Q4 2019 Earnings Call

A few quick disclaimer before we get started here. We will make forward-looking statements in our remarks which are based on our current expectations of future performance. And of course our actual results could differ from current expectations for a number of reasons. We call it out special items in 2018, and we will make reference to 2019 results that compared to Prior year non-GAAP results. Both topics are covered in great detail as always and our earnings release disclosures as well as on our our website and we are also providing commentary today regarding the ongoing Max ground dead and our current estimations of time lines and current planning assumptions for 2020. Keep in mind these timelines and estimations could change materially with impacts on the amount of financial damages are published flight schedule will be on June 6th and our Fleet capacity and capex assumptions to name a few.

With all that said we'll go ahead and get.

And I'm turning over the call to Gary. Thank you Ryan and thanks to everyone for joining us for a fourth quarter and year-end 2019 earnings call straight away. I want to thank our employees. This is our forty-ninth year and they're at least in my experience. There is no more remarkable year than 2019 the grounding of effectively bought 75 of our airplanes, which is about 10% of our Fleet presents a crisis like Challenge and our people ready for it with the best planning tools and technologies that are history but more importantly with the right fortitude and the right resolve to get through this crisis.

Our objectives were to run a great Airline serve our customers exceptionally. Well protect our finances in our jobs and follow through with our capital projects that were underway and we were able to do all those things the max groundings reduced our annual operating income 828 million dollars. Our earnings were still a record our first year basis. non-GAAP basis at $400.27 and that is truly remarkable, but they would have been 28% off and 20% 27% more than a year ago. But for the max when you can do the math on the stock price effect, but we settled with Boeing for the 29th Max groundings and the settlement seems to have zero effect on the price per share by the way, but we also intend to settle up twenty twenty years.

as well

So we're three months later since our last earnings call and unfortunately, we're still talking about the max unhappily. I'm confident about the max more importantly Arpaio confident about the max a Boeing needs to get the work done get the certification flight done. Give the f a a chance to do their work and unground this airplane the right now, we're scheduled for June 6th return which implies a nun grounding several months before bowing surprised us all this week with their June July predictions about the grounding and obviously that would make our and other airlines June dates unworkable. So the timing remains uncertain it we're working through all of that right now.

Our goal is for 2020 giving all of this are very straightforward. We want to return the max to service. We want to continue to run a great operation. In fact, even better. We want to continue to serve our customers very well with exceptional hospitality. And in fact even better we want to protect our finances and our jobs and continue to keep costs low and slow the rate of inflation and do that even better. We wanted to settle with Boeing for 2020 compensation. We want to continue on with the capital projects that are underway.

and then

We want to keep our Network intact and continue making one modest tactical adjustments were able to do.

Having said all those things and all of a sudden that demand and the economy remains strong and that oil prices remain stable and low if we can continue he's cute against all these goals. That means that we only have one problem and that's Fleet growth. So with regard to the fleet we're assuming that the max grounding is a short-lived meaning there are months ago and not years to go and with that in mind, we're aggressively pursuing a couple of tactical ideas and we're one is May retirement schedule where we have a lot of flexibility. So we're actively deferring retirements where it makes sense. Secondly, we're always monitoring to use 737 aircraft Market will continue to do that. Our issue is simple is our see growth is not keeping up with demand much less allowing us to age.

And and we're losing share.

But all that is temporary and we plan to aggressively recapture it once the max is ungrounded in our in a superb a position given our return on invested Capital. There's no change in our efforts to evaluate the risk reward of a single aircraft type or supplier will do that. It's just a lower twenty twenty-five. So there's no update there. I'll also preempt the imminent question by repeating what I've said earlier. I do not agree that the max crisis compels us to acquire another carrier. We would not overpay we would not commit us to his a course. It's inconsistent consistent with our strategy and of course as our policy, we did not call me at all on rumors or speculation about any m&a activity. And then finally I want to thank our board for making an amendment for a 2019.

in profit-sharing in

Even though the Boeing compensation is for 2019. It is not included in 2019 profits and that's not fair to our people for their profit sharing so may result in that $124 million dollars was added and of course that reduced our fourth-quarter profits, but that makes the total annual profit sharing contribution a a record $667 million dollars in our folks earned it and just wanted to congratulate them.

So taking that noteable item into account. We be consistent consensus. So with that quick overview, I'd like to turn it over to mister Bannon to take us through our operations. Well, thanks Gary. And it's Gary was mentioning given all of our headwinds that we were facing. It was extremely important that we won a reliable customer-friendly operation in the fourth quarter and our people certainly delivered they produce the best overall operation we've had in over a decade are system-wide on-time performance for the fourth month was 82.4% and we accomplished that with the least amount of block and turn time and Industry and that's a big factor in our operational efficiency that lowers our costs through Superior crafting lovation. It's the low-cost coupled with the great service that allows us to win.

on the service front

This was the first quarter. We had bagged scanning implemented throughout our domestic Network. We in Planes 30.9 million bags in the quarter and 99.6% of those bags were carrying a life is checked that is a record fourth quarter performance for Southwest Airlines and our customers noticed during November Southwest again, led the industry with a lowest customer complains ratios and supported by the vot and based on a preliminary December results. We expect to close out the year in a similar fashion and frankly. Our people have been delivering this kind of exceptional service the entire year and all the while dealing with the significant activities associated with the max gravity. So in that environment, we grew our y service over 1 million customers and just nine and half months. We implemented Plain Sight scanning for bags across the domestic Network and we continue to implement technology enhancements across all of our offering and functions dead.

oh for all of

19 excluding Hawaiian Airlines Southwest finished in the top three in the industry in on-time performance and baggage handling and with the lowest customer complains ratio always measured by the d o t and that's the best combined yearly industry performance since nineteen ninety nine and our people believe that they can improve from their home yesterday. Our January on-time performance was 87.7% That is just a superb start to the year. It's one of our bests. In fact, we've only achieved an 85% of January on time for a performance for better five times since 1988. And it's the on-time performance that sets the foundation for baggage handling for customer complaints cost control. There's no better team in this industry than a Southwest people and they support our customers are company each other and they were just Relentless and execution.

And they are the heart.

and the soul and the spirit of South West

I'm trying to the max for a moment our guiding principle of relaunching this aircraft continues to be an orderly and controlled manner one which we can execute with a high degree of confidence in certain age. And that's been a critical focal point for our team and we plan and we re planned our return to service activities as new information becomes available. So since the beginning of the year, we have learned of two significant additional considerations a first the Boeing recommendation for both simulator and CBT training for our pilot prior to their operation the airplane and then secondly bones month recent estimate of a mid twenty twenty return to service date.

You know, we have presently removed all Max flying for my schedule's through June 6th. And with this new information, it seems pretty clear that we're going to need to make further schedule adjustments into the summer. So we're replanting it again using the best set of facts and insights into all of the necessary activities and we'll make the appropriate adjustments well in advance so that our customers travel plans on significantly Thursday. We have 34 Max aircraft on our operating certificate there in Southwest Airlines control and they're stored in Victorville, California. Those aircraft must go through maintenance and make ready work before they're ready for service. We also have 27 Max aircraft and Boeing has built and they're being stored by Boeing until the aircraft are certified to fly off those twenty-seven must still go through the delivery and acceptance process. In addition to any Make Ready work to be added to the Southwest Airlines operating certificate those combined. Yep.

You want aircraft or are most?

Reliable source of lift once the aircraft is cleared to fly. And as I stayed in earlier calls, we believe that we can manage around five to ten aircraft a week from this Collective pool to be reduced to the operation. So it will take at least a couple of months for those aircraft to return to service and our crewing is in place today to operate them.

