaker 3

Based on our assumption that fleet utilization will be limited by pilot staffing constraints for the majority of 2023, These cost headwinds will persist throughout next year, but should improve somewhat in second half relative to first At second half twenty twenty three, CASM ex will decrease in the low to mid Single digit range compared with second half twenty twenty two. We continue to be focused on better optimization Our staffing levels to our flight activity and improving our efficiency metrics and operating leverage. That work will begin in 2023 and continue into 2024. Turning to our fleet, our planning assumption for Boeing aircraft This year remains unchanged from what we shared in July. While our contractual order book still reflects 114 aircraft in dealing with as well as uncertainty regarding the timing of the -seven MAX certification.

Speaker 3

However, we are encouraged 31-eight MAX Aircraft deliveries here in 4th quarter. We do not expect to take delivery of any -seven MAX Aircraft this year. We continue ongoing discussions with Boeing And just recently made some modifications to our order book. In short, we converted more -seven MAX Aircraft to Dash 8 MAX Aircraft in the near term. We outlined the specific changes in our press release this morning, So I won't reiterate all of the fleet details here.

Speaker 3

In terms of retirements, we now plan to retire a total of 20 6-seven 100 aircraft this A few less than previously expected, ending the year with an estimated 768 aircraft in our fleet And our full year 2022 CapEx guidance remains unchanged at approximately 4,000,000,000 Turning to our balance sheet. We ended the quarter with cash and short term investments of $13,700,000,000 after paying $1,900,000,000 to Higher debt and finance lease obligations during Q3. This included the full $1,200,000,000 outstanding amount of our 4.75 percent notes are due 2023 $184,000,000 in principal of our convertible notes. We have now repurchased a total of $689,000,000 of our convertible notes, roughly 30% of the original issuance And have $1,600,000,000 currently outstanding. We remain in a net cash position with leverage at a very manageable 48 We continue to be the only U.

Speaker 3

S. Airline with an investment grade rating by all 3 rating agencies, which remains One of our key long term competitive advantages in good times and in challenging times. With our strong balance sheet And continued financial strength, we will soon discuss our 2023 capital plans with our Board of Directors. But our capital allocation priorities remain unchanged. We have a long standing dividend history And reinstating a dividend remains a high priority.

Speaker 3

We will also continue to look for opportunities to reduce debt. We will continue investing in the company and our people, and we are focused on wrapping up negotiations with all of our open Contract Labor Group. Last but not least, and at the right time, we intend to resume share repurchases as part of our shareholder return equation as we have in the past. And all of these intentions assume That the travel demand environment remains steady and we continue producing consistent quarterly profits. We are mindful of the economy and recessionary risk, and we would like to monitor the environment to see If there is any noticeable impact on travel demand as we move into 2023.

Speaker 3

Again, we are not Seeing any noticeable impact today, but we would like to preserve a higher than normal cash balance for some period of time into next year before we materially reduce our cash reserve. So while I can't commit to anything today, I hope that gives you an idea of how we are evaluating our capital allocation choices. In closing, 3rd This quarter represented another profitable quarter in our recovery. Our momentum is building here in 4th quarter, Supported by a strong revenue outlook, and I am encouraged with the progress we have made as we look to close the year strong and turn our focus to 2023. We are committed to generating healthy returns on invested capital And I am very pleased with the direction we are headed.

Speaker 3

With that, I will turn it over to Andrew.

Speaker 4

Thank you, Tammy. I'll provide some additional color on our Q3 revenue trends and Q4 outlook and point you to our earnings release for more detail. Overall, Q3 operating revenues came in right in line with the midpoint of our original guidance range of 10.3% versus Q3 2019. Our path there was a bit different than anticipated, but a solid result nonetheless. We had an 85.4% load factor yields increased 5.3% versus Q3 2019.

Speaker 4

In July August, we saw a step back in close end business demand, That was coupled with stronger advanced purchase leisure demand. In September, we saw a nice sequential improvement in managed business revenues And leisure demand remains stronger than anticipated and was particularly robust for a typically weaker leisure shoulder month post Labor Day. September managed business revenues finished down 25% versus Q3 2019. So while Q3 took a bit of a step back on business trends, we finished from Q2 to Q3 for our travel credit expiration policy change in July, which resulted in lower breakage revenue in Q3. As Bob mentioned, we also increased our short haul flying in Q3 in order to help with our operational stability.

Speaker 4

Mike will cover operational results in a moment. But we over indexed on short haul flying in Q3 relative to where business demand ended up, which created a roughly 2 point drag to Q3 operating revenue. As business demand rebound in September, the additional short haul flying helped overall revenues And our revenue trends in medium and long haul segments were very strong throughout Q3. Our Q3 loyalty program revenue was exceptionally strong And the primary driver of the increase in the other revenues. We saw strong growth in retail sales, which was aided by incremental revenue from Co brand credit card agreements with Chase that we secured at the end of last year.

Speaker 4

Even so, Q3 retail sales, spend per cardholder And our overall portfolio size continue to grow versus 2019. We continue to be very pleased with the performance of our loyalty program And it's significant revenue and EBIT contribution. Our ancillary products also performed well in Q3, in particular, our upgraded boarding product. This allows customers to purchase any unsold Business Select Boarding positions in the A-one to A-fifteen boarding group on the day of travel. We recently rolled out a new digital self-service option to purchase this product, which was previously only available to purchase at the airport gate.

Speaker 4

Our portfolio of new cities and developed markets performed in line with expectations in Q3. Hawaii outperformed our expectations primarily due to stronger Mainland to Hawaii performance as we further invested in and re optimized our Hawaii franchise. These actions are paying off. Our Hawaii and our island service will take longer to development and our primary goal at this point is to generate awareness among local travelers and incentivize them to try Southwest and experience our product. This is not uncommon with the introduction of new service.

Speaker 4

Now looking at Q4, travel demand is strengthening and we expect both leisure and business revenue trends to improve sequentially from Q3 And bookings for the holidays are strong. We expect Q4 operating revenues to increase in the range of 13% to 17% versus Q4 2019. We expect sequential improvement in Q4 business revenue trends compared with September's down 25% And we expect Q4 managed business revenues to be down 20% to 25% versus Q4 2019. The sequential improvement we are seeing in operating revenues is from base business improvement, in particular on the yield side, as we continue as well as continued ramp of benefits from revenue initiatives. Our Q3 capacity decreased slightly Down 0.3% versus Q3 2019, which was in line with our guidance despite flight cancellations from Hurricane Ian.

