Southwest Airlines Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2024

There are 19 speakers on the call.

Operator

Hello, everyone, and welcome to the Southwest Airlines Second Quarter 2024 Conference Call. I'm Gary, and I'll be moderating today's call, which is being recorded. A replay will be available on southwest.com in the Investor Relations section. After today's remarks, there is an opportunity to ask questions. Now, Julia Landrum, Vice President of Investor Relations will begin the discussion.

Operator

Please go ahead, Julia.

Speaker 1

Thank you so much. Hello, everyone, and welcome to our Q2 2024 earnings call. I am joined today by our President and CEO, Bob Jordan Chief Operating Officer, Andrew Watterson and Executive Vice President and CFO, Tammy Romo. Bob will get us started with an overview of the company performance and strategy and will also provide color on the strategic initiatives announced this morning. Andrew will provide an update on the revenue, and Tammy will cover our costs and balance sheet.

Speaker 1

Brian Greene, EVP of Commercial Transformation is also in the room with us today, as well as other executives to support Q and A. A quick reminder that we will make forward looking statements, which are based on our current expectation of future performance and actual results could differ materially from expectations. Also, we will reference our non GAAP results, which exclude special items that are called out and reconciled to GAAP results on our earnings press release. Our press release with Q2 2024 results and a separate press release announcing select strategic initiatives were both issued this morning and are available on our Investor Relations website. And with that, I'm pleased to turn the call over to you, Bob.

Speaker 2

Thank you, Julie, and thanks everyone for joining us this morning. We have a lot to cover today, so let's jump right in. In my comments today, I will touch briefly on our results for the quarter and then provide detail on the plans we announced earlier this morning to implement meaningful changes to our business and better position Southwest Airlines to produce higher returns in a more competitive higher cost environment. As Julia mentioned, Andrew will provide details on our revenue performance, including the work underway to be and they are not reflective of what we are capable of delivering. We will cover where we fell short as well as our action plan in detail later on the call, but I'll hit on a few highlights first.

Speaker 2

Our frontline employees executed very well as we continue to improve in nearly every operating and customer metric. Once again, we ran a high quality operation with completion factor of 99.5% despite challenging weather. This was further evidenced by our performance following Hurricane Vero earlier this month. We experienced an 8% cancel rate on July 8 as storm moved to the Houston area, but had only a 0.3% cancel rate the following day as we recovered quickly with almost no operational hang over from the prior day. I am very proud of our team.

Speaker 2

And following the global technology outages, we were able to recover very quickly and experienced a near 0 cancel rate. Investments made to advance core operations and modernize technology meant that we had redundancy in place for key systems that were experiencing issues. Time and time again, the purposeful investments we've made to improve our resilience and ability to recover from disruptions are demonstrating their value and that investment will continue. Our exceptional customer service continues to improve as well and was recently recognized by J. D.

Speaker 2

Power where we were awarded the Leading Economy Class Customer Satisfaction Distinction for the 3rd consecutive year. Reliable operational performance and customer service are and always will be cornerstones of our business model. Moving on to revenue performance, unit revenue for the quarter declined 3.8% year over year, primarily as a result of domestic capacity outpacing demand. The decline was also a result of Southwest specific challenges as we fully mature our usage of a new O and D based revenue management system. Andrew will go into more detail later, but bottom line, we sold too many seeds for the peak summer travel period too early in the booking curve.

Speaker 2

It's not unusual to have growing pains with these types of systems. We are working quickly to action opportunities to drive performance improvement. We're also adding additional leadership expertise and support, including our plan to hire a Chief Revenue Officer to focus on revenue management and pricing. We continue to have confidence that the new revenue management system will be a driver of long term revenue improvement. The management team and I with the support of our Board are completely aligned on the imperative to produce results and ultimately deliver returns ahead of our cost of capital.

Speaker 2

Doing so requires an evaluation of all opportunities and a willingness to evolve some long standing Southwest policies while staying true to our values. With that in mind, I'll discuss some of the changes we are making to further evolve Southwest Airlines. These are part of an ongoing strategic transformation of the business and we will share more details during our Investor Day, where we will outline a comprehensive plan to deliver transformational commercial initiatives, improved operational efficiency and capital allocation discipline. As I shared back in April, our teams have been hard at work evaluating fundamental changes to our seating, cabin and boarding procedures. It's clear that the open seating model that served us well for so many years is no longer optimal for today's customer.

Speaker 2

I want to stress that this decision was not made lightly. We have been very thorough and deliberate in how we approached the question, conducting multiple sophisticated research studies over many months that evaluated customer preference and looked at different types of cabin layouts and seating methods. Our research shows that 80% of our customers prefer an assigned seat and 86% of our potential customers prefer an assigned seat. Further, when a customer defects from Southwest to one of our competitors, our open seating policy is cited as the number one reason why. The answer is clear, there is more demand for Southwest Airlines with an assigned seating model and there is a significant ability to monetize the cabin more effectively with a premium seating option.

Speaker 2

By extension, these changes are expected to drive significant value for our shareholders. We feel confident that the solution we are implementing will retain the positive elements of the Southwest Airlines experience and enable us to evolve in a manner that's consistent with what today's air traveler is seeking. While specific cabin layouts are still being finalized, we expect roughly 1 third of seats across the fleet to offer extended leg room. We're also designing a boarding process that retains the organized calm our customers enjoy today, but also complements an assigned seating model. We've been studying this in-depth to preserve our operational efficiency and how quickly we return an aircraft.

Speaker 2

We've conducted both live boarding tests to understand passenger movement in a real world environment and also more than 8,000,000 digital simulations to test different boarding options. These digital boarding simulations include data from real flights with real passenger manifests to understand differences in boarding time stemming from passenger mix, things like families traveling together, customers who may need more time to board, experienced versus inexperienced travelers and more. The data clearly indicates that any operational impacts are neutral or an enhancement to current performance. We're also approaching this change in a capital efficient manner. New aircraft will be delivered with our improved Recaro seats beginning early next year.

Speaker 2

For existing aircraft where we must retrofit to a new configuration, we plan to use existing seats within our fleet to avoid a large capital expenditure. We're working quickly to realize the value of this new model as soon as possible. New seat configurations require FAA certification, which typically takes several months and only then can we begin the process of retrofitting the fleet. We therefore expect to make bookings available beginning next year. The aircraft downtime should be minimal to complete the cabin changes, but keep in mind that we have a fleet of roughly 800 aircraft to retrofit and that will take time.

