Q1 2020 Earnings Call

And finally for those who are willing and able to travel the country needs to open back up. So there's something for people to do when they get there. So I mentioned all of this to underscore comparative of low-cost in this environment because every traveler will demand a low-fare.

You know, I I I think at least the recession's that I I experienced Southwest was in a similar position where we were on a low-cost have a strong brand we were we've never been you know, of course in the past as large as we are today, so we didn't have the same kind of a footprint off but there's a lot of similarities. We had a strong balance sheet. We had plenty of cash and we were prepared for the unexpected. So I think all those are very similar the points that I was being a little repetitive but arguing earlier is that this is no doubt a recession and we've seen with the same pattern and the previous three recessions that I experienced were business travel is cut very sharply and businesses can be very disciplined and they can issue orders. They'll shalt not track.

That's our business model. And we're America's strongest and most successful welfare carrier. We're working on a variety of things number one strategic plans that are based on three-month recovery scenarios. And as being led by our president Tom neilan, we're working on customer experience modifications at the airport and on the airplane to ensure the customer feel safe.

We're working on our capital structure and liquidity needs to see us through this pandemic so that we emerge healthy and strong.

We're obviously working on the fleet and that's being led by our chief operating officer Mike Vandeven. And then last we're working on early retirement and other voluntary exit or reduce programs for our employees. So before I pass to my I want to thank all of our employees this has been a crisis unprecedented in our history. Our people are battle-hardened they are resilient and they are fearless and they have done a masterful job running the airline serving our customers and implementing Myriad not procedures and protocols and they are all vital to this company and they are essential to our country and they are my heroes.

And of course, we're seeing that now for different reasons.

But perhaps in addition to economic reasons, but the the recovery as you pointed out of business travel overall was many years and you know, so Southwest benefited in those rotisserie scenarios because of our low cost and our low fares and we gain share and it was very dramatic after the first Gulf War in the early 1990s a.m. And obviously the everything changed dramatically after nine-eleven and we we became you know, very shortly the largest airline in the country by two thousand three two thousand and five or so 2008, you know is is more contemporary times for people and and you know, what's happened there. So I think that was my point is that we're we're fully expecting dead.

I'm very grateful to our employees and I'm very grateful to our leaders for keeping Southwest wrong with that Michael handed over to user. Well. Hey, thanks Gary. And you know, I really appreciate your comments about our people. They really are tenacious and to lean into this kind of headwind and deal with you know, their own personal uncertainty and angst is just frankly amazing and their steadfast wage. They are fearless and I just couldn't be more proud to be a part of this team. Those you mentioned the year began really with our best overall January and February operations. We've had in probably over a decade and all the critical operating measures of on-time performance our baggage handling and the lowest ratio of customer complaints in the wheel in the top two for the industry in each measure wage, and we were realizing the efficiencies of various technology and Equipment Investments that we had made previously to be able to execute our schedule and recover from regular operations dead.

That traffic will will recover but it will recover over a long period of time and you know, we're we're sort of in the depths of this problem right now and it's it's hard to see through to the other side. But this this too shall pass and you know, I do hear and read comments about well New York is never going to be the same again. Well, that's just crazy, you know and and and no one knows exactly what the world is going to be like in the future. But if we can have the Roaring Twenties following the Spanish Flu of 1918 Which is far worse than what we're experiencing today. There's every reason to have hope and confidence, you know that we can get through this so

And those Investments proof?

To be invaluable in March and they allowed us to rapidly adjust our Network and our crewing and our maintenance plans as we react to the covid-19 demand changes and I think they're going to be great assets for our NOC to minimize our daily operating costs as we move forward. So when the year started the max return to service plan was one of our primary focus points. Now I am operations focus is threefold first ensuring that our environment is safe for our employees and customers second rapidly adapting our daily operations to whatever existing conditions are out there and third managing our Fleet and as we prepare and position the operation to support a hopefully an eventual business recovery.

But but realistically we just can't expect things are going to be back to normal in six or twelve months. I don't believe that for a minute. So you need staying power. You need low-cost you need great. You need resolved and you know, that's that's kind of where we are. We also need a plan and you know, I'm proud of our folks and how they have reacted so quickly to something that is really hard to you know, wrap your mind around but our folks have and if we need to radically restructure Southwest Airlines month, we will do that. I think we have a great product and I think we have a very successful business model and I don't feel that that will be necessary but we're going to be prepared for every possible scenario here and if it's a v-shaped recovery, well, we'll all high five each other and we'll go by somewhere planes, but I don't think that's the most likely outcome right now dead.

So we're managing through all that coordination through our emergency response program. And that is led by one of our emergency directors our senior VP of operations and Hospitality Steve Goldberg and he is doing a tremendous job. He has a 53 teams across the company working together on a daily basis to manage the crisis and it's coordinated and it's focused with intentional efforts and lived in Spanish specifically across 30 60 and 90 day time frames. The highest priority is ensuring that we created an environment for both our employees and our customers that introduces whatever additional mitigation techniques and strategies are needed to minimize the spread of this virus. We've implemented social distancing procedures throughout the operation respectable that voluntary temperature checks and our employees have access to adequate masks and wipes and hand sanitizers while at work. We're in the process of adding a plexiglass face off.