Boeing still contractually owes us $51 more aircraft this year. That's the 2019 carryover plus the 20 20 deliveries and with their production line shut down the delivery quantities and the dates for influx. We're going to continue discussions with them to work through what's reasonable for both of us as their plans become better defined. So turning the training with our initial training plans included the 30-day period for all of our Pilots to complete the expected CBT training before we begin flying the aircraft and Revenue Service Boeing now recommending the additional simulator training and the training requirements will be finalized at a later day after the j o j o e b completes. They're testing these require will dictate the time it takes for us to complete our pilot training.

we currently

Have three Maxim's on property and we work with our simulator manufacturer CAE to provide us with three additional Max simulators to be training ready before the summer that will give us at least six Max simulators available for training by the time of year class is released apply and that will significantly reduce our train time from where we started be on June 6th. We have three more simulators deliveries plans for twenty the second half of 2020 and we're working on expected in service dates for them.

That will close 2024 us with nine Mac simulators. I cannot thank you enough for their partnership and support we had a strong relationship with them for many years and they have helped create one of the leading flight Ops training centers in the world assuming for a second is a simulator training maybe two hours. He says a baseline that will take us at least a couple of additional amounts from where we were to get all of our Pilots through that training. So there's still a lot of moving parts and they'll down of those they return to service plan off. The FAA is in control of the regulatory on grounding process and our plans begin. Once they clear the aircraft fly from that date. We're assuming it will take several weeks back on manual is updated and our CMO to approve our changes. And then once that is accomplished we can begin training our pilots and bringing the aircraft into their operational State and as I mentioned it will take a bath

least a couple of additional months

Before the aircraft are ready for Revenue Service and our Pilots are trained. In the meantime. We still plan on performing extensive validation slides to work out any effects of the aircraft for sitting so long also reintroduce them to our people and to make sure that we are completely comfortable with the aircraft performance before any customers set foot on the aircraft.

Wrapping up. Our operation is running very very well. We have a detailed plan to relaunch the Max and will be adjusting it as we get better information. Our people are taking great care of our customers and each other and they're delivering a safe reliable product. They are the best team that I have ever been around and it is a pleasure to support them and with that, Okay, I can wait. Hey, I just really have to go Mike and Gary and also share my congratulations and my thanks to all of our employees their absolute lawyers and then a Southwest Heroes 2019 was a very challenging year with the max. But we also had a great year. We really did have a great year are people across every room just kept rising to the challenge time and time and time again, you know when the max is ground is Gary said in March of last year. We were very clear about our priorities first. We were absolutely committed to running a great operation.

ransley focus and taking break

Of our customers in third. We were very focused on delivering very strong financial results and we did all three and we did it very very well. As Mike said the operation was rock-solid offer the best operation in the decade. Also is Mike said our customers SAT scores at the very top of the industry and when he didn't say is keep in mind, that's the year. We had to proactively re-accommodate am literally millions of customers in our brand scores also remained the highest the industry and among the highest in the world for any company not just their lines. So the customer service off the Telly that we're so famous for is stronger than ever in our people. Just continue to take great care of our customers and one another

So our fourth-quarter results were right in line with our original October guidance of flat up 2% our fourth quarter revenue of 40 basis points to a record of five point seven billion dollars and that was despite a nearly 1% decline in capacity. And we also grew r r as in 1.3% which is also a record performance are based business was very strong and was the driver of performance and this was really the result of strength in both demand and healed. We also had very strong performance in our other revenues more specifically our rep Rewards program performed very well, which will talk for just a minute. We also have very strong performance Mark early bird and upgraded boarding products both of which had double-digit growth by quarter. Now, they said our third quarter call, we made the decision to follow 319 to republish or November and December schedules really with two objectives in mind first, you want to minimize any customer disruption and inconvenience during the holiday travel season in seconds. We want to ensure wage.

green operation with

our capacity

And we achieve both objectives, but we also knew that we weren't optimized and razzing for the peak versus off peak seasonality the fourth quarter and as expected the two or three points temporary your resin benefit off and we saw in the third quarter from the removal of the max didn't occur in the fourth quarter because of the sub optimize Q4 schedules. Now, none of that was a surprise to us. The net effect of this is that there was no material for your max impact to keep for resin. Which again is what we expected and share with you on the last call.

And I got to say once again our Network planning team just did a phenomenal job of developing workable solutions to protect the strength of our network and to minimize customer disruption and the same call out to our Revenue management team an incredible job of managing the revenue yield throughout the quarter.

We also have very strong Revenue growth in our other revenues a rapid rewards program contains to perform extremely well for the full year or other Revenue grenouille 11% in the fourth quarter with Foreman's was a strong 9% growth, and we're continuing to see record passenger mix continued. I'm sorry, we're not seeing that the reward Pastor makes continue to grow which really speaks to the strength and the value of the program for customers know. We're also continuing to see very strong growth in spending on our co-brand credit cards and the sheer size and growth of our credit card portfolio is very healthy with nearly five digit growth and very low attrition. So we continue to be very pleased with the economics in the structure of our program as well as with our partnership with Chase.

so to sum up key for the

Bottom line is very simple, very steady strong demand for both Leisure and business continued strength and pricing strengthen our other revenues and continued industry-leading strengthen our customer and Brands course off. The storyline for q1 is is very similar experience. Thank you for the underlying Trends around demand and pricing that we experienced in Q4 have continued in the queue one that we're seeing for the quarter shows very solid shopping and booking so demand remains solid for both Leisure and business travel and pricing also remain steady and strong. So we have a very good read on first-quarter Revenue in Iraq has been friends. Obviously, we continue to be impacted by the max. We pull the max out of our April schedule which runs through June 6 a.m.

And as you know March of the month the first quarter in our Max aircraft have the synchros and three or four aircraft in March of 2019 to roughly 60 aircraft short by March 2020.

Now that said in q1, we don't have the flight schedule variations in the capacity and demand mismatch complications that we have in the fourth quarter. So because of that we expect a 2.0 year resident benefit in q1 from the Maximum Solutions.

We also have

Roughly appointment half a year or a year resident Tailwind the first quarter from prior-year and negative impacts one point due to the government shutdown and a half point due to the unscheduled maintenance can be cancellations in q1 of last year. So based on the strength of our base business as well as the q1 max resmen tax and the year of your tail winds. We expect a strong Q1 r as performance in the range of of 3 and 1/2 to 5 and half percent wage. I've said this before but I think it's worth repeating as we continue adjusting the flight schedules of the max cancellations. Our focus is to maintain depth and frequency of service to key markets and we're also very focused on maintaining a high degree of point-to-point direct flying as well as maintaining high-quality connecting itineraries. Now when you look at our schedule, you'll see that we've trimmed some capacity from long-haul markets and we've added more compact or short and medium offline, which is a real core strength for a network.

You know just to be clear in no way. We walking away from long-haul flying but with the max out of service and we have opportunities replaced profitable but below system average rasim long non-stop itineraries with high-quality connecting itineraries. We will do that and with the strength of our point-to-point Network. We have the flexibility to do that.

The max Returns the service will certainly restore the vast majority of flights and take them out of our schedules and will do so in a way that lines up their operations and Commercial objectives. You know, we have the world's largest wage is point-to-point network and we intend to leverage our cost structure and our scale and we certainly intend to resume our growth and I tell you we have a long Runway of growth opportunities still in front of us.

