Q3 2019 Earnings Call
Good day and welcome to the Southwest Airlines third quarter 2019 Conference call. My name is Chad and I will be moderating today's call.
This call is being recorded and replay will be available on southwest Dot com and the Investor Relations section.
After todays prepared remarks, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then too.
At this time I'd like to turn the call over to Mr., Ryan Martinez managing director of Investor Relations. Please go ahead Sir.
Thanks, Chad. Thank you all for joining us today.
Joining me on the call, we have Gary Kelly, our chairman and CEO .
Do you want our president and Tammy Romo Executive Vice President and CFO .
A few quick note.
We'll be making forward looking statements based on our current expectations of future performance, which could differ from actual results.
And we will make reference to 29 seen results the compared to prior year non-GAAP results, which excludes special items.
More information regarding forward looking statements and a reconciliation of non-GAAP results at our earnings release from this morning.
Also given the ongoing backs grounding, it's just a reminder.
The timelines incurred estimations, we're sharing today regarding the Max.
Just on Boeing's targeted regulatory approval.
Actually returned to service in fourth quarter 2019.
Any changes the current estimations could result in additional adjustments to our flight schedule beyond February as.
As well as further aircraft delivery delays and additional financial damages.
Gary Mike, Tom and Jerry will provide updates.
For Q1 night, so I will turn it over to Gary.
Thanks, Ryan Thank you all for joining us.
For 2019 earnings call.
Oh around it was an outstanding performance and I am proud or than ever our people.
We told you last quarter, we were going to adjust to the.
Max and operate a great airline and our people did just that.
Our customer feedback reflects that.
It was just a great performance in terms of reliability of hospitality, so very very proud and very thankful.
For people.
We also told you we went to just for the Maxim produce satisfactory financial results.
I think we under promised these results are still were strong revenues better cost performance.
Record earnings you P.S. was up 13.9% and even without the 31 million dollar tax benefit dps would've been up over 9%.
Of course, our EPS would have built up over 43% worse off for the Max grounding.
Our operations frontline employees have delivered exceptionally well.
Got it also get another special shout out to our planners are as I turn on last time, I read planners, who continue to toward all through ever changing scenarios and that as network planning operations planning financial planning just to name a few they continue to work very long hours.
And prison produce amazing results, that's just a truly gerard.
I talked a lot about the importance of being prepared for the unexpected as her taught me and really all of us to do and.
We talk about the importance of low cost.
Ample cash flow that levels sensible growth sensible capital commitments.
But we can never talk too much about the importance of having great and talented employees.
Very strong culture.
And of course that element of that culture, we called Warrior spirit.
And there is all yet so we are truly blessed to have such great people.
I want to talk about what's next.
Addition to continuing to run a superb airline operation and deliver solid financial results. We want to do a couple of things we want to conclude our discussions with the Boeing company regarding compensation for the Max related damages.
And secondly, we want to safely and methodically returned the box to service.
And regarding the timeline or that the ethane Hey has revealed this week. They received the final software and related system documentation for the Max from Boeing and there and the process certifying the changes with the certification flights a weeks away.
Well the F. <unk> has been very clear and very careful not to commit to a date.
Working with Boeing we've assumed and Undergrounding date.
Around mid December and that translates to a Max in service date for US a February the eight a in terms of our flight schedule.
So you know along the way between now and mid December we judge that that they won't be met well roll our schedule yet again.
So recall that our second quarter assumption was that Boeing delivered by the end of September so were about three to four weeks behind that.
Which is why we moved from about what was the January six day to February eight.
So of course, we get more confident I am however, I'm still not highly confident about mid December I think Ryan's already made that clear.
So what's important of course is that we give the F. I hate the time that they need to do their job I wish I know they will and of course, we're here to support them every way that we can.
Our plans and our outlook for the fourth quarter are very solid.
We've got a schedule that stable.
If not optimal.
Travel demand continues to be strong fuel prices are remarkably stable and moderate and our cost outlook for everything else.
It was below our original plan.
Well, we've given you the guidepost for fourth quarter in the press release and the key to understand here is that we had to read do.
What turns out to be nine complex schedules that make up the fourth quarter and their complex because of the wide variability called caused by the holidays.
And we simply didn't have time.
To redo nine schedules. So we did one.
Our in essence, one and that results.
And last peak flying that we would otherwise why.
We didn't have enough airplanes and that translates into more non peak flying that we would like.
So time has gone by since we've done that bookings look pretty darn good for the fourth quarter and were more bullish that RASM will be up.
During the quarter and Weve provided that guidance and you know maybe as much as a 2%.
And that's on capacity that is down just slightly versus a year ago.
Regarding next year.
We are reducing our plan yet again as we speak I don't have a capacity forecast for you for the obvious reason other than to say I can't imagine that it won't be double digit growth.
Compared to 2019 and.
I would also say that a more than likely whatever you guessed it would be based on our July discussions, it's got to be less than that because of the returned to service schedule has pushed out.
So our 2020 market priorities will continue to be Hawaii.
Which is going extremely well and based on what we published so far we will have an emphasis on Denver, Baltimore and Houston.
And obviously looking forward to having the box back so we can restore.
A lot of depth.
That is currently missing and a lot of our markets.
So my Tom and Tami has always are not going to elaborate further a those are the highlights and with that I'm going to turn it over to our Chief operating officer Mr., Mike Van de Ven to kick this off but I will think scary and good morning, everyone.
I spent a lot of time talking about.
The important team work and especially our industry, where our customers are completely dependent on our people to take good care of them and our people do take a lot of price that hey jump through all kinds of things taking care of our customers a lot of Max groundings throughout the second quarter.
Isn't until June we finally have the Max out of the schedule.
A number of spare aircraft incorporated into the network.
Third quarter was really a first clean quarter without having to scramble operationally due to the Max impacts.
As I mentioned in our second quarter call. It was important for us going into third quarter to deliver the operational reliability.
Alley and efficiency that our customers come to expect from southwest and you know our people were just Mike deficit.
They delivered the best overall operation the southwest has produced and at least a decade.
Our on time performance was for the quarter was 83.4% that's the best since 2011.
We carried 30.5 million bags in the quarter and 99.6% those were handled just as they were check.
The best performance in our history.
Our customer certainly noticed follow that two out of three of them were net promoters and southwest based on our survey resolved.
Hi, it's been in five years.
And again, we lead the industry with a lower customer complaint ratio as measured by complaints of video tea and we're also leading year to date that measure.
So overall, an exceptional operational performance and we accomplish those resolved with the lowest amount of aircraft time investing at bloxom turned in the industry.
With respect to our turns.
We had a heavy focus on third quarter on rolling out baggage scanning technology, we introduced a scanners and we trained 10000 plus ramp agents and all of our domestic locations over a buyback period and that effort ended September thirtyth.
Well, that's a foundational investments that's going to help us track our bags with more accuracy provide more customer service automate aspect from a wait and balance process.
Toward a paperless term.
So we expect this kind of operational reliability to continue and at this point not Coburn art. Our on time performance bag handling is shaping up again to be the best in years.
The operation are solid and our biggest unknown at this point is the Max returned to service timing.
As Gary mentioned as you all know we've pulled Max.
Related flying from our schedules through February I.
We had previously planned for an early November returned to fly and.
Our expectation has slid at least a month.
And as Gary mentioned Boeing did confirm reaffirm yesterday in their target was to return them access service on the fourth quarter.
