Southwest Airlines Q1 2022 Earnings Call Transcript

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Provided by Quartr
April 28, 2022

There are 18 speakers on the call.

Operator

Good day, and welcome to the Southwest Airlines First Quarter 2022 Conference Call. My name is Chad, and I will be moderating 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. At this time, I'd like to turn the call over to Mr.

Operator

Ryan Martinez, Vice President of Investor Relations. Please go ahead, sir.

Speaker 1

Thank you, Chad, and thank you all for joining us today. In just a moment, we will share our prepared remarks and then open it up for Q and A. Joining me on the call today, we have our CEO, Bob Jordan Executive Vice President and CFO, Tammy Romo Executive Vice President and Chief Commercial Officer, Andrew Watterson and President and Chief Operating Officer, Mike Vandevan. A quick reminder that we will make forward looking statements today, which are based on our current expectation of future performance, And our actual results could differ substantially from these expectations. Also, we had a few special items in our Q1 results, which we

Speaker 2

All right. Well, thank you, Ryan. Hello, everybody. Thank you for joining us today. Well, the Q1 was a tale of 2 really different environments.

Speaker 2

As expected, we incurred losses in January February due to the negative impacts of the Omicron variant. We anticipated travel demand would rebound in March and we were Pleasantly surprised at how quickly it bounced back and the extent to which demand and bookings surged. While we reported a Q1 loss, we were solidly profitable in March, Actually, not too far off of March 20 nineteen's profit, and while modest, I'm very pleased that first quarter unit revenues increased as compared That was the first quarterly increase since the onset of the pandemic. So but for the Omicron impact, We estimate that we would have been profitable for the Q1. In the Q1, total operating revenues were 91% restored to for Q2, which indicate operating revenues will be fully restored to quarterly record levels on stronger leisure and business demand.

Speaker 2

Our revenue initiatives continue to roll out, and Andrew will cover our new fare product in more detail, but we look forward to launching that this quarter getting another one of our revenue initiatives in place and producing value. We will have another meaningful fuel hedge gain in Q2 And we remain well protected with our fuel hedge portfolio in the second half of this year. Despite higher than normal unit cost inflation And productivity drags from underutilizing our assets, we expect to be solidly profitable for Q2 through Q4 And for the full year 2022, we are currently forecasting a healthy profit for Q2 with solid operating margins. Now, of course, this is based on our current outlook and barring any unforeseen material events, such as another wave that would impact or temporarily slow our progress. But we see no signs of that at this point.

Speaker 2

And it just goes to show the power of our business model and how well our people are managing through a very difficult environment. Our March results and our current outlook for Q2 represent tremendous progress in our recovery. Even if we aren't fully expected to be optimized with our network Fully restored until the end of next year. I'm just really, really proud of our people for their progress to date. We've come a long way, and I'm just very thankful for their constant resilience.

Speaker 2

Now key to our recovery is our continued hiring progress, and we now plan to hire and add over 10,000 new employees to the Southwest family this year, And that's net of expected attrition. By the end of this month, we will have welcomed roughly 6,500 new employees in 2022, That's 5,000 net of attrition. And I'm just really pleased with our hiring progress. We continue to work through lower available staffing And training constraints to keep pace with rebounding travel demand, and we recently reduced our summer flight schedules to match our Capacity guidance as we prioritize our operational reliability. I believe we have already accounted for the impact of staffing constraints And our full year 2022 guidance on capacity of down 4% versus 2019, but of course, we need to trim more capacity, we certainly I can, but I'm cautiously optimistic that we can get to a good balance of headcount to operate our planned flight schedules for the remainder of the year, while setting ourselves up We're resuming more material growth in 2023.

Speaker 2

You've heard me mention these things before, but we remain focused on a few key priorities for this year. 1st, getting properly staffed and focusing on our people second, making progress toward our historic operational reliability and efficiency 3rd, providing our legendary hospitality and 4th, returning to consistent profitability. It will take all 59,000 employees working together to execute on these focus areas and deliver a low cost, high quality product with low fares and great customer service. That's what our people are good at, and they've been good at that for 50 years, and they just do an incredible job. It's a tough environment, and they've been through a lot.

Speaker 2

I'm so grateful And what they do each and every day. Together, we're making tremendous progress to put this pandemic behind us. And while coming out of the pandemic has proven to be messy, As it was coming into the pandemic, I can assure you that we are very hard at work here at Southwest Airlines to make this company even stronger, And I remain very optimistic about our future. And with that, I will turn it over to Tammy.

Speaker 3

Thank you, Bob, and hello, everyone. First, I'd also like to thank our employees for their resilience in yet another challenging quarter impacted by the pandemic and weather disruptions. The rapid rise of the Omicron variant significantly impacted our business in January February, resulting in a first quarter net loss of $191,000,000 excluding special items. March, however, was a much different story As we experienced a rebound in demand and surge in bookings during the month, driving March operating revenues higher than March 2019. This was our 1st monthly revenue increase relative to respective 2019 levels since the pandemic began.

Speaker 3

Last month, cash sales also represented a monthly record as bookings surged for spring and summer travel. And we posted healthy double digit margins for the month of March despite the significant rise in market jet fuel prices. Needless to say, I am excited about the strong revenue trends in Q2 as Andrew will cover in more detail in a minute. Taking a look at nonfuel cost, we are tracking in line with our 2022 cost plan with Q1 CASM ex Coming in at the favorable end of our previous guidance range at 17.9% compared with Q1 2019. Thankfully, favorable airport settlements, better operational performance in March and lower than expected incentive created some end period cost relief in Q1 relative to our guidance.

Speaker 3

As we look ahead, We continue to experience unit cost pressure from operating at suboptimal productivity levels as well as higher inflationary cost pressure, primarily in salaries, wages and benefits. We are leaving our full year CASM ex guidance unchanged at 12% to 16% versus 2019 as we are still not able to fully utilize our assets achieve optimal productivity levels due primarily to staffing challenges. That said, We do expect second half twenty twenty two CASM ex growth rates relative to 2019 to ease sequentially from first half twenty twenty

Speaker 4

two. For our

Speaker 3

Q2, we currently estimate CASM ex to increase in the range of 14% to 18% when compared with 2019 levels. Roughly half of that increase is a result of continued inflationary pressures In both labor and airport rates, which now includes labor rate increases across all work groups As best as we can estimate at this point, given the current labor market and our current outlook for profitability this year. We estimate the incremental labor accruals to be roughly a point to CASM ex. The remaining half of the CASM ex increase It's attributable to headwinds from operating at suboptimal capacity and productivity levels. Our outlook for Q2 capacity remains down approximately 7% from 2019 levels And while our moderated capacity plans are designed to provide operational relief given our current available staffing challenges, It continues to create unit cost headwinds, particularly with a shorter stage length as we add back Higher frequency business routes, which Andrew will speak to shortly.

Speaker 3

Turning to fuel, Market prices have been on a rise and highly volatile given the current geopolitical climate. Our fuel hedge is providing excellent protection Against rising energy prices and significantly offset the market price increase in jet fuel in Q1 2022. We are at 63% hedged for 2nd quarter and estimate our 2nd quarter fuel price to be in the 3.05 To $3.15 per gallon range, which is roughly $0.80 higher than our first quarter fuel price. That includes an estimated $0.61 of hedging gain, which represents cost savings of more than 2 And $90,000,000 in Q2 alone. Of course, this is a snapshot of our fuel guidance at a point in time And market oil prices and heating crack have been moving pretty materially on a daily basis.

Speaker 3

By the way, the current energy environment is exactly why we hedge fuel. Even though the hedging gains in 2nd quarter While fully offset the rise in market fuel cost, our hedging portfolio is providing meaningful cost mitigation. The fair market value of our fuel hedge in 2022 is estimated at roughly $1,000,000,000 Turning to our fleet. We recently adjusted our order book with Boeing to replace the majority of our -seven MAX firm orders with -eight MAX I won't reiterate all the details, but will note a few key highlights. Our current order book now reflects 20 one-seven firm orders, 81-eight firm orders and 12 remaining MAX options in 2022.