Speaker 2

Changing from an open seating model to an assigned seating model will be a complex and transformational change that cuts across almost all aspects of the company and is one of several commercial initiatives currently underway to be detailed at our Investor Day. Given the significance of the changes, I've asked our Chief Commercial

Speaker 3

Officer,

Speaker 2

Ryan will lead this effort along with other commercial initiatives already underway. Ryan has led the work to this point and is steeped in knowledge regarding customer trends and previously and successfully led efforts to transform our Rapid Rewards loyalty program and the digital customer experience. And Ryan will report directly to me. Additionally, today we are publishing schedule that incorporate Redeye flying, which will phase in rapidly by summer 2025 and combined with ongoing reductions in turn time through new technologies and procedures will enable us to fund nearly all new capacity the next 3 years through initiatives rather than additional aircraft CapEx. These initiatives are part of a comprehensive strategic transformation and reflect a commitment and my personal commitment to deliver an implementing plan aimed at driving shareholder value and achieving ROIC well in excess of our cost of capital.

Speaker 2

We will provide more details around the timing and value of these initiatives and other tactical and strategic initiatives when we gather for Investor Day in late September, but we wanted to keep you up to speed on some of the decisions that we've made already and the deliberate plans we have in place to implement them. And before I close, I want to again recognize all the efforts from our incredible employees. Thank you all for the excellence and the dedication that you bring to work every single day. And with that, I will turn it over to Andrew to provide a full update on our revenue performance and outlook.

Speaker 3

Thank you, Bob. I'm very excited about strategic initiatives we have coming. I'm also very proud of our people for their continued focus on safety. Running a quality operation with the lowest year to date cancellation rate in the industry and our strong customer service performance trends. Moving to revenue performance, we have experienced challenges in managing demand across booking curves as we deployed efforts to address load factor underperformance.

Speaker 3

As a result, we experienced yield and ultimately revenue dilution from selling too many seats too early in the booking curve. As you will likely recall, back in the spring of 2023, we transitioned to a new and modernized revenue management system. The system is fundamentally different from and superior to our prior system. The new system manages revenue on an origin and destination basis compared with our prior leg based system. The decision to implement this new system followed an extensive review of our options, including a comprehensive 18 month long pilot to evaluate and test 2 new revenue management systems against our prior system.

Speaker 3

What we directly observed during the testing period was the system we selected consistently produced superior results. The goal is to maximize the revenue performance of our flights, especially our best flights And the new system accomplishes just that by considering what customers are willing to pay at different phases of the booking curve, including taking note of the differentiation between business and leisure customers. However, adapting to a new system is not straightforward. Add to that, changing schedules from Boeing delivery shifts and what we got was a complicated rollout. Regardless, while we estimate about 2 points of year over year headwind to the Q3 from bookings already in place, we are taking decisive actions to recalibrate The estimated impact is already built in to our 3Q RASM outlook of flat to down 2% on a year over year basis.

Speaker 3

The outside experts that Bob mentioned are supporting our employees and getting the most out of capabilities of this new system. The good news is that we have confidence in the superiority of the new system as evidenced by the month long AB testing that we conducted. As we gain expertise in optimizing system, we expect to see a noticeable tailwind to performance, likely starting in September of this year. Adopting a new revenue management system is a once in a generation implementation and we are committed to executing a successful turnaround in our revenue performance. In addition to the improvement we expect to see in our revenue management performance, our plan includes continued network optimization and capacity moderation moving to the back half of the year.

Speaker 3

Our summer, fall and recently published winter based schedules all include actions to target supply to demand across geographies and calendar periods, as well as schedule quality actions to facilitate demand capture. By Q4, we expect less capacity over supply as well as improvements in our revenue management. We are planning for capacity to decline 4 percent year over year in Q4, with seats and trips down roughly 8% and therefore we expect RASM growth to be positive year over year by 4th quarter. We will deliberately and urgently pursue tactical opportunities to improve financial performance, including calibrating our revenue management process, continuing our work to optimize our network. Further, we also have a plan to capitalize on transformational opportunities to generate incremental revenue, some of which Bob shared with you.

Speaker 3

Before I close, I want to thank our people again for doing such an amazing job driving operational excellence and providing our legendary hospitality. I am so appreciative of their contributions. With that, I will turn it over to Tammy.

Speaker 4

Thank you, Andrew and hello everyone. As Bob mentioned, I will provide an update on our cost performance before turning to fleet and balance sheet. Overall, our Q2 CASM ex increased 6% year over year and we continue to expect CASM ex for full year 2024 to increase in the range of 7% to 8% on a year over year basis. The higher year over year CASM ex growth in the second half of this year is driven primarily by a continuation of market driven labor cost pressure from our new contracts as well as from the moderation of year over year capacity growth. We are urgently and deliberately pursuing opportunities to mitigate cost pressures, including the drag from overstaffing related to previously reported Boeing delivery delays.

Speaker 4

As discussed on our Q1 earnings call, we have expanded our voluntary leave and time off programs to further reduce labor expenses and bring staffing levels in line with our current fleet. We have halted all the critical hiring and we continue to expect to end this year with headcount down roughly 2,000 from year end 2023. And we continue to plan for headcount to be down again in 2025 as attrition levels exceed our controlled hiring levels. Our 2nd quarter average fuel price of 2 point $7.6 per gallon was in line with our expectations. Our hedge portfolio continues to provide protection against spikes in prices and we are continuing to opportunistically add protection with no change 24 delivery expectations prior to our April earnings report to mitigate Boeing delivery risk to our internal planning functions.

Speaker 4

We therefore continue to plan for 20-eight aircraft deliveries, 31-seven 100 retirements and four-eight hundred lease returns for the year. We remain committed to our fleet modernization benefit and our and 4th quarter capacity to decrease approximately 4%. Accordingly, our expectation for full year 2024 capacity continues to be up approximately 4% year over year. Looking beyond 20 24, we remain committed to earning our right to grow and plan to keep any future growth at or below macroeconomic growth trends until we reach our long term financial goal of returns on invested capital consistently in excess of our cost of capital. Our expected capital spending for 2024 is approximately $2,500,000,000 which is in line with our prior guidance and well below our expectations of $3,500,000,000 to $4,000,000,000 at the beginning of the year.

Speaker 4

We are in ongoing discussions with Boeing regarding the financial impact of delivery delays. And as with past compensation, we expect any financial damages to be realized as a reduction in the cost basis of certain aircraft. Our balance sheet is obviously a critical competitive strength with an investment grade rating by all 3 rating agencies. We continue to be in a net cash position as we ended 2nd quarter with cash and short term investments of 10,000,000,000 dollars versus $8,000,000,000 of outstanding debt. We expect a modest $29,000,000 in scheduled debt repayments for the full year and currently 2024 interest income is still expected to more than offset 2024 interest expense.

