Categories Earnings Call Transcripts, Industrials

Southwest Airlines Co. (LUV) Q1 2022 Earnings Call Transcript

LUV Earnings Call - Final Transcript

Southwest Airlines Co.  (NYSE: LUV) Q1 2022 earnings call dated Apr. 28, 2022

Corporate Participants:

Ryan Martinez — Vice President of Investor Relations

Robert E. Jordan — Chief Executive Officer

Tammy Romo — Executive Vice President and Chief Financial Officer

Andrew Watterson — Executive Vice President and Chief Commercial Officer

Michael G. Van de Ven — President and Chief Operating Officer

Linda Rutherford — Executive Vice President People & Communications and Chief Communications Officer

Analysts:

Ravi Shanker — Morgan Stanley — Analyst

Duane Pfennigwerth — Evercore ISI — Analyst

Brandon Oglenski — Barclays — Analyst

Helane Becker — Cowen — Analyst

Savi Syth — Raymond James — Analyst

Myles Walton — UBS — Analyst

Catherine O’Brien — Goldman Sachs — Analyst

Mike Linenberg — Deutsche Bank — Analyst

Unidentified Participant — — Analyst

Mary Schlangenstein — Bloomberg News — Analyst

Alison Sider — Wall Street Journal — Analyst

David Koenig — Associated Press — Analyst

Kyle Arnold — Dallas Morning News — Analyst

Dawn Gilbertson — USA Today — Analyst

Laurie Aritomi — The Washington Post — Analyst

Ethan Clapper — TPG — Analyst

Chris Isidore — CNN — Analyst

Robert Silk — Travel Weekly — Analyst

Presentation:

Operator

Good day, and welcome to the Southwest Airlines First Quarter 2022 Conference Call. My name is Chad, and I will be moderating today’s call. This call is being recorded, and a replay will be available on southwest.com in the Investor Relations section. [Operator Instructions]

At this time, I’d like to turn the call over to Mr. Ryan Martinez, Vice President of Investor Relations. Please go ahead, sir.

Ryan Martinez — Vice President of Investor Relations

Thank you, Chad, and thank you all for joining us today. In just a moment, we will share our prepared remarks and then open it up for Q&A. Joining me on the call today, we have our 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, Michael Van de Ven. A quick reminder that we will make forward-looking statements today, which are based on our current expectations of future performance, and our actual results could differ substantially from these expectations. Also, we had a few special items in our first quarter results, which we excluded from our trends for non-GAAP purposes, and we will reference these non-GAAP results in our remarks. Please see our press release from this morning and our IR website for more information, our cautionary statements and our non-GAAP reconciliation for more detail.

With that, Bob, I’ll turn it over to you.

Robert E. Jordan — Chief Executive Officer

All right. Well, thank you, Ryan. Hello, everybody. Thank you for joining us today. Well, the first quarter was a tale of two really different environments. As expected, we incurred losses in January and February due to the negative impacts of the Omicron variant. We anticipated travel demand would rebound in March, and we were pleasantly surprised at how quickly it bounced back and the extent to which demand and bookings surged. While we reported a Q1 loss, we were solidly profitable in March, actually not too far off of March 2019’s profit. And while modest, I’m very pleased that first quarter unit revenues increased as compared to 2019. That was the first quarterly increase since the onset of the pandemic. So — but for the Omicron impact, we estimate that we would have been profitable for the first quarter. In the first quarter, total operating revenues were 91% restored to 2019 levels despite Q1 managed business revenues being only 45% restored. Looking forward, we are very encouraged with the bookings and revenue trends we are experiencing for Q2, which indicate operating revenues will be fully restored to quarterly record levels on stronger leisure and business demand. Our revenue initiatives continue to roll out, and Andrew will cover our new fare product in more detail, and we look forward to launching that this quarter and getting another one of our revenue initiatives in place and producing value.

We will have another meaningful fuel hedge gain in Q2, and we remain well protected with our fuel hedge portfolio in the second half of this year. Despite higher-than-normal unit cost inflation and productivity drags from underutilizing our assets, we expect to be solidly profitable for Q2 through Q4 and for the full year 2022. We are currently forecasting a healthy profit for Q2 with solid operating margins. Now of course, this is based on our current outlook and barring any unforeseen material events such as another wave that would impact or temporarily slow our progress, but we see no signs of that at this point. It just goes to show the power of our business model and how well our people are managing through a very difficult environment. Our March results and our current outlook for Q2 represent tremendous progress in our recovery. Even if we aren’t fully expected to be optimized with our network fully restored until the end of next year, I’m just really, really proud of our people for their progress today. We’ve come a long way. I’m just very thankful for their constant resilience. Now key to our recovery is our continued hiring progress, and we now plan to hire and add over 10,000 new employees to the Southwest family this year, and that’s net of expected attrition.

By the end of this month, we will have welcomed roughly 6,500 new employees in 2022, and that’s 5,000 net of attrition. And I’m just really pleased with our hiring progress. We continue to work through lower available staffing and training constraints to keep pace with rebounding travel demand, and we recently reduced our summer flight schedules to match our capacity guidance as we prioritize our operational reliability. I believe we have already accounted for the impact of staffing constraints in our full year 2022 guidance on capacity of down 4% versus 2019. But of course, we need to trim more capacity we certainly can, but I’m cautiously optimistic that we can get to a good balance of headcount to operate our planned flight schedules for the remainder of the year while setting ourselves up for resuming more material growth in 2023. You’ve heard me mention these things before, but we remain focused on a few key priorities for this year: first, getting properly staffed and focusing on our people; second, making progress toward our historic operational reliability and efficiency; third, providing our legendary hospitality; and fourth, returning to consistent profitability.

It will take all 59,000 employees working together to execute on these focus areas and deliver a low-cost, high-quality product with low fares and great customer service. That’s what our people are good at, and they’ve been good at that for 50 years, and they just do an incredible job. It’s a tough environment, and they’ve been through a lot. I’m so grateful for them and what they do each and every day. Together, we’re making tremendous progress to put this pandemic behind us. And while coming out of the pandemic has proven to be messy. As it was coming into the pandemic, I can assure you that we are very hard at work here at Southwest Airlines to make this company even stronger, and I remain very optimistic about our future.

And with that, I will turn it over to Tammy.

Tammy Romo — Executive Vice President and Chief Financial Officer

Thank you, Bob, and hello, everyone. First, I’d also like to thank our employees for their resilience in yet another challenging quarter impacted by the pandemic and weather disruptions. The rapid rise of the Omicron variant significantly impacted our business in January and February, resulting in a first quarter net loss of $191 million, excluding special items. March, however, was a much different story as we experienced a rebound in demand and surge in bookings during the month, driving March operating revenues higher in March 2019. This was our first monthly revenue increase relative to respective 2019 levels since the pandemic began. Last month, cash sales also represented a monthly record as bookings surged for spring and summer travel. And we posted healthy double-digit margins for the month of March despite the significant rise in market jet fuel prices. Needless to say, I am excited about the strong revenue trends in second quarter, as Andrew will cover in more detail in a minute.

Taking a look at nonfuel cost, we are tracking in line with our 2022 cost plan with first quarter CASM-X coming in at the favorable end of our previous guidance range at up 17.9% compared with first quarter 2019. Thankfully, favorable airport settlements, better operational performance in March and lower-than-expected incentive pay created some end period cost relief in first quarter relative to our guidance. As we look ahead, we continue to experience unit cost pressure from operating at suboptimal productivity levels as well as higher inflationary cost pressures, primarily in salaries, wages and benefits. We are leaving our full year CASM-X guidance unchanged at up 12% to 16% versus 2019 as we are still not able to fully utilize our assets or achieve optimal productivity levels due primarily to staffing challenges. That said, we do expect second half 2022 CASM-X growth rate relative to 2019 to ease sequentially from first half 2022. For our second quarter, we currently estimate CASM-X to increase in the range of 14% to 18% when compared with 2019 levels. Roughly half of that increase is a result of continued inflationary pressures in both labor and airport rates, which now includes labor rate increases across all work groups as best as we can estimate at this point given the current labor market and our current outlook for profitability this year.

We estimate the incremental labor accruals to be roughly one point to CASM-X. The remaining half of the CASM-X increase is attributable to headwinds from operating at suboptimal capacity and productivity levels. Our outlook for second quarter capacity remains down approximately 7% from 2019 levels. And while our moderated capacity plans are designed to provide operational relief given our current available staffing challenges, it continues to create unit cost headwinds, particularly with a shorter stage length as we add back higher-frequency business routes, which Andrew will speak to shortly.

Turning to fuel. Market prices have been on a rise and highly volatile given the current geopolitical climate. Our fuel hedge is providing excellent protection against rising energy prices and significantly offsets the market price increase in jet fuel in first quarter 2022. We are at 63% hedged for second quarter and estimate our second quarter fuel price to be in the $3.05 to $3.15 per gallon range, which is roughly $0.80 higher than our first quarter fuel price. That includes an estimated $0.61 of hedging gain, which represents cost savings of more than $290 million in second quarter alone. Of course, this is a snapshot of our fuel guidance at a point in time and market oil prices and heating cracks have been moving pretty materially on a daily basis. By the way, the current energy environment is exactly why we hedge fuel. Even though the hedging gains in the second quarter won’t fully offset the rise in market fuel costs, our hedging portfolio is providing meaningful cost mitigation. The fair market value of our fuel hedge in 2022 is estimated at roughly $1 billion.

