Hello, everyone, and welcome to the Southwest Airlines Third Quarter 2024 Conference Call. I am Gary, and I'll be moderating today's call, which is being recorded. A replay will be available on southwest.com in the Investor Relations section. After today’s remarks, there is an opportunity to ask questions. Now, Julia Landrum, Vice President of Investor Relations, will begin the discussion. Please go ahead, Julia.

Thank you so much. Hello, everyone, and welcome to Southwest Airlines' third quarter 2024 earnings call. I'm joined today by our President and CEO, Bob Jordan; Chief Operating Officer, Andrew Watterson; and Executive Vice President and CFO, Tammy Romo. Bob will start us off by reviewing the key points from our Southwest Even Better framework introduced last month at Investor Day and cover how our third quarter results reflect initial progress against our plan. He will then turn it over to Andrew to share updates on our revenue and our industry-leading operational performance. Tammy will follow to discuss our cost performance, balance sheet, and capital allocation before turning it back over to Bob who will provide a brief statement on Elliott Investment Management, after which we will move into Q&A. Ryan Greene, EVP of Commercial Transformation, is also in the room with us today to support Q&A. A quick reminder that we will make forward-looking statements, which are based on current expectations of future performance, and our actual results could differ materially from expectations. Also, we will reference our non-GAAP results, which exclude special items that are called out and reconciled to GAAP results in our earnings press release. Our press release with third quarter 2024 results and a supplemental presentation that includes additional details on the expected EBIT contributions of our planned initiatives, as well as the draft initiative scorecard, were both issued this morning and are available on our Investor Relations website. Now, I'm pleased to turn the call over to you, Bob.

Thanks, Julia, and thanks everyone for joining us today. As you know, we laid out our Southwest Even Better transformational plan a few weeks ago at Investor Day. It's a plan designed to deliver increased value for our shareholders and our customers. And since then, we've engaged with many of our shareholders, and I truly appreciate the constructive feedback. The message is simple. Now that we have set out a clear path, it's all about executing, and that's exactly what the team and I will be discussing today. Before turning to that, I want to recognize the widespread devastation caused by recent hurricanes and the communities across the Southeast. While we were able to quickly recover our operation, we know that for so many, it will take much longer. We're leaning on our National Disaster Response Partners, providing financial donations, and offering complimentary travel to aid in the recovery efforts. Our employee catastrophic assistance charity is currently assisting all employees requesting support to ensure that they are cared for and receive immediate relief. Our hearts are with our employees and our communities as they recover and rebuild. Returning to the business, I'll start by reiterating the path we laid out and how our third quarter results reflect initial progress against our plan. As we shared at Investor Day, our plan is detailed, actionable, and highly intentional. We are fully committed to delivering the robust set of tactical and strategic initiatives we presented to restore the financial prosperity that our plan supports, which both Southwest and our shareholders expect. That includes steady marks toward deleveraging ROIC of 15% or higher, well above our cost of capital in 2027, even without tailwinds from our fleet strategy. As part of the plan, we provided specific targets for capacity, operating margin, ROIC, leverage, and free cash flow in 2027. While we have work to do, all actions to achieve those goals are well underway and progressing as planned. The team and I are accountable for delivering on the planned results and being transparent regarding our progress. To that end, we included a scorecard and supplemental detail this morning that we will use to report on progress against initiative development and expected financial results, including updates on critical milestones and the status of meaningful value capture going forward. We also included additional detail this morning on the composition of the initiative-driven EBIT contributions and how that builds between now and 2027, including additional clarification on the contribution from our fleet strategy. At the highest level, our plan builds as follows: value at 2025 is driven by improving the base business, executing tactical and efficiency initiatives, and building the capabilities to launch our strategic initiatives. Value is created in 2026 through strategic initiatives coming online, with the most significant value being unlocked through the introduction of assigned and premium seating options. Finally, value in 2027 is created by the initiative portfolio hitting run rate, where initiatives aimed at the core operation are sized at roughly $3.5 billion of cumulative incremental EBIT contribution, and this includes full realization of the cost plan. When you add the estimated benefit from the fleet strategy, you get a $4 billion total incremental EBIT that we shared at Investor Day. Importantly, we do not view the fleet monetization strategy as part of our core business. While the combination of a favorable secondary market and our attractive aircraft pricing provides a unique and lucrative opportunity to significantly reduce our aircraft CapEx and drive earnings accretion, we feel confident that we can achieve all of our 2027 targets even without the benefits expected from our fleet monetization strategy. Looking at the second half of 2024, we are encouraged by both positive results from our recent actions and by recent industry trends. We are highly confident in our ability to deliver on our plan. In terms of tactical initiatives, everything is progressing in line with what is needed to hit our 2025 commitments. We had third quarter record operating revenues of nearly $7 billion and a unit revenue increase of 2.8% compared to last year. The improvement in unit revenue reflects both a more constructive industry backdrop and a proof point of our effective execution. Improvements resulting from our revenue management actions are particularly encouraging. The team is focusing on improving yields on our best-performing flights while achieving a non-dilutive load strategy on our lower demand itineraries. While not yet in the run rate, we saw better-than-expected improvement in Q3, and we are pleased to see all months in Q4 tracking as expected. Our strategic initiative work is also progressing as planned. On the seating and cabin front, we are working actively with both regulatory agencies and vendor partners toward the successful approval and certification of our new premium cabin configurations. That would allow aircraft retrofits to begin early next year. We will start with our larger aircraft, and the 700s will follow. We are planning to retrofit 50 to 100 aircraft per month, completing the work late next year. We are also announcing today that we have signed our first three direct lodging partners for our Getaways by Southwest product that is planned to launch mid-next year, and that includes Caesars Properties in Las Vegas. Finally, we are narrowing the launch date of our previously announced partnership with Icelandair for the first quarter of 2025. Looking at cost and efficiency initiatives, we continue to expect to end this year with headcount down 2,000 compared to year end 2023. Improved turn times will be reflected in existing schedules starting in November, and red-eye service will begin next February. We're also very proud of our industry-leading domestic operational reliability. We had the best completion factor and on-time performance of any major airline this quarter, and Andrew will share additional highlights shortly. Regarding progress on our fleet monetization strategy, we're already actively exploring the market and are encouraged by what we are seeing. All that said, while our financial results are demonstrating improvement, I recognize that we still have a lot of work to do to fulfill our commitment to return to prosperity. We have a great plan, and I'm confident in our ability to execute and deliver, and we will be transparent about progress and results along the way. It's a really exciting time at Southwest. I want to take a moment to recognize all the efforts by our incredible employees who are committed to making this plan a reality. Thank you for all your extraordinary dedication. Our continued transformational progress would not be possible without all of you. And with that, I will turn it over to Andrew.

