Q1 2021 Southwest Airlines Co Earnings Call

Several special items in our fourth quarter or excuse me in our first quarter results, which we excluded from our trends for non-GAAP purposes, and we will reference those non-GAAP results in our remarks as well we are.

More information on both of these in our press release from this morning. So please make sure you check that out as well as our Investor Relations website.

But that will get started and I'll turn it over the call to Gary.

Thank you Ryan and good morning, everybody and welcome to our first quarter 2021 call.

The first quarter results are notable first of all because there are a lot better than what we thought they would be back in January.

But even with that improvement, we still lost $1 billion.

And it was worse than our fourth quarter results due to the weaker seasonality of January and February travel.

And clearly that's not sustainable.

But fortunately we're here to report that we believe the worst is now finally behind us.

We have a much better outlook report per second quarter.

And we will give you a brief on the first quarter results.

And our second quarter outlook.

But here are a few top side highlights before I p<expletive> the call over to Mike.

Number one thankfully we received a second round apparel support our PSP from the federal government.

And effectively covering the first quarter.

It was much needed we're very grateful.

We're the only airlines, who has avoided pay cuts layoffs furloughs and the like.

I am very very gratified that our 50 year record remains intact on that front.

Not counting working capital changes and cash flow, our cash losses of $1 3 billion were more than offset by the PSP.

Number two beginning with a mid March inflection point, we finally began to see bookings improved from the nine months down 65% flatline that we'd had been experiencing.

So vaccines vaccinations case counts and spring break all converged in the right way.

And same thing this we boosted our capacity by 50% overnight our thousand daily departures in.

In the Midland Mark.

Number three <unk>.

Taking into account our voluntary separation program and attrition since June.

Staffing currently is at 92% of our June 2019 levels and.

And in addition.

We've had thousands of people on leave.

And now that we're adding flights.

We are smoothly recalling those that are needed on voluntary leaves.

And having avoided the mess <expletive>ociated with furloughs and as a result.

We plan to fly 96% of our June 2019 ASM.

Albeit with a different route network.

But the point being is that we're very well prepared to flex up our capacity and even having said that I think that we're very well aware that it will still be messy and we will have to carefully manage.

Number four please understand that the path back to breakeven and beyond.

Is dependent upon two things.

Number one we have to have sufficient flight and seat.

Activity.

And you need to read into that that means more than what we've been doing prior to March.

And number two we've got more customers.

To fill those flights and obviously read into that revenue.

So we have too much fixed cost.

For us to be profitable below roughly 3% to 330 303000 3300 flights a day.

At least now it's realistic for us to project breakeven cash flow scenarios, which are possible here in the second quarter.

So in summary.

A lot of things here. This morning, I am relieved I'm optimistic I'm enthused, grateful and I'm, especially thankful to our tens of thousands of employees, who have fought their way through this pandemic and gotten us at least to this point, we've got a long way to go.

And I'm very very confident that we can all depend upon our southwest warriors, they're very resilient.

And then finally I am pleased with the performances the operation has been superb.

New cities are meeting or exceeding our expectations.

I'm glad to have all of them as permanent additions to our route network.

In addition to our global distribution system capabilities could not have been a more timely.

<unk> two our capabilities as we're pushing aggressively into the huge managed travel business market.

And we've got a great domestic network, we've got great service and finally, they're going to have access to low fares.

The cost and the spinning performance has also been excellent.

Making great progress towards restoring our historic productivity and efficiency.

And then I am absolutely delighted with the deal that we reached with Boeing last month that strategically secures our position as an all 737, operator with all the attendant competitive benefits that enables and with that I'm going to turn it over to our COO, Mike Van de Ven, who I know will elaborate more on that but among other things.

Mike Great job great performance, so take it away.

Thanks, a lot Gary and.

Well, we really had an action packed started the year and I'm very proud of our people and how they just continue to rise to the occasion.

They've opened up for these stations in the first quarter and two more in April.

Implemented a federal mandate return the Max to service.

We secured a new long term Boeing order book from both the Max seven and the Max eight.

And reach service agreements with GE and CFM international from the Leap <unk> engines, and all of that volume running an exceptional operations. So we ended the quarter with an on time performance of 86, 2% and that was a good for third in the industry and that included a reduction of roughly four four points.

Due to weather as you know, we've got large operations in Texas and the entire state froze for several days in mid February net impacted our network as well as a winter storm, Celia, which impacted Denver as we launched into a market based schedule.

Speaking of our Mark schedule, we returned the mountain revenue service on March 11.

Once we've completed all of the maintenance requirements to pilot training and we have a self imposed set of 200 plus readiness flight on the airplane.

The launch was limited to 10 lines of flying and the airplanes were separated from the rest of the fleet for the first month of service on April 12, we increased the line declined to 55 lines and the aircraft are now fully interchangeable across the network.

We currently have 64 Max aircraft in the fleet and we have 32 of those aircraft currently out of service awaiting FAA approval of repair instructions from Boeing.

The repairs will ensure that a sufficient ground path exists for certain components of the electrical power systems.

These aircraft are identified by Boeing as part of the specific production run.

And the impact of mine from lines of flying are being covered by spare aircraft in our next generation fleet, we're not experiencing any significant operational impact and once we receive FAA approval. It will take two to three days per aircraft to.

To make the repairs and then with all the aircraft work.

<unk> to be complete in roughly three weeks so.

So turning back to the first quarter performance, our bag handling and continues to produce all time Best company results. We delivered 99, 7% of all banks complained with Adam and handled claim and as you know, we do that carrying more free bags than anyone in the industry and we continue to lead all marketing carriers with.

The lowest customer complaint ratio to the Dod.

Perhaps the highlight of the first quarter was securing a new long term order book with Boeing for the Max seven and the Max eight as well as our agreement with GE and CFM International to maintain the leap <unk> engines. So we announced our order book on March 29, and there are just a couple of items that I'd like to highlight.

First we added 100 firm orders for the Max seven.

Which will be the replacement aircraft for our 737 dash seven hundreds.

We also converted 70, Max eight firm orders to Max 700 firm orders and that brings our firm order book for the Max seven and the Max eight to 200 and 149 aircrafts respectively.

We also added 155 options for either Max seven Max eight aircraft and that brings our total number of option 270 aircraft.

And the interchange ability as the options.

The aircraft types that just gives us tremendous flexibility.

So when you put all that together, we are maintaining a substantial operational and economic efficiency as a result of a single fleet type and a leap <unk> engine provides at least a 14% better fuel efficiency quieter engine and it has excellent dispatch reliability to support our on time operations.

We intend to retire a significant number of roughly 460 737 seven hundreds over the next 10 to 15 years.

And the Max seven is best in cl<expletive> aircraft for us in that 150 seat category.

Just like the Mark saved the best in cl<expletive> for Us at 175 seat category.

The acceleration of our fleet modernization I think makes great economic sense.

It will also reduce carbon emissions and noise levels, which of course is better for the environment and it also provides a superb cabin experience for our customers and our employees.

Looking forward into the second quarter, we have a couple of important capabilities that we're going to add to the operations.

First we are in the final stages.

Obtaining etops certification for our Max safely so.

So the mark and its fuel burn advantages will allow us not only to reduce our operating cost Hawaii.

That's also going to allow us to fill all of 175 seats and winter wind conditions and Thats something that we can't always accomplish with the Nextgen fleet.

And that was our plan all along but of course the efforts were delayed as a result of the Max Groundings.

Second we're going to begin a fleet transition to an all new maintenance record keeping system beginning with our 737 dash seven hundreds later this month and this system replaces our wizard system and that system has nearly 30 years old.

This new system provides us a foundation real time maintenance record keeping paperless record improved planning better analytics and automated controls to enhance regulatory compliant once we complete the transition of the dash 700 fleet than the Dash 800, and the Max will follow later this year.

So just in closing I can certainly see all the operational.

<unk> building an attempt to tell you it feels good.

We are in the process of bringing our entire fleet back into an operational status.

We're coordinating our staffing to ensure that we are resource to fly at whatever our desired levels are.

And we're introducing new capabilities and navigating through an environment that continues to be impacted by COVID-19.

And our people are just magnificent I can't say enough about them. They do all of these things they still run a great operations and it's amongst the best we've ever delivered and Theyre just the best team that I've ever been <expletive>ociated with in my deepest thanks to each and every one of them.

