That is our most significant inflationary factor. And despite the labor accruals we’ve been recording — we still expect year-over-year pressure next year from normal annual step — and scale increases, as you would expect. And then just beyond those labor cost pressures, we anticipate continued year-over-year cost pressure by the accelerated depreciation related to our fleet modernization efforts and already mentioned maintenance costs. So again, the key reconciling item here is the fact that we’ve moderated our capacity plans for next year, which does put further pressure to our unit cost. But we are not done with our 2024 plan, and we’re not content with our cost outlook. So, we are rolling up our sleeves, and we’re going to keep working on and proving that outlook.
So, that hopefully gives you a little bit more color into kind of the cost and what is sticky. And again, our focus now is on ringing out those cost inefficiencies and driving for better productivity as we moderate our growth plans next year. So, we’re going to stay hard at work on managing our costs. We have a great track record in doing that. And we’re determined to manage our costs as we have for our 50-plus history.
Bob Jordan: And of course, for everybody, I mean, the labor cost increases are — that’s a phenomenon we are all seeing as we all renegotiate contracts and some of the timing is different for folks, but those are going to be costs that I think you’re going to see generally across the board. It always takes — they’re coming in a lump. And it always takes time to adapt to the higher cost structure and as you move across a period of time. The good thing is back to the network work. We are very committed to taking network action. We had already announced last quarter a full restructuring of the network that is going to yield over $500 million in pretax profit contribution in 2024. Beyond that now, we’re moderating the first quarter.
We’re moderating the full year. Again, you’re going to have seats in the back half of the year that are actually going to be down nominally year-over-year. And all of that is designed to match the demand to the network and match the network to the demand, which should ultimately help revenue production, help RASM production.
Catherine O’Brien: Maybe just my follow-up. We’re going through another earnings season where there’s quite a lot of focus on premium products. I guess, is your view that those will still prove to be cyclical in the next downturn, whenever that might be? I guess, really just interested in hearing how you’re assessing demand for premium products and what data points could change your mind on your current product offering?
Bob Jordan: Yes. I’ll start, then Ryan can back clean up with me here. But it’s the — I don’t want to speak for others, and it’s always hard to predict the future. But yes, there’s clearly an outperformance in long-haul international and premium right now, like there was an outperformance in domestic leisure this time last year. Typically, trends moderate. They always have been in this business for a very long time, and all things tend to sort of work their way back to a trend here. We’ll see. And if you think about Southwest Airlines, we’ve got a tremendous coach product. We’ve got terrific seating and great rep rewards program and Wi-Fi and all kinds of amenities we’re putting in power and larger overhead bins.
We just announced bag tracking. So we’re obviously enhancing our product ourselves, which is a little different than premium, but certainly I think we have the most attractive coach product in the industry. Maybe attached to that, we’re always looking at what our customers, our preferences are and what they’re telling us, and we’ll always study that. And if over time, those preferences change. We’ll take a look at what that means for Southwest Airlines. Ryan?
Ryan Green: Yes. The only thing I would add is historically, premium revenue has been one of the more cyclical items in the industry overall. So, the recovery from the pandemic has been a little bit different than other periods. So, we’re watching it closely. If we — if there is some shift in consumer demand here that we need to take note of and evolve the product, we will. But I think you want to be very careful with that and study that very closely given the cyclical nature historically of premium revenue. But just like we have over our 50-year history, we listen to customers. We understand how — what they’re demanding and preferences, how those change. And we’ve evolved our product over time and we’ll continue to do that as we go forward, as we need to.
Operator: Our next question comes from Duane Pfennigwerth from Evercore ISI.
Duane Pfennigwerth: Probably a question that’s been asked a handful of times over the last few years. I understand the plan is to get margins up over time over the long run. But, is there a specific plan to get margins up in 2024? We hear a lot of pushback from investors about your unit revenue kind of exit rate, and I think folks are kind of extrapolating that into the future and they’re having a hard time seeing that path in 2024. So, what does that path look like? And what will be required to get margins up next year? And is that explicitly a plan?
Bob Jordan: Yes. Duane, obviously, that is absolutely the plan to improve margins in 2024, and we’re committed to getting back to our long term outperformance and operating margin. We’re talking about adapting to these new cost levels that will take time, but we’re moving quickly. That is a big piece of adapting the network and matching customer demand and these new demand trends to the network that we put out for our customers, both business and leisure. We have a lot of opportunity to wring out cost inefficiency through operating leverage, through new tools, through managing our headcount. We’ve got a lot of folks that are locked up in training as an example. As we slow our hiring and slow our growth here, that will come out in terms of costs.
We have a lot of cost plays that we can make. We’re still working on our 2024 plans. But yes, I can assure you that a return — growth in 2024 and then a return to industry-leading margins and the margins that our shareholders expect is absolutely a commitment. Tammy? I don’t know if you want to add anything, Tammy?
Tammy Romo: Yes. No, I thought that was very well said. But again, we know we have work to do, and we’re fully committed to delivering on a 2024 plan that enables our operational excellence. We’re going to drive operational efficiency. And as Bob said earlier, work both sides of the equation. So, stay tuned as we work through that. We’ll be back with more details. And I just do want to remind you, as we’ve already shared, the estimated benefit of our network optimization efforts along with the continued maturation of our development markets. We’re still working on our plans. And as we’ve shared, we do expect that to exceed $500 million in incremental year-over-year pretax profits next year. But clearly, more work ahead, and we’ll — we’re hard at work for you.