Thank you, Bob, and thanks to all for joining us today. To start, I want to emphasize how proud I am of our talented team and resilient operations that enabled Southwest to lead the industry with the best on-time performance and completion factor of any major domestic airline in the third quarter. We managed to achieve these outstanding results despite a quarter filled with challenging weather, including four named hurricanes. Overall, our third quarter completion factor was 99.3%, even with critical parts of our network impacted by storms. These weather challenges continued into the fourth quarter, most recently with Hurricane Milton, where our operating teams coordinated incredibly well, and were able to plan in ways that allowed for proactive cancellations with minimal disruption. In the face of these events, we remain steadfastly focused on safely delivering strong operational performance, prioritizing the well-being of our people, and supporting impacted communities. Turning now to revenue performance for the quarter. As Bob mentioned, benefits from the tactical initiatives we have implemented are reflected in the strength of both our nominal and unit revenue growth rates, and are aided by a more constructive supply-demand environment with Southwest contributing significantly to capacity rationalization. Bob covered the improvements we are seeing from our revenue management action plan, which are evidenced by the yield improvements from the work we did to recalibrate our systems and processes to better optimize the booking curve for our highest demand flights. Third quarter managed-business revenue also grew nicely with double-digit year-over-year improvement. This was driven largely by GDS bookings and the success of our investment in Southwest Business. We are continuing to see an increase in unique customers, up 7% year-over-year; deeper penetration of our existing accounts with 76% of the new individual travelers won over the quarter coming from existing corporate accounts; and finally, strong yield performance. Looking at booking trends, we are serving more managed-business customers than ever, but they continue to take fewer trips per year and therefore occupy fewer seats than they did pre-COVID. So we continue to see opportunities to grow our managed-business and backfill those seats with new customers. As such, we also continue to focus on initiatives aimed at network changes and distribution and marketing initiatives. Starting with our network schedules from August 4, they are designed to recalibrate supply to demand. This includes aligning capacity demand in specific geographies and also addressing seasonal and holiday demand patterns. Looking to the fourth quarter, we have created multiple schedules to adjust downward for lower periods, including the anticipated election trough, and then increased flight activity to capitalize on peak holiday demand. While we have made changes, we are seeing positive results and we expect to see additional benefits from changes in our 2025 schedules. We also continue to extend the reach for our distribution in a low-cost fashion by adding new metasearch partners including Google Flights and Kayak earlier this year, and just this month, Skyscanner. These channels have introduced Southwest to new customers and strengthened our presence in points of sale where we have traditionally been weaker. Looking ahead to the fourth quarter, as a result of our actions, capacity is projected to be down approximately 4% year-over-year with seats and trips down about 8%. We anticipate seeing the benefits from initiatives and the capacity moderation, as RASM inflected positively in August and we continue to see sequential RASM acceleration into the fourth quarter. With that, we expect fourth quarter RASM to be up in the range of 3.5% to 5.5% on a year-over-year basis. The range contemplates just under 0.5 point headwind for booking cancellations associated with Hurricane Milton earlier this month. In addition to these revenue initiatives, a key part of our strategic plan is reducing operating inefficiencies and increasing asset productivity. These efforts are clearly paying off. For example, we continue to have industry-leading turn time. We want to do even better. To that end, we have a plan to reduce our minimum turn time, the time when the plane is unproductive at the gate, by five minutes by November 2025. As we previously shared, this initiative is well underway and the reductions are already built into the next month's schedule for 12 of our stations. The turn initiative will make our current fleet more productive and create the equivalent of 16 free aircraft at system-wide implementation. As more investments come into the day-to-day operation, we are confident that the Southwest turn will be a unique competitive differentiator. In addition to reducing turn times, the introduction of red-eye flights is another key component of increasing asset productivity and improving the connectivity and efficiency of the network. The June 2025 base schedule with 33 daily red-eyes will be published next week on October 30. As a reminder, the turn and red-eye initiatives allow us to have modest year-over-year capacity growth of 1% to 2% in 2025, and limit our planned aircraft CapEx exclusively for fleet modernization. To recap, we are focused on delivering on our tactical initiatives to drive financial performance and we'll continue to look for opportunities to optimize our network, advance our revenue management capabilities, and strengthen our marketing distribution activities. Before I close, I want to express my gratitude to our people for their focus on safety and warrior spirit, which allows us to drive industry-leading operational excellence and provide our renowned Southwest hospitality. We could not do it without them. With that, I'll turn it over to Tammy to share updates on our financial performance.