Speaker 4

Our Q4 capacity is a little lower than previously guided due to Hurricane Ian flight cancellations and is now expected to be down approximately 2% versus Q4 2019. Days length is increasing a bit as we move through Q4 and we continue to expect to be about 85% restored from network perspective by this December. Looking ahead to next year, we expect Q1 2023 capacity to increase around 10% year over year and Q2 2023 capacity has increased around 14% year over year. While we aren't ready to provide full year 2023 capacity guidance yet, That should give you an idea of the rate of capacity growth next year. When we talk about being fully restored from a network perspective, That means restoring the key Southwest markets that we borrowed from to fund the new airport growth during the pandemic.

Speaker 4

So our year end 2020 capacity goal would be network restoration plus our 18 new airports and recent Hawaii expansion. In closing, this will be my last earnings call covering the commercial update as our new Chief Commercial Officer, Ryan Green, will take over going forward. I've worked with Ryan for a long time and he's very prepared and well qualified for his expanded role. Some of you have met Ryan in the past, but He was most recently our Chief Marketing Officer. As I'm transitioning to Chief Operating Officer, I'll retain the network planning function As we strive to increase operating leverage as we move past the pandemic and reconstruct the network.

Speaker 4

And with being conscious that I'm standing on his shoulders For my new job, I thank you, Mike, and turn it over to you.

Speaker 5

Well, thank you, Andrew, and hello, everyone. We're now through the busy summer travel season. And aside from some weather that the industry had to deal with, I am very pleased with the reliability of the operations Our employees delivered in the Q3. They're working very hard to take great care of each other and our customers and we've made tremendous progress in several areas, Including getting properly staffed in most work groups and we have more employees that have completed their initial training and they're now contributing on the frontline. So over 95% of our hiring has been in frontline and operations groups.

Speaker 5

2nd, flying our published schedules without making Material posts and revisions. As Bob mentioned, our 3rd quarter schedules were much more stable for our employees and our customers. And 3rd, just as with last quarter, we have improved the quality of the schedule with more depth and more nonstop flights. Andrew mentioned we've added short haul flights in business for end markets, and that provides more options when we have weather or ATC delays. We also have more flying between all of our crew bases, and all of those changes support a more stable operational performance.

Speaker 5

From Memorial Day through Labor Day, the heavy summer travel season, we improved year over year across nearly every operational metric, including our on time And our flight completion rate was 98.6%, which means we canceled slightly more than 1% of our scheduled flight And that's in line with our pre pandemic performance, and that's really where we aim to be. Digging into on time performance for the Q3, our on time performance was 71.2%, which was referred to as A14 by the Department of So if you look at getting our Customers to their destination within 30 minutes. Our on time performance increased to 81.7% and it was 90.4% within an hour. We always want to be on time, but my point is that we are currently canceling very few flights, and we're consistently getting the vast majority of our Customers to their destinations within a reasonable amount of time. We are focused on improving our A14, and we know that the Primary challenge is operating tempo.

Speaker 5

And I talked about this last quarter, but I think it's worth repeating. Our operating tempo is being impacted by the sheer number of new hires starting work. We've got more leisure customers that are in our load factors. The airport environment as well as air traffic control challenges from both weather and staffing, and all of these things tend to require more time and are However, we have made solid progress towards our historical operational results, And we're doing that at nearly pre pandemic capacity levels. We aim to continue improving.

Speaker 5

We've got great momentum here in October with our on time performance running in the low 80% range. We continue to hire and train new employees, and that should have us well prepared for the upcoming holiday season. And we should continue just to get better as we continue our network restoration through next year and get even more employees through training. And just a couple of more thoughts on hiring and training. We continue to hire in most work groups and focus locations, and we still expect to Add over 10,000 employees this year net of attrition.

Speaker 5

We just we aren't just hiring for this year, though. We're hiring to support the spring and the summer of 2023, So that we have a more seasoned workforce in place. Our pilot hiring and training continues to be the pacing factor for growth as we move forward. We continue to attract high quality pilot candidates, and the training programs to onboard a new pilot to Southwest Airlines are robust. We're operating at our maximum training capacity for pilots, and that will continue well into 2023.

Speaker 5

And then just last, but certainly not least, I do want to congratulate my friend, Andrew Watterson, for his new role as Chief Operating Officer. I've been doing that role for almost 17 years, and I know Andrew is well prepared to take on this role. I know he's going to continue driving To modernize the operation, he's going to bring a new perspective and energy that will serve our company well. And I'm looking forward to transitioning into an Adviser role early next year and assistant Bob in the Southwest team on a variety of matters as needed. I would like to thank all of our employees for their hard work.

Speaker 5

I especially want to say thank you to the entire operations team that I've been a part of and have had the pleasure to Southwest is truly a championship team, and I am grateful that I will Continue to be a part of it. So with that, Ryan, I will turn it back over to you.

Speaker 1

Well, thank you, Mike. We have analysts queued up for questions. So a quick Operator, please go ahead and begin our analyst Q and A.

Operator

Ladies and gentlemen, we'll now begin the question and answer session. Our first question comes from Andrew Didora from Bank of America.

Speaker 6

Tammy, two quick questions on costs here. I know you've been accruing for labor most of this year, but do any of the does the recent deal from one of your peers change in any way how you accrue for your agreements And then second, on costs, does the low single digit CASM growth that you outlined at last Investor Day After 2023 still seem reasonable in the current environment?

Speaker 3

Yes. Thank you, Andrew for your question. And yes, we've taken into consideration all of the current labor deals as we've contemplated our accruals here. So all of that has been baked into the guidance that we shared with you. And in terms of the our Investor, the goals that our longer term goals that we laid out with you at Investor Day, I think we're in line, still in line with those longer term goals.

Speaker 3

So clearly we've had some Choppiness here in terms of the rate that we're bringing back aircraft and employees and restoring the network. So That created some lumpiness in our cost trends. But we've done our very best here At least looking, I had for 2023 to include all of those inflationary pressures and the guidance that we provided to you this morning.

Speaker 2

Hey, Andrew, this is Bob. Yes, I agree with Tammy. The goals stand, The if you think you saw that we noted that deliveries as an example only, some of this delivery These delivery issues with Boeing could persist into 2024. So you could still be, to some extent, ringing out some of the inefficiencies that are caused by some of that and just still folks that are in training going back to going out on the line. Some of that could persist early into 'twenty four, but no, absolutely all the goals stand.

Speaker 6

Got it. Understood. Then second, Tammy, nearly $14,000,000,000 in cash on the balance sheet. With the move in rates, just how are you investing this cash? And How should we think about interest income going forward into 4Q because it looks like it's reaching a level where it offsets your interest expense?

Speaker 6

So any color there would be great. Thanks.

Speaker 3

Yes. No, great question. You're absolutely right. We saw An improvement in our other expenses as we've seen rates improve here. So yes, no, we're We are investing that cash in obviously what we consider to be secure investments, but we do expect Interest income to continue to outpace interest expense.