And so with that president nealon over to you.

Okay. Thanks, Mike Good morning, everybody.

While we provided detailed.

Investor update each month throughout the quarter and our earnings release, certainly provide a lot of information. This morning, So I'm going to try not to repeat with Bharti hurt.

But I do want to provide some color regarding the first quarter's revenue performance as well as some perspective on near term trends and our outlook for the second quarter.

So as you know in the first quarter operating revenues decreased 2% year over year were down 60% compared with the first quarter of 2019 and this is better than we were expecting three months ago. When we last spoke with you during the January call.

And during operating revenues ended up about five points better in March about 15 points better than our estimates from at the same time.

That has really been the story over the over the past few months, we have seen steady and very encouraging improvements in leisure travel demand and bookings week after week really since about mid February.

We saw a very nice improvement in March with operating revenues down 10% year over year.

54% compared with March 2019, which would which again was better than our guidance range of down 55% to 60%.

March load factor was 73% also better than guidance and p<expletive>enger yield was down 34% year over year yields were down quite a bit for the months or for the month. Once we got into March but once we got into March rather fares improve each week as we saw demand steadily increase close in bookings held up well. We also see the booking curve extend further out.

Keeping in mind that business travel remained fairly stagnant, which I'll hit on just a few minutes I would say that we were really very pleased with mark overall performance.

We were able to get a very good base of bookings in place from March earlier in the booking curve and we did this through very targeted promotions that we ran back in the December January and February timeframe.

And once we got into March our revenue management team was able to do a really nice job of managing our inventory close range of matching yields.

And as expected spring break performed really nicely very well.

It's bigger than just the spring break story the entire month of March really saw a steady build in p<expletive>enger traffic.

And just to give some perspective marches load factor was 20 points higher than what we experienced in January and that was actually on higher capacity as well, which I think really highlights the pent up demand for leisure travel that we're seeing.

And what's encouraging is that this momentum continues into April and at our last Investor update that was in mid March we estimated April operating revenues declined 45% to 55% versus 2019, but since that update we've experienced steady improving p<expletive>enger volume spares. So we're now estimating April operating revenues to decline in the.

40% to 45 per cent range versus 2019, and Thats, where the load factor between 75% to 8%.

Now the Easter holiday weekend at the beginning of month performed very well as we'd expected and leisure traffic and bookings for the remainder of April hasn't slowed down a bit.

In our earnings release, we give our first estimate for me revenues, which shows further improvement in comparison with People's outlook. We estimate may operating revenues to decline in the 35% to 40% range versus 2019 with a load factor of 75% to 80% range.

And as we.

We experienced in April may holiday in non holiday time periods are both booking very well in terms of our leisure demand.

And with these improving demand trends holding their patterns since mid February it really has provided us a much better opportunity to manage the booking curve for April may and beyond.

Our revenue guidance for April and May include the expectation of sequentially improving load factors and also improving p<expletive>enger yields when compared with March.

We expect that yields will still be down compared with 2019 levels, but that should be fairly intuitive given that we are almost solely reliant on leisure travelers at this point in the recovery.

Now that being said, though we have been pleased how will close to demand performed in March and is trending so far through April.

At this point, we arent quite ready to provide an outlook for June but I will say that we're seeing bookings increase further out in the booking curve and are building faster.

Now, it's still pretty early in the curve for June and July, but I will tell you that bookings are building might be at this point and shaping up seasonally as you expect from leisure travel.

So in a normal year at this point, we would expect to be around 60% booked from may.

Roughly 35% or so book for June and around <unk>, 20% book for July we are currently in the hunt with those levels of bookings.

Now with June being one of our highest demand summer months, our current expectation would be from june's revenue performance to be better than may relative to 2019, but we will provide you with a June revenue outlook as part of our Investor update in mid day.

That was vaccination counts rise and travel restrictions ease and leisure demand increases we are obviously pretty encouraged it feels good and there's a feeling of optimism but.

As you know the improvements or the improvements rather skewed heavily towards leisure demand now into the summer and it's simply too early to make much of a prediction on travel demand for the fall and we are very mindful of the fact that.

And that the demand recovery may not be a straight and quick path back to pre pandemic levels.

Which brings us to business travel.

Our corporate managed travel revenues were down 88% in the first quarter versus Q1 of <unk> 19, which is consistent with our fourth quarter 2020 results.

However, we did see some modest improvement later in the quarter in particular in March where our corporate revenues were down 85% versus March of 2019.

And based on what we're seeing and hearing from our corporate customers continues to be very clear that domestic business travel will certainly continue to significantly lag leisure recovery.

And for now we are planning for a scenario where business travel will still be down 50% to 60% by the end of this year.

Now having said that we are in fact seeing more and more of our customers beginning to allow their employees to get off the bench of flight travel and they're beginning to <unk>.

<unk> relax or travel policies, but.

Although thats happening, we just arent seeing the volumes come back at this point now if you buy into surveys.

Yes, I sorted by in the Survey's, most recent TV Ta business travel surveys suggest that roughly 60% of respondents expect to resume domestic business travel in the third and fourth quarter of the year.

So I guess, we'll see time will tell in terms of the pace of business travel recovery.

And it's also not clear to be honest with you what percent of traditional business travel ultimately returns our views that there could be intend to 10% to 20% reduction in business travel travel either permanently or at least for some extended period of time.

But having said all of that however.

Business demand curve shapes back up I can't tell you as Gary alluded to use a moment ago that we are well positioned in fact this is the best positioning we've ever had in terms of going after corporate business travel.

We're all very aware of the GDS initiatives I'm not going to widen out about that.

Loans is a huge gap in our corporate travel capabilities. As you guys know we are live Amadeus Paolo Galileo and Worldspan today.

And we are very far down the path to implement the sabre GDS platform in the coming months and we have a targeted go live date.

With that we will implement prior to labor day.

So really good progress on this front and the teams are doing an incredible job.

So we're feeling very good about where we are our sales teams are out in the market. We are engaging with our customers at a very high level, a very frequent level and the response has been incredible. So I think we're really well positioned to gain some some revenue and perhaps we'll do share.

Shifting gears to.

The regional demand I, just want to give you a little bit of color on what we're seeing in terms of the different parts of the from the network.

In general our leisure markets, where restrictions have remained low continued outperformed the rest of the system very lastly, beaches mountains southern ski are all performing very well, which is totally consistent with what youre hearing from the other carriers as well.

A little more specifically to our network, we are seeing strength of our Texas markets Austin, Houston, Dallas, San Antonio We're also seeing strength in really all of Florida, but in particular on the Gulf Coast of Florida, which includes Panama City Pensacola Fort Myers Tampa.

The Desert Mountain region is performing really nicely, which includes Phoenix Salt Lake City Boise Denver.

Denver is also performing very well, so theres a lot of strength within the network.

Demand continues to lag in areas such as the northeast Chicago is lagging a bit cash.

California is lagging a bit although is really improving.

Restrictions are being lifted so we are seeing improvements across the system, which is which is encouraging and honestly what is our city has been lagging are outperforming what we are seeing is that all markets have improved fairly significantly recently compared to where they were in January and February.

So as a result of what you just heard we are comfortable adding back flights to capture additional demand, including Hawaii, and it's great to see demand from California to Hawaii as well as between the islands ramping back up.

And we're finally at a point, where we can get our Hawaii flight schedules up to where we would hope we'd be a year ago before the pandemic.

As you know international test remains in place overall I'd say, our international demand is performing just fine not a lot to report at this point, we are only serving eight of our 14 international stations.

Intend to bring the remaining six back online because it makes sense and as restrictions ease.

We'll color and perspective on our new stations at this point, we have opened 10 or announced 17, new airports and all of them are are performing terrific. In fact, there's a lot of clinker in the bunch all of them are generating new customers or additional revenue and collectively are contributing positively to.

Our cash performance, we feel really good about what we're seeing in our firsthand.

More to come so will begin service in Fresno on April 25th.

Walton Beach on May 6th Myrtle Beach, 723rd May Bozeman, Montana between seven Jack.

Jackson, Mississippi on June six.

We just announced last week between Oregon will begin service that August 2019.

And we will.

