Southwest Airlines Company (LUV) — Q4 2019 Earnings Call Transcript

Thanks, Chad, and thank you all for joining us. I know it’s a busy airline earnings day. But we’re going to start out with prepared remarks from Gary Kelly, our Chairman and CEO; Mike Van de Ven, Chief Operating Officer; Tom Nealon, our President; and Tammy Romo, Executive Vice President and CFO. And then we’ll open it up for Q&A. A few quick disclaimers before we get started here. We will make forward-looking statements in our remarks, which are based on our current expectations of future performance, and of course, our actual results could differ from current expectations for a number of reasons. We called out special items in 2018, and we will make reference to 2019 results that compare to prior year non-GAAP results. Both of these topics are covered in great detail, as always, in our earnings release disclosures as well as on our IR website. And we are also providing commentary today regarding the ongoing MAX groundings and our current estimations of timelines and current planning assumptions for 2020. Keep in mind, these timelines and estimations could change materially with impacts on the amount of financial damages we incur, our published flight schedule beyond June 6 and our fleet capacity and CapEx assumptions, to name a few. With all of that said, we’ll go ahead and get started, and I’m turning over the call to Gary.

Thank you, Ryan, and thanks to everyone for joining us for our fourth quarter and year-end 2019 earnings call. Straight away, I want to thank our employees. This is our 49th year, and, in my experience, there is no more remarkable year than 2019. The grounding of effectively 75 of our airplanes, which is about 10% of our fleet, presents a crisis-like challenge. Our people were ready to work with the best planning tools and technologies in our history, but more importantly, with the right fortitude and the right resolve to get through this crisis. Our objectives were to run a great airline, serve our customers exceptionally well, protect our finances and our jobs, and follow through with our capital projects that were underway. And we were able to do all those things. The MAX groundings reduced our annual operating income of $828 million. Our earnings were still a record on a per-share basis, non-GAAP, at $4.27, which is truly remarkable. But they would have been 28% higher and 27% more than a year ago but for the MAX. You can do the math on the stock price effect, but we settled with Boeing for the 2019 MAX groundings, and the settlement seems to have zero effect on the price per share, by the way. But we also intend to settle for 2020 as well. So we’re three months later since our last earnings call, and unfortunately, we’re still talking about the MAX, unhappily. I’m confident about the MAX. More importantly, our pilots are confident about the MAX. Boeing needs to get the work done and get the certification flight done, give the FAA a chance to do their work and unground this airplane. But right now, we’re scheduled for a June 6 return, which implies an ungrounding several months before Boeing surprised us all this week with their June, July predictions about the ungrounding. And obviously, that would make our and other airlines’ June dates unworkable. So the timing remains uncertain, and we’re working through all of that right now. Our goals for 2020, given all of this, are very straightforward. We want to return the MAX to service. We want to continue to run a great operation, in fact, even better. We want to continue to serve our customers very well with exceptional hospitality, and in fact, even better. We want to protect our finances and our jobs and continue to keep costs low and slow the rate of inflation and do that even better. We want to settle with Boeing for 2020 compensation. We want to continue on with the capital projects that are underway. And then finally, we want to keep our network intact and continue making what modest tactical adjustments we’re able to do. Having said all those things and assuming that demand and the economy remains strong and that the oil prices remain stable and low, if we can continue to execute against all these goals, that means we only have one problem, and that’s fleet growth. So with regard to the fleet, we’re assuming that the MAX grounding is short-lived, meaning there are months to go and not years to go. And with that in mind, we are aggressively pursuing a couple of tactical ideas. Number one is mainly our 700 retirement schedule where we have a lot of flexibility. So we’re actively deferring retirements where it makes sense. Secondly, we’re always monitoring the used 737 aircraft market. We’ll continue to do that. Our issue is simple. Our seat growth is not keeping up with demand, much less allowing us to expand. And we’re losing share, but all that is temporary, and we plan to aggressively recapture it once the MAX is ungrounded and we’re in a superb position, given our return on invested capital. There is no change in our efforts to evaluate the risk/reward of a single aircraft type or supplier, and we’ll do that. It’s just a lower 2020 priority, so there’s no update there. I’ll also preempt the M&A question by repeating what I’ve said earlier: I do not agree that the MAX crisis compels us to acquire another carrier. We would not overpay. We would not commit us to a course that’s inconsistent with our strategy. And, of course, as is our policy, we do not comment on rumors or speculation regarding any M&A activity. And then finally, I want to thank our Board for making an amendment for our 2019 profit sharing. Even though the Boeing compensation is for 2019, it is not included in 2019 profits. And that’s not fair to our people for their profit sharing. So as a result of that, $124 million was added, which reduced our fourth-quarter profits, but that makes the total annual profit sharing contribution a record $667 million. Our folks earned it, and I just wanted to congratulate them. Taking that notable item into account, we beat consensus. So with that quick overview, I’d like to turn it over to Mr. Van de Ven to take us through our operations.