Turning to our fleet. We recently adjusted our order book with Boeing to replace the majority of our -7 MAX firm orders with -8 MAX firm orders in the short term, along with other adjustments, which we outlined in our earnings release this morning. I won’t reiterate all the details, but will note a few key highlights. Our current order book now reflects 21 -7 firm orders, 81 -8 firm orders and 12 remaining MAX options in 2022. If you recall from our previous order book as of the end of last year, we had no -8 firm orders in 2022. While we are eager to bring the -7 aircraft into our fleet and remain confident in the aircraft, we simply wanted to go ahead and rebound our 2022 order book to provide more near-term certainty given the ongoing certification process for the -7. We are grateful for the flexibility we have in our order book to shift between -7 and -8 and our plans this year to take 114 aircraft delivery and retire 28 -700 remain unchanged. While our capex guidance assumes we will exercise the remaining 12 options this year, we maintain flexibility to evaluate that intention as decision points arise each month. And given that the certification for the -7 has been going on for some time, we contemplated the possibility of taking some -8s this year into our 2022 capex estimate. Therefore, our capex guidance of approximately $5 billion remains unchanged.

As I have mentioned before, we don’t expect to incur a CASM-X penalty from holding on to extra aircraft versus accelerating -700 retirement while our capacity remains temporarily moderated. So from an economic standpoint, we may not decide to accelerate further aircraft retirements this year despite having more aircraft in our fleet than needed for current 2022 capacity plans. We are also mindful of aircraft and growth needs for 2023 as we plan to continue restoring the network. On our balance sheet, we ended the quarter with cash and short-term investments of $15.7 billion. Our leverage is at a very manageable 56%, and we continue to pay down and retire debt as opportunities arise as we have done with a portion of our convertible debt. We continue to be the only U.S. airline with an investment-grade rating by all three rating agencies, which remains one of our key competitive advantages. In closing, our second quarter financial trends are strong. Barring any unforeseen events or trend changes, we expect solid second quarter profit and operating margins. Our financial position and ample liquidity allows us to continue investing for the future so that we are ready to resume growth as soon as we are first able to restore our network and get staffing to desired levels. And we intend to grow. We are a growth airline. We have great momentum, and we are excited about the ample opportunities in front of us.

With that, I will turn it over to Andrew.

Andrew Watterson — Executive Vice President and Chief Commercial Officer

Thank you, Tammy. I will provide some additional color on our revenue trends and outlook and point you to our earnings release for more detail. Looking first at Q1, January and February passenger revenues incurred two main negative impacts. First, $380 million due to softness in bookings and elevated passenger cancellations attributable to the Omicron variant. And second, an additional $50 million in January due to flight cancellations related to available staffing challenges, which were made worse by winter weather. However, we experienced a very different dynamic in March as we saw a surge in leisure travel and bookings along with a significant pickup in close-in demand. The improvement in March exceeded our original expectations for both leisure and business demand. March managed business revenues were down 36% versus March 2019 compared to our latest guidance of down 40% and put us back on a nice improvement trajectory from pre-Omicron performance in December of 2021. In fact, managed business revenues improved 34 points from January’s down 70% to March’s down 36%. We experienced higher managed business passengers. And most notably, March marked the first month since the pandemic began where managed business fares surpassed 2019 levels.

Our revenue initiatives performed well during Q1 despite the Omicron impact. We saw benefits from our GDS initiative given the significant bounce-back of business demand in March. We also had a strong performance from our loyalty program with other revenue up 43% versus Q1 2019, which was assisted by incremental revenue from our new co-brand credit card agreement with Chase. A nice attribute from our new co-brand credit card agreement is that the revenue stream is rather insulated or diversified from the passenger revenue impact from COVID wave as long as consumers’ spending remains healthy. And Q1 retail sales spend per cardholder and overall portfolio size continue to grow versus 2019. Now our new market performance was impacted by the Omicron variant to a greater degree than the rest of our network. While Hawaii growth markets underperformed expectations slightly in March, largely driven by the COVID protocols that have since been lifted, we are encouraged by the strong demand we saw in March and heading into the summer months for Hawaii. We continue to adjust our Hawaii offering to best suit our customers’ needs and allocate more of our capacity to business markets, and this can be seen in the changes beginning in June. In non-Hawaii new markets, we saw a modest outperformance versus expectations due to the sharp uptick in travel demand in March, which follow the general trend of the rest of the network of broad-based improvement across all geographies. All told, for Q1, we came in at the midpoint of our operating revenue guidance at down 9%.

While the Omicron impact was higher than anticipated in January and February, the improvement in March outperformed our expectations, and we’re very pleased with the recent revenue trends. Looking at Q2, the positive momentum continues, and we’re expecting the operating revenues to turn positive versus Q2 2019, estimated to be up 8% to 12% despite capacity below 2019 levels and managed business revenues yet to fully recover. As we were already operating at pre-pandemic load factors in the low to mid-80% range, our revenue improvement outlook is primarily due to higher passenger yields, both leisure and business. We expect another solid contribution from our revenue initiatives, in particular, with GDS as managed business revenues are expected to improve sequentially. April managed business revenues are expected to be down 30% versus April 2019, and we expect to see sequential improvement in May and June. We also expect our new fare product to roll out this quarter, which we call Wanna Get Away Plus. Having four fare columns displayed in our website is a natural evolution that is geared toward offering customers the attributes they want to choose while not taking anything away. The general attributes of Wanna Get Away Plus are: the introduction of transferable flight credits; more flexibility with same-day confirmed change in standby benefits; and a higher earned multiple for Rapid Rewards points.

At the same time, our Anytime fares will gain the express flyby security lane and priority check-in perks where available as well as early bird check-in benefits. We believe this will better represent the product offerings that our customers want and/or when to pay for, and it has the added benefit of generating incremental revenue for the company. Given the timing of the rollout, we aren’t expecting a material benefit in Q2, but we are expecting a solid revenue contribution in the second half of 2022. Lastly, on our revenue initiatives, our revenue management system continues its progressive rollout. Before I wrap up, I want to share some color on our capacity and published flight schedules. We continue to expect our Q2 capacity to decline 7% versus Q2 2019. While this is a 2-point sequential increase in Q1, we expect a 5-point sequential decrease in stage length from Q1 as we establish trips in shorter-haul markets aimed at business travel and in an effort to provide more recoverability to the operation with more frequencies. We have now adjusted our published flight schedules through Labor Day to match flight activity to our 2022 capacity guidance. In terms of network restoration, we will be roughly 80% restored by June based on trips. And based on our full year capacity guidance of down 4% versus 2019, we expect to be roughly 85% restored by December. As we have discussed, it will take us some time to rebuild the network that we want given current staffing constraints. We will continue to expect to restore the vast majority of our network by the end of 2023.

And with that, I will turn it over to Mike.

Michael G. Van de Ven — President and Chief Operating Officer

Well, thank you, Andrew, and hello, everyone. On our last earnings call, I walked through the availability of staffing and our challenges that we face due to the Omicron variant and the roughly 5,000 employees that became sick in the first three weeks of January. As a result of that, we reinstated an incentive pay program that ran from January nine through February 8. The incentive pay program work is designed. Our employees responded very well. They picked up extra shifts that helped us cover the flight schedule and those employees out sick. While the program cost us $127 million, it afforded us an opportunity to more quickly stabilize the operation. In the first seven days of January, our on-time performance was 41.2%. From January eight through mid-February, that on-time performance jumped to 85.1%. That put us #2 for on-time performance in the industry, and that was a monumental feat after the start to the year that we had. What I think is most impressive about our people is that they not only stepped up to cover the extra shifts during what can only be described as an Omicron crisis, but they put Southwest Airlines in the top spot for customer satisfaction in January for the DOT’s Air Travel Consumer Report, and we remained in the top spot among marketing shares in February as well.

Our people have been through a lot these last few years, and just to accomplish that in the first two months of this year is just superb. And my sincere thanks to everyone out there on the front line that’s working hard for Southwest and/or taking great care of our customers. I am very pleased that our employees and our customers can now make a decision for themselves as to whether or not they want to wear a mask on board our aircraft. I know that enforcing mass compliance has been a tough endeavor for our employees for a long time now, and they deserve a break. The science supports the mask mandate expiring. So great news on that front. Relative to early January, our operational performance in February and March improved. Our February flight levels stayed relatively low at 3,300 flights per day, and then they increased to roughly 3,400 flights a day in March. And as Andrew mentioned, travel demand in March surged with load factors in the mid-80s. We anticipated a ramp-up in demand, but we did run into a few challenges during March related to weather and ATC delay programs. In mid-March, we had Winter Storm Quinlan.