Speaker 7

Thank you.

Operator

Our next question comes from Scott Group from Wolfe Research. Please go ahead with your question.

Speaker 8

Hey, thanks. Good afternoon. I want to ask about the 4Q RASM acceleration, obviously different than others, but I guess your Q3 Deceleration was different than others. Is this just noise around breakage from Q3 or is there some real underlying Acceleration strengthening in the RASM trend Q4 versus Q3.

Speaker 2

Scott, I'll just start for a second and yes, I'll let Andrew chime in here. There is a little noise between the quarters, but I think really it's just it's underlying it's The continued strengthening in the underlying business, you've got leisure trends, which are really strong. And there's been all kinds of talk about what's going on The blending of leisure and business and everything, we are seeing leisure strength and what have been typically off peak Period. Just an example only, in a typical period or typical year, September would have been 2 to 3 load factor points under the summer just sequentially, and this year we didn't see that. So they were about 2 to 3 points Above that sequential trend, so the leisure traffic is really, really strong.

Speaker 2

Coming off, we did have a dip in business in July August And then we got those trends reversed in September, and we expect to see strengthening in the 4th quarter From September's down 25%. So, no, you're seeing it's more about the continued Strength in Leisure and Business Revenues in the Q4 than it is noise.

Speaker 4

Andrew? What I'd add is, yes, we had some company specific drags in Q3 That has either gone away or attenuated. And at the same time, we saw some business travel weakness there during the summertime, Which is unexpected, but then as we exit the summer, we saw business travel pick back up. And business travel in general has had a nice line Trend line of restoration from post vaccine till today, but it's had some kind of ups and downs at unexpected times And it took a kind of a down as Tammy said during early Q3 and now it's kind of ticked back up. And so that combined with some of the actions We took on a little bit less short haul that we send out.

Speaker 4

I think those things combined and show us good both volume and yield Acceleration from Q3 to Q4.

Speaker 8

Okay. And then, Tommy, your comments about wanting to keep elevated cash, Is that sort of a signal don't expect much of in terms of buyback dividend or don't expect much in terms of Size of buyback, I'm just if there's any sort of more color you want to share there?

Speaker 3

Yes. I covered that pretty well And my remarks, obviously, we want to get back to our long standing tradition of healthy shareholder return. And we continue to be thoughtful And our capital allocation decisions, clearly we want to drive future growth and value. As you're aware, The PSP restrictions on dividends and share repurchases just expired at the end of the 3rd quarter. And we'll as we look ahead to December, we'll discuss our 2023 plans with you in more detail, but I would just say that Our capital allocation priorities really haven't changed.

Speaker 3

And as I said earlier, we have a long standing dividend history. So reinstating a dividend continues to be a high priority for us. As we've been doing here this year, we've been looking for opportunities to reduce our debt and we'll continue to look for opportunities that make sense for us there. And importantly, we continue to invest in our company and our people and are certainly focused on wrapping up a negotiation of all of our open labor contracts. And at the right time, We do intend to resume share repurchases as part of our shareholder return equation just like we have done in the past.

Speaker 3

So we're just trying to balance all of that and again Not to I think it is important to repeat. We just all of this assumes that the demand environment remains steady And certainly we haven't seen any step back here as we are talking to you today, but we'll want to continue to monitor the environment. But so far so good on that front and we'll just keep you apprised of our plans as we update them.

Speaker 8

Super helpful. Thank you.

Operator

Our next question comes from Jamie Baker from JPMorgan. Please go ahead with your question.

Speaker 9

Hey, good afternoon, everybody. So Tammy, a follow-up to Andrew's question and just so I understand the accrual mechanism. Hypothetically, if American and United ratified pilot contracts tomorrow With a 30% date of signing increase, I'm being deliberate here, You would upwardly adjust your accrual to reflect that or is it just a set it and forget it metric in your model?

Speaker 3

I'm not going to speculate with you Jamie on any particular percentages, but we certainly take Labor contracts and what market rates in as an input into our accrual. So We do monitor those and do our best job to estimate Labor rates, but obviously there are estimations involved with that. But it's not We don't we evaluate that every quarter and update as we feel is necessary, Which is what we've been doing really starting back in

Speaker 7

the

Speaker 3

beginning of the Q2.

Speaker 9

Yes, I didn't throw you off with the percentage. I was just You don't being dramatic with the data signing, but I did miss that you say you do or you don't upgrade or update it every Quarter to reflect what's going on in the market.

Speaker 3

We do.

Speaker 9

You do. Okay, perfect. And then 2nd, when listing priorities both in your prepared remarks and in the last question, you tend to emphasize labor deals And then you bring up the topic of capital returns. Is that deliberate or put differently, Should we view labor deals as one of the criteria you need to achieve before reinstating capital returns Or am I reading just too much into it?

Speaker 2

Yes. Jamie, this is Bob. And again, we're going to be talking with our Board in the next month about Just capital returns and then we'll be sharing a lot more of this with you at our Investor Day in December. I don't know that you can be that prescriptive in terms of the exact order, But it's very important for us to get these labor deals done. I mean, it's I think We have great employees.

Speaker 2

We want to reward them. They're highly paid today. We want them to be even more even better paid. You're starting to see deals by others. You're starting to see us get some TAs out there.

Speaker 2

So I think it's clear The high priority would be the dividend restoration. And then as you've seen us, we've had opportunities to take To reduce debt, which we've done. But no, the getting our labor deals done is a very high priority for our people.

Speaker 9

Okay. That's great. The bumpy sounds obviously like your answer as well. So sorry about that. Thank you.

Speaker 1

You may have a package on the porch.

Operator

Our next question comes from Ravi Shanker from Morgan Stanley, please go ahead with your question.

Speaker 7

Thank you. Good afternoon, everyone. Great to see the traction on the operational reliability there after obviously a little over a year of trying. So just wanted to get a sense of how robust Our fragile that is, given like if we had a really bad winter storm or there was a huge surge in travel like for like 1 or 2 days during Thanksgiving or something. Do you feel like there's enough slack in the system to be able to support some of that?

Speaker 2

Hey, Robbie, this is Bob. I want to just add one couple of top side things, then Mike could talk about the details. But I think There are several things in here that are just macro helping drive the operational improvement. Number 1 is getting staffed. I mean when you're understaffed, it affects everything.