Well, thanks, Gary. And as Gary was mentioning, given all our headwinds that we were facing, it was extremely important that we run a reliable customer-friendly operation in the fourth quarter. And our people certainly delivered. They produced the best overall operation we’ve had in over a decade. Our system-wide on-time performance for the fourth quarter was 82.4%, and we accomplished that with the least amount of block and turn time in the industry. And that’s a big factor in our operational efficiency that lowers our costs through superior aircraft utilization. It’s the low cost coupled with the great service that allows us to win. On the service front, this was the first quarter where we had bag scanning implemented throughout our domestic network. We emplaned 30.9 million bags in the quarter, and 99.6% of those bags were carried on flights as checked. That is a record fourth-quarter performance for Southwest Airlines. And our customers noticed. Through November, Southwest again led the industry with the lowest customer complaint ratios reported by the DOT. Based on our preliminary December results, we expect to close out the year in a similar fashion. Frankly, our people have been delivering this kind of exceptional service the entire year while dealing with the significant activities associated with the MAX grounding. So in that environment, we grew our Hawaii service to over 1 million customers in just 9.5 months. We implemented plane-side scanning for bags across the domestic network, and we continue to implement technology enhancements across all our operating functions. For all of 2019, excluding Hawaiian Airlines, Southwest finished in the top three in the industry in on-time performance and bag handling with the lowest customer complaint ratio, all as measured by the DOT. That’s the best combined yearly industry performance since 1999. Our people believe that they can improve from there. Through yesterday, our January on-time performance was 87.7%. That is just a superb start to the year. In fact, we’ve only achieved an 85% January on-time performance or better five times since 1988. It’s the on-time performance that sets the foundation for bag handling, for customer complaints, and for cost control. There’s no better team in this industry than our Southwest people. They support our customers, our company, each other, and they are just relentless in execution. They are the heart and the soul and the spirit of Southwest. Turning to the MAX for a moment. Our guiding principle of relaunching this aircraft continues to be an orderly and controlled manner, one which we can execute with a high degree of confidence and certainty. That’s been a critical focal point for our team, and we planned and we’ve replanned our return to service activities as new information becomes available. Since the beginning of the year, we've learned of two significant additional considerations: first, the Boeing recommendation for both simulator and CBT training for our pilots prior to their operation of the airplane; secondly, Boeing’s most recent estimate of a mid-2020 return to service date. As you know, we’ve removed all MAX flying from our schedules through June 6, and with this new information, it seems pretty clear that we’re going to need to make further schedule adjustments into the summer. So we’re replanning yet again using the best set of facts and insights and all the necessary activities, and we’ll make the appropriate adjustments well in advance so that our customers’ travel plans aren’t significantly disrupted. We have 34 MAX aircraft on our operating certificate. They’re in Southwest Airlines’ control, and they’re stored in Victorville, California. Those aircraft must go through maintenance and make-ready work before they’re ready for service. We also have 27 MAX aircraft that Boeing has built, and they’re being stored by Boeing until the aircraft are certified to fly. Those 27 must still go through the delivery and acceptance process in addition to the make-ready work to be added to the Southwest Airlines operating certificate. Those combined 61 aircraft are our most reliable source of lift once the aircraft is cleared to fly. As I’ve stated in earlier calls, we believe that we can manage around 5 to 10 aircraft a week from this collective pool to be reintroduced to the operation. It will take at least a couple of months for those aircraft to return to service, and our crewing is in place today to operate them. Boeing still contractually owes us 51 more aircraft this year, and the delivery quantities and dates are in flux due to their production line shutdown. We will continue discussions with them to work through what’s reasonable for both of us as their plans become better defined. Turning to training. Our initial training plans included the 30-day period for all our pilots to complete the expected CBT training before we begin flying the aircraft in revenue service. Boeing is now recommending