Q2 2021 Southwest Airlines Co Earnings Call

<unk> business model.

Given the revenue recovery, obviously, our next focus is to sustain our profitability that we've achieved here in June and maintain stability going forward.

Next year, we plan to resume new aircraft deliveries with the desire to restore our route network as needed to pre pandemic levels and clearly the network restoration will depend upon travel demand, which may in turn depend upon the state of the pandemic. So worst case, we will.

Reduce our growth and early retire our oldest aircraft, which will be accretive to earnings with the.

With the trade out with the Max So, we're very well positioned and very well prepared to manage.

Pretty much any scenario here and the net.

Couple of years.

So things aren't back to normal yet, but clearly they have stabilized and are much improved and we are at a point now where we can actually plan and work on managing and spend less time on surviving the intensive care unit and.

Then finally I did want to congratulate and welcome Bob Jordan will be our next CEO come February 1 of next year and the reception. So far has been terrific. The transition work is well underway. Bob is very busy and he may comment on that but it's going very very well very proud of Bob He is going to do a terrific job.

And I'm going to hang around to support our team in any way that I can and so with that Bob Let me just turn it over to you Alright, Gary Hey, Thank you and good morning, everybody.

It's really good to be with you today and I'm looking forward to reconnecting with many of you over the next few months as I begin to 10 or Investor relations activities I'm going to make just a few brief remarks.

But as Gary said I'm, just super excited for the opportunity to serve southwest as the next CEO of.

Beginning in February and I am very glad that Gary will continue to serve as executive chair.

Many of you know Gary has been my mentor and friend for over 3 decades, and the 2 of US along with Tom and Mike are already working very hard to ensure that the transition will be a smooth and orderly 1.

Since the announcement on June 23rd I've had the chance to visit and talk with hundreds of our employees around the company.

An example, I was in it got to spend the day in Atlanta yesterday, with our wonderful team there and I'm just amazed by their spirit their enthusiasm.

Their heart per each other and for our customers and I'm just energized by bandwidth them I'm also focused on continuing to work with our leadership as we continue to lead through the pandemic recovery and as we start to work on our 2022 planning efforts as we evaluate the post pandemic environment.

And the many many opportunities that are ahead of us here at southwest.

I've been part of the strategy here as we develop our strategy each year and I'm very confident about our purpose and vision and where we're headed and I will be very purposeful in how we plan for the next several years. Our strategy is sound, we are a low fare low cost growth airline.

Price ourselves and terrific customer service and being a great place to work for our employees that business model and our people have been the enduring strength for 50 years now and we've enjoyed unparalleled success in the airline industry. We now have the nation's most robust point to point network and we have at least a decade's worth.

Are attractive growth opportunities in front of us with the Boeing 737.

Our customer and brand rankings remains really high year after year and our commitment to transparency continues with no bag fees and no change fees. We are committed to that we have opportunities in the pipeline to continue enhancing the customer experience is just 1 example, and that will be a focus.

Along with our commitments to both diversity in leadership and in the workplace.

And to environmental sustainability.

We will remain focused on maintaining our strong financial position and our investment grade balance sheet.

As always we will balance our commercial opportunities, our operational flexibility and reliability and our financial performance.

You know, we want new itineraries for our customers, we want growth opportunities and job security for our employees and we want to create significant value and returns for our shareholders that formula has worked so well for southwest for decades, and I expect that it will be and continue to be what works for us for decades to come.

We have a very deep bench of terrific leaders here at southwest that are ready to lead for the future and as a team. We are all very aligned on the future of southwest Airlines.

I don't want to say above all it's our people that bring our vision and our purpose to life every single day and I'm, just honored to serve them and to support them on a daily basis and with that I will turn it over to you Jamie. Thank you, Bob and Hello, everyone. I will provide a quick overview of our overall financial results and some color on our outlook.

Yeah.

On a GAAP basis, we generated $348 million profit in second quarter, or <unk> 57 cents per diluted share.

In addition to improving revenue trend the primary driver of our GAAP profit for the quarter was the $724 million of PSP pricey that offset a sizable portion of Sal.

Gary wages and benefits expenses.

Excluding this temporary PSP benefit.

And our usual hedge related special items, our non-GAAP net loss with $206 million or a 35 net loss per diluted share.

Second quarter operating revenue non fuel operating cost steel cost and available seat miles were all within our most recent guidance ranges and I am pleased with our overall financial performance and second quarter.

With the strong tenant summer demand and a solid cost performance June Mark a key milestone as we generated both average daily core cash flow and profit as we had hoped.

This is our first monthly profit since February 2020, when soon after the negative financial impact of the pandemic began to impact our results.

And this is excluding the benefits of PSP protein, which is more reflective of our base business.

These second quarter results.

We're not where we need to be represent a significant recovery for our business and are a testament to our amazing employees, who are simply the best in the industry and make us proud of each and every day.

And by all indications it appears that we outperformed the industry again in second quarter.

We provided a lot of color in our press release regarding revenue and cost trends.

I will just add that our trip flow are estimated to be down 11% in third quarter compared to third quarter 2019, and as such we have several cost categories that are expected to continue to trend lower than 2019 level.

Such as maintenance expense advertising expense technology expenses, and passenger and personnel related expenses.

These cost categories are expected to ramp up as trips and passenger increase and as we resume a more normal investment agenda moving forward.

We are mindful of the tight job market as well as general inflationary pressures.

We expect to have wage rate inflation.

And our normal annual wage rate increases as we want to be competitive to retain and attract talent.

Including the decision to increase the minimum hourly wage to $15 per hour across all work groups. We now estimate $5 million to $10 million of additional salary wages and benefits cost pressure in third quarter.

And approximately $15 million in fourth quarter.

We are also mindful of bottlenecks shortages in wrap up inconsistency across the travel industry as we restart after more than a year of low activity.

And we are not I mean that said, we will continue our focus on ramping up costs, along with flight activity as efficiently as possible.

While being nimble to adjust and add where needed.

We are hopeful to generate net income again in third and fourth quarters on a GAAP and non-GAAP basis.

Our ability to do so will largely be dependent on the revenue environment, which Tom will cover in a minute.

But based on our current revenue outlook and even with the additional cost pressures. We noted our third quarter bottom line outlook is over $200 million better than it was back in April.

We have flight schedules currently out through early January and we will continue evaluating growth opportunities and fleet and capacity to decisions to construct the most efficient route network for 2022 being mindful that our network has evolved from what it was pre.

Pandemic.

With leisure travel levels, where they are today it is easy to forget that less than 6 months ago, the environment with drastically different.

Over the past year, we were most focused on raising capital and building liquidity minimizing significant cash burn and drastically cutting capacity and cost.

And the changes that we made to our network are producing the revenue, we had hoped or even better than hubs.

And we are now evolving our focus areas.

First we are focused on managing through the current environment with adequate resources to deliver a reliable operation.

We then need to optimize our cost profile with our route network in 2022.

And beyond that will be focused on producing sustainable levels of profitability margins and returns.

We plan to continue managing the business closer in at least for the remainder of this year, but we have begun 2022 planning process at a very high level.

Although I don't have any specifics to share with you today I can reaffirm that we have tremendous flexibility.

Perhaps the most flexibility we have ever had going into any year in my nearly 30 years at southwest.

We have flexibility with our cost efficient Boeing order book with a significant number of Max options remaining in 2022.

We have flexibility in terms of where to deploy our aircraft in the network and how much capacity did a fly in 2022.

And we have a strong cash balance modest debt requirements and discretion over how quickly we want to resume non aircraft investments in 2022.

So we have flexibility with our capital.

And aside from our people our biggest core strength is our balance sheet and financial preparedness, even coming out of this pandemic.

So with that I will turn it over to Tom.

Thank you Tammy and good morning, everybody.

Our second quarter operating revenue performance was very much in line with our expectations, we saw improving monthly trends throughout the quarter in both leisure demand and yields. We also saw a steady improvement in business demand, which I'll talk about in just a minute and.

And we're also pleased to see broad based improvement across the entire network. So this was not concentrated improvement in certain regions or cities, but it really was across the entire system, which was terrific to see.

Jews leisure passenger traffic was actually higher than June 2019 levels in june's passenger fares were in line with June 2019 levels very much as we expected and we also saw a significant improvement in business travel revenues as well improving from down 77% in may to down 69% in June versus 2019.