And we're in continue conversations were falling in the M&A as they complete their various milestones in the process.
We'll get a clear picture when the aircraft may be clear and apply if we don't have certainty of in mid December returned to service will likely need to push our cancellations out further.
So once the aircraft for cleared the fly out profit to get them back into service. The same as I reported last quarter. It will take 30 to 40 days from the issuance of the airworthiness directive to get our manuals updated.
Hey approval on our pilots train our assumptions at this point as a pilot training will be computer based training and will not require simulator Todd.
We will lobby coordinate who work necessary to bring the aircraft back into the operational fleet to correspond to the end of that pilot training period.
So Boeing owes US 41 aircraft, we contracted for 2019 that have yet to be delivered and the add that to the 34 on boxes and that gives a 75 aircraft a backlog to ingest into the fleet window when the grounding is lifted.
We believe we can manage that at a rate of about five to 10 airplanes per week, which if you do the math implies a two to four months before all of our 2019 at Pryor Max aircraft are back in the operational service.
As Gary mentioned, our main objective and Relaunching the Max the do it with a high degree of certainty and confident it's critical that the schedule and the aircraft availability come together. So we avoid the unexpected customer disruption that he had earlier in the year. So in closing.
I am so grateful to all of our employees they arent a heartbeat southwest Airlines.
The other fast.
The operational results from the sharp for the third quarter were superb our plans to return the master service or well thought out embedded in our coordinated across all of our operating team and our focus remains on running a safe reliable hospitable and efficient operation and I think we've got the best team and the industry to do it so.
Tom over to you okay.
Thanks, Mike Good morning, everybody and start to pick up right were Mike left off I also want to Echo what Gary and Mike said, we just had a tremendous third quarter operationally, absolutely rock solid service and hospitality was incredible.
Where the very top the industry in terms of our service and went to deliver great financial results and I really do believe is making Gary said. This is absolutely because we have incredible people. There just so committed on southwest Airlines stands for so I just want to thank you for three performance.
So that let me just jump right into the third quarter, our RASM growth of 4.2% year over year was in line with the guidance, we gave arch light earnings call and reaffirmed back in September .
Throughout the quarter, we saw continued strength in passenger demand trends, both leisure and business travel were strong and we continued to see strong year over year passenger yields.
Obviously significantly impacted by the removal of the Max more schedules and the result was American passing declined 2.9% in the quarter.
We had an awful lot of moving parts, we made a lot of schedule changes because a max in spite of this with our domestic and international processes performed very well.
In India or business has performed very well in the quarter, but would you have to making choices around the timing of network investments on a market by market basis.
But even with the Max Challenge, we generated record third quarter passenger revenues and record operating revenues as well as record RASM performance. Our commercial team did an absolutely incredible job minimizing good portion of the next impact.
And as expected we experienced roughly two points of temporary year over year RASM benefit for Q3 compared against our original plan before the Max rounding.
We also had a half point year over year RASM benefit from our new rest system and revenue management tools as expected.
And we also had a half point year over year RASM tailwind from 2018, suboptimal schedule as well as a half point tailwind from flight Thirteeneighty.
Our other revenues increased 8.6% year over year for the corner and this is primarily due to the continued strong performance a rep rewards program.
You are they basis, our other revenues growing at 11.4%.
So we're continuing to see strong growth and spending our coat our co brand credit cards I.
I think this is really being driven by two things first our customers tend to keep our credit card top of mind and top wallet and I've always see this is a function of the real value that our customers getting the program. So they tend to use our card as a primary credit card, which is very important.
Second we're seeing new credit card acquisition growth rates in the double digits on a year over year basis, and the acquisition growth rates, our business co brand cards or even higher so we're seeing tremendous growth in the size of our credit card portfolio.
Our rapid rewards program continues to perform very well and we're very pleased with the structure in the economics of our program as well as with our genes relationship.
The beauty of the program is simplicity and the value that it brings to our customers no seat restrictions no blackout dates it's easy to earn its easy to redeem points. So there's really value to our customers and they love It which is why it's no more wing program year after year after year.
So our loyalty program and saying on all cylinders and we couldn't be more happy with where we are my last point on Q3.
Im sure. Most have you seen by now we did announce in early August our plan to expand into the global distribution systems for Gdss with new agreements with Travelport Amadeus.
And we'll have the highest level GDS participation with industry standard capabilities, which will make it easier for travel management companies and corporate travel managers to do business with southwest.
And this opens up a whole new pool corporate customers that we haven't had access to through our current distribution platforms.
We also think it's important to note.
Vast majority of domestic business travel is booked as coach travel.
We happen to be pretty good at.
Our product has a lot of distinct advantages the business travelers and corporate travel managers truly value such as low fares strong network with high frequencies, roughly 75% of our customers fly nonstop.
No fees for changes quite tenors, which by the way, yes, that's a big deal for business travelers to spend a lot of money.
And no bank fees, a great loyalty program and so on someone so we have a great products for the business traveler.
But the GDS channel.
As a channel where we've never truly competed as you'd expect once we do go live in this channel we intend to compete very hard to when the business traveler.
We're targeting to have our GDS capabilities up and running by mid 2020, and we expect initial ramp up will contribute $10 million to $20 million EBIT contribution the second half between 20.
The initial revenue impact is very modest we also know there's a big opportunity to grow this piece of our business substantially over the next several years.
So we're building out our technology nearly as I speak and we're also well into the build out of our southwest business sales team and our business to business service capabilities.
So the other day southwest will have strength in three business to business distribution channels first self service to our new swab. This platform, which is largely targeted at small and medium companies.
Second direct connect distribution through the ATP co exchange platform.
And third our full function GDS capabilities, which will go lives I said in mid 2020, so a lot to come on this will talk about this more going forward.
That's it for Q3 is lets jump into Q4.
So from a flight schedule perspective, we've been very focused on maintaining the integrity and the strength our network in spite of the fact do we have significantly fewer crap aircraft originally planned.
And that phrase is not just throw away free is why say, we want to maintain the integrity of strength to our network. What it means that we want to maintain the depth and frequency of service to key markets. It means we want to maintain our high degree of point to point direct flying. It also means we want to maintain our high quality exacting itineraries.
I think our network planning team as Gary alluded to there's just an incredible job adjusting and re publishing and re publishing our schedules multiple times.
Enter a very large extent they've done just bad and maintain the integrity to strengthen our network throughout the process.
Saving be self our revenue management team they've done an equally incredible job managing the revenue environment in the second and third quarters. They were successful in offsetting the yield dilution Max related rebooking customers.
Now in terms the removal of Max weights in the fourth quarter. We've had our work cut out force will have a 68 aircraft deficit by year end, which is double the number of Max aircraft, we grounded in mid March.
And as you know Q4.
Always has most complex set of schedule simply because the seasonality the peak versus off peak nature the quarter.
Our working assumption as were building. These schedules months ago was that the maximum back in service for all the fourth quarter. So that was our base assumption based on that we published nine separate flight schedules covered in November and December time frames and use these were very well optimized for the holiday and not holiday time periods.
Reality of today versus our base schedule assumptions are quite different and the result is that our flight schedule adjustments in Q4 are very unique set of challenges in comparison to what we're solving two in Q2 in Q3.
So we're now solving to a deficit of 68 aircraft in a highly seasonal period.
Most practical approach for US was pre buys are published schedules in such a way as a smoother flying during the fourth quarter versus our original plan of optimizing Ralph peaks and troughs.
