Q3 2020 Southwest Airlines Co Earnings Call

And of the board and CEO, Gary Kelly, Chief Operating Officer, Mike Vandeven, Our President, Tom Nealon, and executive Vice President and CFO Tammy Romo.

Just a few quick reminders.

We will make forward looking statements today, which are based on our current expectations of future performance and our actual results could differ substantially from these expectations. We also.

We also had several special items in our third quarter results, which we excluded from our trends for non-GAAP purposes, and we will reference certain non-GAAP results in our remarks today.

We have all of this spelled out in our press release from this morning regarding special items forward looking statements non-GAAP reconciliations to GAAP results and other important risk factors and of course, you can find our press release and other helpful resources at our Investor Relations website.

And now we'll go ahead and get started and I'll turn it over to Gary. Thank you Ryan and good morning, everybody and thanks for joining us for our third quarter earnings call for 2020.

Obviously, we can't be happy or satisfied with our office, but im.

But I'm going to tell you upfront some of the things that I am happy and grateful for.

Number one the record loss was significantly less than I feared three months ago.

We got past the July wobble in demand.

Over to our outlook for fourth quarter reflects the continuation of this improvement better revenues lower cost compared to the third quarter and assuming our October trends hold for November and December and that's of course also assuming that we have stable fuel prices.

Number three we've announced nine new destinations to be added over the next three quarters I'm happy to have these opportunities I am happy to play all fans I'm happy to generate.

More revenue on minimal incremental cost, which means more cash and I'm happy to put idle aircraft and excess staff to work.

Number four I am happy that there's still a chance that we can reserve pay jobs and service by Congress extending the payroll support program for another six months.

Getting that support extended is a top priority I'm hopeful.

Hopefully it will happen quickly. So we can terminate work on our plan b.

Which is to press our unions to sacrifice with concessions in order to prevent furloughs as we currently are roughly 20% overstaffed.

Number five I am happy that finally, we seem to be nearing the grounding of the Max.

Number six I'm happy that we have the scientific evidence to provide comfort and assurance that it is safe to unblock, the middle seats, which will happen on December the first and the same.

And the scientific support arrives as demand continues to improve which should absorb our 50% increase in seats offered for sale.

In our models show that this will be revenue cost and operating profit positive and that all makes me happy too.

I'm happy that we have at least three years of cash and I know its borrowed money but.

But that should see us through this crisis and if we have to we can borrow more.

Number eight I'm happy that we are uniquely prepared for this environment with our business model, we have low cost low fares no hidden fees and nothing to hide no second class the nation's best route system, though the nation's largest airline 97% domestic and better prepared than ever to serve.

Business travelers when they return to disguise.

And then finally have enormously grateful for our people they've done a phenomenal job monitoring and adjusting this airline theyve done a phenomenal job running a superb safe on time high quality operations, they've done a phenomenal job, serving our customers with industry, leading hospitality and finally I'm grateful for their room.

Resilience in their perseverance and their devotion to our cause.

Our leaders are going to continue to do everything in their power to take care of all the people who have built and operate this airline and serve our customers every day.

Job one is.

He is keeping our company financially strong and healthy and with perpetual competitive advantages.

So those are a sampling of my favorite things and.

Yes, the worst may be behind Us and I hope there are no more surprises.

And yes, we have a long way to go but we will get through this we will survive this and we will emerge with the best balance sheet and the best business model to compete and thrive in the post pandemic world and.

And Mike Tom and Tammy have a lot to share with you so I'm going to wrap up and turn it over to Mr. Mike management.

Well, Thanks, Gary and I would go ahead and globe well over the operation that Mike because it is absolutely superb well I hope Thats one of the things that that also made you happy so.

So this quarter really was the first full quarter of year, where each day. Our plan was to operate all the flights as scheduled we were we were able to get out in front of the scheduled changes that we made during the quarter and we got our crew schedules and airports staffing adjusted we had all of our customers re accommodated well in advance of that.

Actual operation and so as a result of the operational performance, which is magnificent it was arguably the best overall performance in southwest history.

Yeah.

Pre labor day, we were flying roughly 2800 credit today post labor day around 2000, and we published.

Just over 19000 extra flight sections during the quarter and our on time performance for the quarter was 94.4% that led the industry our best performance since 1992.

Baggage handling was the best in our history, we carry roughly 12.4 million bags and we only had a bag claim for a loss or damage bag for about 8.2% of them. So thats two claims for every thousand bags caring and that is superb service and you don't have to pay.

Extra support.

The reliability of our service and hospitality of our people resulted in a net promoter score of 8.7% and Thats the highest in our history.

It was just a testament to our people.

In this environment was full of Pandemics politics, or social issues generally designing and our people as they come to work they take care of our customers. They take care of each other and take care of southwest Airlines and I'm, just very very proud of our southwest team.

So in addition to running a very reliable operation. We are equally focused on cost efficiency, we executed both a voluntary separation and extended time off programs in the third quarter. Those programs were very successful they reduced our operational staffing just over 25% as we begin the fourth quarter.

We have roughly 730 year four airplanes on property, we have about 100 of those and long term storage that includes the 34 Max aircraft and those.

And those aircraft for selected based on their maintenance profiles and the near term heavy checks and so the point of all that is that we can cover the variation of daily flight activity in the fourth quarter at optimal staffing and optimal aircraft maintenance profiles, while continuing to produce very high on time performance results.

Weve actually been doing some extensive operations research into the cost of executing the flight schedules at varying staffing levels and aircraft productivity levels and on time levels and historically, we've assumed that an on time performance in the low eightys really optimized our cost profiles, but some of the most recent research that we've been doing is indicating that.

Our optimal cost profile may occur when our on time performance is in the upper Eightys. So that's really an exciting opportunity that we would have that would foundationally improve both schedule reliability for our customers and our employees as well as minimizing.

Our operational cost execution.

So turning to the Max.

Several major milestones have been completed the certification flights are done the joint operations evaluation Board has met and given their recommendations for training.

The flight Standardization board has considered them they've issued their draft report for pilot training requirements and that report out for comment through November 2nd.

And after that a final report needs to be issued there.

There is bound to be UBS, a couple of open regulatory items that they need to be addressed but ultimately an airworthiness directive and instructions need to be issued that would allow for non browning.

No as you know there is no timeline.

But we're hopeful that that happens before the end of the year, but it could be early next year in any event. Our process is the same as we previously discussed.

We have to put all these requirements into our manuals. We have received FAA approval, we have to schedule and complete pilot training for roughly 7000 pilots we have made.

We have maintenance work to do to bring our own Max aircraft out of long term storage and into an operational status and.

And we will be doing operational readiness and validation flights on the aircraft before the return revenue service we.

We also have a 34 undelivered aircraft from Boeing that they currently have built and we're working with them on an updated delivery schedule.

Our process is going to be deliberate structured and we're expecting it to take three to four months between the non grounding in the aircraft being in revenue service when they are ready for revenue service. They will replace the seven hundreds we.

We've got significant operational experience with the aircraft is on those cost effective aircraft. It is our most reliable aircraft. It is our most environmentally friendly aircraft and it's our most comfortable aircraft. So we really look forward to flying it again.

So in closing I think we really settled into a rhythm in the third quarter with even more stability in our schedules in the fourth quarter. Our aircraft in our people resources are better aligned with our commercial needs. Our customers are getting the best value in the industry low fares and superb reliability and thats delivered by our time.

In hearing people that will treat our customers like family and keep them say during their journey and that.

And Thats, the southwest team and as I said, I'm, just really really proud of them.

And with that Tom over to you.

Thank you Mike Good morning, everybody I'm also very proud of the sales teams quarterly number.

For like we've never had operationally so congratulations all use theirs.

Theres a lot today covers on and get right into it.

So our third quarter revenues as Youve already were down 16% year over year, which is actually a pretty decent improvement versus 83% decline we experienced in the second quarter.

Passengers declined 65% for the third quarter and our fares were down roughly 20% and we do expect that yields will continue to be under pressure, but having said that we've actually seen some pockets of close and sequential yield improvement that began in September and that has continued into October which is quite encouraging.

In terms of our monthly performance demand and bookings stalled so hard in July with the rising Qubic cases in July operating revenues were down 71% year over year with load factor, 43% and that was on capacity that was down 31%.

In August we saw modest improvements in bookings and close and leisure demand with operating revenues down 69% year over year and that was on load factor of 43% with capacity of 27.7% down 27%.