Speaker 2

Don't have margin to deal with any kind of issue and we are so much better staffed today than we were even 3 to 4 months ago. Obviously, we have ways to go with our pilots, But really what's happening there is we just aren't we are just under flying our aircraft because of that. The other big thing is we committed, I think late in the spring, early in the summer, we committed to not republishing our schedules any longer, Because it's really hard on our employees, it's very hard on our customers and that republishing just adds it's part of what adds operational So post the summer, we are committed to not republishing schedules and you've seen improvement operationally in September and real improvement here in October. I think our OTP in October is low 80s and our NPS scores are in the 60s. And So yes, you're always going to have IROPS, but I think the base stability of the operation is much better for those reasons.

Speaker 2

But Mike?

Speaker 5

Yes. Robbie, I don't have much to add there. But we've been very purposeful in trying to make sure that we match our resources to our schedules for the whole year. And we've had really good experience over the summer in difficult weather conditions with high load factors, All the kinds of things that would be an operational challenge during the holidays, and we navigated through all of them very stably. So I feel like we're really set up to perform well over the holidays as we go into Thanksgiving and the Christmas season.

Speaker 7

Very encouraging. Maybe just a follow-up. I apologize if I missed this, but you guys introduced a new fair class structure A few months ago, what's the update on that? What's the take rate like? And how much of a boost could that be to TRASM?

Speaker 7

How much are we seeing already and how much could it be in 2023?

Speaker 4

Hi, it's Andrew. The new Fair Product Wanted Gateway Plus is one we talked about at Investor Day last year And we rolled out in Q2, it was part of the bundle of initiatives we said next year would give us about between $1,000,000,000 to 1.5 $1,000,000,000 of EBIT. So we didn't break out the line item for that nor did we break out, the take rate. What I have said and will say again is that The large majority of our customers will still buy the anchor want to get away. So this allows us to have more bite sized sell ups for additional features that customers will only pay for and don't have a huge cost of delivery for us.

Speaker 4

So some intangible costs, but don't have a big cost for delivery. And we have a cross functional team whose job it is to take that product which was delivered exceptionally well from a technical perspective And move it to our inside target take rate for the customers. They're making great progress on that. They've already done a different We're taking different actions on merchandising, on price and how they communicate to customers. And so we are seeing really good progress.

Speaker 4

It's on its track to hit the business case and we couldn't be happy with

Speaker 7

Very helpful. Thank you.

Speaker 9

My pleasure.

Operator

Our next question comes from Duane Benningworth from Evercore. Please go ahead with your question.

Speaker 10

Hey, thanks. Andrew, since this is your last call on commercial, I wanted to ask you a revenue question. So just longer term, how do you think about The stickiness of yields in the context of an inflationary environment, do you think people should still be indexing Their thinking to 2019 or has the world changed? And how much of the yield environment would you attribute to capacity deficiency? How are you thinking about the new normal here?

Speaker 4

Well, I appreciate the philosophical question on my last revenue call. But I think I'm tired of 2019 comps. So hopefully next year we'll stop talking about 2019. You do have a supply demand mismatch right now in the industry. And you have a bounce back from this Recession that was stronger than any other recession that kind of I recall, and certainly going back maybe one of the early 80s double digit recessions had A fee like this, but it was extraordinary.

Speaker 4

So, it's unusual if you have demand quickly outstripping supply like this. So, it's going to take a while I think for the industry to have Why come back up because whether you have economic softness for next quarter, next year, whatever, It will keep chugging along and generating more demand. And given that some airlines are having trouble getting pilots And the air framers are having trouble kind of meeting their target delivery dates. It's going to supply is going to be hard to come by At an industry level for a couple of years now. So I think we have a couple of years where demand and supply may not be as aligned as it was pre pandemic, Which I think will have these yield tailwinds for a while.

Speaker 4

So, that's about as far as I think one could reasonably see in this industry, but definitely a couple of years of Supply headwinds and demand tailwinds.

Speaker 10

Appreciate those thoughts. And then maybe for Bob or whoever wants it, Southwest is a margin focused company in our opinion, but in any given year, you might have different priorities. So what is your Guiding light for 2023 growth. Are you solving for margin expansion next year? Or has this COVID recovery been so unique that the goal is sort of capacity restoration and we'll worry about margin expansion beyond this 2023 transition year?

Speaker 2

Duane, I think they all hang together. So we I mean, we've got several goals. We need to continue to restore our ops reliability. We've got against Staff that's really pilots next year so that we can fly our whole fleet. That enables the ability to restore the network.

Speaker 2

In other Get all the stuff that we flew pre pandemic back into the network. We'll be sort of 90% restored in the summer. We think 100% fully restored by the end of next year, 2023. Why that's important is because that capacity is going back into markets We were in, so that they are going into markets that we are very strong in. We have a strong customer base.

Speaker 2

So it comes on at much less Risk than opening a new market. So that ties into the revenue performance and the margin discussion, because it helps. The but no, the goal on top of those goals in 2023, the goal is to grow revenues, to grow profits, to grow margins and to grow returns.

Speaker 9

Appreciate the thoughts.

Speaker 4

Thank you.

Operator

Our next question comes from Conor Cunningham from Melius Research, please go ahead with your question.

Speaker 8

Hey, everyone. Thank you for

Speaker 11

the time. You talk a fair bit about just training in general and it seems like that's one of your biggest problems from a pilot standpoint. And I'm just Is there anything you can do to bolster the throughput there? Like I feel like this has been an issue for a while, and I'm just surprised that it hasn't been fixed. But like There hasn't been a better solution in the near term that could drive some efficiencies there.

Speaker 2

Yes, Connor, I just want to clear up. Sometimes there's confusion between hiring and training. We are having note we're having I just want to point this out, we're not having any trouble hiring We're getting all the pilots, good, great pilots that we need. We're overbooking classes as an example. That's different than getting everybody through the training process.

Speaker 2

There's just a max capacity. We have a lot of simulators, Mike. We have 23. 26. 26.

Speaker 2

We're adding 3 here. So we've got a lot of simulators, but the training pipeline is full. You're, Andrew, talking about the whole industry being constrained. I think that's really what's going on in the industry is this constraint To some extent hiring for some carriers, but really the training processes. So if you ask about what can you do about it, it's really difficult Because the lead time on a simulator is years as an example.

Speaker 2

So by the time you get that in, you don't need it any longer terms of managing this bubble, so but the main point is the hiring is going great. The training is full. Our plan this year was to hire 1200 pilots and we will hit that. The plan next year is to hire 2,100 pilots and we will hit that. And then the plan is to have sort of the pilots catch the aircraft late next year so that we're flying the whole fleet and that will be our plan.

Speaker 2

Mike, you want to add anything?

Speaker 5

Yes, I'll just jump in Conor. So, yes, our training throughput, we're at maximum training throughput with all of the infrastructure We have. So we've got I think 26 bays. We'll have 26 simulators in there at the beginning of the year. We're fully staffed on flight We've got enough Czech Airmen to go do that.