Does that answer the essence of your question that's helpful and and just for a follow-up, you know in light of the actions that you're taking today. Can you just give us some perspective on how you're thinking about the loans portion of of the cares stimulus package, you know, what are the positives and negatives of the loans and should be thinking about the actions you're taking today as an alternative to that or or in addition to and and thanks for taking the questions Gary. Yes, sir. And I know damn you want to speak to this too, but basically coming into this and again in a pretty high level we felt like it was important for the government the federal government to flood our country with liquidity so we could get through this crisis without having a depression.

shields for our ticket counter gate and our cargo agent positions

in terms of aircraft cleaning. We have an enhanced overnight cleaning process that includes wiping down all high-use areas in the cabin and the galleys and the cockpit with a hospital grade disinfectant in addition to that each month every year craft receives an additional application of a disinfectant to the use of a of an electrostatic. Mr. And as well as an application of an antimicrobial mist and that covers all the surface of the aircraft, so those procedures provide protection for up to 30 days against virus contamination, and then lastly where the process of adding additional cleaning procedures during the turn and we expect to have those in place within the next 30 days.

so that's my

And I think that view is shared by many and the way we tapped into that is through the cares act apparel Support Program thus far so good. You're all very familiar with that. Our share was three point two or three point three billion and we've gotten half of that so far. We'll get the other half over the next ninety days of May April May June July, I'll go forward with the calendar. So the other part that you are referring to is the the big Loan program is a little loan component of the of the payroll support program, but the the other part of the cares act it's available to the industry is the secure Loan program and are you sure of that are pro rata share of that is two point eight billion dollars. The application is due this week. We will apply will Reserve access to that amount dead.

Were using social distancing techniques for customers during the boarding process and while on board and we've eliminate are in Cabin service to further mitigate risk. So in short we should be ready to support our employees and our customers needs as travel begins to rebound as we move into May the disruptions that we've experienced associated with all the various States wage by state travel restrictions some of the international restrictions. And then the ATC closure have been evading are published flight schedule is about fourteen hundred s a day and our focus is all running the most cost-effective operation. We can be very flexible with the tools. I mentioned earlier and we have the ability to look out for plus days with respect to age bookings and demands and we can easily accommodate customers while simultaneously reducing our flight activity further. So the goal there is to minimize our cash burn further dead.

Tammy can talk to you about the cost of that. I think right now we're not committed to taking advantage of that we have until September 13th to do so and that will give us time to evaluate other financing options. Obviously with today's news. We took ourselves in a really strong liquidity position that I'm very pleased with but I think Hunter mentioned it, you know, we're going to need to think Beyond just this year off and think how we're going to pay down this debt how we're going to restructure the balance sheet over time. So Tammy and her team will continue I think well, I know to be very active and working this the thing about the Loan program is a curious, you know from from your perspectives. It carries a lot of conditions we can't pay dead.

And that comes in the form of a reduction.

If you land Landing fees in the engine flight cost the really the only drawback is that those cancellations in the near-term they count against the published on time of arrival statistic, but that hasn't really concerned me given the the cash savings and actually the fact that the the on-time performance on the flights that we do operate they're averaging in the mid-to-upper 90s Thursday that significant reduction of flight activity has left has left us with excess aircraft. So we're managing through that through a combination of long-term storage and parking programs. So with respect to the storage program, we've moved a hundred and six engine aircraft into a long-term storage program and combining those with our 34 maximum have a 140 Year craft and long-term storage the additional NG aircraft were selected based on their age and the proximity to an upcoming significant heavy maintenance requirements.

During the time that the loan is outstanding plus a year can't do any share repurchases. You may you may not be as concerned about executive compensation, but it's just another restriction on the company's ability to manage. So I think the cost of the death is pretty reasonable. Let me speak to that but the security of the collateral required we've been led to believe will be pretty lenient, but we don't know you know, so I think all of those things have to be thought through very carefully and it could be that we may want to entertain taking out that loan and then paying it off pretty quickly as long as the conditions also come off quickly as well. So so right now it's out there as an option for us and we're not committed to take it any anything you want to add to have any known. Thank you really covered at all just in terms of the the structure of the loan. That would be a five-year seen a senior security job.

Supposing your craft in long-term storage. It will take a minimum of three or four days of time and probably more to bring each of those aircraft current with respect to their maintenance program, or they can be read introduced into the active sleep. We have about 250 injuries in short-term parking programs that rotate in and out of active flying and the benefits outweigh. The short-term parking program is at the aircraft do remain part of the act of sleep and it's more cost-effective in terms of storage costs in the long-term storage program when it is time to bring the aircraft back in to publish flying schedules are most cost-effective aircraft to fly is the max.

and and Gary said the terms are reasonable like

It has less fuel burn. It's got lower inch and then maintenance cost and there's not much to update on the max since January earnings called based on Boeing's latest update on the max returned your service off and given the maintenance and a pilot training requirements. It will take at least a couple of months before those aircraft are ready to fly Revenue Service. So the max isn't included in any of our published flight schedules at this point just as a reminder Boeing has 27 aircraft in the Southwest Airlines configuration in their storage facilities, so wrapping up we've offered armor voluntary extended leave be home with their families if needed through August and many of our operations employees are taking advantage of these programs and they're helping the company out in a big big way. We're exploring additional early out and further extended time off options. Our highest priority is the safety of our employees and customers as they work and travel pass.

Never placed you on a fifty basis points and it's attractive that the loan is repayable at any time. So it really just gives us a lot of options here and it's off a wonderful backstop to have and we're very grateful for that.

Thank you.

The next question will confirm Jamie Baker of JPMorgan please. Go ahead. Hey, good morning everybody Gary. I was just thinking I've known you almost thirty years and I think this is the first time I've heard you refer to the Roaring Twenties. I actually liked that reference, you know a lot just not not really part of the the vernacular in the past. Was it there I was there you go. Oh, yeah, not suggesting that either of us were first question for Tammy. Could you give us the composition of the two billion in unencumbered non aircraft assets off?