<unk> service in Bellingham, Washington later this year.

So all the new stations that are operating today are meeting or exceeding our expectations not on our radar for years and it's great to see them open operational and honestly, it's kind of.

Pretty interesting I think our network planning team is batting a thousand percent. So this is really something and the operations are starting up really cleanly.

In terms of our capacity for the first quarter capacity decreased 35% year over year. It was down 39% compared with first quarter of 2019, which was consistent with our expectations.

And as planned we added as Gary alluded to we add additional capacity in March which equated to roughly 1000 flights each day beginning mid month.

And that really paid off as demand improves and these incremental flights improved our March performance by roughly $150 million Thats revenue performance by $150 million.

Our April capacity is expected to declined 24% and may capacities.

Two declined 18% relative to 2019 levels.

Now this includes a modest increase in flying in April and about three points of incremental capacity and bank compared with our previous guidance.

Which is really just the result of stronger demand outlook.

At this point, we are in the process of adjusting our June flight schedules and once the revisions are complete we expect June ASM declined 4% versus 22019.

And as you've seen throughout the pandemic actually we've cut more business oriented short haul flying and added more leisure oriented longer haul flying as well as more connecting itineraries, which is driving higher capacity with fewer aircraft and this makes up roughly 4% to five points of the 14 point sequential capacity increase from May to June.

And <expletive>uming the current trends continue our preliminary plans for dry haul for similar levels of capacity adds.

At June relative to 2019 levels, and we will be finalizing our July plans here very shortly.

So in terms of p<expletive>enger revenue and capacity our focus remains on managing the next few months with as much precision as possible, which is what we've been doing throughout the year.

And improving our revenue performance as well as improving our cash burn performance towards breakeven or better with an emphasis on or better.

Our goal.

In terms of other revenues or other revenues performed better than p<expletive>enger revenue in the first quarter and was down 15% year over year from March though our other revenue was actually up 3% year over year.

Our ancillary products, specifically commissions from car hotel and vacation bookings performed about in line with p<expletive>enger revenue no surprise, there, but the biggest contributor to our other revenue performance was our rapid rewards program.

And the first quarter total revenue from our loyalty program was down 19% year over year or 22% versus 2019, we look at it just the royalty revenue that flows through other revenue revenue was down 12% versus 2019. This is a very strong performance, especially relative to p<expletive>enger revenues and I think it's Joe.

Speaks very clearly to the strength of the program as a whole and the high level of engagement that we have with our customers and they with us.

The sequential improvement from Q4 was primarily driven by increases in retail sales and commissions on new card acquisitions totaled.

Total co brand card spend in March was only down 1% versus March of 2019 and for the first time since the pandemic began our credit card portfolio size grew in the first quarter again relative to 2019. So we're thrilled to see that so our credit card portfolio remains very strong we're seeing the average spend per card holder.

<unk> continued to improve.

Attrition continues to be very very low and we are really very pleased with the performance of our program.

And I think you can see in our results we have more rapid rewards members more credit card holders more engagement from our customers and now we have more places from to go with a lot more leisure destinations.

And building on that our brand remains very strong our brand NPS scores continue to rank at the very top of the industry, which is something that we focus on and watch a lot from <unk> great.

Closely are tripped MTS, which measures individuals' play experiences was trending even higher right now as well, which speaks to our people's focus on hospitality and producing great on time performance. So as Mike said and I am so grateful.

Pipeline employees execute every day at precision from creates and are thankful for that.

And finally.

I do want to share a few comments and our perspective regarding our focus on the environment, which seems appropriate to day is Earth day.

Gary has already share of our long term goal is to be carbon neutral by 2050, which is aligned with <unk> goal as an industry.

And this isn't a new topic for us, though this is something that we've been.

Focused on for a long time, our focus has certainly intensified over the past year, but just for perspective since 2002, we've invested more than $620 million in fuel efficiency initiatives, that's independent of new aircrafts.

And in 2019, we saved more than 7 million gallons of fuel through flight planning initiatives. So this is something that again is not new to us and as Mike discussed earlier.

We plan retiring a significant number of our roughly 460 737 dash seven hundreds over the next 10 to 15 years, and we will be investing billions of dollars on new aircrafts that are 14% more fuel efficient.

And as it stands today the carbon emissions that we generate on a per ASM basis is among the very best in the industry and our fleet modernization program gives us a m<expletive>ive opportunity to continue to significantly reduce our scioto emissions over the next 10 to 15 years. So that's all great.

Also note that fleet by loan isn't nearly enough to get us to our goal of carbon neutral by 2050.

Our views are the most promising path.

Over the next 10 to 15 years is a combination of fleet modernization.

Operation operational fuel efficiency initiatives air traffic control by organization and the introduction of economically viable sustainable aviation fuels or SaaS at scale.

Today, we have a SaaS offtake agreement in place with Red Rock Biofuels and our teams continue to work with the national renewable energy lab or in rail on the development of new SaaS feedstocks and pathways.

We've also recently signed Mou with marathon.

Petroleum and Phillips 66 to accelerate the production staff with the objective of achieving affordable SaaS with low carbon intensity scores at scale.

And the crux of the agreement is to work together towards the production of 300 million gallons of SaaS and the 2025 2025 time frame.

Sure.

This is a very ambitious target and there's a tremendous amount of work to be done, but it's also a really important step forward and we intend to work very closely with both NAV and Phillips 66 throughout the process.

With the attempt to secure large offtake agreements represent a significant share of the staff is produced.

But to be honest. This effort is not just about southwest securing more SaaS for southwest. It's also about getting large energy producers into the market getting production to scale at affordable prices.

We also believe that the use of carbon offsets can be appropriate and helpful. But we see this as a bridging technique or use of offset so far has been focused on renewable energy credits, which are natural gas offsets to complete our headquarter campus, 100% renewable energy plant.

But up to this point, we have not been using carbon offsets with used appropriately again that can be helpful, where it's making us thats available to customers of corporations, who are looking to offset their travel emissions. So more to come on this but again, we see offsets as a bridging solution.

Direct air capture new airframe and engine technologies, and new energy sources, such as hydrogen powered liquid or PTO also have tremendous promise, but we see these things as being much further out call it 2035 and beyond.

And our objective is to focus on things that we feel like we can have a real impact that over the next 10 15 years.

So this is something that we are absolutely committed to achieving but to be really clear. The industry is going to have to work together those single airline can do it well, it's just impossible.

It's going to take a lot of work with a variety of organizations, including the private sector and nonprofits as well as strong support in policy from the federal government and state governments, and we will lead innovation scale from the energy industry.

I will also need continue advancements from the aerospace industry become carbon neutral by 2015.

Now Gary has asked me to be the executive sponsor for our environmental efforts and I've asked Stacey <unk>, our vice president of supply chain, who haven't seen extremely knowledgeable of SaaS.

And fuel supply chain to take this on Whitney as well.

Okay.

So to wrap it up we will be providing a comprehensive report of what we're doing and the progress we're making in our annual sustainability report, which we call the southwest one report.

It will be publishing this online to our investors site in the coming weeks.

So with that Tammy I'm going to hand, it over to you.

Thank you, Tom and Hello, everyone.

Round out today's comments with a few remarks on our performance.

If you have a cost fleet liquidity and cash back before we move on to Q&A. This morning, we reported first quarter net income of $116 million or 19 cash per diluted share, which included $1 $2 billion in payroll supply excluding this benefit and other special items at day.

In this morning's press release, our first quarter net loss.

Julien are a $1 72 loss per diluted share.

While our losses persisted in first quarter I feel good about the progress we are making in particular ethylene midstream second quarter here.

I want to commend our people on another solid cost performance.

We have to remain extra diligent with our spending.

Excluding special items, our first quarter total operating costs decreased 24% year over year from $3 3 billion and increased 17% year over year on a unit basis.

Joe represented about 35% of bad debt free.

Our first quarter economic fuel price of $1.70 per gallon was that the midpoint of our guidance range and our fuel expense declined 44% year over year.

We give capacity levels resulted in gallon consumption.

7%.

The largest driver of our year over year decline.

And economic price per gallon down 11%.

We really like the modest pension gain of approximately 1 million or one cent per gallon and our hedging program premium costs were $25 million or nine cents per gallon.

