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Text: In just a moment, we will share some brief remarks and then open it up for Q&A.
And on our call today, we have our chairman of the board and CEO, Gary Kelly; executive vice president and incoming CEO, Bob Jordan; executive vice president and CFO, Tammy Romo; executive vice president and chief commercial officer, Andrew Watterson; and president and chief operating officer, Mike Van de Ven.
Just a few quick notes.
And second, we had a few special items in our fourth quarter results, which we excluded from our trends for non-GAAP purposes, and we will reference these non-GAAP results in our remarks today.
So, with that, I have the pleasure of turning it over one last time to my friend, Gary Kelly.
And first and foremost, I'm delighted to be able to say there were earnings and better than we thought at Investor Day last month.
It's obviously a great way to end a tough, but much improved year, a great way to start a new year.
We're, of course, finding our way through the Omicron surge in January, February, and looking forward to a strong rebound in March and thereafter.
And, as always, as barring any unforeseen events, I expect we'll make great progress in 2022 and will enjoy another much improved year.
As we all know too well, it will not be without its challenges.
But, our people and our leadership are more than up to the task.
I'm enormously proud of all of them.
They've just done a phenomenal job.
Southwest is on top, because our people deliver great service, low fares and our business model delivers consistent profits and handsome returns on capital.
And we've emerged from two years of pandemic with our balance sheet strength and our liquidity intact.
And we are perfectly positioned to restore, to expand, and compete aggressively in the coming years.
And I could not be more enthused and more excited about our future.
We were last together on December 8th at Investor Day, and a lot has happened since then.
Gary is a phenomenal leader and done so much for Southwest and for me personally.
And I'm thrilled that he will be our executive chairman.
I'll take over the CEO responsibility for investor meetings going forward.
So, this is Gary's last earnings call.
Well, 2022 has had a challenging start, but that doesn't change our goals for the year, getting properly staffed focusing on our people, making meaningful progress returning to our historic operational reliability and efficiency, providing our legendary hospitality, and returning to consistent profitability.
We made significant progress in '21, including a profitable fourth quarter, despite the pandemic and saw strong demand.
88% of 2019 revenues restored and managed business demand ahead of our expectations for December.
While we don't expect to be profitable this quarter, the omicron impact does appear to be isolated to January and February, and we expect a profit in March, expect to be profitable in the remaining quarters and for the full year 2022 based on our current plans.
Our people performed just really well during fourth quarter as they always do, and particularly during the holidays and demand held up well through year and despite the omicron variant.
Beginning in early January, we experienced a very difficult environment due to rapidly rising COVID cases and a decrease in available staffing levels.
It's amazing, when in the first three weeks we had roughly 5,000 employees test positive for COVID, with employee cases roughly two and a half times what they were during the delta variant.
The resulting staffing shortage combined with winter weather caused a spike in flight cancels and a significant disruption to the operation.
I'm pleased to report though that over the last few weeks, the operation and staffing has stabilized, and we've seen performance even better than during the holidays.
Yesterday, for example, we were 95% on time, which I'm just usually proud of.
To maintain sufficient available staff, we extended incentive pay programs for ops employees through early February.
While that does add temporary cost pressure, it's imperative that we have sufficient staff to operate our schedule and minimize our flight cancellations.
COVID case counts are on a downward trend and we intend to normalize our staffing and pay structure as a result.
Hiring is part of the equation, of course, and we met our 2021 hiring goals and we are on track with plans to add at least 8,000 employees this year.
We're also raising our starting wage rates to be competitive in the market and due to the impacts from omicron and the variant and recent staffing challenges.
And we're further moderating our first half 2022 capacity plans to provide additional buffer for the operation.
We're encouraged by the recent improvement in bookings across the booking curve, especially in the March timeframe and we are hopeful that business travel resume the 2021 trend.
It appears that omicron impacts are pretty well contained to January and February from a revenue perspective, and we believe our temporary approach to boost available staffing is working.