Now this might the max cancellations we continue to add additional flights into some of our key markets. We have near-term growth Focus will continue to be in Baltimore Denver Houston, Hawaii Hawaii contains performed very well for both Long Haul and inter-island markets. And this is totally consistent with our plans and our expectations now looking Beyond q1, obviously our 2020 growth be determined by the Mac trying to service until that occurs. We'll discontinue to adjust our plans recording. Our objectives are no different than what they were in 2019 or write a great operation will take great care of our customers and will deliver strong Finance.

And is Mike alluded to?

If we need to make further adjustments to our June schedule, which runs from June 7th through early August will do so and that would likely include further transport non-stop long-haul flights and potentially a modest home with high frequency markets, which is essentially the same Playbook that we've been running for the past several schedules.

We also have a full pipeline of revenues and costs initiatives. Most of which we won't discuss yet for competitive reasons, but I can tell you the Run Track to implement our new GPS capabilities for corporate travel mid year would travel board and Amadeus which we expect to drive incremental ebitda between ten and twenty million dollars in a second half of 2020 and there's clearly a very large opportunity to grow that substantially over the next several years. So that's where we are at queue one is off to a strong start Trends remain strong in regarding our wrath and be up 3 and 1/2 to 5 and half percent. And once the max Returns the service we are raging bring it back into service with all the operational and Commercial discipline that you would certainly expect in Southwest Airlines.

So what's that? I'm going to turn over to.

Thank you, Tom. And hello everyone. I'd also like to thank all of our employees for their tremendous efforts managing through a very challenging year. The max grounding have had a significant impact on our company, but our employees continue to rise to the occasion and the strong results. We reported this morning simply would not have been possible without their hard work and incredible focus and team with the max return to service timeline shifting frequently. It has been difficult to Anchor our full-year 2024 cast to support meaningful Guidance the whole year. So I'll Focus primarily on first quarter guidance in my comments today regarding our cost performance Fleet capacity and Catholics plans and our strong position.

During fourth-quarter as Gary of covered. We reached a confidential agreement with Boeing for compensation related to 2019 Financial damage to the max groundings. The compensation from Boeing will be accounted for as a reduction of the purchase price of our 31 owned Max aircraft and future Max from org, which reduces property and equipment on our balance sheet and will result in lower depreciation expense over the useful life of the aircraft.

and lights

A disagreement our board of directors authorized a $124 million pre-tax profit sharing award. This incremental award was a crude and fourth quarter and reduce fourth grade learning by 97 million or 18 cents per diluted share as we covered in the release a record $264 million in fourth-quarter profit sharing extent. I am loaded a $124 million discretionary award and will be paid later this quarter as part of the record 667 million full year 2019 profit-sharing distribution to employees.

So now that I've covered profit-sharing I'll go ahead and cover fuel costs before I move into our cost performance excluding Fuel and profit sharing our fourth quarter fuel price of $2.09 per gallon decrease $0.16 or 7.1% year-over-year and that's primarily due to a roughly an 8% decrease in market prices. We have a great fuel hedging protection in place this year with a 66% Hedge for first quarter and a 59% Hedge for full-year 2012. We've been adding some protection to Future years and are currently about 54% Hedge for 20 21 and about 31% Hedge for a 20 22 month. We also recently began adding modest protection to 20 23 and expect to continue our systematic approach to building a meaningful multi-year hedging portfolio at a reasonable cost to program.

Find some insurance.

On around what about a third of our cost structure?

For first-quarter 20/20 based on market prices as of January 17th. We expect our fuel price to be in the range of $2 and $5 to $2.15 off per gallon with a modest one cent hedging gain at current prices.

Our fuel efficiency continues to be significantly impacted by the max grounding. We came into 2019 expecting a solid year-over-year improvement in our fuel efficiency wage Lee driven by the operating performance of the 75 Max aircraft. We should have had an 2019 as a reminder the max produces a 20% fuel burn Improvement them are retired classic Fleet and a 14% improvement over RNG Fleet. However, our fourth-quarter and full-year 2019, asm's per gallon declined 2.8% off. So we lost some ground the last year will continue to be impacted until the Return of the Mack and first quarter 2028 as in per gallon are also expected to decline year-over-year and number of down to to 3% We look forward to reversing this trend and getting back on track with our fuel efficiency Improvement gold.

Fuel and profit sharing the 5% year-over-year increase in our fourth quarter Chasm X was right in line with our most recent guidance and as we outlined in our release the primary driver of the year of your increase was the temporary underutilization of overhead combined with the lower than planned capacity from the max grabbing for a full year. 2019 Ark hasn't increased 7.7% year-over-year the max grounding impact drove approximately five points of this year over year inflation, which is what we all expected excluding the max impact. Our cost control is very solid with core year-over-year 2019 unit cost performance slightly below our original guidance range of 3 to 3 and half percent and that includes the incremental ten million a maintenance expense to keep seven of the seven hundred aircraft. Yep.

We were originally going to retire.

In 2019 as well as the incremental and 42 million ratification true up for our mechanics contract.

Looking at first quarter 2020. We expect our Chasm X to increase in the six to eight percent range year-over-year our Outlook includes an estimated 7.6 penalty from the max grounding as our Fleet. To take Rose relative to our cost base. We will continue to have temporarily unabsorbed overhead that will be utilized upon the max return to suck.

Setting the max aside our first quarter Chasm X Out loot look also includes one to two points of inflation primarily due to increases in salary wages and benefits wage expense and operating expenses related to technology and facility Investments.

As you know, we have your of your Tailwind related to the first quarter 2019 impact associated with the ratified labor agreement with our mechanics and cost associated with unscheduled maintenance disruption and flight cancellations, which offsets inflationary pressures here in first quarter.

turning to

overview of our Fleet plans

It has obviously been a focus for us this year with the max rounding. So I'll spend a little more time walking you through all the moving parts.

Prior to the max Brown These are 2019 plans were for $44 Max deliveries. That was 37 x 8 + 7 x 7 along with 18,000 retirement. This would have resulted in a fleet a $776 a year in 2019 instead. We had three max eight deliveries off retirement. And therefore is a 2019 with a total Fleet of 747 aircraft. We took delivery of three 737 Max 8 aircraft and first quarter before the max ground is in mid-march.

We have not taken any delivery since then and as a result, we decided to postpone seven of the eighteen planned retirements for 2019 to help mitigate a portion of our Fleet is it well operate these seven aircraft were around two more years and they are scheduled retired by the end of 2020 one of the remaining 11-7 a retirement plan for 2019. We retired six of them one and third quarter and 5 during fourth-quarter. The remaining five retirements have shifted to first half a 2020.

we have

Updated our contractual delivery schedule with Boeing the 41 Max aircraft that we did receive and 2019 are still in flux, but in our contractual order book schedule is shown in our earnings release this morning. We reflected 40 of those deliveries as part of our 2024 Motors and one as a 2021 from order. However long I will provide some context as far as our current planning assumptions because we do not expect to receive seventy eight aircraft deliveries at this point in June 2020.

The news from Boeing a two days ago that the max will likely not return to service until mid 2020 has this now re-evaluating our Fleet incapacity plans further. Mike has all taking you through some of the details of our Max return to service plan and he referenced the two sources of Max aircraft that we are currently focused on as part of our 2020 fully planning assumption. Mike is working through the plan to safely return the 34xx already in our Fleet. We will also be working with Boeing in the SAA to deliver the 27th next Thursday that are built in in storage at this juncture. Our current planning scenario is for 27 Max deliveries and 20/20 that brings us to around sixty Max's Thursday. We are currently staffed to operate.

we also

Back to retire sixteen aircraft this year the V that shifted from 2019 and 11 more planned throughout the year. This is Faith in the twenty to twenty-five that we previously communicated and that's simply due to the slower esteemed ramp-up of Max production and delivery catch up. I invest approximately twelve million this year and to those eleven aircraft that we were that were extending for a few years based on our planning assumption that I walked through. We would add a modest eleven that aircraft to our Fleet and twenty20 at 758 total aircrafts.