While gold price, but still below year ago level energy price. It has been creeping up over the past few quarter, which only serves as a reminder of the importance of having a consistent and meaningful fuel hedging program.

Based on market prices as of April 15, we expect our second quarter fuel price to be in the range of $1 85 to $1 95 per gallon, including another modest <unk> one per gallon.

Looking at 2022, we also have a high quality fuel price you'll have some placement at similar level of protection, but we would start recognizing hedging gain around $60 per barrel Brent range with more meaningful hedging gain beginning at $70 per barrel and higher.

Last year, we took the opportunity to add our 2022 hedged position while prices were lower.

Our first quarter fuel efficiency improved 5% year over year, primarily driven by many of our older aircrafts remaining part.

Some of the correct fuel efficiency gains are temporary and we will see some sequential pressure as we return to more of our older 797 cash 700 aircraft to service this summer.

However, we currently estimate our second quarter fuel efficiency should be sequentially in line with first quarter's ASM per gallon.

Actually due to returning the Max to service last night.

And that is our minutes fuel efficient aircraft and we have a line of sight to more significant improvements over many years as we plan to retire a significant amount of our 737 700 aircraft in the next 10 to 15 years.

We get at least a 14% fuel efficiency improvement on a per aircraft basis. Each time, we replace an end of life 737 cash 700 aircraft with the new Mac.

This will be a big driver of progress towards our long term environmental goals.

Excluding fuel special items and profit sharing first quarter operating cost decreased 19% year over year.

On the better end of our guidance range.

On a unit basis, the increase was 23% year over year, primarily driven by the 35% reduction in capacity.

We continue to realize cost savings from our actions taken in response to the pandemic, including 412 million of saving and first quarter salaries wages and benefits driven by the benefits of our employee voluntary leave programs implemented last year.

We had pay rate increases for our people that are flowing through this year, but the voluntary program savings are offset that rate of inflation.

Outside of salary wages and benefits, we had year over year decreases and most other categories.

Due to reduced capacity and the related cost relief.

Primarily in the areas of maintenance landing fees and employee customer and revenue driven cost.

In terms of a few other notable items in first quarter aircraft rental expense was $52 million down 9% year over year, driven by the return of leased 737 cash 700 aircrafts.

Advertising spend has increased sequentially from fourth quarter as we ramp up the marketing, but our first quarter advertising spend was down 8% year over year.

And we realized a one time favorable settlement from first quarter, primarily property taxes and those are reflected in our other operating expenses.

Again, our first quarter cost performance was solid and I. Appreciate all the work our teams are doing to manage cost in an unprecedented environment.

Turning to the second quarter. We currently expect operating expenses, excluding fuel and oil expense special items and profit sharing to increase in the range of 10% to 15% year over year.

And also to increase sequentially compared with first quarter.

We estimate that 60% to 70%.

The expected sequential increase is due to variable flight driven expenses.

As we plan to increase capacity to near 2019 level IGN.

To support the increased flight activity.

Are we calling a portion of our employees.

Our voluntary extended time off program.

In terms of salaries wages and benefits expense.

Sequential cost increases from a few items account for about a third.

<unk> of the total sequential increase.

We have increase is driven by a higher number of active employee and second quarter include.

Including the impact every <unk> employee.

Roughly half of our recalled employees will return in second quarter, and some training will be required from ventas employees that range.

David talk and.

We prepare for them to go back to work.

Partially offsetting our second quarter cost pressure from these recall is an estimated $325 million in cost savings from our voluntary separation and extended leave programs.

Those employees that took a voluntary separation last year.

And those employees that remain on extended time off.

With some early because we now estimate annual 2021 cost savings from our employee voluntary program would be in the range of one one to $1 2 billion down from our previous estimate of one point.

$2 billion.

Outside of salary wages and benefits the largest drivers of our sequential cost pressure, our flight driven cost increases and landing fees.

Employee customer and revenue related costs and maintenance expense as the prepare aircrafts that have been parked for a return to revenue service.

As well as higher flight driven maintenance expenses as fly to read them.

These ramp up costs combined represent the other two thirds of our capacity driven sequential cost increase.

Outside of capacity driven cost increases, we expect sequential cost pressure driven by airport cost inflation.

And higher aircraft ownership costs due to the Max delivery.

And this rounds out the majority of the remaining casting piece here.

Yeah.

While we are facing expected sequential cost increases that naturally come with increased flight activity.

We expect our second quarter operating costs to remain a low second quarter 2019 level.

And we expect that our ramp up cost pressures will vary and persist until we get capacity back to 2019 level.

That said, we remain laser focused on cost control as we navigate through this recovery.

Our first quarter interest expense was $114 million in line with fourth quarter.

And <expletive>uming our current momentum continues we don't currently anticipate raising additional debt and based on current levels of debt outstanding and current interest rates, we expect second quarter interest expense to be approximately $115 million.

Yeah.

Our first quarter effective tax rate was 21%, which was in line with our expectations and we currently estimate our annual 2021 effective tax rate to be approximately 23%.

Mike covered the highlights of our Boeing agreement.

I just want to add my thanks to the team at southwest Boeing and GE and CFM international for their tireless work to develop the agreement.

And support our long term relationship and that support.

Our Boeing 737.

737 business model.

Based on the refreshed order book and our retirement plans over the next 10 to 15 years I feel very comfortable with our ability to manage the size of our fleet.

Mark fleet modernization and preserve pursue growth opportunities as they arise.

And we can do this in a cost effective manner and particular with manageable capex.

We ended first quarter with 730 aircrafts, including 61 Max eight.

For the second quarter, we expect to receive seven Max eight deliveries and retired three 737700.

And we will have one more on Max eight delivery in third quarter and retire up to six more.

Dash seven hundreds by the end of the year.

Beyond 2021, we are going to wait a bit longer before we make a decision about 'twenty 'twenty two sleep plant and 2022 Capex.

That said, we are well positioned to begin retiring roughly 30 to 35 737 dash seven hundreds a year.

Getting next year.

Our firm orders should cover the majority of our fleet modernization plans.

And we will make decisions on exercising option.

Based on the economic and demand environment and based on growth opportunities and capacity plans.

As Mike mentioned, our options provide us tremendous flexibility.

As expected our first quarter capital spending was $95 million and we currently expect our full year 2021 capital spending to be roughly $500 million.

With an immaterial amount of aircraft Capex.

And driven mostly by technology facilities and operational investments.

We have plenty of flexibility to manage capex with our order book with aircraft Capex on firm order of $700 million next year.

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

We currently have approximately $14 3 billion in cash and short term investments.

In line with where we ended first quarter.

We are thankful to our federal government for providing continued economic relief to protect jobs as the pandemic persists.

We received $1 7 billion and payroll support program proceeds during the first quarter.

And expect to soon receive an additional $259 million.

As our final distribution of the second round of PSP support.

<unk> 2 billion in total from the PSC extension.

We are.

Currently working to finalize our agreement with the Treasury on the third round of PSP support.

And expect to receive an additional $1 9 billion.

Our liquidity position provides a solid foundation.

Asian ethylene operating in the wake of 2020 substantial losses and on the heels of another substantial non-GAAP loss in the first quarter.

Our first quarter average core cash burn was 13 million per day.

A $1 million a sequential increase from fourth quarter with rising fuel price, it's offsetting improving revenue trends.

The material improvement in revenue began substantially in March resulting in an $8 million improvement from our February cash burn a $17 million per day.

Q a march cash burn of 9 million per day.

When you include the benefits from future cash bookings and other changes in working capital as we define for you in our earnings release, we flipped positive in March and produced cash flows of 4 million per day.

Assuming the continuation of positive revenue trends, we expect our average core cash burn in second quarter to be in the range of two <unk>.

Q4 million per day.

And we continue to expect to achieve cash flow breakeven with roughly with revenue up roughly 60% to 70% of 2019 levels.

Barring any unforeseen changes in current demand trends, our cost trend and <expletive>uming revenue and booking trends continue to build throughout second quarter. We are helpful.

That we can achieve poor cash.

For cash breakeven results or better by Kim.

In closing, while the effects of the pandemic presents our southwest team continues to Parker.

And I'm familiar challenges of the day.

