Southwest Airlines Co at Goldman Sachs Industrials Conference Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Catherine O'Brien - Goldman Sachs - Analyst : Of course. So you front ran my first question a little bit here with the 8-K out this morning, raising revenue guidance, talking about a new ASR to fall on the ASR you previously announced. We've had a couple of your peers here at this conference. Sounds like everyone is feeling a little bit better about the fourth quarter and how that's trickling into the first quarter. People are cautiously optimistic. Would love to hear a little bit more on what went well, what drove the update? It sounds like it's a little bit industry, a little bit Southwest specific. Would love to hear some more.

Question: Catherine O'Brien - Goldman Sachs - Analyst : That's great. And maybe just one follow-up. So a couple of your peers yesterday, and this was in a couple of the other 8-Ks, talking about both peak and off-peak being stronger than expected. Obviously, last summer, off-peak was the real problem for the industry. And any comments on peak versus off-peak?

Question: Catherine O'Brien - Goldman Sachs - Analyst : That's great. And you kind of referenced this already but industry a lot more capacity discipline. The backdrop still looks good as far as you can see into next year. No one's cheating around the edges.

Question: Catherine O'Brien - Goldman Sachs - Analyst : Okay. Great. Let's talk about the revenue initiatives.

Question: Catherine O'Brien - Goldman Sachs - Analyst : Let's do it. So you provided a path to $4 billion in incremental run rate EBIT in 2027, $3 billion of that is tied to revenue. Can you walk us through the ramp to get to that $3 billion run rate? What do we see in 2025? And I think there have been some investor questions on how to bridge to that $3 billion, it's an EBIT number. I understand that there's some expenses that you're netting against the revenue initiatives. So it would be really helpful maybe just high level, understand what the revenue underlying that --

Question: Catherine O'Brien - Goldman Sachs - Analyst : Right. Makes a lot of sense. There's a lot going on there. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 05, 2024 / 2:20PM, LUV.N - Southwest Airlines Co at Goldman Sachs Industrials Conference

Question: Catherine O'Brien - Goldman Sachs - Analyst : There's a lot there. A lot of tech to get in place, installing things on planes. Can you walk us through the execution checklist on delivering on these initiatives? What are the biggest risks to delivering the initiatives on time? I hosted our aircraft leasing conference here just a couple of days ago, a lot of concern around MRO slots, how that's going to work. Should we be concerned about that in terms of getting the new seats on the planes?

Question: Catherine O'Brien - Goldman Sachs - Analyst : Exciting. I'm looking forward to the scorecard. That would be great. So just drilling into the $1.5 billion, the seats, that's a big transformational part of the business. It's a big piece. It's $1.5 billion of the EBIT target. We did some math. We think it sounds a little conservative. We attempted to forecast a per seat buyout. And when we got to that number, it was much lower than your competitors. Would love to hear if you think there's some conservatism based in? It would be great to hear a little more on that.

Question: Catherine O'Brien - Goldman Sachs - Analyst : Okay. Great.

Question: Catherine O'Brien - Goldman Sachs - Analyst : Yes. That would be good. Maybe moving to capacity. You introduced conservative capacity outlook at Investor Day. We've spoken to it a bit here today, 1% to 2% until you get back to the 15% ROIC. I still remember the last time we did this, and it worked very well for the company. So given the struggles at Boeing of late, do you think there's any downside risk to conservative plan? Like I know that you kind of have your own internal metrics to get back to upside but is there a risk of the downside?

Question: Catherine O'Brien - Goldman Sachs - Analyst : That's great. I'm sure they're all excited.

Question: Catherine O'Brien - Goldman Sachs - Analyst : And new customers --

Question: Catherine O'Brien - Goldman Sachs - Analyst : No more pages.

Question: Catherine O'Brien - Goldman Sachs - Analyst : Right. And so I guess what I'm hearing from you is you control of your own destiny apart from Boeing over the next couple of years on capacity growth. It's interesting. It's the first time I've ever seen in 10-Qs and Ks that there's -- we now have contractual deliveries and expected deliveries for everyone. So that's a new one. So it's nice that you guys are --

Question: Catherine O'Brien - Goldman Sachs - Analyst : Hope number.

Question: Catherine O'Brien - Goldman Sachs - Analyst : That's great. It helps on the cost side as well and not having to hire ahead for planes that don't show up. Makes a lot of sense. Maybe just digging in on the 2025 capacity picture a little bit. You've guided to 1Q 2025 being down 1% to 3% year over year. We're going to end the year up 1% to 2%. That implies some back half growth. We just talked about this is in your control. Is that all redeyes, that's the turn feathering in across the system, stage gauge departure growth?