And then effects as it will have less flying what's optimal during peak and thats due to lack of aircraft and more flying whats out well during the non peak periods simply to ensure that the <unk> activity between the flight schedules. This is an ideal and certainly not an optimized schedule, but it does satisfy the three important criteria that we centralized team.
Those are first you want to minimize any disruption our customers during the holiday travel second we ensure that we had a schedule that was operationally feasible as efficient as possible and third we wanted to make sure to contain and minimize the impact on operating income.
So again this is an optimal we have been able to achieve these objectives maintained the quality work, our product and our operation while producing strong financial results.
The estimated fourth quarter revenue penalty from the Max grounding is expected to be greater than a third quarter. That's simply because we had more Max aircraft Hilton the original plan.
And unlike Q3, we had a two point temporary RASM benefit during your due to the Max we expect any fourth quarter resin benefit to be immaterial.
The two or three points of estimated RASM benefit removal the Max flights will be offset by the resin drag from the optimize schedule revisions in a slightly higher off peak flying.
But that being said our fourth quarter.
Based business trends continued to be very solid we are continuing to see healthy leisure and business travel demand that's across the booking curve.
We're expecting a solid fourth quarter RASM performance year over year in the range of flat to up 2%.
All in with our fourth quarter RASM outlook. This puts us well above our 2019 RASM growth goal in excess of 3%.
But all things considered that's a result that we are very proud of.
Just a fewer things I'm sure that you saw we recently implemented system wide five dollar one way bear in Greece, and based on where we are in the booking curve for the fourth quarter I think this likely helps 2020 more well through later this year.
But we do continue to see sell demand across the booking curves and we do believe the revenue environment continues to support yield momentum in yield strength.
And just a few quick comments on Hawaii with the recent announcements of more why flights will now be up to 12 dealing California to why flights and will also have 34 doing interoil and flights.
The demand for our service to Hawaii continues to be very very strong and our load factors continue to exceed our system average the demand for Interoil and service is also very strong and this also includes a very strong mix won't customers, which were thrilled about.
Our brand and customer experience scores continue to perform above our total system net promoter score and that's true for both our long haul flights to and from Hawaii as well as for our in Ireland flights.
As far as our stance on beginning service from originally announced California cities, we still have San Diego left to connect and we'll do that in the near future and we're planning for additional flights in 2020.
To continue building off our initial success.
So looking forward to 2020, we obviously still has some uncertainty related to the Max return to service date, and Mike Liar very close on this and that he said once we can return the aircraft to service, we will be focused on a measured ramp up Max aircraft.
We're anxious to get the since back in the schedule, a smart way as we begin to restore and grow our network.
We will not restore every flight that we removed due to the Max grounding.
It will certainly want to restore the vast majority of our network, which we'd expect to produce favorable results almost immediately.
You can see from our flight schedules published through mid April that we are very focused I continue investment in Baltimore Denver.
Houston, California in Hawaii.
And beyond these cities, we have a very long list of attractive growth opportunities, we will be focused on strengthening our depth and frequencies between strong nonstop city pairs.
Next week, we'll be publishing our next set of schedules that take us out through June six so stay tuned for that.
So with that and Thats already Danny.
And my thanks to everyone for joining US today, we had another solid quarter of earning as Fred along with margin expansion, which is notable considering the extraordinary challenges, resulting from the grounding of the Max I'm very grateful for the incredible resiliency and hard work of our employees and extremely proud.
How our southwest family rallied together produced strong results. Despite an unanticipated six to six and a half point reduction in our capacity this year due to the Max.
Yes, Mike and outline most of the challenging that challenges for managing through.
So I will round out our remarks with commentary on our cost performance.
And capacity plan and balance sheet and cash flow, including the related Mack impact.
Turning first to our Nonfuel cost performance.
Our just driver of the 7.6% year over year increase in our third quarter CASM, excluding fuel and profit sharing our CASM ex was an estimated six to seven point impact from the Max Groundings, and resulting flight cancellations.
Our third quarter year over year capacity growth was approximately eight points lower versus our plan, which will also be the case and fourth quarter.
Excluding the Max related unit cost pressure the remaining modest year over year increase was driven largely by increases in salary wages and benefit as well as maintenance expense.
While these cost pressures were anticipated, we did come and favorable to our latest guidance of 8% to 10%.
In addition to good cost control across the board, we saw cost efficiencies and a labor cost related to the strong operational and on type apartments that Mike covered earlier.
We also received some favorable airport settlements during third quarter as well as lower than expected airport rate increases.
Overall, I'd like to commend our employees for executing our cost plan to keep it on target. This year, excluding the significant year over year unit cost pressure from Max related flight cancellations.
We started the year expecting fourth quarter 2019, CASM ex to decrease around 2% year over year.
We've had about one point of year over year, CASM ex shifting from earlier periods into fourth quarter.
And we are expecting a fourth quarter unit cost penalty from the macro links to be approximately six point.
Therefore, we now expect our fourth quarter 2019, CASM next to increase and the 4% to 6% range year over year.
A key driver year over year, our increases in salary wages and benefits.
Maintenance expense and airport cost.
It is worth noting that we have taken actions this year to mitigate what impact we could including on the cost side.
As I said previously our fourth quarter capacity is about eight points lower than it would have been absent the Max grounding.
However, we expect that we will be able to offset about two to three point of unit cost inflation due to the benefits from higher off peak flying in fourth quarter, which nets us to our six point penalty.
We will continue to focus on these areas to lessen the unit cost piece.
Hi, our best effort the impact to our overall unit cost inflation and fourth quarter continues to be significant.
Looking at our full year non fuel cost, we currently expect CASM ex to increase.
Approximately 8% year over year.
With some unit cost mitigation of fourth quarter. The Max Groundings are now expected to drive five points of year over year inflation have full year 2019.
Slightly better than we previously estimated.
And again, our employees have done an incredible job executing on our plan to control cost pressures.
Excluding the impact of the Max rounding to our 2019 call our core year over year unit cost performance and inline with our original plan to keep CASM ex inflation to three to three and a half for sat for 29 team.
And that includes factoring and the incremental 10 million of maintenance expense.
One of the 737 Dash 700 aircraft that we were going to retire as well as the 42 million bonus for our mechanics.
Both of which occurred after our initial three to three and a half point unit cost guide a back in January .
A quick note on first quarter 2020, we expect continued year over year unit cost inflation due to the level of fixed costs, we carry regardless of the depressed capacity from the Max rounding currently out to February eight 2020.
As we gradually ramp back up.
In addition, we estimate incremental return to service cost and the 10 million next year.
Moving on to fuel.
Our third quarter fuel price was $2.07 per gallon near the lower end of our guidance range.
Market energy prices spiked following the Saudi Arabia oil attacks around the time by mid September 8-K.
Update and then moderated in the second half a September .
The recent volatility in the energy markets served as a reminder of the importance of having meaningful insurance with our fuel hedge program. We are approximately 65% hedged our fourth quarter 2019.
Our 2020, we are nearly 60% hedged.
For 2021, we're around 50% and we have been adding to our 2022 hedging position, putting us at around 25% protection.
Our fourth quarter 2019 based on market prices as of October 18th we expect our fuel price to again be and the range of $2 and by adds to $2.15 per gallon.
The fourth quarter crude oil forward curve is slightly lower than third quarter, but fourth quarter heating oil cracks are currently estimated to increase around 20% sequentially.
Our fuel efficiency continues to be significantly impacted by the Max routing.