We'll stay flexible, of course, and we'll be willing to further adjust our plans if needed.
So, several things have transpired since Investor Day, all driven by the pandemic though, but for omicron, we would be on our Investor Day Q1 and full year 2022 guidance.
However, I want you to know, make no mistake, we are laser focused on preserving our low cost position in the industry and returning to 2018 productivity and efficiency levels by the end of 2023.
We believe Q1 CASM-X as a peak, and our plans call for unit cost to ease from here into 2023.
Looking at 2023 based on current growth plans, we expect CASM-X to be down as compared to 2022.
Restoring both, the network and our fleet efficiency are key to returning to historic efficiency levels.
And beyond that, I'm really excited about opportunities that continue network growth as we add gates in key cities such as Denver and Phoenix and Las Vegas, Baltimore, Nashville, and even more.
Beyond 2023, we see opportunities to meet and then beat our historic productivity and efficiency levels as we continue to grow the company and focus on modernizing our operational tools and processes.
And Mike will talk more about that.
But I want to repeat my main message from Investor Day.
Despite the near-term noise, we have a superb business model, the substantial underlying competitive advantages.
We have a great five-year strategy and a strong set of initiatives that will drive significant value.
Our new co-brand credit card agreement is in place with a partner Chase, our GDS expansion is complete, and our Southwest business team is armed with the tools they need to grow our business customer base.
We continue to work on our new fare product and our revenue management system optimization, so more to come there.
But both should begin producing value this year.
And as we continue retiring older 737-700 aircraft and taking the MAX aircraft this year, in support of our fleet modernization initiatives as well.
All combined, these initiatives are expected to deliver incremental EBIT of 1 to 1.5 billion in 2023, and we continue to expect roughly half of that value this year, given the initiatives in place.
There have been all kinds of challenges and they have performed just superbly.
They continue to do an incredible job and manage through all of these challenges, and I am just in awe of them.
And together, we will emerge from the pandemic, and we will seize the opportunities in front of us.
I've worked with Bob for a long time, and I agree with Gary.
He is going to be a great CEO.
And I'm not going to say anything else because I will get choked up.
It is their hard work, dedication, and focus that enabled us to achieve an important milestone in our recovery with our first quarterly profit since the pandemic began.
We reported a $68 million profit in fourth quarter or $0.11 per diluted share.
And excluding special items, we reported an $85 million profit or $0.14 per diluted share.
As Bob mentioned, our fourth quarter profit was driven by strong leisure demand during the holidays, business travel momentum, and incremental revenue from our new co-brand credit card agreement with Chase.
Our fourth quarter results were all within the guidance ranges provided last month at Investor Day.
For full year 2021, our net income was 977 million or $1.61 per diluted share, driven by 2.7 billion of payroll support program proceeds.
Excluding this temporary benefit to salary, wages, and benefits expense, and other smaller special items, our full year net loss was 1.3 billion or a $2.15 loss per diluted share.
Andrew will cover our revenue trends and outlook here in a minute.
Taking a look at cost.
We continue to experience inflationary cost pressure experienced in fourth quarter, primarily in salary, wages and benefits and airport costs as expected.
A portion relates to hiring, and we made great strides toward our hiring efforts in 2021 and remain on track with plans this year.
And, of course, the labor market continues to be a challenge, which continues to pressure wage rates across the board.
Since Investor Day, we have experienced additional cost pressures related to omicron and winter weather.
As a result, our first quarter unit cost inflation compared with first quarter 2019 and excluding fuel special items and profit sharing has increased about 10 points.
Roughly half of that increase is driven by the 150 million of additional incentive pay we are offering to operations employees to early February, and the other half is associated with flying fewer ASMs than we were planning.
In light of the significant impact from the omicron wave on available staffing, extending the temporary incentive pay and further reducing our capacity were necessary steps to stabilize the operation.
Aside from these impacts, we would be on track with our previous unit cost outlook.
Market fuel prices have continued to rise here, which also resulted in a $0.10 increase in our fuel cost per gallon guidance.