Thank you, Andrew, and hello everyone. As Bob mentioned, just a few weeks ago we presented our plans to transform Southwest to make our company even better, including outlining how these plans will restore our financial prosperity and drive sustainable shareholder value. We're focused on moving swiftly and deliberately to execute our plan, controlling what we can and adapting as needed. We have the right team in place supported by our incredible people whose warrior spirit, hard work, and continued focus will help us deliver these results. I am so appreciative of each and every one of our amazing and dedicated employees. As Bob and Andrew spoke to the macro, revenue, and operational performance, I will start with our cost performance and then cover fleet, balance sheet, and capital allocation updates. Looking at our cost performance, overall our third quarter CASM-X increased 11.6% year-over-year, on the better end of expectations. For the fourth quarter, we expect continued cost pressure driven primarily by new labor contracts and overstaffing, with additional pressure from the lower capacity including over 0.5 point of unexpected unit cost headwind from flight cancellations associated with Hurricane Milton. We currently estimate our fourth quarter CASM-X to increase in the range of 11% to 13% year-over-year. We are deliberately pursuing actions to mitigate cost inflation. Looking ahead, we are in a much more stable position. We have ratified all 12 of our labor contracts, creating better cost certainty over the next three years for our largest cost item. We've implemented voluntary leave and time-off programs that allow us to reduce our overstaffing impact. In addition, we outlined a cost plan at Investor Day aimed at enhancing cost efficiency, which includes improving efficiencies in our ground operations and optimizing our operations around our new labor rules. As we shared, we expect savings from the opportunities we have identified to ramp over the next three years and reach over $500 million in run rate cost savings in 2027. This demonstrates our commitment to drive efficiency and preserve or improve our relative cost performance. Again, benefits from the fleet monetization strategy would be incremental to these savings. Our third quarter fuel cost of $2.55 per gallon was in line with our expectations, and as we have seen fuel prices come down recently, we now estimate fourth quarter fuel to be in the $2.25 to $2.35 per gallon range. Turning to our fleet, this is one of the key areas where we're seeing our prudent planning and ability to adapt really pay off. We came into the year expecting to receive 79 Boeing aircraft deliveries. In March, Boeing informed us we would receive 46. After going through a detailed process, we conservatively planned for 20 deliveries in April to reduce the risk of further operational impacts. As we close out the year, we have received 19 aircraft and expect to receive one more, exactly in line with our internal expectations. In the third quarter, we pulled forward the retirement of six additional 700s in 2024, bringing our count for this year to 37 700 retirements and four 800 lease returns for a total of 41 retirements. We shared our plans to opportunistically monetize the value of our fleet and order book at Investor Day. As a reminder, we are funding annual capacity growth of 1% to 2% over the next three years through our turn time, modernization, and red-eye flying, which results in access to more aircraft than we need to fund our capacity plans. Therefore, the combination of a favorable secondary market, our attractive aircraft pricing, and the excess aircraft available in our order book provides us a unique opportunity to reduce our aircraft CapEx and drive earnings accretion. We plan to capitalize on this opportunity through both sales and sale-leasebacks. We will pursue our fleet monetization strategy with a focus on delivering a positive NPV across the portfolio of sale-leaseback transactions. We're actively exploring the market and are encouraged by what we're seeing. Again, we consider our fleet strategy as incremental to our core business. As such, we provided an additional breakout of the EBIT contribution in our supplemental third quarter earnings materials available on our Investor Relations website. Given the complexity of the transaction, the competitive nature of the market, and the fluidity of new aircraft deliveries, we are going to limit the level of detail provided on future transactions that we are planning. Of course, we will update you as we close deals. Regardless, our plan comfortably supports all of our 2027 Investor Day financial targets without benefits from our fleet strategy. Ultimately, we remain committed to achieving our ROIC goal and in doing so, have committed to longer-term capacity discipline. With this discipline and the plans we have outlined, we believe we are well-positioned to achieve ROIC greater than or equal to 15% in 2027, which is well in excess of our WACC. Our expected capital spending for this year is approximately $2.1 billion, of which just under $1 billion is aircraft CapEx excluding any impact from our fleet strategy. Obviously, there is a lot of uncertainty around future aircraft availability, given continued challenges at Boeing. We have taken this risk into consideration in our 2025 contingency planning. While planning and re-planning remain a challenge, our moderated capacity plan reduces our need for new aircraft, and we have a lot of flexibility to make further adjustments with planned retirements. Boeing production is something we are watching closely and will defer providing more detail on CapEx and additional 2025 guidance until we have a better line of sight to an updated order book. Finally, our balance sheet remains a lasting competitive advantage, and we continue to be the only airline with an investment-grade rating by all three rating agencies. We ended the third quarter in a net cash position with cash and short-term investments of $9.4 billion and a fully available revolving credit line of $1 billion for total liquidity of $10.4 billion, well in excess of our $8 billion of outstanding debt. We remain committed to providing significant returns to our shareholders through dividends and share repurchases. We have returned more than $13.7 billion through share repurchases and dividends since 2010, including $431 million in dividends to shareholders this year. As we announced at Investor Day, our Board authorized a $2.5 billion share repurchase program, which we expect to be significantly earnings-accretive. And as we announced this morning, we will soon be launching an initial ASR under this authorization. So as we wrap up, I want to reiterate that we have a strong financial foundation and a compelling plan to support our return to prosperity and strong shareholder return. We have a comprehensive and measurable plan that we expect will enable us to cover our WACC in 2026 and achieve an after-tax ROIC of at least 15% in 2027. There is a significant body of work underway, and we believe we are taking all the necessary steps to deliver. And with that, I will turn it back over to Bob. Thank you.