The trend improvements continued into September with operating revenues down 66% year over year with load factor of 52% and that was on capacity that was down 41% as we reduced our schedules to right size our capacity for post summer demand and this certainly helped us to get to the better end of our guidance range.

And labor day travel was actually pretty solid and leisure demand held up well for the remainder of the month, which was great to see certainly relative to July.

In terms of the demand environment. What we are seeing continues to be heavily heavily leisure oriented and bookings continue to trend closer in mostly insight at 21 days for the third quarter now.

Now at this point, we are seeing a modest pickup in bookings beyond 21 days, especially for the Thanksgiving and Christmas holidays, which is great to see and certain seasonality certainly continues to be a key factor or demand.

I think as you expected this point to our business travel continues to be very weak in our corporate managed travel was down 89% for the quarter, which is consistent with the second quarter and we expect business travels remained down significantly through the end of 2020 and well into 2001.

I will talk more about this in just a few minutes now in terms of our capacity planning demand continues to be inconsistent by market, which makes it pretty challenging for our network planning team is doing a very very incredible job and they have the tools. They have the experience to make capacity and scheduled judgments quickly and they're doing that quite routinely at this point.

However, in the third quarter, we did certainly continue to see strength in areas, such as southern California into retail Las Vegas, Denver, Phoenix, Texas, and Florida, and we're also seeing more signs of life in markets like Chicago, Kansas City, and Saint Louis as well as others.

We're also seeing demand for wide again come back as a state relaxes quarantine requirements for travelers that tested negative for Covance.

And to begin to see us add back our Hawaii flying will have all of our California to Hawaii routes restored in November with the exception of Oakland and San Jose to Kona.

We're also adding new service to how loop in San Diego and for the time being our interaction service remain status quo.

We're also continuing to see relative underperformance in markets with quarantine restrictions, such as New York delinquent and other states.

Short haul markets. We've also seen less strength, we've added more in connecting Antares to compensate for this and we're still maintaining service to all of our markets. We continue to adjust our flight schedules in 30 60 90 day increments at this point, we are in a very very clean rhythm to do so effectively and efficiently we're getting pretty good at this.

In terms of the third quarter financial impact from Black Middle seats. The impact in July and August was was fairly immaterial.

But we estimate the September impact was roughly $20 million and that was from SPIL revenue that we just werent able to accommodate.

But similar to what we did in the second quarter. We added nearly 19000 additional flights as Mike mentioned during the third quarter to capture as much the demand that otherwise would have been spilled and the results were pretty good with over 75% of those flights covering the variable costs and helping to reduce our cash burn so.

So the close of the third quarter as want to hit on our other revenue, which was down 19% year over year as you might expect to ancillary revenues trended almost right in line with the faster decline that we've experienced especially for products like earlybird and upgraded boarding.

No revenue from our friendship rewards program was down 43% year over year, we're actually continuing to see strong performance from our co brand credit card.

In fact revenue from the card spend in the third quarter performed quite well and was down only 12% year over year obvious.

Obviously, cardholder acquisitions were down substantially simply due to fewer customer customers as well as tightened credit approval rates, but we still added new shareholder cardholders and our attrition rate in cell steady. So our overall credit card portfolio continues to perform very well, despite some very clear and obvious challenges.

Okay fair enough on Q3 fourth quarter.

I would say that we are cautiously optimistic about steady modest improvements and leisure revenue trends going into the holidays October demand and bookings have held up well comparison of Tempur and thats. Despite the lack of big holiday weekend in October.

We don't have much of October left to book at this point and we expect operating revenues to be down approximately 65% to 70% year over year with an estimated load factor of 50% to 55% and what they assume is expected to be down approximately 45% year over year.

At this point in November and Thanksgiving travel is booking pretty nicely November operating revenues are currently expected to be down 60% to 65% range year over year with load factor in the 50% to 55% range and thats with capacity capacity expected down roughly 35% year over year.

So as you all know Thanksgiving travel dates for completely in November of this year, which gives November operating revenues of three to four point head start versus last year due to the calendar shift.

We have less visibility into December but at this point, we're seeing a nice really trend in holiday demand and I'd say at this point in the booking curve our book load factor for the Christmas Holiday period is roughly in line with prior years, but of course thats on much lower capacity. So we can extrapolate that for the full month, and but hopefully buyers case counts will stay under control in that.

Gives you a sense of the type of leisure demand that we're seeing for holiday peak travel periods.

We also expect a more significant negative financial impact from Black middle seats in October November as demand continues to improve so for October.

We're estimating a 20 million dollar impact to pre tax results in a $40 million to $60 million impact in November.

So our ability to add flights during the Thanksgiving travel periods pretty limited so were not able to capture the customer demand that we're seeing in our markets. So we are spilling that revenue opportunity.

As you see from our most recent schedules, we've adjusted our December schedule to better match capacity to demand or expecting to cimbria sends to decreased 40% to 45% year over year. So in total fourth quarter Asms are expected to be down roughly 40% year over year.

So we are ready to drive a lot of color on December at this point, but we will provide an 8-K investor update sometime in November.

I do want to share a few thoughts on corporate travel.

First off we achieved yet another milestone recently with the launch of the Avondale GDS platform, which is the last of our four new GDS platforms. So southwest fares now available on Apollo Galileo World span and now Amadeus.

And I will tell you that throughout the entire pandemic. This entire experience our corporate sales team hasn't slowed down a bit in fact, they have been extremely active working with corporate customers and the travel management companies and without a doubt I can tell you. There is a lot of energy and there's a lot of excitement about having southwest Spears is available in the GDS channel.

So as it stands today the vast majority of our corporate accounts continue to have travel restrictions in place and they are telling us they expect a modest return travel over the next six months.

But having said that I can tell you that we're seeing over 90% of our large corporate accounts traveling today, although on a dramatically reduced level, but they are beginning to travel.

We're also beginning to see the corporate booking curve flatten out a bit which signals to us the customers are gradually became more confident booking future travel.

No we don't have a crystal ball and you have the same data that we have our expectations that domestic business travel will continue to return slowly.

And perhaps by the end of 2021, our assessment is that domestic business could be in the range of down 50% to 60% now whether or not business trail returns in 2019 levels. The next two or three years is anyone's guess and there are a lot of opinions on this but there could very well be at 10, and 20% structural reduction in business travel coming out of Covance that could take.

Several several years to rebuild.

But I got to tell you that from a southwest standpoint, there is still a lot of upside for us since we're competing and channel where we've never competed before.

You know the southwest experience through him.

I'm sorry, the customer experiences southwest is firing on all cylinders in the southwest promise is a very big part of that and.

And our customers are continuing to share very very positive feedback about their travel experience.

Mike mentioned this but we we continue to have the highest branded net promoter score the industry, but in addition to that we are significantly outpacing the entire industry. When it comes the DMT customer satisfaction rankings.

So in the last month report published by the DMT, We're best in the industry with a ratio of 3.97 complaints per 100000 passengers boarded.

Just to put that into context and perspective, our closest competitor was almost twice that in the closest network carrier had a ratio of almost six times more complaints than we did.

And just as it's always been thats because of our people that's because we're hospitality that's because of our culture that because of the quality of the operation, but thats, who we are.

So I do want to spend a few minutes talking about the south was promised because I think it's a really important to really timely topic.

So as you know we require faced coverings and a health declaration before traveling.

We have extensive cleaning and airports with that with physical distancing at the gates as well as a physically distance boarding process.

Every aircraft is equipped with an air distribution system to introduces fresh outdoor air and heavily filtered air into the cabin, while in flight and what all that means that the air the cabins being exchanged every two to three minutes in Hep of filters remove 99.97 per cent of airborne particles met similar to what you find in hospital operating rooms.

Our enhanced overnight aircraft cleaning requires six to seven hours of labor each night on every plane in our fleet. We are applying any electrostatic disinfectant and antimicrobial spray on every surface has been certified to last 90 days, but we're applying every 30 days or three times what's required.

We clean laboratories and trade tables every aircraft before every flight or blocking middle seats through November thirtyth.

So thats the southwest promise and we just know a lot more today than we did seven months ago and now we're seeing all the medical and scientific research and very clear that the aircraft environment is one of the safest indoor environments anywhere in the world.

When you think about what we do everyday weird shopping going on he lives 40 events. There really is no. Other environments, we are going to find that conditions in all the precautions you're going to find on airplanes.