Actively managing our daily operational activity to take care of our customers at our lowest cost profiles and we have three hundred ninety aircraft in some form of a storage or parking whole program to reduce costs and we have a great partner in Bowling really to manage our Fleet plans in this time of uncertainty mean, you know, we literally are at war with covid-19 and we are really blessed to have a ferocious group of lawyers that are ready to fight and they really do inspire me everyday and so with that, I'll turn it over to you. All right. Thank you Mike, everybody. So I also want to start by you gotta acknowledge our party more people. So I thank all of our employees especially all of our front-line employees who are out in the airport and operations folks that are maintenance hangars are call centers that are in our network operations center.

Just the Deep. So the two billion of not encumbered. They're just they're just miscellaneous assets. Like, you know Gates lots of dead simulators real estates. Yes just general assets such as okay, but but LaGuardia and do you see slots are are in that pool your account in that it would include all of that sort of those sort of assets. Yeah. Got it. Got it. But also no loyalty assumption is correct. No, sir. Okay and second question, you know, probably figure you indicated, you know this morning not fully selling the cabin going forward and curious. If you could expand, you know on what sort of limits you're envisioning and also how this will be reflected and how you got on capacity. I assume when you discuss capacity and when you file schedules, it's still going to be based on the entire home.

And of course the special, thanks.

Flight attendants and Pilots that are on the plains of rebate taking care of our customers from you know, honestly, you guys are all truly amazing and respect and the admiration that I have for each of you really is Indescribable you're doing is you're robot guys want to say thank you for all you're doing and that's very very genuine. I really mean that to you guys and by all accounts, you know, the first quarter started off is Gary and white kind of indicate all ready to start off very much as we expected demand and pricing with with strong. We had very solid loads in our January and February and March bookings and rasim as well as capacity. We're very much laughing spectations. So we had a lot of confidence are razzing guidance of being up 3 and 1/2 to 5 and half percent from the quarter, you know, we always talked about our Rapid Rewards program and it was also doing very very welcome consumer spending Arco brand cars was very strong in January and February and on a card number basis pin was a record levels and was up double digits year-over-year so great performance there and our club.

Compliment we're in reality flown capacity, maybe lower by whatever seat cap you put in place. I mean, I guess that could be a a difference of as much as a third choice or taking out middle seats. Yes, sir. So I definitely want to speak to that and as I mentioned in my remarks, you know, we've got a we've got a series of work efforts and and this is one so and I'll just at the outset say this too shall pass. So this is not forever more faith things will get back to normal. It's just a question of when and what do we need to do to get from here to there? So in the meantime, we all know that there's a health concern so here in Texas governor Abbott announced yesterday that the state is opening back up for business and they do informal polls and Thursday.

For satisfaction scores, which are always the very top of the industry. We're also at record levels for both January and February with both months being up double-digits versus our internal targets which are very odd and targets. So, you know phenomenal how the quarter was shaping up and obviously everything changed very dramatically and very quickly and beginning in late February. We began to see a direct impact from covid-19. Now that point is Gary said our bookings were still holding up relatively well, but we did begin to see a significant increase in cancellations and this continued to accelerate into my life now by March 9th, the situation had escalated dramatically you cancellations began to exceed new bookings and this continued to grow into a massive spike in trip cancellation. And we end of the month of March with cancellations being up over 500% year-over-year which resulted in a never-before-seen trend of net negative bookings.

Three-quarters of the people think it's too soon. So we know that we're we have work to do to convince customers that are willing and able to travel that it's safe to come to the airport. It's safe to get onto the airplane and and we all know the techniques we're going to you've got masks so there's PPE will be doing cleaning and disinfecting and Mike went through the things that we're doing there, which I'm very proud of but then you've got social distancing there was a news story just this morning of a woman who was on a flight who it was unexpectedly full and she was uncomfortable with that. So for now we are thinking and Tom will be a working on this we were thinking that perhaps we won't take off bookings that would fill up an airplane. So it would be something less than that was it was nothing physical?

That I want us to do.

So is demand collapsed and cancellations grew we did what you would expect we began to reduce our flights for the back half of March we end up canceling 34% of roughly 3,800 flights down to a full month of March or capacity client 17% year over a year now just to get some perspective how rapidly and How Deeply demand dropped off even with the 34% reduction of flights in the back half of March are load factors fell steadily to single digits by the last week of the month. And that's where they are today our March operating revenues roughly 50% off a year and of course our ancillary and other revenues dropped off dramatically as well. And as you'd expect we're also experiencing lower partner revenue from Chase is the credit card portfolios are seeing reduced spending a little requisitions. None of which is a surprise and this is part of me.

Due to an airplane. We're certainly not going to take out seats. And nor would we go to the effort to block a middle seat nor would we prevent anybody from sitting in the middle seat off but we would simply manage it from a booking standpoint. That is an idea. We haven't announced that yet. We haven't implemented that yet, but that would be a logical way to address a concern about social distancing getting on the airplane. So the flip of that Jamie would be fine. You can try to sell out the airplane, but if people aren't willing to risk that off all then you're going to fail, you know, so all of this again argues for low-cost really managing our expenses carefully making sure we have plenty of a gash to manage our way through this time. We'll be thinking about masks and things like that with customers. I know that one of our competitors had an announcement on Thursday.

So for the first quarter or r as in performance was a negative 11.8% in our Revenue was four point two billion dollars, which is off our expectations by just over a billion dollars.

Today, yeah, certainly be doing everything that we have to do to follow CDC guidelines, but in terms of mandating that you know, your customers and employees have to be doing things, you know, just stay tuned on on on that on that part of the question. Okay, very helpful. Thank you all. Take care.