We came into 2019 expecting a solid year over year improvement and fuel efficiency largely driven by the operating performance of the Max aircraft, which is expected to produce a 20% fuel burn improvement over our retire classic fleet and a 14% improvement over our next generation our Angie.
Right.
Third quarter Asms per gallon declined 8.9% year over year at fourth quarter Asms per gallon are also expected to decline year over year in the range about a 1% to 2%.
Once the Max returns to service, we expect to reverse this trend and get back on track with our fuel efficiency improvement goal.
Wrapping up the income statement as you read in the highlights of our press release, we did record 31 million reduction Q income tax expense late in the quarter, a which related to a clarification of regulations that allowed an increase to the amount of tax bonus depreciation relating to our 27 packs.
Return when the rate was 35%.
This represented five cents per share that was not factored into our previous guidance.
Even excluding the tax adjustment.
What are what they fall in feed to expectation.
Now turning to fleet and capacity.
We have not taken delivery of any aircraft that's the Max filings and Medmarc. We retired why 737 aircraft during the third quarter, two and a quarter with 752 total aircraft.
We haven't officially updated our contractual delivery schedule with Boeing at this point, which continues to reflect 44 total Mac deliveries. This year with 41 remaining as at the mid March rounding.
Based on Boeing targeted regulatory approval of Max returned to service and fourth quarter 2019.
Following has proposed a revised Max delivery schedule that has this receiving seven Max aircraft during fourth quarter 2019.
That would result in the remaining 34, Max delivery shifting out of 29 team and into 2020.
We continue to expect to retire 10 more 737 Dash 700, this year for a total of 11.
Versus our original retirement plan of 18.
We post how the retirement of seven of our owned Dash 700 to help with our 2019 aircraft deficit.
Assuming seven aircraft deliveries and fourth quarter, 2019, and netting out our 11 retirement. This year, we expect to end 2019 with a total fleet of 749 aircraft.
Our 2020 based on Boeing targeting returned to service timeline, we expect to be back on our aircraft delivery schedule around mid 2020.
This would result in 72, Mac deliveries and 2020 and we currently expect to retire 20 to 25 of our 737 700 aircraft next year.
Resulting in a total fleet of approximately 800 aircraft by year end 2020.
Our third quarter available seat miles declined 2.9% year over year.
Our fourth quarter 2019, we expect our capacity to decline in the range of 1.5% to 1%, which would put our full year 2019 capacity down approximately 1.5% year over year.
With ongoing uncertainty of the Max returned to service date, we're not ready to provide annual 2020 capacity guidance at this point.
We have published flight schedules through April 13th of 2020, which includes the removal of the Mac through February the eight.
And based on those published schedules. We currently expect first quarter 2020 capacity to increase in the 2% to 3% range year over year.
Now turning to the balance sheet and cash flow, we ended the quarter with very healthy cash and short term investment of approximately 4 billion.
Our cash balance is higher than usual as we haven't been making aircraft delivery payment since mid March.
Due to a lower number of expected aircraft deliveries and fourth quarter 2019, we now expect our 2900 capex to be and the range of 1.1.
1.2 billion with aircraft related Capex of approximately 300 million.
Our 2019 aircraft Capex is down approximately 700 million from our original Capex plan, which will shift to 2020.
Assuming our aircraft delivery delays are caught up next year.
As a result of the Max founding we've incurred a 435 million operating income penalty a year to date.
Phil our cash flow generation has been very strong.
For the first nine months in 2019, we generated 3.2 billion and operating cash flow and 2.4 billion and free cash flow with 1.45 billion of share repurchases and 372 million and dividends.
Our current 500 million accelerated share repurchase program ramps up next week and we have 1.9 billion remaining on our current share repurchase authorization.
In closing I'd like to add another each thank you to all of our employees.
Despite the significant impact from the Max Brown.
Operation and financial results, we generated record operating revenues record RASM and record net income and earnings per share and third quarter.
Our margins and returns on capital, we're falling considering a two to three point impact to each from the Max grounding.
Absent the impact we would have expanded margins, even further and grand returns and third quarter year over year.
Our balance sheet and cash flows remained very strong and we continue to provide meaningful returns to shareholders.
Overall I am pleased with our strong financial results this quarter and I'm very happy with the execution. This year, especially considering the 435 million year to date operating income penalty for the Max grounding and resulting flight cancellations.
Excluding the Max impacts thus far on a unit basis, we remain on track to achieve our unit revenue and units hospital or this year.
This is simply outstanding and a tree Testament to the unwavering fortitude entry Brett of Ourself with family.
All in all we have a lot to be proud of and we are eager to get the Max Bakken service and resume our growth once the as a deemed that thanks to these though.
With that Chad.
Turn it back to you now to take analysts' questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if you're using speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.
Our first question comes today from Duane Pfennigwerth with Evercore ISI. Please go ahead.
Thank you.
I appreciate all the uncertainty around next year, but based on what you just outlined.
If we assume you hit your stride by the third quarter is low teens growth in the ballpark of what your plan would be.
Although your or give me a number.
You mean like 12 to.
13 14.
No no I'd, we'd be below 10%.
Easily you break 10 minute yes.
For the error for the quarter Duane.
For the third quarter for the back half essentially yeah.
I don't have a number of my mind, but what are you pretty mature app.
It is premature.
And yeah, we're not prepared to wind to give you.
Capacity guidance at this point for all the obvious reason.
I I'd be happy to kind of walk you do.
Kind of how we're thinking about the full year 2020.
But.
Well I would just I would just say, we think family and Mike have both.
Yes, Mike as assuming.
Five to 10 airplanes a week.
I don't know, whether we can do that or not I mean. This is this has never been done before it's just not a routine thing.
And.
We don't have we're in the midst of updating our plan for next year to take the Max also January six returned to service.
And don't have a plan yet February eight and to be honest with you were just going to wait a little while here and see if thats realistic before we go to yet more work to do that only the throw that away undue yet another player.
So.
I think all I was trying to help you with earlier to say.
That will be something less than 10% for the year.
And we'll we'll judge.
The rate of return based on several factors.
I don't want us to pay for airplanes, and then have them set.
So some of this will have to just workout with Boeing but.
But we've said we could restore the fleet between two and four months.
But I think theres, a lot of assumptions in that and especially as you look at the way things have gone.
So we're dependent upon our people Boeing and the F.A. to return to each airplane to service and there's just I'm just admitting to everyone that there's uncertainty.
With regard to exactly how that's going to get the.
All very fair.
I agree with your comments in your praise for your for your planning and your re planning teams.
Can you talk a little bit about how the network response evolved.
From the initial shock to the system of the grounding and maybe here to the fourth quarter.
It feels like initially you where you were giving up all sorts of traffic.
And over time, it feels like you figured out how to retain your highest quality traffic and maybe the share that you're giving up is pretty low quality in nature would appreciate your thoughts. Thank you.
Well, Tom do you want to well to comment on that first I think we've been looking for a note you are actually took them for myself, but.
And we've been pretty pretty diligent about trying to trim out some of the.
Longer haul flying where we can.
Put but we haven't taken at all by the way of we've seen some out and.
With that allows us to do is quite connecting traffic ends were maintaining a presence in the markets. We're trying to seasonalize a little bit we pulled some out of the International's just as an example.
And what you're seeing is does do is invest more short medium haul flying in fact, you look at what we just published you're seeing Denver and.