Gary talked about our partnerships with UTI southwestern Stanford University School of Medicine. Both of these organizations are serving his expert resources to us to help us shape. Our policies. So we continued to deliver our southwest promise going forward.

The latest Bolton by by Harvard School of public health conclude that wearing face masks as part of a multi layered approach offers significant protection.

We also have new research from the department of defense on how airflow systems combined with help of filters.

Effectively make the the risk of contracting cobot nineteena aircraft extremely extremely low even if every seat is occupied.

So the science on the issue is pretty clear at this point and with the data and knowledge. We now have we feel very confident make the decision to begin selling all available seats beginning December onest.

But I do want to be really clear, we would not have made this decision well without the overwhelming data that makes clear that this does not put our employees or our customers of risk we couldn't possibly do that with a clear conscience and wouldn't do that but we.

But we do have confidence our decision based on medical expertise studies research and partnerships are in place as this is safe and this is the right approach going forward.

So tomorrow, we will begin communicating with every customer was booked a flight the on November 30.

If a customer is uncomfortable with us selling all seats and wants to cancel their flight will given the full refund no questions asked we'll have this option in place throughout the month.

We'll also notified customers at least several days before the before the flight if the play is book beyond 65% and they choose a change in flight, we'll do our best to re accommodate them as well as what we do.

So the selfless promises real concerned commitment we've made it's important to us it's important to our customers and support to our employees. So we're going to continue to be proactive and transparent in communicating with our customers and we're going to keep taking great care of them.

So lastly, I just want to talk about our recent announcements of new additions to our route map Gary alluded to them and you read about them. These new airports, our recent thoughts and they certainly are reactive thoughts to the current environment in fact, David our list of commercial opportunities for years.

But as you all know with retirement of the 737 classic fleets and the grounding of the Max aircraft, we've been in an aircraft deficit position for the past several years now.

At this point with Kobe, we're actually in an aircraft surplus position and now we're able to put idle aircraft and our people to work while at the same time strengthen existing markets. Our network. There are already very very strong markets like South, Florida, California, Denver, Chicago and Houston. These are markets, where we have a significant presence and these are cornerstones of our network and these addition.

It's only make them stronger still.

So here's a recap what we've announced year.

Year round service to Miami in Palm Springs begins November 15th these are leisure oriented markets that strengthen our successful operations in southern Florida and California.

Seasonal service to Hayden, Colorado, Montrose, Colorado against December 19th user markets to expand on our successful Denver operation provided really strong seasonal revenue opportunities. We typically have idle aircraft time.

And the first half of 2021, we'll add service to Chicago, O'hare and Bush Intercontinental and this allows us to reinforce our commitment to these cities in markets similar to how we operate the La basin, Oakland, San Francisco, the Boston area and in DC and Baltimore.

As part of our earnings release earnings release today, We've also announced our intent to begin serving Colorado Springs, Colorado Savannah, Georgia in Jackson, Mississippi, All slated to begin service in the first half of 2021 and all.

And all these new airports are great opportunities for southwest and we have a long list of others that we intend to tackle as it makes sense and each of these new airports are natural extensions the plug in a really well towards listing network.

So with that we had turned over to Tammy take us through the financials. Thank you, Tom and Hello, everyone.

Beyond that todays comments second Avenue, and our cost performance three liquidity and cash burn before we may line.

Yeah.

Before I begin I'd like to extend a huge thank you to all im confident going here.

All are performing magnificently, despite a challenging.

Thank you the 1.2 billion net loss, we reported on both a GAAP and non-GAAP basis. This morning, certainly speak to the staggering impact and pandemic heads have air travel demand and our business.

Our GAAP results included two large and special items payroll.

Hi fees 1.2 billion, which was mostly offset by 1.1 billion and charges for our voluntary separation and extended our merchant fee time off program as well as our normal fuel hedge special item.

Speaking of our voluntary programs.

Also like to thank our more than 15200 employees participated in these important programs to reduce our cost and cash burn.

It has been emotional defeat on many of our staff with family members to part and we are very very grateful for their dedication and service to our incredible company we.

We are determined to make and Pratt and are focused on emerging from this pandemic a stronger than ever.

We had a strong at 25% total participation rate, but our employees and the two programs combined and in addition to helping us cut our costs. The extended lead program gives us a lot of flexibility should the business recover faster.

We determined we need to recall and clean.

We had more than 4200 employees I would like to voluntary separation program.

Our effective March Thirtyth headcount of nearly 58000 fulltime equivalent employees down nearly 3200 compared with June thirtyth, which illustrate about 75% of voluntary participants left the company during that quarter.

Virtually all of the remaining employees have separation bank by year end.

The total cost of the two voluntary program could be up to approximately 1.7 billion.

Not at the pilots on extended time off a record before the end of that is that selected a five year election period.

The NPV of the paragraph day 2025 exceed Q billion. Yes. There are now employees were caught early from an extended emergency time off program.

And in terms of the accounting we have now created approximately 1.4 billion and 20 21.7 billion potential cost cutting program, which includes all costs associated with the voluntary separation program and an assumption that there would be no material recall.

Fully elected extended time off at least in February of 2020 can bring.

Richard 18 months from the beginning of that program.

We accrued approximately 300 million in second quarter, and $1.1 billion and third quarter, which are reflected as special items and our non-GAAP results and solid quarter.

The remaining 300 million of program costs are related to employee if you would like to extend the time off our longer than 18 months, which consists solely of pilots.

Due to the uncertainty of the current environment No accruals were recorded for extended time off election beyond that 18 month period.

We will closely monitor the demand environment and record further accruals if appropriate.

We made cash payments to employees and approximately $195 million in third quarter, leaving I created program caught out about 1.2 billion.

We expect our cash payments to be approximately $300 million fourth quarter about.

About 500 million and 2021.

And up to approximately 700.002 million 22 and beyond.

And in terms of the cost savings from the program, we expect salary wages and benefit cost savings and approximately 550 million and second half 2020.

$143 million million realized in the third quarter and over $400 million and fourth quarter.

For 2020, why we expect 500 million in incremental savings ever 2024, approximately $1.1 billion and total savings next year.

Our over 90 million per month.

We expect the annual run rate savings from our voluntary separation program to be roughly 500 million, beginning and 2022 and beyond.

And savings are the voluntary extended merchant fee time off program could be.

Up to almost 600 million and total for 2022.

320, 25, if no employees I recall from the extended a merchant could time off program.

So the savings opportunity and flexibility of the programs provide are substantial.

We also recently shared that we are seeking the equivalent of a 10% pay reduction across all work groups and 2021, which would represent cost savings of at least 500 million beginning next year.

These cost savings are crucial, especially in our largest cost category as we aim to preserve jobs, while achieving necessary meaningful cost efficiency and then suppress capacity environment. So that we are better positioned for a healthy and faster recovery.

Our third quarter, our overall cost performance was strong as we remain laser focused on managing our costs.

Excluding special items, our operating cost decreased 30.

30.1% year over year to 3.4 billion and increased only 4.1% year over year on a unit basis.

Our third quarter capacity was down 33% year over year, which resulted in approximately $330 million and reduced cost for our variable flight driven nonfuel expenses and.

And that primarily in salary wages and benefit maintenance expense and airport costs.

We realized further cost savings driven by the actions weve taken in response to the pandemic.

I already covered the cost savings for our voluntary lead program, which was $143 million in third quarter.

Hi parking aircraft, we were able to defer flight hours and maintenance activities and further reduce our maintenance expense, which was included in <unk> and the 330 million I mentioned previously.

We also reduced our third quarter other operating expenses by more than 100 million by cutting advertising spend technology projects and discretionary spending.

Our cost performance continues to benefit from significantly lower energy prices, which saved us $257 million in third quarter alone compared with our expectations for third quarter fuel costs at the beginning of this year.

Our third quarter fuel price was $1.23 per gallon down 84 cents, our 41% year over year and based on our current fuel hedge and fourth quarter market prices. We estimate continued and welcomed fuel price relief year over year with an estimated fourth quarter fuel price and now one.

Color and 20 cents to one dollar and 30 cents per gallon range compared with two.

$2.09 per gallon and fourth quarter last year.

Our fuel hedging portfolio continues to provide insurance against spikes in jet fuel prices with material upside protection no floor risks and very manageable fuel hedging premium ex that.