Our estimated first quarter fuel price in the $2.25 to $2.35 per gallon range is also roughly $0.25 higher than our first quarter 2019 fuel price, and that's inclusive of an estimated $0.35 of hedging gains here in the first quarter.
Turning to our full year guidance.
At Investor Day, we were planning for capacity to be roughly flat versus 2019 levels with no material impact from the omicron variant on either revenues or costs at that time.
Fast forward to today, the impact from the omicron variant on available staffing has led us to reevaluate our first half 2022 capacity plans, in particular March through May.
Our planned flight schedule adjustments take some capacity upside optimism off the table for this year and reduces our full year 2022 capacity outlook by about four points from roughly flat to down 4% versus 2019.
I've already covered the 150 million of additional incentive pay in first quarter.
And in order to be more competitive on the hiring front, in particular for ground operations, we are raising starting wage rates from $15 per hour to $17 per hour, which is estimated to be a 20 to $25 million total impact to this year.
And of course, we have contemplated labor rate inflation in our guidance as best we can for this year, understanding that the market is somewhat uncertain.
This is clearly not where we hope to be along our recovery curve nearly two years into this pandemic, but we are making great progress.
While we must remain nimble in this environment, it takes the necessary actions to take care of our employees and provide a reliable product for our customers.
We are very focused on the long term and determined to get back to 2018 levels of productivity and efficiencies as we shared with you all at Investor Day.
As Bob said, our goal is to get there by the end of next year.
Although it is early based on our current plan for 2022 and preliminary plan for 2023, we expect 2023 CASM-X will decline year over year compared with 2022.
Longer term, our framework that we provided at Investor Day remains unchanged, and that includes a post-pandemic target of mid-single-digit ASM growth accompanied by low single-digit CASM-X growth.
I want to be clear that our longer-term CASM-X framework includes an estimate for labor rate increases as best we can estimate today.
We currently have 77 MAX firm orders and 37 MAX options with Boeing this year.
While our plan assumes we will exercise the remaining 37 options this year, we maintain the flexibility to evaluate that intention as decision points arise.
We continue to believe that taking the additional options this year will yield a positive NPV on aircraft replacement if we don't deploy them in the network.
As I have mentioned to you all before, we won't incur a material CASM-X penalty from holding on to extra aircraft in the event we temporarily park some of our -700 while capacity is moderated this year.
As we work our way back to an efficient utilization of the fleet, we remain in the fortunate position to have the flexibility needed with our retirement plans without a financial penalty.
I'll wrap up with a quick note on our balance sheet strength.
We ended 2021 with liquidity of 16.5 billion, our leverage is at a very manageable 54%, and we continue to be the only U.S. airline with an investment-grade rating by all three rating agencies, which I believe is one of our key competitive advantages.
We have ample liquidity that allows us for a further cushion in the event of further COVID wave.
Overall, our balance sheet strength puts us in a category of one in terms of our ability to withstand shocks and remain financially healthy.
I'll also start by extending my gratitude to Gary.
I'll be forever grateful for all that he taught me with his words and its actions.
Looking back to our last earnings call in October, we were dealing with a delta variant.
The negative revenue impact to Q3 was $300 million.
At that time, we estimated negative revenue impact to Q4 of $100 million.
Revenue trends have begun to pick up -- pick back up and stabilize in mid-September, and our outlook called for a sequential monthly improvement in revenues throughout Q4.
We reaffirmed this in our early December investor update, and we closed the quarter strong.
Our operating revenues finished within guidance, down 11.8%.
And managed business revenues came in better than guidance, down 50% in December.
The negative revenue impact from the delta variant came in lower than we thought at around $60 million as we saw a continued rebound in demand and yields throughout the quarter.
However, we saw some choppiness in late December from decelerating bookings and increasing cancellations, and we had a $30 million negative revenue impact from the omicron variant as COVID cases increased.
Combined, this $90 million COVID impact in Q4 was slightly less than our original estimate of $100 million from COVID as we were able to mitigate some of the load factor decrease through higher yields.