Speaker 5

So we're just hiring a lot of new pilots. We've got a lot of captain upgrades and we have the normal So we'll be at maximum training capacity in 2023, and then it falls off, as Bob mentioned, in 2024 and beyond there. So, we're not we're putting as many piles through our system as we can.

Speaker 4

I'd actually compliment Mike and Tammy on this. In the middle of the pandemic, when people are focused on day to day, they made a decision to expand our training facility by putting in more bays To order simulators, but no one else is doing either. So when we came out, we actually have more training capacity now than we had pre pandemic by quite a bit. And so even though we're at capacity, this was capacity was added during the pandemic when everyone else was thinking about today, they were thinking about tomorrow.

Speaker 11

Good morning, Andrew. I appreciate that detail. And just sorry to like piggyback on Duane's margin question, but So you still have a fair bit of inefficiencies in the 'twenty three and some of your hedge benefits probably roll off. So we're kind of banking on revenue being really Strong. And I'm not really asking about forward pricing, but is there any other levers out there outside of revenue that could drive

Speaker 2

Well, you've got Yes, you've got again strong revenue performance and that's for a number of reasons. The other thing, you've got our initiatives coming fully Online as Andrew pointed out. So the contribution is sort of 1 to 1.5 EBITDA in 2023 and we've been right on track Hitting the contributions that we told you about in terms of our revenue initiatives. We have work to do on the cost front. Some of our cost pressures are what everybody is seeing, their inflation, in particular wage inflation, some other categories.

Speaker 2

Another piece of that are inefficiencies that again I would argue almost everybody is seeing. They're just folks in training, not flying all your fleet, just Not back to the efficiency levels that you were pre pandemic. And so we've got an opportunity to work on We talked to you about this some, especially in the operations areas, tools, processes, Ways to take cost out of our of the operation in particular, and we'll be sharing a lot of that at Investor Day here in December.

Operator

Okay. Thank you.

Speaker 2

Thank you.

Operator

Our next question comes from Savi Syth from Raymond James. Please go ahead with your question.

Speaker 8

Hey, good afternoon. Can I ask

Speaker 12

on the managed business revenue, is the Decline that you saw from June, is that a function of pricing or is that volumes as well? Because I know you give a revenue kind of outlook here And I'm guessing pricing has been softer just generally from kind of the earlier in the summer?

Speaker 4

Yes. Sorry, it's Andrew. We did see coming out from June to July August both some volume and yield softness in managed business, Which then turned around in September October. And so it was clearly different behavior. As I mentioned before, there's been kind of a start, stop, start, stop with managed business from Post vaccine rollout.

Speaker 4

And it's hard to get be super clear on exactly the drivers are, but we do hear lots of anecdotes over the summer of Our company is reinstating PTO caps. Therefore, people had to take PTO during the summer. Also, many companies put in place kind of Hybrid work, but then had remote Julys where you could kind of work remotely for the month of July and therefore you don't travel for business reasons. So lots of these anecdotes fit with a summer slowdown in travel, but then resume post Labor Day It was a nice tick up post Labor Day and that trend continued to accelerate from September into October. So, not Fucking too much about why, but it was clear this is what happened and both volume and fare are improving now for managed business as we exit the summer.

Speaker 12

That's helpful. And if I might, I know that there's a lot of uncertainty around delivery, but I was wondering if you could put a guardrail around 2023 capacity plans Or just even a guardrail around maybe what you could see in terms of what you think is realistic in terms of kind of fleet delivery from a low end and a high end?

Speaker 4

I think what Bob said earlier that we're pilot constrained until the end of next year. So, a lot of what we're doing for the bulk of next year It's really paced by our pilot training capacity, not by Boeing deliveries. Obviously, these are much more efficient aircraft we'd love to fly, But it's not the delivery rate that's really constraining 2023 for the bulk of the year.

Speaker 2

And I think of you've also got It's just a way to think about the capacity that we've given you. So we've given you the 10% in the Q1 and the 14% in the second quarter, probably gives you some guidance as out of We're not ready to offer 2023 full year capacity yet, but gives you some way to maybe think about that. Another just, it wasn't exactly your question, but just to tie to that, when think about the capacity for the first half of the year, the vast majority of that is just carryover from capacity that was implemented In 2022, I think, Andrew, it's upwards of 90%. Yes, just around 90%. So you got about 90% of that capacity is Just stuff that's carried over from things that were added back as we restore the network in 2022, if that helps.

Speaker 2

I agree with Andrew. On the delivery front, I don't we don't see a scenario right now where the Boeing deliveries Our reduced to the point where somehow that limits our ability to put into place the capacity that we want, because again, we're pilot constrained In all likelihood through the end of the year. So we again, our intent is we public schedules our intent through the middle of the summer, our intent is to fly those. I don't think those will be affected by any delivery issues. And I do expect to, like all companies, as the year moves along next year, I don't want to speak for Boeing, but as you continue to work on supply chain, whether that's engine or parts or whatever, I would assume they'll begin to stabilize those deliveries and so no, I don't think it will have an impact on 2023.

Speaker 12

That's helpful color. Thank you.

Speaker 5

You're welcome.

Operator

And our next question comes from Brandon Oglenski from Barclays. Please go ahead with your

Speaker 6

Hey, good afternoon, everyone, and thanks for taking the question. I guess, can we stay on this topic of being constrained by pilots and network recovery? I think if we're reading your op stats correctly, you actually have a lower average stage length now than you did in the past. So I get it, maybe the composition of the Citi pairs is not the same as the past, but it would seem some of that long haul flying that was challenging you in the past Maybe it's coming out of the mix here. So can you just help us understand like where are you scaled from a pilot If you could have everyone trained like how large of a fleet could you fly and how much more could you scale capacity from here?

Speaker 2

I think it's really it's not a we've changed the network as the driver, it's we have we picked an order in which we have restored capacity. And so we chose to restore some of the short haul earlier this year, A little bit of a bet on business recovery, a lot of a bet that, that helps the operational reliability, which is what we're seeing here in the last few months, Which is different than we've got a different network post pandemic. And so I think it's really the order of restoration. And I'm not sure this is exactly answering Question, but if we could fly all of our aircraft, that is we had enough pilots to fly the aircraft on property, We would be roughly 5, 6, 7, 8 higher percentage of capacity or ASMs This year, right now, that's about how much more we could fly. It's really more that's the factor than it is the mix of the flying short haul, medium haul, long haul.

Speaker 2

But Andrew, you want to add anything?

Speaker 4

That's true. From last summer through last winter, We had a much longer stage length because we had fewer short haul that did hurt. We determined the network stability. A bad day could become a very bad day. And so to hedge against that, we restored the short haul sooner than we would have otherwise paced it based on demand in starting Q2 of this year, And that has proven a robust decision because we've had bad days.