Just keep in mind that on our Q1 call we reported that our business revenues were down 88%. So throughout the second quarter, we saw a very steady sequential improvement in business travel from the first quarter. Yeah. Just so you know when I talk about business revenue I'm really referring to manage the business travel.

In terms of third quarter trends, we're continuing to see strong leisure travel throughout the summer and as I said June leisure traffic performance exceeded 2019 numbers and we're seeing that strength continue into July and.

In fact, we are estimating that both leisure traffic and fares will trend higher in July relative to 2019 based on the trends that we've seen so far.

Also see continued improvements in close in demand and yields for business travel as well. So in total that results in an improving July revenue outlook of down 10% to 15% versus 2019.

In our earnings release, we also introduced our August revenue outlook down 12% to 17% versus 2019.

Our estimated August has a 1% to 2 point headwind compared to August of last year and this is simply due to the calendar shift that pushes all of labor day in September.

But when you adjust from the calendar shift we were pleased with the way the booking curve is shaping up for the month and demand and fares are also shaping up really nicely for August and this is very consistent with our expectations as we move from our highest leisure demand months, which is July by the way into August.

Now with respect to business travel the recovery path as was clear, but it's also clearly improving so if you look back to Q1 and then 2 every month in Q2, we've seen consistent sequential improvements over the past 6 months.

So we're encouraged by what we're seeing and we're expecting a continuation of the steady weekly improvements in business bookings.

Also very clear that more and more companies return to the office Youre seeing that were seeing that and without a doubt. We're also seeing the corporate travel restrictions are beginning to be relaxed or removed altogether, which is great to see.

And as you would expect we're doing plenty of our own surveys with our travel management company partners and our business customers, we're talking with them frequently we're talking with them directly.

We're very encouraged by what we're hearing from them, but we're also probably more encouraged actually by what we're seeing in terms of travel activity.

So business volumes and fares were both down in the second quarter, but both showed improvement in April may and June and we're expecting sequential improvement from Q3 as well, but we do expect overall yields will continue to be pressure in the third quarter versus 2019.

The booking for our booking curve Rutherford business as you know is naturally closer in so now it's mostly about improving volumes as the booking window tightens up.

And I will say that and I'll just reiterate what Gary said the guidance that we're giving you today doesn't include any impact from the Delta variance what I will say is that we have not seen any impact in the delta variance at this point. So our outlook is based on trends that we're currently seeing all of which by the way are very encouraging.

Just a quick comment or 2 on our rapid rewards and ancillary business. We had a great quarter. We saw another strong performance in Q2, and both our rapid rewards loyalty program as well as in our Chase co brand credit card program.

And we have more rapid reward members today than we did in Q2 of 2019 and June was actually the highest new member acquisition month in the history of the program, which was terrific to see.

And our co brand credit card program is larger now than it was pre pandemic and retail sales per second quarter up nearly double digits versus 2019 and the spend per card also beat Q2 of 2019 levels. So as you can imagine we continue to be very very pleased with the strength of the performance of our loyalty card programs are.

Our ancillary revenue trends such as upgraded boarding and early bird also performed extraordinarily well in the second quarter, which is what we expect to see as load factors improved to historic levels.

Just a quick comment on our GDS initiatives, which continue to rollout and as you know we've already gone live with Travelport and Amadeus will be going live on <unk> on July 26, which is this coming Monday.

This is a big accomplishment has been a tremendous amount of work, it's a big deal and creates a big opportunity for us and this does complete the implementation phase of our industry standard GDS works.

So we now have a full array of distribution channels, which gives our business customers are challenged Joyce whether its a GDS platform, where a direct connect API channel or our swab is self service platform.

So without a doubt our southwest business team is.

Pretty energized to pretty jazzed up yes, they are a great product to sell over in the right channels and they are really focused on driving new business.

And now that the barriers removed, there's a big opportunity for us to win more business, both from existing customers, which by the way we have a lot of we just under index as well as new customers.

And this is a tough sell force before moving to industry standard GDS platforms. So I think we're in a great position, we have a great business products you have a great value as of Monday, we will be in all the managed travel distribution channels. We have a great sales team. So I'm looking forward to all the products are going to make here.

Just a quick comment on our network Tammy alluded to it but before I wrap up I just wanted to talk about that for a second to give you just a bit of perspective I'm sure we'll get into it in Q&A.

As you've seen we've made some some pretty meaningful changes and additions to our network. Since the pandemic began 14.15 months ago and over the past year, We've announced service to 18, new airports and at this point 15 of the 18 are now up and running.

And all the new markets are either performing within our expectations or ahead of our expectations and each 1 has a very strong very natural addition to our network that we wanted to do for quite some period of time.

And as you know new stations have a development curve and we understand that we get that we are very pleased with where these stations are at this point. They will have the time to develop and as I said all of them are meeting or exceeding our expectations.

And we also have the objective again Tammy alluded this of restoring many of our pre pandemic routes and frequencies, while also mature in the new markets.

So in terms of aircraft investments are 18, new airports represent nearly 100 non stop markets and over 280, new trips per day.

And by the end of the year, they will utilize roughly 55 aircrafts and with our recent additions to why which which really is the culmination of the original plan was suspended because of the pandemic. We're at 37 trips per day from the mainland U S wide with nearly 40% of real interest per day and that utilizes roughly 37 aircrafts.

So we've committed substantial amounts of aircrafts, the new city opportunities and to Hawaii, and both investments are paying off and meet your expectations. It was the right decisions are Boeing order book gives us a tremendous amount of Optionality and that allows us to fund our current network investments, while also allowing us to pursue the planned restoration of our network.

All of which will be working through in our 2022 planning process that Tammy just alluded to.

So I'll tell you I think that we are very very well positioned for the future and with that I'm going to turn it over to my friend, Mike to talk about the operation.

Well, hey, Thanks, Tom and welcome everyone.

From an operational perspective, I would say this is a pivotal quarter for us we moved from how would describe on managing and moderating our operation in the first quarter to really an acceleration focus in the second quarter.

If you would compare just March to June those 2 months, we added about 650 additional daily trips. So that's a 25% increase and then our customer and bag volumes far surpassed that they were up nearly double that with a 45% increase between those 2 months and that is just a.

It'll increase and it was done in a short period of time and inside an airport environment that I would say is really still adapting and everything in that environment seems to take a bit more time today.

Our travel mix as you know it's been reported is primarily leisure so our pre check customers from a TSA perspective, we're down over 10% from as compared to June 2019.

If you go out to the airport restaurants.

Have reduced hours or staffing levels. So there are longer lines. The third party providers for wheelchair services haven't been able to scale with customer demand.

The hotel shuttle services are less frequent and of course. The airport is 1 of the last experiences across the country or master required throughout the travel day.

Considering all of that that's just a tough environment to live in every day and I am tremendously proud of our employees. They continue to answer the call and they really are southwest warriors and in fact, they produced a very solid second quarter operation. So in the midst of that increasing customer.

Volume, we also launched service to 7 new cities, we rolled out our new maintenance system.

We launched Hawaii service from.

Las Vegas, and Los Angeles, and Phoenix, we expanded our existing Hawaii service and we accomplished all of that while delivering an on time performance of 76, 3% and that was right in line with our 2017 through 2019 results pre COVID-19.

<unk> handling remained exceptional it was our best quarterly performance.

Outside of last year's second quarter, when travel demand was really low and we continue to lead the industry with the lowest customer complaint ratio to the <unk> for all of the marketing carriers. So just again I'm just very very proud of our employees now.

June was our most difficult month of the quarter, our April and May outperform previous years, and all of our key operational metrics.

And even with the customer volume increase June was off to a solid start mid month, we did run into a combination of technology issues, followed by a weaker weather challenges across our entire network and those and introduce some extreme delays into the network and it caused significant crew availability concerns as well as delays and cancellation.

That impacted our customers and that dropped our OTT to 62, 4% for June.

And we need to and we will do better than that moving forward.

As we move through July whether it's still a bit of a concern as is the overall tempo of the airport environment, but the entire industry is feeling the impact of those things and thats reflected in the overall industry otp, thus far in July.

We expect our operational reliability to continually improve from our June performance.

We use planning models that require an adequate level of airplanes as people and facilities to run our schedules.

As we entered into the second quarter, we had all of those resources aligned and we were on track until roughly mid June.

And so there are a couple of focus areas for the operation as we move forward.

The other passenger demand is very strong and our load factors going in and out of our large cities are 90 plus percent most days and were still ramping up the operation and we have 16 fewer flights than we did in June of 2019, which for US means there are fewer ways to re accommodate customers.