Of course, we don't have certainly on the timing of the max return to service the production of timeline from Boeing our our aircraft delivery timeline. So this is all subject to change and we'll keep you updated accordingly shifting to capacity fourth quarter 2019 ASM declined 9% year-over-year, which I expect it was about eight points lower than our original plan our full year 2019 capacity declined 1.6% year-over-year and was significantly lower than our original plan juice nearly 5% in 2019.

the first quarter

20/20 we currently expect rasm capacity to decline in the range of down 1 and 1/2 to 2 and half percent year-over-year. We currently have Max flying remove through June 16th, but with Boeing's latest guidance will likely extend. Our Max related Vitae jumps adjustments are further. So based on the flight schedule adjustments through June 6th. We expect a quarter $20 twenty capacity to increase no more than 2%

So now turning to the balance sheet and cash flow. We ended the quarter with robust cash and short-term Investments of approximately 4.1 billion our cash balance continues to be higher than what we usually carry as we haven't been making aircraft delivery payments since mid March 2019 delayed delivery payments. Also lowered our Capital 1 billion and 2019 versus our original plan of 1.922 billion the majority of the 2019 spend related to technology and facility of birth.

and we also

Received a $400 million and supplier proceeds which we consider an offset to our Capital expenditures.

For 2020 if you assume we get the 27 States or bowing that are already built for us that would result in total capex of approximately 1.4 to 1.5 billion month, which is net of a supplier proceeds O2 as at a year-end 2019 our cash flow generation and 2019 was very strong despite. The 328 million operating income reductions is the max rounding during 2019. We generated for billion and operating cash flow and a record 3.4 billion and free cash flow with two billion of share repurchases and $372 billion in dividends. We have 1.35 billion remaining on our current share repurchase authorization off of the five hundred and fifty million accelerated share repurchase currently underway that is expected to wrap up no later than mid February .

We have very healthy.

Cash and liquidity low leverage manageable debt obligations this year and remain focused on a balanced approach to investing and our employees and the company and returning cash and value to our shareholders money in closing. I'd like to extend another huge thank you to all of our employees taking into consideration the significant impact the max grounding pack on our operational and financial performance. Our 2019 results were truly superb. We did not leave Brown on our very strong financial position wage maintaining our investment-grade balance sheet ample liquidity strong cash flows and healthy shareholder returns, and we also continue investing in our business and we're well-positioned for the future months.

Absence the impact of the max surroundings and first quarter 2019 unique items. We achieved our unit Revenue growth hold of greater than 3% for 2019 took like wise we beat our unit cost guidance for 2019, which is just tremendous.

Of course.

The max dissing of the significantly impact 2019 and 2020 will also be significantly impacted by the ongoing match situation, but our focus on solid execution remains changed. We look forward to getting past these near-term challenges and temporary headwinds safely returning the max to commercial service and leveraging our low-cost a wrong route Network to resume our growth. So with that Chad. We are ready to take tables questions. Certainly. We will now begin the question-and-answer session to ask a question. You may press star then one on your telephone keypad. If you're using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press star then Thursday at this time. We'll pause momentarily to assemble our roster and the first question will come from Andrew the Dora wage.

Bank of America, please. Go ahead.

Hi, good afternoon, everyone and thank you for the questions. Tammy seems like you were able to offset the one to two points of inflationary pressures in one Cube. Yeah, partially due to some of the easier, I think partially due to me some of your that cost initiatives that you have but going forward. Do you think you have a similar ability the rest of the year which would allow you to keep wage? Do you think you have a similar ability the rest of the year to continue to offset these cost pressures or and keep it more contained to what the max impact is or do you think yeah inflation will continue to ramp over the course of the year. Thanks.

Thanks for your question Andrew. So yes, we certainly have abnormal capacity trans this year again. But as we drill down into our court costs and strip out the estimated impact of the max grounding and all the other noise. We do seek or business unit cost inflation. And that should call it close to 2% range that said we don't know exactly when the max will return and our second-half 2020 capacity plan is very much in flux. So again, that's our best rate at this point. We've reported our analysis of the unit cost impacts each quarter from the max surroundings. So along the line we've done our best to get a sense of what our true Chasm X run raised is from 2019 to 2020 so normalized dead.

for the Max and

The other unique items for both 2019 and 2020. We believe we could have reached sarcasm exterior of your growth in 2026 less than 2% which is in line with our goal. But admittedly we have a a lot of moving Parts try to tease out. So I guess in summary. I just say I'm very pleased with how we met the cutest against our cost plan in 2019 and we are very focused on being even more efficient. So and I think it's reasonable to assume or think we should be able to improve our trajectory here in twenty and twenty relatives 2019 excluding the max.

But just again including the max, obviously, the year-over-year comparisons are very skewed and we're incurring costs that we didn't expect such as extending retirement money and incurring the related maintenance investment and have some timing items of such as deferring a flight crew hiring from 2019 and a 2020 at cetera wage. Um, but overall, I'm just really proud of our folks. They're really doing a great job with their budgets and controlling costs, and I'll and I'm just saying we're all definitely looking forward to the safe Return of the Mack resuming our growth, utilizing our unabsorbed overhead and beginning to reverse the temporary home in a cost penalties that were incurring. So thank you again for your question. Great. Thank you for that detail Tammy and then maybe my dog

second question just for for Gary or from

Like okay. I know it's difficult to comment on full-year capacity given a lot of moving pieces, but you know based on what might make explained in his prepared remarks what could growth look like. Once the max returns to service. Could it be that high single-digit growth rate that I think many were maybe expecting a few months back and then how does Sim training change the time line for a full kind of return optimal utilization for your Fleet? Thanks and you're calling the best position to answer that, you know, we Andrews, you know, we didn't put off office. We did not put any guidance.

For the year being for the obvious reasons, but I mean, yeah, it's it is tough to answer for all the reasons. We've we've all laid out with in terms of the second quarter. We've given you our guidance there for ASM grows. If you strip out the if you assume the Max gets just beyond the the second quarter just offered that probably get you to roughly black capacity year-over-year for the second quarter and then really it's just a function of the of the return to service plan and we've told you we got a good line of a line of sight on the 61 airplanes Mike's walked you through the ramping of all of that which is several months process. And from there. It's really I think based on the production rates from Boeing's wage.

Just don't know the answer to that question yet, so it's just premature.

Going to try to guess what the capacity ramp up your over your could be here in the second half of the year and I think my point is is out. But so Mike you might want to comment but we may just to be clear. We're we're staffed we're resource. We got gates at cetera 461 more airplanes. And so what I have a a line of sight on as you got 34 weeks we own 27th at Boeing has the issue. Is there a 16 retirements that are coming so to get to 2 a.m. To fill up, uh, sixty-one airplanes worth of flying we'd have to get sixteen more beyond the 61 airplanes from Boeing and whether we'll get those in 2012's like I don't think we know so I think that's possible. So the point that I wanted to make with that is we want to get 61 airplanes wage.

to Service as fast as

We can and that is all understanding that it needs to be saved. It needs to you know, meet all of our other objectives et cetera, but we will want to get to that 61 just as fast as we can. We just need to know what that speed will be and some of it may be us, you know, we may find that we want to we want to you know, gate gate the flow of airplanes back into that operation off more than what we know right now, but hopefully that gives you a little bit of insight but you know, you can throw any percent out there you want it's certainly not going to be 10% There's no way nothing close to that home and and twenty Twenty-One, you know got the same same kinds of concerns. So we're not so worried about the presents right now. I'm just as much as you are but

But you know, we're we're certainly not going to be growing rapidly year in 2040.