additional simulator training, and the training requirements will be finalized after the JOEB completes their testing. These requirements will dictate the time it takes for us to complete our pilot training. We currently have three MAX sims on property, and we have worked with our simulator manufacturer, CAE, to provide us with three additional MAX simulators to be training-ready before the summer. That will give us at least six MAX simulators available for training by the time the aircraft is released to fly, and that will significantly reduce our training time. Beyond these six, we have three more simulator deliveries planned for the second half of 2020, and we’re working on expected in-service dates for them. That will take us to a total of nine MAX simulators by the end of 2020. Assuming, for a moment, that the simulator training might take two hours, this serves as a baseline; it will take us at least a couple of additional months from where we were to get all of our pilots through that training. So there's still a lot of moving parts to nail down the return-to-service plan. The FAA is in control of the regulatory ungrounding process, and our plans begin once they clear the aircraft to fly. From that date, we’re assuming it will take several weeks to get our manuals updated and for our CMO to approve our changes. Then once that is accomplished, we can begin training our pilots and bringing the aircraft into their operational state. It will take at least a couple of additional months before the aircraft are ready for revenue service and our pilots are trained. In the meantime, we plan on performing extensive validation flights to work out any issues from the aircraft sitting so long, to reintroduce them to our people, and to make sure that we are completely comfortable with the aircraft's performance before any customers set foot on the aircraft. Wrapping up, our operation is running very well. We have a detailed plan to relaunch the MAX, and we’ll be adjusting it as we get better information. Our people are taking great care of our customers and each other, and they’re delivering a safe, reliable product. They are the best team that I have ever been around. It is a pleasure to support them. And with that, over to you, Tom.

Okay. Thank you, Mike. I just really have to echo Mike and Gary and also share my congratulations and thanks to all of our employees. They are absolute warriors, and they are Southwest heroes. 2019 was a very challenging year with the MAX, but we also had a great year. We really did have a great year, and our people across every work group just kept rising to the challenge time and time again. When the MAX was grounded, as Gary said, in March of last year, we were very clear about our priorities. First, we are absolutely committed to running a great operation. We’re absolutely focused on taking great care of our customers. Third, we are very focused on delivering very strong financial results. And we did all three. And we did it very well. As Mike said, the operation was rock solid, arguably the best operation in a decade. Also, as Mike said, our DOT customer satisfaction score is at the very top of the industry. Keep in mind, that’s the year when we had to proactively re-accommodate, literally millions of customers. Our brand scores also remain the highest in the industry and among the highest in the world for any company, not just airlines. The customer service and the hospitality that we’re so famous for is stronger than ever, and our people take great care of our customers and one another. Our fourth quarter RASM results were right in line with our original October guidance of flat to up 2%. Our fourth quarter revenue grew 40 basis points to a record of $5.7 billion, despite a nearly 1% decline in capacity. We also grew our RASM 1.3%, which is also a record performance. Our base business was very strong and was the driver of our Q4 RASM performance. This was the result of strength in both demand and yield. We also had a very strong performance in our other revenues, more specifically, our Rapid Rewards program, which performed very well. We also had strong performance from our early bird and upgraded boarding products, both of which had double-digit growth in the quarter. On our third quarter call, we made the decision in fall 2019 to republish our November and December schedules, really with two objectives in mind. First, we want to minimize any customer disruption and inconvenience during the holiday travel season. Second, we wanted to ensure that we ran a great operation with lower capacity. We achieved both objectives, but we also knew that we weren’t optimizing RASM for the peak versus off-peak seasonality in the fourth quarter. The two to three points of temporary year-over-year RASM benefit we saw in the third quarter from the removal of the MAX didn’t occur in the fourth quarter because of the sub-optimized Q4 schedules. None of that was a surprise to us. The net effect