At this point with a lot of the country still Sheltering in place in many states continuing to have some level of travel restrictions in place. We're continuing to see record low passenger demand and revenue Trends here Thursday, April of May with operating Revenue down roughly ninety-two 95% year-over-year and single-digit load factors, you know it at this point it is very very tough to predict exactly how and when will see Trends turn around. So we're staying focused on those things that we can control and then we can manage to so we have control of our flight schedule, you know, we have control over the quality of operation is Mike alluded to and we continue to have the highest customer and brand scores in the industry and that's all because of the people of Southwest Airlines.

The next question will be from Mike linenberg with Deutsche Bank, please go ahead. Oh, yeah. Hey, hey, Gary and everyone. Good morning. Hey, just a I guess to hear you should look at and maybe this is actually a question for Mike. When I look at your capacity cuts. It does seem like that. You are cutting a bit less than what you would Suspect with revenues down ninety to ninety-five percent and I'm not sure how much of that is just the function of your network. Will you do a lot more point-to-point or the fact that it does give you the flexibility to do a lot more clothes in walk-ins which you know in theory should preserve more cash than just thoughts on that.

So it's shifting now to second quarter capacity. Our April capacity was down 50% for the first two weeks of the month and will be down roughly 70% for the last two weeks of the month. The full month of May is published down in the range of 60 to 70% compared with pre cope with schedules and June capacity is currently down right around fifty percent for May and June. We've also shortened our operating day off by removing many of our flights before 7 a.m. And after 8 p.m. So we pulled our shoulder flying in we've also restructured service across our Network while maintaining service to all of our domestic cities, including all five with Marcus, by the way, and we've been able to preserve over eighty percent of the itineraries that were available in the in the prior flight schedules.

That's really the ladder. And so I think as a rule of you all should assume that we will schedule more than will fly down right now. It's guess work as to what traffic demand will be. And obviously we right now we're it's not such a guest to know that it'll be light, but I'm steamed will it sort of a two-pronged effort? Tom's team will publish a reduced schedule which Believe It or Not takes quite a bit of technological effort to accomplish and then my my team on an operating basis days ahead of a scheduled flight will go in and cancel aggressively. So Tom and Mike you all want to comment on that and that was my life. I actually liked where we are at this point with our reductions for April May and June, you know, we need to take more capacity out. We can just you know, honestly it's a lot easier to take capacity out than it is to put capacity. Yep.

You have the capacity reductions that I just mentioned will show up and republish schedules, but we'll also continue to manage capacity tactically and closer in based on demand. And this is being managed jointly by our Network planning team our network operations center. This is a day-to-day week-to-week very fluid situation and will continue to make tactical capacity and schedule decisions as we need to be changing gears a bit quite a bit our last call. I gave a quick update on rgds initiative which you might recall is focused on growing our share of the corporate travel Market, We announced last week that will be going live on May 4th with travelport Sao Paulo and Worldspan GDs platforms, which means that all of our everyday low fare content will now be available with industry industry standard ticketing and towing capabilities and responsible to travel management companies and corporate travel managers across the country has been absolutely phenomenal and we're excited about what this means for us and for our customers. Yep.

In yeah, I'd like to maintain as many itineraries as we possibly can and you know, we'll just respond accordingly, but you know, I think at this.

The point, you know, if you look at where we are take me, for example, you know r a s m r. About 65% but we're only reducing our Monday markets by 28% So we're maintaining a tender is now that's quite different than the mix of our competition. So I feel really good that we are serving the markets we have product on the Shelf if you will wage and if the product isn't selling we'll take it out or that's that's where the operation site comes in. We'll take we'll pull the capacity out, which is very hard to put it back in. So I'd rather have it on hand and pull it out as necessary so long.

From a corporate travel perspective in spite of Coco. It is Full Speed Ahead and we will be in a strong position as business travel begins to come back. It's going to take some time but it will come back. We'll take more than our share. So I'm going to wrap up by saying this without a doubt Southwest came into the situation as the most well-prepared US Airline and this will very likely reshape. The industry wage would agree. That's not yet clear. But we have a lot of reasons to be confident. The Southwest will come out of this very strong and will be ready to compete aggressively in The New Normal environment. So at that I'm going back over to Tammy. All right. Thank you Tom. I'm happy to round out today's comments with a discussion on our cost liquidity and sleep before we move to Q&A.

They vary that's why we said that will be will be reducing our capacity at least sixty percent wage. And it could you know, Mike from a schedule you can reduce it another 10 points. Can't you? Yeah, and so we've got 1,400 flight is scheduled for May and that's close. We're operating a slightly fewer than that today. So I think that we can we can cut that down a little bit if we need to great. I I think I think it's position really well and if the if the traffic isn't there we're going to we'll be aggressive and cutting expenses. And the other thing that we're trying to do here is reach a goal or a milestone of producing a cash Profit. Just looking at the flight operating Club.

Linda Revenue production dramatically off Trend as Tom discovered when you're clearly focused on controlling.

Not cost and preserving cash.

I want to come in our employees for their quick work to Rally together to reshape our cost trajectory in the near-term. I'd also like to take a very quick moment to recognize our finance, legal team governmental Affairs team commercial and operations team really all Southwest teams for their tireless efforts over the past weeks wage. They rapidly changing environment calls for rapidly evolving Financial scenarios and forecasts and actions and our people have risen to the task life after day and often 9 after 9. They are truly Warriors and the phase of the significant Challenge and I want to sincerely thank them for their continued efforts. Our first quarter unit cost Trends illustrate how diligent we have been to reduce cost quickly.