That impacted many of our Mid-Atlantic and Northeast airports. And then we also had a line of severe thunderstorms that stretched from the Gulf of Mexico and across Florida, and that resulted in air traffic management programs, operational adjustments and then resulting flight cancellations. In early April, we experienced a technology outage that caused similar issues, and it took a couple of days to work through that event. We’ve had a tough time during irregular operations given our center network and some of the unanticipated air traffic control slowdowns. The good news is that we’ve made some adjustments to our network starting this month that we believe will help and I’ll speak to them more shortly. On the staffing front, we continue to aggressively hire. And as Bob mentioned, we’re now targeting over 10,000 new employees this year, net of attrition. The majority of this hiring is in the operations group, and it’s imperative that we are properly staffed.

The goal with the majority of these hires is to cover our published flight schedules and our capacity plans this year. But also, we intend to build some buffer so that we’re ready to resume growth in the near future and get ahead of our spring and summer 2023 staffing needs. We are making great progress with hiring, but we have thousands of employees that are in training, and they’re still gaining proficiency. So it just takes time before we’ll going to have a full complement of frontline employees that are on the job versus either being a new hire and still in the training pipeline. So we’ve made trade-offs with lower capacity in order to support operational reliability. And the combination of this and the continued hiring should help us as we move into the summer. On behavior trends and hours worked per employee, we continue to lag prepandemic metrics. We’re still experiencing higher sick time, more employees on inactive status and overall staffing availability challenges. We’ve also had some constraints on training throughput, but we believe we have a path to get the sufficient headcount in our key operational groups this year.

It remains a work in progress, and it’s one of our top priorities. Until then, our capacity will remain muted versus the aircraft that we would like to return to service to accelerate the network restoration. And lastly, Andrew mentioned that we expect our average stage length to decrease by about five points from the first quarter to the second quarter, and that should help us with our operational recoverability in Q2. We’re adding short-haul flights in the business-oriented markets. That provides us more options when we have weather or ATC delays. We won’t snap back to a historical network composition overnight, but I believe that our operational performance will continue to improve as we restore the network through the end of next year. That should provide the foundation to recapture better operating leverage, and we’re also working on other initiatives to improve overall efficiency and return to our historic levels of productivity.

And so with that, Ryan, I’ll turn it back over to you.

Ryan Martinez — Vice President of Investor Relations

Thank you, Mike. I believe we have analysts queued up for questions. [Operator Instructions] So Chad, please go ahead and begin our analyst Q&A.

Questions and Answers:

Operator

[Operator Instructions] And the first question will come from Ravi Shanker with Morgan Stanley. Please go ahead.

Ravi Shanker — Morgan Stanley — Analyst

Thank you. Good afternoon everyone. A quick question on the corporate side. Can you just give us a little more detail on what you expect the corporate ramp trajectory to be through the rest of the year into next year? And also, we’re hearing from some corporate accounts that they expect a fair bit of competition in the second half of this year going into ’23 when it comes to negotiating kind of just corporate travel agreements just given that we’re kind of coming off this trough and everyone is going to be fighting for a slice of pie. Or do you have any visibility into that or not?

Robert E. Jordan — Chief Executive Officer

Ravi, it’s Bob. I’ll start, and then I’ll let Andrew chime in on more of the specifics. I think we — while the — our managed business recovery has obviously lagged leisure — I mean leisure is well ahead of 2019 at this point. We’ve seen a really robust recovery. So I think we — in March, we were down about 36% compared to 2019, but that’s a 34-point recovery from January, which is just a really significant trend. It looks like April is going to be about 30%, down 30%, and I would expect that the — from what we can see, the trends continue to improve through May and then through June. And while it’s a long ways away, you never — it’s all a forecast, I wouldn’t put it out of the realm of possibility that we could have managed business revenues fully recovered to 2019 levels by the end of this year. But I’ll let Andrew add some details as well. Andrew?

Andrew Watterson — Executive Vice President and Chief Commercial Officer

Yes. Thanks, Bob. The only thing I’d add to that initial macro point of view is if you kind of go back further than January and kind of April of last year when corporates really started traveling again, we have a nice strong trend line, but it has some ups and downs with COVID waves. And so now that we’re kind of out of Omicron and seeing a sharp comeback, it’s still on that same trajectory, which leads one to believe that it will get to what Bob said. So we have pretty good confidence in this growth because it’s grown and rebound strongly through at least two COVID waves so far. So that’s good news. And in regard to corporate contracts, a lot of them become stale because originally a lot to renegotiate during the pandemic. So we fully expect there will be kind of a big season of renewal of contracts in the fall, as you mentioned. And given — during the period from pre pandemic to now, we’ve greatly transformed our offering in managed business through both the GDS we’ve talked about, but also ramping up our Southwest Business team with the tools for TMCs and CTMs as well as more account managers, we think that kind of broad-based renewal is actually beneficial for us and our play for a bigger share of this pie. So we’re encouraged by the renewal season coming up this fall.

Ravi Shanker — Morgan Stanley — Analyst

Very helpful. Thank you.

Operator

And the next question will be from Duane Pfennigwerth with Evercore ISI. Please go ahead.

Duane Pfennigwerth — Evercore ISI — Analyst

Thanks for the time. Maybe one for Andrew. Sorry to stay with you. Just regarding the strong implied yield improvement in 2Q. If we assume a stable macro backdrop, so stable economy, stable fuel, how do you think about the progression of yields for the balance of the year? I’m not asking for explicit guidance or anything like that. But if the economy does not change and fuel does not change, is there anything you’re thinking about which would cause yields to change seasonality or otherwise?

Andrew Watterson — Executive Vice President and Chief Commercial Officer

What we did — the economy printout today wasn’t a positive one, so I don’t know how long we can say the economy doesn’t change. But at least, consumer spending was still strong in the underlying detail of that. So I think the broader picture, though, is that demand for air travel, especially for leisure, is above 2019 levels, as Bob mentioned. However, supply is not. And we don’t see a pathway yet for supply to get back to 2019 levels until much later this year. So a backdrop of demand exceeding supply is what you can give broad based of price increases that we’ve seen, mostly from the lack of discount fares versus kind of fare structures being increased. So I think that’s a tailwind we have going on. Now the wildcard is the economy and how — what that does over the near term. Certainly, there are headwinds with Fed increases and stuff like that, but the underlying consumer spending seems to be robust. So I feel like we have pretty good confidence in the kind of continued demand outpacing supply, at least for our guidance range. Does that answer your question?

Duane Pfennigwerth — Evercore ISI — Analyst

That’s helpful. Yes, I couldn’t get you to completely agree to no change on macro, but I think that’s helpful color. Just as a follow-up, is there any way to think about yields on this 2019 baseline on a same-store basis? I mean, I know, the network looks very different than it did back then, and you alluded to that, but how much of this RASM expansion is the result of not flying lower marginal RASM routes because of your constraints right now?

Andrew Watterson — Executive Vice President and Chief Commercial Officer

Well, it’s hard to generalize because we have the network that is different, and you have demand being different of leisure and business being separated by so much. And I did mention that business fares are up versus 2019. So I think you can see broad-based demand exceed supply is the driver regardless of the route structure. So now you’ll still have variations in your route by route, but I think it’s still a broad-based demand strength and a broad-based supply insufficiency is what’s behind all this. Getting kind of a little more detailed, I think, doesn’t really show you any different trends than that kind of broad-based trend I talked about.

Robert E. Jordan — Chief Executive Officer

And Duane, I would just add the same thing. You’ve got this set up in the second quarter here. Again, it’s all a forecast where you have overall operating revenue performance up 8% to 12% on capacity down 7%. I mean so that’s a significant amount of strength. And that’s still on the backs of your managed business being down. The talk about in April sort of the 30% range. The other piece of this, too, is as we restore our network, there is — and we’ve got 125 aircraft that we need to put into restoring the network this year and next year.

That all comes on at lower than normal risk in terms of the typical yield drags you might see as you add new cities or new routes because these are routes that we’ve had before, and they’re connecting cities that we have a presence in. So I think they come on without those penalties. At the same time, again, if the trends hold, you’re restoring business at a faster rate, which also helps on the yield side. So — now who knows what’s going to happen to the macro economy? There’s a lot of different things that can occur out there with the Fed moves and potential for recession. And I think what’s helpful there is that, despite all of that, consumer savings is still more than double what it was coming into the pandemic. So there’s a lot of consumer strength out there in terms of what they’ve saved and what could be spent. But anyway, hopefully, that helps a bit.

Duane Pfennigwerth — Evercore ISI — Analyst

It does. Appreciate. Appreciate your time.

Operator

And the next question will be from Brandon Oglenski from Barclays. Please go ahead.

Brandon Oglenski — Barclays — Analyst

Hey. Good afternoon, everyone, and thank you for taking my question. Maybe this one is for Bob or Mike. But can you guys just help us understand where the constraints are right now on operating more capacity? Because I hear you that you need to restore the network to pre-pandemic levels, but your stage length is only down maybe 2% here. Your FTEs look like they’re almost back to 2019 levels. Now maybe with a lot more new folks that need to be trained up. But is this really a pilot issue? Are you guys having trouble filling trainee classes? Can you speak to some of the constraints and what it’s going to take to get back to where you want to be?