Speaker 3

If you recall from our previous order book as of the end of last year, we had no -eight from orders in 2022. While we are eager to bring the -seven aircraft into our fleet and remain confident in the aircraft, we simply wanted to go ahead And rebound our 2022 order book to provide more near term certainty given the ongoing certification process for the -seven. We are grateful for the flexibility we have in our order book to ship between -7s and -8s and our plans This year to take 114 aircraft deliveries and retire 28-seven 100 remains unchanged. While our CapEx guidance assumes we will exercise the remaining 12 options this year, we maintain flexibility to evaluate that intention as decision points arise each month. And given that the certification For the -seven has been going on for some time, we contemplated the possibility of taking some -8s this year And to our 2022 CapEx estimate.

Speaker 3

Therefore, our CapEx guidance of approximately $5,000,000,000 Remains unchanged. As I have mentioned before, we don't expect to incur a CASM ex penalty from holding on to extra aircraft versus accelerating -seven hundred retirements, while our capacity remains temporarily moderated. So from an economic standpoint, we may not decide to accelerate further This year despite carrying more aircraft in our fleet than needed for current 2022 capacity plans. We are also mindful of aircraft and growth needs for 2023 as we plan to continue restoring the network. On our balance sheet, we ended the quarter with cash and short term investments of $15,700,000,000 Our leverage is at a very manageable 56 And we continue to pay down and retire debt as opportunities arise as we have done with a portion of our convertible debt.

Speaker 3

We continue to be the only U. S. Airline with an investment grade rating by all three rating agencies, which remains one of our key competitive advantages. In closing, our Q2 financial trends are strong, Barring any unforeseen events or trend changes, we expect solid second quarter profits and operating margins. Our financial position and ample liquidity allows us to continue investing for the future, so that we are ready to resume growth As soon as we are first able to restore our network and get staffing to desired levels, and we intend to grow.

Speaker 3

We are a growth airline. We have great momentum, and we are excited about the ample opportunities in front of us. With that, I will turn it over to Andrew.

Speaker 5

Thank you, Tammy. I will provide some additional color on our revenue trends and outlook and point you to our earnings release for more detail. Looking first at Q1, January February passenger revenues incurred 2 main negative impacts. First, $380,000,000 due to softness in bookings and elevated passenger cancellations attributable to the Omicron variant And second, an additional $50,000,000 in January due to flight cancellations related to available staffing challenges, which remained worse by winter weather. However, we experienced a very different dynamic in March as we saw a surge in leisure travel and bookings, along with a significant pickup in close end demand.

Speaker 5

The improvement in March exceeded our original expectations for both leisure and business demand. March managed business revenues were down 36% versus March 2019 compared to our latest guidance of down 40% And put us back on a nice improvement trajectory from pre omicron performance in December of 2021. In fact, Managed business revenues improved 34 points from January's down 70% to March's down 36%. We experienced higher managed business passengers and most notably March marked the 1st month since the pandemic began where managed business fares Surpassed 2019 levels. Our revenue initiatives performed well during Q1, despite the omicron impact.

Speaker 5

We saw benefits from our GDS initiative, given the significant bounce back of business demand in March. We also had a strong performance from our loyalty program, With other revenue up 43% versus Q1 2019, which was assisted by incremental revenue from our new co brand credit card agreement with Chase. A nice attribute from our new co brand credit card agreement is that the revenue stream is rather insulated or diversified And the passenger revenue impact from COVID waves, as long as consumers spending remains healthy. In Q1 retail sales, Spin per cardholder and overall portfolio size continue to grow versus 2019. Now our new market performance was impacted by the omicron variant to a greater degree than the rest of our network.

Speaker 5

While Hawaii growth markets underperformed expectations slightly in March, Largely driven by the COVID protocols that have since been lifted, we are encouraged by the strong demand we saw in March and heading into the summer months for Hawaii. We continue to adjust our Hawaii offering to best suit our customers' needs and allocate more of our capacity to business markets, And this can be seen in the changes beginning in June. In non Hawaii new markets, we saw a modest outperformance versus expectations Due to the sharp uptick in travel demand in March, which followed the general trend of the rest of the network of broad based improvement across all geographies. All told for Q1, we came in at the midpoint of our operating revenue guidance at down 9%. While the omicron impact was higher than anticipated in January February, The improvement in March outperformed our expectations and we are very pleased with recent revenue trends.

Speaker 5

Looking at Q2, the positive momentum continues and we're expecting operating revenues to turn positive versus Q2 2019 Estimated to be up 8% to 12% despite capacity below 2019 levels and managed business revenues yet to fully recover. As we are already operating at pre pandemic load factors in the low to mid 80% range, our revenue improvement outlook is primarily due to higher passenger yields, Both leisure and business. We expect another solid contribution from our revenue initiatives, in particular with GDS, as managed business revenues are expected to improve sequentially. April managed business revenues are expected to be down 30% versus April 2019, and We expect to see sequential improvement in May June. We also expect our new fare product to roll out this quarter, which we call Wanna Getaway Plus.

Speaker 5

Having 4 fare columns displayed in our website is a natural evolution that is geared toward offering customers the attributes they want to choose while not Taking anything away. The general attributes of One Gateway Plus are the introduction of transferable flight credits, More flexibility with same day confirmed changes standby benefits and a higher earned multiple for Rapid War Points. At the same time, our anytime fares will gain the Express fly by security lane and priority check-in perks where available as well as early bird check-in benefits. We believe this will better represent the product offerings that our customers want and are willing to pay for and it has the added benefit of generating incremental revenue for the company. Given the timing of the rollout, we aren't expecting a material benefit in Q2, but we are expecting a solid revenue contribution in the second half twenty twenty two.

Speaker 5

Lastly, on our revenue initiatives, our revenue management system continues its progressive rollout. Before I wrap up, I want to share some color on our capacity and published flight schedules. We continue to expect our Q2 capacity to decline 7% versus Q2 twenty Team, while this is a 2 point sequential increase from Q1, we expect a 5 point sequential decrease in stage length from Q1 as we establish trips in shorter haul markets aimed at business travel and in an effort to provide more recoverability to the operation with more frequencies. We have now adjusted our published flight schedules through Labor Day to match flight activity to our 2022 capacity guidance. In terms of network restoration, we will be roughly 80% restored by June based on trips.

Speaker 5

And based on our Full year capacity guidance of down 4% versus 2019, we expect to be roughly 85% restored by December. As we have discussed, it will take us some time to rebuild the network that we want given current staffing constraints. We will continue to expect to restore the vast majority of our network by the end of 2023. And with that, I will turn it over to Mike.

Speaker 6

Well, thank you, Andrew, and hello, everyone. On our last earnings call, I walked through the availability of staffing and our challenges that we faced due to the Omicron variant And the roughly 5,000 employees that became sick in the 1st 3 weeks of January. As a result of that, we reinstated An incentive pay program that ran from January 9 through February 8. The incentive pay program worked as designed. Our employees responded very well.

Speaker 6

They picked up extra shifts and helped us cover the flight schedule and those employees out sick. While the program cost us $127,000,000 it afforded us an opportunity to more quickly stabilize the operation. In the 1st 7 days of January, our on time performance was 41.2%. From January 8 through mid February, That on time performance jumped to 85.1%. That put us number 2 for on time performance in the industry.

Speaker 6

And that was a monumental feat after the start to the year that we had. What I think is most impressive about our people is that they not only stepped up To cover the extra shifts during what can only be described as an omicron crisis, but they put Southwest Airlines in the top spot for customer satisfaction in January for the DOT's air travel consumer report, and we remained in the top spot among marketing in February as well. Our people have been through a lot these last few years, and just to accomplish that in the 1st 2 months of this year It's just superb. And my sincere thanks to everyone out there on the front line who's working hard for Southwest, and they're taking great care of our customers. I am very pleased that our employees and our customers can now make a decision for themselves as to whether or not they want to wear a mask on board our aircraft.

Speaker 6

I know that enforcing mass compliance has been a tough endeavor for our employees for a long time now, and they deserve a break. The science supports the mask mandate expiring, so great news on that front. Relative to early January, Our operational performance in February March improved. Our February flight levels stayed relatively low at 3,300 flights per day, And then they increased to roughly 3,400 flights a day in March. And as Andrew mentioned, travel demand in March surged with load factors in the mid-80s.