Understood. Thanks for the color.

The next question will come from Savvy with Raymond James, please. Go ahead.

Good afternoon. Just it's just a follow-up like to clarify the the color that you gave about the max and I know there's a lot of uncertainty there on the return to service but the color was helpful, but make sure I understand it sounds like including the manual updates and kind of the concurrent training and maintenance assuming it's only a two hours. There's a lot of assumptions their thoughts about four weeks from certification too, or at least four weeks from certification to when you can get the aircraft, sorry four weeks more than the kind of two months that you have mentioned before to get the aircraft up and running is is that right? And then also just would you be willing to kind of train a subset of Pilots if it means that you can get the max off the ground sooner.

Yeah, so just maybe give you a little bit more color on that when there were we were thinking about when there was when it was just a requirement of CBT training there's a period of time and they're they're they're really three things there as getting the manuals approved. And so once there's a return to service date we need to get the manuals and get it need to get all those changes in our manuals and we need to have them sign off on all that and that could take three weeks. Let's say three three to four weeks to get that done. Once that's done we can begin to execute in on the plan and the plan is twofold get the airplanes into their proper maintenance State these Pilots trained when there was just CBT training we can get the pilots trained within 30 days.

Now that there is a potential for simulator training.

I think that can add at least a couple of months to that date.

So that is the that's the challenge with the CVT training and that lays over really with the aircraft time at the same time so that hope that gives you a little bit of color from where we were to kind of where we are today.

To be able to subset a group of piles to bring the airplanes back earlier. We would need systems. We would need procedures and I would need a an adjustment to our a pilot contract to allow how all that works. So there's a lot of work with that. We're exploring opportunities in that area wage, but there is just a lot of of risk and and and uncertainty with all of that. So that's not an easy path here.

I'm sorry. I need to know in the end, you know all that together and really compared to what we were assuming before compared to simulator training and again another check it out to see who's been terrific to work with will have significant amount of simulator capacity. If that's the route that we need to go and pick up a couple of months. Yeah, so based in and you you said it there are a lot of assumptions there, but just trying to give you some guidance. So we we won't be up and running immediately after a nun grounding. It'll be it'll be several months later on the other.

I just want to make a clear also if we will have the year before that we're talking about Revenue Service there, which I know that's what you're interested in before that. We're going to try we will do validation a slice out there so that we can make sure that everything that is occurred on those airplanes of

They're they're flying the maintained. We've got all the cobwebs, you know knocked out of them for such for a long-term storage. So we we will also be so the airplanes will be up in the air flying off before that so we can do that. In other words without having trained our entire Corps Pilots know that's helpful and I think I misspoke I meant for months. So it sounds like roughly speaking from from time to recertification. And then maybe Tammy's just a clarification on on the kind of Boeing the the kind of lower-cost that you're going from. These compensation is some of that already flowing through for the aircraft that you own and are grounded today. So, it's some of its already reflected and that will continue to build as you go out. And then also just wondering if you can provide the a breakout of the fair value for the fuel edges between 4:21.

Sure, Sabi.

The just answer your question first on the on the compensation. So it's really pretty straight forward with the compensation will be allocated to the 34 aircraft that we have grounded. So we'll get some benefit of that here more immediately and is more for next year or actually for this year now in the millions call it maybe five million for this year and month and as as low lower depreciation expense and then as we bring on the aircraft, uh-uh deliveries in the future that will simply be spread were the useful life of the aircraft's of the benefit will be realized for you know, obviously over many years here. So but that's the kind of short birth.

and simple, uh, excellent

How that's going to roll out.

And so we don't have for the 2020 settlement that we keep talking about. There's nothing factored into any of our that's right forward comments for that. So, the only thing that says 20/20 is related to the deal that was done for 2019. That's correct. Thanks Carrie. And then on your second question, I guess we found out in terms of the fair value the um, it was two two million for the first quarter and 31 million for the remainder. So just the way that rules out is dead. Then twenty Twenty-One. There's we'll call it roughly another forty million twenty twenty-two. It's in the same neighborhood forty million. And then in fact, it's it's less than ten million. I think that's

The next question will come from Hunter K with wolf research, please. Go ahead. Hey everybody. Thank you for the time. Hey, Gary, u r a m a r c never guy so you might not like this question, but I would challenge you what were some things one or two things that you think you're fairly sure Southwest will never do as long as your CEO and I ask this question because I'm pretty sure it's something like we're never going to have basic economy a month or two ago. So just I'd like to know what is in that never category as long as your CEO .

All right. Love all your

Questions always I don't know. I don't know if I could give you a comprehensive list of the numbers and your and you are right. I am a Never Say Never but I don't see us ever charging for bag fees. And obviously one of these days somebody else could could view that differently. We're not going to do basic economy. We've tried you know, there's been a couple of media stories page or way off. So we've tried to clean some of that up. But yeah, we won't be doing basic economy. And I don't know. I mean, I'm sure there's some other things that we won't do I don't I don't see us certainly in the near future doing. Well. I don't know I I was going to say something I probably shouldn't say so I won't waste my time my follow up with my follow-up question then Gary. Yeah. Sorry. My follow-up is please tell me what you're going to say just now dead.

You said you always asking questions and that one I own answer. All right. All right.

Thanks, and then just real quick. I mean, um, obviously you said second Fleet type decision is is not for now. That's later discussion. I get it. But can you just run me about just the the the CBA restrictions around adding a second Fleet time. Is that a gating item for a decision to be made across multiple CVS, or is that something that can happen concurrently? Just just sort of pragmatically order of operations with regard to your CVS. Thanks a lot.

Well, yeah, we would need to collaborate with our employees and especially our Pilots. I think all that is contemplated. You know with with what Mike and I have been thinking about whether it's a gating Factor, you know, it needs to be collaborative. So yeah, I don't know if gating is exactly the right way, but we would need to be thinking about it comprehensively. I think our Pilots would be interested in supporting the company in terms of growth and wage economical manner because and you know selfishly it means more jobs for them. It means more upgrades for cap than so as long as we can conclude that wage and then convince them, you know that that is the right case. I I think we can we can come to an agreement on that. But you know Tammy and I were talking earlier this morning.

how about this and

Uh for us to have to arrive in a different course of action here with the fleet. We've got to have the right timing to meet our needs in terms of additional airplanes. We've got to have the right product and it's got to come at the right price. So those are all three maybe two of the three at least are pretty big hurdles to overcome. I think, you know, we were to reverse this and we hadn't shared with you all that were going to explore the risk-reward and having a single Fleet type slash like supplier. I think you'd be asking us, you know, this order to illustrate the risk of of having all of your eggs in one basket. So I think we have a duty to look at that. We're going to look at it very seriously and I think we have to be realistic that is can be a hard hurdle to overcome. So I don't know at least during the way I'm thinking about it. I don't see the threshold question being dead.

The CBA. I think the threshold question is does this make sense?

For us or not, and if it does well, then you you sort of knock down the other barriers that are out there, but our Pilots are great and they're fantastic and I certainly don't see that as a quote or obstacle.

Okay. Thank you, Gary.

Next question will come from Jamie Baker with JPMorgan, please go ahead. So you're saying there's a chance for hot meals off. How did you know? That's what I heard. Sorry. I respect the confidentiality around the Boeing settlements. So let's focus on page 20 which has, you know, not been settled. How do you calculate or try to calculate the impact? You merely look at a pre shut down this planet compared to actual results. Do you focus on you know, some trailing pretax margin calculus. Do you do you make adjustments for the fact that you're grown now able to competitors now, we'll have over a Year's jump in certain markets and it's going to you know cost something to win that share back. I'm I'm not asking about what you annoying might settle down.