Speaker 4

There's a lot of bad days over the summer. We operated just fine, got through them In contrast to some of our competitors. Now that does lead to a kind of imbalanced network where the stage length is much shorter as you point out. And so when we talk about restoration, we're essentially talking about adding in longer haul, medium to longer haul departures From now through the end of next year to fully restore the network, it will bring it back in balance. But while I won't say we'll have every city payer have the same number of frequency we had before, we will Every city will have its kind of pre pandemic network as far as what it's serving customers who want to fly for business, visiting friends and relatives and holidays.

Speaker 4

So I think You'll see a kind of regular Southwest network stage lengthen composition by the end of next year.

Speaker 6

Okay. I appreciate the response. And just maybe a quick follow-up for Tammy. So you know the outlook for improved full year CASM ex in 2023, I guess that's really not that contingent on Boeing deliveries then, right? It sounds like it's more the pilot

Speaker 3

Yes, I think that is a fair assessment and how Our ability to bring on that capacity. So, yes, I would agree with that.

Speaker 6

Okay. Thank you.

Operator

And our next question comes from Chris Sathopoulos from SIG. Please go ahead with your question.

Speaker 13

Good afternoon. So Bob, I was wondering if you could give some color on how your Strategy in Hawaii has evolved now over the last 3 or so years. And you mentioned in your prepared remarks about I realize that the fare special is in place through the end of the year, but Should we think that that level of pricing, which is clearly unsustainable could persist, perhaps not at that absolute level, But as you talk about incentivizing or making travelers aware of Southwest that that level of pricing could persist into next year.

Speaker 4

It's Andrew. I'll start off and then Bob can correct me Where it needs to? Obviously, we won't talk about forward pricing, but what I will say is the current pricing is we have a special and in fact since really the end of summer Where we have a low price and we guarantee that low price for customers, this is not at all uncommon. You look back over Southwest history And we've done this many, many times. So it's not unusual that we do this to incent trial.

Speaker 4

Kind of to work backwards here, Bob and I were there this past summer, met with a lot of customers, a lot of stakeholders and we saw they were aware of Southwest. They knew us. They didn't know about us too much. They did not try this as much. And so to kind of incent that trial, we had this low fare and we had it Available all the time just to make it really easy for people to try us and we've seen a kind of explosive growth and use by the car miner, the local customer To fly us for travel between the islands.

Speaker 4

The travel between the islands is much reduced from what it was before. That's because the mainland travel from vacationers has come back to its pre pandemic levels, but it had not come back in our island. In general, when we were visiting, people were not traveling around as much as they used to back before it was a monopoly. So, we wanted to get people back in the habit of traveling to Neighbor Island, with a family, to go to football games, for all the reasons one might In the mainland, getting your car and drive. And so it was really about getting people used to a different behavior, which is you can count on low prices between the islands.

Speaker 4

And once you kind of Get them back to knowing that they can adjust how they're going to allocate their budget, what they're going to do on the weekends. And we think that ultimately ends up Having a more robust inter island market compared to before when it was characterized by high prices and monopoly service. So we think this is a pathway onto that. Now our schedule has also at the same time been changed. Our entry into Hawaii, we view it as a franchise and that franchise includes Mainland offline As well as Neighbor Island flying and we kind of dimensionalize that based on customer feedback.

Speaker 4

So we went out to Hawaii well before we start flying And we heard from people, yes, great you're going to fly from the Mainland Southwest, but can you please give us inter island travel. We heard all kinds of sad stories of not being able to visit friends and relatives. And so we came and we put that back into our business plan. We figured out a good network that will provide good robust reliability and customer options to have Some very short Mainland very short Inter Island flying and some long haul Mainland flying and the combination looks good on paper to us. We've kind of adjusted that based on feedback.

Speaker 4

We heard from a lot of the local customers, please fly to Vegas. So we added Vegas to it. They said, hey, Southwest, It's great you're offering options, but I need more a better schedule so I can get back home because if you've ever been to Maui they have very nice hotels, but they're quite So if you're a business traveler, you don't stay over, you come back home. And so you look at that and you think of business travelers as your white collar workforce, which is True, in Hawaii, but they also have a blue collar workforce that travels for business, construction workers, dock workers, trades people. And so, They need to be able to get back home each night when they go to Neighbor Island to serve their customers.

Speaker 4

So that led us to having a bit more of a schedule offering This kind of span the day, so people could have that round trip ability. And because we had started off a little bit more Of a looser schedule in Hawaii because it was very new to us to fly such a long stage link. We're able to kind of tighten up our scheduling parameters and really didn't use a whole bunch more New aircraft and new crew time because both are there and just not as productive. So we're able to kind of increase that offering without a lot of cost to us. So This all fits down to I think a franchise that's maturing.

Speaker 4

We love it and I think our product fits with the local customers and they're responding in droves by our introductory offer.

Speaker 2

Yes, I would just say, yes, Andrew and I had the pleasure of spending a week in Hawaii in May, and it was it's clear that people love us, but they don't all know us. And this gives us a chance to introduce ourselves. It was also really clear a much better inter island schedule Was something they really wanted and needed. And the last thing I would just say, I've been Southwest 34 years, and we've gone In my time here, we've gone into lots and lots of new markets, new cities and grown some of those to what today are what we would call mega stations and Using introductory pricing to really introduce ourselves to the market and drive traffic is It's a tactic that we have used very successfully here for years years years and this is very similar.

Speaker 13

Okay. Thank you. And my follow-up, so if we look at U. S. Domestic capacity in the first half for next year.

Speaker 13

Narrow bodies, this is for the U. S. As a whole now. Narrow bodies are up low double digits, wide bodies up a few points, RJ is down, obviously not Completely relevant to you, but as we think about the capacity plans that you outlined for the first half, but also the yield environment for Is the base case scenario that this mix of equipment for U. S.

Speaker 13

Domestic travel as a whole normalizes or perhaps just in an easier way that these narrow and wide bodies return to their more natural markets? Thank you.

Speaker 2

Yes, I really can't speak to the industry and what their plans are. I think if you look ahead at especially with aircraft, if you look ahead at and then Sort of the intermediate term in terms of capacity, as Andrew noted, a lot of carriers' capacity will remain moderated We suspect that's because of the same pilot constraints that we have, but it does look like it Remain moderated for a while. And I'll go back to what I said in terms of our so How that interacts with the yield environment, I think we'll just have to see. But the best guess would be that for a while here, you do have moderated Overall capacity. Again, if you look at us, we've got more capacity growth, a lot of that is carryover, but it is nearly all back end markets That we served pre pandemic, served successfully, have an established customer base.