When we have delays or cancellations.

Higher volumes and fewer re accommodation options translate for us into a longer operating day.

So we're adding staffing in several of our large cities to have additional resources to cover those longer operating days and reduced the need for a premium pay.

We've increased our minimum starting pay to $15 an hour to better source applicants for those positions and we're offering premium pay for our employees to pick up open shifts on their scheduled time off just in the meantime.

The second thing that we're focused on is sourcing flight instructors.

So we can ensure that we can support the training needs for our pilots returning from extended time off as well as our recurrent training needs as we continue to add flying to the network throughout this year and then set ourselves up for 2022.

It feels really good to finally be in a position where we can add fly can pick up our operating momentum.

It was a bit Murphy as we throttled down our activity and it doesn't surprise me that it's a bit messy as we're accelerating it but our employees navigate those through those things youre relatively they have great hearts for our customers and for each other and I'm, just so proud and thankful for their efforts every day.

And with that Ryan I think I'll turn it back over to you. Thank you Mike Chad.

Chad will turn it over to you to give instructions on how to queue up for analyst questions.

Thank you we will now begin the question and answer session to ask a question you May Press Star then 1 on your Touchtone phone.

You are using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then 2.

And the first question will come from Arthur K Oar.

Research. Please go ahead.

Hey, everybody.

Thanks, Kelly Ann.

I think it's probably a couple of for Tammy, but I'm not sure. So first 1 is is where are you right now on an average daily utilization.

And.

When do you plan on getting back to 2019 levels.

Yes, yes, I can take that.

Our utilization is currently.

Around 11 hours per day roughly.

And in terms of just getting back.

We're working through our schedule you know Anthony.

We look into 2022 so we're.

Yeah, we're hoping to get back more in line with levels in 2019, but we're not we're not too terribly far off.

Either obviously a lot of that will just continue to be.

Based on demand and as Tom Tychy, due largely a function of how quickly we see corporate demand returning.

We still have what 39 airplanes in storage as well.

Absolutely.

The total fleet.

And Hunter in addition, just to what schedule.

Still have some some slush in there yes.

Yes, we will try to wring out.

Future schedules, obviously correlating with what Mike was describing which is making sure we have the proper resources to support the additional quite active.

I gotcha.

And then you sort of in the same vein on on that.

I know you said youre going to continue to evaluate the 44 options.

Given the ESG benefit you highlighted is it fair to assume that the bar is very high for you not to exercise those meeting.

Whether it's COVID-19 related or whatever things have probably get a lot worse for you not to exercise those options is that a fair default anyway to think about it I think that is absolutely fair as pointed.

Pointed out we have a very cost efficient Boeing order book, obviously, we have a very strong balance sheet with ample.

Cash and we can wait there's a strong ROI.

On the options.

Either way and obviously, we're hoping we can.

Continue to grow the airlines ear Bud it's not.

It's a compelling business case for us too.

Retire the older Dash 7 hundreds so I think that is a fair.

<unk>.

Thank you.

And the next question will be from Ravi Shanker with Morgan Stanley. Please go ahead.

Thank you and good afternoon, everyone.

So the question on corporate I think you said that your June corporate was down 69%.

And that's a pretty nice step up from where it was a couple of months before that I think from the legacy peers are down a little bit less than that so I'm. Just wondering if that's kind of normal given your mix of business and kind of how do you see that trending over the next several months given that you are now complete with all your GDS integration.

Well.

So this is Tom.

What we're seeing is I think we're seeing something very similar actually to what I'm hearing and reading from other carriers as they report.

So just to give you some context roughly call it 30% of Mark passengers are so are our our business travelers.

35% of our revenues is generated by business travel.

Yes, I think that the opportunity for us I think this is kind of gets to your point or to answer. Your question. We have a lot more opportunity to drive a lot more depth within the current accounts, we have with GDS. So I think that youll see that begin to drive up our southwest business numbers. If you will but very consistently we're seeing about 5 points.

The improvement in <unk>.

Southwest business bookings each month over the past 4 or 5 months.

We said I guess it was in the first quarter call. Ryan We said that we our expectation was southwest business or business travel will be down about 50% by year end.

Just kind of extrapolate where we are right now we would beat that I think our expectation, we'd probably be at 50% by the end of this quarter.

And certainly beat that by the end of the year, assuming things keep going so I'm not sure that we're behind our competitors are not to be honest with you I feel like from down 8.8% down 69% of the path towards down 50 by the end of the quarter is pretty much in line with the market.

But I think we're going to see more and more penetration with the GDS.

Implementations and again, we just under index significantly.

Big accounts, so that's that's an opportunity for us.

Im not going to say anything different than what Tom said is probably unnecessary for me to say anything but.

Just offer you my own opinion, which is we're using the corporate accounts that we know as a proxy.

And so our total business travel as far beyond this proxy.

And you know.

I think 1 could.

Assume that there are smaller companies, maybe sole proprietors or what have you but.

Our frequent flyer credits in there just other inputs that we look at that would suggest that that is a conservative number. So I agree with Tom we're the largest airlines in the country, we carry more people than any other airlines I think we carry more business travelers than any other airlines. So I find it hard to believe that we're in.

Consistent with anybody else, but admittedly we here we are at the same numbers that you hear and we just can't.

We went out surveying people, we cant be for sure what their purpose of travel is but our frequent flyers.

Those flight credits or down far less than 69%, which is some indication of course it could be a business person who is traveling for personal reasons, we just don't know but.

Probably more information than you wanted but I can't imagine that we're out of step with anybody else in the industry.

No that's great color and that makes a lot of sense, maybe a follow up with I mean, you kind of just given some of the labor issues that are hitting virtually every industry and every company out there maybe you can talk about kind of what what southwest seeing on the ground and maybe some other initiatives that you guys are taking to make sure that you guys are fully staffed for backup there. Thank you.

Yes al.

Chime in there and.

And Mike May want to chime in as well, but yeah. We are.

A couple of things.

As I already mentioned.

We are in we are increasing salaries across our system and the minimum wage there. So I think that will certainly be helpful.

We are.

And just to kind of step back where we were actually were actually fast.

Appropriately coming into the quarter now there are some locations, where we're wanting to boost our hiring.

And well.

We will continue our efforts there.

And then as we also mentioned we have recalled.

Our employees that were on the voluntary leave programs and we well recall all of those employees by the end of third quarter certainly by the end of the year. So are we.

Southwest is known as 1 of the best employers in America. So we don't anticipate any issues there on the hiring front. So we will as we ramp up capacity here make those decisions will we will be able to hire the employees that we need but.

Those are a few of the things that we're doing Mike anything that you wanted to add to that no other.

I don't have I don't have much I would say that across.

The network.

We're we're appropriately staff, we've got pockets, where we need more people, we've got pockets, where we have too many people 1 other great things that we can do and that we are doing is we can.

We can incent people, Tim temporarily to go fill in where we're short so we're doing that.

Our large locations and as Tammy mentioned as we have.

A handful of our large locations, where we have very aggressive recruiting recruiting efforts going on.

And as Tammy mentioned with our <unk>.

With our $15 minimum pay increase we have really good pay packages with our union contracts out there.

Feel like we'll be able to do.

Get those people.

As we ramp up the network.

We've just gotten back into the game. So I don't know when you started trying to recruit and hire of Mike but it.

It can't be that now most of the co.

Once again.

It is it is more challenging so we we acknowledged that and I am I am worried about it but I agree with Tammy and Mike moved.

The minimums up to 15 Bucks, an hour, which will certainly.

Will certainly help but pilots flight attendants.

We're not we're not sensing that we're going to have any problem. Yeah, I think it's more just hiring and.

Our ground operations.

Theres just a lot of competition.

Sure.

That pool of potential employees so.

It's interesting to the staffing challenges a lot of times that we find ourselves having R&R problems.

The industry, it's everything around the industry, whether it's banned drivers or or made services to clean hotel rooms or people to work at restaurants, and it just makes that entire environment difficult for our employees our customers to navigate through.

Very good thank you.

The next question will come from Stephen Trent from Citi. Please go ahead.

Hi, good afternoon, everybody and thanks for taking my question.

Just a very quick 1 from me.

Any sense, whether or not just you guys, but any sense of whether you think the industry might need to step up.

It's T.

Spend post pandemic not only in terms of.

Facilitating customer interface, but also considering cyber security that you have this.

From a few months ago at our South East pipeline incident.