is that there was no material year-over-year MAX impact to Q4 RASM, which, again, is what we expected and shared with you on the last call. Again, our network planning team did a phenomenal job of developing workable solutions to protect the strength of our network and minimize customer disruption. The same goes for our revenue management team, which did an equally incredible job of managing the revenue and yields throughout the quarter. We had very strong revenue growth in our other revenues as well. For the full year, our other revenue grew nearly 11%. In the fourth quarter, performance was a strong 9% growth. We are continuing to see record passenger mix continue to grow, which speaks to the strength and value of the program for our customers. Our growth in spending on our co-brand credit cards remains very healthy, with nearly double-digit growth and low attrition. To sum up Q4, the bottom line is straightforward: steady, strong demand for leisure and business, continued strength in pricing, strength in our other revenues, and continued industry-leading strength in our customer and brand scores. Q1 looks similar to what we experienced in Q4. The underlying trends around demand and pricing that we experienced in Q4 have continued into Q1. Everything we’re seeing for the quarter shows solid shopping and bookings. Demand remains solid for both leisure and business travel, and pricing remains steady and strong. We have a good read on first quarter revenue and RASM trends. Obviously, we continue to be impacted by the MAX; we pulled the MAX out of our April schedule, which runs through June 6. March is the peak month in the first quarter, and our MAX aircraft deficit grows from 34 aircraft in March of 2019 to roughly 60 aircraft short by March of 2020. That said, in Q1, we don’t have the flight schedule variations and the capacity and demand mismatch complications that we had in the fourth quarter. Because of that, we expect a two-point year-over-year RASM benefit in Q1 from the MAX cancellations. We also have roughly 0.5 points year-over-year RASM tailwinds in Q1 from prior year negative impacts, 1 point due to the government shutdown and 0.5 points due to the unscheduled maintenance cancellations in Q1 of last year. Based on the strength of our base business and the Q1 MAX RASM impact, we expect a strong Q1 RASM performance in the range of up to 3.5% to 5.5%. As we adjust flight schedules for MAX cancellations, our focus is to maintain depth and frequency of service to key markets while maintaining high-quality connecting itineraries. Taking a look at our schedule, we’ve trimmed some capacity from longer-haul markets and added more capacity into our short and medium haul flying, which is a real core strength of our network. In no way are we walking away from long-haul flying, but with the MAX out of service, we have opportunities to replace profitable, below-system-average RASM long-haul, non-stop itineraries with high-quality connecting itineraries. Once the MAX returns to service, we intend to restore the vast majority of flights that have been taken out of our schedules. We have the world’s largest and strongest point-to-point network, and we intend to leverage our cost structure and scale to resume our growth. We have a long runway of growth opportunities still in front of us. Despite the MAX cancellations, we’ve continued to add additional flights into some of our key markets. Our near-term growth focus will continue in Baltimore, Denver, Houston, and Hawaii, which continues to perform well in both long-haul and interisland markets. Looking beyond Q1, our 2020 growth will be determined by the MAX return-to-service. Until that occurs, we’ll continue adjusting our plans accordingly. Our objectives remain the same as they were in 2019: we will run a great operation, take great care of our customers, and deliver strong financials. As Mike alluded to, if we need to make further adjustments to our June schedule, we will do so, which will likely include further trims to our non-stop long-haul flights and potentially a modest thinning of high-frequency markets, essentially the same playbook we’ve been running for the past several schedules. We also have a pipeline of revenue and cost initiatives, most of which we won’t discuss yet for competitive reasons. But I can tell you that we’re on track to implement our new GDS capabilities for corporate travel by mid-year, with Travelport and Amadeus, which we expect to drive incremental EBITDA between $10 million and $20 million in the second half of 2020. There’s clearly a very large opportunity to grow substantially over the next several years. Q1 is off to a strong start. Trends remain strong, and we’re guiding our RASM to be up 3.5% to 5.5%. Once the MAX returns to service, we are ready to bring it back into service with all the operational and commercial discipline you’d certainly expect from Southwest Airlines. With that, I’m going to turn it over to Tammy.