And, of course, the most notable item in Q4 was incremental revenue from our new credit card agreement with Chase, which we covered at Investor Day and included in our most recent revenue guidance.
While we can't share the specifics about the incremental revenue from our new credit card agreement, you can see that other revenues in fourth quarter 2021 increased 20% compared with Q4 2019 while outpacing the recovery in passenger revenue, and we are on track for expected benefits in 2022.
Our new markets continue to develop and perform overall in line with expectations aside from the impacts from the delta and omicron waves.
Hawaiian markets also showed improvement, and all of these markets turned in line with a broad-based improvement we saw across the rest of the network.
Now, looking at first quarter, we estimate the weather-related and staff-related flight cancellations in January, resulting in a $50 million negative impact to operating revenues.
Additionally, bookings have slowed for January and February, which are seasonally low travel periods anyway for leisure.
And trip cancellations were running quite high, beginning in early January but have moderated and are back to normal trends.
We expect the omicron-related negative revenue impact to January and February combined to be roughly $330 million.
Like the delta variant, the impact of omicron-related trip cancellations has been mainly focused in the closed-in window, and we remain optimistic about the likelihood of demand recovery and time for spring break travel.
On the corporate travel side, the business demand we experienced in December has slowed, but we continue to believe there is pent-up demand for business travel, and we are hearing from many of our corporate customers that they intend to ramp up travel post-President's Day.
I think that will depend on where we are with COVID case counts and hospitalizations, but we are encouraged by what we are hearing from our customers in terms of their future travel plans.
We expect first quarter managed business revenues to be down 45 to 55% versus 2019, and improve sequentially from January through March.
And our Southwest and GDS business initiatives is also on track for expected benefits in 2022.
When you put all these moving parts together, that gets us to our first quarter operating revenue guidance of down 10 to 15% versus first quarter 2019.
This outlook is in line where we were in the fourth quarter, but we are currently expecting a step change in improvement in March.
As far as our other initiatives, new fare product remains on track for deployment by midyear, and the new revenue management system continues its progressive rollout.
And lastly, we're in the process of adjusting our published flight schedules in March through May in order to further support the operations and adjust to available staffing trends.
The result of this exercise, combined with the flight cancellations we have experienced so far this month, is a three-point reduction in first quarter 2022 capacity from down 6% to down 9% compared with the first quarter 2019.
And for full year 2022, as Tammy mentioned, it's a four-point reduction from roughly flat to down 4% compared with the full year 2019.
Our flight schedules remain subject to further adjustments, if needed.
But while this is a slight delay to our previous capacity plan, we still have time to get back on track.
As of March 2022, we are roughly 75% restored based on trips, and we continue to expect to restore the vast majority of our route network by the end of 2023.
Our people did face quite a bit of adversity in 2021, and I just am really proud of their tremendous finish to the year, and they've built quite a bit of momentum thus far into 2022.
As we've all said, we've moderated or we began moderating our capacity in the fourth quarter to provide more staffing cushion in the environment.
And we needed all hands on deck to those periods, and we incented folks, and we urge them or those that were willing to pick up open time or voluntarily work on their days off with premium pay.
And that certainly worked.
Our people really responded.
And our on-time performance for that period was 87%, and that was better than our five-year average.
So, we ran a similar play over the Christmas holiday, and our daily trips there increased to roughly 3,600 a day.
And again, our people responded.
So normally, during the Christmas holiday, we deal with weather, but this year, we also saw the beginning of a sudden and the surging spike in COVID cases.
And because we had those people to pitch in to pick up extra shifts during that week of Christmas, we had a completion factor of 99.2%, and we had less than 1% of our flights canceled in the face of that COVID surge.
All told, we ended up the fourth quarter with an on-time performance of 72.6%, mainly due to some of the challenges we faced in October.
That's certainly not up to our standards.
We must do better, and we will.
But our holiday performances were very good, and we know that we can operate in our peak travel days when everyone is available.