Thank you, Tammy. Before we go to Q&A, I want to briefly address our recent settlement with Elliott last night. The Board has taken a lot of time to engage with shareholders and get feedback and taken significant steps based on that feedback. There's been a lot of Board refreshment that has already begun and is ongoing, and we're very pleased to have come to a collaborative resolution with Elliott. As we welcome our new members to our Board, all of whom I had a chance to interview and talk to and get to know, our focus remains on executing our plan, and that's exactly what we are going to do. I can promise you it all lies forward here as we work to set up Southwest for success for generations to come. With that, I will pass it back to Julia to start our Q&A session.

Thank you, Bob. This completes our prepared remarks. We will now transition to analysts’ questions. We'd like to get to as many of you as possible, so we ask that you please limit yourself to one question. Gary, we are ready for the first question.

The first question is from Stephen Trent with Citi.

Yes. Good afternoon, everybody, and thanks very much for taking my questions. I'm just curious, when we think about your CASM for 2025 and going forward, how are you thinking about your goals with respect to sale leaseback gains in the event that you might not receive equipment at the pace at which you're currently expecting?

Hi, Steve. First, I would just say, as you think about our unit cost generally today, there are costs in there that are really one-time step-ups, things like labor, new labor agreements, and you have costs in there like the hurricane that are one-time pressures that don't occur again. Items like the labor step-ups obviously we will lapse. But there's a lot of work in our transformational plan that we put in front of you a few weeks ago. A lot of that is around efficiency, like the red-eyes and compressing time out of the turn, driving aircraft efficiency, and then there's a cost plan that we're committed to fully realizing by 2027. So looking at '25 and beyond, we are just not ready to guide yet. There's a lot of uncertainty out there with Boeing in particular. You saw that the contract was not approved. So it's just early to be able to guide the year at this point. Obviously, it's something that we're very focused on. Tammy, if you want to add anything.

The only thing I might add is just in regard to your question about the sale leasebacks. Obviously, we have flexibility there, and those we would keep in our fleet for some period of time. We continue to have opportunities there on the sale leaseback front, and again there's a lot of flexibility to manage towards the targets that we laid out at Investor Day.

Good afternoon, everyone. I was just wondering if you could share from a revenue trend perspective just what you're seeing on the managed corporate side, as well as kind of generally how the quarter is progressing given the noise? I know you called out the hurricane Milton impact, but just wondering if there's anything else in the quarter that we should consider that's going to be on the core?

With regard specifically to managed business, we did see during the hurricane, there was a dip in managed business travel because, as you might imagine, in that geography. So, that did have a dip down, but then it bounced back up after both hurricanes went through and kind of returned to its previous run rate. We don't see any structural change in demand for business travel at this point in time.

And then, Savi, just generally on revenues, obviously, here in the fourth quarter and the holiday period looks strong as well. We're really pleased that you saw our unit revenue performance in the third quarter. We saw, with the actions that are being taken in revenue management and network and in distribution marketing, we saw an acceleration in the trends across the quarter and that continues here into the fourth quarter. So a good tailwind from the actions that are being taken, so I'm very pleased with that. More to come, but we're on track in terms of the performance out of those tactical actions that we need to hit what we told you concerning 2025 goals at Investor Day.

I appreciate that. Tammy, if I might follow up on the previous question, when it comes to sale leasebacks, given the Boeing delivery uncertainty, is the consideration that includes like existing aircraft in the fleet that you could do sale leasebacks or how are you thinking about that progression?