Thank you, Tom, and hello everyone. I’d also like to thank all of our employees for their tremendous efforts managing through a very challenging year. The MAX grounding has had a significant impact on our company, but our employees continue to rise to the occasion, and the strong results we reported this morning would not have been possible without their hard work, focus, and teamwork. With the MAX return-to-service timeline shifting frequently, it has been difficult to anchor our full-year 2020 forecast to support meaningful guidance for the full year. So I’ll focus primarily on first-quarter guidance and my comments today regarding our cost performance, fleet capacity and CapEx plans, and our strong financial position. During the fourth quarter, as Gary covered, we reached a confidential agreement with Boeing for compensation related to 2019 financial damages due to the MAX groundings. The compensation from Boeing will be accounted for as a reduction of the purchase price of our 31 owned MAX aircraft and future MAX orders, which reduces property and equipment on our balance sheet and will result in lower depreciation expense over the useful life of the aircraft. In light of this agreement, our Board of Directors authorized a $124 million pre-tax profit sharing award. This incremental award was accrued in the fourth quarter and reduced fourth-quarter earnings by $97 million or $0.18 per diluted share, as we covered in the release. A record $264 million in fourth-quarter profit sharing expense included a $124 million discretionary award and will be paid later this quarter as part of the record $667 million full-year 2019 profit sharing distribution to employees. Now that I’ve covered profit sharing, I’ll go ahead and cover fuel costs before I move into our cost performance, excluding fuel and profit sharing. Our fourth-quarter fuel price of $2.09 per gallon decreased $0.16 or 7.1% year-over-year, primarily due to an approximately 8% decrease in market prices. We have great fuel hedging protection in place this year with a 66% hedge for the first quarter and 59% hedge for the full year 2020. We’ve been adding some protection to future years and are currently about 54% hedged for 2021 and about 31% hedged for 2022. We also recently began adding modest protection to 2023 and expect to continue our systematic approach to building a meaningful multi-year hedging portfolio at a reasonable cost to provide insurance on about a third of our cost structure. For our first quarter 2020, based on market prices as of January 17, we expect our fuel price to be in the range of $2.05 to $2.15 per gallon with a modest $0.01 hedging gain at current prices. Our fuel efficiency continues to be significantly impacted by the MAX groundings. We came into 2019 expecting a solid year-over-year improvement in fuel efficiency, largely driven by the operating performance of the 75 MAX aircraft we should have had in 2019. As a reminder, the MAX produces a 20% fuel burn improvement over our retired classic fleet and a 14% improvement over our NG fleet. However, our fourth quarter and full-year 2019 ASMs per gallon declined 0.8%. So we lost some ground last year. We’ll continue to be impacted until the MAX returns to service, and first quarter 2020 ASMs per gallon are also expected to decline year-over-year by 2% to 3%. We look forward to reversing this trend and getting back on track with our fuel efficiency improvement goal. Excluding fuel and profit sharing, the 5% year-over-year increase in our fourth quarter CASM-Ex was right in line with our most recent guidance. The primary driver of the year-over-year increase was the temporary underutilization of overhead combined with the lower than planned capacity from the MAX grounding. For the full year 2019, our CASM-Ex increased 7.7% year-over-year. The MAX grounding impact drove approximately 5 points of this year-over-year inflation, which is what we expected. Excluding the MAX impact, our cost control was solid with core year-over-year 2019 unit cost performance slightly below our original CASM-Ex guidance range of 3% to 3.5%. This includes an incremental $10 million of maintenance expense to keep seven of the -700 aircraft that we were originally going to retire in 2019, and an incremental $42 million ratification true-up for the mechanics contract. Looking at the first quarter of 2020, we expect our CASM-Ex to increase in the range of 6% to 8% year-over-year. Our outlook assumes an estimated 7-point unit cost penalty from the MAX grounding