Speaker 4

Following the pandemic, we have maintained elevated liquidity levels, primarily to fund fleet modernization efforts, labor contract ratification bonuses, debt service considerations and to provide insurance against unforeseen business risk. With much of the uncertainty largely behind us, we intend to start normalizing our liquidity levels back towards pre COVID levels targeting minimum total liquidity including our undrawn revolver. Our long term financial goals remain unchanged. Maintain a strong balance sheet, investment grade credit ratings and ample liquidity, grow earnings, margins and capital returns. If you look in, we intend to pay off 2025 debt maturities at least partially in cash and specifically plan to repay or refinance the 1st tranche of the payroll support program loans as the associated interest rates start to ratchet higher for the industry beginning next year.

Speaker 4

We also remain committed to our legacy of healthy shareholder returns. We are proud of our history of returning capital to our shareholders. We returned more than $13,500,000,000 through share repurchases and dividends since 2010 and we returned $215,000,000 to shareholders through dividends in the first half of this year. We paid another dividend just a couple of weeks ago here in Q3. We are actively reviewing our return of capital policies and ultimately our goal is to restore shareholder returns to historic levels.

Speaker 4

As I close, I want to reiterate that our financial performance is not reflective of what we can and must deliver. As shareholders, you expect us to lead the industry in financial performance, and we will be satisfied with nothing less. There are areas we need to improve, which we are owning and addressing as a management team. Despite these distractions, our employees remain steadfast in their dedication to the mission of the company and to providing our storied and world class hospitality to our valued customers. I am both proud and grateful for our employees.

Speaker 4

I am excited about the plans we have in place to secure a bright future for Southwest and to share more about our tactical and strategic initiatives, as well as our capital allocation plan at Investor Day in September. We remain fully committed to executing on a plan to restore returns on invested capital in excess of our cost of capital, as this remains our guiding financial principle. And with that, I will turn it back over to you, Julia. Thank you, Tammy. This completes our prepared remarks.

Speaker 4

We will

Speaker 1

now open the line for analyst questions. We would like to get as many of you as possible, so we ask that you please limit yourself to one

Operator

The first question comes from Brandon Oglenski with Barclays. Please go ahead.

Speaker 5

Hey, good afternoon and thanks for taking my question. 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?

Speaker 5

And why wasn't this with that maybe even just a few years ago when you did do like a cabin redesign?

Speaker 2

Yes, Brandon.

Speaker 6

I think a lot of

Speaker 2

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.

Speaker 2

At the 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 a seat back power. And I was, I'll admit, a bit surprised. We did extensive research here.

Speaker 2

Tens of thousands of customers surveyed, a lot of work, conjoined 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 cab, but I was surprised at the level of the preference. 80% in favor of assigned seating among our customers, 86% amongst 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 demand.

Speaker 2

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.

Speaker 5

Well, I think your investors appreciate the effort here to make changes. But I think some of the public criticism being levied on the company and the Board is that it's been such an insular culture. These things couldn't even have been discussed years ago. I guess what are you doing from that aspect? Are you looking to fill some of these executive positions externally?

Speaker 2

Yes, I think you can always hindsight is always a lot more perfect. And so you can always look back and criticize the timing of a decision. I'm just telling you that we're 100% focused on transformational change here at Southwest Airlines driving forward and driving forward with pace. You heard us today announce not just the assigned seating and the cabin changes, you heard us announce Red Eye Flying, which is not something we are working on. It's something we have worked on and it's in the schedules published today.

Speaker 2

We've been working aggressively on operational systems, which we can talk about. And that work on operational systems allowed us during the tech outage last week to have a I believe it was a 99.8% completion factor on the day of the tech outage. And we had systems critical systems to the operation affected. So we are fully focused on transforming the company, driving forward at pace and having a plan that addresses comprehensively delivering transformative commercial initiatives, improving our operational efficiency and addressing capital allocation discipline.

Speaker 5

Thank you.

Speaker 2

You're welcome.

Operator

The next question is from Jamie Baker with JPMorgan. Please go ahead.

Speaker 7

Hey, good afternoon everybody. On a signed seating, do you envision still being able to board an aircraft with just a single agent?

Speaker 2

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.

Speaker 2

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 a form that our customers love, but doing it in a manner that it pairs with assigned seating. 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.

Speaker 2

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 be a different seat and a curtain and meal than ovens. And so we will do this the Southwest Way and the same exact thing applies to boarding.

Speaker 7

Perfect. Thanks. And second, and I don't know if you have ever commented on this in the past, but from a rapid rewards perspective, how important is Hawaii? Like for example, could you disclose what percent of overall redemptions choose Hawaii, something like that? I'm just trying to model how important Hawaii is to getting credit cards into people's wallets and driving brand preference, that kind of stuff?

Speaker 7

Thanks in advance.

Speaker 2

Yes, Jamie. It's very important particularly as you think about the West Coast and the franchise, but I'll let Andrew take a crack at the details here.

Speaker 3

Yes. I can't recall off the top of my head, Jay, but it is high. It's not as high as a ruble. Ruble is actually our highest redemption and that goes for kind of our East Coast customers who want a kind of aspirational vacation destination and that allows them to redeem for that. In the West, we have a very business centric network in the West with leisure being Vegas and Phoenix and Seasons.

Speaker 3

So, Hawaii is important to our customer franchise in the Western U. S. Who are closer geographically to Hawaii and state of Florida for their beach and warm weather destination. So, it's important for that customer base who is a repeat purchase customer base. So, Rapid Rewards reflects someone who identifies their brand and wants in the credit card.

Speaker 3

So, we have to have a multi purpose travel network for them and why is that for our Western U. S. Customers. So, there that's one of the importance there and that's why I spend so much time trying to mature it, doing so many adjustments to it to make sure it can fit profitably into our network as well as give that kind of customer adhesion point of an aspirational vacation destination.

Speaker 7

That's good detail. Thanks very much. I would not have guessed the Aruba nugget. That's a good one. Thanks.

Speaker 2

Thank you, Jamie.

Operator

The next question is from Savi Syth with Raymond James. Please go ahead.

Speaker 8

Hey, good morning. Just on the OND 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 CIBC, 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 fare sales still out there and that doesn't seem to jive with realizing that you've sold too many seats at too low prices.

Speaker 8

I was just kind of curious if you could talk about the fair sale activity you're doing today and how we should interpret that?

Speaker 2

Yes. Maybe just talking about revenue management generally. The O and 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 schedule changes adapting to Boeing delivery issues and that's not helped. 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.

Speaker 2

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, 3rd 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.

Speaker 2

Maybe tearing that apart a little bit from the fair 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. I think in the 2nd quarter.