Robert E. Jordan — Chief Executive Officer

Yes, Brandon, let me take a shot, and then Mike can add a lot of detail there. I think we are hiring progress since we restarted in the fall has just been tremendous. We’ve hired thousands of folks. We’re now projecting that we’ll hire over 10,000 this year. Obviously, there’s some attrition in there as well, but I’m just really proud of our people department and our hiring teams for making that happen from literally a dead start last fall. If you look at that in aggregate, we are still today below our total FTE headcount in 2019, so we haven’t caught 2019 yet. It’s just one basic point. The other is, as you think about just all the folks that we’ve hired overall, they’re not all working or working proficiently yet. So we’ve hired roughly 8,000 in that time period, but 1,600 in a typical month right now, they’re in training. So they’re not out there on the frontline. They’re not working. So they’re in training, so they don’t really add to our ability to fly and add capacity. If you look at the remainder, we have something on the order of over 15% of our entire workforce that is new since the fall. So they’re out there working, but you know what it’s like to have a new job. They’re just not proficient yet.

They’re not efficient. They’re still learning their positions. So that comes into account as you think about our ability to restore capacity. Now when you get to the where are you most constrained, definitely, it’s pilots. And to some extent, it’s our flight instructors to train our pilots. We had several thousand pilots go out on the long-term leaves with COVID. We had another 640, I think, take early retirement. Job one was to get everybody that was out on leave back trained and flying, and we just got that completed literally in February of this year. And then job two is to replace the pilots that took early retirement. And we’re just over half the way through that, maybe 2/3, so we haven’t caught that back up yet as well. So I would tell you that, yes, the chief constraint right now is on the pilot side. But Mike, please add some more detail.

Michael G. Van de Ven — President and Chief Operating Officer

Yes, Brandon, I think most of the other work groups that we hire to really is just a one-step process. We go out, we find the people. We bring them in, we interview. For the pilots, it really is, for us, it’s a 2-step process. Step #1 is making sure that we have flight instructors in place that can, so we can get to our maximum capacity of flight training. And so that’s where we’re focused at this point in time is making sure that the slots that we have for training are focused on flight instructors, so we can have — we can get up to maximum capacity in terms of our hiring towards the end of this year and into next year. So that’s step #1. And then in terms of access to pilots, we still have — we’re an airline that pilots love to come to. We have a long history of success here. And so we’re able to go fill up our classes and have access to the pilots, at least certainly here in the next year or 2.

Brandon Oglenski — Barclays — Analyst

Thank you.

Operator

The next question will be from Helane Becker from Cowen. Please go ahead.

Helane Becker — Cowen — Analyst

Thanks very much, operator. Hi, everybody and thank you very much for your time. Just two questions. The first question is on the crew members who worked extra hours. Are you concerned that as the year goes on, especially at the end for the peak, there won’t be enough crew hours for them to fly during the busy year-end season?

Robert E. Jordan — Chief Executive Officer

Yes. Helane, are you talking about pilots running up against their block hour limits for the year?

Helane Becker — Cowen — Analyst

Yes.

Robert E. Jordan — Chief Executive Officer

Yes. I don’t think that we’re at risk of that at all. We’ve got our schedule adjusted for the capacity that we have. We’ll see more pilots coming online in the second half of the year. And so I don’t think we’ll have an issue with that.

Helane Becker — Cowen — Analyst

Okay. That’s very helpful. And then maybe, Tammy, one for you since you’ve been so quiet during this Q&A. On cash and liquidity, how are you thinking about bringing cash down to whatever your new minimum liquidity or cash level is going forward?

Tammy Romo — Executive Vice President and Chief Financial Officer

Yes. Thanks for the question, Helane. Yes, our — obviously, our liquidity is much higher than where it has been historically. And if we have learned anything through this pandemic recovery, it can be choppy. But we are making really great progress as evidenced in the commentary that we shared with you on our second quarter outlook. So we’re making really great progress there. And when you combine that with our fuel hedge protection, our — we’re very encouraged with where we’re headed there. So all that to say is I think we’re really well positioned. So we want to get comfortably past the pandemic. Obviously, we want to have plenty of cash reserves to invest in the business, and we’ve shared all of that with you. But we do want to work down our cash levels over time. I’ve shared with you in the past that kind of — right now, we have an agreement to be roughly, call it, $10 billion in cash. And now going forward, we believe we can continue to bring that down. Now can we get back to historical? Should we get back to historical levels, which were probably in that, call it, $2 billion to $3 billion range? It may need to be higher than that.

So we’re going to work our way through that. Obviously, first order of business is to get back to solid profitability. So looking good there. And we want to invest in the business. And then obviously, we want to get back to shareholder returns. And we certainly have a desire to reinstate our dividend. And as we go here, as always, we’ll consider share repurchases as those feel appropriate. And obviously, that will be based on, as always, free cash flow and just profitability level. So kind of a long-winded answer, Helane. But clearly, we want to get back on track to what we were delivering pre pandemic, and that obviously starts with adequate returns on capital, and that starts with profit. So I think we’re making really good progress here, and we want to work our way back to those pre-pandemic levels.

Helane Becker — Cowen — Analyst

Thank you.

Operator

And the next question will be from Savi Syth with Raymond James. Please go ahead.

Savi Syth — Raymond James — Analyst

Hey. Thank you. Good afternoon. Just a question on the stage length. You mentioned kind of five points of contraction here in this quarter. And I would assume that a lot of those other markets that you’re adding on short haul as well that, that might continue to contract. Any color you can give us over the next few quarters on how that will trend? Or was there something kind of unique about the network restoration this quarter that had a bigger jump than you expect going forward?

Robert E. Jordan — Chief Executive Officer

Yes, Savi. Good to talk to you. I’ll give a start and then let Andrew, obviously, weigh in from a network perspective. But as we redesigned the network here to deal with the pandemic, and it was obvious that leisure demand that was going to come back faster than business, we orient ourselves in that direction. So yes, we flew longer. We had differences in places like intra-California. And now that business demand is coming back, you want to — you want the network position to take advantage of that. So really, it’s simply adding back more short haul to really build — begin to build the network that is aligned around the business demand that we anticipate. The good thing is, in addition to meeting the business demand, that additional depth in the network also helps us with our recoverability for our customers. So it helps us with network depth.

And when we had the regular operations, it’s extremely helpful. Andrew can talk to sort of thinking forward sequentially does that continue, but it is a big shift, a 5-point change quarter-over-quarter in the stage length is significant. You didn’t ask this, but it is a piece of our cost story here in the second quarter with costs up, our CASM-X projection up 14% to 18%. Sort of half of that is labor rates, airport, those kinds of things, or typical inflation. The other half is sort of inefficiency in the system plus the drag caused by this increase in — this decrease in stage length from Q1 to Q2 is having a material impact as well. But Andrew, if you want to just add some color on just the — this and where we are going forward in terms of stage.

Andrew Watterson — Executive Vice President and Chief Commercial Officer

Yes, certainly. The — if you kind of break down our network in the short, medium and long hauls, what’s really going on here is we’re adding back lots of short haul and even more medium haul versus 2019 in order to kind of get restored network. It also happens to be kind of business-oriented as we see business demand recovering. And also, as Mike mentioned, helps the network, all things being equal, for recoverability. So really, it’s a case of what’s missing, and that’s the long hauls that will probably be the last to be restored. Because they — they’ll though be attractive to customers and they do well financially, they don’t add as much to kind of network resiliency or kind of business travel recovery. And so we kind of prioritize those and so you’ll see stage length for a period of time be down as a result of this. And then towards the end of restoration, you should expect it to start to come back up a little bit as those long hauls get restored.

Savi Syth — Raymond James — Analyst

That’s helpful. Is there kind of a general on that just the stage-length level that you think you’ll get back to when it’s fully restored?

Andrew Watterson — Executive Vice President and Chief Commercial Officer

I think as you get — we said we’d be largely restored by the end of next year and then we get towards the end of next year, success would be having a lot of those network metrics look very, very similar to just before the pandemic. And so that’s where we want to be. As step 4, we now have these new things we added during the pandemic could overall enhance the attractiveness of the network, but the composition of short, medium and long and the kind of what’s the point-to-point versus connecting, all that goes back to the network we love before the pandemic.

Savi Syth — Raymond James — Analyst

And can I ask a quick follow-up on the pilot responses earlier? I was just curious, in the opening remarks, you mentioned setting up for more material growth in 2023. Just curious like how — because it seems like, again, for Southwest, hiring is not the issue, it’s clearly an attractive destination, but training class sizes and that bottleneck seems to be on the training side. So when you talk about kind of material growth next year, I mean, are you expecting your training class sizes to get bigger? Or like what’s going to change that helped you get back to kind of growth next year, especially on the pilot side?