Speaker 6

We anticipated a ramp up in demand, but we did run into a few challenges during March related to weather and ATC delay programs. In mid March, we had winter storm Quinlan that impacted many of our mid Atlantic and Northeast airports. And then we also had a line of severe thunder Storms have stretched from the Gulf of Mexico and across Florida, and that resulted in air traffic management programs, operational adjustments And then resulting flight cancellations. In early April, we experienced a technology outage that caused similar issues, and it took a couple of days to work through that event. We had a tough time during our regular operations given our center network and some of the unanticipated air traffic control slowdowns.

Speaker 6

The good news is that we've made some adjustments to our network starting this month that we believe will help, and I'll speak to them more shortly. On the staffing front, we continue to aggressively hire. And as Bob mentioned, we're now targeting over 10,000 new employees this year, net of attrition. The majority of this hiring is in the operations group, and it's imperative that we get properly staffed. The goal with the majority of these hires is to cover our published flight And our capacity plans this year, but also we intend to build some buffer so that we're ready to resume growth in the near future And get ahead of our spring summer 2023 staffing needs.

Speaker 6

We're making great progress with hiring, but we have thousands of employees that are in training and Still gaining proficiency. So it just takes time before we're going to have a full complement of frontline employees that are on the job versus either being a new hire and still in the training pipeline. So we've made trade offs with lower capacity in order to support operational reliability. And the combination of this and the continued hiring should help us as we move into the summer. On behavior trends and hours worked per employee, We continue to lag pre pandemic metrics.

Speaker 6

We're still experiencing higher sick time, more employees on inactive status And overall staffing availability challenges. We've also had some constraints on training throughput, but we believe we have a path to get the sufficient headcount in our key operational groups this year. It remains a work in progress, and it's one of our top priorities. Until then, our capacity will remain muted versus the aircraft that we would like to return to service to accelerate the network restoration. And lastly, Andrew mentioned that we expect our average stage length to decrease by about 5 points from the Q1 to the Q2 And that should help us with our operational recoverability in Q2.

Speaker 6

We're adding short haul flights in the business oriented markets. That provides us more options when we have weather or ATC delays. We won't snap back to a historical network composition overnight, But I believe that our operational performance will continue to improve as we restore the network through the end of next year. That should provide the foundation to recapture better operating leverage, and we're also working on other initiatives to improve overall efficiency and return to our historic levels of productivity. And so with that, Ryan, I'll turn it back over to you.

Speaker 1

Thank you, Mike. I believe we have analysts queued up for

Speaker 7

questions.

Speaker 1

So Chad, please go ahead and begin our analyst Q and A.

Operator

Thank you. We will now begin the question and answer session. And the first question will come from Ravi Shanker with Morgan Stanley. Please go ahead.

Speaker 7

Thank you. Good afternoon, everyone. A quick question on the corporate side. Can you just give us a little more detail on what do you expect the corporate ramp trajectory to be through the rest of the year and And also we're hearing from some corporate accounts that they expect a fair bit of competition in the second half of this year going into 2023 When it comes to negotiating, kind of just corporate travel agreements, just given that we're kind of coming off This trough and everyone's going to be fighting for slice of the pie, do you have any visibility into that or not? Thank you.

Speaker 2

Hey, Robbie, it's Bob. I'll start and then I'll let Andrew chime in on more of the specifics. I think we While the our managed business recovery has obviously lagged leisure, I mean leisure is well ahead of 2019 at this point. We've seen a really robust recovery. So I think we in March, we were down about 36% compared to 2019, but that's a 34 Point recovery from January, which is just a really significant trend.

Speaker 2

It looks like April is going to be about 30, down 30, and I would expect that From what we can see, the trends continue to improve through May and then through June. And while it's a long ways away, you never it's all forecast. I wouldn't put it out of the realm of possibility that we could have managed business revenues fully recovered to 2019 levels by the end of this year. But I'll let Andrew add some details as well. So Andrew?

Speaker 5

Yes. Thanks, Bob, the only thing I'd add to that initial macro point of view is if you kind of go back further than January and kind of April of last year when Corporates really started traveling again. We have a nice strong trend line, but it has some ups and downs with COVID waves. And so now that we're kind of out of Omicron and seeing a sharp comeback, it's still on that same trajectory, which leads one to believe that it will get to what Bob said. So we have pretty good confidence And this growth because it's grown and rebound strongly through at least 2 COVID waves so far.

Speaker 5

So that's good news. And with regard to corporate contracts, A lot of them have become stale because there was really a lot to renegotiate during the pandemic. So we fully expect there will be kind of a big season of renewal of contracts in the fall, as you mentioned. And given that during the period from pre pandemic to now, we've greatly transformed Our offering to manage business through both the GDS we've talked about, but also ramping up our Southwest business team with the tools for TMCs and CTMs, as well as more account managers, we think that kind of broad based renewal is actually Beneficial for us in our play for a bigger share of this pie. So we're encouraged by the renewal season coming up this fall.

Speaker 7

Very helpful. Thank you.

Operator

And the next question will be from Duane Pfennigwerth with Evercore ISI. Please go ahead.

Speaker 8

Hey, thanks for the time. Maybe one for Andrew, sorry to stay with you. Just regarding the strong Implied yield improvement in 2Q, if we assume a stable macro backdrop, so stable economy, stable fuel, How do you think about the progression of yields for the balance of the year? I'm not asking for explicit guidance or anything like that, but If the economy does not change and fuel does not change, is there anything you're thinking about which would cause yields to change, seasonality or otherwise?

Speaker 5

What we did, the economy printout today wasn't a positive one. So I don't know how long we can say the economy doesn't change, But at least consumer spending was still strong in that and the underlying details of that. So I think the broader picture though is That demand for air travel, especially for leisure is above 2019 levels as Bob mentioned. However, supply is not and we don't see a pathway yet for supply to get back to 2019 levels until much later this year. So a backdrop of demand exceeding supply It's what you can give broad based price increases that we've seen mostly from the lack of discount fares versus Kind of, you know, fare structures being increased.

Speaker 5

So I think that's a tailwind we have going on. Now the wildcard is the economy And how what that does over the near term. Certainly, there are headwinds with Fed increases and such like that, but the underlying consumer spending seems to be robust. So I feel like we have Pretty good confidence in the kind of continued demand outpacing supply, at least for our guidance range. Does that answer your question?

Speaker 8

That's helpful. Yes, I couldn't get you to completely agree to no change on macro, but I think that's helpful color. Just as a follow-up, Is there any way to think about yields on this 2019 baseline on a same store basis? I mean, I know The network looks very different than it did back then and you alluded to that. But how much of this RASM expansion is the result of not Flying lower marginal RASM routes because of your constraints right now?

Speaker 8

And thanks for taking the questions.

Speaker 5

It's hard to generalize because we have the network is different and you have demand being different of leisure and business being separated by so much. And I did mention that business fairs are up versus 2019. So I think you can say broad based Demand exceeds supply is the driver regardless of the route structure. So now you'll still have variations in your route by route, But I think it's still a broad based demand strength and a broad based supply insufficiency is what's behind all this. Getting kind of a little more detailed, I think doesn't really show you any different trends than that kind of broad based trend I talked about.

Speaker 8

Thank you.

Speaker 2

And Duane, I would just add the same thing. You've got this set up in the Q2 here. Again, it's all a forecast where You have overall operating revenue performance up 8% to 12% on capacity down 7%. I mean, so there's a significant amount of strength And that's still on the backs of your managed business being down, as I talked about in April, sort of in the 30% range. The other piece of this too is as we restore our network, there is and we've got 125 aircraft that need to put into restoring the network this year and next year.

Speaker 2

That all comes on at lower than normal risk in terms of the typical Yield drags you might see as you add new cities or new routes because these are routes that we've had before They're connecting cities that we have a presence in. So I think they come on without those penalties. At the same time, again, if Transold, you're restoring business at a faster rate, which also helps on the yield side. So Now who knows what's going to happen to the macro economy. There's a lot of different things that can occur out there with the Fed moves and potential for recession.