Yes, thanks, Savi. That's exactly right. Obviously, aircraft in our fleet are certainly eligible. It would include existing aircraft in our fleet. Again, we have a lot of flexibility, I believe, when it comes to the sale leasebacks. Regarding outright sales, obviously, we would pace those based on that, which would be informed by Boeing and the delivery schedule. We've got some work to do here given the news that was out yesterday.

Thanks. Not to beat a dead horse, but certainly, appreciate for competitive reasons you might not want to be that specific, but many investors left the Investor Day with the perception that fleet monetization over the three-year time horizon only means sale-leaseback gains. Is that how investors should be viewing? Is that the right takeaway, or is it more than that specifically on the new side?

Duane, it would include potential sales, and that's over the three-year period. We'll just have to, obviously, consider the fluidity of the situation at Boeing. Just again, we have 694 aircraft in our order book, and with our moderated capacity plans, we don't need that many airplanes. We'll manage accordingly based on what's thrown our way with regard to the situation at Boeing. But certainly in the near term, we have opportunities without consideration for a sale leaseback.

Yes, Duane. I thought we were clear; my apologies. I thought we were clear at Investor Day that we will be monetizing the value that is in the fleet order book. It could be sale-leasebacks; it could be direct sales. We'll be flexible on that front, and obviously, we need to take into account where we are, and what the market looks like. But I think we're open to whatever approach maximizes that value.

Thanks. And certainly appreciate the uncertainty with respect to the fleet next year, but can you give us any high-level shaping on cost trends, non-fuel cost trends maybe first half, second half? Is the down one to three I think in the first quarter? Is that new information, or was that kind of your thinking at Investor Day? Just to put a bow on it, when do you expect unit revenue growth to exceed non-fuel cost growth? Thanks for taking the questions.

Yes, Duane, what you were referencing was our capacity guidance. We didn't provide CASM-X guidance for next year, and we'll come back given the moving parts here at our next earnings call and give more specific guidance for next year. But our targets that we provided at Investor Day with regard to our operating margins all of that still stands.

Hi, everyone. Thanks very much for the time. Would you mind providing us an update on where things stand with your revenue management system? Is that giving you a tailwind now, or what's the latest on that?

Thanks, Tom. It's Andrew. I would classify the system and processes and organization together. It wasn't just one thing; it's a combination of factors, and we put those into place in late Q2. If you recall, we forecasted a two-point drag to Q3, and we ended up with just a one-point drag in Q3. That shows that we saw an inflection point in that. We highlighted, I think at Investor Day, that August was particularly an inflection point where we saw that particularly the last half of August. We've recalibrated our system, hired new people, put in place new processes, and new tooling to support them. That is driving yield growth on our strongest flights, which is the objective. So we can see the intended actions are manifesting in actual outcomes, so it gives us confidence that this is working for us.

Thanks very much. That's really helpful, Andrew. And then any color— it seems like inter-island fares in Hawaii have been picking up lately. Are you seeing any benefit from that?

My pleasure. Hawaii we view as a franchise, but knowing there's different parts to your franchise, and we've seen results of our focused efforts that we mentioned in Investor Day. We are seeing RASM increase quite significantly above system RASM, which, as you saw from our results, is also increasing, and that is both for inter-island and the Mainland to Hawaii. So we are pleased with the progress. We have teams that are cross-functional and organized to focus and drive this, and we are seeing the results of those efforts which will continue until we reach our business case.

And you've got future actions coming next year around modestly moderating inter-airline capacity and then adding red-eyes and really helping connections and a connecting complex back to the mainland. So all that should continue to drive improvement as well on top of what you're seeing already today.

So I apologize for turning this into a sale-leaseback call, but I am still a little confused because I think I heard something different at the Analyst Day than what I just heard. So maybe Tammy, can you just clarify? The 3% to 5% margin for next year, does this include or exclude any potential sale-leaseback?

Yes. On your first question about the margin guidance that was provided at Investor Day, we provided a range. The low end of that range would be without the fleet monetization strategy, and the high end of that range contemplates our fleet strategy, which is why we provided you a range so you can think of it more or less with or without the fleet strategy. Hopefully, that clarifies that.

And just separately on the cost side. I know we talk a lot about CASM, but if I just looked, the third quarter has got employees down 1% and labor cost up 18% year-over-year. I know we've got like new contracts, but I don't know that they're up that much. Can you just help us understand why labor costs are up so much?

Yes. On your first question, just with regard to the cost pressures, looking ahead, I guess as a starting point, we would expect for next year just our normal inflationary cost pressure to continue. Keep in mind, an important input into all of that is our moderated capacity growth. As we've already shared, we will be moderating our capacity growth next year. Then we'll also have costs associated with the investment in the launch of our assigned seating and premium seating initiatives, but offsetting we realized savings from our cost plan. Again, we'll provide more insight into all of that on our next earnings call. But the inflation cost obviously was much more significant, and as Bob said, we'll be lapping some of the abnormal labor cost pressures. However, there's just normal annual inflationary cost pressures baked into our labor contracts, and that includes also some work rule changes as well. So that is all factored into the guidance that we gave you for next year for an operating margin in the 3% to 5% range.

Scott's question was the same as mine. So we should interpret today's 3% to 5% margin as essentially a guidance lift versus last month since fleet initiatives are now separate, correct?