Speaker 2

And so we see that as very different than going Putting all the service into new markets that then have to be developed. So those will that's Why? The plans next year include continued expansion of the revenue plan, continued expansion of margins, continued expansion of profits. So I see those things a little bit differently, but no, we can't manage the industry environment. All we can do is manage Southwest Sure, Alex.

Speaker 4

Yes. I would say that the Bob says we're going back in a market frame before, we know there's travel demand. We know that we normally would service that travel demand, yet we're unable to at this point in time. So we know the demand is there. So we'll put the supply up against that demand.

Speaker 4

We think that makes us quite low risk. It's clear that other carriers are having trouble Scheduling all or servicing all of their RJs. And so their regional flying is down right now. If you look at the forward schedules, it Hop's back up. So obviously, they're not going to get regional pilots in a cliff change here in the next year.

Speaker 4

So It's unlikely that the capacity is kind of out there and regional flying can actually be serviced. So, you imagine that would come down as they true up their plans.

Speaker 13

Okay. Thank you.

Operator

And we have time for one more question. We'll take our last Question from Sheila Kahyaoglu from Jefferies. Please go ahead with your question.

Speaker 8

Thanks so much, and good afternoon, everyone. I I just had two questions on labor, if that's okay. So, first, when we think about your net new hires for 2022, it's about 10,000 folks or 15%

Speaker 3

of the workforce.

Speaker 12

We'll have less

Speaker 8

than 1 year of 10% of the workforce will have less than 1 year of experience. So how do we think about the timing of getting those Employees up to speed and is there a CASM impact associated with that for 2023?

Speaker 3

Yes. No, We thought about all of that as we've shared our guidance with you this morning. But yes, there is certainly And impact as we hire new employees, there is some dilution as a result of that And does that offset somewhat some of the inflation that we're seeing? And of course, but on the other hand There is a penalty if you will because we are continuing to hire to fund future growth. So, there's that probably washes itself out a bit as we look ahead into 2023.

Speaker 2

And I think some of the that proficiency question, which we've been asked a lot, is probably different by work group. So you take a pilot And they come out of training, and you've got 2 pilots in the cockpit, and you're proficient. In other words, You're not becoming more productive over time. You're flying the aircrafts and you're fully proficient. Other jobs, On the ramp, for example, you're trained, but it takes a long time to understand The nuance of the job, you're paired with somebody else.

Speaker 2

Mike uses the word get our tempo back. You're just low at first scan and bag, that kind of thing. So You've got other jobs that over time we will gain efficiency and as folks in those Jobs get their tempo or their full proficiency back. So I think it does vary by work group. But there is opportunity For sure, opportunity for sure in 2023 to begin to ring those efficiencies out of the operation.

Speaker 8

That's helpful. And then just another follow-up on labor. I think at the Analyst Day in 2021, you targeted 80 employees per aircraft and we've seen that step up to 86 per aircraft today granted that's hiring ahead of the So how do we think about that level normalizing?

Speaker 2

Well, we'll be sharing a lot of this in December at Investor Day. I think that normalization of that number is being affected by a number of things. It's just again, it's the inefficiency in the system that will take, I think all of 2023 to ring that out. It will take flying all of our aircraft. It will take becoming Perficient, it's also going to take modernization of some of our tools and processes, Taking paper and again, we're going to share a lot of this stuff, using new tools and processes, taking paper out of the turn, so that It takes less labor in some areas as an example to perform the same tasks.

Speaker 2

We also have to take a look on the other side of things like, if we're going to continue to take, I'm just making this up, but the MAX 8 for a While like we have been in lieu of the 7, well, it takes an extra flight attendant to manage that aircraft. And so we're going to have to just think about 80 in that context, but the goal remains to be efficient in terms of employees per aircraft. We'll share an update On our thinking and then how to close that gap at our December Investor Day.

Speaker 3

Okay. Awesome. Thanks.

Speaker 1

Thank you. Okay. Well, that wraps up the analyst portion of our call today. I appreciate everyone joining and have a great day.

Operator

And ladies and gentlemen, we will now begin the Media portion of today's call. I'd like to first introduce Ms. Linda Rutherford, Chief Administration and Communications Officer.

Speaker 3

Thank you, Jamie and welcome to the members of the news media to our call today. We can go ahead and jump right into our Q and A. So Jamie, if you would just give them some queuing instructions, we'll get started.

Operator

And our first question today comes from Alison Sider from Wall Street Journal. Please go ahead with your question.

Speaker 12

Hi, good afternoon. Thanks so much. I guess on the MAX 7 Certification. Just curious if you could share anything so when did it become clear to you that that certification wasn't going to happen this year and sort of how did you find out about it and Anything you could share about kind of your reaction as that situation has evolved?

Speaker 5

Yes, Allison. This is Mike. We talked to Boeing continuously, And they're working diligently with the FAA to provide the information they need to get the airplane certified. And at this point in time, Boeing believes that there's a chance it gets certified at the end of this year or early next year. And so that's I don't have anything other to add anything more to add other than that.

Speaker 12

And I guess, has there been any like surprise or frustration regarding reports that Boeing sort of had gotten Behind in some of the certification paperwork or some of the submissions were incomplete and the FAA's reaction to that?

Speaker 2

Well, there's just there's a lot of

Speaker 5

I mean, it's a new process for both Boeing and the FAA to go through. And so when you just think about trying to go through the process with all the information, First of all, you want to have a format for that information to flow to the FAA with, and they need to agree on that. They need to gather all of that information and submit it. There's analysis that needs to be done and there's questions. And I think all of that just takes time.

Speaker 5

And it's brand new, and they haven't had to do it before.

Speaker 3

Thank you.

Operator

And our next question comes from Robert Silk from Travel Weekly. Please go ahead with your

Speaker 14

Yes. Thanks for taking my call. So some of the other the big three carriers that I've been talking about, a little bit of Narrowing of demand, the variation in demand across days of the week and even across hours of the day due to Hybrid work schedules and leisure travel, are you all seeing any of that?

Speaker 4

I think every after every recession, business travel demand changes, behavior changes a little bit. So, we should expect this time For the change as well. So we did see during COVID when business travel was much reduced, we did see leisure travel and periods where you often didn't see So you still have more leisure travel in July than you do in September. The surprise finding is There is more leisure travel in September than there used to be. And now during COVID that led to kind of like more You had peaks and valleys that were kind of more prevalent in COVID because of the absence of business demand.

Speaker 4

Now as business demand comes back, As we discussed earlier and that leisure demand is staying and that's a surprise. It's not the case that as we rotate out of the pandemic and go back into the office That leisure event goes away in the off period of time, it appears to stick. And so that's quite welcome. So that does tend to dampen some level of seasonality, but you're still going to have that seasonality. It's a welcome development And, but they're still going to have peak season and off peak season.