So, we really have momentum to build on.
So, in contrast to those previous holiday periods, January started in the face of severe weather and this omicron variant spreading rapidly.
And as Bob mentioned, we had roughly two and a half times the number of employees with COVID cases for omicron than we did with delta.
And we had roughly 5,000 employees become sick in the first three weeks of January.
And so, the biggest impacts were in terms of flight cancellations for the period of time, the first week of January, January 1 through January 7.
And that week, we canceled roughly 3,800 flights.
About 1,900 of those were for weather, and about 1,600 of those were for staffing.
And then our on-time performance of that period was 41.5%.
So we reinstated the incentive pay program to encourage again those who would come in and pick up extra shifts and help cover the flight schedule.
And again, the response was superb.
We got all that implemented.
And so from January 9th through the 25th, our on-time performance jumped to almost 87%, and that leads the industry for marketing carriers, and the incentive pay program runs through February 8.
We're also benefiting from a decline in our employees that were sidelined due to COVID.
Our case counts peaked in that first week of January.
And just by way of example, we had over 700 pilots and 1,500 flight attendants that were able to work in that time frame.
And thus, the incentive program to help cover those that were out.
Those COVID numbers have dropped substantially since then to roughly 100 to 150 people for each group, and that's a lot closer to what we originally expected.
Next, we continue to aggressively hire.
Bob mentioned that getting staffed is one of our key objectives of 2022.
We also want to make progress toward our historic operational reliability and efficiency metrics.
And then a lot of ways, those go hand in hand as we're not operating at optimal levels today, nor is our network restored to where we want to be relative to 2019.
For the over 8,000 employees that we intend to hire this year, about 40% of them are fly crews, about 40% of them are ground operations.
So, it's very heavily operations-focused to support the schedule this year and beyond as we resume the growth.
As we restore the route network this year into 2023, that should provide the foundation to recapture better operating leverage.
And we're also working on other initiatives to improve efficiencies.
Of course, we've got the fleet modernization cost initiative, but we're also working on things like enhancing our turn times, which are already the best in the industry; expanding self-service options for our customers; and investing in daily schedule management tools, which will help us manage regular operations more efficiently.
So we've got many items in our technology and process improvement pipeline in order to support our low-cost position within the industry and improve our overall efficiency and our resilience.
Just in closing, as we move forward into 2022, we have an exceptional order book for the fleet with its economics and its flexibility.
We have new technology foundations in place for our maintenance and our airport systems.
We have a laser focus on getting staffed and running a reliable operation.
And we're building an operations modernization portfolio of initiatives that I touched on.
And our employees have sacrificed.
They've worked hard through a challenging and ever-changing environment.
And I think that positioned us well to carry this January momentum through the first quarter and beyond.
So, I am immensely grateful for the grit, their determination and, of course, their care for our customers.
And so, with that, Ryan, back to you.
I believe we have analysts queued up.

user
compname says qtrly adjusted earnings per share $0.14.
southwest airlines - qtrly earnings per share $0.11; qtrly adjusted earnings per share $0.14.
southwest airlines - with omicron variant and weather impacting our results, expect losses in jan and feb and a return to profitability in march 2022.
southwest airlines - leisure travel demand was strong, particularly during holidays, and business revenues continued to recover compared with 2019 levels.
southwest airlines - experiencing higher unit cost inflation in 2022 as we continue to navigate the pandemic.
southwest airlines - temporarily extended incentive pay for operations employees through early february 2022.
southwest airlines - omicron variant has delayed the demand improvement we were previously expecting in early 2022.
southwest airlines - omicron variant significantly impacted available staffing beginning in early jan 2022.
southwest airlines - sees q1 operating revenue compared with 2019 down 10% to 15%.
southwest airlines - sees q1 asms compared with 2019 down about 9%.
southwest airlines - sees q1 casm-x compared with 2019 up 20% to 24%.
southwest airlines - sees q1 load factor 75% to 80%.

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