We have not made a material changes to our 2020 portfolio and our premium cost per gallon has increased this year simply as a rate as a direct result of lower fuel gallons being and fan.

Our third quarter premium expense of $24 million equates to eight cents per gallon and full year 2020 premium costs remains at 97 million also eight cents per gallon.

Clark 2021, we expect premium expense to be similar to 2020 based on our current portfolio.

Our hedging protection for 2021 is solid with hedging gains that we began at Brent prices around $65 per barrel with more material gains when you get to $80 per barrel.

In addition to the cost really from lower market fuel prices, our third quarter fuel efficiency improved 10% year over year, driven by many of our older aircraft being parked.

We are also benefiting from lower load factors and better on time performance and.

We expect this trend to continue in fourth quarter and currently estimate our fuel efficiency to be similar to what we will act on third quarter year over year.

Excluding fuel special items and profit per your profit sharing third quarter operating costs were down 17% year over year, which was towards the better end of our guidance range, an increase of 23.4% year over year on a unit basis, driven primarily by the significant reduction in capacity.

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Based on current plans for fourth quarter 2020 capacity to decrease approximately 40% year over year fourth quarter operating expenses, excluding fuel and oil expense special items and profit sharing expenses are expected to decrease in the range of 20 to 25.

<unk> percent year over year.

This represents a sequential improvement from third quarter, driven primarily by lower capacity and additional cost savings from our voluntary lead program.

Our Swift self help actions have reduced our 2020 cash outlays by approximately 8 billion compared with our original plan.

Our 2020 operating expenses, excluding fuel special items and profit sharing are expected to be down 2.8 billion this year compared to plan B.

The benefit of fewer fuel gallons consumed from less capacity has driven fuel savings of more than 1.5 billion.

We have reduced capital spending by 2.4 billion taking into account proceeds from sale leaseback transactions and supplier proceeds received and there.

And the remaining savings are driven primarily by the suspension of dividends and share repurchases.

In addition to be self help actions we've benefited from the significant drop in fuel prices. This year, which we estimate will save us another billion and fuel costs compared with our expectations at the beginning of the year.

That brings our total fuel savings compared with plan to more than $2.5 billion and our total cash outlays savings to approximately 9 billion compared with the original plan.

I am very proud at the southwest team and their diligence to realize these meaningful cash saving.

Our effective tax rate for third quarter was 25%. The tariff act allows any losses created in 2020 to be carried back five years for a refund of taxes paid.

And beginning in 2015, and as I thought cash tax payer for the past five years, we will be able to take advantage of this cures act provision with our projected 2020 net losses.

Further as our corporate tax rate was 35% part of the passage of tax reform in 2017, our 2020 tax rate is trending higher.

Our year ago right.

This was due to the net loss carry back provision being applied to a higher priority your tax rate that drives the larger tax refund. We currently estimate our annual 2020 effective tax rate to be in the range of 24% to 26%.

Turning to fleet and Capex, we continue to be well positioned with our fleet flexibility over the next several years, whether through retirement to adjust to lower demand our through our ability to return aircraft to service to ramp up capacity if the environment supports growth.

As a reminder, our interim agreement with Boeing from earlier. This year is that we will take no more than 48 aircraft through the end of 2021.

And the environment.

Has not improved since then and it certainly safe to say that we do not need 48 aircraft next year at least for growth.

We are in the process of restructuring our order book with Boeing and do not have a robot delivery scheduled to share with you today, but we do hope to nail down the specifics as soon.

Our 2020 <unk> capital spending forecast remains unchanged, we have more than offset the $1.4 billion to $1.5 billion of Capex. Originally planned for this year we.

We have been successful and aggressively managing our capital spending throughout the pandemic and our goal is to do the same and 2021.

While we are not prepared to provide 2021 capex guidance today, it's our full intention to keep 2020, capex to a minimum and low level, including any revisions to our order book.

Before I wrap up and open the call up for questions I'll provide an overview of our liquidity.

We ended third quarter with cash and short term investments investments of 14.6 billion and including our fully available 1 billion revolver liquidity of 15.6 billion.

Since our last earnings call, we issued an additional 1 billion of unsecured debt raised 121 million through an aircraft secured financing and received our full allocation of payroll support program proceeds.

We ended the quarter with a total of 10.9 billion and that on our balance sheet, leaving us in a net cash position of 2.7 billion with leverage of 54%.

We continue to have approximately 12 billion and unencumbered assets with approximately $10 billion in aircraft and this doesn't include the significant value from our rapid rewards loyalty program.

We remain laser focused on reducing our core cash burn and for third quarter. Our average core cash burn was $16 million per day, which was a sequential improvement from our rate of 23 million per day in the second quarter.

This improvement was driven primarily by strengthening close end leisure demand and booking trends.

Based on these strengthening our fourth quarter revenue trends, thus far coupled with cost savings from our voluntary employee lead programs. We currently estimate core cash burn for October to be approximately $12 million per day and fourth quarter to be approximately 11 million per day.

And remember that our core cash burn calculation does not factor in certain changes in working capital.

During fourth quarter, we expect the most notable working capital change and.

Not included in our average daily car cash burn of 11 million to be driven by payments made for our voluntary employee lean program, which will be nearly 300 million.

We also anticipate a normal seasonal swings and our air traffic liability balance with unexpected seasonal drop off in bookings later in the quarter due to the post holiday slower time period, which could cause our cash burn, including working capital to be.

Higher than our core cash burn estimate of 11 million per day.

Our current cash balance is 13.7 billion, which factors in a 500 million of bullet maturity debt payment that we repaid earlier this month.

Factoring in all the moving parts I just mentioned, we currently estimate our cash balance to be roughly $13 billion at the end of this year.

And finally, we expect to have about 500 590 million weighted average shares outstanding and fourth quarter, which is an increase of 27 million shares from second quarter due to the may 1st issuance of 80.5 million shares which was included in the weighted average calculation for.

Only two months in the second quarter.

So in closing we are.

We are proud to still have the U.S. industrys strongest.

Strongest balance sheet.

We are the only domestic airline to be rated investment grade by all three rating agencies and our goal remains to protect our balance sheet and investment grade ratings.

We must see a significant rebound in revenues as we've covered today, but our efforts to these liquidity add new low risk pools of revenue and on going focus to reduce cost and cash burn provide a solid foundation when they do allow us to rebuild our predominantly domestic network.

While we've got a ways to go our people have the grit resolve and determination to carry us through this pandemic.

And with any luck the worst is hopefully behind us.

So with that can we are ready to take analysts' questions.

Certainly thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before Chris.

To withdraw your question please Chris.

Chris are into.

And the first question will come from Myles Walton with EPS. Please go ahead.

Thanks, Good morning, Thanks for taking the call.

Good question I'm curious could you comment on the moves at Houston and O'hare in the context of the aspirations.

The aspirations of the corporate travel and how much those two or are interconnected i. I understand what you said about having the capacity of planes that you didnt used to have and now you have a surplus you put them there, but it does seem like two or probably more connected than not could you just elaborate.

Yes, I'll try and then Tom will chime in.

[music].

Yeah, we've been thinking about Houston for quite some time.

Usten is sort of a sprawling metroplex.

And hobby.

Serves Houston, well, but it doesn't serve the north part of Houston, which is where the growth has been over a long period of time. So I made the decision in 2005 to pull out of Bush.

We had other priorities at the time, and we debated whether or not.

Whether or not we were.

Going to be giving up access to a growth region. So companies come a long way of 15 years, we've got a lot of opportunities, though lot of good things but.

I just felt like at some point, we wanted to get back into a Houston and a rather a bush.

And it's our third time I don't know if you know our history there, but it was actually the original Houston Airport when the company started.

Funny enough back in 1971, but.

It was in our plan for 2021 and forecast very well, we're going to have a great schedule out of there.

Just on the city of Houston that in the airport system, we're very supportive of southwest we were delighted to work with.

So we've got the real estate access I would contrast that so again, it's a great opportunity if it's a leisure oriented world for a while there will be plenty of leisure customers.

That will be able to take two and from a through you Houston or no.

O'hare is different.

In the sense that.

We're going to continue to grow back to the Houston example out of Houston Hobby, we'll continue to.

We will continue to invest and grow not right now because of the pandemic, but this will pass.

Chicago is very different we are not able to continue to grow and if it gets passed at midway.

And I'm sure you're familiar with the constraints there so.

I just can't Fathom that it's a good strategy for our company to sit here and say for the next generation we cannot grow in Chicago.

