Southwest Airlines Co. (NYSE:LUV) Q2 2023 Earnings Call Transcript

Page 2 of 12

And I think, Tammy, if you just think about fares, the average fair drag from that sort of those excessive development markets compared to normal is about $2 right now. So, it just gives you a ballpark in terms of thinking about average fare as well.

Scott Group: Helpful. So, I guess, just a quick follow-up, like to that. The network optimization, is that more of a cost opportunity or revenue opportunity? I guess, ultimately, I’m trying to figure out like if capacity is up high single next year, do we think CASM is up or down next year?

Bob Jordan: Do you want to take that, Tammy?

Tammy Romo: Yes. We’ll tag team on that. No, we believe that the network redesign, it will be beneficial to both our revenues as well as on the cost side. And as we look ahead to next year, we are absolutely committed to driving our unit cost down. And certainly, the network and our opportunities there to align our staffing and our fleet to our network — our network design should be helpful in helping us to achieve that goal.

Bob Jordan: Yes. And I think I would just add, too, you talked about the large capacity in the first quarter that we’ve just talked about, 14 to 16. It’s still capacity. But just as a reminder, with the restoration — getting all the aircraft flying this year, it’s going to produce a lot of capacity just doing that because we were so constrained, particularly on the pilot side, which again goes away in the third quarter. So, it produces a lot of carryover, especially into early next year. So 90% of that growth in the first quarter is simply carryover from adds back here in 2023. As you think about the network optimization, yes, as Tammy said, it’s a play on both sides. But the travel patterns — it’s clear, the travel patterns post-pandemic are not what they were pre-pandemic.

Some of that is leisure, a lot of that is that business. I expect business to continue to come back, but I think it’s going to trail the restoration of leisure here for a while. So, Ryan talked about this, but it’s things like a much more aggressive reduction into — on a Tuesday and a Wednesday for example. Normally, that schedule would fall about 2 points from a Monday. I think it’s going to fall about 8 points with the optimization of the network. We’re managing much, much better management of really early and really late flights, which obviously have RASM penalties on those. So anyways, it’s definitely a revenue play, but it’s really meant to just match the post-pandemic demand and travel patterns to what we’re seeing to the network.

Andrew Watterson: Yes. To give some color on this, it’s kind of put in the 4 buckets, the network changes we’re doing. The first is a frequency shift from mostly short-haul business heavy routes to more medium and long-haul routes with a lower business mix. The second is Tuesday, Wednesday reductions, are down 7% to 10% versus Monday, Thursday, Friday, depending on the season. The third is the shoulder of the day. So moving the latest and earliest flights, which are typically our worst performers a little bit in. And then the fourth is we’re adjusting the new city in Hawaii markets, as we’ve understood their seasonality and demand patterns, we will be shifting them as a result. Now to give you some — a little bit of color on that first one about how we’re shifting the frequencies, let’s take Midway.

Page 2 of 12