Speaker 2

And I think what's helpful there is that despite all of that, consumer savings is still more than double what it was coming into the pandemic. So there's a lot of consumer strength out there in terms of what they've saved and what could be spent. Anyways, hopefully that helps a bit.

Speaker 8

It does. Appreciate your time.

Operator

Thank you. And the next question will be from Brandon Oglenski from Barclays. Please go ahead.

Speaker 9

Hey, good afternoon everyone and thank you for taking my question. Maybe this one is for Bob or Mike, but can you guys just help us understand where The constraints are right now on operating more capacity because I hear you that you need to restore the network to pre pandemic levels, but Your stage length is only down maybe 2% here. Your FTEs look like they're almost back to 2019 levels Now maybe with a lot more new folks that need to be trained up, but is this really a pilot issue? Are you guys having trouble filling trainee classes? Can you speak to some of the constraints and what it's going to take to get back to where you want to be?

Speaker 2

Yes, Brandon, let me take a shot and then I'll yes, Mike can add a lot of detail there. I think we are hiring progress since we restarted in the fall has just been tremendous. We've hired thousands of folks. We're now projecting that we'll hire over 10,000 this year. Obviously, there's some attrition in there as well.

Speaker 2

But I'm just really proud of Our people department and our hiring teams for making that happen from literally a dead start last fall. If you look at that in aggregate, we are still Today, below our total FCE headcount in 2019. So we haven't caught 2019 yet. It's just one basic point. The other is as you think about just all the folks that we've hired overall, they're not all working We're working proficiently yet.

Speaker 2

So we've hired roughly 8,000 in that time But 1600 in typical month right now, they're in training. So they're not out there on the front line. They're not working. So They're in training, so they don't really add to our ability to fly and add capacity. If you look at the remainder, we have something on the order of over 15 Yes, they're not efficient.

Speaker 2

They're still learning their positions. So that comes into account as you think about our ability to restore capacity. Now when you get to the where are you most constrained, definitely it's pilots. And to some extent, it's our flight instructors Trainer pilots. We had several 1,000 pilots go out on long term leaves with COVID.

Speaker 2

We had another 640, I think, Take early retirements. Job 1 was to get everybody that was out on leave back trained and flying, and we just got that completed literally in February of this year. And then job 2 is to replace the pilots that took early retirement, and we're just over half the way That may be 2 thirds. So we haven't caught that back up yet as well. So I would tell you that, yes, the chief constraint right now is on the pilot side.

Speaker 2

Mike, please add some more detail.

Speaker 6

Yes. Brandon, I think most of

Speaker 2

the other work groups that we

Speaker 6

hire It really is just a one step process. We go out, we find the people, we bring them in, we interview. For the pilots, it really is for us, it's a Two step process. Step number 1 is making sure that we have flight instructors in place that can so we can get to our maximum capacity of flight training. And so that's where we're focused at this point in time is making sure that the Slots that we have for training are focused on flight instructors, so we can have we can get up to maximum capacity in terms of our hiring toward the end of this year and into next year.

Speaker 6

So that's step number 1. And then in terms of access to pilots, we still have we're An airline that pilots love to come to, we have a long history of success here. And so we're able to go fill up our classes And have access to the pilots at least certainly here in the next year or 2.

Speaker 7

Thank you.

Operator

The next question will be from Helane Becker from Cowen. Please go ahead.

Speaker 10

For your time. Just two questions. The first question is on the crew members who worked extra hours. Are you Concerned that as the year goes on, especially at the end for the peak, there won't be enough crew hours For them to fly during the busy year end season?

Speaker 6

Yes. Helane, are you talking about pilots running up against There are block hour limits for the year?

Speaker 11

Yes.

Speaker 6

Yes. I don't think that we're at risk of that at all. We've got Our schedule adjusted for the capacity that we have, we'll see more pilots coming online in the second half of the year. And so I don't think we'll have an issue with that.

Speaker 10

Okay, that's very helpful. Thank you. And then maybe Tammy one for you since you've been so quiet during On cash and liquidity, how are you thinking about bringing cash Down to whatever your new minimum liquidity or cash level is going forward?

Speaker 3

Yes. Thanks for the question, Helane. Yes, obviously our liquidity It's much higher than where it has been historically. And if we have learned anything through this pandemic recovery, It can be choppy, but we are making a really great progress But as is evidenced in the commentary that we shared with you on our second quarter outlook. So we're making really great Progress there and when you combine that with our fuel hedge protection, our very encouraged with where we're So all that to say is I think we're really well positioned.

Speaker 3

So, we want to get comfortably past the pandemic. Obviously, we want to have Plenty of cash reserves to invest in the business and we've shared all of that with you. But we do want to work Down our cash levels over time. I've shared with you in the past that kind of Right now we have an agreement to be roughly call it $10,000,000,000 in cash And now going forward, we believe we can continue to bring that Now can we get back to historical? Should we get back to historical levels, which were probably in that, call it, $2,000,000,000 to $3,000,000,000 range, it may need to be higher than that.

Speaker 3

So we're going to work our way through that. Obviously, first order of business is to get back to solid profitability. So looking good there And we want to invest in the business and then obviously we want to get back to shareholder returns. And we certainly have a desire to reinstate our dividend and as we go here, As always, we'll consider share repurchases as those feel appropriate. And obviously, that will be based on, As always, free cash flow and just profitability levels.

Speaker 3

So kind of a long winded answer, Helane, but clearly we want to get back on track to what we were delivering pre pandemic and that obviously starts with Adequate returns on capital and that starts with profits. So I think we're making really good progress here and we want to work our way back to those pre pandemic levels.

Speaker 10

Thank you.

Operator

Thank you. And the next question will be from Savi Syth with Raymond James. Please go ahead.

Speaker 12

Thank you. Good afternoon. Just a question on the stage lens, you mentioned kind of Five points of contraction here in this quarter. And I would assume as a lot of those other markets that you're adding are short haul as well that that might continue to contract. Any The color you can give us over the next few quarters on how that will trend or was there something kind of unique about the network restoration this quarter that had a bigger jump than you expect Going forward.

Speaker 2

Yes, Avi, good to talk to you. I'll give a start, then let Andrew obviously weigh in from a network perspective. But As we redesigned the network here to deal with the pandemic and it was obvious that leisure demand was going to come back Faster than business, we oriented ourselves in that direction. So we flew longer, we had differences in places like Intra California. And now that business demand is coming back, you want to go you want the network position to take advantage of that.

Speaker 2

So really it's simply adding Back more short haul to really build begin to build the network that is aligned around the business demand that we anticipate. The good thing is in addition to meeting the business demand, that additional depth in the network also helps us with our recoverability for our customers. So it With network depth and when we have regular operations, it's extremely helpful. Andrew can talk to sort of thinking forward sequentially, does that continue, but it is a big shift, a 5 point Change quarter over quarter and the stage length is significant. You didn't ask this, but it is a piece of our It's a piece of our cost story here in the second quarter with costs up, our CASM ex projection Up 14% to 18%.

Speaker 2

Sort of half of that is labor rates, airport, those kinds of things, sort of typical inflation. The other half is sort of inefficiency in the system, plus the drag caused by this increase And this decrease in stage length from Q1 to Q2 is having a material impact as well. But Andrew, if you want to just add some color Just the this and then where we are going forward in terms of stage?

Speaker 5

Yes, certainly. If you kind of break down Our network in the short, medium and long hauls, what's really going on here is we're adding back lots of short haul and even more medium haul versus 2019 in order to kind of get restore network. It also happens to be kind of business oriented as we see business demand recovering. It also, as Mike mentioned, helps the network, all things being equal, for recoverability. So really it's a case of what's missing and that's the long hauls that will probably be the last to be restored because they will be attractive to customers and they do well financially, They don't add as much to kind of network resiliency or kind of business travel recovery.

Speaker 5

And so we kind of prioritize Oceania. And so you'll see stage length For a period of time, be down as a result of this and then towards the end of restoration, you should expect it to start to come back up a little bit as those long hauls get restored.

Speaker 12

That's helpful. Is there kind of a general on that just a stage lamp level that You think you'll get back to when it's fully restored?