So you can kind of go through the middle list of what the options are and I can assure you that trying to expand midway is not an option. It is just literally not feasible option certainly nothing that could happen in a in a short period of time it would cost a bloody fortune.

So that leaves O'hare and O'hare was.

Real estate restricted and.

And now it's not.

And so were there and I'm very much looking forward to that opportunity if like Houston will also offer access to a.

Yeah.

A section of the Metro area that we probably don't serve very well in the norm, but.

I think we will likely have a similar route system to begin to plug into our strengths and I think we'll do very well there it will complement midway very well.

And then finally I guess.

Yes, they are.

They are not leisure destinations per se, but there are plenty of consumers that we're getting.

Our airplanes all over our system and again I think pretty much explains why the timing is what it is with O'hare. We don't move now we risk never hitting in there. So we're moving now.

Thanks for the color.

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

Hey, thanks.

[music].

Just on your views on corporate of course, nobody knows exactly how this is going to play out, but I think I heard you say.

You're planning for it still to be down 50% to 60% by the.

By the end of next year and.

If if that's the case what are the implications for southwest restoring profitability.

And certainly appreciate you manage through.

Period too.

Impaired corporate where you're earning snapped back and your revenue snap back a lot more fast a lot more quickly than the industry broadly. So so just from a southwest perspective, what are the implications for profitability if that plays out.

Well I didn't give Tom a chance to hits or otherwise so I will this time.

I would.

To make one point, which is.

We're positioned now and the corporate market could be a real player.

And I think as the corporate market begins to recover we will.

We will we will capture a larger share.

Of that recovering market that are.

A handful of.

Competitors number one.

But number two is it's what I covered in my overall remarks, which is we are low cost were low fare we are very well suited to serve the consumer and I have been delighted to see how our.

Yields have been improving here with the help the business customer so.

So.

I wouldn't that all assume that we can be successful with a smaller mix of business travelers and the implication on the fares. There at all I think we are we're perfectly suited to operate in this environment and have weve operated in recessionary environments before where business travel was depressed.

A recovering and.

Performed very nicely, but what.

I think you kind of characterize it pretty well I think that we've got a I really do believe we have a great opportunity in the large corporate managed travel business I feel like we've been so wonder index, there, we're going to get more than our fair share.

Thanks, Thats a big deal.

But you know I think this is part of the reason.

We're going to have to live longer if you will off of leisure travel and as part of the reason, we're looking for new revenue pools, and that's part of the very strategy, we have been and we have some pretty clear criteria for the markets that have been on the whiteboard for while that we've chosen while weve already embedded these things financially and operationally but.

What they've got to do for US is to deliver quickly. So no person into contribute quickly to reduce cash burn versus no longer startup markets to three or start Mark is you've got to be low startup costs with quick payback and they got to strengthen existing network and got to have more connectivity coming from these other other.

New station. So we're trying to find ways to fill in the capacity gaps. If you will but I think that the corporate market will come back and we're going to be stronger than you might have seen in the past but.

So thats why were doing the new markets as well I think.

Thanks, and then if I could sneak in a follow up can you just remind us on the 48, Max you were slotted to take and I understand that number may change how many of those 48 or built today. Thanks for taking the questions.

Yes, Hey, Duane there's 34.

That are currently built that have not been delivered to southwest.

Thank you.

Okay.

The next question comes from Helane Becker with Cowen. Please go ahead.

Okay. Thanks very much.

Operator, and thanks very much everybody for taking the time just on a follow up question on the business traffic what milestones do you think we should watch to see how you're doing in that new segment and I don't mean, it from a recovery perspective as much as I mean it for.

Greetings share and seeing what we should look at so that we know that youre what youre.

We're doing it's working.

Well, that's what I'm looking at what our team is looking at is were looking at contracts. We're looking at contract compliance or looking at just the sheer number of new.

New business travelers that were getting were looking at the relationships the interactions with our corporate travel partners. So externally I'm not sure exactly what you should be looking at but no we're going to run the business and it is really.

It's.

It's a pretty tight its way to run the business, but we are really looking at number can gauge mints number of interactions new contracts signed contract compliance is year over year revenue growth and by the way what are we doing to make sure that customers really satisfied so need any one off kind of things need to be doing to satisfy that customer we're going to do to satisfy tax we intend to take market share.

So im not sure exactly how I look at my review.

We will report on that for you in terms of our business performance versus leisure, but.

But internally, we have got a pretty myopic you're pretty.

Very narrow set of things we're looking at that we're executing guest.

Helane This is I believe.

I don't know I'm really add anything I think we will manage that like you would expect and then I'll defer to.

Tammy and Ryan to the side.

How they want to share the information, but we would want to measure our growth.

We would expect that growth rate to be easily double digit.

So, we'll we'll set high.

Hi goals for ourselves.

But the.

We are.

We will.

The other nice thing about this is these are discrete customers we know them.

And we can monitor the traffic so its unlike the.

The so-called business travel segment, we don't know what people are traveling for less we asked them.

So this is different this is a subset of corporate travelers, we know them, we know the travel managers and.

Something that is very very measurable I don't think we have enough experience right now to set a meaningful goal for a year.

Other than a target so as we gain some experience here I think we'll know better weather.

Whether or how effective our approach is and be able to make adjustments, but the pandemic has missed all that up as we all know so well get our feet under us here and be able to set some realistic goals and amie and Ryan will decide how they want to share, but I do think that just as we do.

You will be looking is it as a GDS data this is Judy us.

It is if you look at the art data just like we look at the fourth is we're doing picking up share in ethic of share but.

No gears rates growth and we intend to grow.

Okay. That's really helpful. Do you would you would you look at.

Signing up for partnering with an international airline at some point.

As a as a predominantly domestic airline do you think your business travelers.

Walk that or your business travelers and corporate customers per day.

Predominantly domestic.

Well I think that at some point I think we've we've talked about this several times I think although military Jim Im sorry, many times that we think the code share partners airline partners to be a good thing for us both inbound and outbound certainly as we start to work with the more international corporate customers. They do other national travel which is.

Is really an addressable by US today. So you are having a good codeshare partner would be a good thing it's not our priority right now given what's going out there that will again, what we're trying to do with some other priorities but.

Yes, we would absolutely been a nice thing for us to have in our in our back pocket if you will.

Yes. Thank you very much I appreciate your help yes.

Okay.

Next question will be from Hunter Kay with Wolfe Research. Please go ahead.

Hi, everybody.

I would like to continue to steam of.

Corporate stuff and Tom and Gary I want to push you a little bit on a couple of things.

Last year I asked you about agency commissions in their roles and then.

Fly to me that you are really interested in paying a lot of commissions to them but.

History would suggest that you're going to have an uphill battle with those people unless they're really incentivized to participate do you still feel the same way about that knowing now what you know.

Yes.

I think once again the GDS world.

They are going to be working with the team season. That's that's that's part of what we do that we do want to make sure that we protect or our core business, our core channel, which is southwest dot com, so you're going to see us be very restrictive in terms or white label agencies that will that will be allowed to work with us in GDS, but I think thats a columbia.

In that World Order I think thats part of the deals while make sure they're working with the right ones and work with the right clients.

But yes, that's that's not something we intend to turn onto our leisure try.

Travel, if you will and Twitter.

Hunter, It's very fair question I think the the other thing that.

We would argue is we've got a great route network, we have great service, we have great policies. There there is more to it.

And we have traditionally been as you well know very successful by the customer driving the demand and not the intermediary so.

It's a classic now near 50 year old Southwest Airlines play. So we feel like we're in a stronger position than ever to be able to execute well on this but thats fair question.

We're kind of just getting started at this but.

Agree with Tom I think that's the right way to do this and I think we are going to be very successful.

Okay and then.

As a follow up.

I get your point about the customer driving it but when you think about the ease of use for the TMC right. If you are not giving these TMC.

The ability to know they've got full content and to know that they are seeing the lowest fare be time, how are you, making their life easier if they're still for that.

During the booking process. They still have to go to your website and check that they're getting the lowest fare is there a scenario where TMC is because a partial content are not going to be able to see.

The full spectrum of fares that are available to them through that GDS channel.

Hi, Hunter, it's Andrew.

Right now of zero to 13 days all of our content is in the GDS the team.

The TMC is can access our content through the GDS through the.

Our direct connect as well as the swap is and our competitors also have content, which is not in that quarter.