Speaker 2

We're going to moderate that to 2% in the 3rd. It will actually be down roughly 4% in the 4th, and sort of underneath that trips will actually be down about 8% in the 4th. And sort of underneath that trips will actually be down about 8% in the 3rd. And sort of underneath that trips will actually be down about 8% in the 3rd. And and sort of underneath that trips will actually be down about 8% in the 4th quarter.

Speaker 2

So we are working down capacity aggressively on our part here. But yes, Andrew, you want to comment more specifically on RM?

Speaker 3

Yes, I think I would say just in the fair sale Bob that can be a red herring we get often. We distribute directly to consumers which means you always have to be out there pulling them to your website and a 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 are giving. In that situation, I don't think anything has really changed if you look at the current sales.

Speaker 3

So, kind of we always expect us to be out there promoting the customers who pull them on our website that often has to have a number attached to it to get them there. But that's the normal course of business has been that way through good

Speaker 9

times and bad

Speaker 8

over the years. That's helpful clarification. And just if I might on the I know there's a lot more information coming at Investor Day, but I was curious on the for the changing of the seating on the plane. Once the FAA approves it, just how long is that process generally to kind of doing a whole a large fleet like yours?

Speaker 2

Well, you've got 2 yes, you've got 2, maybe 3 sides here. We've got to finish up the design of the Lobo or the layout, which we're very close to here. And then there's a month long certification process. And then, of course, we have roughly 800 aircraft that need to be modified. We're going to do this in a capital efficient way.

Speaker 2

We don't we're going to utilize, obviously, the new Recaro seat coming off the line with new aircraft beginning early next year or existing seats. But at 800 aircraft, it still takes a while to move all the way through the fleet, even if it's a relatively rapid modification. Obviously, it's a complex change, so you have technology, process, training, other work to be done that will be a pacing item as well. But and again, we'll be revealing the timelines in more detail in September. So the only tidbit we have out there right now is that our plan is to sell in the new form, so in the assigned seating roles beginning in 2025, but more to come.

Speaker 2

And again, the fleet, the mod is not complex. It just has to be approved. And then again, we have to move through 800 aircraft in the fleet.

Speaker 8

I'm one of those 80% of passengers who like to see the change, so have to see that. Thanks.

Speaker 3

You're welcome. Thank you.

Operator

The next question is from Connor Cunningham with Melius Research. Please go ahead.

Speaker 10

Hi, everyone. Thank you. Maybe just sticking on the premium stuff. So have you secured slots from MRO perspective? And then you mentioned doing this on all 800 aircrafts.

Speaker 10

I'm just curious on why you're doing the 700s if we're talking about retiring those over the next 10 years. And sorry for the extra question on top of this. Like when you think about the layout, are you expecting the same amount of seats on each plane, I. E. You're not losing any seats by adding premium?

Speaker 10

Thank you.

Speaker 2

We're still and Brian can add a lot of detail here. We're still working on specific logos and layouts. We want to do this in a Southwest way and be true to our values here. So in the same manner that our intent is not to change our customer friendly policies and take anything away from you, we want to have not just in the extra legroom section, but in the remainder of the cabin, we want to have an attractive pitch. So we're still working through that question.

Speaker 2

The 700s, they're going to be in the fleet for, I believe, for a while, for a long while here. And so and again, we're going to be sharing the detail on the math as well as just the financial benefit. But it's clear that a modification to the 7s, you want the extra legroom seats in the 700s as well, sort of roughly the same, about a third, our desire is to get this into a third of the seats across the entire fleet. And then just mechanically for our customers, it would make no sense to you're just buying a flight. So it would make no sense to buy one flight and there are a lot of extra legroom seats and buy another flight and simply because it's a different aircraft type, there are none or very few.

Speaker 2

So we want to do this in a way that it makes sense to our customers and that extra legroom section is available on every single flight.

Speaker 6

Yes, I think that's the most important part, Conor, is that when you start wrapping seating benefits, premium seating benefits into your overall value proposition, whether you're selling it as an ancillary or a fare, The customer, when they go on to buy their flight from Dallas to Denver, they don't know if we're going to operate it with a 700 or a MAX 8 aircraft. And you want a consistent value proposition across the board to serve the customers' needs. So, I think that's the most important piece of that equation to your question there.

Speaker 10

Okay. And then on the comment of growing at or below macro trends in 2025, I'm trying to understand why growth is even on the table right now given what returns are at. In that same context, like you're talking about unit revenue down today, but then seats down 6% to 8% that inflects unit revenue positive. I just try and understand why we should then ramp back up to in line with the economic growth. And then in the context of all that, can you just frame up how you view the current demand environment in general?

Speaker 10

Thank you again.

Speaker 2

Yes, Conor, you bet. And we are still working on 2025. So I wouldn't take anything as an exact number. That was a commitment, obviously over the next number of years and obviously commitment until we are able to earn our cost of capital here. So we've not picked a number necessarily for 2025, but we are going to be managing obviously our capital expenditures aggressively.

Speaker 2

Tied to that and we haven't talked about the Redeye flying, but we're also announcing that today, which I'm really proud of. And our customers want it, but what it also does for us is it produces ASMs without having to buy but that's allowing us to take time out of the turn. The combination of those two things, the Redeye flying and then the turn compression will allow us to fund nearly all, if not all capacity 25, 26, 27 through initiatives and not through buying incremental aircraft and spending incremental CapEx.

Speaker 10

Okay. That's helpful. Thank you.

Speaker 3

Okay, Connor. Thank you.

Operator

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

Speaker 11

Yes. Hey, Bob, I know you had mentioned earlier you talked about sort of capacity domestically running a bit higher than demand and maybe what was driving the price weakness. But how much of it do you think may also be attributable to just that more price sensitive consumer who may be pushing back? I mean, we are seeing that in other sectors. And I would think that you tend to carry a healthy amount of that type of segment.

Speaker 11

Are you seeing it?

Speaker 3

Hey, Mike, it's Andrew. Hey, Andrew.

Speaker 12

We're not seeing

Speaker 3

any specific thing in regards to customer segments that are pulling back so to speak. I think sometimes because we aspire to have low fares, people assume we are going for a lower fluent passenger which is not the case. And so, we want to have low fares and high quality. As I mentioned earlier, we have large parts of our network which are very high business contribution which implies a customer that's relatively more fluent. And so, we are seeing, I think, business travel actually grow faster than capacity both in Q1 and Q2.

Speaker 3

So, you do see that part of the economy going well, it's just I think there is some choppiness with regards to off peak times and how much leisure spending is going on there. That was a characteristic of COVID where people would more frequently take off time trips for leisure reasons and there's less of that now. And so that does create this kind of period of the year when there's more capacity than demand.

