Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Southwest Airlines Co (LUV, Financial) achieved a high completion factor of 99.5% despite challenging weather conditions.
- The company quickly recovered from Hurricane Beryl, reducing the cancel rate from 8% to 0.3% in one day.
- Investments in technology and operational resilience have proven effective, as evidenced by quick recoveries from disruptions.
- Southwest Airlines Co (LUV) was recognized by JD Power for leading Economy Class Customer Satisfaction for the third consecutive year.
- The company plans to implement assigned seating and premium seating options, which are expected to drive significant shareholder value.
Negative Points
- Unit revenue for the quarter declined 3.8% year over year due to domestic capacity outpacing demand and challenges with the new revenue management system.
- The company sold too many seats at lower prices early in the booking curve, leading to revenue dilution.
- Southwest Airlines Co (LUV) expects higher year-over-year CASM-X growth in the second half of the year due to labor cost pressures and capacity growth moderation.
- The transition to a new revenue management system has been complicated, resulting in a 2-point year-over-year headwind to third-quarter revenue.
- The company faces ongoing challenges with Boeing delivery delays, impacting fleet modernization and staffing levels.
Q & A Highlights
Q: Bob, we definitely appreciate the new product changes that you announced today, like extra leg room, red-eye flying. But I think you'd agree, these have been offered for decades at your competitors. So I guess can you give us insight into the timing of this? Why now? And why wasn't this with that maybe even just a few years ago when you did do like a cabin redesign?
A: Yeah, Brandon. I think a lot of things changed. I mean, you have changing demand patterns. We have customer preference that is always changing. It changed to some extent, also coming out of the pandemic. You can always debate when. At end of the day, it's the right thing to do right now, particularly as we over time have flown longer and flights are more full; I think that is a large driver of this. One of the things that's obvious is if you have a longer flight, customers have a preference to know where they are sitting, just like they have a preference to have seat back power. And I was, I'll admit, a bit surprised. We did extensive research here. Tens of thousands of customers, surveyed a lot work, conjoint analysis to understand products, what customers prefer, what they're willing to pay for. And while I wasn't surprised that the preference ended up coming out for assigned seating, and more premium options in the cabin. I was surprised at the level of the preference, 80% in favor of assigned seating among our customers, 86% among those that fly other carriers. And then, of course, we reported, it was the number-one reason that customers when they defect from Southwest Airlines that they leave us. So it's very clear that there's strong, strong demand. But you can always pick the time and the place. I'm 100% forward focused. In other words, we've done the work to ensure that this is the right change. The change is right to do now. We are not quite ready to share the timelines other than that we plan on selling the new seating in 2025. And we'll share all of that at our Investor Day in September. But it's clearly the right thing to do for our customers, for our employees, and for our shareholders.
Q: On assigned seating, do you envision still being able to board an aircraft with just a single agent?
A: Yes, absolutely, that would be the intent. We're still working on product design and some of the specifics. We have a lot of line of sight to the layout of the cabin. We have a lot of line of sight right now to the product design. We're working on the boarding. One of the things that we get a lot of credit for today, Jamie, is the calm and order of our boarding. We board in an ordinal manner in order and our customers that we survey really like that. So there's a lot of focus on maintaining the boarding in the form that our customers love, but doing it in a manner that it pairs with assigned seating. And again, more to share at our Investor Day but that would be the goal. And we want to do this whole thing the Southwest way. And we're known for, obviously, things that make sense, common sense, not adding complexity. So if you look at the cabin, again, we're not ready to share everything. But we'll have a -- again, a third of the seats or so across the fleet in this extended leg room and there will be differentiation. It will be different than the rest of the cabin. But it won't a different seat and a curtain and meals and ovens. And so we'll do this in Southwest way. And the same exact thing applies to boarding.
Q: Just on the O&D revenue management system, you kind of shared a lot of details. It seems like you've had revenue management changes in the past that have kind of come up with some issues as well. But I was curious, I think, Bob, in your comment on CNBC, you mentioned that you just sold too many seats at too low prices. And I don't know, Ryan, if you want to kind of talk about you're seeing a lot of fair sales still out there, and that doesn't seem to jive with realizing that you've sold too many seats at too low prices. I was kind of curious if you could talk about the fair sale activity you're doing today and how we should interpret that?
A: Yes. Maybe just talking about revenue management generally. The O&D systems are, by nature, more complex. And it's not unusual that they take time to be tuned and adapted. And also we've had, not making excuses, but we've also had a lot of noise around the demand with scheduled changes, adapting to Boeing delivery issues and that's not help. But clearly, we sold too many seats early for the peak summer travel period, which means you're going to take them in lower booking classes. And it also means when you get to the summer and you have those strong flights, you have fewer seats to sell later in the booking curve, which obviously comes in higher booking classes. So we've had a strong diagnostic to understand what's happening. We've had experts -- third-party experts in to help. We have a strong action plan. And that action plan is being put into place right now. We're also adding more expertise, senior leadership over the area simply because it is more complex. Maybe tearing that apart a little bit from the fare sale, it's also clear -- and the RM system, it's also clear that there's simply more capacity than on the domestic side than demand right now. And so that's got to be a piece of what you're talking about. I mean, for Southwest Airlines, we're taking actions for ourselves here. Capacity was up about 8 point, I think, 6% in the second quarter. We're going to moderate that to 2% in the third. It will actually be down roughly 4% in the fourth and sort of underneath that, trips will actually be down about 8% in the fourth quarter. So we are working down capacity aggressively on our part here. But yes, Andrew, you want to comment more specifically on RM? I think I would say just in the fair sale, Bob, that can be a red hearing we get often. We distribute directly to consumers, which means you always have to be out there pulling them to your website and promotional activity is the way that you do that. So the frequency of our sales does not hold a special meaning. It's a depth of a sale that would give you indications about any kind of promotional level of discounts we're giving. In that situation, I don't think anything has really changed. If you look at the current sales. So kind of we always expect us to be out there promoting to customers from our website that often has have a number attached to it to get them there. But that's a normal course of business, has been that way through good times and bad over the years.
Q: Maybe just sticking on the premium stuff. So have you secured slots from an MRO perspective? And then, you mentioned doing this on all 800 aircraft. I'm just curious on why you're doing the 700s if we're talking about retiring those over
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