as our fleet deficit grows relative to our cost base. We will continue to have temporarily unabsorbed overhead that will be utilized upon the MAX return to service. Setting the MAX aside, our first quarter CASM-Ex outlook also includes 1 to 2 points of inflation, primarily due to increases in salary wages and benefits, maintenance expense, and operating expenses related to technology and facility investments. We have year-over-year tailwinds related to the first quarter of 2019 impacts associated with the ratified labor agreement with our mechanics and costs associated with unscheduled maintenance disruptions and flight cancellations. Turning to an overview of our fleet plan, this has been a focus for us this year with the MAX grounding. I’ll spend more time walking you through all the moving parts. Prior to the MAX groundings, our 2019 plans were for 44 MAX deliveries. That was 37 MAX 8s and seven MAX 7s along with 18 -700 retirements, resulting in a fleet of 776 at year-end 2019. Instead, we had three MAX 8 deliveries plus six -700 retirements, ending 2019 with a total fleet of 747 aircraft. We took delivery of three 737 MAX 8 aircraft in the first quarter before the MAX groundings in mid-March. We have not taken any delivery since then, and as a result, we decided to postpone seven of the 18 planned retirements for 2019 to help mitigate a portion of our fleet deficit. We’ll operate these seven aircraft for around two more years, scheduled for retirement by the end of 2021. Of the remaining 11 -700 retirements planned for 2019, six of them have already been retired, one in the third quarter and five during the fourth quarter. The remaining five retirements have shifted to the first half of 2020. We have not updated our contractual delivery schedule with Boeing. The 41 MAX aircraft we didn’t receive in 2019 are still in flux. In our contractual order book schedule shown in our earnings release, we reflected 40 of those deliveries as part of our 2020 firm orders and one as a 2021 firm order. However, our current planning assumptions indicate we do not expect to receive 78 aircraft deliveries in 2020. The news from Boeing that the MAX will likely not return to service until mid-2020 has us reevaluating our fleet and capacity plans further. Mike has already taken you through some of the details of our MAX return-to-service plan and referenced the two sources of MAX aircraft we’re focused on as part of our 2020 fleet planning assumptions. Mike is working through the plan to safely return the 34 MAX 8s already in our fleet. We will also be working with Boeing and the FAA to deliver the 27 MAX 8 aircraft that are built and in storage. Currently, our planning scenario is for 27 MAX deliveries in 2020, bringing us to around 60 MAXs, which we are currently staffed to operate. We also expect to retire 16 -700 aircraft this year, five of which shifted from 2019 and 11 more planned throughout the year. This is less than the 20 to 25 we previously communicated due to the slower assumed ramp-up of MAX production and delivery catch-up. We will invest approximately $12 million this year into those 11 aircraft that we’re extending for a few years. Based on our planning assumption, we would add a modest 11 net aircraft to our fleet in 2020, totaling 758 aircraft. Of course, we don’t have certainty on the timing of the MAX return-to-service, production timelines from Boeing, or aircraft delivery timeline, so this is all subject to change, and we’ll keep you updated accordingly. Shifting to capacity, fourth quarter 2019 ASM declined 0.9% year-over-year, which was about 8 points lower than our original plan. Full-year 2019 capacity declined 1.6% year-over-year and was significantly lower than our original plan to grow nearly 5% in 2019. For first quarter 2020, we currently expect our ASM capacity to decline in the range of 1.5% to 2.5% year-over-year. We currently have MAX flying removed through June 6, but with Boeing’s latest guidance, we’ll likely extend our MAX-related flight adjustments further. Based on the flight schedule adjustments through June 6, we expect second quarter 2020 capacity to increase no more than 2%. Now turning to the balance sheet and cash flow, we ended the quarter with approximately $4.1 billion in cash and short-term investments. Our cash balance continues to be higher than usual as we haven’t been making aircraft delivery payments since mid-March 2019. Delayed delivery payments also lowered our CapEx to $1 billion in 2019 versus our original plan of $1.9 