Speaker 6

And Mike, this is Ryan. Just to add a little bit of color to what Andrew said there. When you look at our customer base demographically and how that compares to our peers in the industry, it looks a lot more like our customer base looks a lot more like our legacy peers than it does LCCs or ULCCs, the LCC or ULCC peer set. Specifically, when you talk about households with incomes in the $100,000 plus bracket and the $200,000 bracket that looks much closer to legacy than it does the LCC and ULCC peer set.

Speaker 11

Great. Very helpful. And then just my last question, this may be for Tammy. When I look at your CASM guide for the year, which you were able to maintain, we come off the Q3 and at the midpoint, we're looking at call it 12% on a couple percent of capacity. When we get to the Q4, we're up maybe high single digits, but now that's on a capacity reduction of about 4%.

Speaker 11

So sequentially, there is a healthy improvement there. Is there something in 2023? I know there was a restatement, but is there anything in there credits or one timers that would allow you to see that sort of progression or maybe we're anniversarying some of these various contracts and cost inflationary items? Thanks for taking my question.

Speaker 13

Yes, no, absolutely Mike. And there really isn't anything unusual to point out. We are anniversarying some of the contracts, so that is just just to clarify on the CASM ex numbers for last year, I know we've had some questions coming in on that just to make sure you all have the correct numbers. The specific numbers for the Q3 is $10.67 and 4Q is $0.1097 bringing the full year to $11.09 So just to make sure you've got all the right numbers in your model, but yes, you got it. It's mostly anniversarying the contracts.

Speaker 2

And just to be just to break it down, I'm sure you know this. I mean, sort of our normal if you look at our midpoint of our Q3 guide 12, kind of normal would be low 4s. We've got close to 5 points of sort of abnormal labor pressure with the new contracts. So as Tammy said, as you begin to anniversary that as material and then between Boeing direct impacts and then Boeing over staffing impacts, you've got about 3 points. So as that tails off and the over staffing begins to tail off and we are mitigating a large number of that and we can talk about that later if you want.

Speaker 2

So as those extraordinary items come off, that's very helpful or you anniversary them.

Speaker 11

Great. Thank you.

Speaker 3

You bet.

Operator

The next question is from Duane Pfennigwerth with Evercore ISI. Please go ahead.

Speaker 14

Hey, thanks for the time. Wanted to ask you about network changes versus product changes, things like assigned seats and which area you think will be the bigger contributor to your lagging margins here? Do you see a path on margin improvement before these product enhancements come on board? Only reason I ask is there are some carriers out there that have all the premium bells and whistles, but still have lagging margins, which suggests that premium in isolation is not a silver bullet. So is there a network issue and a new markets issue that we can address first?

Speaker 3

Hey, Duane, it's Andrew. I would say, yes, there is obviously a lag with the implementation of the initiatives. So between now and then we absolutely are aiming towards having margin improvement. And I would actually put it on the back of 3 efforts, network changes, many of which we've put in and we will keep putting more in. You saw some big ones in Q1 and there's still some good modest sized ones throughout the year, this year.

Speaker 3

And then, when the capacity is set then on the shorter duration, we are focused on yield improvements. You saw through the discussion about revenue management system both the raising the negative that you saw in Q2, but also getting more out of the system is a positive on top of eliminating the negative. So that's one vector. And then on the other is some we have a load gap and focusing that load gap in particular, you see our efforts on our new advertising campaigns, our entry into Google Flight and some of our customer acquisition activities help us to kind of broaden out our customer base. It's down a little bit, because we find that road warriors don't travel as much per person as they did pre pandemic.

Speaker 3

And so those efforts in the short to medium term will give a tailwind to load. So those marketing activities, revenue activities and network changes are all three that we intend to work between now and the go live initiatives.

Speaker 14

Appreciate that and we'll be watching for progress on that front. And Bob in the spirit of comment about looking at all opportunities, I wanted to ask you about bags and not from the traditional revenue perspective, but just from a Southwest take rate and cost per bag perspective. Do you have a feel for how much higher your bag take rate is versus the rest of the industry? How many more bags per flight you carry and what you estimate your cost per bag to be?

Speaker 2

Yes, we I believe just to get Roger question and check bags, I believe we carry about 2x the industry standard. But then also you've got bags that come out of the cabin that also has an issue in terms of how you manage the operation. Just to be real clear on Bagslide 3 as a policy, I mean, we're not looking at this point to change that policy. Our industry leading set of initiatives is a of customer friendly policies. And you know the list is a big part of what attracts people to Southwest Airlines.

Speaker 2

And after fare and schedule, bags fly free is cited as the number one issue in terms of why customers choose Southwest. So it's not something under consideration right now as we rethink our products related to the seating in the cabin.

Speaker 3

I would say also Bob that as far as the cost, there can be breakpoints at certain volume scales in individual airports, but if you give any given flight having 1 or less bags or 10 or more or less bags doesn't necessarily change the cost profile to handle that as a number of people and equipment required to load and unload the aircraft stack in that range. So there's not a variable cost as far as the handling part. Of course, the weight is variable with the fuel burn, but that would be the true if it was in the cabin instead of the belly.

Speaker 2

Well, the thing you have to think about too is the bags move around and so we are working to take and we will share a lot about this at our Investor Day. We're working through technology and processes to take time out of the turn because you free time there and basically free aircraft just fall out because you're able to utilize the aircraft more effectively during the day. And we don't have a large issue today with cabin overhead bags that are then slowing down the operation because the overheads are full and they have to be moved down into the checked and moved into the hole. So or into the bins. And so you'll just move the issue around.

Speaker 2

I mean, I'm sure you've flown on others and there's a massive last minute checking of bags from the cabin down into the bin under the aircraft and that cost you a lot of turn time potentially, which then just burns aircraft time that could be used more effectively. So it's a trade and we do look at the trade.

Speaker 6

And just to add one other point on that, it's about twice as many checked bags. We carry twice as many checked bags as legacies and it gets closer to 3 times more checked bags than ULCC. So I think that just points to the popularity of the policy and goes to indicate why one of the reasons why customers choose Southwest Airlines.

Speaker 14

I appreciate the thoughts. Thank you.

Operator

The next question is from Scott Group with Wolfe Research. Please go ahead.

Speaker 9

Hey, thanks. Good afternoon. So, I know you're going to quantify the changes in September, but just directionally or should Any way to help us think about how much CapEx this requires? Any way to help us think about how much CapEx this requires? And then just more conceptually, like some of the legacies would say, hey, it's not just extra legroom that you need for it to truly be sort of premium, like are there other changes you are contemplating beyond just extra legroom?