Speaker 5

Yes. I think as you get we said we'd be largely restored by the end of next year and then we get towards the end of next year, success would be having A lot of those network metrics look very, very similar to just before the pandemic. And so that's where we want to be. At step 4, we now have these new things we added during the pandemic The overall enhanced and the attractiveness of the network, but the composition of short and even long and the kind of what's Point to point versus connecting, all that goes back to the network we loved before the pandemic.

Speaker 12

And can I ask a quick follow-up on the pilot responses earlier? I was just curious in the opening remarks, you mentioned setting up for more material growth in 2023. Just curious like how because it seems like Again, for Southwest, hiring is not the issue, clearly an attractive destination, but training class sizes and that bottleneck seems to be on Training side, so when you talk about kind of material growth next year, I mean, are you expecting your training class sizes to get bigger or like what's going to change That helps you get back to growth next year, especially on the pilot side?

Speaker 6

Yes. Well, Savi, we've got a 26 bay Training facility out there currently we have 23 of those bays filled. We're going to have 3 additional simulators here coming on line Later this year and they'll be ready and fully operational for next year. So we have that capacity growth there. And then as I said, if we can get our instructor level up to our targeted levels, We'll have plenty of capacity in terms of our training to produce more pilots next year, Even balancing out our recurrent training with the new hire training and the upgrade training.

Speaker 12

That's helpful. Thank you.

Operator

Thank you. And the next question will be from Myles Walton from UBS. Please go ahead.

Speaker 13

Good afternoon. I don't know who it's for, but I'll pose it anyway. You had really good growth in ATL, maybe Just 10% below 1Q 2019 levels, but the big 3 at 50% to 100% higher ATL growth in the Q1 This year versus 2019. And I guess my theory is that it's because of the policy change on change fees, but curious if you have a perspective

Speaker 3

Policy change on change fees at all because we have not really changed that.

Speaker 13

Sorry, I meant their change fee is changing. Yes.

Speaker 3

So, no, I really when we've been sharing the demand environment is just obviously Really strong. We had a surge in bookings here in March. So just really solid robust demand and we're seeing that as we've already shared On both the Leader Shot side as well as the corporate side. So I would attribute that just more to Strong

Speaker 6

bookings.

Speaker 13

Okay. Okay. Yes, I was really getting at the delta between their outperformance and your in line performance, but I'll take it up offline. And just a clarification on the 10,000 hiring versus the 8,000 previously. Can you just add color to As well as if there's a difference in composition versus the January comments?

Speaker 2

No, I think it's just If you look at our ability to train, so training capacity has come up just here a little bit. And so really that's the There's no other significant change. We want it's going to take into 2023 To restore our network, deep into 2023 and to fly all of our aircraft. And so the sooner we can get there, the better. And so we've As I mentioned before, I'm just really proud of our hiring folks because we went from a dead start to hiring at these incredible sort of 1500 a month kind of levels And so really it's just a boost in our ability To hire versus we have somehow changed our target hiring.

Speaker 13

Okay. Thank you.

Speaker 2

You're welcome.

Operator

The next question is from Catherine O'Brien from Goldman Sachs. Please go ahead.

Speaker 14

Hey, everyone. Thanks so much for the time. Maybe just staying on the labor front, Labor availability has been a major theme this quarter. It seems like you guys got ahead of the curve realigning your outlook for this year. So Asking a longer term one, when we get beyond 2023, I know there'll be some lumpiness of changes to this year, but Beyond 2023, is your 5 year guidance for mid single digit capacity growth and low single digit unit cost still doable In your view based on what you can see for your own hiring pipeline and then what you're hearing from airports and your 3rd party vendors?

Speaker 2

Yes, I would say that there's a lot of choppiness out there. So we've you've got Unknowns in the workforce, who's going to return, what's driving some of the folks who were out of the workforce, you have inflation concerns, you have You got Fed policy, you have this overhang of a potential recession. So there's a lot of things proeconomy, which obviously drives the workforce, things like that. And we're not in control of that and the projections are a little bit all over the map at this I would just tell you that while you do have to work harder, we have not had an issue hiring Quality, I mean really good folks. I spent a lot of time with our new hires.

Speaker 2

I'm proud to bring And the Southwest Airlines, because they're exactly the kind of people that we want here. I think we're going to have to continue to work hard And at Adapt Our Hiring, we've all had to speed up the processes. We've had to use Channels and techniques that we didn't before like social media. We've had to do instant interview, instant offer, all that. But I think beyond that, I don't see as you look beyond 2022, 2023 that somehow the labor market becomes A constraint to what we want to do, what we want to grow.

Speaker 2

Job number 1 is use all of our aircraft, Fully restore our network and then beyond that we've got aircraft coming. We have lots and lots of opportunities. You saw also in the 18 cities. We have a lot of

Speaker 3

The only thing I would add to that is just in terms of our 5 year targets, I agree. I do think we were out ahead. We were certainly expecting Inflationary pressures this year and that's certainly playing out here as we go. But I think we all have confidence in our plan and so nothing that we're sharing with you today would change Any of the 5 year targets that we shared with you back at Investor Day.

Speaker 14

Okay, that's great. And then maybe just for my next one, You already walked through how you're moving around to MAX-7s and MAX-8s this year just given the status of the -seven. I guess just

Speaker 3

like what makes you comfortable with taking more

Speaker 14

of that larger variant closer in? Is it the demand uptick? And then what's your willingness to keep taking -eight closer in just pending the -seven certification? And then maybe just along with that, are there any moving pieces we should think about on CapEx here as you move to larger gauge? Or given that this is more of like a Boeing FAA issue, do you keep your -seven price in or maybe even get some like remuneration just given the changes to your order book?

Speaker 14

Sorry, it's a bit of a long run, but thank you so much.

Speaker 3

No, I think I followed what you're trying to add there. But just in terms of the Overall mix of aircraft, we really do have a lot of flexibility with the network as we've And sharing here today, we're hard at work to restore our network, and That really does call for a mix of aircraft. So we feel really good about taking the MAX-8s. We Yes, as we shared today, we firmed up 81 of those for this year. We'll just continue to monitor that as we go and I don't really see any issues even into next year from a network So we'll continue to work with Boeing to firm up Whether or not they are MAX 7s or MAX 8s, but right now we're delighted with our order book and Certainly very cost efficient.

Speaker 3

So, no, very pleased and don't really we have a lot of optionality and I think we can manage that really Well, here as we restore our network and resume growth.

Speaker 6

Hey, Catherine. The way I've just thought about it is, Just pretty simply is we have 2 big objectives with the fleet. We want to modernize the fleet and then We need more shells to restore the network. And at the end of the day, I think we're comfortable anywhere Between the 8s and the 7s in a 60 to 40 split one way or the other. So it might be a little choppy here as Boeing It's the MAX 7 certified.

Speaker 6

But as you plan that out over the next couple of years, we're going to be in that range and we don't want to give up Delivery slots in the near term because we because the modernization and the restoration are important to us.

Speaker 14

Totally makes sense. Thanks so much for the time.

Operator

The next question is from Mike Linenberg from Deutsche Bank. Please go ahead.

Speaker 15

Yes. Hey, good afternoon everyone. Quick one here for Andrew. Can you just walk through some of the considerations what drove So do you thinking in expanding the Hawaiian inter island operation? And as a consequence of that, are you going to have to establish Either a pilot and or flight attendant domicile there?

Speaker 5

I'll start with the last part first. Usually we have much larger operations before we start establishing domiciles. Secondly, as I referred to in my Remarks, we kind of restructured Hawaii both the summer and the fall. Part of that was reallocating more capacity to business market As a robust return. And then for kind of customer preference, we've done some changes to our Mainland Hawaii line, which is mostly about how we take the connectivity we have, because it's mostly point to point with some connections on top of it.

Speaker 5

We structured We'd like to have those connections take place on the mainland. And then for the ones that places where we want to have gateways that rely mostly kind of origin, Then we will have those connections happen to neighbor islands in Hawaii. So as a consequence of that, we have less flying from the mainland to Hawaii And then more flying between the islands. It also has a great benefit of having some time of day appeal Because our previous frequencies did not allow for kind of reliable day trips for business travelers in the islands. If you think about Your business travel on Oahu with the largest population, you're going to Maui, there's very nice hotels in Maui, but there's not a business hotel.