I had 2 or 3 people tell me today that your website happened to be down I don't know if that is true but.

I just love to hear your thoughts.

Well I guess I'll take that 1 this is Tom.

Okay Tom.

Think that's I think we're all struggling.

As airlines and I think every company is struggling trying to figure out where to invest in cyber security dollars what elements are the most exposed.

Where is the biggest risk how do you defend against that and it's kind of a moving target, but that is a real source of focus I noted I'm sure. It is for our competitors.

Competitors as well it certainly is from me and my role.

And so we're spending a lot of time on cyber security I think that the.

I think that's the primary reason I think that this is a network that is so.

Technology dependent and so network dependent, but I think thats an area of investment that everyone's probably investing more in but I think beyond that I think every company has their own business strategy and their own set of technology requirements for that.

Big common thing I think is just the cyber security investments spend is very important it's very real and significant.

Art.

So.

This is a pile on to Toms comment and actually I'm stealing his words, but.

We are very technology dependent as an industry is probably stating the obvious.

But that does suggest that we need to be.

Top drawer when it comes to our technology.

And obviously the cyber risk everyone is aware of and it's.

There's sort of a bottomless.

Bottomless pit when it when it.

It comes down to how much does 1 need to do.

But not.

Not really trying to speak for the industry is talking to us, but absolutely we view ourselves as a technology company. We have an excellent team we have ample.

Ample dollars allocated for that effort.

And 1 thing that the pandemic has done for US is it's made us a lot more efficient with our technology.

<unk> investment and management.

And it's enabled a lot within the workforce as well so I feel like we're better than ever and southwest and you can be sure that we're going to continue to make that a high strategic focus Gary if you don't mind.

Since you just said we view ourselves as <unk>.

Technology company and in Airlines and service company.

We just did have an outage so I think rather than wait for a question on it or not address let me tell you how we feel about that and what happened. So just to be really clear. We did have a technology outage, which was pretty impactful effect really Andrew Mike in the operation and very significant way.

Just revenue June yes back in June and it really clog things up and just made for a very rough situation and that's why you guys first of all it was not a cyber security issue. It was not a hardware failure was non engineering.

Failure or architectural issue it was a human error.

Is this something that was a mistake made and.

We're dealing with it.

But it was not a structural issue or investment level issue. It was just the simple human error and we feel terrible about that we got to be better than that.

Especially if youre going to be so dependent upon technology, you can't have mistakes like that but this was not a failure of technology. If you will.

I'm a mistake, so we will do better but I just wanted to get that out there before the question was asked or.

Okay I got you.

Steven you mentioned 1 visit.

As Bob customer experience investment that's just an example of it.

I'll just chime in for a second because it is.

Kind of on my list of focus items I'd like to look at for 'twenty, 2 and beyond.

Cause there just when when they typically tend to be things that.

Relatively low spend you can put more and more.

Decisions and transactions at the hand in the hands of our customers on mobile devices, especially when we have things like irregular operations the ability to handle that that way give them choices without standing in line, making a call.

Our wonderful us he SNS employees as an example.

Those are just terrific things that I would I would love to look at and we will look at because more and more customers and our employees expect that they will be able to manage their lives interruptions on the mobile devices and it's just good all the way round because it.

It's good for our customers because then they can handle more and more things via self service and it's good for us because it moves those transactions from potentially long lines or a long haul.

Wait time.

To a much shorter handling period. So it is a focus of something that I would like to look at is just how we can continue to take our terrific customer experience 2 into an even greater level.

Oh that was a super helpful. Thanks, very much everybody.

The next question will be from Duane I think worth with Evercore ISI. Please go ahead.

Hey, thanks for the time.

Question for Gary and Bob and not sure. If you all intended to have a pesky analyst questions at this point, but.

Can you give us a sense for any differences in priorities, our leadership styles or or relative strengths. I. Appreciate you..2 have worked together for a long time, but maybe you could highlight some differences or previous some differences.

I think the biggest difference is that Bob is in AG.

Longhorn.

And other than that.

We're sort of joined at the hip but.

Bob Bob mentioned in his remarks that he's he's been a part of this and he's been a part of it for a long long time 33 years is a long time is that a number of different executive jobs.

So I.

I think you all should just know that he's been a part of coming up with and defining our purpose and our vision and translating that into a strategy and he's been a huge part of the execution, but.

At the same time, what we've got to be careful here is the task of a leader is to have the wisdom to know what the change and what not to change.

And at the same time I need to sell.

Selfishly I need to empower him.

And get out of his way so I had a good teacher and Herb Kelleher. He was executive chair from me.

And.

I wasn't necessarily thinking at the time that okay, well I need to learn from this because I'll do it some day, but fortunately I have lived through that.

And I do have a good idea of what I need to do to support him.

But Bob it's really more of a question for you.

And we have been able to work through that whole AGGY Longhorn thing it's.

2 of the 3 decades, but we got there.

No I'm, just kidding, but yes, I think a couple of things 1 we.

At the end of the day as a CEO you cannot do it all yourself you use it it's all about the team and we have a wonderful team of leaders here and I think we're both very passionate about.

Focusing on that developing our team developing our leaders developing the co.

On the next generation of leaders in preparing people and so I think that I feel like we're very similar in that way again, it's the same way that Gary invested me invested in me and many others for decades.

At the patient point of mine to be able to continue to do that because it's all about.

Not just what we can do is we have this change it's about what we can do this at southwest Airlines up for success for 20, and 30 and even more years.

On the other just style fraud and in addition to that I think ourselves are again very similar we're very collaborative.

We love.

Bringing the team into the conversation and Decisioning, if there's a difference probably.

And this can be good and bad.

I, probably a little more of a driver maybe a little more in patients from time to get it which is probably why a lot of my assignments over the years have been go go do things go we'll go get the Airtran integration.

Under way and push the throughput.

Through completion as an example, so that can be a benefit in terms of driving and getting things accomplished in our plan, but I also have to work on sometimes slowing down being collaborative and just make sure we make wise decisions here as we as of course, we will.

The how we would approach the plan and our strategic plan in particular were very similar there.

As you know, we're very focused on things like GDS and modernizing the fleet.

Plans change, though you you complete a set of things and you roll into the next set of things and you want to be very thoughtful about what those are and we want to be again collaborating with our team about developing that set up next through strategic initiatives and so we will work as part of our 22 planning to think about that next set of things.

I mentioned this upfront and focused around things that are just maybe part of what is an expectation today, so our customers expect us.

To work with them and engage with them and produce a customer experience that is maybe again terrific. Our employees are just terrific, but they expect a lot of things to be.

Quick delivered over mobile mobile platforms easy to resolve EBIT in Iraq situation. Our employees expect the same thing and they want it to be very easy to work with southwest Airlines.

Manage their shifts off of their iPhone for example, and so it will be very focused on some of those things. The other and again. This is a focus on both.

Gary and myself and our whole team is very focused on our diversity commitments.

We like some of that out next last year, we have things that we need to focus on we.

In particular, our diversity and our senior leadership group and so you will likely hear me talking a lot about that as Tom mentioned, we have a lot of we have a lot of focus in our our sustainability commitments and so plans change overtime. They always do that the initiatives we have on the table.

Right now or what.

And Gary you know those were involved in 10 years ago, and so theyre always going to shift.

But we're going to make sound sound judgments, we're going to develop the team.

Going to standby the principles.

That may southwest Airlines are great our business model our people balancing.

Our results with our operation in with our customer experience and so.

Maybe a long winded answer, but I think we have generally a lot of similarities in how we approach the business and the problems in our people.

Appreciate that perspective from from you both maybe.

Maybe just a quick follow up with respect to the labor availability tightness youre seeing frontline ground ops.

Can you comment if that's broad based versus specific regions.

And how do you think.

How do you think about solving what may prove to be a transitory.

Cost issue with with permanent solutions or how do you. What's your view on sort of transitory versus sort of fixed thank you.

Yeah, Mike want to comment on that.

You bet.

And it's a complicated question because there's so many factors.

Mentioned I was in Atlanta yesterday, so you can see that the the hiring of labor complexity firsthand. There. So I think you're at multiple things youre going to Youre at a broad based market with supply shortages. So there's just there's just not enough people to fill the jobs that are open I might just add that I think I've heard as we went into.

The pandemic with open a lot of open jobs here in the U S and I think we have had 9 or 10 million folks exit the workforce at this point. So we all see that the help wanted signs everywhere. So you're competing in a market that is just tougher as an example, we're getting fewer applications for open position that we are used to.