Speaker 2

Yes, Scott, you bet. And again, yes, we're going to share a lot more in September. But just maybe just to put a ballpark figure out there, our ancillary products today around boarding, like early bird upgraded boarding generate just shy of $1,000,000,000 for us. And the opportunity in the assigned but just maybe it gives you a little directional. And also hopefully, giving you the stat that roughly a third of the seats in our fleet will be in the extra legroom configuration can give you a kind of a ballpark there as well.

Speaker 2

There's very little CapEx to invest because we're not buying a whole different seat configuration, that kind of thing. So it's mostly about adjusting the cabin more than it is buying a lot of stuff to change the cabin. We already have a new seat coming from Recaro that customers really like. We're already working on some of the other components of the cabin anyway. So there's actually very little incremental CapEx related to this change.

Speaker 2

Then maybe on your last point, we're still defining the products and exactly the detail around what we want to attach to extra leg room. But again, just to be clear, we're not looking at 1st class, you really have a huge differentiation and therefore you really have a huge differentiation in cost. We really took a revenue per square foot view of a way to solve for this. You have so many feet in the cabin that you can deal with and maximizing that revenue per square foot is how we attack the problem.

Speaker 9

That's helpful. And just to clarify, when you talk about substantially north of $1,000,000,000 do we is that a I'm trying to is that a gross number or net number meaning in theory we'll lose like the early boarding ancillary that we have today, I would assume?

Speaker 2

That's an incremental. So incremental too. In other words, obviously hurdle 1, if those products are generating shy of a $1,000,000,000 dollars Whatever we do has to clear that as a hurdle. And so anything that we talk about will be the net change. But again, we're just not ready to share that in detail.

Speaker 2

But no, we wouldn't be making the change if number 1, it wasn't what our customers wanted number 2, it wasn't what our employees wanted. And number 3, it wasn't significantly beneficial financially for our shareholders.

Speaker 9

Thank you, guys.

Speaker 3

Thank you.

Operator

The next question is from Sheila Kahyaoglu with Jefferies. Please go ahead.

Speaker 15

Great. Thank you, guys. I want to maybe ask about 2025 growth in a little different way. When you look at the contractual order book, it has 70 aircraft getting delivered, plus ASMs from the Redeye aircraft. So how should we think about that in the context of at or below GDP growth?

Speaker 15

Are we getting to the point maybe where fleet growth needs to be neutral? Do you accelerate retirement, how do we think about that?

Speaker 4

Yes, hi Sheila. Yes, we have a

Speaker 13

lot of all of our plans. We'll do that out at Investor Day, but all of our plans. We'll do that out at Investor Day, but we have ample flexibility to reflow the order book to ultimately meet our needs. And we'll balance all of that clearly given all of our objectives including CapEx spend and also our initiative to renew the fleet. So we'll lay out all those details for you at Investor Day.

Speaker 2

And obviously, we're still working with Boeing on settling up against the issues that we've seen here with delayed deliveries and those delayed deliveries against plan continue into 2025. So again more to share later on that as well.

Speaker 15

Okay. And then maybe one on cost to follow-up item. With the Red Eye buying, how do we think about additional headcount required for that or any cost impact?

Speaker 3

Yes. So, Sheila, it's Andrew. The incrementality is quite low on this. Obviously, it's fuel incrementality, but the nature of this is the aircraft to part the West, while it's still the operating day for those airports and then arrives in the East during their operating days. So you're staffed on both ends, so it doesn't require your ground operations.

Speaker 3

We have a situation where we have ample pilots right now and so we does not require us to hire additional pilots to be able to operate the Redeye. So, it's a way to kind of get more flying out of the current employee base and the current asset base for next year.

Operator

And Sheila was our final analyst question.

Speaker 1

Thank you. That wraps up the analyst portion of today's call. I appreciate everyone joining and have a great day.

Operator

Ladies and gentlemen, we now transition to our media portion of today's call. Ms. Whitney Eichinger, Chief Communications Officer, leads us off. Please go ahead, Whitney.

Speaker 4

Thanks, Gary. Welcome to the media on our call today. Before we begin taking your questions, Gary, can you remind everyone and share instructions on how to queue up for a question?

Operator

Our first question is from Alexandra Scores with The Dallas Morning News. Please go ahead.

Speaker 4

Hi. Can you all hear me?

Speaker 2

We can, Ali.

Speaker 4

Hi. Yes, it feels like a very historic step for Southwest with regard to the changes in policy today. I wanted to ask, are we entering a new era? Is this a step towards a new era for the company? And how is Southwest going to kind of differentiate itself from other major air carriers?

Speaker 4

Because that's kind of been the history of Southwest. So I'm wondering if you can kind of speak to that.

Speaker 2

We have we do it thoughtfully and carefully, but we've always been willing to adapt and change here at Southwest in the time that I've been here. And we always kind of forget about the plastic boarding passes, but we've made a lot of change. I will tell you, I do and I think our team does view this as a strategic transformation of the company. We are making as we've talked about, we've made significant and continuing investments in our operational capabilities. And you see it showing up.

Speaker 2

I mean, we've taken 60,000,000 pieces of paper a year out of the cockpit. The turn is going completely paperless on iPads. If you're flying out of Dallas and Baltimore and other stations, you'll see big ramp information displays up that are managing the turn and much, much more. And the investment in core technology there is allowing us to operate really well. I talked about it earlier, but we had an 8% cancel rate when the hurricane came through Houston and almost no cancels the following day.

Speaker 2

The ability to recover and you saw that when the global tech outage hit last week and we ran basically a normal day. So those investments in the operation are more than tactical. They're really transformational investments to change the way we operate, our resilience and reliability. And the same thing is going on in the commercial space. We are announcing the seating and the cabin changes today, but it's been a purposeful build that goes back 2 years to begin to add power and larger bins and Wi Fi and we're reworking the cabin and you have upgraded in different more modern uniforms coming to our crews, the our digital approach is significantly different.

Speaker 2

If you just go back maybe even 18 months, today you can track your bags and you can do same manage your same day standby and there's much, much more to come, so on the digital front. So we do see this as a fundamental transformation of Southwest Airlines to meet our customers' needs, to be more efficient and add capabilities. All that said, we're not going to change the core of what we stand for here. True hospitality, the best employees in the industry, customer policies that make sense, being transparent with our customers. So we're going to adhere to the things that make Southwest the Southwest you love, but we're going to make this an even better Southwest Airlines.