Speaker 5

So you have to get back that night. And so the service pattern has to allow for the early morning departures and the evening returns. And so the increased frequency count also appeals to them. So It achieves multiple objectives and it's part of that broader restructuring of a reduction of about 20% in Mainland Hawaii flying as part of that.

Speaker 15

Okay. That's super helpful. And then just quick one to just Bob or Mike on the 10,000 up from the 8,000. Bob, as I recall a few months back, You sort of hinted that it's not just $8,000 this year, it feels like it's probably going to be $8,000 for several years. So the way we think about it, is it 10,000 this year and you're getting ahead of next year and therefore next year you may be looking to only hire 6,000 on a net basis And what in round numbers, how many pilots this year and next year?

Speaker 15

I know you said that you're going to replace 640 Pilots who had early retired, but I believe your natural attrition is probably several 100 pilots per year. So what are we looking at For this year in pilots and maybe even 2023? Thank you.

Speaker 2

You bet. There's a lot in that question. But I think There are really 2 things happening in hiring. Number 1 is to catch us up to where we need to be to our And network restoration, as I mentioned before, we're still below just in total, we're below our 2019 headcount Still and we had as also mentioned, we have a large number of the new our new employees, so they count in that number that they're either still in training Or they are gaining proficiency. So in my mind, it's 6 months, 9 months, a year before They're fully proficient as a longer term employee.

Speaker 2

So Obviously, we've got to catch up. Number 2, we want to get a bit ahead here because we've got a lot we've got 114 aircraft coming in this year. We have 90 and then net, obviously some retirements next It's going to take the $125,000,000 to restore the network. So it's taking a lot to get back to where we've got our network restored. So there's a bit of that 10,000 there's part of that 10,000 that's catching up, and I think there's a part of that 10,000 that's trying to get a bit ahead.

Speaker 2

At the end of the day, goal number 1 is to fly over aircraft, restore our network, have a reliable operation. And then as we've talked about by the end of 2023, get back to our historic operational Reliability and get back to our historic productivity, which we've defined as regain 2018 productivity and efficiency. How that translates into an exact number for hiring for 2023, I can't really tell you just because it's dependent on attrition and the whole number of things. My guess, Just because the aircraft number or the deliveries that retirements are falling from 2022 to 2023, it may be reasonable to expect that 2023 hiring overall is a bit lower, but I think we just have to see again, I come back to the number one goal is Use all of our assets, fly all of our aircraft and return by the end of 2023 to our historic efficiency and reliability. On the pilot front and Mike can give you a lot more exact number than I can.

Speaker 2

What I've got in my head is the pilot hiring in 2022 here is roughly 1200 or so, Mike. So yes, if you don't mind just a little more detail on pilot.

Speaker 6

Yes. Just a couple of things. In terms of the hiring, just the way I think about that, I'd always rather go faster than slower. When we get behind on staffing, it just takes a longer time to catch up with that. And then if we can have staffing with some cushion, it gives us a better cost profile with less premium pay.

Speaker 6

It gives us a better operational recovery profile. And what if you find yourself in an overstaffed situation, you can just dial back the hiring and you can solve that pretty quickly. So just as a frame of reference, the faster that we can hire and get up to speed for us, the better. In terms of the pilot hiring, Bob is right. We've got somewhere just north of 1,000 pilots here This year, and then if we can get up to full capacity, we can produce probably close to 2,000 300 pilots next year if we needed to.

Speaker 15

Wow. Thanks for the detail. Big numbers.

Speaker 2

Thank you, Mike.

Operator

Ladies and gentlemen, we have time for one more question and that question will come from Sheila Kahyaoglu with Jefferies. Please go ahead.

Speaker 13

Hi, it's Scott on for Sheila. Just on that managed corporate down 30% in April, is there any way to maybe parse out how much of that is restoration of 2019 managed corporate revenue and how much is coming from Taking share with these new revenue initiatives you put in place?

Speaker 2

Andrew, you want to take a shot at that one?

Speaker 5

Sure, which I'm going to disappoint you as we're that's part of our overall revenue initiatives, which we gave a Instead of $1,000,000,000 to $1,500,000,000 at Investor Day and we're not decomposing those individually, you can certainly take a look And the ARC data and see our increasing composition of ARC and what that means for us getting more and more business travel, but that restoration is a combination Of what we had before and new stuff, the new stuff is really mostly share of wallet, if you will, for individual entities. So the people with whom we're doing business through the GDS, we were also doing business through our Direct Connect or Southwest Business, Swab has application before, so it's really about giving them multiple ways to purchase from us, whatever distribution channel they prefer And we're seeing we're getting more of those accounts business as we've given them this option.

Speaker 2

Yes, Scott. I think the thing is terrific is, Investor Day in December, laid out our revenue initiative plan to add $1,000,000,000 to $1,500,000,000 in EBIT in 2020 Half of that here in 2022. And so it's all things that attract business. So as Andrew said, GDS, It's new revenue management tools. It's the new fair product, which I want to get away plus it launches here shortly.

Speaker 2

It's our enhancements to our Our Raptor Rewards program and our agreement with Chase and all of those things are on track, the ones that have been delivered are performing. And so I think the main takeaway is that we laid out a really good plan and we're on track to meet those goals.

Speaker 13

Thank you.

Speaker 2

Thanks, Scott.

Speaker 1

Okay. Well, that wraps up the analyst portion of call.

Operator

Thank you. Ladies and gentlemen, we will now begin with our media portion of today's call. I'd like to first introduce Ms. Linda Rutherford, Executive Vice President, People and Communications.

Speaker 3

Thank you very much, Chad, and welcome to our media members. I think we can go ahead and get started if you would give them the instructions on how to queue up for questions.

Operator

Certainly. And looks like our first question will come from Mary Schlangenstein with Bloomberg News. Please go ahead.

Speaker 4

Hi, thanks. I just had a couple of quick questions. Bob, Southwest had said previously that they plan to hire 25,000 people over 3 years. So the 2,000 that you added Today to bring you to 10,000 for this year, do you think that just brings the 25,000 to 27,000 or do you think you still over those 3 years Would you end up adding just the 25,000?

Speaker 2

Yes. Well, Mary, I'll be completely honest with you, which was That's an old the 25 is an old number and as we were planning it, it was a very round number, just trying to think through what it takes To get our staffing fully back in place, the other thing too that to me that's a gross number, which is we always we have So I wouldn't be I don't think I would be quite so granular. I do think the if you look at the changes this year, so the 8 becoming 10, I feel comfortable with that because a lot of that was dependent at the time that we set the goal of 8. We weren't quite sure what We could ramp the hiring machine too because we again, I know I've said this three times, but we went from no hiring machine to trying to hire 1,000 And it was we were just unclear in terms of how quickly we could rebuild all those processes, and we Our folks have done a terrific job and we're all actually ahead of pace. And so that's really what's raised the 8 to the 10 in this case.

Speaker 2

Okay.

Speaker 4

And although you talked about how many pilots you hope to hire this year, a couple of months ago, you actually Trimmed your plan for hiring 1st officers because of the lack of simulator instructor or flight instructors. Has that number changed like have you had to carve out a few more despite the goal that you have of hiring over 1,000 if you had to bring that down any?

Speaker 2

I would tell you that it's moved around. Our constraints generally have moved around over time, Which group in particular is the real constraint? The constraint right now is flight instructors. We've made tremendous progress on our flight instructors and we're getting very close, but that's really what is the narrowest constraint Versus literally pilots, we have a lot of pilots in the pipeline and we could go faster if we had our Full complement of Flight Structures. Now, we recently have really invested in Speeding up that process.

Speaker 2

So probably way much way more than you want to know, but we have retention bonusing, we have Referral bonusing with our current employees, we have begun to use or thinking about how to use pilots You have recently retired to be flight instructors. So we really widened out our thinking in terms of how to grow that because Every airline is looking for flight instructors right now. But no, that's our primary constraint right now is Yes. And then

Speaker 6

and this is Mary. Mary, we do our target this year is to hire 1200 pilots. And I think we have a very reasonable path to hit that target. Just realize though that some of those pilots are going to be coming on here in late October, November, December, they'll still be training, and they won't be out on the front line flying at that point in

Operator

time. Right.