I'm just wondering how you

Think about what your entitlement is.

Well, you know.

I I think it's a very fair question. I don't know that you know, you know and we know that this is a negotiation wage contractual. This is a negotiation so I don't see being selfish about this. I don't see a lot of Merit or wisdom in this laying out our entire string about this. I also don't want to give our competitors a roadmap what I don't if you just simply talk about the harm that the company that has incurred. I wouldn't quarrel with anything that you put out there and as I mentioned in my remarks

You know, there's a lot of years Jamie where we have you know, what goes in issues that we needed to deal with and right now we've been blessed with having one that the operations fantastic and I woke up for everything that at the four of us have been trying to drive home today, but the companies in really really good shape. We have one problem and it's a serious one and the sitting a dog paddling for a year while our competitors grow right past us. It's costing us issue or six or seven million customers. And yeah, I'm I'm very worried about that and that's that's not that's not anything that we can mitigate we can we can deal with the operation we can do with all these other things. We got the finances holes so to speak but that we can't do anything about it until we get airplanes until we can grow in and it's so am I do I think we've been harmed absolutely and Thursday.

everybody knows we're going to

See conversation from Boeing and I'll just if you don't mind I'll just put a period on it. Okay? Sure sure that helps I appreciate it. You know when I think about Max impacted Airlines around the globe, you know, you're clearly one of the most profitable if not the most profitable so put differently, you know other customers are desperate to get Max's. There's no doubt that you want them. But as you point out it's not like your margins have collapsed. So as Boeing, you know jiggers around the skyline would have any interest in letting some of your delivery slots go to the needy for lack of a better term or is it mandatory that you get what you're entitled to as fast as humanly possible, you know somewhat philosophical I I assume but you know, I think this is a really good company and I think part of the reason dead.

That we're able to absorb the blow is.

Because of five decades worth of preparation and you know, we went through nine eleven and I can vividly remember our competitors whining about their state and that was their fault for the unexpected without trying to be too harsh here. But you know, we shouldn't be penalized because we bought a Chevron and great company for for five decades taking care of all of our constituents. Especially our shareholders. We shouldn't need to advise further than that. I wouldn't be

I wouldn't be serving all of our stakeholders today if we simply said oh well because we're not on the verge of collapse. We should forfeit these positions that makes no sense to me. So no, I wouldn't do that at all. I would say quite the contrary. I think that Boeing has benefited in the 737 program has benefited mightily because of Southwest Airlines and our success over five decades, very clear. Thank you Gary. And the next question will come from Dwayne. The Earth with evercore is I can I help you.

Thank you. Understand estimates are are exactly that and I think we understand how you get your arms around the cost impact from the max being out but just for argument's sake how do you estimate the benefit as I think about some of the hard choices you've had to make, you know cutting your worst flying focusing on your your best and that's fine with basically, no capacity growth that feels like the rason benefit could be very very substantial. So for example in the fourth quarter in in the in the press release, I think you called out to three-point Tailwind from from the box being grounded. What is that compared to like? What would capacity growth have been and how do you get to that number?

Well, you know, it's you're right their estimates and and I think by definition is sort of a with and without and you don't know, you know, what it what it and we admit we we don't know exactly what life would have been like with seventy-five more airplanes as of the end of the year, but I think our folks through, you know Tom through the years been consistent in pointing out that often you we're not growing capacity and arguably there's some benefit from that at least temporarily but the way we've had to reproduce schedules has been a grossly inefficient and put our Revenue Management in a really tough position because we're not building up bookings in a normal way and we're we accommodating people that low prices the fourth quarter of course was unique with the gosh over 3% was added back for lack of birth.

vision and and the scheduling so he

Was wholly inefficient in the fourth quarter. So anyway, I think I think that we've laid all of that out and it's at most in the quarters and come back to quarters 3 and quarters one of 20 20. It might be two points in quarter for I think is zero because it was wholly offset by having a very inefficient schedule. So I think that answers your question to me. I don't know if you heard it or Tom any differently than I did. No, no disagree thing. You said I do think this I think if you just start with the fundamentals and trends that we saw in Q4 just flowing into q1 and even if you take I'm not giving guidance on key to buy the way but if you begin to look at the early piece of cute to the trends just continue to look pretty solid. So the fundamentals are good. I get back to the max out of our 2019 performance. We still formed really really well not mistaken. There's a point of Max and benefits so you get back that out. We're still at home.

7 range I think it's look at that.

Twenty-twenty I think would be a little more modest than that, but we still have you know strong positive room. I think what's interesting is what what we can't lose sight of I'll tell you what the problem I'd love to have is a dog passing plan coming in. So we have a problem to deal with cuz we need to grow right but don't misunderstand. We are still flying a very very strong schedule and back just the 2020 baseball schedule April May schedule has or four thousand flights and it 4016 to be precise. And that's in comparison to last year is $4,078. So we still have these little factoids. I want you guys to know Thursday's we still have a very very strong schedule and when it's also interesting is in Mike and I and the operations commercial teams are very very tightly linked on this whole RTS thing mean literally off. The only are you going through this stuff and what I do know is as as Mike in the operations team sort through the reality and the information becomes clearer and clearer it's dead.

After them to tell us when the capacity.

He's available on the reason I say that is It's Not Unusual at all for us in normal circumstances as we move between schedules from high utilization of low utilization or vice versa It's Not Unusual for us to flex up forty fifty aircraft at a time. Right? So, you know our our our work in terms of building the max back in the commercial standpoint. I was saying it's easy, but we know where we put it back in June it's going to be governed by how fast are the aircraft coming back into service and then we'll just balance the three things that keep talking about operational stability Financial results and customer but you know, I think the base Trends are solid we need to put the capacity back in but I can see where we put it back in and see what we took it out. So, I think we're ready to go. Once once Mike says okay. Here's your craft.

They thanks for that and then thinking ahead optimistically to that to that maybe someday where where you're spooling back up for growth what what spending if any and and I'm talking wage affects here. Capx. Have you deferred as you wait around the basket for for Boeing to get its act together? Thanks for taking the questions.

On the and I I heard you clearly they're just another opportunity for me to reinforce. We have not ugh deferred in you all correct me. We haven't found any of our capital projects. So we've got a lot of investment underway in airports around the country. We just opened up a maintenance hangar in Houston. We've got other hangers that we're working on. A lot of Technology efforts are all of that continues on the up side. We're not burning the fuel. You know, we we we sort of stopped the hiring at uh, you know, the the the fleet plan that we've shared with you. Also. We're we're we're we're suspending a lot of jobs hiring other than attrition. Uh, none of that is of optimized and even with that again, the results are quite strong.

But beyond that Mike, I can't think of anything, you know.

Advertising flops around here, you know, we're going to obviously support the re-introduction of the max at the appropriate time. So you have things like that off. But otherwise, I can't unless you have something specific that you were probing on. I can't think of anything that you all should expect that will be a large expenditure except for the marketing and the messaging and and those kinds of things, you know, leave it up to you how you want to and then there's you know timing made me from quarter-to-quarter in terms of Maintenance. But all of that, I think we've got a good handle on and can manage so so now I I we feel like the cost are in good shape and

other than that, it's just unique to the return to service of the max storage cost that sort of thing, but

Okay. Thank you very much.

The next question comes from Helene Becker with Cohen, please. Go ahead.