While we aren't out of the woods, yet we are encouraged by the rise in vaccinations that seem to be unlocking the pent up leisure demand that we all believed was there.

We are optimistic and hopeful that the worst is behind us, but we are mindful that business travel continues to significantly lag leisure.

We will continue to manage our business closer in to focus on what we can control maintaining a strong balance sheet and liquidity position, reducing our cash burn as we work towards breakeven and managing tight cost control and seeking efficiencies.

Especially as we began to rebound capacity level.

I am immensely proud of how our people continue to persevere and show up for our company our customers and each other.

Together I am confident that our best is yet to come.

With that Keith we are ready to take analyst questions.

Yes. Thank you we will now.

Begin the question and answer session.

Ask a question Star then one on your Touchtone phone.

Speakerphone, please pick up your handset before pressing the keys to try a question. Please press Star then two.

And our first question is with Steven Trump lets see.

Good afternoon, everybody and thank you very much for taking my questions.

Tammy I was intrigued.

By what you mentioned about.

Your hedging policy and you guys also mentioned the.

The approach to climate change with renewable energy credits.

Are you thinking about.

The energy credits.

And lower emissions.

And your fuel hedging policy going forward are you thinking about then.

Conjunction with one another as a let's say a holistic approach to these topics.

Yeah.

Absolutely.

Joe.

Really to two different topics in mind, but we are certainly thinking about them all holistically.

Our fuel hedging program as you know we've had that in place.

For many years to provide us a protection.

Against a rising fuel prices and.

Looking forward a component of that will be.

Stable aviation fuels were just not at a point today, where that were at significant volumes there with us with a sustainable aviation fuel so I see that being more relevant with time, but you know as we look here. This year over the next several years with our hedging position that we have.

Place.

The purpose of that is really to protect against Covid conventional fuel, which is obviously going to be what we're heavily reliant on.

I appreciate that.

So Steve I think that.

S a.

Up to where it needs to be there's going to be some sort of market, making going on.

And it's going to be some level of incentive tax credits for the producers or the blenders for the consumers.

So I'm.

I'm not sure I think Tammy and I are both kind of early and exactly what's the tax benefits are for all these various ESG oriented.

Elements, we've got to be investing in price.

I think that you.

That's part of it we have to create in order to make S. A really viable and economically viable. If you will going forward. So I think it's kind of an open question to be honest with you at this point.

I appreciate the color. Thank you.

Thank you Andrew next question comes from Hunter Keay with Wolfe Research.

Hey, everybody good afternoon.

Oh no.

So Gary as you.

Southwest has a long track record of flow going after your shareholders, obviously, you and others diluted a lot during COVID-19. So what do you think is the best way to sort of repay your shareholders is through buying back that stock because it through special dividends or is it really just sort of just taking the money investing it back in the business Andrew.

Just trying to grow the stock price to earnings.

Mike.

I think it's.

It's.

It's really.

A ways away before it's a real question for US obviously, because we've got cares act limitations that Tammy co what through September between 'twenty three 'twenty 2023.

As you are well aware you know so it's proposed that environment. So I do think.

We've tried to be clear that our priorities would be.

Pay down the debt.

Number one and then number two grow the business.

Tim.

Obviously, we think that that's the best way to maintain the health of the enterprise, but also this is the best way to take care of all of our stakeholders certainly our shareholders.

Yeah, I'll, let Tammy add.

If she if she wants to.

Just think it's premature.

To telegraph, what our thoughts might be ultimately.

In terms of shareholder returns.

Not a fan of special dividends I don't mind sharing that.

So also don't mind sharing that I haven't had that thought that we would be doing a special dividend and we couldn't do it until post September 23, or 2023 anyway.

But.

You know it's.

We've got four phases Hunter that we're thinking of what is survival.

As a stabilized third would be prepare.

And then fourthly would be back to prosperity. So.

We've sort of declare that until we stop losing money we're still in the survival mode. So that's you know that's a roll out there.

For what we're thinking.

We get to prosperity I'd love for us to get back to a handsome shareholder returns and I just feel like we need the room.

Repair the balance sheet first I got the question. This morning on CNBC and I thought it was a good one.

We view share repurchases as you well know we had a healthy dividend going into the pandemic. As you will note. We also had the strongest balance sheet in the lowest leverage in our history coming into 2020 and all of that is key in terms of thinking in the future about what we would do with shareholder return. So we've got a.

Our balance sheet back in order, it's not broken, but we do have some work to do.

Okay.

I know, we're all aligned here or there that's our top priority.

Yeah, No I appreciate that color and just a quick one here for you Gary as well I know this is a cause like a crazy question, but.

If demand sort of doesn't get a whole lot worse, but it doesn't get a lot better either we find ourselves looking at PSP for maybe attached to the infrastructure bill or something like that day is that something that you expect to happen or would advocate for or would actively say.

We don't need it.

Well.

Now.

I will admit that's not anything that I've contemplated.

Very grateful that we've gotten.

Not one not two but three P. S p's.

And.

You know.

I guess to be to be totally open all my question.

We feel like we're on the cusp here.

<unk> breakeven, it's hard for me to argue themselves.

Southwest would need any.

He further support the premise that you raise of course is that.

If I could sort of extrapolate.

The debt that is achieved and we sort of bump along.

With my comments initially.

Yes, our first quarter turned out better than we thought it would be but we still lost $1 billion well that can't go on indefinitely for any company and certainly foreign airlines. So I don't think that that's what we're staring down I don't think we're looking at a $1 billion loss second third and fourth quarter.

So given that I.

Which is the only way I can really answer that question I don't think we're in that scenario. So therefore no.

Because this is a live question on this infrastructure bill it.

And then finally, no we're not advocating for anything different other than.

Just trying to provide our input.

On the spending and the investments that are being contemplated in that bill.

Along with the prospect of corporate tax increases so that's our that's our focus.

Thank you.

Thank you and our next question comes from Ravi Shanker with Morgan Stanley.

Thanks, David definitely one.

Gary can you share a little more detail on what the early conversations with your corporate customers or potential corporate customers have been now that you have widespread GDS integration.

Is it different from your existing corporate customers given that kind of your one of the firstly I N C. C is to enter the space.

How are those comments just trading in and how would that how is the customer base looking versus what you initially envisioned.

Yeah there are.

Managed travel accounts definitely are behaving differently than our non managed travel accounts and I'll, let Tom and Andrew I'll speak to that I was hoping you would so.

Let me just talk about the business travel for just a second so the.

Industries that are starting to pop back up again I consider our business demand is falling as opposed to leisure demand, which is hard to put the areas of the business man that are starting to travel to a lot of government D. O D is manufacturing and transportation of the areas that are not traveling or the.

But the big consulting firms, which by the way are the biggest consumers we have of their travel so thats whats really not happened yet I think that in terms of.

The conversations with the with the large accounts at this point given that we are now on the GDS platform. So we're talking about this before we starting to see the channel shift that we'd expect to see given that we're now in four for GDS platforms.

It was I guess the the honest answer is the volumes are still low. This is hard to know if we're seeing what we would have expected to see in terms of channel shift from from <unk>.

What's the other what we are seeing a little bit of a shift I think Andrew jump at it from leverage from that correct here it will be a shift from the sabre BB are basic.

Product into more of that.

Standard GDS.

Platform, So that's working well, but I guess just in general the.

The commentary, we our teams talk with effect.

David did a great piece with Hunter I'm not sure if you guys read it.

Took a while to read it it's pretty long was really good but the conversation was really is such that the customer really gets our products. They really want the product. We just been so artisan business with et cetera, et cetera. So I think the conversations with our with our large corporates are really very very positive and they just want us to be on the shelf.

And sabre and the others and we will be.

We have seen a thorough business traveling thing.

Andrew the only thing I'd add to that is that these PMC as a corporation. So we already have relationships with them because through our direct connect and our swap as platforms. Their customers now just was not their preferred platform. So I would think of it more of a is expanding.

Our book of business with them, rather than introducing ourselves to the new corporate centre AFC. So the fact, we're moving to something Thats more they are liking. It has received good returns from them. So that's why we expect to do to get better post pandemic. The pre pandemic with the largest corporations, who had more of a standardized process. It would go through the GDS.

Very helpful. Thank you.

Okay.

Yes.

Thank you and our next question comes from Mike Lambert with Deutsche Bank.