Speaker 4

Okay. And how many flight instructors do you need to add to be fully staffed?

Speaker 6

We're looking somewhere between to hit our plan 35 to 38 To exceed our plan, a little north of that, say, 50 to 60.

Speaker 4

Okay. Okay. Thank you very much.

Speaker 8

Thank you, Mary.

Operator

And the next question is from Allison Snyder with Wall Street Journal. Please go ahead.

Speaker 12

Hi. Thanks so

Speaker 14

much. I guess one question, just curious if you're seeing any issues with fuel supply at any of the airports Where you operate, it was a little bit of an issue in some places last summer and seems like the stocks are kind of low in some parts of the country now. And just curious if that's something you're anticipating or what you're doing to

Speaker 11

get ahead of it?

Speaker 2

No, Allison and Tammy I would tell you that those are really spot issues and we're really not seeing those now. The issue now of course is price And price differentials across the country and then not just the rise in underlying crude prices, but a titanic rise in the crack Which is driving up cost as well. Luckily, we're well hedged, and our hedge portfolio this year is going to add About $1,000,000,000 in value in terms of helping manage our fuel costs. But no, straight up with your Question, we aren't experiencing significant issues with fuel supply at this point. Tamyal, if you want to add anything?

Speaker 3

No, you covered it, Bob. Yes, really no So much better position than we were and yes, and even Relative to just the increase in prices as Bob already said, we've got a wonderful Fuel hedge in place. So, no, I think we're in a much better position there.

Speaker 14

Okay, thanks. And I guess one other thing I thought was interesting you mentioned about just people being sort of new and it taking time for people to kind of get ramped up and To be really proficient in their jobs, where are you seeing that kind of manifest? Is that kind of slowing things down on the maintenance front or where is that Causing issues?

Speaker 6

Allison, mostly that presents itself on the ground and in the airports. So think about you're a new ramp agent and you're out in the different conditions That you'll operate in during the course of the year, just navigating through all the transfer bags, navigating just to the The tempo of the airport operation out there, all the equipment moveage, it just takes several months for you to kind of get up to And we want to make sure that we focus Then with a lot of supervision and a lot of oversight, because it's Safety is our highest priority out there. We want to make sure that with the new hires out there, we've got all of our I's dotted And the T's crossed as we're executing through our procedures.

Operator

The next question will be from David Koenig from the Associated Press. Please go ahead.

Speaker 5

Okay. Thank you. Hi, everybody. Bob, your fares in the Q1 were up quite a bit from a year ago, although they're Only up 5% from 2019, which I suspect is less than CPI, but any concern that consumers who are seeing inflation in everything they buy and because travel Discretionary Choice, do you have any concern that general inflation and higher fares Are you going to cut into the strong demand you're seeing?

Speaker 2

Yes, Dave. Thanks for the question. There's a lot in there. And again, I just as a base, I just want to reiterate that we've not been raising fares. So we did have one modest fare increase in the Q1.

Speaker 2

I think it was $5 What's really happening is that we've got a normal fare structure and as demand is really strong, the lower in fares Close out faster and you move along the fare structure, but we've not modified our fare structure. The other thing that I would add is as we Especially as we add our Wanna Get Away Plus product and as we've managed what we call fair gaps between the columns, What you're seeing is that in a lot of cases, and Andrew could talk to this, in most cases, the prices or the differentials between Wanna Get Away and Anytime and Business Select have come down substantially. So our fares on the upper end are actually and that fare gap is actually Much lower than it has been historically. So in that case, those fares are actually more affordable. But generally, As demand is strong and it's extremely strong, again, our 2nd quarter operating revenues Per our forecast could be an all time record, which is just incredible after 2 years of the pandemic.

Speaker 2

But as you see that kind of strength, Seats are going to sell out faster and customers are going to see higher fares. So far, we don't see any dampening of demand. Some of that may be because there's a lot of discretionary household savings still in the system, But so far we've seen no indicator that demand has been dampened by this increase in fares. Andrew, you want to add anything?

Speaker 5

The one thing I'd add is, overall, our capacity is down versus 2019 for the summer that you mentioned, Dave, as well as the industry as a collective. So We're actually not able to satisfy all the travel demand kind of as is given the capacities are lagging 2019. So there will be People who are not buying that would have bought 2019, but as we restore more capacity, we expect that demand to be there. Okay. I get that the rise to higher average could be because the lower buckets are selling out faster and your everybody's capacity is Still recovering, but I just wondered if there was any concern going forward about inflation nipping this in the bud.

Speaker 5

Thanks so much.

Speaker 2

Thank you.

Operator

And the next question is from Kyle Arnold from The Dallas Morning News. Please go ahead.

Speaker 11

Hey, thanks for taking my time or taking some time. Have you done made any more work or is there anything I think you've done to solve some of the irregular operations problems. I know there's a report about a meeting in Florida, talked with the FAA about some of the What are you doing to make sure that some of that either tech or the staffing or compounding problems don't creep up again this summer?

Speaker 6

Yes. Let me start in there for you, Kyle. So we've done a couple of just basic things. As you know, we've reduced our originally published Scheduled through Labor Day, that absolutely is going to give us more cushion and staffing cushion in the We've been talking all morning long about our aggressive hiring plans, so adding people there. And then Andrew talked a little bit about us re optimizing our aircraft flow and our design toward the shorter haul trips, and that's Going to help our crew and our operational recovery.

Speaker 6

So we feel that those are the 3 big pieces that we're in a much better condition in place that we've been in As we move forward, we do have as you mentioned, we do have specific and when I say we, I mean the airline industry Has specific impacts with respect to Florida air traffic control and travel through there and it's a combination of problems down there. There's more commercial activity. There's more GA activity. There are more space shuttle launch. The weather patterns that go through there Or complicating all of that additional traffic.

Speaker 6

And then I think that just like Everyone else going through with staffing, the FAA is going through staffing challenges as well. So there is a focus, an industry focus on that. And in May, The FAA and some of the impacted carriers are going to talk about solutions to that specific airspace. So I think when you package all of those things together, We're in a much better place going into this summer than we were last summer.

Speaker 2

And Kyle, I just wanted to add. I wanted to just offer some praise for the FAA here because they're taking this head We got this meeting in May to develop solutions. They're working with carriers and working directly with us and to think about developing solutions because look Clearly, we have more issues this year, more weather. Mike mentioned you got more SpaceX and other launches. The flight activity is back above scheduled flight activity back above 2019 levels.

Speaker 2

But the other thing that's obvious is we put as they put in Programs, flow control, those kinds of things that are designed to manage the issues, they're just not working as effectively As they have historically. So I'm just really pleased that the FAA has hit that one head on, and they're working with carriers, working with us directly to find solutions that work for everybody. Mike mentioned one other thing that I think is really important, which is while we both there's been a lot of public focus on Scheduled flight activity is above 2019. I think it's really important to point out that general aviation or GA aircraft activity is far above 2019, that takes a piece of the obviously the limited airspace out. So I think that's understanding that and solving That is a significant part of the solution as well.

Speaker 2

Appreciate it.

Operator

Thank you. And the next question is from Dawn Gilbertson from the USA TODAY. Please go ahead.

Speaker 16

Hi, good morning. Speaking of higher ticket prices, you now offer Uplift as an option and I just was noticing it Really just popped up right when I was searching for a flight. Can you give any color to what percentage of bookings, new bookings you've added that, people are buying now and paying later. I know with Southwest Vacations, it was a notable percentage. And Secondly, speaking of Southwest Vacations, are you guys taking that in house?

Speaker 16

Thanks.

Speaker 2

Andrew, I'm going to defer to you.

Speaker 5

Okay. Yes, we did, we do offer uplift. It's a very small Percentage of sales that I'm not going to disclose, but it's also part of the overall progress we've made in payment forms, whether it's PayPal, Uplift, Apple Pay. We've just been on a program over the last few years of giving more and more options for payment method for consumers on the idea that more choice is better. And for the Vacations and higher ticket values, yes, that our order values rather that does offer a benefit for consumers that want it.