So it's just going to take a lot of vigor around.

The focus on hiring.

The.

Some of the some of the differences are regional I would say theyre more about how to triage critical positions. So we have we have places where.

It's more critical to the operation than others. For example, we are we're really we've got a full.

Press onto higher on the Denver ramp as an example, because their needs. There. We are full and we have a full press to higher flight instructors because we have.

Plenty of pipeline.

Our pipeline of pilots, we feel like but we need to get them trained we have folks coming off of VX T O and it just takes time to train and get them back into the workforce. So there needs to rebuild our training capacity just like our hiring capacity. So I think I would tell you the.

It's.

Probably more focused on this being a broad based problem in terms of just labor availability than than a narrow issue in terms of a specific job.

The biggest question for me I think we're we're fighting our way through because we'll get through rebuilding from recruiting teams and training teams and that net short term those are short term issues.

How long does this persist and we planned against this being a 3 month issue is the folks who are really going to return to the workforce for example, once school starts.

Or are we planning against a multi year issue, where it's going to be folks coming back into the workforce very slowly and that's a difficult question, which means you just have to be nimble in your planning, how we think about bringing aircraft per the schedule with them.

Please we have the flexibility how you're thinking about planning your schedules on how you think about staffing your schedules. The last thing we want to do is put a schedule out there where we cannot staff.

And so other there's just there's a lot of focus on this I will tell you. It is not the number 1 focus right now it is 1 day, which is getting.

Getting our hiring in place in their staffing in place and the good news is there are techniques Duane to do what Bob described.

That is the philosophy.

That we're going with.

But I'm sure you have gleaned this effort per higher.

I don't know what Bob doubled what it always to be at least double so that's money in.

All of that I think that's what Bob means.

In addition to just how do you plan the next schedule, but Mike anything you want to add.

Not much I would just say.

For me in the operation I would say that there are.

6 to 8 big locations in big cities that if I could snap my fingers and we could go add ramp agents to those locations. That's what we want to go do I think we've got a great package to offer them.

And so when we get that in front of them.

I think we'll be very successful at doing that.

But there is just to be transparent with you there are also.

Frustration.

People have to go through to get on the ramp there or background checks. There is margin at airports. There is driving out to the airports. So those are the things that we have to overcome with a compensation package and a career and benefits and travel privileges and I think we'll be really successful at that but it might take us.

6 months or so to kind of get into.

We entered the swinging thing and that says contrast, and Mike seems like Amazon Ryan It doesn't require near the.

They don't have to.

Obviously, we do so.

Okay. Thank you.

Okay.

The next question will be from Catherine O'brien with Goldman Sachs. Please go ahead.

Good afternoon, everyone. Thanks, so much from the time.

Maybe just coming back to the discussion we had earlier on free you know you've placed a couple of incremental orders for for aircraft since the pandemic, including 1 since we last spoke last quarter will look like from pretty attractive economics.

Not asking for capacity guidance, which I know will also be influenced by retirements. As you noted but off of that 2019 base that was still impacted by the Max grounding, how should we be thinking about your ability to produce systems.

Based on the Max return to service and these incremental deliveries over the next couple of years, thanks for any color.

I think the.

I'm sure there are several thoughts in the room here I think that the company.

You're talking about technology, and physical plant and facilities and things like that I think the company is very well prepared.

To increase volume.

We're very so to me you kind of think about it if we want to grow we need airplanes, we need airports, we need money and we need people those are sort of the 4 big categories.

We've got the Boeing deal as I mentioned to you all back in the first quarter that is a huge strategic positioning for us I'm very very pleased with that so check I.

I think the airport capacity that we have around the country is in great shape, and where it's not for the most part we have a line of sight to address it number 2 so I would check that 1 we've got money.

And as I was trying to share with you all in my introductory remarks, we have more money right now than I thought we would 3 months ago or 6 months ago. So I'm feeling really good about the balance sheet and our liquidity and I think youre down to what we've been talking about the last 15 minutes, which is.

People resources.

And that I think will be our constraint.

So.

I hope that answers your question, but I'll just open it up.

The thing I would add Catherine this is Thomas thing I'd add is assuming you can get past the people.

The strength piece of it.

In terms of how we want to use the capacity and by the way I think back to Hunter's question.

It seems to me we would take those aircraft because we want to retire you still you can retire you gotta. It's NPV positive other kind of stuff you have a better customer experience at all work. So I don't think there is a fear or concern of us taking too much aircrafts being stuck right right. So we have plenty of flexibility.

We've retired the ability to retain and keep growing but I guess, what I'm really getting at is our ability to produce good day assumes a productive ASN that'd be somewhat in fact, largely dependent upon windows business traffic begin to come back and let me explain why.

The composition of our network our point to point network.

Our principle around the point to point network has not changed with the pandemic, how that's been executed for the past year, it's been shifted a little bit just by virtue of the environment, but our philosophy is it very soon so we do want to get back to the pre pandemic mix of direct versus connecting flights.

Call. It $75.25, historically, we're a little bit skewed off of that as probably I don't know Andrew 72.

<unk> 28, or something like that so we want to get that back. We also wanted to get back to our mix of short medium and long haul flying call. It rough terms 40, 40, 20 short medium long as a percentage.

Right now it's more like 30, 40, 30, because those short haul flights those of the business driven flights and the business traffic wasn't there would either create leisure capacity that came from short haul. So as business comes back you'll begin to see us.

Just reinstate that kind of flying.

So there are many many productive uses of the capacity against the capacity if the demand does not show up we have the ability to retire 737.7 hundreds right. Yeah. Just continue to improve the fleet. So I think we've got in fact, either Mike said this or Tammy said this or we've also this the flexibility we have on the upside or downside is.

Really positive it's really strong.

Yeah, I think the redeployment and you all check me on this but the redeployment.

To try to go back to where we were in 2015, that's 15% of our route system as I recall that we have reallocated from call it more business oriented markets I E short.

A longer more leisure oriented so.

I think that speaks somewhat to what you're describing but the other thing I would comment on 2019 at 2019, we were close to providing the network that we wanted because we were constrained in that scenario by the fleet.

And so we're already trying to get back to where we were plus and all of this as we've all said, it's all dependent upon demand.

Materializing, Mike we're thinking.

Yeah, I think we've got a great opportunity and as long as we can get I think at this point that people will.

We will be able to deliver.

That's great. Thank you so much for the color and I think Gary someone needs for retirement presence. They get you that recipe for capacity growth on a pillow or something.

Mike.

Yes.

If I could just maybe sneak 1 more modeling type question shorter term in.

Looking through the monthly revenue forecast, we see August stepped down a little bit from July I think theres. Some holiday moving in there as you mentioned then and perhaps second half of August is a little bit more back to school, given your kind of south and southeast parts of your network.

If that's right on the return to school driving a little bit less leisure demand, while corporate still depressed would it follow that September should also see a sequential step down on performance versus August or are there. Other factors at play. Thank you so much from the time.

Youre asking good questions I think that the.

First of all I think that the calendar shift from 2 points from August to September is just that the calendar shift it doesn't really belies the underlying strength of the business. So August is performing well so I'm not concerned about August through no red flags in August.

But it does have a natural.

Ah seasonality the first half is strong leisure the second half it's back to school and that's where the business travel begins to kick in and pick up the slack in that kind of thing. So we're waiting to see that we feel pretty good about that in terms of September.

This is something this year that was really creative so I'm kind of smiling at Andrew right now because he and his team sort this out and work through it but we had a.

50th anniversary sale that was really all about driving leisure demand in the back half of September September caused second week of September through November 3rd or some such state, but it's basically trying to fill in upfront the leisure bookings early to secure a nice solid foundation book a bit.

And from that point forward throughout the rest of September and October if youre able to begin to manage.

The remaining.

Booking window. If you will so that has worked really well in fact, the the 50th anniversary sales a 3 day sale I think 2 of the 3 days Andrew were 2 of the top number 1 and number 2 in terms of our history over 50 years of bookings alright. So this thing really work point.

Point being we have very solid foundation of leisure bookings in place for September.

I'm very curious to see what's going to happen with.

With business travel post labor day, everything we're sensing feeling hearing.

Adjusted net you're going to see it begin to come back what I'm really encouraged by us.

I think I'd be quick I'm, taking too much time.

Of the top 50 or so.