Oh, Yeah, Hey, good morning or good.

Good afternoon, everyone Hey, Gary.

Earlier I saw a headline out about you, making a comment about you know a business travel rebound.

Not taking place for about 10 years and I'm just curious the context within that comment and I don't know if it was a misquote or maybe there's some you know analysis that you guys have done or maybe it's your point referencing that maybe some portion of our business is never going to come back can you just sort of clarify or qualify that statement.

Be happy to Mike.

Honestly there is nothing new.

710 years for a year and at my only point was it was really in it.

And.

And in your expert at all of this we've just lived through an environment, where it is impossible to forecast, it's impossible to predict because.

All pontificate.

And so all I've been saying, it's really in response, Mike to your question about will business travel ever recover.

And I think it will I think it's silly to sit here and say it will never recover I mean, that's a bold statement.

But but Mike it could be a long time, and that's where I've thrown out the 10 years and I've done that consistently you know that a.

Typical recessionary recovery is five years for business travel and we.

We've lived through a lot of recessions together, so that's that I feel confident what I'm not confident about is whether this is a typical recession number one.

It's got some pluses.

Compared to a typical it has the negative because of everything that we know about being able to work now with technology virtually remotely.

That is a huge question mark.

Mark one other board besides southwest talk to other Ceos talk to all my friends and colleagues here at southwest and we get plenty of anecdotal information that suggests that business travel will not recover to pre pandemic levels anytime soon.

So you know.

There's just no way to know so no I'm not predicting it is 10 years.

Really what I was trying to do with sort of tamped down the argument that it will never recover as well and just simply to say that you know who knows it could be a long recovery time period, but.

We're gonna be prepared Mike, regardless and so Thomas we're.

We're just talking about.

GDS.

For southwest I think that we will recover business travel faster because we have a new avenue to gain business travelers.

We.

We dramatically under index.

The managed travel market.

That was because we work.

Part of the GDS, we remedied that we're the largest airlines in the United States by virtue of that I would argue that we're the largest business airline in the United States and.

As I said in my remarks now the managed travel accounts will have wide access to a great network Great service no bag fees, no change fees and low fares. They will finally have access to low fares I think we will do extremely well there.

Great that that context is very helpful. Just Mike My second question to Andrew.

With the cities are you.

You know Ken that had been announced I think out of 17.

Interesting when you think back historically, you know southwest was an airline that was very sort of tactical admit that that's not a methodical sort of additions you know maybe one.

Two a year, maybe some years new cities and now all of a sudden the daily use of cities and some of these are actually small markets and if I think back southwest in the past you know some small markets you know the company historically may have struggled.

You know.

It sounds like the ramp up is going fairly well, Andrew maybe what has changed that you feel much stronger and moving into some of these smaller markets and more quickly maybe it's just the pandemic you know you strike when the Iron is hot maybe it's the density of the southwest network small cities can plug in and you can turn on and be successful.

Full far easier today than the southwest at 10 years ago, you know maybe I answered the question, but if you could just give us some color because this is kind of a different mood for southwest with respect from new city development.

Certainly I would be happy to answer them from so if you're doing in we are methodical and so prior to the pandemic. We have a practice every year of going through and looking at every place we could fly our aircraft and evaluating them at least the desktop if not in person visits. So all of these cities were ones that were known to us and evaluated prior to the pandemic.

From a pandemic as Gary talked about we're unsure about the pace of business travel return and so because we have a lot of business travelers. If they were not to return in a timely manner. We would have a shortfall in revenue activity to deploy our people and <expletive>ets against that with the operating leverage model you don't want that so we want to make sure we have.

Oh, I love new cities to cover any potential shortfall not returns southwest.

Go with bigger scale than normal.

The cities. We chose we chose also to have a low risk as far as their maturation and we've been plenty of small cities for a long time you know.

It wasn't in Texas City.

Pack northwest city, there, so theres modest and we do quite well upstate New York and the key is the small city that is relevant to a place where we have a large customer base and so if you look at all these small cities, they're either mark he destinations unto themselves or their relevant to a nearby large southwest city, we have a large customer base, who would be a big purchases of ticket.

These small cities and so that's what's important to US and then we want to make sure. We go in with at least a level of flight activity that allows for crew efficiencies. So we have originated a terminators that makes it not to have you know crude deadheads.

Undermined inefficiency so all those things must come together for us to add those new cities. So I think we were prepared and it fits with our model I think the answer Mike and I just from a final along very quickly.

Got it.

<unk> style to $19 92, when you worked on our secondary offering and those day.

And then there are more but its we didnt want to go into a city.

In the early 19 nineties, unless we thought we could do let's say eight departures a day.

And so I wouldn't I wouldn't translate what.

We're doing with the 17 cities as being a violation that even that old rule of thumb because some of these quotes small cities I think Andrew.

Won't name names, because we may not want to telegraph, yet, but there are a handful that I can think of that you might think per small we're thinking theyre going to be a dozen or more daily departures into a number of non stop destinations. So I do think the fact that we now have.

Such a large U S presence. It makes a lot of these quotes smaller markets are much more viable today in terms of flight activity than it did 30 years ago.

But the other thing I would point out is that Miami isn't this fall.

Bush is a small co.

While Sprague small oh here is not so.

We do have a few cities that have three or four daily departures on the route map and I would call them, Mike Mike would call those small.

And we have experience with them and we know that they can work I don't think that that means that every city like that would work but.

Anyway.

We have been delighted that we could actually have the capacity to put them on the route network here.

I got asked earlier today about whether we will continue this and I think <unk>.

Andrew is going to need that's <expletive>uming that we continue on a recovery path he's going to need to take a lot of these airplanes and put them back into restoring a flow.

<unk> activity into our existing network so that.

That will challenge our ability to continue doing this play but are there permanent ads and we're delighted with the performance that we're seeing.

Thank you.

Just to give a little more than one question. So we'll move quickly. So we've got about 45 aircrafts. So Andrew I think committed to the new Steve So far but eight per cent of trips, but you know as I talked about the business demand volume as it begins to thought we're going to need to begin to.

Our network back in business travel shape.

And just to give you a little too because people are asking that ask us. So what does that so when does the network get back to normal will the network.

It's nothing to get back to what it was because we had 17 new cities on the networks, but what I can tell you is when you think about the principles in the the characteristics of the southwest network those will be intact point to point so.

You should expect to see a very similar mix of short medium long similar mix of directly connecting traffic and our focus once you begin to see business on Saul is going to begin to put the depth back into the markets like the St. Louis is in Milwaukee.

<unk> business markets and stuff so.

It's going to be an interesting, but that's also why we're getting more aircrafts. So we were going to retire some weakness from incremental so it's going to take time, which is fine because the business traffic is that going to show up on Sunday and all of a sudden it's back it's going to take time and will begin to build our fleet back in our network depth back east.

Spurred a likely talk topic.

Topic, there Lindbergh so thank you.

Gary I appreciate and everyone I appreciate the responses and especially the early nineties reference Gary I remember carrying everyone's day. So it was a fun time.

Yeah, Mike.

The thing that really Pisses me off about usually don't look any different.

You can't see me.

[laughter].

Okay. Thank you and the next question comes from Ryan <unk> with Barclays.

Yeah, Hey, guys well I wasn't on the early read so sorry about that but.

Gary you did mention you know.

Phases here survival stabilized prepare grow I think it's the way you laid it out.

It sounds like Youre going to go through stabilizing prepare pretty fast here you know just with your your June capacity outlook. So I guess I just have one question because I know it's been a long call, but investors are wondering you know how are you going to take advantage of your net debt position, especially relative to some of your larger competitors that have other capital priorities in front of them.

Is the view here that potentially youre going to grow into a marketplace potentially take share could that sustained lower fares in the future or should we be thinking what we really wanted to get back to prior profitability before we push a lot of these sweet and network expense opportunities that you guys just discussed.

I think we want to keep all options available.

And we.

We've got a great balance sheet as it stands today.

We will absolutely have to get back to profitability, regardless, we've got to get back to profitability and I already have conceded that balance sheet repair will be an objective.

Tammy Tammy has already rethinking liquidity targets as well that will be more robust perhaps than what we had before so there are several things that will want to think through but clearly we're in a position where we have that option. We can pay down more debt more quickly or are we.