Speaker 5

And then secondly, on Southwest Vacations, We are, as we kind of alluded to at Investor Day, on an approach to kind of restructure, redefine how we handle self vacations. We're setting up a team and working with industry partners to figure out how we take advantage of the fact that our network is really over indexed to a lot of big leader destinations where packages are sold And yet we don't really distribute through the traditional package channels and so there's an opportunity there for us to do more business in selling packages to consumers. And so that's something that we're looking at as a future revenue initiative. As we kind of look over the horizon in order to kind of meet the Investor promises we've made about RASM performance exceeding CASM, we don't want to leave ourselves with the vagary Of kind of the market, so to speak. So we need a pipeline of revenue initiatives allow us to have kind of ex market, if you will, Benefits that can make sure we keep our top line growing.

Speaker 5

So this is one of those things. It's kind of still in the laboratory and we'd expect to roll out over the next couple of years as we make more progress.

Speaker 16

Thanks very much, Andrew.

Speaker 5

My pleasure.

Operator

The next question will be from Laurie Aratana from The Washington Post. Please go ahead.

Speaker 3

Hi. Thank you for taking the time to do this. Keying off of Kyle's question, I wondered how you might characterize Southwest approach this summer compared to last summer. You mentioned you're in a much better place going in. Last summer was kind of odd because not folks weren't there was pent up demand, but all folks weren't vaccinated.

Speaker 3

So can you talk about this summer versus last summer?

Speaker 6

Yes, Laurie, I just generally I just think that the conditions that the U. S. Is operating in It's different this summer coming up as compared to last summer. So last summer, We still had surges of COVID coming. We still had Challenges across the country with schools, with daycare, with parents availability, with working from There were lots of challenges that created a situation where People just couldn't behave in this pandemic world like they did in pre pandemic.

Speaker 6

And as a result, when we went into the summer, We should have had more staffing, because the tempo of the operations were slower last summer, and we should have had more I think available or less capacity out there to navigate through that better. I think some of those conditions are changed as we come into this summer. As you mentioned, there's more vaccines out there, there's more boosters out there, and we've also got a better Balance between staffing and our capacity. So we have cushion more cushion available this year to absorb any shocks

Speaker 2

Yes, Laurie, I think it's exactly what Mike said. We've got I think number 1, we've got more visibility. I mean, we thought we knew what was happening last summer, and then the demand just surged at the sort of April, May last minute. While we've got a big surge this summer, we've seen it coming for a lot longer and we've been able to anticipate it. 2, the network is more restored and there's more flight activity, which Means you just have a better ability to recover when you have a regular operations and a better ability to move customers and then move employees when we need to.

Speaker 2

Another big item is COVID polls. And so we had employees that were going out on you have a close contact, You go out, you go out for, I can't remember, it's 5 days or 10 days. And so the number of employees out And then out at the last minute, so it was not predictable. You didn't know till today what your workforce was going to look like in a lot of ways. And so with the change in those policies around COVID, that's gone.

Speaker 2

So we can have a much better predictability around Even the available workforce. So I'm not saying it's going to be perfect, but I think our ability to manage this summer And our belief this summer is going to be much more reliable from an operational perspective is much better here in 2022 than it was in 2021.

Speaker 3

Great. Thank you.

Speaker 2

Welcome.

Operator

The next question comes from Ethan Klaper from TPG. Please go ahead.

Speaker 11

Hey, thanks for taking my question. We're hearing from pilots and From members of Swappa that there have been a lot of no shows for pilot classes and that the recruiting has been especially difficult in that area. So why is that and how can Southwest fix that?

Speaker 6

Well, Ethan, Generally speaking, I would just say Southwest Airlines is the airline for pilots. We've got very competitive rates of pay, Great benefits, good retirement program. And we have a very efficient network with less ground time. And I think that allows our pilots just They get more flying per day than anybody else. They generally receive more pay than as a result of that.

Speaker 6

So I just I feel like that Southwest Airlines is an airline where pilots want to come to. We protected their careers. We've built great retirement programs and great career earnings for them. So you take that as a foundation of it's a great place to work. I believe given that we are going to Attract absolutely our fair share of pilots out there from all the pools.

Speaker 6

We may see ebbs and flows from one class To another, but I think we have all of the tools and the toolkit we need to attract all the pilots that we need. Yes.

Speaker 2

And I think you got to be careful generalizing. I think, overall, this has not been an issue. You always have no shows. We've had classes and we've had a good no show rate I mean good show rates and we've not had a significant portion that didn't show in the class. So this has not been an issue.

Speaker 2

We recently had a class where we had a higher no show rate than we expected, and we're trying to understand exactly why that happened. But I wouldn't extrapolate this one incident to we have a broad based problem. So I just got to be careful about that. And then number 2, There's a ton of work going on. It's a competitive market.

Speaker 2

And the longer you take to make an offer, the longer you take to get somebody into a slot in a class, The more risky run that they could go somewhere else. And so there's a ton of work going on between our flight ops department And our people and hiring folks to take those processes down to the absolute minimum And we're all over that. But I think main thing is I wouldn't extrapolate what happened in a class to that's happening across the board because it has not been.

Speaker 7

Thank you.

Operator

And the next question is from Chris Isador from CNN. Please go ahead.

Speaker 17

Hi. Wondering what you can say about where you see the status of the various labor negotiations And do you feel any it would be advantageous in your hiring efforts if you were to Be able to wrap those up and be able to let potential new hires know what the Labor contract would be if that puts more pressure on the negotiations than maybe the past years when you weren't doing the hiring Bing, is that you're doing now?

Speaker 6

Yes, Chris. So I've been through lots of labor contract negotiations Over the years, and I would just say over the 50 years of Southwest Airlines, I would characterize every contract negotiation as vigorous, As contentious, as passionate on both sides. And what I will tell you is that over that 50 year period, Those kinds of negotiations between the unions and the company, they have manifested themselves, I would say, in the most job Opportunity for our people and that's what our people really want to have. They want to have a company that can count on through good times and bad. And if we can get through the contract negotiations and achieve all of that faster, I'm absolutely for that.

Speaker 6

But at the end of the day, it's that process that creates that the company needs And our people's needs and we've been very successful doing that over the years and I see no reason that we won't be just as successful going forward.

Operator

Thank you. And we have time for just one more question And that question will come from Robert Silk from Travel Weekly. Please go ahead.

Speaker 17

Yes. Hi. Thanks for taking my question. David Cohn, I actually had a story about this recently, but what are you are you all getting many Calls or cancellation requests from individuals who are worried now that there's no mask mandate. And if so, are you allowing Cancellations in those cases?

Speaker 2

Robert, I we watch our customer relations calls And questions every single day. I haven't seen a material rise in that at all. Yes, we survey our customers every single day, and I would just start with the percentage of Customers that are comfortable flying just overall is very, very high. It's 90%, 90% plus. The second is we also survey How comfortable our customers are flying without masks and that number is also very much in favor of Our customers being comfortable.

Speaker 2

And just to mention on the mask, I'm very pleased for employees and for our customers that they now have a It's tough to wear the mask all day. The data shows that while cases may be rising modestly, they're very low, hospitalizations are not So I'm just pleased that our customers and our employees now have a choice. We have a we always have had Wonderful flexibility in our policies and in our fares. And so every ticket Every ticket that you buy can be canceled and then those funds held for future use with no change fee. And obviously, if you buy a refundable fare, we will refund that.

Speaker 2

But if you're not comfortable flying, we'll either refund that if it's refundable And or we'll allow you to use that those funds for a future ticket. But generally, overall, no, we're not hearing I'm not hearing anything relative to customers canceling because they're now afraid to fly because of the mass mandate change.

Speaker 17

Okay. Thanks very much.

Speaker 6

Thank you, Robert.

Operator

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

Speaker 3

Chad, thank you very much, and Thank you all for joining us and

Speaker 14

for putting a little bit of extra time so we could accommodate all of the questions for you this afternoon. If you have any follow-up, our Stellar Communications Group

Speaker 3

is standing by at 214-792-4847 or you can visit us online at www.swamedia. Thank you all very much.

Operator

And thank you. The conference has now concluded. Thank you for attending today's presentation.

Speaker 17

You may now disconnect.

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Earnings Conference Call
Southwest Airlines Q1 2022
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