Hi everybody, and thank you very much for squeezing me in I just have two questions one is Gary have you talked to your pilot or anybody in the team talked to the pilots about the potential of what leasing aircraft on an absolutely short-term basis to get through this to to pick up some of those lost passengers and my second question is as you think about shifting from long-haul to short-haul fine. Do you worry about you know, what people will say about climate change and whether or not you're being a good Steward of the environment. So thanks very much for for the time. Well, I'll take them both and you can chime in here on the first one. I'm Elaine to be honest with you with our executive team. We have not spent any time.

Exploring the opportunity for what leasing so obviously since we haven't talked about it. No, we haven't talked with anybody else in the company. We're focused on the retirements plan change and then we're always tuned into the uh, the used Market. I think that makes the most sense because you just think about the effort involved trying to work with a third party and all that that would bring it's not going to be in our configuration. We've got a unique business model its efforts cetera. It's everything is sort of predicated on agreeing with our assumption that this is a short-lived issue and not something that we deal with for years. So as long as it's months, I think we're making the right judgment. So that's that's a easy answer to a question. You may not agree with it, but it's but I think we give you an accurate answer and on the short versus the long we're short hole specialist, and we you know, we've got more short-haul wage.

Is anybody else in the country and arguably more?

So the only point I'm making with that is what we're tweaking here in in nineteen because of this is not fundamentally changing our long-term effects at all. We're we're still very very heavily weighted with a short-haul flights with respect to our concern about that. Yeah. I think we're concerned about sustainability. And you know, I I was asked on CNBC about that this morning and we are very focused on conservation on fuel economy. The max is front and center in terms of addressing that this porting to get that airplane back in service because it consumes 15% less gas. We need the air traffic control system modernized and I think the most tangible thing our industry needs to accomplish over the next ten years is commercially viable alternative fuels dead.

adequate supplies and

And reasonable prices and that would make a you know, a very significant impact on you know, Carbon offsets are all great. But in my own life, you know, there's only so much on setting that the world can do and eventually we need to get it, you know consuming less, uh admissions, but if you look at Dead air transportation relative to other Alternatives it Compares very very well. And so certainly I don't see any challenge to our short-haul business off anytime soon. If ever especially if we continue to improve our carbon footprint as we have been doing

Great. Thank you very much for those answers. I appreciate your time.

It appears we have time for one more question. We'll take our last question from David Vernon with Bernstein, please go ahead. Hey guys. Thanks for taking that time Gary. I think if we go back before every month, and by by the max you guys had had laid out a vision for implementing some Revenue initiatives that you were very excited about have you guys had to delay the timeline or introduction of any of those initiatives been kind of focusing on on managing through the fleet deficit or is the and and we should expect those kind of come on as the the the max returns or is there been no change to the the line on the commercial stuff?

No, sir. There's been no change on that. In fact, I don't.

I can't recall a change that we've made because of the max with any of it again. I'm lumping that in as a capital project given the the the fact that you know, there is a 5-digit pin associated with the mask is sort of encourages to maybe accelerate, you know, some of these revenue and other cost initiatives and I am Tammy made this point but one of our cost initiatives is Fleet modernization and what that means at least for 2019-2020 is the acceleration of a Max's into our Fleet and the acceleration of retiring some of the older technology and obviously we're not in position to take advantage of that, uh cost optimization opportunity right now. There was a question earlier about cost inflation. So we'll have a little penalty because of that here dead.

In the next year or so and then hopefully we can get back on track on getting more Max's in as a percentage of a mix but except for that. I can't think of anything that has been waged certainly is a headline. We've asked our officers to execute their plans and execute them well, and let's get them deployed and let's start driving the value especially on the revenues. Okay. Thanks for that. And then maybe just as a quick follow-up Tammy the the supplier proceeds number of 400. Is that associated with the max payments or what exactly is that when you think about the the the cash flow numbers in the in the earnings release the the all I can really say there is a supplier proceeds as we've already mentioned. The agreement with Boeing is confidential.

Okay, so we will draw in just to be.

Clear, um, we do consider that effectively and offset of capex. So and I think we made that clear as well. It is it is it is a reporting requirement. That would be broke out that way and I think we would admit that with Boeing agreement. It makes it material enough that now it is a line item.

Okay, now without describing what suppliers are in that line item and and and do you think about the the cache that might be created from this month supplier proceeds category. It would this be cash that you'd be keeping on hand to fund future requirements or would this be something that you might accelerate into the buyback?

We will be looking at all of that. I'll just point back to the statements that I made earlier which is will continue to take a balanced approach to our Chef old appointment. And I think if you look at what we've done in the past, we've used all of those. So again, I'll just repeat we're going to continue investing in the business office. At least at this point. We have no intentions to slow down reinvestments back in the business. And I think our track is our track record speaks with our our goal to also take care of our shareholders. So we'll just continue to take a balanced approach to all of that as always and I would just took office which is always better to have more cash.

I love animals lots of options.

And he has we love cats. Thanks a lot guys portion of the month. Thank you all for joining us. And as always feel free to give us a call if you have any follow-up questions.

Thank you. Ladies and gentlemen, we will now begin with our media portion of today's call. I'd like to first introduce is Linda Rutherford senior vice president and chief Communications officer.

Chad thank you would like to welcome the members of the media to our call today will go ahead and get started with the Q&A portion. So chat. If you could just give them instructions on how to cue up we'll get started.

Sure. Thank you to ask a question. You may press star than one on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press * then two at this time. We will pause momentarily to assemble that roster.

And our first question will come from Kyle Arnold with Dallas Morning News, please go ahead. Thanks. Can you talk a little bit about why you want to get that $124 million dollar profit sharing month payment out to employees this year and whether as you go forward and negotiate with with Boeing and moving a 2020 whether you're going to look any kind of similarly for employees.

Well, I think it's really really easy. It's we we knew we were going to settle with Boeing. We also offer we're quite sure that the settlement would not flow through earnings and in terms of the classic definition of profits for profit sharing that so if you just put yourself in in an employee position here, so if you're here is an employee in 2019 and you may not be here for the next 30 to 40 years when it's just benefit is realized in your harmed. You'll never see the benefit of that and we actually got a settlement from Boeing. So it was all of that was anticipated. We took that early on that. We were going to work to settle with Boeing and we have a precedent over Decades of making amendments to the contribution.

To do what's right for our people and that's either plus or minus for that matter. So, uh, we going back to nine eleven and then the government subsidies that offered up we paid profit sharing on that and it did not strictly meet the definition of profits for profit sharing so long history of doing things like that. And you know, it was a great year. It would have easily been a record year. It was actually a record year, even though we had these penalties and I'm just delighted that we can do that. So and so was are more and they were delighted to do it for people.

And are you going to look for more compensation back for employees as you continue to go shooting with Boeing?

This is simply a question of how to treat the settlement for profit sharing purposes. And you know, we will certainly would do in 2020 attempt to do in 2020 what we were able to accomplish with Boeing and 2019.

And the next question will be from Alice Insider with the Wall Street Journal, please go ahead.

Hi, good afternoon. I was wondering you mentioned that there have been a couple, you know, just in the last couple of weeks. If you you know things that are going that have been surprising or unexpected and you know, big changes to sort of the assumptions that you'd had wage was wondering if you know you could say whether you know how you think things have changed under their new leadership, you know, what's improved and what what happened? You know what you're still looking for?

Oh, I think it's way too early. You know Boeing has been unstable, you know since March of last year and this is part of the instability. You've got a new CEO wage CEO the commercial organization. So it's far too early to make an assessment there. No, both of the is as you and I have talked we know all of us know sick and deal and think a lot of him and some of us know Dave Calhoun and think a lot of him, so

Great. Now I can have one follow-up. It's just curious, you know, as you sort of look ahead to return a service, you know curious if you thought it all if there's any sort of discounting Max flights if that's something we're likely to see or if that's not on the table at the possibility.