Baltimore little bit in Houston, you're seeing more short medium haul flying we're getting a lot of aircraft utilization is pretty high quality flying is really being directed towards repairs that are very strong for us. So I think we're doing a pretty good job and optimize the network given what we have to work with right now.
Yes, I think.
Okay, and I think your idea there is a decent one in other words I don't think it would be correct to assume that we have lost share on 100% of our system I agree with your logic there.
Without studying a little bit more sort of market by market I'm reluctant to.
To just readily agree that there was a large percentage, where we haven't lost because I do I do have assess that.
Even where we've been able to sustain frequencies in markets that there may be a shift between locals and connects and.
Because I agree with Tom we've taken long haul segments out.
And have tried to serve those.
City pairs on a one stop basis.
And so I, just it's just more complicated than than that but.
We have at least been able to sustain for the most part as an entity or shoretel.
Routes are medium haul routes.
We have shaved some long haul in international which Tom mentioned.
So it's not across the board, but still we're not happy with the fact that were eight points below where our capacity would have been and clearly where.
Temporarily losing some share, which we don't like and.
We've we've heard our competitors.
Which their right to do.
Share that they have picked up some from traffic as a consequence.
Thanks for the thoughts.
Your next question comes from Hunter K with Wolfe Research. Please go ahead.
Hi, everybody. Thanks Bye.
I've got two questions on the same topic.
What are the gating term gating items at the getting your fares on sabre and how much of an incremental pre tax income should we expect if you're able to come to terms with them.
Well.
Or the gating issues with sabre.
Well, we work with Sabre for a long time, we know sabre pretty well they know us pretty well.
Obviously, the largest U.S. GDS player. So their importance, we certainly you're right. It would be created out of talk to them as we're going through this but.
Very simply we just weren't able to get to commercial terms of sabre.
Which was unfortunate.
I am thrilled we have two very good partners and Travelport not today as.
There are lot of corporate customers out there I guarantee you want to access the southwest content and they'll be on get through those too so where things go with sabre I do not know.
We've got a good plan that good set of partners in place right now.
Yes.
Okay, and then into that you said, there's a lot of corporates that want your product that pmcs that books your sabre, but what about the TMC themselves and how willing are you to play in the commission game.
The teams these are not going to be swayed simply by your product alone.
Well TMC. Thank you for the question other I think the first of all you know we will be paying our segment fees as we as you'd expect that GDS and we're competitive there our pricing I think as competitive as I think is best in industry, but I think it does what needs to do.
I think that part of the play with the team sees is on the customer side that customers are going to be asking for that content. So I think the strength is not just what we think our product, but I think the strength is what the travel managers think of our product on what their travelers liquid product I think thats going to be a pull to get the TMC is showing the.
South was content and by the way to be honest with you. Historically, we have not spent a lot of time with TMC. We just haven't had two we didnt. So we are out there right now with our sales team. We just in fact, we had.
Pretty big group in this past week or two weeks ago, and so we're starting to work with what the TMC is that what the travel managers and there is a real pull for itself was content I guess, that's that's why I can tell you.
Okay. Thank you Tom.
Sure.
The next question comes from Jamie Baker with JP Morgan. Please go ahead.
Hi, good afternoon, everybody. So Jeremy given the current return to service assumption the five to 10 aircraft a week getting back to sort of hitting your fleet stride by mid year.
It sounds like ex fuel CASM challenges are going to persist fairly materially in the first half of next year, how confident should we be that those pressures don't subsequently bleed into the second half as well it just feels like RASM takes a hit as soon as the additional capacity picks up but.
Cost relief is stickier and the markets assumption is that you're going to experience material ex fuel costs related next year, but given what you've said about the first quarter. The returned to service guidance I am I'm not convinced that ex fuel CASM really improves that much thoughts.
Yes, sure well, we're obviously going to work really hard.
To mitigate.
Any cost as we return Max to service here.
And we'll just have to remain nimble and adjust as we need to.
What.
As you as you said and what we do know at this point as that we do expect to have a ramp up unit cost penalty in the first half of 2020.
And while we do what we'll do what we can to mitigate the financial impact the penalties are significant uncertainly grow as the fleet doesn't say Greg.
Of course, our discussions with Boeing are ongoing in that regard.
But our long term cost target remains unchanged and bad.
Our annual unit cost growth, excluding fuel and oil expense or profit sharing to below 2%. So we haven't lost side of that goal and while they're likely to be some inefficiencies as we focus on the safe return of the Max the service in the short term well.
The laser focused on achieving our long term.
Optical.
Can you put any numbers on first half are second to FX. Okay.
It is honestly, it's just too early to do you got.
I will return to service I just thank you, it's just premature to do that.
Roughly once we have more certainty around return to service I will come back and.
Walk you through and and give you as much guidance, we can but as we've all said we want to have a measured approach to.
Bring the Maxim to service and we've got a lot of objectives that were balancing here.
And certainly hitting our financial targets.
One of the objective.
Jamie I think the issue is.
The timing of achieving the spirit or what you're asking so.
We're all reluctant to say, yes third quarter is going to be really clean.
We just don't know, but I think once we get to the point, where we are clean yes, I think that the parameters that you're thinking about without getting specific yet it makes sense to us.
Okay.
Got it and Gary for my second question I saw the headline sorry on CNBC before.
Board.
Looking at a second fleet type.
You can obviously you achieve that in one of two ways. You can go get in line for deliveries and start from scratch or you can buy an existing fleet and immediately get scale with the aircraft, albeit with some other baggage that inherently a company's consolidations. So is it safe to assume that if the board is the.
Baiting, a second fleet type adds as you said today, it's also debating consolidation or is it somehow possible to divorce those two topics because in my mind, they're highly intertwined.
Well I.
You are a brilliant mind. So I do think that they are they are potentially intertwined, but they could also be disaggregated I think just depends on.
No one wants to think about it but.
But.
Just give you a straight answer we're where.
Where as I did say earlier, we are focused on two fundamental things.
We're focused on settling up with Boeing and we're focused on getting the Max back into service.
The the comment that I made about.
Evaluating the question a single fleet type is.
That's not new news I've shared that before.
Got it and they also asked me well, what herb too and I know what herb.
Did do because we did this way we looked at it very carefully on several.
Occasions, Mike led that effort as late as 2011, when we agreed to launch the Max we ever very serious look.
To an alternative so I would simply.
Sharing that if and their people do there are people that do have this question is it time for us to look at the question Yeah, not now but next year, maybe the following year.
It is time to look at that question, yet again I wouldn't prejudge the answer at all we've been extremely successful for 48 years with a single fleet type.
I know that.
Our vice President of flight operations would agree it certainly makes for.
A more reliable and arguably safer operation when we have the expertise that we do in this area. So there are plenty good arguments for.
Just.
I really feel like this just acknowledging the obvious and I feel like we have a duty to look at the question and especially in light of.
What's going on right now so hopefully that answers part of the question as well as.
You know two to say today understanding that we're not we're not entertaining. This question today. So today to say hey does that make us enthused about consolidation for that reason absolutely not it's irrelevant.
Because that is that in that sense. They are two different questions.
If we got to the point, where we said we want a second fleet type.
I would admit you would you would you might want to think that through in terms of that as a means to get to a second fleet type, but I would quickly add.
And then all I'm doing as repeating our airtran experience just because we buy another airplane doesn't mean that southwest instantly has the capability to operate it so regardless of the path that we do that we go through without without hypothetical we would still and Mike.
Shop and with.
With technology support have to construct the capability to operate a second fleet type.