The corporate travel environment, they they fall in the GDS the Bluffton corporate travel so the corporate travel wants to access their lowest fare. They also have to go outside the GDS environment to find those based economy fares, which usually wind up with the fares that we don't have in the corporate environment. So I think our content is like for like overall.

And then in zero to 13 is 100%.

Thank you. So another good question under we had to call. It a lifeline on that one so.

Thank you I appreciate all the color sorry for that it's in left field, but I. Appreciate the color guys. Thank you Oh no not at all very good questions.

And the next question is from Joseph Denardi with Stifel. Please go ahead.

Hi.

Thanks, Good afternoon.

Gary you spoke pre co that about the desire to have a more economical smaller gauge airplanes and talked a little bit about the 220 I'm wondering if the opportunities to gain share as a result co bid whether that.

Makes the case for the 220 more compelling when you think about playing offense and gaining share how much more of an opportunity would there be if you had any claim like the 220.

Well I'm, just reflecting on your pre and post.

The nature of your question.

Idle, Mike I don't know.

That.

The pandemic in it of itself changes things.

Except that.

It was just we've shrunk the airline.

So and Tammy was referring earlier to our ongoing commitment we don't know when we're going to grow and we.

We have a surplus of aircraft so the only thing that I would.

So willingly admit is that if they are.

If there were ever a scenario for us to consider making a change and aircraft. It would be now because we're not desperate to grow the airline and may not be for a long time.

That doesn't really address the essence of your question I think what Mike and Tim you're working on is to make sure that we're comfortable.

That we're going to have the best.

150 ish see narrow body airplanes in the world in terms of performance in terms of economics into.

In terms of fit into our system.

And it just makes if we have to make a change and just again I'm just admitting that the environment lends itself to.

To the time that would be required for us to make that kind of an investment absent that Mike I don't know for Tammy I don't know that there's anything that's really different.

At addressing that question.

We've been very forthcoming that were.

We are talking about a two Boeing about a variety of things and obviously, we're talking to them about the.

737 Bucks.

That's a component of these a major component of these these conversations but Tammy Mike anything you would add to that.

Yes, the only thing I would add to Joe's that is in our.

In our network, there's definitely a need for what I would say a 140 150 seat airplane versus 175 seat airplanes.

Today show at the present time, we're mostly focused on the map phase 175 seat airplane and the eight to 20 of the metrics and the two players in the marketplace and both of those airplanes have their strengths and their disadvantages and were.

We made no.

We've been looking at both airplanes, we will continue that evaluation, we're just not at a point in our network, we don't really need to make those decisions. So probably 2025 and beyond timeframe. So today, we're just really focused on the Max getting the backs back into service, making sure that we have the right delivery schedule with Boeing.

Yes, I'll just emphasize the point that Mike made which is and this maybe the essence of your question, we absolutely still need the smaller airplane prospectively, we have a ton of met.

737, seven hundreds that are coming up for retirement over the next five to 10 years.

And we will absolutely want to replace them, but we're certainly not thinking that we won't all 175 theaters.

We'll all along.

I'd hesitate to.

To guess today, but I mean, if you assumed as half and half is probably.

As probably as good a guess as anybody is right now about what the future is there, but we'll need a a large number of the smaller gauge.

And and the only thing I would just chime in and I guess, the Max seven in a teach weighing about buying airplanes I think both of them.

Certainly serve the mission and obviously as always on just.

The economics of course come into play and we have long been an all Boeing carrier and Dan There are certainly there are certain.

There are certainly efficiencies that come with that and but all that gets factored into our valuation.

I agree on that.

Smaller gauge aircraft I would like to to 20, our maximum certainly.

Certainly.

Our aircraft that we will need to apply those shorter to medium hot market, but my only point, there and obviously the economics, our pizza business.

And I will make sure that we have economics that will service well and.

Where we can maintain our along low cost position.

Okay.

That's all very helpful and then.

Gary You talk you talked about obviously the capacity you have to.

To play all sensible along with your expectation for a structural reduction in demand over a period of time Im wondering if that makes the case for M&A more compelling all else equal.

Whether M&A is a means for you all to restore earnings power restored employment to pre Cove it levels and whether you think the D. J should change the way they consider further consolidation in the industry. Thank you.

Well I think M&A is always on the table, we've we've participated.

Every 10 years roughly.

M&A and so I think there was a time at a place for that.

Literally today.

I think it's a nonstarter personally I mean, all you would do is take on massive losses.

And the only restructuring that could be done profitable profitably is to buy and shut down and that I don't think that thats fees.

Feasible.

Or palatable, but.

And I realize we're all with your question, you're assuming about well is what we're all assuming we're going to get back to normal here at some point. So I do think it's a very fair question as to whether or not.

Well as for US as it has been for quite some time, we are not dependent upon the acquisition to grow at all.

I think the number of new markets that will be deploying here are evidence of that and that doesn't even hit the.

Large number of beyond 48 state markets that we were interested in as priorities to these.

And.

We are behind before the pandemic and investing in a lot of our domestic market. So quite frankly that we were complete.

Complaining to each other about so I think we have ample opportunities for growth.

Under the assumption that things began to get back to normal if they don't then I think your question is much more relevant.

But only when you can be comfortable that you're not just buying losses that we think the company.

So.

We're just in this uncertain time period were.

[music].

Where there's just a lot of question marks on this on the DJ aspect of this there is a failing carrier doctrine.

That we're all very familiar with and.

Every airline right now is failing in that sense. So.

They are not insolvent.

Because of the massive amounts of debt that's been taken on by the industry, but.

But yeah, who knows how this will play out.

Right now you have far too many seats that are available chasing far too few customers. So all this has to get corrected.

And I I don't know.

Our general counsel sitting here, so I don't Mark Sean I don't know if you want to comment but it seems to me you've got all the mechanisms you need to be able to enter.

Entertain M&A in this environment as it exists today.

Because everybody is in distress right I agree.

It is mentally instead of of good.

Getting back to.

Post coated world series.

Things are.

Yes.

All very helpful. Thank you very much.

Ladies and gentlemen, we have time for one more question and we'll take our question from Jamie Baker with JP Morgan. Please go ahead.

Hey, good afternoon to the team Gary if we think about the industry excluding southwest.

Post pandemic cost structures are expected to improve given some level of labor Juniors Asian fewer aircraft families and so forth.

In Southwest's case, you may experience, some junior position yourself, but you obviously want to participate in any fleet rationalization. So the question is if your ex fuel CASM.

Relative to your competitors Manros, what's sort of influences that have on how you operate the airline or are you just completely agnostic about what competitor CASM looks like.

Okay.

Oh Gosh Ray question that I don't think that we know we're not agnostic absolutely not no. We want to use this as an opportunity to widen our cost advantage.

And I think it's a little too early to intelligently argue.

These.

The prospects for that.

Because as usual, Jamie you make excellent points, but.

As we think about late 21 wants capacity under under an assumption that capacity begins to get back.

To absorbing our overhead we're very.

Food cost about the cost environment that we'll find ourselves in.

At point.

The other thing that I, just don't mind sharing is that.

As we've said several times, we're negotiating with Boeing.

What we want is to have the.

Lowest cost narrow body operation in the world when it comes to an airplane.

So.

The.

Yes, the other thing that I know you know very well is.

Is that okay.

Oh are you hitting you talked about an industry except southwest.

Well the whole industry has made investments to match a certain size.

And that size is now much lower.

So by definition the cost pressure is going to be there.

And I think it just remains to be seen whether what you were describing actually turns out to be true because that's going to be a difficult challenge to us.

To have built an airline for 100, and then to operate at 80 and to think that you're going to have a lower cost structure.

So we'll just have to see I think one of the opportunities that we are get we'll just be.

Blatant about this this is an opportunity for us to gain share to get back quicker than our competitors to where we were in terms of our operation.

And we're as I said in my opening remarks, we are the best suited for the current environment, which is more heavily weighted towards the consumer and leisure travel.

We've got.

Tremendous opportunities to add new pools of revenue, which we were not able to attend to before because we didnt have enough airplanes. So now we find ourselves in this office position so.

[music].

Yes.

The wheel well no we are not agnostic and hopefully you can see that were behaving in a way that we're trying to make sure that we not just maintain our cost advantage, but we're going to be looking for ways, where we can extend that.

And the utilization and the competitive all of that is key.

When you have a high fixed cost business as I know you know well.