No. There's no change here in what we said at Investor Day. Jamie, what we said is the 3% is excluding fleet on operating margin, and the 5% would include fleet.

Yes, Jamie, for each year there was a page in there that we had an operating margin range and we had an ROIC range. And the way to think about that is one is without fleet base business and one is with fleet. I think for 2027, we said the ROIC greater than or equal to 15% would be exceeded with and without fleet. So yes, the ranges were intended to provide you with and without fleet number. And then I think we also clarified that the fleet contribution was roughly $500 million a year.

Okay. And so the change in tone, Bob, in your prepared remarks and in the answers on this topic, what drove that? Was that something maybe Elliott pushed for or was it just trying to clear up misperceptions? I'm just curious. And also, why it's not just called out as a special item?

No, we were clear at Investor Day about the with and without fleet. In the scorecard we presented today, we provided more clarity regarding the decomposition, including the fleet composition throughout the year. There was no connection to Elliott at all. After Investor Day, we engaged in many shareholder discussions, and one of the topics was wanting more clarity on the EBIT stack for '27 and other related matters, which is why we included that in the presentation filed this morning.

On the $1 billion EBIT build you called out for '25, I believe most of that's revenue, but could you just talk about what percentage is already enacted? You show an ongoing network optimization and I know you're doing marketing now and revenue management. But if you could just talk about where we're at in terms of percentages of that already in the network today.

Conor, I'll just start and then Andrew can come behind with details. Obviously, you've got 3 things. You've got the revenue management changes that were enacted primarily to take effect in August. You had network changes that are ongoing. There is another set that comes into play next year with things like Atlanta. Then you've got the distribution and marketing efforts and changes, things like Skyscanner that just went active. The ones that are in place today, primarily revenue management, are the contributors to why we're seeing the acceleration in the unit revenue trends across the third quarter, and that so far is continuing into the fourth quarter. So you take all that together, what is in place so far, which is again some network, primarily revenue management, we're on track for what we need to see in terms of improvement to hit that $1 billion in 2025. That's a little different than your question. I can't quantify, but the main point is that we're on track for a build to hit that $1 billion in 2025.

You're right, Bob. I don't think we've decomposed. We have not. How much and when and stuff like that, but as far as the actions that lead to that value, the network, as I've mentioned earlier, will be published next week through the summer. So what you'll see then will be a reflection of the network changes largely in place then. Then you have the revenue management and marketing activities, which you have the first couple of waves of those are already being implemented and you're seeing them ramp up in their benefits. There are further actions to come in both revenue management pricing and the marketing distribution for us to drive further value to get to that tactical initiatives business case that you'll see reflect in 2025. So I would say that a lot of the actions are done and underway in the market, but the value would ramp up as we progress through next year.

Got it. That's helpful. And then maybe back to just the headcount question that Scott was talking about. I know you're offering paid time off to some employees, and you're working through headcount in general through natural attrition. Has there been any internal debate, though, around being more aggressive with whether it's early retirements or so on? The reason why I ask is you're buying back stock; you feel comfortable with the outlook. Has there been more of a focus on trying to get heads out that aren't necessarily as productive as they're going to be, given your expectations around capacity growth?

Conor, thank you. Just to level set on where we are, and sorry, this is redundant. Our commitment was to be down 2,000 headcount this year compared to last year, even on modest growth, and we're on track to do that. We have another close to 2,000 that are effectively out through the short-term leave programs, a day, a week, a month kind of thing. They show up as an FTE, but there's no cost because they're effectively on a short-term leave or basically just time off without pay. We're committed to being down again next year. Now your question is: are we willing to go further? As part of the cost project, in addition to your typical supply chain efforts, tech ops, parts, all the kinds of things that you know, efficiencies, we'll be working hard on overhead. As we work our way through that, which we are just now starting, I'm not predicting anything, but we've done it before; maybe we do offer tools around things like early out. We just need to foresee the numbers, understand where we are, and then look at what tools it takes to hit the target. So we'll have a lot more for you as we progress through the cost initiative. But just to start with, we are committed to hitting the cost we've committed to, being more efficient across the company through overhead, corporate overhead, and we use the tools that we need to get there.

I think, Bob, sometimes people do FTEs, time to salary equals cost, which is appropriate for a white-collar workforce. But for an hourly workforce, it misses the fact that there's hours in there. If you were to look at the ground ops, in public data, you'd say FTEs per trip of about 22% versus pre-pandemic because the hours we paid are up 14%. So you see a big gap between the hours we're paying out and the headcount. Now that residual 14% is still something we need to work on, but you can take roughly half of that and say that is staffing we needed pre-pandemic that we didn't have. We needed because of the winter ops demand. There needs to be more efficiency as we work down that kind of inefficiency that's come in post-pandemic, and then also work back that extra headcount, the needs of extra headcount that we saw that we needed because of the winter ops demand.

And just one final note that might be helpful, just on the what's embedded in terms of the net overstaffing impact. As I shared, I believe at Investor Day, we expect that to be roughly $120 million this year. As Andrew took you through, that impact is expected to be less than $20 million for the fourth quarter, again with that impact coming primarily from the pilots. So we're working it down, and we're very focused on our cost initiative next year to continue rein in the impact from overstaffing.