Corporate travel accounts 7 are our professional services consulting firms theyre all traveling the lockdowns are removed. So they are traveling and that is a big deal for us from that just begins to generate more and more so I think it's beginning to pick up some steam so.

I'm nonplussed by the August issue you raised I don't think that's an issue September we've built a good solid book of leisure and I feel good about where we are yeah and comment on the only other thought that I'll just tag on really quickly is we've got some.

Exciting things happening in just a few days as we turn on.

Labor so.

You know, obviously that obviously theres going to be a ramp.

But we're super excited about that and we think we're uniquely positioned in that regard with respect to corporate business travel. So a lot to look forward to we're really excited about it.

And as I think Gary.

And Tom have already alluded to is you shouldnt read anything different into our September forecast versus what youre hearing by some of our competitors. We are we're just we're coming out of a pandemic, it's as simple as that but we feel really good about where we're headed and.

We have just continued are sort of pandemic.

Rhythm here, providing 60 days outlook.

But.

We're not we don't see anything that suggests that September is going to drop off.

Well I think that's that's.

Just to make sure that that comes through.

We're reluctant to provide a forecast yet because it's just far enough out but.

But the August as Joe.

So the timing of the holiday is all with us.

The next question will come from Savi <unk> with Raymond James. Please go ahead.

Hey, good afternoon, everyone.

A question on the cost side, if I might ask again.

If I take out the hopefully what are shorter term rebuild near term pressure as it looks like your net costs are flat to down 4% or sales versus 2019.

Capacity being back to 2019 levels I was just wondering if this is a fair base level and I ask this because I know in <unk> 90, and I think that was about 7 points of pressure from the Max related grounding. So curious how we should think about what we've had.

What's been achieved in terms of getting costs out.

Yes, Savi I can start and I'm sure others will want to chime in here as well but.

Just to take.

Take you through our thought process here.

As we laid out for you in the release.

Absent the operational cost impact that we called out our third quarter non fuel unit costs, excluding special items and profit sharing.

With the forecast to trend in line below.

In line or below 2019 unit cost level.

While most of these near term cost pressures should be.

1 time or nonrecurring as we move beyond this ramp up period.

We have.

Always really consider getting back to 2019 unit cost level as sort of a point in time target and we've shared that sentiment with U I know before.

As far as the cost base in 2019.

We are.

Are we weren't carrying extra employees as you pointed out due to the Max grounding.

However, when you think about that the nominal cost to us of that.

Yeah. It was a really overshadowed by the 7 points of capacity that we were unable to fly back in 2019 that Cosby the.

The outsized inflation. So if you fast forward to where we are today.

We have a lower overall head count.

<unk> voluntary retirement, but just keep in mind, we've had 2 years of Wright inflation for our employees.

And as we've already covered with you we've recalled the vast majority of those employees from extended time off.

The the recalls will help us of course, as we continue adding trip here in the third and the fourth quarter.

But it does reduce the benefit from our voluntary leave program by about $50 million.

In both third quarter as well as fourth quarter.

And the other thing to consider.

Is that we are now back to 2019 as levels and we are building toward 2019 trip levels as I pointed out earlier.

And just.

So we'll have some noise here as we weren't covered with you all.

It's not as clean as we would like as we're adding back end capacity.

And we will.

Well, we'll need to do some hiring as we've already covered with you all before.

For our work for many of our work brand.

To support that trip growth.

In the second half and as we restore our net our network next year.

But what I really wanted to get to is as we get back to restoring our network and we kind of get into a rhythm here.

We should have more.

Operating leverage.

As we.

Bring back on more capacity. So I think that's a really key point for new law were just its just a little messy here, but that is obviously our goal our goal is to scale as efficiently as we can as we restart our networks. So.

Thank <unk>.

Hopefully that's helpful. We're going to be really focused on our productivity metrics like employees per aircraft and where we're going to all work together just to be as efficient as we can and really go back to more of our history.

You know, having very highly productive employees and that will be anchored around our <unk> network and are all Boeing 737 fleets. So I feel like our competitive cost advantages are very much in tact.

And we're going to work really hard to make sure that we.

We are scale efficiently and offset inflationary.

Inflationary pressures, which it is with which is not unique to southwest best we can that really savi I think Tammy is west point is that is the important 1 which is our we want to strive and it ties in with Hunter's initial question about aircraft productivity the schedule efficiency in that.

It will be somewhat dependent upon demand and how many flights a week and put in but.

2018, 2019 coming into 2020, we had great momentum running the operation we have great plans to improve the turn times and improve our efficiency and we've not yet had a chance to test those out I'm very excited about that opportunity.

So.

That's really key.

It's guesswork as to when we're going to have the opportunity to actually do that.

We will need more airplanes, we need more flights.

We.

All of the things that we've been talking about all morning here. So.

That would be fine Mike.

Make sure I understood that and if I kind of there's a lot of moving parts clearly, but it's more of a realistic way to think about a sustainable level and there will be inflation beyond that but maybe getting to slightly below 2019 is realistic.

On once things have normalized.

Yeah.

Well I'd be shooting from the hip to answer that question I think we can be.

Be thoughtful in answering that Tammy may already know the answer but the 2019 was not optimized either.

And as you have pointed out I think the question is if it were what would that benchmark b and how realistic is that given the inflation. So yeah, I agree with Gary and Savi just.

We're not ready to provide fourth.

Fourth quarter guidance, and we will be meeting later this year and we'll be more prepared at that point to lay out our plan for 2022, but I'll try to just provide you just a couple.

A point just to give you a little bit.

Color.

Yeah, we do just to be clear, though we do expect the current cost inflation and salary wages and benefits from our operational strain to be temporary.

And here in the near term, we anticipate some ongoing cost pressures and other costs Gary cost categories, as we ramp up our flying and that's obviously like maintenance airport and other operating cost so there'll be some costs that come back on as we add capacity it would cover.

And then.

There'll be some choppiness to as we as we bring back our flying.

Just looking ahead to fourth quarter as an example.

Maintenance costs will be a burden more in fourth quarter due to just bringing the dash 7 hundreds that.

Gary mentioned.

Out of storage and back into service.

And we're realizing airport cost pressure as well and and and then the inflation we've already covered.

So again I think it really goes back to as we as we scale level have more operating leverage and you know well.

The key here is to get back to the 2019, our productivity levels.

Well again lot of moving parts and as we get through the year and have more visibility into next year, we'll be prepared to give you evolved a better guidance there.

I appreciate all the color. Thank you.

We have time for 1 more question and we'll take our last question from Helane Becker with Cowen. Please go ahead.

Thank you very much operator for squeezing me in thank you guys. So I have 2 questions.

1 is you talked about the.

The level of credit card acquisition.

And I guess the June quarter, and I'm wondering if you can say what you attribute that to.

Why you're seeing such a strong.

Recovery in that area versus maybe what you would've expected pre pandemic.

Well.

It's pretty simple actually when we had a lot more people traveling so you have the opportunity to get from the sign up.

We also markets that really are we had a very aggressive 60000.

<unk> out there sign-up offer.

With more people being out there is that much more appealing I guess or it's easier to get more people will sign up.

But it's also just a great card.

As part of the rapid rewards program, which is an incredible program is no blackout dates appoints never expire in a non non interest a very very valuable card and foreign currency.

Performing extraordinarily well it's Mike.

Going to get into chase performance numbers, but net we are performing very very well so.

And I think pharmacist people being out there traveling again and being able to acquire and we have market, it's pretty hard I think our margin.

They're flush yeah as well in the other.

And they want to spend money and I think that's right Gary.

Credit card.

We've been we've been very pleased with that.

Okay great.

Yeah, No and then the other question is you talked about.

Environmental issues and culture, and diversity and things like that and then I thought you know you've got a pretty good.

Other companies had a pretty good track record Tammy isn't the first.

CFO, that's a female and Colleen barite back in the day with President's. So you have had a really good.

Track record of supporting I think all of those checking on this box is a young fuel efficient fleet and diversity at every level and I'm just kind of wondering what you're thinking 2 things what you need what do you think you need to do.

Tim maybe get more credit for it and then second.

How we should measure you against that.

Okay.

Well I'll be wrong.

I think it's yeah, you're right. We have we I think we have a really good track record in.

What you saw for US last year, we came out with commitments that were really around diversity and particular racial diversity in our senior leadership group. So I think what you find is as you look at our broad employee base.

We are very diverse so I, particularly on the frontline I think I would.

My guess would be that our diversity and our overall workforce, particularly the frontline for the for the most part matches what you would see here in the United States.