Well. Tom speak to that, but I know I I don't think that we would we would approach it in the way described if you want to talk about how you're thinking about reducing it to servicing honestly off.

And we've done a lot of research on this. All right, so I think that one of the things that is interesting is we are very very very focused on the max as you are. What's interesting is the general population is nowhere near as zeroed in on this whole topic as we are in the industry. So, you know, we are doing a lot of work. We understand the customer perceptions there, you know, so our customers that we talked to a number of customers now they are it's interesting. It's really kind of a bell curve. I think I share this with you at one point is kind of a bell curve in the vast majority of that bell curve is we intend to fly the same always flown. Yeah, then you have the ends of the bell curve and actually the two ends one end excuse higher and that's we intend to fly more on the 737 max. They're approved for the thought being it's a chrome to save a certain point out there and spell the scrutiny and then some questions say going to fly less. But you know, I think we're going to see the customers come back pretty nicely some they take a little longer than others you maybe a month or two months.

Going to come back and you know this point there's no notion of discounting Max Max whites. That's not that's not in our considerations at this point.

Thank you.

and the next question comes from

Hope for with the Dallas Business Journal, please go ahead.

Good. Good afternoon, everybody. I just have a quick question for you regarding the potential renaming of the 737 Max Gary. I think you said last year that that is something that you would not be interested. In fact, I'm just wondering if consumer sentiment ever got so negative or the brand became just so toxic that you would consider that or is that kind of a moral Line in the Sand that you will not cross and to me it's just a matter of being transparent. Um, you know, notwithstanding Tom's earlier comment. I think the awareness of the max issue is very very often by the importance of the tribute to it. I think is where Tom was headed but everybody knows the name the 737 Max and so who's kidding who you know, it's just disingenuous now if it's a different airplane and it's a it's a totally different product and it would be appropriate to rename it. But this is a you know, ironically

It's a very minor change to a piece of salt.

Where when you get right down to it, and it's Boeing's call. It's not ours and that's what they they call it. But we talked to them at least the previous management team and they were both interested in doing that and we certainly haven't been lobbying them to do it because I think it's just disingenuous.

Great. Thank you.

The next question comes from Pilar wolf Stellar with flightglobal, please. Go ahead. Hi. I've got two questions about your Hawaii service. Number one. Could you talk a little bit about how successful it's been or you know some of your plans for the future and the second question is you have any comment to the reports that the FAA gave Southwest preferential treatment when it approved those those roots

What time I'll let you talk about Hawaii. I'll since I'm talking I'll answer the second one first. We don't know we we we don't know what's nice about this is a whistleblower complaint and we don't know who whistle blower is. We don't know what the complaint is. So I think what I'm mostly focused on a certain feel like we got preferential treatment, by the way, cuz we we worked really hard and they worked this really hard but I was proud of the work that our team did uh, we were told going in that this is probably a 12 to 18-month effort. I think in the end we kind of came in around fourteen months which uh is is about what one would expect it was the government shutdown was in the middle of that which hampers some of the efforts what I'm most interested in is what issues are there with re tops. I'm not aware of any are folks. I think it done of phenom.

Job developing it and then operating it on.

That point so I think it's a long way of saying we don't know what that's about and then Tom I'll let you talk about Hawaii please sir. Well, I think quiet first of all, it's keep doing this wage ten months. We were flying over 10 months and it is doing phenomenal or is everything that we expected is a poor better than our expectation wage, you know, keep in mind too small piece of our businesses, you know, right around 2% but it has a very important role that it really supports our California business. So it's it's it's exceeding and every Dimension. I think the demands of factors have been very very good or very satisfied with that with the long haul as well as the inter-island our ramp up Ashley's been a little slower than we originally expected because of the month we can pass the issue but everything we put in the service we're thrilled with this point. We are I think this is right. So I'll check it but you know, we've got let's see fourteen daily flights from California.

Why you cross the form of our our big cities?

San Jose to Sacramento to San Diego and we have three please enter Island. So it's it's it's doing fantastic really happy with it. What's interesting is we're actually creating demand that we didn't even see was as being there. So we're seeing more connecting itineraries within the West Coast which is interesting because we're we're creating a demand for growing the market and fares are low wage. And what does that sound like to you? That is the classic Southwest effects. It's happening again. And I guess the last point I'll be quiet here is just you know, I think one of the questions we were asked a lot is is a pretty long home. Like how do you feel like your practice point to perform on the Long Haul flight? And by the way, it's not our longest long-haul flight. We have transcribed there longer but having said that the scores for the customer experience and the brand scores are actually higher than our total system right from the mainland to Hawaii flight. So net-net. We are very very comfortable.

or or flight attendants and shrugs they do, you know, so just real quickly to the

Says we were involved in that and it was not a quick drive who's very very thorough and it was very very challenging and you look at the quality of what we're doing today. It is phenomenal. So I can't I can't speak highly enough of the operation see what they've accomplished in a short period of time actually wasn't a short. It was fourteen and fifteen months to get done by the way, which is 12:18 is the norm. So that is not a fast path. But Mike at this point no one from the FAA is coming to you on any issues with detox sadly. No, no, no, like my Gary said it was it was The Whistleblower complaint. I don't really know a lot about it. I just I'm not getting any tops authorization that is automatic. And there's a rigorous approach to that. There are advisory circulars at the layout you take that and you follow it. We thought we did that and you know over a 14-month. Have pretty new procedures in place after you start flying you're in a heightened surveillance. For six months off.

Over 3000 flight since we started service there in the indications are the procedures that we were authorized to perform were performing were executing them very well and they're them exactly what the FAA and Southwest Airlines expected to do. So, it's all a surprise to us and again their issues. We want to know what they are and we we we have a good rest them right now. We don't know what it's about.

Thank you.

It appears that we have time for one last question today. And that question comes from David slotnick with the Business Insider, please go ahead. Hi everyone. Thanks for taking the call off. I was just wondering because you were talking about the I think you said nine full flight simulators by the end of 2020. I was wondering if you could talk a little bit about your future hiring plan. Once the max is ungrounded really over the next ten years. I know that the simulators represent a big investment. So sort of wondering how that fits into the whole thing.

No talking about that money. Yeah. Yeah David so, you know, we have a you know, as we bring airplanes into the into the fleet, we hire a certain number of pilots and flight attendants for the airplanes that we bring you in the fleet. And and so that's there's just some math that we go through and and we do that the same thing that influences our pilot Hiring Our retirements and so we've got probably around three to four hundred in it and it grows every year as we ate at three or four hundred miles we go through retirement. So we're we're adding our pilot hiring with to replace retirements and then an airplane can come on in the fleet but as you know, Gary mentioned we've got you know, if we don't have production airplanes from Boeing this year will only have 45 minute new airplanes this year and we're already staffed up to sixty-one so we don't need a lot of additional High birth.

In 2019, and they should start ramping up again in 2020 as the delivery process from Boeing.

But we do plan to grow, you know, we plan to go and you know, roughly 15 to 20 airplanes a year and we plan to hire thousands of people every year. So I'm even in recessionary times in our history. We've been able to grow and not shrink. Obviously we some years we might grow less money, but for the most part and 2009 maybe being in in exception to that but yet we've definitely plan to grow and continue to hire.

Great. Thank you.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to send a conference back over to miss Rutherford for any closing remarks. Thank you Chad. If you all have any other questions, please feel free to reach out to our Communications Group 214-792-4847 or via our online Newsroom at www. Thank you for attending today's presentation. You may now disconnect.

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