Bob, just to keep it to 1 question, 3 parts here, though, and it's really about capacity. So as we think about the network for '25, could you speak to the composition, so stage, gate departures? And then also, where you see the opportunities, where you're focusing on, I guess? And within those markets, is that going to be more about frequencies and connectivity? And then part B, so the 1% to 2% guide for next year, it's not a wide range at a point, but all the moving pieces particularly as they relate to the revenue side. Why isn't 1% a better way to think about this, again, all things considered with the plan out there and how dynamic the marketplace is?

You bet. On the composition of the network, and Andrew can add a lot more here; we're basically holding capacity from areas that may be struggling a bit. You saw the changes we announced to Atlanta, Chicago O'Hare. We've closed a few cities and then we're generally redeploying in points of strength like Nashvilles and Austins, those kinds of things. It's a little bit of everything. Sometimes it's a new route, sometimes it's frequency on a route. Andrew, I think in general the stage is continuing to rise just generally, maybe a little rule of thumb, especially with business travel continuing to not be all the way back, putting some pressure on short haul. What we're going to do is continue to apply capacity at points of strength and where we see demand. On the narrow range between the 1% and the 2%, yes, that's really, really tight. I'm not sure I understand the question on why 1% versus 2%, but it's really a modest amount. That creates obviously unit cost pressure to be growing at that small over rate, and anything below that exacerbates that. But we're just committed to a lower capacity number until we exceed our cost of capital and hit the targets that we've talked about. The wildcard for '25 is what about Boeing? I'm proud of our folks. They planned effectively for '24. We planned for a strike. We created our own number of 20 deliveries, and it's going to come in right on top of that. '25, if the strike goes much longer, there will be an impact. We've got a lot of flexibility in the fleet. We'll have to deal with that and adapt. But if the strike goes a long time, it's going to be much harder to hit the higher end of that capacity number because you're just not getting the deliveries. A lot of this is really up in the air until we know more about Boeing, when the strike ends, when they get back online, and when they hit their rate. So I just say that for '25, we just owe you an answer as we know more about Boeing. As for Andrew's response on the decomposition of the network?

Yes, we already see this year that our stage reflected outward was pushing mid-single digits. As we go into next year, you can see what's already published that our trips are going to be down year-over-year, but our actual gains of our aircraft are up about 1% in those months that are already published, and you start to get to lower single digits for stage increase. The stage engage will drive ASMs and reduce frequency. You can infer by that these are going to be not short-haul business markets necessarily, but more medium-haul distance, which is around about 1,000 miles on average, is what we expect to see for all the new stuff.

Okay. That wraps up the analyst portion of today's call. I appreciate everyone joining and hope you all have a great day.

Ladies and gentlemen, we now transition to our media portion of today's call. Ms. Whitney Eichinger, Chief Communications Officer, leads us off. Please go ahead, Whitney.

Thanks, Gary. Welcome to the media on our call today. Before we begin taking your questions, Gary, can you please share instructions on how to queue up for questions?

The first question is from Robert Silk with Travel Weekly.

Probably a question for Ryan. Regarding the Getaway product, have you decided yet if you'll only sell direct or if you will also sell through travel agencies? Additionally, you mentioned Steve as a partner and noted there are two others. Can you share who the other two are?

Sure, yes. Getaways, as you know, we'll launch mid-next year. Today, we announced partnerships with three direct lodging partners: Caesars Entertainment in Las Vegas, and then Sandos and Playa in Cancun and the Caribbean are the three direct lodging partners. We also have access to hotel inventory outside of direct lodging partners as well. We announced our bed bank partner today, hotel beds as well. There are a couple of other announcements out there on some technology that we're using to put the packages together. So a lot of announcements today. We're making really good progress towards our launch mid-next year. As it relates to how we're going to go to market there, primarily it will be direct from our website. We have the largest airline website in the United States where we have a lot of customers that we can monetize these packages to. Does that mean that we won't sell through travel agents at all? The answer there is no, but the primary source of that will be our own direct distribution.

I have 2 questions, 1 on Boeing. Second on Elliott, but when does Boeing strike start impacting your growth plans?

Well, Boeing, we really don't know what to expect. We anticipated nearly 80 aircraft this year, but we'll only be taking 20, which puts us significantly behind our original plan. Next year, we'll almost certainly be off track with our contractual roadmap as well. Lowering our capacity requirements to 1% to 2% is definitely a positive step. If it were higher, we would be facing much greater challenges. We have considerable flexibility in our fleet plan due to this adjustment; we only need a smaller number of aircraft to support our growth, which will come from other initiatives. Ultimately, we need Boeing to perform well and consistently deliver aircraft to Southwest Airlines. We can manage a minor disruption from the strike since we prepared for it, but if the strike extends, we will need to reconsider our fleet strategy and scheduling for next year. There's still much to clarify about Boeing's situation, and once we have that information, we can work on ways to mitigate any negative effects. However, it is certainly a concern.

And on Elliott, congrats on getting the deal done. But there is a view that the deal has come at a very high price. They have five board seats. Some people are calling it more of a truce than a peace deal. Do you foresee it being disruptive going forward for your turnaround strategy?