Robert E. Jordan — Chief Executive Officer

Yes. Well, Savi, we’ve got a 26-day training facility out there. Currently, we have 23 of those bays filled. We’re going to have three additional simulators here coming online later this year, and they’ll be ready and fully operational for next year. So we have that capacity growth there. And then as I said, if we can get our instructor level up to our targeted levels, we’ll have plenty of capacity in terms of our training to produce more pilots next year, even balancing out our recurrent training with the new hire training and the upgrade training.

Savi Syth — Raymond James — Analyst

That’s helpful. Thank you.

Operator

Thank you. And the next question will be from Myles Walton from UBS. Please go ahead.

Myles Walton — UBS — Analyst

Good afternoon. I don’t know who it’s for, but I’ll pose it anyway. You had really good growth in ATL, maybe just 10% below 1Q ’19 levels, but the big three at 50% to 100% higher ATL growth in the first quarter this year versus 2019. And I guess my theory is that it’s because of the policy change on change fees, but curious if you have a perspective on that relative performance?

Tammy Romo — Executive Vice President and Chief Financial Officer

No. Really nothing to do with any policy change fees at all because we have not really changed that.

Myles Walton — UBS — Analyst

Sorry. I meant fare change fees changing.

Tammy Romo — Executive Vice President and Chief Financial Officer

Yes. So no, I really — when we’ve been sharing the demand environment is just obviously really strong. We had a surge in bookings here in March. So just really solid, robust demand. And we’re seeing that, as we’ve already shared on both the leisure shop side as well as the corporate side, so I would attribute that just more to strong bookings.

Myles Walton — UBS — Analyst

Okay, okay. I was really getting at the delta between their outperformance and your in-line performance, but I’ll take it up off-line. And then just a clarification on the 10,000 hiring versus the 8,000 previously. Can you just add color to that as well, if there’s a difference in composition versus the January comments?

Robert E. Jordan — Chief Executive Officer

No, I think it’s just — if you look at our ability to train, so training capacity, it’s come up just here a little bit. And so really, that’s the difference. There’s no other significant change. We want — it’s going to take into 2023 to restore our network deep into 2023 and to fly all of our aircraft. And so the sooner we can get there, the better. And so we’ve — as I mentioned before, I’m just really proud of our hiring folks because we went from a dead start to hiring at these incredible sort of 1,500 a month kind of levels here in six months. And so really, it’s just a boost in our ability to hire versus we have somehow changed our target hiring.

Myles Walton — UBS — Analyst

Thank you.

Tammy Romo — Executive Vice President and Chief Financial Officer

Thank you.

Operator

The next question is from Catherine O’Brien from Goldman Sachs. Please go ahead.

Catherine O’Brien — Goldman Sachs — Analyst

Hi, everyone. Thanks so much for your time. Maybe just staying on the labor front, labor availability has been a major theme this quarter. It seems like you guys got ahead of the curve realigning your outlook for this year. So asking a longer-term one. When we get beyond 2023, I know there’ll be some lumpiness with changes to this year, but beyond 2023, is your 5-year guidance for mid-single digit capacity growth and low single-digit unit costs still doable in your view based on what you can see for your own hiring pipeline and then what you’re hearing from airports and your third-party vendors?

Robert E. Jordan — Chief Executive Officer

Yes, I would say that there’s a lot of choppiness out there. So we’ve — you’ve got unknowns in the workforce. Who’s going to return? What’s driving some of the folks who were out of the workforce? You have inflation concerns. You have this — you got Fed policy. You have this overhang of a potential recession. So there’s a lot of things that are going to drive the macro economy, which obviously drives the workforce, things like that. And we’re not in control of that, and the projections are a little bit all over the map at this point. I would just tell you that, while you do have to work harder, we have not had an issue hiring quality, I mean, really good folks. I spend a lot of time with our new hires. I’m proud to bring them into Southwest Airlines because they’re exactly the kind of people that we want here.

I think we’re going to have to continue to work hard and adapt our hiring. We’ve all had to speed up the processes. We’ve had to use channels and techniques that we didn’t before, like social media. We’ve had to do instant interview, instant offer, all that. But I think, beyond that, I don’t see, as you look beyond ’22, ’23, that somehow the labor market becomes a constraint to what we want to do, what we want to grow. Job #1 is use all of our aircraft, fully restore our network. And then beyond that, we’ve got aircraft coming. We have lots and lots of opportunities. You saw us open the 18 cities. We have a lot of opportunities in front of us, and we intend to take advantage of those.

Tammy Romo — Executive Vice President and Chief Financial Officer

Yes, Bob. And the only thing I would add to that is just in terms of our 5-year targets, I agree. I do think we were out ahead. We were certainly expecting inflationary pressures this year, and that’s certainly playing out here as we go. But I think we all have confidence in our plan, and so nothing that we’re sharing with you today would change any of the 5-year targets that we shared with you back at Investor Day.

Catherine O’Brien — Goldman Sachs — Analyst

Okay. That’s great. And then maybe just for my next one. You already walked through how you’re moving around to MAX -7s and MAX -8s this year, just given the status of -7, I guess, just like what makes you comfortable with taking more of that larger variant closer in? Is it the demand uptick? And then what’s your willingness to keep taking -8 closer in, just pending the -7 certification? And then maybe just along with that, are there any moving pieces we should think about on capex here as you move to larger gauge? Or given that this is more of like a Boeing/FAA issue, do you keep your -7 price in? Or — and maybe you can get some like remuneration just given the changes to your order book? Sorry, it’s a bit of a long run.

Tammy Romo — Executive Vice President and Chief Financial Officer

No, I think I followed what you’re trying to ask there. But just in terms of the overall mix of aircraft. We really do have a lot of flexibility with the network. As we’ve been sharing a year today, we’re hard at work to restore our network and that really does call for a mix of aircraft. So we feel really good about taking the MAX 8. We — as we shared today, we firmed up 81 of those for this year. So we’re just — we’ll just continue to monitor that as we go. And I don’t really see any issues even into next year from a network perspective. So we’ll continue to work with Boeing to firm up, whether or not they’re MAX 7s or MAX 8s, but right now we’re delighted with our order book and certainly very cost efficient. So no, very pleased and don’t really — we have a lot of optionality, and I think we can manage that really well here as we restore our network and resume growth.

Robert E. Jordan — Chief Executive Officer

Catherine, the way I just thought about it is just pretty simply is we have two big objectives with the fleet. We want to modernize the fleet and then we need more shelves to restore the network. And at the end of the day, I think we’re comfortable anywhere between the 8s and the 7s in the 60% to 40% split one way or the other. So it might be a little choppy here as Boeing gets the MAX seven certified. But as you plan that out over the next couple of years, we’re going to be in that range, and we don’t want to give up delivery slots in the near term because we — because the modernization and the restoration are important to us.

Catherine O’Brien — Goldman Sachs — Analyst

Totally makes sense. Thanks so much.

Operator

The next question is from Mike Linenberg from Deutsche Bank. Please go ahead.

Mike Linenberg — Deutsche Bank — Analyst

Hey. Good afternoon, everyone. Quick one here for Andrew. Can you just walk through some of the considerations what drove sort of your thinking in expanding the Hawaiian intra-island operation? And as a consequence of that, are you going to have to establish either a pilot and/or flight attendant domicile there?

Andrew Watterson — Executive Vice President and Chief Commercial Officer

I’ll start with the last part first. No, usually, we have much larger operations before we start to establish domiciles. Secondly, as I referred to in my remarks, we kind of restructured Hawaii, both the summer and the fall. But part of that was we’re reallocating more capacity in the business market because business has a robust return. And then for kind of customer preference, we’ve done some changes to our Mainland Hawaii flying, which is mostly about how we take the connectivity we have because it’s mostly point to point with some connections on top of that restructured where we’d like to have those connections to take place on the Mainland. And then for the ones that — places where we want to have gateways mostly kind of origin, then we will have those connections happen to neighbor islands in Hawaii.

So as a consequence of that, we have less flying from the Mainland to Hawaii and then more flying between the islands. It also has a great benefit of having some time of day appeal because our previous frequencies did not allow for kind of reliable day trips for business travelers in the islands. And if you think about your business travel in Waldo who was a larger population you’re going Mali, there’s very nice hotels in Mali, but there’s no business hotel. So you have to get back that night. And so the service pattern has to allow for the early morning departures and the evening returns. And so the increased frequency count also appeals to them. So it achieves multiple objectives, and it’s part of that broader restructuring of a reduction of about 20% in Mainland-Hawaii flying as part of that.

Mike Linenberg — Deutsche Bank — Analyst

Okay. That’s super helpful. And then just a quick one to just Bob or Mike on the 10,000 up from the 8,000. Bob, as I recall, a few months back, you sort of hinted that it’s not just 8,000 this year. It feels like it’s probably going to be 8,000 for several years. So the way we think about it, is it 10,000 this year and you’re getting ahead of next year, and therefore next year you may be looking to only hire 6,000 on a net basis? And what in round numbers, how many pilots this year and next year? I know you said that you’re going to replace 640 pilots, who had early retired. But I believe your natural attrition is probably several hundred pilots per year. So what are we looking at for this year in pilots and maybe even ’23?