And that would all have to be factored into.
Whether we think thats the right priority. So those are all really complex questions and not anything that we are thinking about or talking about at this point in time.
Okay. That's very very helpful. On thank you for the kind words by the way I Hope I mean, some off the hook for having misspelled southwest a couple of quarters ago. Thank you very much.
We are always said here the Irish Alzheimer's, which remains means he always carry the growth.
Okay.
[laughter].
The next question comes from Michael Linenberg with Deutsche Bank. Please go ahead.
Hey, good afternoon, guys just.
Guys and Danny.
Question here on I think Tom you mentioned about some of the gross you would be focused on Denver, Baltimore in Houston, and you know it does seem like on one hand, you may be targeting the markets have a particular competitor, but I suspect that those markets are those airports our focus because you can get gates, there and I'm just curious if that.
That is what's driving that decision on one hand, and then as we look out are there other airports that are key to southwest where you do see additional gates coming on maybe over the next 12 to 18 months.
I think that.
Your comment about we're going after the airports where competition is like I say I think we're looking at the strictly from when you look at the proximity and where we're Denver is were.
Baltimore is where Houston is and how they fit with our networks. Our intent is to view really begin to use these as cornerstones, if you will and drive more productivity and tightened up the spiderweb our point to point network.
Yes, that's what's driving it now there is a competitive response at all of those by the way so thats part of it as well, but this is really primarily about strengthening the core of the network.
And I do think that there's value to us in adding in more medium and short haul flying in conjunction with what we're not going moving away from long haul it all back them actually it's a great long haul aircraft.
But with more medium flying in and out of Denver, Houston, Baltimore, It really does give you much greater.
Number by 10 or is it gives a greater operational reliability and recovery as just early efficient network structure for us. So I think we're just building on our core point to point network is what you're seeing Nashville is another one that you see is growing in all quite a bit.
So that's that's how I'm thinking about it.
Okay, and then anything on as it relates to infrastructure as we look out maybe over the next 12 to 18 months airports that you do that are key to you where you do seagate's coming on we are currently constraint there seems to be work.
We seem to be constrained many places, California, we have Megan strains, obviously, Denver, we have capacity coming on its always out.
Mike or do as well, but like I think you probably know what the culprits are.
I don't I don't know that we have anything new to share on that point today, but except to agree with you that they are constraints. Fortunately, we have a vast enough array of opportunities to grow that we can work around them.
And then they have a cases, where at least the constraint and be Remediated, we're working on those but.
Elway acts as a prime topic and were very desirous of adding nine more games through.
What is envision does terminal one E and we just don't have a timeline with lawwell yet. So that's one that is well underway, but still could be out there before there was a solution I hope not obviously, we'd love to have that capacity, but.
Yes.
The thing I was going to quickly just underscore with Tom's answer is.
We're seeing a return of demand and short haul markets, which obviously, we have a real strength than we have limited aircraft resources and.
Right now we have more of a focus both in 2019 in in 2020 and addressing that.
So it and you see you see evidence of that with the fact that we trimmed a lot of long haul flights because of the Max here. So it's not to say that we don't like long haul flights. It's more to say that we were short of capacity and will be for for quite some.
Time, and we've we can at least address those oh in D. city pairs on a one stop basis.
But if we don't put the flights into the short haul markets you're.
If the obvious your.
You are not serving that market. So good news as we got a lot of opportunities and not as good news is we don't have enough airplanes, but over to remedy that here. So.
Great. Thanks, Gary Thanks, Tom.
Sure.
The next question comes from Savi CIFH with Raymond James. Please go ahead.
Hey.
Good afternoon.
Just Tammy I was wondering if you could help us understand I can understand I. Appreciate just have difficult next is planning is right now, but I was wondering if you could help us understand.
Just as some of the bigger cost items that were pressures this year ex Max.
How did those trend into next year should we be thinking about airport cost.
I was just generally how do you think they should be trending into next year.
Yeah sure Savi I'll give you a little bit of color here I just.
Really going into next year the.
Biggest penalty here starting at least.
In January and that will will continue until we get the match returned to service is related to the grounding of the Max.
Side of that I feel pretty good about our cost structure.
Do you have.
Going on maintenance cost pressures.
And just our normal inflationary cost pressures with dollar wages and benefit.
And.
Outside of that we are always looking to.
Balance, our technology, and I and make sure that anything any and our investments that we make obviously.
Our benefits to come along with that.
So.
Yes and.
As we kind of think past the Mac.
We we we've got a lot of initiatives underway.
And I feel really good about the efforts that we have a one obviously is our fleet modernization plans and that's been halted here, obviously with the Max rounding, but certainly once we get the Max back on track.
Be able to see the benefits there.
And certainly on the fuel efficiency side as I noted earlier, so I just looking past the Max I really feel good about where we are but as always you know dialing take a hard work.
And our people are up to that so I'm I'm confident we'll deliver there.
So and again I'll, just kind of point you back to our long term goals is to.
Maintain inflation I Kappa Max sub 2%.
That's helpful.
Is that kind of sub 2% does that include kind of any kind of upcoming labor deals as well where are you going to target that again.
Yes, thanks for asking that Sabi Ah, yes, we incorporate labor cost into that and all of our cost pressure and one cost pressure I didnt mention simply because we.
We alluded to that earlier is airport cost pressures. So that's one.
Cost pressure that we'll continue to have to work hard over the longer term to control.
Alright, great anytime I just ask is a quick clarification question on on the.
Gross if I think about next year.
His Hawaii still kind of a large part of of good in the next year's growth assuming you think grow as you want to grow or how should we think about kind of the composition. If you can do what you want to do.
Just keep in perspective, why slow flow around Hawaii, we're pretty excited about why it's a very very modest portion of our network. It's like was as I guess, 1% by about point of our network. So you were going to continue invest and we're off to a great story, what I continue to build on momentum, but even if we were too.
I'm not sure exactly give order status for our plan for next year is but as that could be a massive portion of our capacity is this is not you will see focus on California, as I said, California, Denver, Baltimore, Houston, why we're going to stay committed to we're absolutely committed why by the way if anyone wants to know we got back up why absolutely not.
Open five stations in Hawaii, and performing really well so what are backed off it may have the pace a little bit depending upon the Max but.
Why is going be a focus but can be a relatively modest piece of our capacity I think.
Got it thank you.
The next question comes from Kt O'brien with Goldman Sachs. Please go ahead.
Good afternoon, everyone. Thanks, so much for the time.
So not to keep harping on the cost outlook here, but I guess, just if I think about your 2% to 3% capacity forecast for the for the first quarter and then just think about.
You next CASM growth is just linear with cost growth that will get me too.
Based on what your plans given the fourth quarter to hear that would get me to a first quarter CASM ex of around 3% all else equal I guess, just starting there what are the puts and takes that led that could actually be thinking about take to get me away from that number. Thank you.
Yes, just just looking ahead to the first kind of going into the first quarter.
That's correct.
Yes.
So.
I just said.
Just to make a few points on the first quarter and I think this will help address your question. So excuse me if I'm a little that redundant.
But now keep in mind, we've got the scheduled out through first quarter 2020, and at this point the Max canceled in February .
And so I just want to point out that we do have some conservatism built into our February schedule.
Okay and again all this is contingent upon the deliveries.
How those for them from Boeing but based on.
What they've indicated.
They are targeting here in the fourth quarter.
We would expect to have around 50 Max aircraft in our fleet at the beginning of February and that of course includes the 30 format.