We're really good shape, there, but as you move sort of up the leadership chain here and and again I'm thinking about our senior leadership.

It is hard to argue that we don't have some work to do.

We have terrific leaders.

We have a terrific pipeline of leaders and it's really just about making sure that as we think about our succession planning and our long term pipeline.

That those are diverse we are hiring practices focus on.

Im thinking about diversity as a component where do we recruit how do we think about hiring and then how we choose to hire and then again because if you just took our senior leadership group as an example, where we do have some work to do I would argue.

And that was part of our goals stated last year, it's a long succession pipeline to move from a kind of an entry level leadership position ultimately into a senior leadership position that may that may be a decade, a decade long process. So it is very focused on to be honest.

The the <unk>.

Processes, we used to think about how we hire and how we recruit and where we hire now and where we recruit.

And then how we think about.

Just improving our diversity and senior leadership, and then again that depends on the pipeline. We're looking at things like just classic.

Sponsorship and Mentorship programs, which we all do and so again I wouldn't take that as well.

While we have a big issue I think we I think we historically you are right.

We have.

Mike.

Produce really good results, but there is improvement that we are I.

I think we need to focus on there.

That's that's very helpful. Thank Joe.

Welcome I am looking forward to being with you at the conference here in a month or so by the way.

Looking forward to it as well.

Alright, well that wraps up the analyst portion of our Q&A I appreciate everybody joining us this morning.

And if you have any follow up questions. Please give our investor relations team a call. Thanks, so much and have a good day.

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 Executive Vice President people answering locations.

Chad. Thank you very much we'll get underway with our media Q&A. If you'll go ahead and give them some instructions to queue up for questions.

Thank you to ask a question you May Press Star then 1 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 2.

At this time, we will pause momentarily to assemble our roster.

Okay.

Thank you and our first question will be from Alison Sider with the Wall Street Journal. Please go ahead.

Hey, thanks, so much.

I guess I was wondering if I guess with the benefit of hindsight. If there's anything you would do differently in planning for the summer for any additional sort of coordination that you know there might have been between kind of the network side and the operations side.

Just as you look back at you know if you had the opportunity to kind of replay of this summer all over again, if you do anything differently.

Well, so I'll take that 1.

You know what we are.

Sure.

Only with the benefit of hindsight the other way because the schedule was very well planned it was very well coordinated between our financial objectives.

Our commercial opportunity and our operational capabilities. It was very well planned it was planned based on our historic.

Modeling of what kind of resources, we need for what kind of activity.

Which we have 50 years of experience doing.

And we included some.

Cushion for lack of a better word.

So turn times as an example, we're actually planned to be higher than what we would otherwise expect.

And in hindsight there are some elements of our plan that were too tight that being 1 of them at some of our locations. If you were listening to the analyst call Mike mentioned.

His 8 largest airports.

So.

Weather.

We factored in whether as best we could and the weather was more spring like in June in particular than normal and so that that kind of whack. This so that's out of our control technology or 1 off things.

And those are the 2.

Headline issues.

For June if we get into July.

I think we're in the middle of the pack most days Mike. So we're not we're not first in the industry. We're not last so the industry is simply operating slower.

And I think we want to be.

Yeah.

We can see some elements of where that's manifesting what we do know.

As we have a different network.

Then 2 years ago.

We have.

A much higher proportion of consumers traveling.

That has translated into much heavier baggage loads.

And also.

Okay.

Buying itineraries that are more complex I E connecting.

Which also translates into more connecting bags.

So we can see.

Things today that we would not have known.

When we put the schedule into effect I can assure you we will be factoring that in prospectively.

So that's the 1 very tangible thing.

That that I've seen so far and again <unk> got experts in the room here that they may want to chime in but the overall.

Allegation that we were understaffed is not true that as that is incorrect.

Meaning that it wasn't understaffing thats led to delays the problem becomes.

The delays whatever the reason for his puts pressure on the staffing.

Because the days are longer.

As Mike was describing how our flight crews ended up diverted and in the wrong place and out of position and so the airplanes.

Getting the airline back on the tracks are obviously as.

Job 1.

And but our people have done a phenomenal job. They are working very hard Mark described Mike described.

Some of the challenges in the environment.

It's just I blame it on the pandemic, it's messy, it's messy coming in is certainly messy coming out.

<unk>.

Anything you guys want to add.

I'll throw something in here Allison so.

Our point to point network is it's a different model than most other airlines out there.

And the way that we are able to absorb some significant events in that kind of a model is we would generally cancel a flight get the airlines back on time, and then we would re accommodate customers.

Through other alternatives that we had and we do that very successfully at year end and year out the biggest change that I think we face this year with 2020 hindsight, we can't absorb those significant events as efficiently. This year as we did in the past because we don't have as much frequency.

Our network today that we did yesterday.

But we will in the future and so what that is causing us to do is to run those flights.

A little bit later and it extends the operating day.

And so that's that's really the crux of the issue and then the solve for that is you know.

As we grow the net working to add flights back.

<unk> solves itself.

And then also we're going to come into a period of time, where we don't have the thunderstorms and these pop up weather events.

That we do here in June and July so I feel like.

The worst part of all of that is behind us.

And.

Given all the information that we had as Gary said, we were planned appropriately well just not able to absorb those significant events like we could in the past.

Saying all of that we're roughly in the middle of the pack in terms of dealing with those things today and Allison.

Agree with Mike's point on our network, but even having said that we had no problems with this quote new network until mid June no problem whatsoever, and we had great on time performance all the way through May so.

Yes, you know I will admit to you and I take full responsibility for it I was surprised.

I wasn't surprised at the impact that the technology outages had.

But.

We took quite an effort to work our way through the second half of June and the weather events and we're closer to normal here in July although we're not satisfied with where we are.

Long answer to your question, but.

It is complicated.

I will say that.

It's been 24 by 7 because it's not obviously the other.

Customer service that we want to offer our customers, but I think the worst clearly the worst of it's behind us in June.

Well, thanks for all that detail appreciate it.

Okay. The next question will come from Tracy Rucinski with Reuters. Please go ahead.

Hi, everyone. Thanks for taking my question I was wondering if you have any updates on steps that you're taking to address unruly passengers and even better equipped to deal with bad behaviour in flight.

Oh, yes, so Tracy this is Mike so our flight attendants, they have really good training on handling.

Passenger disruptions and just how to.

2 day escalate events, and we have recurrent training with respect to that and I think that they do a very very good job with that but as you as.

As you mentioned there has been a marked increase in what I would say our abuse of customer behaviors and that throughout the whole industry in.

I know that it's a small subset of travelers to be sure, but we haven't experienced these kinds of violent outbreaks before and I can understand from a customer's perspective, maybe how some of that frustration builds up.

But.

If there isn't we have no tolerance for customers to take out that frustration on on our people or anyone else for that matter and especially if those are in physically threatening our salt and manners and so.

We try to be as hospital as we can as part of our operating philosophy day in and day out, but we do have a responsibility to inform customers of the scheduled mass mandate.

And we do participate in the enforcement of that masked mandate by reporting abuse of been threatening behaviors.

Who are 2 authorities, we have been very vocal.

With our unions about having these authorities follow up and be as aggressive as they can on these abuse of customers.

And in addition to that we will add customers to our restricted travel lift.

If they are of using our employees.

Will you make self defense classes mandatory per flight attendants.

We have we have we have different.

Defense mechanism defense classes that defense techniques that we talk that are already part of our recurrent training and our flight classes.

Okay. Thank you.

Yeah.

The next question will be from Leslie Joseph with seat NBC. Please go ahead.

Hi, Thanks for taking my question.

I was wondering what your expectations are for labor costs in the next few years, especially as you start renegotiating some contracts with some other groups.

Hum.

Leslie I think.

We have there's been a lull.

In 'twenty.

You know 19 in our 2020 in 2021 getting through this pandemic, but I think as the.

Economy recovers and in the business in the United States grows back up to what everybody thinks that theyre going to be I think will have the same type of labor pressures going forward as we did in the past.

And generally those are both of those.

Wage rate increases our scale increases that are along the lines of.

Inflation or a GDP growth and and I think we will have those going forward. Yeah. I think the important thing to note and Mike said it I'll just restate it a little bit different way is we're coming off of.

$5 billion worth of losses, and we lost money again here in the second quarter, we're hoping to make money in the third quarter. So in that kind of environment, you're kind of question. The wisdom of increasing costs further and I think our point is real.

