Tammy Romo
Executive Vice President & Chief Financial Officer at Southwest Airlines
Thank you, Bob, and hello, everyone. As Bob mentioned, 2023 wasn't without its challenges, but we are stronger and ready to take on another year and that is all thanks to our incredible employees. We delivered $986 million in profits for the year and our fourth quarter net income of $233 million both when excluding special items, was on the better side of our expectations.
We prioritized the restoration of our network and operational reliability in 2023, which has taken a lot of resources and focus. With our operations now stable and the network fully restored, we can direct much more focus and energy to consistently delivering a strong financial performance along with delivering operational excellence.
We have incredible strengths to build upon and the levers we need to optimize and regain our position as an industry leader. We will be steadfast in our efforts to make meaningful progress this year in support of our long-term goal of generating consistent returns well in excess of our cost of capital.
Ryan and Andrew will cover the headway we've made with our revenue and operations performance in detail. So I'll start with our cost performance before moving to fleet and balance sheet.
Overall, our unit costs, excluding special items were down 16% year-over-year in the fourth quarter. Our fourth quarter average fuel price of $3 per gallon was right at the low end of guidance, primarily due to jet fuel prices in the LA market, steadying after significantly spiking in mid-November. Thankfully, market prices dropped as we moved into this year and our fuel price guidance of $2.70 to $2.80 per gallon for the first quarter and $2.55 to $2.65 per gallon for the full year and the welcome reduction in fuel cost compared with 2023.
We are currently 60% hedged here in first quarter and 57% hedged for the full year, with more meaningful hedge protection kicking in at Brent prices around $90 per barrel. That's a higher strike price than where our 2023 hedges began to provide meaningful protection, which was closer to $70 per barrel. This is reflective of the current market conditions and elevated cost of hedging.
We continue to prudently add to our fuel hedge position for 2026, nearing 20% hedged and are currently 46% hedged in 2025, in line with our goal to be roughly 50% hedged in each calendar year. While we are not fully immune to the volatile energy market, I am grateful that our hedging positions provide meaningful protection against catastrophic increases while also allowing us to participate fully when market prices decline.
Moving to non-fuel cost, our fourth quarter year-over-year CASM-X decrease of 18.1% was on the favorable side of our guidance range, driven primarily by elevated operating expenses and lower capacity levels in fourth quarter 2022 as a result of the operational disruption. This was partially offset by general inflationary cost pressures, including higher labor rates for all employee work groups as well as elevated maintenance expense, both of which are sticky as we move into 2024.
I also want to congratulate our pilots on their newly ratified contract. Obviously, the market for pilot wages has increased significantly and it is important that we keep pace to reward our employees appropriately. As a result of the new agreement, we recorded a change in estimate for the pilot's ratification bonus and you can find the details and breakout of the accounting treatment in this morning's press release.
Looking to first quarter 2024, we currently estimate our CASM-X to increase in the range of 6% to 7% year-over-year. Roughly 3 points to 4 points of this estimated increase is driven by higher overall 2024 labor costs and market wage rate accruals. The remainder of the first quarter CASM-X increase is primarily due to year-over-year pressure and maintenance expense driven by rate increases, as well as an increase in maintenance activity as our -800s are coming off their honeymoon period
Speaking to full year cost, our CASM-X guidance of a 6% to 7% increase year-over-year is also essentially driven by labor and maintenance cost pressures. Roughly 4 points to 5 points is attributable to labor and roughly 2 points is from maintenance for the reasons I previously covered. While we accrue for market wage rates, the recently ratified pilot contract contributes the majority of the labor CASM-X increase this year due to a step up in wage rates, work rule changes and enhanced benefits.
As Bob mentioned, we are steadfastly focused on regaining efficiencies to help counter some of the structural cost pressures as we look to control what's controllable. We are not satisfied with our current financial performance and we will work relentlessly until we produce the financial strength and returns you should expect from Southwest Airlines.
We have a solid 2024 plan which includes the benefit of roughly $1.5 billion in incremental year-over-year pre-tax profits from our strategic initiatives. The vast majority of the initiatives delivering value in 2024 are revenue-related, contributing well over $1 billion of the $1.5 billion total expected incremental benefit. And our network optimization and market maturation efforts are providing the bulk of that revenue lift. The balance of the revenue generating benefits come from incremental managed business initiatives, primarily increased GDS participation.
The incremental cost benefit relates primarily to fleet modernization and early yields from other operating efficiency efforts such as digital service modernization and our turn initiative. We will go into a lot more detail on our initiative portfolio at Investor day later this year. While early, our plan provides significant progress towards our long-term goal to generate ROIC well in excess of our cost of capital. Again, more details to come at our 2024 Investor Day.
Now turning to our fleet during 2023, we received a total of 86 -8 deliveries, one more than planned and retired 39 -700s, two less than planned, ending the year with a total of 817 aircraft. We consistently mentioned the flexibility in our fleet modernization efforts being a key competitive advantage, and the minor shifting of deliveries and retirements throughout 2023 validates our ability to thoughtfully plan and execute given the continued supply chain challenges facing Boeing.
Moving into 2024, there is continued uncertainty around the timing of expected Boeing deliveries and the certification of the MAX 7 aircraft. Our fleet plans remain nimble and currently differs from our contractual order book with Boeing. We are planning for 79 aircraft deliveries this year and expect to retire roughly 45 -700s and four -800s resulting in a net expected increase of 30 aircraft this year.
Taking our current plan into consideration, we expect our 2024 capex to be in the range of $3.5 billion to $4 billion. After finalizing our 2024 plans and refining capacity levels to better reflect the current environment, we now expect full year 2024 capacity to be up about 6% year-over-year. And our 2024 capacity plans do not currently include any MAX 7 flying. So if certification of that aircraft continues to push out, our 2024 capacity plans will not be impacted.
In addition, we are also reducing our total fuel expense with our fleet modernization initiative, as we continue to bring on more fuel efficient -8 aircraft and retire -700s. We saw a nearly 3% year-over-year improvement in fuel efficiency in 2023 and expect continued improvement this year. In addition to fuel savings, our fleet modernization initiative is a key component in reaching our environmental sustainability goals.
Lastly, I am proud to report that our balance sheet strength continues to be a financial backbone as we move into another year. We remain the only U.S. airline with an investment grade rating by all three rating agencies. We ended the year with $11.5 billion in cash and short-term investments, returned $428 million to our shareholders through dividend payments in 2023, paid $85 million to retire debt and finance lease obligations in 2023 and continue to be in a net cash position. We expect to pay a modest $29 million in debt payments this year and continue to expect interest income to well exceed our expected interest expense of $249 million in 2024.
So we are pleased to have a plan for significant financial improvement to be made this year. With some major milestones behind us, such as restoring our network, becoming fully staffed, fully utilizing our fleet and so much more, our sights are set on expanding margins and covering our cost of capital in 2024. And as I close, I'd like to sincerely thank our people for another year of hard work and dedication to the mission and vision of Southwest Airlines. I am so grateful for each and every one of you. You are truly my heroes.
And with that, I will turn it over to Ryan.