So bringing in a little while while it might appear on the surface that there's too much capacity that's still cash positive. If you will even though it may not be enough cash to cover overhead. That's still saying that it's better to fly that flight and then use that airplane as opposed to letting it just sit there on the ground. Okay. That's now that's very helpful. And then just Gary back to your office opening comments, you talked about, you know, the importance of low fares and I think within a sentence or two, you also talked about this modification of the customer experience and it does feel like that. There will be some permanent permanent change to how people book and fly going forward are those are those in Congress to have you know, arguably higher costs tied to this new experience versus low fares. How did how are you thinking about that now and I realize it's early

Despite first quarter capacity declining nearly 7% year-over-year, which was five to six points lower than we previously expected first quarter Chasm founding Fuel and profit sharing increase only 5.1% year-over-year for March alone. We were able to save approximately 100 million and 9 fuel costs based on self-help measures despite roughly 75% of our cost structure being fixed due to the sudden fall off and demand coupled with closing capacity reductions.

Yeah, it might get is early and again, I'm not I'm not willing to accept yet that the flight experience is forevermore changed. And so I I don't agree with that for here Thursday and until this pandemic is behind us. Oh, yeah. I think we're going to be living in operating differently going to a restaurants going to be different, you know, so that is some point I will get behind us and we will get back to normal. So in the meantime, I think that's part of the restructuring effort that Tom is working on we need to be mindful of those things see what kind of impact of these things might have to our cost structure or Revenue opportunity. I think what the the point I was trying to impress on is

We saved another roughly 150 million and first quarter from less gallons consumed and the following fuel prices with roughly half of those savings coming from a gallon and second quarter capacity is expected to be down at least 60% and we are estimating operating expenses to be down around 35% bulb vs. Original expectations prior to the pandemic if you factor in the benefit from the fuel price decline costs are expected to be down nearly 40% in a second quarter versus plan. So between our variable cost relief and self-help actions. We are seeing significant relief on the cost side relative to, to cut these combined efforts have resulted in a reduction of more than two billion in full year twenty-twenty operating expenses.

It doesn't matter.

Everything is relative. Yeah, it's this is going to apply evenly across the industry in terms of the change from here and it just makes the low-cost position even more important than ever. It's it's because there's going to be cost pressure in addition to revenue pressure off. I think it's back to Duane's question history shows that through recessions is the low cost that wins and that's served as well. And I'm certainly what our Focus will be more than ever here going forward. Very good. Thanks for taking my question.

In terms of capital spending. We have virtually eliminated all expenditures this year with over 1 billion and canceled our deferred projects and reduced aircraft delivery payments month. We canceled or deferred hundreds of projects this year, but we are continuing to work on several critical work streams such as a recent GDs launched at Tom covered Thursday. We have a new agreement with Boeing and are currently working with them on our on our revised aircraft delivery and payment schedules for twenty twenty and twenty Twenty-One the agreement Bow Wow's to take no more than 48 aircraft through the end of 2021. We have not nailed down the specifics and we have some time to do so much fun for twenty twenty at this point. We currently expect to receive fewer than the 27 Max aircraft that we were previously planning for this year.

Ladies and gentlemen, we have time for one more question and we'll take our last question from Joe catoe with credits with please. Go ahead.

Hey, thank you very much for squeezing me in here. Hope you all are doing well Gary. I'll ask a high-level question. You know, the the immediate focus is obviously been on doing everything. You can efficient Southwest to to survive and to navigate the current crisis and and come out the other side of this. Are you worried at all about the supply chain that sits underneath you and especially perhaps a smaller vendors and suppliers and their ability to navigate the crisis and then ultimately support an Industry Recovery. Can you just comment on what you see in the supply chain and any concerns that you have them? Thank you.

between our work with

Boeing and our retirement plans for our Fleet, I feel very comfortable with our Fleet flexibility over the next several years both two plugs down or up as needed. And of course we are mindful that the environment is fluid and dynamic and we want to position ourselves to be able to adjust quickly based on a recovery of travel demand or to a pro-life recovery with no road. We have included on March 31st order book in our 10-q that was filed this morning and it isnt updated yet for this agreement page for 20 20 and 20 21 deliveries, excluding the 16 leased aircraft with third parties. We have reduced our contractual deliveries with Boeing by at least sixty nine aircraft are roughly half.

Would you like it's a great question? I I think in this I mean this is you know, this is a catastrophe so it there's plenty to worry about and yeah, I worry about that. I worry about our suppliers, you know, there was an article in aviation daily. I guess it was this morning about Airbus and and reporting that they may not survive, you know, so this yes now in terms of what we've seen so far, I don't think we've seen of course. It's only In fairness seven weeks into this month and we got a long way to go. But Tammy leaves up our supply chain. I don't know of any we're not running into any problems that are getting in the way of us executing. I'll put it down so I'm aware so scary. I think our supply chain team is doing a fantastic job and what has been a really challenging situation, uh, just interesting.

I am proud of what we have accomplished quickly and it is showing up and significantly lower cash burn and second quarter. Our original outlook for second quarter pre-packed was average cork Ashburn and the range of $60 to $65 million per day with actions today. We now estimate our second quarter average core cash birth to be in the range of thirty to thirty-five million per day and to be very very clear the app.

Of uh, you know p p you know that they worked really hard to secure that but they've been able to secure what we need and Thursday we so far no major disruptions.

I appreciate those thoughts. Thanks. Everyone stay safe.

You too.

Okay, well that wraps up the animals portion of the call today. Thank you all for joining and have a nice afternoon.

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

Thank you, Chad. Hello, everyone and welcome, and I think we'll go ahead and jump right into the Q&A portion chat. If you want to give them some instructions on how to cue up for questions certain age to ask the question. You may press * then 1 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 star them to at this time. We'll just pause momentarily to assemble our roster.