Question: Catherine O'Brien - Goldman Sachs - Analyst : Got it. That makes sense. And so I guess as we just -- I know you're not going to give us '25 guidance here on the stage. We're very happy to take that.

Question: Catherine O'Brien - Goldman Sachs - Analyst : Yes. It makes a lot of sense. But I guess just since we're talking about kind of the high-level sequential how that works year-over-year. Should I guess, do we start to flip to growth like in the second quarter? Is that more back half weighted? And then I guess, on the other side of that, to your point on unit cost, should we just think about there being a pretty direct relationship between the capacity growth going up and CASMx going down over the course of the year? Or anything lumpy we should be aware of as we go through the year?

Question: Catherine O'Brien - Goldman Sachs - Analyst : And I guess you said the natural cost inflation here on low single-digit growth would be mid-single digit. You've got cost initiatives that ramp over the next couple of years of your plan. In 2025, there's obviously some front-loading of cost to get technology and running for all the great stuff you've got coming on the revenue side in the later years of the plan. How do we think about how the offsets to kind of the natural cost inflation come in? Is 2025 a year where maybe there's a little bit of front-loading for later years, '26, '27, we could see you do better than that?

Question: Catherine O'Brien - Goldman Sachs - Analyst : Nothing from my model.

Question: Catherine O'Brien - Goldman Sachs - Analyst : That makes a lot of sense. Let's talk about fleet strategy. I think it'd be great to dig on this a bit more. I understand you're actively in negotiations in the 8-K this morning kind of teased we should expect something in the first quarter. So I won't press you too hard. But I've been fielding some investor questions on this. So I think it would be great to clarify to the extent you're possible. Can you speak just philosophically about the opportunity on what would influence the pacing, covering lessors, I know a lot of times like getting these actual T's crossed, I's dotted on the legal back end can take some time. Yes, I would just love to hear how we should kind of think about this. We've got the 1Q teaser but the subsequent information after that.

Question: Catherine O'Brien - Goldman Sachs - Analyst : Right. And I guess would it be on the embedded value in that order book. Would it be fair to say, number one, you've got a lot of value there as one of the largest 77 customers in the world?

Question: Catherine O'Brien - Goldman Sachs - Analyst : And number two, I mean, it has been a couple of black swan events in the airline industry since then. But rolling back to '19, you were one of the most impacted carriers by the MAX grounding. I remember at the time you talking about the value that was rolled forward. So I'm assuming -- now you're not going to tell the number but I'm assuming you got a significant benefit to the future price of aircraft on that.

Question: Catherine O'Brien - Goldman Sachs - Analyst : Right. I don't want to get too in the weeds on the margin differential and all this. But in 2025, you've got a 2-point differential with and without the fleet strategy. In 2026, it's 3 points. I attempted to do the math. In 2026, that 3-point gap drives a larger than $500 million gap between the two margin guidance. Totally understand $500 million a year in fleet is an average number. You're saying average for a reason. But I guess, does that give us any hints about the timing of capitalizing on the current strong market? Like is that what we should be interpreting from that? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 05, 2024 / 2:20PM, LUV.N - Southwest Airlines Co at Goldman Sachs Industrials Conference

Question: Catherine O'Brien - Goldman Sachs - Analyst : Okay. Fair enough. Maybe just in our last couple of minutes here, I'd love to talk about the fortress balance sheet. So you guys are still running in a net cash position today. You have -- you're going to have a lot of cash generation out of this fleet plan plus the improving backdrop of the business. Would you ever consider running some low leverage over the next couple of years as you're making some big investments as well and looking to return cash to shareholders, but still within a healthy IG rating? Like how do we think about where you might go on the balance sheet?

Question: Catherine O'Brien - Goldman Sachs - Analyst : Maybe just one last quick one. You started with a $250 million ASR. Now we're talking about $750 million. Should we read this as like the pace is picking up because the backdrop looks better or you're excited about some of the fleet strategy? I know you just said you're going to complete the $2.5 billion by the end of 2025. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 05, 2024 / 2:20PM, LUV.N - Southwest Airlines Co at Goldman Sachs Industrials Conference

Question: Catherine O'Brien - Goldman Sachs - Analyst : Right. Okay. And so I guess, like should we expect to see kind of the tempo here continue to accelerate on the share repurchase front?

Question: Catherine O'Brien - Goldman Sachs - Analyst : That's great. Well, Bob, thank you so much.

Question: Catherine O'Brien - Goldman Sachs - Analyst : Always a pleasure. Thank you for coming.

Question: Catherine O'Brien - Goldman Sachs - Analyst : Thank you so much.