Currently grounded.
We will only have 30, Max aircraft flying for sale and our.
February 2020 schedule and that that routes to 65 aircraft in our March schedule.
And as you all know there's a strong demand that we have a pent up demand here at southwest. So we'll want to ramp up prudently, but we certainly want to ramp up as quickly as we can.
Yeah.
Utilize our assets and to absorb some of the cause pressure that we're obviously experiencing here on the fourth quarter.
So currently the largest step up of aircraft coming back in the service is from the seasonally uptake of February time period into March.
And that's how we met to the current first quarter capacity number that that you mentioned would just be up 2% to 3% year over year.
And but most importantly, well won't want to be measured in delivered in the way, we energy that Max aircraft.
Safely back into service.
But all of these planning assumptions change if we have to extend our flight cancellations are there.
So hopefully you can appreciate how difficult it as you now nail down a solid planning cost guidance or even this environment.
But all that said, we're focused on delivering solid results and focused on mitigating those cost pressures as as much as we can.
And of course.
As always our goal would be to have a positive RASM in the first quarter. So we're looking to a balance all all of that so we'll have to manage our flight cancellation impacts of discuss capital very carefully.
Each time period has its own set of any challenges, but again.
Based on the current.
And I feel pretty good that we can do that so we expect the year over year unit cost penalties to continue and I will face those headwinds as we ramp back up.
But.
We'll.
You know as we get passed the Max the penalties that we've shared as to you throughout the year you know we would expect those two.
Reversed and turn into a tailwind.
Next year, what we get past the the return to service that we're back up to our normal capacity plan.
So that was a long winded answer but.
That said just wanted to give you a little bit of colors to that you can appreciate how difficult it is for us to nail down.
Got it.
Yes, no definitely a lot of moving pieces here it seems like an ever moving target on the certain date. So really appreciate all the work you guys and the in place. There has had to do I guess, just maybe one quick follow up to to that question and then one more so I guess is there and again I as I just thought I really appreciate all the moving pieces here, but I guess this.
Is there anything though we should think about as we go into the first quarter that would either provide cost from improving on a linear basis or help costs improve.
Even more than that I'm just in terms of I know there service costs. There are some are some good guys. Maybe we're forgetting about from earlier this year that will create a tailwind and then just.
Our non aircraft Capex, how should we think about that next year and going forward I know you got a lot of irons in the fire on the technology front. Thank you very much of the time.
Jamie let me jump in here I think there's way too much focus on the first quarter would your question the.
The other cost performance here in this and the third on the fourth quarter looks really good to me and so I feel like we'll be able to continue.
Managing the as best we can the issue is a numerator and denominator near as Unabsorbed overhead and until we get the airplanes flying you're going to have that cost penalty rolling forward.
Especially compared to a year ago, that's number one number two.
As it is not linear so what Mike has to do if we're going to ramp up our flying yes, a higher asked a higher in advance. So it is actually front loaded.
And now the question becomes a judgment on our part about how much we front load and to be honest with you. We don't know yet we don't know how many people were going to higher at what point.
In the first quarter, what Mike is trying to do is he's got to chances here. He can hit the peak for spring break.
Or we'll miss that and then we'll try to hit the peak and I'm talking about flying and then we'll try to hit the peak flying for say June .
And so we just don't know how it will ramp up yet I think we'll get much more visibility over the next 30 days.
But we'll still have to continue to make a judgment about whether we're either going to hit this February the eight date.
So I think.
I know you want to number.
I think basically what we're trying to do is make sure that we don't waste money here until we get back to something that is more manageable, but until we get there.
And this just as the audits true it won't be messy.
And we don't and wear and we're not in total control we're not in control of what Boeing can do we're not in control what the if they can do to support our return to service. That's all assuming that we do we're on a path returning to service at that point.
Instead apologize for the short term nature that question and then just maybe 10 man on the non aircraft Capex any comments there. Thank you again for all the time.
Yes, sure and just too.
Add one more comment on the call because I can't help myself is.
We are telling us telling up all those damages and obviously I have ongoing discussion with Boeing yeah and on the on the non.
Capex aircraft Capex.
2019 is.
Roughly in the 800 million range, and so that im not expecting a significant departure from that for next year, but as we've said many times, we just haven't wrapped up our plan.
For all the obvious reasons and once we day, we'll come back and I give you more precision around what we're doing next year.
Q.
We have time for one more question, we'll take our last question from Joe Kato with Credit Suisse. Please go ahead.
Hey, good afternoon, everyone. Thanks for the time.
Gary and Tom.
Teased us with some some new revenue initiatives that you have in the pipe for 2020, it sounds like like some are getting ready for prime time like the corporate travel initiative that Tom water and not in great detail. Appreciate that are there any other of these revenue initiatives for 2020 that are getting ready for prime time that that you might get or share with us today.
Well no not today.
I think the GDS is the big one is in the pipe for 2020 Theres lots of work going on right now for.
Yeah, Theres, a theres, a pretty rich theres, a pretty rich revenue initiatives pipeline and that we are so I can take you through it so I wish I could it's a pretty excited about it but we're going to base it out.
These are all they are kind of sequence in such a way one builds upon the other in terms of the technology Foundation. So it's all he just certainly is all other onetime they are very it's it's a very ads and kind of process, but GDS is a big foundational piece for us.
Put that in and then we have more than that tells the.
Subsequent to that but we are really great pipeline, just like I talked about today.
Okay. That's the other thing.
Yes.
What is what's interesting for US next year is there's a lot of capacity. This on the sidelines is going to return at some point.
And so I think.
We've made clear that were not just going to put back in what we took out so there's an opportunity there to up to optimize.
And.
Tom answer the question earlier about Hawaii.
Hi, Tom I don't think with what we're going to add back next year, there's that much development flying I think its and that sort of the to reemphasize. It sounds boring, perhaps to you all but adding to Denver, adding the VW, adding to Houston should generate strong return.
Turns quickly and that's part of our strategy for next year as a great revenue idea, it's not new but it is what is.
What I Wouldnt discount too much is the fact that we've taken that that work we've taken some capacity out there we're going to re optimize that network were forced to.
So we're trying to do it in a way that it produces a superior product and I'm really excited about that so weather.
Well just have to get out play the game and see how good that turns out but.
The emphasis on a short haul markets, which are very core for southwest.
Emphasis on still retaining a presence and longer haul Wendy markets and maybe on a one stop basis.
I'm pretty excited about all that.
Okay, great. Thank you both and maybe just a very quick follow up for us for Tammy.
Clarification question really deep the incremental cost sort of associated with with the return to service explicitly associated with the returned to service.
Are you going to include those in.
Your your 2020 CASM ex guidance. When you do provide that are you going to exclude them and adjust them out.
Oh wait we would include that.
Okay got it thanks, everyone.
Okay, great well that wraps up the analyst portion of our call that as always if you have any follow up question.
Give me a ring so thank you all for joining.
Thank you ladies and gentlemen, we will now begin our media portion of today's call I'd like to first introduced Ms. Linda Rutherford Senior Vice President and Chief Communications Officer.
Thank you Chad I would like to welcome members of the media to our call today and we can go ahead and gets started with our key Una session. Chad if you'll just give them instructions on how to queue up certainly to ask a question you May Press Star then one on your telephone keypad, if you're using speakerphone. Please pick up your handset before pressing the keys to which.
So your question. Please press Star then to.