And our first question today will come from Mary Stein with Bloomberg, please go ahead. Hi. Good morning. I just wanted to ask real quickly go to a point of requiring passengers or crew to wear a face mask during flight or at the hour at the airport, I guess.

Mary this is this is Mike. You know, we have been trying to follow CDC guidance and best we can and we have highly recommended that our our employees in our customer wear masks while other at work or travelling and and today we have seen the vast majority of our employees and our customers just naturally follow those instructions, but we are in the process of rolling out a temporary policy that at least with respect to our our employees that are on the front line facing customers that in the near-term the ability to wear masks while other work in their front-line positions, and and then we're also going to be in a position to have available for customers a mask if they would like to wear one in and then they don't have one.

But is this point? No requirement for passengers? No, no, no requirement. Yes Mary, but I do I do think that it's a valid question and one that it's fair to say that we're continuing to Think Through ourselves. Um, I just don't think we've gotten back to the point where the the the majority of people have been confronted with this. So everybody's been Sheltering it home and here in Texas as we were talking earlier, you know, now people can venture out starting Friday and I think that we're going to find that there's a a strong majority of people who aren't comfortable unless everyone around them has a mask on it as an example. So I think it's a little bit premature for us to make that judgment. I think we're all inclined to let people make you know their use their own good dog.

but in this particular case

We maybe we may need to be more aggressive there, but we haven't made that decision yet.

Okay, great. Thank you very much.

The next question comes from Tracy rucinski with Reuters, please. Go ahead.

Hi, good morning. Hi, I want to ask hello. I wanted to ask about your agreement with Boeing to reduce Max deliveries through 20 21. And your order book review. Is it fair to assume that delivery get pushed down the line that some will ultimately be canceled.

So yeah, this is Mike again. So

We have so the max is a really good airplane. We've got a great price on the airplane. It's fuel-efficient has got a great engine performance. The engine costs are really good. And just in the long term of Southwest Airlines, it would be in our best position to bring that airplane into the fleet. So we have a lot of flexibility with Boeing order booked up right now when you know, we have so many airplanes sitting on the ground. It doesn't make a lot of sense to go, you know, bring additional airplanes in from Boeing. So we do have a lot of flexibility to shift orders down. But as Gary said, I do think that this is going to you know, the industry is going to rebound and we're ultimately going to have need of need airplanes to fly in the fleet. And and so we do offer to bring the Max on to the fleet and if we need to early retire or manage the the flea by taking older airplanes out of the fleet, I think that's the best position for us to be in

The Tammy where we have a there's no cancellation a position. They're just they're just moving. Yeah, I think your takeaway should be that we're still working through restructuring of our order book with Boeing and just what we announced so far is just is is a piece of that but it's just too early to know and obviously a Boeing is going to be a very thoughtful with the max returned a service that we and we'll we'll we'll work with them on that package delivery schedule that makes us for Southwest but no cancellation of so far.

That's really helpful. And just one more if you can help us understand how the new situation affects your negotiations with Boeing regarding Max compensation.

Well, I think that's all part of it. You know In fairness we we're we're we're we we don't need the max right now, you know, we don't need all the airplanes that we have. So it's hard for me to argue to them that we're being damaged by Max delays here in April to be to be brutally honest, So all of that again is we have great relationship with Boeing. I think arguably we're we're their best customer around the world and Thursday. We we we we worked together through this Max crisis so far and I have every reason to believe it will continue to work very well together. But God there's nothing there's the we don't have an issue with the max as we sit here today. We're anxious to get it back in the air and they're working hard with the FAA to get it on grass.

and and recertified so we're will be with

Looking forward to that.

And our next question will come from Leslie Joseph with CNBC, please go ahead. Hi. Good afternoon everyone. Hope you're all well. I had a question about your patience. If you've had any with the federal government the facc with Trump himself about safety and airports. Are you guys talking about either testing passengers or taking temperatures or anything like that? You know Trump is speaking about that earlier today, and also it's having you just go over the numbers for the max deferral. Thanks.

Well the answer to your first question is yes. We we are talking with the administration members of Congress about life. You know what the protocols should be and I think it's a fair to say that the airlines were American Lung Association is leading the effort to advocate for some kind of health screening at the security checkpoint. And I know where Chief Operating Officer has off of it is argued that it is. It's just another element of security if you will just making sure that you don't have people off an airplane that that you know could infect others. So absolutely those those ideas are out there. I don't have anything to report this morning other than wage.

Free with your thought is some kind of screening makes sense and I think to get people flying again, they need to be comfortable and I think that that's one way to provide additional that would be in the hands of the federal government or some federal agency doing those textiles that that would be my opinion and that's what we've allocated with our trade Association. And that's that's what I believe they'll take forward to the administration and the members of Congress. But but again, your question is being actively discussing. I don't I I think what I'm reporting is I don't think any decisions have been made what the scenario that you that you're asking where perhaps the federal government does not take up a role. And what would we do? I think that that's a question we'd have to answer. I think a lot of it again just depends on how long this goes on. We're not prepared to be medical professionals dead.

But we're we're asking all the same questions that you are and obviously again speaking for Southwest advocating that the federal government assume that role the same thing is there so it's seems very natural. It could be done at that point.

If you'll if you'll recall we Boeing has twenty-seven of our Max aircraft that have been built in produced. And so, at this point we're not planning to we're planning to take less than those 27 again. We we haven't worked through those details with Boeing. So those discussions are ongoing and as we lock that down will certainly share that with you Leslie Leslie. This is this is Mike. I'm also just uh, I know that you know the wage remember the Boeing is not producing those airplanes today either and so they don't have they don't have a production schedule between now and the end of next year that they could even tell you exactly how many airplanes would be available. So that's part of a discussion with them about the order but what is their production capacity? What do we need? And how does that start to play together?