Speaker 2

And Robert, the only thing I would add, I do think it's interesting, I mean, These are new phenomena, right?

Speaker 11

So these sort of

Speaker 2

this the leisure strength has been with us for A long time now coming out of COVID, we've had very strong leisure, but the sort of this shifting of leisure into some of The prior off peak periods and strength in typically off month like September and day a week and although those things are they're noticeable, you could see them and they're real. What I think we want to be careful with is trying to decide that this is forever. I think as we continue as the business travel continues to restore And as people's work habits, if that's a piece of this as they continue to move, I think it's going to take a while for all of this to settle And I do think it continues to change. So I would I personally been slow to decide that we have a new trend And that's the trend for a long period of time. What's really what we're focused on is Whatever the why and this idea of blending business and leisure, the trends are really good.

Speaker 2

The leisure trends are really strong. The business trends have come out of that dip and they are strengthening. So our revenue trends overall are really strong. They're strengthening further in the Q4. I think we think they'll strengthen further in 2023.

Speaker 2

So That's the focus versus trying to understand in exact detail whether some of these things are forever.

Speaker 9

Okay. Thank you.

Speaker 2

Thank you, Robert.

Operator

And our next question comes from David Zlodnick from TPG. Please go ahead with your question.

Speaker 9

Hi, all. Thank you very much for the question. Thinking about just back to the next seven, are you Do you have a contingency or a plan B for if it's not certified this year and if Congress chooses not to pass the ICAS extension?

Speaker 5

Well, David, Boeing is very confident that they've got a path to either certification or an extension. And I believe that that's going to happen as well. But if for some reason by the off chance it doesn't happen, of course, we have Plan Bs, but we're just not publicly discussing them at this point. And as

Speaker 4

Bob talked about, we can easily tolerate that Next year, in fact, our network plan and business plan for next year assumes no MAX 7 deliveries. And so, We've already figured out that we can operate 2023 just fine with all MAX 8s and with the 7 Hunts we have today. So beyond that, We could continue taking Mac stakes for a period of time as well. The benefit of having such a decentralized network and kind of really Good options around the country is that we can rejigger our network without kind of unwinding it. If you have a big hub and spoke, It's pretty fragile.

Speaker 4

You have to operate the hubs and spokes, just like the hub is supposed to operate, unless you miss connectivity. For us, we have a lot of flexibility moving our assets around. So That gives us a much bigger tolerance and some to deal with this.

Speaker 3

Yes. And just one last thought, To emphasize again and our order book that we have with Boeing gives us tremendous flexibility and there's a lot of detail in our release Today and we've been converting as you can see there to Dash 8 along the way here. So we've been able to manage through really without any issues so far.

Speaker 9

Sure, thanks. And then Just looking at holiday travel coming up, forgive me if you said before, are you planning just given the extended holiday period for Staff incentives or any other kind of staffing plan, just avoiding the issues that some carriers have last year?

Speaker 5

Well, David, last year, because of where we were in the staffing, we did have incentive plans to try to And send people to come in on their days off, but our staffing level is significantly enhanced this year. And then we spent quite a bit of time making sure that the schedules that we published, we've got matched to our resources. So we feel well prepared to go into The holiday travel, just like we did this summer.

Speaker 2

Yes. I think we're in so much better shape. The other thing, just to remember, especially Christmas And New Year's last year, we were dealing with Omicron. So in addition to being a little tighter than we would like on staffing generally, We went in 2 to 3 weeks, we suddenly had thousands of employees that were out with Omicron at the tail end of December early Which made the staffing, it just really compounded that staffing question. So that's really what you saw last Christmas and New Year's.

Speaker 2

We as Mike mentioned, we've had focus on like always on managing the summer really well and then Managing these holiday periods like the 4th July really, really well because obviously they're important to our customers and our Mike, I think our cancel rate was well under 1%. I mean, we had terrific operations during those summer holiday periods and we will focus on The operation overall and then of course the holiday period is the same way this fall. But bottom line, we are so much better staffed. And again, we I know I mentioned this 3 or 4 times, we've not republished our schedules and that schedule stability, It just makes our staffing even more efficient because our crews haven't been moved around just like our customers have moved around if we have to republish the schedule.

Speaker 9

Thank you. Appreciate it.

Speaker 2

Thank you.

Operator

And our final question today comes from Leslie Joseph from CNBC. Please go ahead with your question.

Speaker 12

Hi, everyone. Thanks for taking the question. Just curious on the pilot negotiations and flight attendant and other negotiations as well. How much do you think those contracts are going to add to your costs In 2023, if you do reach a deal soon, because inflation is much higher than when you started negotiating. And then on the pilot shortage issue in general, are you in favor of any increase in the pilot retirement age Or changes to training from the 1500 hour rule, I know Republic had some trouble with that.

Speaker 12

How do you think about that? And do you think there's a need for any for regulatory changes there.

Speaker 2

Yes, Leslie, Mike, if you don't mind, I'll talk about the rates and then you can talk about the other On the rates, no, as Tammy pointed, we constantly update those. And I'm not going to talk about negotiations Here obviously we're in mediation with both our pilots and our flight attendants and I'm hopeful that And it helps move us to a deal sooner because again, I want to get contracts and we love to get them soon with our awesome employees. But we are as you look at both inflation and then as you look at deals that are occurring in the industry, in Alaska just had a pilot deal last week, for example. As Tammy mentioned, we look at those and then we manage our accruals Accordingly, and I would say, you never know till you get there, but I would say right now it feels like We're adequately accrued for all work groups beginning last April of course, but I think our accruals look really reasonable to me. Now the markets are really moving, who knows, but in terms of what we've seen happen So far our accruals are very reasonable.

Speaker 2

And Mike on just the changes to the pilot

Speaker 5

requirements? No, we're not. I don't think we're interested in the pilot age going up further than what it is. And The pilot requirements are fine with us the way they are today. We're I think we're an employer of choice.

Speaker 5

We have, I think really all of our labor contracts, when you look at the scheduling and the quality of life, the compensation, the benefits, the I think we have best in class contracts. We had that coming into the pandemic. I expect we'll have those going out of the pandemic. And as a result, we're able to recruit all the people that we need. So we haven't had a problem recruiting pilots or any other work groups for that matter.

Speaker 12

Thank you.

Operator

And this concludes today's question and answer session. I I'd like to turn the floor back over to Ms. Rutherford for any closing remarks.

Speaker 3

Thank you, Jamie. Thanks to the members of the media for joining us today. If you all have any other questions, you can reach out to our Rockstar Communications Group at 2147924

Operator

Ladies and gentlemen, the conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your

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