Can think about expanding more rapidly as compared to some baseline.

It's just too early to judge that yet but.

We have tons of opportunities, we're a growth company, we know how to manage growth.

And we would be foolish to p<expletive> on what I think is the opportunity of a lifetime to grow this airline in this environment, we are so well positioned.

If in fact.

You know the business travel stays.

Modest over the next five to 10 years, we are perfectly positioned to prosper in that environment with our low cost and our low fares.

Thank you Gary.

Thank you and the last question of the session comes from Jamie Baker with JP Morgan.

Hey, everybody I got to tell you I really [noise].

I really liked Mike's question, I remember being in Telluride with them about 20 years ago and bedding.

The one market that you might open that year end and I'm sure. If he got here from mantra never crossed either of our useful mines.

But it's a good day, it's a good segue into my question.

Is there a reservation or Ikea issue.

That prevents you from flying to Canada.

Tell me when you guys talk about that.

As you.

So to make Canada work for us, let's split the business or leisure market and we've got to be able to sell against its back to the whole foreign currency for yourself and when we talk about for a long time, but that's the thing we need to get done.

Jamie is that all I can say.

On comparable technical capacity, we don't know how to do it's just a question that we keep putting GTS and GBS. We have these other priorities popping up now to etops. So it's not that we don't know how to do it so that it keeps getting back down the list in terms of priority, but you know, it's just a piece of work around the foreign currency and for language that we keep talking about that we just keep day prioritizing because it's bigger.

Idea, but it's really as simple as that but we think theres, probably 567 really nice markets, which by the way is our reason Bellingham is now in the schedule right. So there's some nice Canadian markets that they can really do very well on the southwest network. It's just going to take US you always.

He's got to get a little more time to get that on top of the list I think really that's.

Totally totally agree with everything Thomas here, but I would just reemphasize our previous conversation to his question, which is okay. We've added. These 17 destinations we got a lot more we'd like to add.

Don't know that we would have airplanes.

But if we tackle that technology challenge I don't know that we would have airplanes to be able to add.

Those new market so.

I guess the point as Jamie.

Jamie I don't consider it to be an obstacle for southwest at all it's whenever we're ready we'll commit to that will get the work done we will add it to our route network right now we got all we can eat with the current capabilities we have.

Got it and a follow up to an earlier point you mentioned that you know consultants are still pretty much granted pre COVID-19 can you remind me what your top three businesses, where that make up corporate revenue and what percentage of your corporate spend they represented cop three or four.

Specific companies or industries.

I got you are going to give you the companies in America.

Yes.

I cant remind you because I've never told you, but I don't see what Tammy and Tom FSA.

I think on the <unk> and deploy those much if not more but.

Defense is a big deal about a industry, but D. O D is a big big travelers for us.

Certainly financial services banking as big as certainly our professional services consulting in fact, if you look at the <unk> 100 I bet.

Every major.

Tier one tier two consulting firms in there they are big transportation manufacturing. So the list goes on and on of higher Ed actually you know the state of California, higher Ed is a pretty big free.

Big deal. So there's there's a long list I guess is the point, there's a lot of money tied up in it as well. So I think what's more important is it's not 80 20, our largest one.

Very very small percentage of our corporate book of business. Our corporate book of business is a long list with each one can we appreciate them all with a modest number compared to our overall revenue line item.

Sure. That's very helpful. Thank you very much everybody take care.

See you.

Okay, well that wraps up the analyst portion of our call today and as always if you have any follow up questions.

Give me a call at two and $4 79 to 4415.

Thank you all for joining us and Keith I'll send it back to you.

Yes.

Okay.

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.

Thank you Keith and I'd like to welcome the representatives of the medians from our call. Today. We can go ahead and get started so Keith if you would give them instructions on how to queue up for questions.

Yes, if you would like to ask a question you May Press Star then one on you touched on phone.

To withdraw your question. Please press Star then two to remove yourself from the list.

Okay.

And the first question comes from Dawn Gilbertson with USA today.

Okay.

I'm, sorry, I had a question as with Alison Sider with the Wall Street Journal.

Thank you hi.

Yeah, I wanted to ask about the latest issues with the with the Max just curious how youre thinking about that.

How are you.

That's your ability to build confidence in the place given that there was a lot of betting in you know new issue just cropped up.

Yeah, Hey, John this is a this.

This is Mike.

The issue of the airplane was it was specific tail numbers that were identified by Boeing as part of our production run and they made certain changes in that production run and.

May have caused some electrical ground and bonding issues in a couple of different components and a risk there really is.

It was just inconsistent electrical cars to those systems.

I think that we.

We haven't had we had had no issues or any.

Identification of that being an issue with our own operating experience in the airplane and I think the issue is well understood by Boeing it's well understood by our engineers and I think it's a relatively straightforward repair on the airplane and as soon as the FAA comes out and approves both Boeing.

Service bulletins were ready to execute that repair and I think it's like I said, it's just a.

One or two day repair on the airplanes and it's relatively straightforward.

Got it and I'm just curious is there any you know when he found out about the couple of weeks ago. What was the reaction was there any frustration you know to be kind of in this position again, so soon after bringing the playback.

Well.

Yeah, I mean, I think it was its frustrating to have to go through that process again.

I don't know if I'm Lucky is the right word to it but we had a.

Plenty of spare airplanes, where the.

Terms of an operational.

Issue it was not not a concern for us, but you know overall, Don I think Boeing is a good company I think they clearly suffered.

Over the last several years, maybe with various quality issues across some other product lines, but you know at heart, We're an engineering company and I feel like they need to be leaders in the aerospace and the commercial.

Businesses for our country and I think they understand that and I think they're going to get back to their roots and I have a lot of confidence at the Max airplanes going to lead the way there.

Thank you.

Thank you.

And the next question comes from Dawn Gilbertson with USA today.

Hi, Good morning, I have two questions. First question is for Tom have you guys seen any impact from the state departments.

Alert level that they raised you know as you did back when the CDC started the testing requirement or is it too early.

What do you what are you seeing there if anything.

You could go ahead, and just elaborate a little bit on what you talked about not really familiar with what you're saying.

A couple of this week the state Department has been raising the alert level for international countries, including such popular places as Mexico to better align with.

The CDC range.

King.

Now more than 80 per cent of countries, including like I said, some part of their destination.

Alert level and I know, sometimes bookings take a hit when that happened I Wonder if you see any impact at all or expected.

I know youre talking about now because.

Mike is booked.

So the answer is no I don't think we're really seeing much of an impact on that at all at this point.

<unk>.

What's your second question.

The second question I'm not sure how it's for it when when do you guys, where we currently flight attendants recently one of the things you cited what you know in one of the number which was an increase in people calling in sick I'm curious why you're seeing an increase in people calling in sick or are you seeing an increase in.

Infections as travel Covid infections as travel has rebounded or is there reluctance among flight attendants to return can someone cause someone to talk about that a little bit. Thank you.

I'll jump in there with that and then everybody else kind of add a little bit of color but.

Our labor contracts.

Have a very.

We're very flexible for our people in terms of their sick banks and kind of how they use sick.

And it could be a variety of things it could be a family issues that they're dealing with it could be a day care issues that they're dealing with it could be illnesses or cells that can be doctor's appointment.

And as we are recalling people and they are coming back and to work I would argue that they don't have.

They don't have all of their personal lives all laid out as neatly as.

They normally would and so I think we will see a spike in that as people are coming back to work, but I don't think that it's any indication of a long term trend or a big operational.

Pick up for US we have reserves that will cover those lines.

We navigated through that pretty well.

Thank you.

Thank you.

And the next question comes from co out with the Dallas morning News.

Hey, guys. What are you seeing in the air fare environment and.

Or are you going to be able to hit some of your your financial goals are.

With the leisure traveler still.

The leisure travel is very fickle in terms of airfares still leading the way.

Well, I guess I'll start and Andrew you're free to jump in but.

Like I described earlier in the call is I think the leisure side is pretty hot right now and I think the business demand side is starting to fall.

But I literally have right in front of me, what our with the booking curve and the fair curve looks like for.

For the upcoming months and they're pretty they're pretty solid and they are really encouraging so barring a drillship I feel pretty good about where we are and it's kind of back to what we said in the call.