I mean it's right here right now and we've got to get passengers on the airplane at in numbers that are sufficient to pay the bills or else we're going to have to take you know, obviously a lot more drastic action, but Labor Relations or no different than they were they're they're very solid and you know, I gotta believe that are pagal when its time comes we need to do some things. I think we'll have a lot of very willing participants. Is there any like normal ongoing work with contract negotiations like Pilots or is that all kind of on hold until there's a little more clarity.

You know, all of that is confidential but I do think just yeah, the headline is everything is in suspense when it comes to that because all of those are talking about the future and the future he's just so uncertain. It's it's really hard to it's it's back to the Tamia Mike's points about Boeing. It's really hard to make plans for the future with Boeing when you don't know what the future is dead. So I think in in the other thing else and is that everybody realizes that this is an emergency. So they're we're the health club analogy is apt the you know, Southwest is in intensive care. So there are things that must be attended to today and there's just in terms of prioritizing the work efforts. There's things that can be attended to or later and clearly that's one of the leaders what our people want is job security and pay security and benefits and they've

That at least for now and so, you know, we're we're not I think that's what they are most interested in and we'll worry about what changes we can make em in a later date. But right now it's we're we're just trying to make sure that we have a plan to survive this and then we will be working hard to make sure that we have a plan to thrive once we get through this.

The next question is from David Koenig with the Associated Press, please go ahead hi. Hi everybody Gary. I recovered some of this, uh in response to Jamie Baker's question and and also marries and here and they're elsewhere. But could you take off again? The things you're likely to do to get make customers more comfortable about flying again and and one example of that would be, you know, you discuss this but how much less than full would you book flight and end and not long do you think you will have to do that? Thanks, Dave. Well, I think it's just all the basic things that the country is going through, you know, in terms of like we need to defeat the virus, right? So we need vaccine we need therapies to treat people who do get the virus. Yep.

We need testing to know who's who's sick and who's not sick. We need the antibody testing all of those things. I think are important for customers to get comfortable going back to their normal routines and that would include air travel within within the air travel environment. It's I think you know Mike it's mostly just thinking about the airport. I'm not Tom our employees and talking about our customers. So it's really just thinking about the airport and the airplane environments. Um, so the uh, screening health screening of individuals coming into the airport. Um, it's it's pretty much ready-made given that you screen every single passenger who get on an airplane. So I think that would be a very logical thing to pursue and that was that was a earlier question here with the media session there section then in terms of what the yep

Can do I think it's providing mask for customers maybe other people besides that but primarily I think it's a mask and maybe hand sanitizers. And so there are things like that to be considered and and Tom kneeling is a leading up the customer effort on that and I think you should expect you know, some some announcements from us soon on that front. Then you have what's left is within our environment is pretty much the social distancing so we can do things with them airport to address that we can we can do things to modify or boarding process to accommodate social distancing and then finally left and with the airplane if you left every middle seat open, that would be booked in the airplane to two-thirds, you know, so you'd have a 66.66% load Factor.

and

I I I've used that idea as a temporary thing again. I don't accept that forever. More people are going to stay six feet apart from each other and I asked for the rest of our lives. I just don't believe that I think will get past this pandemic and with a little luck. We won't have one for another Century, but it for the until we get to that point. We've got to be prepared for masks certainly and social distancing certainly and Thursday and I think we've got an effective way to think about that. The other thing that I you know, I haven't should have mentioned earlier Tammy to at our in our call and shame on me for not doing it but

You know, we we are a really high-quality low-cost Airline and we have never gotten our cost Low by jamming extra seats on airplanes. So it's a very comfortable seating environment and I think that's going to work again in our favor here and on just certainly back to the middle seat idea. What day I finally, you know, if I'm traveling with my with my two granddaughters and I want one of them to sit by me in the middle seat. I want to have that option to do that. So we're not going to physically restrict this or a Thursday or flight attendants to be police men and women on this we'll just we'll manage that if we do this will manage it in some other means by by simply just taking off less than 100% bookings.

Sure. Sure. I don't want to get into a discussion of kids and all that but you know, you could you could say that well two people sitting in the same, you know in the same aisle seat but one row off from each other, you know, they're they're closer than six feet. So that's why I wondered if you meant taking, you know, holding capacity at something less than 67% but it sounds like that's kind of where I'm thinking.

That's my thought, you know where we end up, you know, we haven't made a final determination on that. But it with with two-thirds of the airplane David kind of gets back to the the same point, which is we just can't burn nine hundred million dollars a month forever. And so we we've got to have some balance between social distancing and you know, just the affordability for people to to fly right even here in April. We have tens of thousands of people flying every single week every single day. And so, yep, that's what the government has asked us to do is keep you know, keep keep the keep the transportation lines open, so

so we're going to have to

And some balance there, but we recognize will need some distancing of in terms of the the airplane experience and and David this is this is my you know, and the Disco thing is just that I just want you to be aware. That's just one additional form of mitigation, but there are a lot of other things that are going on in the airplane. We've got a deep cleaning program of the song playing with those electrostatic misters and that they antimicrobial so there will be no disease floating around on that airplane. We have you know, we'll have everybody should have access to good personal hygiene with wipes or hand sanitizers and masks on board and then I just don't want you to forget that everybody is sitting and facing in the same direction. We have very sophisticated filtering systems on the airplane. So it's not like those viruses just spread around the airplane. So I think the airplane environment wage

Is set up really well to be a pretty disinfected environment for our customers and if we can go find a way to just enhance that a little bit with some social distancing that's just a professional goodness to it. And and I think you'll see the same thing as you go through the airport with with respect to the cleanliness of the facilities wage, then the availability for our employees and our customers to have exceptional personal hygiene in places. They go through that environment.