Robert E. Jordan — Chief Executive Officer

You bet, and there’s a lot in that question, but I think the — I mean there are really two things happening in hiring. Number one is to catch us up to where we need to be to our current fleet and network restoration. As I mentioned before, we’re still below — just in total, we’re below our 2019 headcount still. And we — and as I also mentioned, we have a large number of the new — our new employees, so they count in that number that they’re either still in training or they are gaining proficiency. So in my mind, it’s six months, nine months a year before they’re fully proficient as a longer-term employee. So obviously, we’ve got to catch up. Number two, we want to get a bit ahead here because we’ve got a lot — we’ve got 114 aircraft coming in this year. We have 90. And then net, obviously, some retirements next year is going to take the 125 to restore the network. So it’s taking a lot to get back to where we’ve got our network restored. So there’s a bit of that 10,000. There’s part of that 10,000 that’s catching up. And I think there’s a part of that 10,000 that’s trying to get a bit ahead. At the end of the day, the goal #1 is to fly all of our aircraft, restore our network, have a reliable operation. And then as we’ve talked about, by the end of 2023, get back to our historic operational reliability and get back to our historic productivity, which we’ve defined as regained 2018 productivity and efficiency. How that translates into an exact number of hiring for 2023?

I can’t really tell you just because it’s dependent on attrition and a whole number of things. My guess just because of the aircraft number or the deliveries, net retirements are falling from 2022 to 2023. It may be reasonable to expect that 2023 hiring overall is a bit lower. But I think we just have to see — again, I come back to the #1 goal is use all of our assets, fly all of our aircraft and return by the end of 2023 to our historic efficiency and reliability. On the pilot front, Mike can give you a lot more exact number than I can. What I’ve got in my head is the pilot hiring in 2022 here is roughly 1,200 or so. Mike, so yes, if you don’t mind just a little more detail on pilot.

Michael G. Van de Ven — President and Chief Operating Officer

Yes. Just a couple of things. In terms of the hiring, just the way I think about that, I’d always rather go faster than slower. When we get behind on staffing, it just takes a longer time to catch up with that. And then if we can have staffing with some cushion, it gives us a better cost profile with less premium pay. It gives us a better operational recovery profile. And if you find yourself in an overstaffed situation, you can just dial back the hiring and you can solve that pretty quickly. So just as a frame of reference, the faster that we can hire and get up the speed for us, the better. In terms of the pilot hiring, Bob is right. We’ve got somewhere just north of 1,000 pilots here this year. And then if we can get up to full capacity, we can produce probably close to 2,300 pilots next year if we needed to.

Mike Linenberg — Deutsche Bank — Analyst

Wow. Thanks for the detail, great numbers.

Michael G. Van de Ven — President and Chief Operating Officer

Thank you, Mike.

Operator

Ladies and gentlemen, we have time for one more question, and that question will come from Sheila Kahyaoglu with Jefferies. Please go ahead.

Unidentified Participant — — Analyst

It’s Scott on for Sheila. Just on that managed corporate down 30% in April, is there any way to maybe parse out how much of that is restoration of 2019 managed corporate revenue? And how much is coming from taking share with these new revenue initiatives you put in place?

Robert E. Jordan — Chief Executive Officer

Andrew, you want to take a shot at that one?

Andrew Watterson — Executive Vice President and Chief Commercial Officer

Sure, which I’m going to disappoint you is we’re — the — that’s part of our overall revenue shifts, which we gave a benefit of $1 billion to $1.5 billion at Investor Day, and we’re not decomposing those individually. You can certainly take a look in the ARC data and see our increasing composition of ARC and what that means for us getting more and more business travel. But that restoration is a combination of what we had before and new stuff. The new stuff is really mostly share of wallet, if you will, for individual entities. So the people with whom — while we’re doing business through GDS, we were also doing business through our Direct Connect or Southwest Business, SWABIZ application before. So it’s really about giving them multiple ways to purchase from us, whatever distribution channel they prefer. And we’re seeing we’re getting more of those accounts business as we’ve given them this option.

Robert E. Jordan — Chief Executive Officer

Yes, I think the thing that’s terrific is Investor Day in December we laid out our revenue initiative plan to add $1 billion to $1.5 billion in EBIT in 2023 and half of that here in 2022. And so — and it’s all things that attract business. So as Andrew said, GDS, it’s new revenue management tools. It’s the new fare product, which is Wanna Get Away Plus. It launches here shortly. It’s our enhancements to our Rapid Rewards program and our agreement with Chase. And all of those things are on track, the ones that have been delivered are performing. And so I think the main takeaway is that we laid out a really good plan, and we’re on track to meet those goals.

Ryan Martinez — Vice President of Investor Relations

Okay. Well, that wraps up the analyst portion of our call. I appreciate everyone listening in. Thank you for the questions, and have a great day.

Operator

Thank you. Ladies and gentlemen, we will now begin with our media portion of today’s call. I’d like to first introduce Ms. Linda Rutherford, Executive Vice President, People and Communications.

Linda Rutherford — Executive Vice President People & Communications and Chief Communications Officer

Well, thank you very much, Chad, and welcome to our media members. I think we can go ahead and get started if you would give them the instructions on how to queue up for questions.

Operator

Certainly. [Operator Instructions] And our first question will come from Mary Schlangenstein with Bloomberg News. Please go ahead.

Mary Schlangenstein — Bloomberg News — Analyst

Hi. Thanks. I just had a couple of quick questions. Bob, Southwest has said previously that they plan to hire 25,000 people over three years. So the 2,000 that you added today to bring you to 10,000 for this year, do you think that just brings the 25,000 to 27,000? Or do you think you still over those three years would end up adding just the 25,000?

Robert E. Jordan — Chief Executive Officer

Yes. Well, Mary, I’ll be completely honest with you, which was that’s an old — the 25,000 is an old number. And as we were planning, it was a very round number. Just trying to think through what it takes to get our staffing fully back in place. The other thing to that, to me, that’s a gross number, which is we always — we have attrition in there, too. So I wouldn’t be — I don’t think I would be quite so granular. I do think the — if you look at the changes this year, so the eight becoming 10, I feel comfortable with that because a lot of that was dependent at the time that we set the goal of 8. We weren’t quite sure what we could ramp the hiring machine, too. Because we — again, I know I’ve said this three times, but we went from no hiring machine to trying to hire thousands. And it was — we were just unclear in terms of how quickly we could rebuild all those processes. And we’ve done a — our folks have done a terrific job, and we’re actually had a pace. And so that’s really what’s raised the eight to the 10 in this case.

Mary Schlangenstein — Bloomberg News — Analyst

Okay. And although you talked about how many pilots you hope to hire this year, a couple of months ago, you actually trimmed your plan for hiring first officers because of the lack of simulator instructor or flight instructors. Has that number changed? Like have you had to carve out a few more just despite the goal that you have of hiring over 1,000, if you had to bring that down any?

Robert E. Jordan — Chief Executive Officer

I would tell you that it’s moved around. Our constraints generally have moved around over time, which group, in particular, is the real constraint. The constraint right now is it’s flight instructors. We’ve made tremendous progress on our flight instructors, and we’re getting very close, but that’s really what is the narrows constraint versus literally pilots. We have a lot of pilots in the pipeline, and we could go faster if we had our full complement of flight instructors. Now we recently have really invested in speeding up that process.

So probably way much — way more than you want to know, but we have retention bonusing. We have referral bonusing with our current employees. We have begun to use or thinking about how to use pilots, who have recently retired to be flight instructors. So we really widened out our thinking in terms of how to grow that because every airline is looking for flight instructors right now. But no, that’s our primary constraint right now is flight instructors.

Andrew Watterson — Executive Vice President and Chief Commercial Officer

Yes. And Mary, Mary, we do — our target this year is to hire 1,200 pilots. And I think we have a very reasonable path to hit that target. Just realize, though, that some of those pilots are going to be coming on here in late October, November, December. They’ll still be training, and they won’t be out on the frontline flying at that point in time.

Mary Schlangenstein — Bloomberg News — Analyst

Right. Okay. And how many flight instructors do you need to add to be fully staffed?

Andrew Watterson — Executive Vice President and Chief Commercial Officer

We’re looking somewhere between, to hit our plan, 35 to 38. To exceed our plan, a little north of that, say, 50 to 60.

Mary Schlangenstein — Bloomberg News — Analyst

Okay. Thank you very much.

Andrew Watterson — Executive Vice President and Chief Commercial Officer

Thank you, Mary.

Operator

And the next question is from Alison Sider with Wall Street Journal. Please go ahead.

Alison Sider — Wall Street Journal — Analyst

Hi, thanks so much. I guess the last question, just curious if you’re seeing any issues with fuel supply at any of the airports where you operate. I know it was a little bit of an issue some places last summer, and it seems like the stocks are kind of low in some parts of the country now. I’m just curious if that’s something you’re anticipating or what you’re doing to get ahead of it?