Barring a trend change we feel good about the opportunity as a breakeven perhaps even make it will move a profit sometime in June or beyond.

So I think.

That's that's kind of how I would answer at this point is the booking curve begins to get more extended out further out.

This gives us a lot more flexibility in terms of how we manage the inventory from affairs and starting to take a normal.

Booking distributions shape, if you will the levels too low, but the shape is normal so we're able to manage our pricing more effectively and that's that's kind of where we are so we feel good barring a trend change.

Guidance for Tammy and Tom gave you.

See what we saw in the spring of the leisure fares.

<unk> gained stronger from the bottom of the winter wave through towards the summer. However, the lack of business travel that Gary and Tom talked about moving some of the higher fares.

They pay will be absent so you can.

First overall will still be down year over two years and year over year as a result of that so it's moving.

So Kyle this is this is just talking about.

Our peers on average were down 20% in the first quarter.

So this is where we're at.

Yeah.

We never give information about what we're going to charge so that they're not speaking to that we're just talking about how the array of errors that we have average out.

With the demand that we have but I would just say this.

The industry has more seats.

And it does p<expletive>engers.

And economics 101 tells you that.

Pricing will.

Subtle that but at a software level. So we're down 20% this quarter and what will be prepared for us.

A very low fare environment for a long time.

Which gets back into the discussion that we've been having all day about business travel demand.

And that is our wheelhouse, we are a low cost.

We are a low fare and.

We can live on low fares and we'll certainly make sure that we manage our business accordingly.

Okay.

Thank you and the next question comes from luxury Joseph C. N V C.

Hi, Thanks for taking my question two quick things on the Max are you getting any compensation from Boeing either as a form of payment or discount on other planes and do you have any sense of how much I'm not having those planes in service is costing southwest and then my second question. If you want to wait until after.

I guess this is tammy.

In terms of the pricing on our aircraft with Boeing.

That is confidential.

We have shared with you.

Capex that we have.

With regard to our firm order book.

For next year is about 700 million.

And that is for.

That is 430 aircraft.

But interesting it's just not that simple.

A lot going into that and as you've alluded a day on.

That incorporates a discount.

From previous settlements that we've had with Max it with Boeing on the Max grounding.

As well as the terms of our most recent agreement, but the actual truckload.

From South are confidential.

Are you talking more specifically to this most recent grounding yes, the electrical issue do you get any.

You know what the financial impact as you know.

Yeah, we've got our arms around what we think that impact is I would tell you. It is in the scope of our operations, it's not material, but there are new airplanes, the airplanes of warranty by Boeing.

And I think that we have I don't think that would be a concern for us at all.

Okay and then my other question is what are your staffing needs for this year and then going into next year do you expect to hire and do you think that's too many employees who left the company permanently some employees on temporary leave we're getting called back early.

Well I think I can maybe start with this and all.

Maybe you've had some of my friends around the table talk but.

The real question is is what we're looking for the commercial side of the business to be able to go sense.

The demand out there and we're looking out five or six months and then be able to lay out a schedule that responds to that demand and I feel like we have a lot of flexibility on the airplanes side and on the staffing side with plenty of notice to be able to go from that.

Just to be honest, we can we can do any of the things that if demand falls off from here. We're in a good position if demand stays flat we're in a good position if it if it increases we have ability to recall people fall on X T O and if it really explodes and we have the ability to go hire people.

And so it's just a it's tricky and we're trying to make those decisions as close as possible. So we haven't really thought about the second half of the year yet.

I'll just summarize them.

Comments that I made at the outset of our analyst call.

Which is we are.

Currently at about 92% of our pre pandemic staffing.

And of course, you pick a point in time and you can judge that number around but that just gives you some sense and what Tom was talking about was flying.

Flying our June schedule at 96% of what we were pre pandemic, Virginia.

We had a little bit of attrition.

We've had a voluntary separation program and that's what gets us down from 100 down to this 92% level.

So we're comfortable where we're staffed right now.

In March April.

Projecting forward to June.

We would be right at the proper staffing if not a little bit short.

So there's.

There's pluses and minuses, one department might be a little over one department might be a little under.

But I think beyond to Mike's point beyond June I think what we're all anxious to see as well one of the things look like when we get to June or are we going to hit our forecast as we've anticipated it where the bookings for July August September look as good as we hope.

Is there a pent up demand that is not sustained beyond that I mean, there's just a number of good questions. There.

Can be posed at this point, so it's just a little bit premature.

But if we get to the point, where we've got some staffing challenges I think all everybody here, we consider that to be a really high quality problem.

But Bob Jordan is here with us.

And bought about heads up our.

Our corporate services, which isn't which includes HR. So in terms of our current hiring our current hiring plans you might just share or whatever you're willing to share. There. Yeah. You bet on the on the recalls we gratefully, we had about 11000 folks take the <unk>, which is a terrific.

Terrific response for our employees and we recalled just south of half of that to meet the demand that everybody's talked about here for the summer.

And if you see more demand we can be in a position to continue the recall.

We have begun to ramp back up our hiring ability. So before he can hire you've got to have people that went off and did other jobs come back and sort of rebuild that team. So we are ready to hire where that's very modest right now its key positions, but I think if we see the demand continue where we are in a position to ramp that back up quickly.

I do think again to be straightforward about this.

I think we're all prepared for this to be messy. It's just it's just not easy to predict and then if it's not easy to execute and we also don't want to end up with excess staffing you know so it's just trying to strike the right balance here. It was really messy a year ago trying to downsize of the airlines.

And I think we're all just kind of have to recognize it will be.

I think we need to be up to the task here and manage well, but just recognize that may be messy now having said that our operations went up 50%.

In terms of flight activity overnight back in March.

And had a flawless execution and outstanding performance so.

We've got a basis I think for our confidence going forward, but we've been hiring machine for 50 years and I feel like we'll we'll do well when we're ready to turn that back on but.

I'll look forward to that I think that would be a high quality problem.

Thank you.

Thank you and the next question comes from Rich Valera with Las Vegas Review Journal.

Thank you I hope this is a little bit of a lighter topic and some of the heavy things that you've been discussing.

Does the company have any opinion on the city of Chicago's plan to enable the installation of slot machines at midway in O'hare International Airport and as a follow up does the company have any position on legislative proposals.

Who opened Texas to legalize gambling with integrated casino resorts in.

Dallas, Houston, San Antonio and Austin.

Hey, Rick it's great to hear your name and hear your voice and I understand where you're coming from.

I would say for Chicago.

Looking at our real estate Guy here I would say anything that lowers our operating costs at a airport we will be all for [laughter] I think Las Vegas has led the way with some really.

Innovative techniques out there so beyond that I I don't know that I'll comment on what's going on at the state of Texas right now.

But.

Yes, I guess by extension anything that generates more travel I bet everybody in this room would be all for it so.

Good to hear from you.

Thank you.

Thank you and we have time from one more question and that comes from J Singh with simple flying.

Hey, Thanks, I just wanted to go back a little bit of your NAV earlier. So it seems like you have an appetite for expansion and you got an order book out until 2031.

Whats the argument against taking maybe a max nine or 10, and freeing up from small they've got great expansion and when you've got a pretty significant backlog with a lot of flexibility.

Well I think.

The downside for us taking the Max nine or 10 is it doesn't fit our network.

We just need our network is built around a point to point, we don't want to have too many.

Connections and you start getting to a nine or 10 year quickly into 200 p<expletive>enger aircraft and that's just too big for our network and the way we go about our business.

Yeah, I think we'd rather see Boeing if that's our challenge we like the eight we liked the seven as well as we like the eight.

We don't we're not certain what mix of those.

Model numbers, we will have in the future.

But.

Just as a as a rule of thumb call. It 50, 50, 60, 40, who cares.

But if that is the issue I think we'd be pressing Boeing to increase their production rates.

And again that would be a high quality problem.

Great. Thank you.

Thank you.

A question and answer session I would like to turn the conference back over to MS. Rutherford for any closing remarks.

Thank you all for joining us today, and if you have any other questions. Our communications team is standing by Q1, four 790 4847 of course through our media website Www Dot SWA media Dot com. Thank you.

Thank you.

Since Thomas concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Yeah.