Thanks, Mike.

The next question will come from dawn Gilbertson with the USA Today, please go ahead. Hi. Good morning. I guess it's afternoon. Now, you mentioned. Of the call you saw you think things bottomed out and first week of April, you saw gradual Improvement in the second and third week. Can you give us any color on where you're even the slightest uptick are they are they dead from these states that are lifting restrictions or maybe never had really tight restrictions and related to that may not feel like it but a month from now summer vacation season is set to begin the Southwest see any scenario where there's a summer vacation to season of any significant. Thanks.

Yeah. On the two that your first question now that that's all proprietary information. So one of the things that Tom and his team are doing is just looking to the future of seeing what route changes we can make that will really help strengthen our strong points. And if there's some temporary access that we want to make will do that. But otherwise, we'll keep we'll keep that information very close to the vest your summer travel season question is a good one. You know, we have a decent booking a place for July as an example. We just have no idea. We have no way to predict what cancellations will be and and obviously they've been very vigorous for Thursday at seven weeks. So that's a question that we have. So it's we'll we'll be watching the demand for sort of June July August carefully birth.

if in fact the

The country opens up like we are reading about hearing about their obviously half a dozen or more safe that have relaxed their their stay-at-home orders. This is reopening back up. I think that that will put vacationers in a position where they can be more confident that hey I can go somewhere fun and there will be something to do with when I get there. So, you know, we we just use my family as an example. They are determined even though they've all all sheltered in place and they've been very coughing they are determined that we're going to the beach in July for vacation and I got to believe that we're one of many so it just remains to be seen whether or not that will be materialized but there's no evidence right now other than extrapolating the current there's no evidence. That would say that people won't be traveling for Vacation Club.

But you have to believe that things are going to open up and that the kind of steps that that that Mike and Tom and Tammy. I've been describing as far as cleaning a mask and social distance things all that will be acceptable people Tom to you any thoughts. I guess just one or two thoughts in terms of any specific City Job markets where we're seeing decline the obviously the organs having some time. That's pretty is there the hotspots like that but I think more more than that. I think that what we're seeing is the booking agents are it's really more of a barbell kind of booking curve as opposed to zero two six seven and thirteen just kind of spreading out 06. So people that really need to travel tend to be traveling and then 40 days and Beyond which kind of gets your summer question that's where the other piece of the booking tends to be coming from and Gary's point is right, you know up until KO Good Hits. Yep.

We had a pretty nice, uh looking curve for June July any questions going to be what he said, which is what does the the cancellation curve look like? So we just have to wait to see that would begin to be self-evident. Here's not too distant future. But the demand you know right now in April May and June for those booking time frames is pretty anemic. I mean, that's just Where We Are

Thank you.

You know last question today will come from David slotnick with Business Insider, please go ahead.

Hi everyone. Hope everyone's doing well and thank you for taking my call Gary. You said earlier in the call. I think it's very beginning that impasse refreshing to be seen corporate travel take about five you return. Everything that I'm reading is agreeing that corporate travel is probably going to be a slower recovery from major. Do you think in this case that it might be a bit of a longer range of the corporate travel or blade beginning of that returned just because of uh, you know companies. Liability is having their employees travel during coded maybe then eating can cancel because work from home has been proven to be at least relatively Peaceable during the

yeah, the only thing I was going to say is it's well we

What we think corporate we think the really big companies and and Tom mentioned our our our corporate effort earlier. So we're really referring to business travel overall, which is you know, um is about a third of of the traffic for us and a third of the traffic for the industry. You know, I think you can argue it many many ways. I think that's a lot of business travel and corporate travel for that matter is would be in large meetings or conventions and I I would suppose that those are going to be slow to come back on for 20 21 because a lot of those things have a long lead time and you would think that people I mean I even think I'm company with large events that we host is just really hard to know exactly what the world is going to be like and therefore that kind of slows down a making plans and making commitments wage.

So but but that's sort of again an eighteen month time Horizon. I read predictions by by people that you know in eighteen months things are going to quote me back to normal and I I wouldn't disclose that. I wouldn't discount rather that that possibility. I think what we're trying to do is just not in a position where we can react effectively either direction if we need to upsize that'll be a pleasant thing and we'll do that if we need to downsize it will be less pleasant, but we'll be able to do that. And I think the main thing I was trying to share with with you. All earlier is that based on history in a recessionary environment is a long recovery period for businesses and it's intuitive to me all why that would be this one feels like which I think is your point. This one feels like it could be

You worse and you've got companies that are ordering their employees not to travel again. There's there's historical precedents. I think off or examples for these kinds of scenarios and I just I just don't think we're just not in the in the business of making predictions I guess but I I don't think there's any way to know and I know a lot of people are using zoom and there there's predictions that that will forever change meetings and I just don't believe that I think it's just one more tool that people have and if you're like me, I'm sick of these Zoom calls. I'm ready to go talk to people face-to-face. So I don't we don't know but we're certainly prepared for a very, you know, very long recovery.

Great. Thank you very much.

ladies and gentlemen

Includes our question-and-answer session. I would like to turn the conference back over to miss Rutherford swimming closing the Box.

Thank you Chad. Thank you all for being with us today. As always. If you have any follow-up questions, the communications team is ready to help you out. You can give us a call at 214-792-4847 or visit us at our media Newsroom. Www.swa.com. Thank you all very much. And thank you for conference has not concluded. Thank you for attending his presentation. You may now disconnect your lines.

Thursday