Robert E. Jordan — Chief Executive Officer

Alison — and Tammy, please chime in. I would tell you that those are really spot issues, and we’re really not seeing those now. The issue now, of course, is price. And price differentials across the country and then not just the rise in underlying crude prices, but a titanic rise in the crack spread, which is driving up costs as well. Luckily, we’re well hedged. And our hedge portfolio this year is going to add about $1 billion in value in terms of helping manage our fuel costs. But no, straight up with your question, we aren’t experiencing significant issues with fuel supply at this point. Tammy, if you want to add anything.

Tammy Romo — Executive Vice President and Chief Financial Officer

No. You covered it, Bob. Yes, really no physical issue, so much better position than we were. And yes, and even relative to just the increase in prices, as Bob already said, we’ve got a wonderful fuel hedge in place. So no, I think we’re in a much better position there.

Alison Sider — Wall Street Journal — Analyst

Okay. And I guess one other thing I thought was interesting you mentioned about just people being sort of new and it’s taking time for people to kind of get ramped up and to be really proficient in their jobs. Where are you seeing that kind of manifest? Is that kind of slowing things down on the maintenance front? Or where is that causing issues?

Michael G. Van de Ven — President and Chief Operating Officer

Alison, mostly that presents itself on the ground and in the airports. So think about your new ramp agent and you’re out in the different conditions that you’ll operate in during the course of the year, just navigating through all the transfer bags, navigating just to the speed in the tempo of the airport operation out there, all the equipment move. It just takes several months for you to kind of get up to speed and get comfortable in that environment. And we want to make sure that we focus them with a lot of supervision and a lot of oversight because it’s a — safety is our highest priority out there. We want to make sure that with the new hires out there we’ve got all of our I’s dotted and the T’s crossed as we’re executing through our procedures.

Alison Sider — Wall Street Journal — Analyst

Great. Thanks.

Operator

The next question will be from David Koenig from the Associated Press. Please go ahead.

David Koenig — Associated Press — Analyst

Okay. Thank you. HI, everybody. Bob, your fares in the first quarter were up quite a bit from a year ago, although they’re only up 5% from 2019, which I suspect is less than CPI. But any concern that consumers, who are seeing inflation in everything they buy, because travel is a discretionary choice, do you have any concern that general inflation and higher fares are going to cut into the strong demand you’re seeing?

Robert E. Jordan — Chief Executive Officer

Yes, Dave, thanks for the question. There’s a lot in there. And again, I just said, a base, I just want to reiterate that we’ve not been raising fares. So we did have one modest fare increase in the first quarter. I think it was $5. What’s really happening is that we’ve got a normal fare structure. And as demand is really strong, the lower-end fares close out faster and you move along the fare structure, but we’ve not modified our fare structure. The other thing that I would add is as we — especially as we add our Wanna Get Away Plus product and as we’ve managed what we call fare gaps between the columns, what you’re seeing is that, in a lot of cases, and Andrew could talk to this in most cases, the prices or the differentials between Wanna Get Away and Anytime and Business Select have come down substantially. So our fares on the upper end are actually — and that fare gap is actually much lower than it has been historically. So in that case, those fares are actually more affordable. But generally, as demand is strong, and it’s extremely strong.

Again, our second quarter operating revenues per our forecast could be an all-time record, which is just incredible after two years of the pandemic. But as you see that kind of strength, seats are going to sell out faster and customers are going to see higher fares. So far, we don’t see any dampening of demand. Some of that may be because there’s a lot of discretionary household savings still in the system. But so far, we’ve seen no indicator that demand has been dampened by this increase in fares. Andrew, you want to add anything?

Andrew Watterson — Executive Vice President and Chief Commercial Officer

The one thing I’d add is, overall, our capacity is down versus 2019 for the summer that you mentioned, Dave, as well as the industry as a collective. So we’re actually not able to satisfy all the travel demand kind of as is given the capacities or like in 2019. So there will be people, who are not buying that would have bought in 2019. But as we restore more capacity, we expect that demand to be there.

David Koenig — Associated Press — Analyst

Okay. I get that the rise — the higher average could be because the lower buckets are selling out faster and everybody’s capacity is still recovering, but I just wondered if there was any concern going forward about the inflation nipping this in the bud.

Tammy Romo — Executive Vice President and Chief Financial Officer

David, thank you.

Operator

And the next question is from Kyle Arnold from Dallas Morning News. Please go ahead.

Kyle Arnold — Dallas Morning News — Analyst

Hey, thanks for taking my time. Have you done — made any more work? Or is there anything specific you’ve done to solve some of the regular operations problems? I know there’s report about a meeting in Florida, talk with the FAA about some of the issues happening in there. What are you doing to make sure that some of that, either TAC or the staffing or the compounding problems, don’t creep up again this summer?

Michael G. Van de Ven — President and Chief Operating Officer

Yes. Let me start out there for you, Kyle. So we’ve done a couple of just basic things. As you know, we’ve reduced our originally published schedules through Labor Day. That absolutely is going to give us more cushion and staffing cushion in the operation. We’ve been talking all morning long about our aggressive hiring plans. So adding people there. And then Andrew talked a little bit about us reoptimizing our aircraft flow and our design toward the shorter-haul trips, and that’s going to help our crew and our operational recovery. So we feel that those are the three big pieces that we’re in a much better condition in place that we’ve been in as we move forward. We do have — as you mentioned, we do have specific — and when I say we, I mean, the airline industry, has specific impacts with respect to Florida air traffic control and travel through there.

And it’s a combination of problems down there. There’s more commercial activity. There’s more GA activity. There are more space shuttle launch. The weather patterns that go through there are complicating all of that additional traffic. And then I think that just like everyone else going through with staffing, the FAA is going through staffing challenges as well. So there is a focus, an industry focus on that. And in May, the FAA and some of the impacted carriers are going to talk about solutions to that specific airspace. So I think when you package all those things together, we’re in a much better place going into this summer than we were last summer.

Robert E. Jordan — Chief Executive Officer

And Kyle, I just wanted to add — I wanted to just offer some praise for the FAA here because they’re taking this head on. We got this meeting in May to develop solutions. They’re working with carriers, are working directly with us and to think about developing solutions because, clearly, we have more issues this year, more weather. Mike mentioned you got more SpaceX and other launches. The flight activity is back above — scheduled flight activity back above 2019 levels. But the other thing that’s obvious is we put — as they put in programs, flow control, those kinds of things that are designed to manage the issue. They’re just not working as effectively as they have historically.

So I’m just really pleased that the FAA is hitting that one head on and they’re working with carriers and working with us directly to find solutions that work for everybody. Mike mentioned one other thing that I think is really important, which is while we both — there’s been a lot of public focus on, scheduled flight activity is above 2019. I think it’s really important to point out that general aviation, or GA aircraft activity is far above 2019. That takes a piece of the — obviously, the limited air space out. So I think that understanding that and solving that is a significant part of the solution as well.

Kyle Arnold — Dallas Morning News — Analyst

Please go ahead.

Operator

Thank you. And the next question is from Dawn Gilbertson from USA Today. Please go ahead.

Dawn Gilbertson — USA Today — Analyst

Good morning. Speaking of higher ticket prices, you now offer uplift as an option. I just was noticing it really just popped up right when I was searching for a flight. Can you give any color to what percentage of bookings — new bookings since you’ve added that people are buying now and paying later? I know with Southwest Vacations, it was a notable percentage. And secondly, speaking of Southwest Vacations, are you guys taking that in-house?

Robert E. Jordan — Chief Executive Officer

Andrew, I’m going to defer to you.

Andrew Watterson — Executive Vice President and Chief Commercial Officer

Okay. Yes. We do offer uplift. It’s a very small percentage of sales that I’m not going to disclose, but it’s also part of the overall progress we’ve made in payment forms, whether it’s PayPal, Uplift, Apple Pay. We’ve just been on a program in the last three years, we’re giving more and more options for payment method for consumers under the idea that more choice is better. And for the vacations and higher ticket values, yes, that order value is rather that does offer a benefit for consumers that want it. And then secondly, on Southwest Vacations, we are, as we kind of alluded to an Investor Day, on an approach to kind of restructure, redefine how we handle Southwest Vacations. We’re setting up a team and working with industry partners to figure out how we take advantage of the fact that our network is really over-indexed, a lot of big leisure destinations where packages are sold, and yet we don’t really distribute through the traditional package channels. And so there’s an opportunity there for us to do more business and packages consumers.

And so that’s something that we’re looking at as a future revenue initiative. As we kind of look over the horizon in order to kind of meet the investor promises we’ve made about RASM performance exceeding CASM, we don’t want to leave ourselves with a vagary of kind of the market, so to speak. So we need a pipeline of revenue initiatives that allow us to have kind of ex market, if you will, benefits that can make sure we keep our growing. So this is one of those things. It’s kind of still in the laboratory, and we’d expect to roll out over the next couple of years as we make more progress.

Dawn Gilbertson — USA Today — Analyst

Thanks very much, Andrew.

Operator

The next question will be from Laurie Aritomi from the Washington Post. Please go ahead.