At this time, we'll just pause momentarily to assemble that roster.
Thank you very much our first question will come from analysts insider with Wall Street Journal. Please go ahead.
Hi, Thanks, so much.
I'm just kind of quickly about the.
Diversification review and the sound a little bit make more of a formal process than the ongoing kind of kicking the tires that you've described in the path.
Is that right and you know what kind of factors and metrics will be looking at as part of this review.
Listen I'd say, yes, and no in terms of the literal looking at different airplay, it's no different than what we've ever done the only thing that we will.
We I feel we are obligated to do is just debate the wisdom strategically of having a sole source vendor and one fleet type that is different I don't know that we've ever focused on it with that kind of intensity.
And I don't want to prejudge the answer to that they are but they are two different questions. You can say, we'd love to have a separate fleet type, but when we look at it it just may be economically and operationally and feasible.
Our and vice versa, we may find that even without the strategic necessity of having to we might may may discover I doubt it but we may discover that it's better to have two airplanes economically.
Operationally, so all of that will need to be thought through.
But again it just addresses a question of.
The obvious question and.
We posted in our board agrees with that and we'll we'll study it at the right time, I've said next year and I don't feel.
That is a deadline by the way, but it's as mailing to make clear that with the questions that we've had so far on that topic. We've made clear we are not thinking about that right now we're not working on it.
It is not an issue we have two things start that settling up with Boeing and getting the Max returned to service that is our focus and as you can tell from listening theres a tremendous amount of work involved running the airline in the meantime, with the uncertainty of when it comes back so it's.
At the right point in time, we'll take a look at that and as I tried to make clear. This morning, that's not new news. We've said, we what we've said that months ago.
We would.
Maintain these things as our priority and that we would look at that question later.
Okay. Thank you and if I can ask one more.
One of their employees Mark workers focus of the DJ and criminal investigation for his role in developing the Max and so messages.
From when he was that billings adjusting.
He may have detected some issues of m. cancer unintentionally misled regulators do you have any concerns about those messages or concerns with him working on air Max issues now that he that southwest.
Well.
Those are clearly issues unrelated to the southwest employment.
And so that you know.
All of that investigation will have to run its course and.
So it it is.
Nothing to do as far as I am aware with his employment itself west.
Hey, good by all accounts. He is a very fine man and does a fine job for us.
Okay. Thanks.
The next question comes from Tracy Rosinsky with Reuters. Please go ahead.
Hi.
I was wondering.
What your internal research and looking past February eight are telling you about customers.
Slide on that.
And to what extent that sentiment playing into your planning for putting aircraft back into your network.
Okay, well this is Thomas I'll be glad to.
Take that question. So good question.
Obviously this is this is something that's getting media nearly every day. So the consumers are very very aware obviously.
I think would say is we do expect there to be some uneasiness in the early days. The aircrafts return of services very natural you expect that its national given the nature of the situation just how much attention has been focused media.
Having said that though we've been we've been doing research every very frequently. So this thing has come this has happened in March Youre Rolling bands Research. If you will add what we're finding is that theres very little difference originally versus what we're hearing today. We are hearing is this southwest has a very very strong reputation as being a safe.
Slide flutter sleep through end of life have confidence in southwest They trust us number one.
We're also very consistently hearing that a majority of customers not just our customers but travelers.
Do not expect unchanged or flying behavior based on aircraft type that's an interesting learning which has also been very consistent.
There are some travelers, though who were saying it is minority we're saying they'll have a there'll be looking for different aircraft flying.
And then maybe trying to avoid the Max for a month three months or six months, but that isn't minority but.
Based on what we're listening to and hearing from our customers.
You'll like we have a pretty good understanding.
We have to figure out how do you how do you begin to insert that into what do you plan financially from a business standpoint in terms of book away.
Phenomena. So we're still working through that but we are sensing as that the customers really are they will come back our core customers are very confident loyal to southwest we feel pretty good about that.
Can you give us a little since when you said that there isn't much different from originally versus today.
Can you.
You talked about a minority can can you give us a little bit more color on what that looks like in percentage terms.
Well now.
Sure I have all the specific facts in my head, but I think the majority I think it's got a super majority actually all right. So if I can give you precise number but it is a super majority are saying this is not that big of an issue for me Im not going to change by fly behaviors I think it's in the high Sixtys Seventys very significant so.
I'm not going to do justice by trying to give you always will affect towards but it is a minority it's a it's a real minority as opposed to a almost 50 50.
But we feel good our customers feel very they're running easy just like everyone else I want to see the aircraft why they want to be assured safe, but they really do have confidence in the way, we're going to bring us back into service and Tom Tom May have mentioned this but the other thing to note.
Or maybe repeat is that what we survey our customers do you Trust southwest the trust factor is extremely high and higher than our competitors quite frankly so.
I think that all of this be all the research we've done suggest that time will address those so the airplane comes back into service. It performs well add I think most people answer the question.
By saying well I won't fly it for six months for those who to de select flying it.
Or might not fly it for 12 months.
And.
So I think we feel that the research supports at our.
History supports and our judgment would would say that.
That will be short lived.
No one just a little factoid, the kind of helps build a would gary's last comment was.
Our customers do have the ability to see what aircraft. They are flying and you might think the given all the news in the Max and all this stuff going on to that there'd be a higher propensity to be checking my I want those aircraft and it's like less than a single digits of actually less than 1%. So I. Just don't think people are are really.
As focused on it as we are being in the industry. I think this is going to this fall.
Take care of itself I think right and in other words were taking bookings for the Max now it's in our schedule.
And our schedule as of February the eight then theres nothing abnormal we're seeing the oil collateral. So you know book away.
At this time, we'll take it last question that we have and that is from dawn gilbertson with the USA today. Please go ahead.
Hi, Good morning, everyone. Good afternoon to question unrelated the first on the Max or no Gary or 200 years somebody can you give us an update on where you are in a negotiation with.
Both.
For the current timetable there you know for recovering damages and my second question has to do with sees I'm wondering if you could give us an update on.
Year to date early bird revenue and upgraded boarding and whether you might be considering any changes there.
To the fees.
Thank you.
Well Tammy is leading the.
She wants you to you to work on or your second question she's leaving.
A couple of negotiations for us, but she's working Schumacher working together with Boeing the dam he's got the lead on it and.
Yes, I'm in patient on that I'm anxious for that to get wrapped up so no I can't give you a timeline other than to say, it's a good some may major objective.
Most of mine and I want that wrapped up quickly.
Yes, and on early bird I have.
The fourth quarter numbers.
Which would be helpful kind of.
As you think about Annualizing that maybe going forward, we had very strong.
Early bird.
Apartments, and the fourth quarter and in the fourth quarter alone that was.
Probably 112 hundred $13 million and our upgraded boarding was about 20 million.
Both.
Up significantly.
From the prior year and our third quarter was our third quarter was.
About 19%. So we're we're running on well over 100 million with respect to early bird. So it's been it's been a tremendous success and obviously a very popular.
Product for our customers.
Thank you.
Yes, I have I have a year to date number for you it just a minute to.
Atlanta.
342 million I hear today.
Well earlybird and both of those.
If it's far early bird.
Okay. Thanks very much.
Alright. This concludes our question and answer session I would like to turn the conference back over them is Rutherford for any closing remarks.
Thank you very much if you all have any other question or.
Inquiries you can contact our communications group to one for seven nine to 4.47 or you can find an increase to our online newsroom at www Dot. Several you aim media dotcom. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.