And is it and thank you for that carry and as a quick follow up you know I.

I was just reading something from swap up before that referred to the proposed 10% pay cut as being arbitrary and Thats fine I mean, their third title to use that word but it did make me curious what sort of calculus went into the decision to seek 10% as opposed to some other number and why it's not.

Yes across the various working groups not asking you to negotiate in public just just kind of curious about the genesis behind that 10% ask.

Well it is progressive in the sense that we are not asking everyone to contribute the same flat dollar amount. So I think percentages by definition make it make it.

Progressive in that sense, I know, what regress progressive being so I get that but no. It's not arbitrary its tami pegged the number at a half a billion or more so it's a meaningful amount of money.

Right now and just very.

Raw numbers were roughly 20% overstaffed.

Mike I think that that are Tammy I think that that number equates to roughly a $1 billion a year carrying cost.

So.

I want us to be in a position where we go back to your previous question, where we can grow our at least grow from here when the time is right.

If we downsize the airline.

It's a much more cumbersome to try to react to that.

And certainly much less humane have to put a bunch of people on the street. So the last thing that I want to do especially at a.

With a legacy that we have itself West Airlines that we all care about but.

But.

If you if you.

There's there's a cost first of all you can implement a furlough effectively.

Effectively on January one so you get some slippage in 2021 in terms of getting a full year benefit of that the other thing is there is a cost to implement a furlough both with severance moving costs training all of that is not free so.

So you kind of do the arithmetic and if if we said look we need some relief in 2021, we don't need this for two years as the best judgment, we've come up with.

You can kind of get back to you know I take half a billion.

Because you're not going to get a billion in 2021 in the first place.

So number one but number two.

You know the logic to says look hey, we just lost we had a record box, we've just lost $1.2 billion. So.

So the logic that I don't understand which is to say oh well.

If you can only do half a billion dollars.

Why do it well then.

You wouldn't do anything with that logic number one and number two as well if you come in and ask for a 25% consumption or a 50% concession. So you get the point I think a lot of our logic was let's try to be reasonable.

And still empathetic that 10% is a lot to ask for but it is a lot less than what airlines have traditionally done in terms of the sacrifice that theyve asked of their employees. So it's a meaningful amount of money.

I feel in terms of talking to our investors and our board of directors I feel like it is.

An effective way to address our overstaffing and it provides us some optionality to be able to respond when demand comes back.

And I think morally I feel most strongly about this at every one of the the southwest employees that are here.

He has worked hard to build this company they work hard to serve our customers and they have the junior people are our future and we owe it to them to do everything that we can.

With the rest of our company to share this sacrifice and not put the burden on on just a few.

And I feel very strongly about that all that has to be negotiated with.

With the Union Representatives and then.

Because these are contract changes at effect they have to be ratified by our employees. So we have.

We have a long way to go before we can arrive at that now.

That's an explanation on what we've asked for by my focus is on getting the payroll support extended that is planned a.

And Thats all its all these issues.

And I am optimistic that Thats still could happen and if it does we will terminate all of these request.

And I think it puts us in a very good position, where we don't have to ask any of our people for a pay cut much less so.

For oil.

Gary. Thank you very much for these answers I appreciate it take care and good luck.

Okay, well. Thank you for all the great questions I appreciate everybody joining us today.

That's the end of the analyst portion of our call and have a nice afternoon.

Thank you, ladies and gentlemen, we will now begin with our media portion of today's call I'd like to first introduce Ms., Linda Rutherford Senior Vice President and Chief Communications Officer Linda.

Thank you Chad I'd like to welcome the members of the media to our call today and I think we can go ahead and get started to China's you've given me in construction firm have Qs.

Certainly to ask a question you May press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then too.

And at this time will just pause momentarily to assemble that roster.

Right. Our first question will be from Kyle Arnold with Dallas morning News. Please go ahead.

Hey, Gary Hey, guys.

At the time.

Right.

Where you left off a little bit.

But the plant.

I'd been skeptical and.

Pulled a little bit at the idea that.

Hey, guys, how how likely you are to get.

For a deadline.

Are there other options that they could be on the table outside of that.

Right.

Well, yes.

Yes, Kyle I wouldn't want to speculate on odds here, obviously I'm hopeful that we can get what we need to protect our our people's jobs. This is an overstaffing.

Challenge. It is huge we have locations that have twice as many people as they need as an example, so.

And this is a problem that could persist for a long period of time and it just carries a high cost.

Our union reps have a duty to represent the company has a duty here.

Here too.

Two first of all maintain the financial health.

Of southwest Airlines are it puts every job in peril. So we've got a long way to go and obviously hopeful that we can arrive at.

Something quickly and this is the speed is necessary because we are losing money everyday.

And Theres, just no time to waste here.

What would be best of courses for Congress to act.

And that way, we could stop all of this and focus on operating.

Great airline here, but in any event, we're going to continue to we've had great dialogue with our our unions and.

They are almost all engaged a very grateful for that and hopefully we can arrive at what our best.

Thank you and our next question will be from Allison Snyder with Wall Street Journal. Please go ahead.

Okay.

There's a lot of talk about the role that testing could play in creating international travel corridors and just curious kind of how you are seeing a testing we how that night.

Domestic travel and state level quarantine requirements, you know if there is a role for testing and eliminating some of those and also kind of what are you expecting any big changes if we have a new administration.

You know as I do I do worry about all of that I think that that has a very much has a dampening effect on air travel is which is probably.

Stating the obvious.

Tom or Mike do you guys want to I'm, a huge proponent of the testing and it's something that.

We're we're very engaged with.

Well.

Yes, sure I think at this point.

I guess the smaller issue for us today that is for the international network carriers, but having said that I think that it can become an issue for southwest as well as domestic travel and travel restrictions could in fact become a bigger deals that today is already usher eight nine states and cities that have restrictions. So it's.

Becoming a bigger deal for us as well Hawaii by far is the most prolific those we have a testing in solution in place to handle our customers there, but I think.

I think what we really need is a.

Is a more consistent less attach working kind of solution right, it's really hard for us to be dealing with Massachusetts, and New York, and Rhode Island, and Connecticut, then dropped on new Mexico in Illinois. So you got to have some sort of consistency in terms of a testing regimen in protocol I think thats important.

And I think that.

Honestly test people I think customers they know what they are expected to.

What Tesla needed take where are they going to get done how really before the travel and all that kind of stuff. So there's a lot that we need to important customers have to make its.

From an achievable, but I think thats, where we are so this is something that I know that is important for us I think it's important for the industry.

And so to answer your question Nelson.

Thank you and the next question will come from Tracy since Keith with Reuters. Please go ahead.

Hi, everyone. Thanks for taking my question.

Hi, I'm going to follow up on Ali's question on testing beyond the use of testing as a way to help ease travel restrictions are quarantined given.

Given reports yesterday about a woman who died on the spirit flight from Las Vegas to Dallas.

Who later turned out to have co that.

Testing ensure that people are not getting on air. Please go ahead and how important is that.

Well I think it's a layered approach to begin with and it's.

It's a pretty good step forward.

In determining who's who's positive and who is not so and.

And I think is the only other thing I would throw in.

To allison's or just an answer to Allison's question is.

It's going to take some time to rollout testing protocol, let's say, but I think it's well worth it we were not prepared for this pandemic in this country or in the world and we need to learn from this and be prepared for the next one.

Even if we don't find that we.

That we need these testing protocols for this pandemic.

But I think theres a risk of another one so.

I just defies logic to suggest that it's not a worthwhile effort to identify those people who are sick. So.

So they don't infect others. So I think we definitely need to press forward on this Tom.

And Mike are leading the efforts to do this and.

It will help with our Hawaii traffic.

And.

You know as recent as today of having conversations with acquaintances talking about well I'm ready to travel, but where I want to go I'd have corn team.

And.

Allison also asked about the change in administration if that happens.

We know what the current administration's view is on.

Imposing quarantines, what we wouldn't know is what is what would a new if we have a new administration what would they require I, we just don't know.

So that would be a concern and it would certainly.

A blunt the of air travel recovery, if you have to contend with quarantines no question about it.

And Tom mentioned, the word patch work, which is the exact image the hip makes it really difficult.

As it is someone.

Someone in the travel and tourism industry.

Much less for being a traveler folks. So you just if you're not really on top of this you don't know what you are going to FID, so all that needs to be addressed absolutely.