Laurie Aritomi — The Washington Post — Analyst

Hi. Thank you for taking the time to do this. Teeing off of Kyle’s question, I wondered how you might characterize Southwest’s approach this summer compared to last summer. You mentioned you’re in a much better place going in last summer was kind of odd because not folks weren’t — there was pent-up demand, but all folks weren’t vaccinated. So can you talk about this summer versus last summer?

Michael G. Van de Ven — President and Chief Operating Officer

Yes. Laurie, just generally, I just think that the conditions that the U.S. is operating in is different this summer, this summer coming up as compared to last summer. So last summer, we still had surges of COVID coming. We still had challenges across the country with schools, with daycare, with parent availability, with working from home. There were lots of challenges that created a situation where people just couldn’t behave in this pandemic world like they did in pre pandemic. And as a result, when we went into the summer, we should have had more staffing because the tempo of the operations were slower last summer. And we should have had more staffing available or less capacity out there to navigate through that better. I think some of those conditions are changed as we come into this summer. As you mentioned, there’s more vaccines out there. There’s more boosters out there. And we’ve also got a better balance between staffing and our capacity. So we have cushion, more cushion available this year to absorb any shocks that come.

Robert E. Jordan — Chief Executive Officer

Yes. Laurie, I think it’s exactly what Mike said. We’ve got, I think, number one, we’ve got more visibility, I mean, we thought we knew what was happening last summer. And then the demand just surged at the sort of April, May last minute. While we’ve got a big surge this summer, we’ve seen it coming for a lot longer, and we’ve been able to anticipate it. Two, the network is more restored and there’s more flight activity, which means you just have a better ability to recover when you have a regular operation and a better ability to move customers and then move employees when we need to. Another big item is COVID poles. And so we had employees that were going out on — you have a close contact, you go out, you go out to, I can’t remember, it’s five days or 10 days. And so the number of employees out and then out at the last minute. So it was not predictable. You didn’t know until today what your workforce was going to look like in a lot of ways. And so with the change in those policies around COVID, that’s gone, so we can have a much better predictability around sick leave and the available workforce. So I’m not saying it’s going to be perfect, but I think our ability to manage the summer and our belief that the summer is going to be much more reliable — from an operational perspective is much better here in ’22 than it was in ’21.

Laurie Aritomi — The Washington Post — Analyst

Great. Thank you.

Robert E. Jordan — Chief Executive Officer

Welcome.

Operator

The next question comes from Ethan Clapper from TPG. Please go ahead.

Ethan Clapper — TPG — Analyst

Hey, thanks for taking my question. We’re hearing from pilots and from members that swap out that there have been a lot of no shows for pilot classes and that recruiting has been especially difficult in that area. So why is that? And how can Southwest fix that?

Michael G. Van de Ven — President and Chief Operating Officer

Well, Ethan, generally speaking, I would just say Southwest Airlines is the airline for pilots. We’ve got a very competitive rates of pay, great benefits, good retirement program. And we have a very efficient network with less ground time. And I think that allows our pilots just to get more flying per day than anybody else. They generally receive more pay then as a result of that. So I just — I feel like the Southwest Airlines is an airline where pilots want to come to. We’ve protected their careers. We’ve built great retirement programs and great career earnings for them. So you take that as a foundation of it’s a great place to work. I believe, given that, we are going to attract absolutely our fair share of pilots out there from all the pools. We may see ebbs and flows from one class to another, but I think we have all of the tools and the toolkit we need to attract all the pilots that we need.

Robert E. Jordan — Chief Executive Officer

Yes. And I think you got to be careful generalizing. I think, overall, this has not been an issue. You always have no shows. We’ve had classes, and we’ve had a good no-show rate — I mean good show rates, and we’ve not had a significant portion that didn’t show in the class. So this has not been an issue. We recently had a class where we had a higher no-show rate than we expected, and we’re trying to understand exactly why that happened, but I wouldn’t extrapolate this one incident to we have a broad-based problem. So you just got to be careful about that. And then number two, there’s a ton of work going on. It’s a competitive market. And the longer you take to make an offer, the longer you take to get somebody into a slot in a class, the more risk you run that they could go somewhere else. And so there’s a ton of work going on between our flight ops department and our people and hiring folks to take those processes down to the absolute minimum, and we’re all over that. But I think the main thing is I wouldn’t extrapolate what happened in a class to what’s happening across the board because it has not been.

Ethan Clapper — TPG — Analyst

Thank you.

Operator

And the next question is from Chris Isidore from CNN. Please go ahead.

Chris Isidore — CNN — Analyst

Wondering what you can say about where you see the status of the various labor negotiations. And do you feel any — it would be advantageous in your hiring efforts if you were to — be able to wrap those up and be able to let potential new hires know what the labor contract would be if that puts more pressure on the negotiations than maybe in the past years when you were doing the hiring being exactly that you’re doing now?

Michael G. Van de Ven — President and Chief Operating Officer

Yes. Yes, Chris, so I’ve been through a lot of labor contract negotiations over the years. And I would just say over the 50 years of Southwest Airlines, I would characterize every contract negotiation is vigorous, is contentious, is passionate on both sides. And what I will tell you is that, over that 50-year period, those kinds of negotiations between the unions and the company, they have manifested themselves, I would say, in the most job secure, the highest productive and the most attractive career earnings opportunity for our people. And that’s what our people really want to have. They want to have a company they can count on through good times and bad. And if we can get through the contract negotiations and achieve all of that faster, I’m absolutely for that. But at the end of the day, it’s that process that creates that — the company needs and our people’s needs, and we’ve been very successful at doing that over the years, and I see no reason that we won’t be just as successful going forward.

Operator

Thank you. And we have time for just one more question, and that question will come from Robert Silk from Travel Weekly. Please go ahead.

Robert Silk — Travel Weekly — Analyst

Thanks for taking my question. Actually I heard a story about this recently, but what are you — are you all getting many calls or cancellation requests from individuals who are worried now that there’s no mask mandate? And if so, are you allowing cancellations in those cases?

Robert E. Jordan — Chief Executive Officer

Robert, I — we watch our customer relations calls and questions every single day. I haven’t seen a material rise in that at all. We survey our customers every single day. And I would just start with the percentage of customers that are comfortable flying just overall is very, very high. It’s 90%, 90%-plus. The second is we also survey how comfortable our customers are flying without masks, and that number is also very much in favor of our customers being comfortable. And just to mention on the mask, I’m very pleased for our employees and for our customers that they now have a choice. It’s tough to wear the mask all day. The data shows that while cases may be rising modestly, the’re very low. Hospitalizations are not rising. So I’m just pleased that our customers and our employees now have a choice. We have — we always have had wonderful flexibility in our policies and our fares. And so every ticket that you buy can be canceled and then those funds held for future use with no change fee. And obviously, if you buy a refundable fare, we will refund that. But if you’re not comfortable flying, we’ll either refund that if it’s refundable and/or we’ll allow you to use that — those funds for future ticket. But generally, overall, no, we’re not hearing — I’m not hearing anything relative to customers canceling because they’re now afraid to fly because of the mask mandate change.

Robert Silk — Travel Weekly — Analyst

Thanks very much.

Robert E. Jordan — Chief Executive Officer

Thanks very much.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Ms. Rutherford for any closing remarks.

Linda Rutherford — Executive Vice President People & Communications and Chief Communications Officer

Chad, thank you very much, and thank you all for joining us and for putting a little bit of extra time, so we could accommodate all the questions for you this afternoon. If you have any follow-up, our Stellar Communications Group is standing by 214-792-4847 or you can visit us online at www.swamedia.com. Thank you all very much.

Operator

[Operator Closing Remarks]

Disclaimer

This transcript is produced by AlphaStreet, Inc. While we strive to produce the best transcripts, it may contain misspellings and other inaccuracies. This transcript is provided as is without express or implied warranties of any kind. As with all our articles, AlphaStreet, Inc. does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company’s SEC filings. Neither the information nor any opinion expressed in this transcript constitutes a solicitation of the purchase or sale of securities or commodities. Any opinion expressed in the transcript does not necessarily reflect the views of AlphaStreet, Inc.

© COPYRIGHT 2021, AlphaStreet, Inc. All rights reserved. Any reproduction, redistribution or retransmission is expressly prohibited.

Most Popular

Trxade (MEDS) is increasing the breadth of product offerings: CEO Suren Ajjarapu

Trxade Health Inc. (NASDAQ: MEDS) is an online pharmaceutical marketplace that provides a platform for independent pharmacies to operate more effectively. The company’s digital platform helps optimize drug procurement and

AMAT Stock: Is now the right time to invest in Applied Materials?

It is estimated that the size of the global chip manufacturing equipment market would nearly double from the current levels to about $142 billion in the next eight years. Applied

Here’s a look at Take-Two Interactive Software’s (TTWO) expectations for the coming year

Shares of Take-Two Interactive Software (NASDAQ: TTWO) were down over 2% on Friday. The stock has dropped 32% year-to-date and 35% over the past 12 months. Earlier this week, the

Add Comment
Loading...
Cancel
Viewing Highlight
Loading...
Highlight
Close
Top