I would like to remind you that the Board is currently undergoing a planned refreshment period. We have added several new members, and we previously announced that six would step down along with Gary, making it a total of seven. We moved that deadline up to November 1 as part of the agreement, but we had already indicated that seven were leaving. We intended to keep filling those positions if we couldn't reach an agreement with Elliott, which led to Pierre’s addition. Essentially, seven are departing while six are coming in, including Pierre, so the Board is still reducing in size. Importantly, a portion of the Board does not have control over the company or that subset of the Board. Our priority has been to interview candidates thoroughly to gauge what they bring to the Board, their backgrounds, personalities, and how well they will integrate with the current members. Ultimately, our goal is to have excellent Board members who will support Southwest Airlines, our shareholders, and our objectives. I’ve personally interviewed the five candidates we selected, and I believe they will positively contribute to our Board, bringing significant experience to the table. Whether they are associated with Elliott or came from elsewhere, we are focused on finding strong Board members.

When do you expect the MAX 7 to fly for Southwest? Additionally, considering Boeing's potential changes in the next five years, how do you envision Southwest evolving over the next five to ten years? Will it resemble legacy carriers more closely, and how do you plan to differentiate the airline?

I'll take the first one and give Bob the second one. Obviously, the MAX 7, we still expect it to be certified sometime in the middle of next year. The engine is an issue which is a pacing item. It's undergoing tests now. Our engineers have confidence in the technical changes that are proposed. The FAA will ultimately decide if it's sufficient. Once that is sufficient, they have to then finish the rest of the certification activities, which to us looks almost all but done. After that, we'll need at least a six-month lag between that and us putting it in revenue service because obviously, we have to then bring it into certificate, get our manuals updated and approved by the FAA and such. Therefore, our plan for next year does not include the MAX 7. But our plan for the following year could, given that the Boeing's delivery issues we don't lock down that plan, given their type of gauge they deliver to us at this point. But as we get closer and we do see the certification, we began in earnest for the details in our 2026 plan, we would then perhaps integrate that into our flying schedule.

Leslie, just on the longer-term Boeing and Southwest Airlines, I've got to tell you we've got a great order book in place with Boeing that goes through 2031, giving us access to a lot of aircraft at very attractive pricing. So we've got really good protection there, kind of no matter what we want to do with that. We've talked a lot about monetizing the opportunity to monetize the fleet, but we have access. Again, the main thing is we have access to a lot of aircraft and terrific pricing. We need Boeing to fix the issues and deliver those aircraft. As you think further than that, maybe that's where you're going. Number one for Southwest Airlines, we're focused on delivering the transformational plan that we just laid out a few weeks ago, assigned seating and extra legroom, partnerships, and Getaways by Southwest, and so much more. Our focus is delivering all those initiatives and hitting the targets that we laid out. Like any company, there's always a strategy mode out there. You're always thinking about what about five years from now? What about ten years from now? We're just not ready to talk about any of that. One thing you know for sure is the Southwest that you see in ten years won't look like the Southwest that you see today because you're always evolving. That could include all kinds of things. But yes, I'd just be speculating. The main thing is we've got a great order book with Boeing that takes us well into the future to 2031, and we're fully focused on executing the plan that's in front of us.

Okay. And then you mentioned earlier, Bob, that if the strike goes on much longer, you're going to have to revisit the fleet plan. What is much longer? Is it through the end of the year? Is it a couple more weeks? What is that cut-off?

It's probably an inexact answer. We planned for a strike roughly, I think, Andrew, in the five-ish weeks kind of range, where we are because I believe historically, that's been a typical strike for Boeing. We planned for that. The amount of adjustment obviously fluctuates a lot based on how long this goes. So it's just really hard to speculate. If the strike goes a lot further, again, we'll look at our fleet opportunities in terms of what we can do and maintain capacity sets. At some point, it becomes difficult to do that, and you think about having to adjust schedules that are way out in the future. We don't want to do that because it's disruptive to our customers. So it's all total speculation at this point. What I'm most proud of is that our folks planned for the strike and they planned appropriately. We're getting exactly the number of aircraft this year that we planned on, and you got to control what you can control, and we planned on a moderated number in '25 as well compared to what the original expectation was. I think we just have to see where we are. Again, we have options to manage within our fleet, but at some point, you'd have to moderate capacity and schedules. We're just not there yet.

It's less about the duration itself and more about how quickly things can ramp back up afterward. The longer a shutdown lasts, the greater the chance it could impact the supply chain and lead to delays. In any manufacturing process, whether it involves airlines, aircraft, or something else, a shutdown means that once operations resume, it typically takes longer to reach full capacity, and it’s rarely a straightforward recovery. We need to understand how long it will take to ramp up, as that will influence our planning and pacing going forward. Ultimately, Boeing will need to navigate this situation effectively and keep their customers informed.

Thanks, everyone. If you have any further questions, our communications group is standing by. Their contact information, along with today's news release, are all available at swamedia.com.

The conference has concluded. Thank you all for attending. We'll meet again here next quarter. You may now disconnect.