Robert E. Jordan
President & Chief Executive Officer at Southwest Airlines
Hey, thank you, Julia. Hello, everyone, and welcome to our first quarter call.
Well, let me state right up front that I am disappointed with our first quarter performance. There are a lot of factors that I'll go into and there's a lot to cover, including the latest Boeing challenges. And more importantly, there are significant efforts and progress underway as we cannot and we won't be satisfied until we are delivering the kind of returns you expect from Southwest Airlines. So before I go any further, I just want to sincerely thank our people for their extraordinary efforts as we work quickly to drive improvement.
Now turning to our performance, we achieved records for first quarter operating revenues in passengers, continuing our streak of eight straight quarters of record top line performance. We saw a nice acceleration in managed business revenues up 25% nominally year-over-year. We also continued our streak of solid operational performance. For a while now, we have been consistently running a great completion factor, averaging right around 99% and we continue to improve in nearly all operational and customer metrics. I'm also proud of the progress we made on our open labor agreements. It's been a long road and I want to recognize everyone involved for continuing to work through to the finish line to reward our amazing employees for their contributions.
Ryan will go into our revenue performance in more detail in a moment. And while our revenue trends were solid in the first quarter and are expected to be solid here again in the second quarter, we need to increase revenue production to offset cost inflation. The biggest opportunity to improve performance and profitability and urgency is continued focus on network optimization and capacity. We opened 18 new cities during the pandemic and worked hard in 2023 to restore our network and fly our full fleet on the heels of the demand surge in 2022. While that boosted aircraft utilization, it added significant capacity and when combined with 2023 business travel coming in below projections has resulted in a significant number of new markets under development and a material number of markets that are not performing at the level required in this higher cost environment.
Network adjustments planned last fall are in place as of the March schedule and they are proving to be largely on track. Those optimization efforts were primarily aimed to adjust for changing demand trends, including lower capacity on Tuesday and Wednesday, a reduction in short haul business markets and a material reduction in flights during shoulder periods of the day. The changes are beneficial and they contributed to us exiting the first quarter with healthy margins for the month of March. More is needed, and we are continuing efforts to optimize the network and reduce the number of markets in development that aren't performing to more historic levels. Along those lines, we have made the difficult decision to eliminate service in four cities, Syracuse, New York, Houston Intercontinental, and Cozumel and Bellingham, Washington. That is never an easy decision.
We form bonds with the airports and the communities that we serve. These are wonderful communities and we are very grateful for their support over the past several years. In addition, we are also restructuring several other stations, most notably, we are reducing flights in Atlanta and Chicago O'Hare. While it's never our desire to exit the city or shrink service to a market, we are committed to our financial performance goals and network and capacity actions will continue as a lever to improve overall financial performance. In addition to network optimization, we have a number of other efforts underway to increase revenue productivity.
First, tuning our new revenue management system by better anticipating and optimizing demand and fares along the booking curve and unlocking additional capabilities that will further boost the contribution from the system. Second, focusing on increasing passenger volume, including adding new attributes to our value proposition. We are working to ensure our current and future customers understand our terrific value proposition. That includes a significant new brand campaign, which started last week, highlighting our signature customer-friendly policies. Separately, we are considering more transformational options and follow-on initiatives. That includes work previously underway to study customer preference around seating and our cabin. It's been several years since we last studied this in depth and customer preferences and expectations change over time.
We are also studying the operational and financial benefits of any potential change. We remain committed to our industry best customer-friendly policies, but we are also committed to understanding and meeting customer expectations. We have transformed before adding things like WiFi, larger bins and in-seat power and we will continue to adapt as needed. It is too early to share the specifics of what we are exploring, but I want to be transparent and let you know that work is well underway. Of course, the biggest change we have experienced is the news from Boeing on deliveries. The Boeing issues are a significant impact, and we are taking quick action to replan based on expected 2024 and 2025 delivery delays.
As I've said before, while it's impactful, I support Boeing taking the time to do the work to understand and fix the issues. A stronger Boeing company for the long term is good for Southwest Airlines. I visited Boeing in late March and while there is much work to do, I am encouraged by the comprehensive approach that their leadership is taking. I will be back at Boeing this summer when they complete their plan and I will be visiting Spirit AeroSystems as well. I won't downplay the challenges from the Boeing issues. They are a big deal and contribute to changing capacity set. They're redoing schedules and forecasting now and accurate staffing levels. All of that is costly. It pulls people away from their regular work and it creates a significant financial drag. That said, it won't deter from our work to improve our results.
We will continue to control what we can control and work our plan as they take the time to become a better Boeing company. Boeing issues aside, we already had aggressive plans in place to further optimize the network to improve profitability, moderate capex and capacity to improve free cash flow at ROIC and drive staffing and operational actions to improve efficiency. All of that work is now being accelerated. As we continue our focus on capital efficiency, free cash flow generation and aggressively restoring our returns, we will continue to moderate both capacity and capex until we do so. Managing our capex is obviously key to improving free cash flow, which along with ROIC we are laser-focused on.
Our bias will remain to retire aircraft as planned and any capacity growth that we have in the near term will come entirely from gauge and initiatives to drive aircraft utilization, including tightening turn time through process innovation and automation and introducing a modest level of red eye flying. Both of those initiatives boost aircraft utilization and create capacity without aircraft capex. The initiative to reduce turn time is going well and as a first step, 12 stations will see a five-minute reduction in turn time in the November 2024 schedule with further reductions in early 2025. We will share details on the full plan, which includes these and other planned strategic initiatives at our Investor Day, now planned for September 26 when I look forward to welcoming everyone here to Dallas.
On our cost control efforts, note that we already had plans in place to end 2024 with a headcount flat to down through efficiency efforts like deploying automation and Gen AI solutions for greater productivity in some customer support functions and driving organizational efficiency by combining like functions. Further capacity reductions in 2024 and 2025 create additional headcount and efficiency challenges and we are moving quickly to address those through a combination of voluntary programs. We have essentially frozen and stopped all hiring except for a limited number of critical positions and now expect to end 2024 with a headcount down approximately 2,000 as compared to the end of 2023. Headcount will be down again in 2025 through continued efficiency efforts.
We are already seeing the benefits of time off without pay programs and in fact, the participation in these programs generated higher than expected savings in March, which was one of the factors that contributed to us beating our first quarter CASM-X guidance. Last quarter, we laid out a plan that included providing a line of sight to cover our cost of capital in 2024. We are admittedly materially off that plan. Much of the miss comes from external factors, including headwinds from increased market prices for fuel and impacts attributable to the most recent delays in Boeing deliveries, but we aren't accepting that as our fate and are taking swift action against what we can control.
So there's a lot going on right now and we have a good grip and plan around areas of the business where we can improve. As a recap, we are continuing to be guided by our goals to drive ROIC performance by making additional network adjustments to specifically address underperforming markets and adjusting capacity, enhancing revenue performance in the intermediate term through marketing and revenue management efforts. Offsetting cost pressures with efficiency initiatives and programs to reduce headcount and lower discretionary spending, curbing our capacity plans and managing down capex and investing in initiatives that create capacity without capital investment.
And finally, by creating a new set of strategic initiatives to share with you at our Investor Day this September. We will not tolerate underperformance of any kind and everyone is committed to doing what it takes. I am truly blessed to lead a company with such passionate and dedicated employees and I am confident that we can and will adjust as needed as we have in the past and work to hit our financial targets, which are not negotiable. So before I close, I just want to say thank you again to our employees for all that they do every single day.
And with that, I will turn it over to Tammy for a more in-depth review of our financial performance and outlook.