Simple, which is no we want to we want to take care of our people we want to continue to reward them.

They've gotten us through this pandemic they've got a setup for prosperity. Once again as we work our way out of this and we're certainly looking forward to concluding negotiations, where we can reward our people going forward the exact amount, which I don't know if you were driving for that exact amount.

Certainly for our contract employees as negotiated and we wouldn't speak to that but the main thing is we want to get those done so that we can reward our employees.

Okay and in the near term are you seeing any benefit or near and medium term to having more junior employees join at the end of the floor is higher now, but maybe lower rates on some of the senior people that left.

Yes.

As always.

Growth is always a help.

Because of that average wage rate effect. So yeah, as we're hiring which is which is an element of growth, whether we actually literally grow or not if we're hiring people.

Get some benefit there but.

But that doesn't that's not really a driving.

That's not a strategic or even much of a tactical objective of ours. That's that's just that's just the arithmetic way that works out I don't know Tammy if you have it.

Off the top of your head what that effect might be but just remember that for over a year. We werent hiring anybody was going the other way. So we're just now getting back into the hiring mode and I Couldnt tell you how many people we've actually hired here recently, but it is not that many.

Not much to add there Gary that's exactly right.

We're just now really getting up the hiring.

Sheen, but.

Yes.

In terms of the contracts that.

We have with our employees you know really.

While we love or low cost, we don't achieve those certainly on the backs of our employees and just just looking here at the current year.

We'd estimate rate increases than a couple a couple of $100 million for the full year. This year just based on the current contractual increases so.

So it's not like wages are standing still Ryan our rates embedded in the contracts and which is what Mike was referring to at the step increases and so that is.

Call. It couple of hundred million that I was referring to that are our employees that are not under union contracts, they've got merit increases last year.

Get them there.

They've had them this year.

And we're having promotions and promotional increases so.

I think our folks are doing a good job of taking care of our people.

Thank you.

The next question will be from David Koning with the associated press. Please go ahead.

Hi.

Can you and everybody.

As a follow up to Alison Sider his question.

You mentioned in the release and Tammy mentioned it here that youre going to save less money than you had previously expected because you're calling people back from leave.

A little earlier than you had thought so I wonder do you feel now like you waited too long before recalling people did that contribute to what's happened over the summer.

No.

David we were called.

Everybody I think.

Robley in March April timeframe.

We have about 400 pilots left on <unk> and they are coming back to the company here between October and March.

But.

Before the summer started we had all of our people recall.

And we have nearly yes, we have nearly everybody back here in the next month or so.

The.

No I feel like we we began to recall because we know the schedule far in advance.

Foreign to them.

And we know our training capacity far in advance so all all of that the output of that is how many flights can you fly right and so no. There is no. There is no implication at all that we need to do.

That we should have recall people earlier.

Okay. Thank you.

And the next question will be from David Slotnick with the points Guy. Please go ahead.

Alright, thanks for taking the question.

I'm, just wondering about the delta Barry and accounts from everything that we've been hearing over the last 2 weeks like it hasnt been affecting bookings from airlines aren't really seeing any consequence from that guy.

What I'm wondering is what red flags are you looking out for what signs are you looking at for that Theyre in damage.

And from happening.

Well I guess.

Transaction, we're just looking at bookings straight up other bookings coming in or not so that's kind of real time <unk>.

Prospectively, we are looking back and trying to understand what is the customer sentiment and our customers will begin to be less willing to travel or not because of the delta variant.

Be honest with you we have not seen that very very modestly but almost.

Typically insignificant be honest with you so.

We're looking at the customer sentiment, but we're also we're certainly looking at current bookings as well as forward bookings and the trends of the trends and they are they still sell in trends. So we really have not seen it. If we did we would share that with you, but we're just not seeing at this point.

Any issue or any impact from the Delta variant.

Think further to that our folks tried to stay very well informed and we're aware of like you are that the case counts have ticked up.

We're locally at least we're hearing predictions that the cases will will rise significantly in the fall.

I hope not but we're reading that too.

It's not just the airlines activity.

You look more broadly and there's no indication anywhere that I see that activity is being diminished because of the increase.

The increase in the case counts so so so far so good and I'm worried about it.

Like just like your question implies and you know.

I think what I've tried to share is that we've got to be very nimble and very flexible here and.

We are very well prepared.

If things do soften up we're ready.

And we will adjust accordingly.

I think the last thing is watching the all of the data as Gary mentioned the Big question is also.

Sure.

I think we all feel like it's the getting the vaccines out there and the vaccine efficacy is what drove the surge in demand and bookings starting in maybe late February and then the surge in demand here in the summer. The question would be is the delta variant or whatever variant comes into future somehow changing the efficacy of the vaccines.

And Theres no.

As far as I know there is no evidence of that I mean, the story is go get vaccinated, because if youre vaccinated, it's working.

And the town Hall that President Biden had yesterday that report was that.

You know of all of the recent deaths and.

All of this is unfortunate I think 99, 5% of the folks were not vaccinated.

So I think we're also looking at is somehow the variant changing the efficacy of the vaccines and so far it has not.

I appreciate the insight thank you.

The next question will come from Dawn Gilbertson with USA today. Please go ahead.

Hi, Good morning Ali asked but just from my question about the operations, but I do have a couple of follow ups on upfront.

The other question on the mask mandate.

Bob You mentioned in your remarks, you were talking about fewer flights to re accommodate people I wrote down. The number 16 did you mean, 16% or can you whats that statistic.

It was percent yeah.

Okay.

And I heard the same thing you did.

Just left off percent from sorry.

Alright, Okay, because I know it was in 16.

Amanda.

Sure.

It was actually hey, Mike, but that's okay.

Oh, sorry, I meant yes.

And then on time performance what is it so far in July you said it from the pack and basically I guess the question is when can travel as expect I know you said the worst is behind you, but when can travelers expect you guys to get back to normal operationally or at least to your standards operationally.

Uh huh.

It's 67%.

Month to day here in July at this point in time a 14th.

And that's when I say, 67% that means.

Yeah that there were arriving within 14 minutes of scheduled arrival time.

We're closer in the in the eighties. There if you just expand that to the 30 minutes. So I think from a customer perspective, we are still offering a decent experience it's not what we want.

Because it's taken them a little bit longer to get to the destination than what we would like to.

I think that as some of these weather events and these thunderstorms.

Disappear here in the August September timeframe, and then I think just net the natural trends are for our load factors to 2.

Tailor off just a bit and that will give us more recovery options than we have today and so I expect us to be better here were better in July than we were in June I think we'll be better in August and we were in July and hopefully here by the end of the third quarter into the fourth quarter will be back to.

<unk>.

Where are we where we wanted to be.

Okay and then the follow up question I don't know Francisco, Gary or Bob I'm.

I'm going to ask mandate.

September 13th expiration day do you expect that.

Can be lifted or extended and what is your stance on that thank you well I'll take that 1.

Yeah.

That's.

Well.

That's a political question to a degree.

So I don't know, whether the mandate will be extended or not.

What we have been consistently advocating as that we follow the CDC guidelines, which is if you are vaccinated.

There is no mask required.

And if you are not vaccinated, then you should wear a mask.

And Oh.

Unless that changes from the CDC.

We wouldn't advocate.

From southwest perspective, or the <unk> for that matter.

Pending the mask mandate, you've got the Delta variant now that is.

As.

Somewhat new information at this point, so I'm sure that is being very carefully thought through and and studied but I'm.

I'm not aware of any effort underway to extend the mass mandate.

At least at this you know as of today, we're not advocating an extension.

Thanks, very much Gary.

We have time for 1 more question, we'll take our last question from me.

Schlegel standard with Bloomberg News. Please go ahead.

Hi, I wanted to go back to the issue of the unruly passengers just real quickly and ask.

With southwest advocate for more of those passengers to face criminal prosecutions versus civil penalties and do you think that would have any impact on the level of disruption.

Well.

Mary.

I just I have a hard time tolerating any passenger physically abuses are employees.

That feels criminal to me and I think that is criminally if it's a criminal activity.

Criminal prosecution.

So there are extreme cases out there that that is occurring and I think that.

We will be for whatever the full enforcement and letter of the law whatever was available we would be.

It would be in support of that.

Yes.

Okay. Thank you.

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

Thank you so much Chad. Thank you all for joining US today. If you have follow up questions. You can reach out to our communications team and you know that we're always on at Www Dot SWA media Dot com. Thank you all very much.

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

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Yes.

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