Speaker 4

Thank you for that, Bob. And my second question, just for some of the Dallas passengers too, I've been noticing have been pretty vocal about concerns about how this will be implemented. And I know you're not sharing specifics, but one that they are rather interested in is family boarding. That's like a prime reason why folks come into Love Field and have vocalized that to me. Can you share anything about how family boarding might be implemented with this new policy?

Speaker 2

No, I mean, and Ryan can talk about this. We're still there are, as you could would expect, there are 1,000 details to be worked through. But if you just think about that as a family, especially if you're on a long haul flight and the uncertainty in today's world, the uncertainty of are we going to be able to sit together is a huge question and it comes up as a stress point for families that we carry. And so in the new world and in the assigned seating world, you'd have an assurance that you're going to sit together because you have assigned seats that take that stress away. And if you want to sit together in an extra leg room section, even better.

Speaker 2

And so I think for as we've surveyed, a lot of what the changes are accomplishing are actually taking stress out of the boarding process and the seating process because most of the stress comes from where am I going to see it sit, not just am I going to get a good seat, but where am I going to sit, am I going to sit close to the folks that I want to, for example. So moving to assigned seating takes all of that stress out of the process. The goals we talked about earlier is to marry the things that folks love about our boarding with that assigned seating change. But Brian, if you want to add anything?

Speaker 6

No, yes, I think moving there are friction points in the current customer experience that come along with open seating that we've had to adapt to by creating things like our family boarding section today. Just to give a little insight into that, almost 60% of customers are checked in within the first 30 seconds of the 24 hour check-in window opening. And that goes up to about 75% of customers checked in within the first hour. So if you're a busy family and you don't hit the check-in window right on the nose, that causes anxiety. And so like Bob mentioned, this is one of those this is a way to solve a lot of those friction points that the current open seating process has introduced and just causes more anxiety than we want.

Speaker 6

So I think families at the end of the day are going to love the change.

Speaker 2

And for employees, I mean, it should be our employees end up on the aircraft if there is an issue, family boards late, there aren't seats together, the open seats together, our flight attendants end up having to manage that situation or police that situation. And if your customers that are in the last boarding group and the flight is full, you get on board and it's tough to see the open sea. So you have what we call spinners, people going up and down the aisle spinning and looking for the open sea because it's hard to see since the aircraft is full. So that's obviously stressful and the assigned seating change basically eliminates all of that.

Speaker 15

Great. Thank you.

Speaker 3

Thank you.

Operator

The next question is from Rajesh Singh with Reuters. Please go ahead.

Speaker 12

Hi. Bob, can you provide an update on your discussions with the Elliot Management? And do you expect a compromise with them? They are threatening a proxy fight.

Speaker 2

It? Yes, I can't speak for Elliot. We're speculating on what Elliot may or may not do. But so far, they've not shown any willingness to engage in any meaningful conversations with us. Most of that has been public personal attacks on leadership and the Board.

Speaker 2

So like any shareholder, we would love to engage and hear their feedback and but so far there's been no willingness on their part to do that. So for our part here as a leadership team, we're focused 100% on moving the company forward on the plans that some of which we laid out today and on transforming this company and hitting our desired financial returns.

Speaker 12

My second question is that about premium seating. Have you done any calculation that how much of investment will require? What kind of boost it will provide to your revenue and earnings next year?

Speaker 6

Yes. I think, Rajesh, we'll have more to share on the overall value opportunity of the premium seating and assigned seating initiative at Investor Day this fall. On the cost side of the equation, we're doing it in a very capital efficient way. We're using existing seats. So there's a very little capital outlay here.

Speaker 6

And then on the revenue side, we'll have a value share here later in the fall.

Speaker 9

Thank you very much.

Operator

The next question is from David Koenig with the Associated Press. Please go ahead.

Speaker 16

Yes. Hi. Actually, Alexander asked some of my questions. But just as follow-up, I'm curious how much did in regard to the open seating demise here, how much did the current gaming of the system factor in your decision?

Speaker 2

Hey, Dave. We haven't called it the device, but we're seeing it's a shift to a sun seating, but anyway, I would say that it didn't factor in terms of the analysis. So this is all about trying to make the right decision and making it not in emotion, but in data. So we as Ryan can talk about just extensive surveying of our customers, our non customers to understand their preferences. And then also to understand things like if you have status on Southwest today, you know your A List preferred, what benefits how do you value benefits and what would be attached to your status in the assigned seating and extra leg room world, for example.

Speaker 2

So just a ton of effort there and then a ton of effort to understand the operational impacts, if any, because we certainly don't want assigned seating to turn the aircraft slower, which everything that we worked on proved that it will not. So it was really about the change itself. We do know for our employees in particular, managing the boarding process as you described can be stressful and it can be for some of our customers. So while that wasn't a direct item that we studied, I think it could be that that is an indirect benefit that we see.

Speaker 16

Okay. And I think you kind of I inferred from your earlier remarks, Bob, that you were surprised by the degree to which people wanted to see assigned seating. And I don't know what your history, what baseline polling you had or surveys. Is that something that happened very recently? And is it because of the encouraging more passengers to pay extra to move up in the line?

Speaker 16

What was the timing there?

Speaker 3

Yes, I think

Speaker 6

customers' preferences shift over time. And I think it's been clear. I think their preferences shift over time and their travel patterns and travel behavior shift over time. Customers are just taking fewer short haul trips today. They're flying longer and when they fly longer, the importance of an assigned seat goes up.

Speaker 6

We've talked a lot about our desire and initiatives to grow market share with corporate business travelers in the managed business space and their preference is for an assigned seat versus an open seat. So I think that that goes into it. And then when you look at premium, premium just you can see it with in the airline industry ourselves, premium product growth has outpaced the growth in main cabin revenue for some time here. And then in other parts of the economy, consumers are

Speaker 11

just reducing non essential retail purchases and spending that on experiences. So it's a

Speaker 2

combination of

Speaker 6

customer preferences changing over time that we're adapting to here.

Speaker 16

Okay, thanks.

Operator

The next question is from Laurie Arouthani with The Washington Post. Please go ahead.

Speaker 17

Hi. Thank you for pulling me out of the queue. Sort of building on what David asked and what you just said, Bob, customers are fickle, right? And their preferences change. So are you worried that this is what everyone wants now?

Speaker 17

A few years back, the legacies were moving to basic economy, right? Because that was the hot concept. Do you worry that you're going to make this change and then couple of years from now, people are going to want something different?

Speaker 2

Hey, Laurie. No, I don't think I said customers are fickle. Just kidding. But no, we Okay. Sorry about that.

Speaker 2

They have been changing ideas. I'm kidding with you. I mean, preferences do change over time and they change sometimes over long periods of time. And just more philosophically, you can have beliefs, we as a company can have beliefs and hold on to them. But if you don't understand in data what is happening with your customers, they can move away from you.