And the next question is from Mary Schlangenstein with Bloomberg News. Please go ahead.

Hi, Thanks, I just had a couple of quick follow up question from Tom I wanted ask you first you mentioned about testing on.

On the.

Apps to Hawaii is that something that in place for southwest or Youre working on to have the testing done at the end.

At the airports prior to that and then my second question is a follow up.

I'm sorry go ahead Doug.

Im sorry, very good as your question.

And then my second question is to Mike on.

On on the discussion of eight to 20, you've talked a lot in the past about that but you said a decision wouldn't have to be made till 2025, and I'm wondering do you mean, a decision not till 2025 or 2025 would would be when you would like to start getting some of the smaller aircraft.

Alright, let me jump into the first one which is.

We handling Hawaii in the at home that kind of stuff so the.

The approach were taking is kind of the.

Three three pieces one is the at home tests. The second is we we are making people aware.

Of what pharmacies for Hawaii are approved they are approved providers. If you will and then the airport in Oakland is actually doing free drive through testing.

Which is done they for two days before travel kind of thing.

Yes. This kind of gets back to is going to be interesting to see how many airports do it the same way and how how do people know it's going as the first thing the southwest. These do is make sure. We have all the most current information out on southwest Dot Com business.

It is very clear for travel from us or from mainland to why what you guys do.

So our intent is not to get into the testing business. Our intent is to make customers very aware of what the three paths or whether it's at home.

Vs pharmacies as just as an example is our is our partner a record right now with Hawaii.

I think oakland's working with a radical color.

Correct Andrew.

Well, they're working with his provider to provide the odd airports.

I think so there I think the I thank them for getting exactly.

I forget exactly your question, whether there are three pass for us to be executing our testing with our customers the big things for us to make just to make them aware.

Okay, yes that answers it.

So hey, Mary Thanks, a lot.

It's good to talk to you a yet so when I was talking about we need the airplane on property coming in around that 2025 period and so obviously, we'll we'd have to make a decision before that so you know within the next year or so we're going to have to narrow in on what we're going to go do there and why.

Well, the pros and cons.

As you know introducing the second fleet cut for southwest Airlines.

If we decided to introduce an 80 20, it's a big undertaking for us not only with pilot training, but with our systems and.

And our maintenance program. So yes, so we need to spend the next year or so really gets into a deep dive on all those kinds of things and then in in coming up with a decision.

Great. Thanks, very much Mike.

And the next question comes from David Koenig The associated press. Please go ahead.

Okay. I think my question was asked and answered, but I had one other and im a little bit curious.

We're seeing a higher number of cases of the virus now in many states.

And I wonder whether your fourth quarter planning.

How much is that takes into account the possibility of.

Right I see cases would in other search this fall or winter.

Any idea what that might do to your Thanksgiving or Christmas bookings fourth quarter plans.

You know, Dave as I said as the.

The bookings so far here, we are still pretty ways pretty far ways off from Thanksgiving, but Thanksgiving in December bookings are actually looking as I said modest.

Modestly optimistic that things are getting a little better and that's in spite of the rising cases right. Now every day, you're seeing it what we are seeing in Andrew and our revenue management team are working everyday going back to what does the trend look like in July as an example, when bookings you prior to the Spike book.

These were trending really nicely cancellations were coming down and we are going back and looking at what happened in terms of the early warning system. If you will in terms of when we began to see a change a demand signal change and we haven't we've identified that we kind of understand that is we are not seeing that right now it all with the spike in cases.

We are not seeing the same kind of dynamic that we saw back in July in prior to July and perhaps that's because you start getting the mindset of the consumer perhaps people just aren't as concerned about it at this point, perhaps because you're not seeing as many hospitalizations as death and test, although both the rising right now and I get that but perhaps.

People haven't been as concerned about as they were in the past whatever the reason is what we're seeing in terms of our demand. The cancellations is not reflective of an increase in cases that we might have seen in the July as an example.

Okay. Good commentary thanks.

Okay. The next question is from Dawn Gilbertson with USA today. Please go ahead.

Hi, Good morning, Dave just on my first question about the link between core layers cases. So my other question is is there regarding your switch in your selling.

Selling middle seat beginning December 1st do you see any scenario under which you guys would reverse that decision and also did you do any kind of consumer research or surveys before making this decision. Thank you.

Hey, Dan This is Todd.

Well I guess the first thing is I would never say never.

You know our certainly our intent is not to reverse the policy decisions and then theres lot of ample evidence for that good scientific data for that so I think we and we certainly intend to do that.

Just give me the rest of your question again is ahead of us.

'cause customer Kunstler research, yes, so we do customer research I'd say every week, whether its online or.

Jasmine that kind of thing and our customers totally get the fact that you guys are a business and you cannot survive makes money is really selling two thirds of your inventory. So they don't expect us to do this forever what they want to understand is our rationale for making the change and the rationale is the data yeah.

And so we have to communicate that we're not going to be marketing all this but we didnt communicate the rationalization for why we're doing this to our customers and our customers tend to get I mean, they really do.

Good.

Those is I guess the answer the answer your question is I can't imagine US reversing course based on everything we know.

We have talked to our customers and we try and be as generous as possible in terms of extending the wondering why refund you get a refund.

So we're being very generous there so we're going to manage our way through it and we'll begin communicating pretty aggressively to more with our with our passengers.

Can't Unlike Tom I can't see a scenario, where we're going to change your mind and John you know I mean, we're one of five I thought it was four but I was correct. It earlier the Irrs were one a five airlines in the world who are doing this so there is more than ample evidence that.

Change is the right thing to do.

Based on all the sites that we've got available to US now and the deal you know the department of defense is very compelling.

And they are not biased there theyre not there is nothing self serving about it they want to make sure we saved for them to move their troops around.

And their conclusions I've felt were were very very compelling. In addition to all the work that we've had.

We've been engaged with with various.

In theaters is just to be clear the the.

The middle seat deals and you'll see it was really not one of our safety components or or.

[noise] safety elements, the southwest promise it was all about customer confidence and comfort the safety piece of the self was promise was the cleaning in the.

All of the masking all you just talked about so this was really about customer confidence and getting them comfortable traveling gun honestly. If you were to ask my family you wants to pull the middle seat they say like having opened because I get what room, but we understand that you can't do that I think that is waiting for customer sentiment to be positive, it's going to be hard to get that.

Because people actually like it to be.

So.

Thank you very much.

Ladies and gentlemen, we have time for just one more question and that question comes from Robert Sill with travel weekly. Please go ahead.

Thank you. Thank you all for taking my call.

The.

Even though the couple of new ski routes ski destination routes.

Wondering overall, how does your total number of routes.

Ski town Cubist donations this winter back up against last and also just capacity to those areas and what is the outlook you're seeing.

On bookings for these key areas considering that the fuse.

A few other consoles are going to have some.

We're making changes that have their own challenges.

Mm.

Well I know, we're up at least two.

<unk>.

Robert Peters that years ago, we had I think we had charter only scenarios.

[laughter].

Yes, yes, they are brand new for us I'd say something like that I don't know what the industry capacity is there I got to believe that it's probably down but.

Steamboat out of out of Dallas, I believe I think we had steamboat, maybe Jackson hole and but it's been decades since we've been since we've done that and sort of a scheduled charter basis, but.

It's all about snow in Sun right now is what I've learned from our marketeers.

Theres enough traffic it will support a few flights and we've got a huge presence in Denver.

I would say that we have a good bit of ski business and Boise in Reno as well as Salt Lake City in Denver. So these two new ski destinations complement susser.

You got it tied into Texas, So it's all about giving our current customers new options and also all about trying to win some new customers on these routes and all the research we've done we will support this and right now the hurdle is not real high because we already have the airplanes, we already have the people.

Substantial mostly because we had a dinner with people that drive in the mountains.

So those are kind of big ski destinations.

So we're already paying for that.

We can just get enough customers onboard to pay for gas referring to a few extra costs.

We are ahead of the game and.

That's not a long term viable business strategy I will add tongue in cheek, but for the time.

For the time being it will work out really well and.

We're planning to have these in our system.

There are many many many many years so.

Thank you.

Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Jim Rutherford for any closing remarks.

Thanks, Shannon. Thank you all for being with US today, if you have any follow up questions. Our communications is standing by Q.

Q1 for seven nine to 4.47 or online at S.W. aim media dotcom. Thank you.

Thank you. The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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