Speaker 2

So you've got to be willing to challenge everything that's not fundamental to you as an airline. But the we do we have periodically it has moved towards assigned seating over a decade. It has moved towards assigned seating over decades. I think the last time we looked at it, which was years many actually several years ago, the preference was more fifty-fifty. But the you've got a different generate you've got what we're trying to point at too is, it's very clear that as different generations emerge and spend more on travel, their preferences are potentially very different than the prior generation.

Speaker 2

I mean, not making a value call at all, but you've got to aim because you're always working, you've got to aim at the customer that you're going to see in 5 years 10 years. So I don't worry that the in fact, this is what I love about the way we're implementing this. We're not doing anything way out on the fringe. We're moving to assigned seating. We're moving to extra leg room and we're doing it in a way that is consistent with Southwest Airlines, which is we're doing it in a very efficient way.

Speaker 2

And we're not putting in seats with that that have doors and seats that massage you or something like that. We're doing things that make sense for Southwest. So I'm comfortable that we're moving towards the customer and that those customer desires will not shift on us.

Speaker 17

Okay. Can I sneak one more and because we have readers that are of course very engaged in this? Do you guys have you worked out yet what this is going to mean for A List the folks that have A List status?

Speaker 6

That's part of what we are hard at work finalizing. Now I think it's safe to assume that just like our current A List, A List Preferred customers, there is a boarding benefit associated with their status level. I think it's safe to assume that there will be a seating benefit seating benefits that are associated with it. But the exact nature of that and the details there are things that we're defining as we speak.

Speaker 17

Great. Thank you so much.

Speaker 6

Thank you, Laurie.

Operator

The next question is from The Wall Street Journal. Please go ahead.

Speaker 4

Hi. Thank you so much. I just wanted to ask

Speaker 13

a safety related question. Obviously, the FDA review is just starting or hasn't yet started. But as you internally look at some of the incidents that you've had recently, are there any common themes that are emerging? Are there any lessons learned or changes that you're thinking about implementing to training or procedures?

Speaker 2

Yes, Natalie, I'll let obviously Andrew talk in detail. But I did want to take some time before our call ends just to reiterate that there's nothing more than safety period. We have had recent issues. We take them very seriously. Andrew can talk about it, but we've got a team on understanding what happened and how we can improve.

Speaker 2

I did speak to FAA Administrator Whitaker earlier this week to reinforce our commitment, my personal commitment to safety and our support and really appreciation for the work that the FAA is doing. So I just want to preference anything we say about the issues with the fact that there is nothing more important than safety and we fully support the FAA.

Speaker 3

Bob, I'd add on to that. It's not just the words we say safety is a priority, it's in our actions as well. So our efforts started actually in April. We noticed some things that caught our eye that we merited further involvement from us. So within the construct of our Safety Management System, we engaged our flight safety personnel within the company with the representatives from our pilots union, their Safety certificate management office to set up a joint team to do some joint analysis investigation of what are root cause drivers and what are actions we can take in the short term and the medium term.

Speaker 3

Some of the short term actions is about enhanced communication transparency because Aviation Safety today is based upon that kind of that transparency and collaboration. So that actually led to us communicate proactively to our personnel about what's going on, which then of course led to these things getting out in the press and getting more media. So, there's a little bit of self reinforcing there, but we clearly saw issues. We clearly see things that we need to work on. So, we have then since that time as we've dug into it increased our focus and tempo on it and the FAA now has increased theirs as well.

Speaker 3

So, this is the carrier, a stick and holder evaluation process, it's something that every airline goes to roughly every 5 years, but it can be kind of invoked off cycle. The FAA has already done that with one other airline this year. Now they are doing it with us. They can either do a kind of broad based review or kind of audit or focus. They have chosen here as a focused effort for us and so we expect that to begin here in the coming weeks and be a finite duration.

Speaker 3

However, the other work we already started will continue. That process shouldn't always be ongoing and so they can we can both sides can flex in additional resources from inside companies, inside organizations as well as outside. So, this is a multi layered approach to safety and I think it makes us better, but also it gives the FAA the more visibility to bring back into the rest of aviation system and vice versa, because a lot of the topics we see other airlines see and vice versa. So, we are super happy to have this kind of great relationship and joint investigations.

Speaker 4

And I know a

Speaker 13

couple of the incidents seem to have involved sort of less experienced first officers or people new in their seats. Is there anything that you are looking at specifically to address that issue?

Speaker 3

No, I would say that what we are looking at and you have seen price on internal communications is human factor. So it's not the experience or airmanship necessarily of any individual. It's the what's called kind of generically in the industry cockpit resource management, the how you interact between the pilot flying and the pilot monitoring, there is insights to be gained there. I think that's what we are focused on. We have brought in external help, the FASB brings external help and they've told us they've seen some other things elsewhere that would be helpful to us.

Speaker 3

So this is more about that dynamic than it is about any specific demographic.

Speaker 13

Thank you.

Operator

The next question is from Mary Schlangenstein with Bloomberg News. Please go ahead.

Speaker 18

Hi. I just wanted to follow-up on that. Andrew, what did you see back in April that triggered the Southwest Review? Was it some of the specific incidents that have been reported or was it something else? And then the second question is, if this is a focused investigation from the FAA or focused review, Is that focused solely on pilot training and just all focus on pilots or what is the focus?

Speaker 3

There is a focus on flight operations and flight training, but there's a couple of the items as well that will be finalized as they start up. So it's not everything. It's a handful of items. And with regards to the what caught our eye is, we had 2 flights in particular in April that had some similarities that caught our eye and led us to start this process. So that was just one too many, if you will, and that's when we started up ASAP.

Speaker 3

Really, literally with days of us seeing that, we started the joint exercise with the FAA in our pilot unit.

Speaker 18

And can you be more specific on what the similarities were? What problem did you see?

Speaker 3

Well, I won't go into too much detail. Once I mentioned Aviation Safety is based on transparency and collaboration and part of the voluntary disclosure. So, we have since individual actors within the Aviation Safety System to self disclose things that they saw that they did in exchange for anonymity from that. And so, I will not liberty and go into exactly what it is there, but you could see where the programs we've launched, you could see where the FAA has launched and how these things all fit together.

Speaker 13

Thank you.

Operator

This concludes our question and answer session for media. So back to Whitney now for some closing thoughts.

Speaker 4

Thanks everyone. If you have any further questions, our communications group is standing by. Their contact information along with today's news release are all available at swamedia.com.

Operator

The conference has concluded. Thank you all for attending. We'll meet again here next

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