billion to $2 billion. The majority of the 2019 spend related to technology and facility investment. We also received $400 million in supplier proceeds, which we consider an offset to our capital expenditures. For 2020, if you assume we receive the 27 MAX 8s from Boeing that are already built for us, total CapEx would be approximately $1.4 billion to $1.5 billion, net of supplier proceeds owed to us at the end of 2019. Our cash flow generation in 2019 was strong, despite the $828 million operating income reduction due to the MAX groundings. In 2019, we generated $4 billion in operating cash flow and a record $3.4 billion in free cash flow, with $2 billion of share repurchases and $372 million in dividends. We have $1.35 billion remaining on our current share repurchase authorization, net of the $550 million accelerated share repurchase currently underway that is expected to wrap up no later than mid-February. We have very healthy cash and liquidity, low leverage, manageable debt obligations this year, and remain focused on a balanced approach to investing in our employees and the company while returning cash and value to our shareholders. In closing, I’d like to extend another huge thank you to all of our employees. Taking into account the significant impact the MAX grounding had on our operational and financial performance, our 2019 results were superb. We did not lose ground on our very strong financial position, maintaining our investment-grade balance sheet, ample liquidity, strong cash flows, and healthy shareholder return, while continuing to invest in our business. We’re well positioned for the future. Absent the impact of the MAX groundings and first quarter 2019 unique items, we achieved our unit revenue growth goal of greater than 3% for 2019. Likewise, we beat our unit cost guidance for 2019, which is just tremendous. The MAX significantly impacted 2019, and 2020 will also be significantly affected by the ongoing MAX situation, but our focus on solid execution remains unchanged. We look forward to getting past these near-term challenges and temporary headwinds, safely returning the MAX to commercial service, and leveraging our low-cost and robust route network to resume our growth. With that, Chad, we are ready to take analyst questions.

Hi, good afternoon, everyone, and thank you for the questions. Tammy, it seems like you were able to offset the 1 to 2 points of inflationary pressures in 1Q partially due to some of the easier comps and maybe some of your cost initiatives. Do you think you have a similar ability for the rest of the year, which would allow you to keep it more contained to what the MAX impact is? Or do you think inflation will continue to ramp over the course of the year? Thanks.

Thanks for your question, Andrew. Yes, we certainly have abnormal capacity trends this year again. But as we drill down into our core costs and strip out the estimated impact of the MAX grounding and all the other noise, we see core business unit cost inflation in that, call it, close to 2% range. That said, we don’t know exactly when the MAX will return, and our second half 2020 capacity plan is very much in flux. We’ve reported our analysis of the unit cost impact each quarter from the MAX groundings. Along those lines, we’ve done our best to get a sense of what our true CASM-Ex run rate is from 2019 to 2020. Normalizing for the MAX and the other unique items for both 2019 and 2020, we believe we could have reached our CASM-Ex year-over-year growth in 2020 of less than 2%, which is in line with our goals. But admittedly, we have a lot of moving parts to try to tease out. In summary, I’m very pleased with how we executed against our cost plan in 2019, and we are very focused on being even more efficient. So I think it’s reasonable to assume we should be able to improve our trajectory here in 2020 relative to 2019, excluding the MAX. But just again, including the MAX, obviously, the year-over-year comparisons are very skewed, and we’re incurring costs that we didn’t expect, such as extending retirements, incurring the related maintenance investment, and deferring flight crew hiring from 2019 into 2020, et cetera. Overall, I’m really proud of our folks. They’re doing a great job with their budgets and controlling costs. And I’ll add that we’re all looking forward to the safe return of the MAX, resuming our growth, utilizing our unabsorbed overhead and beginning to reverse the temporary unit cost penalties that we’re incurring. Thank you again for your question.

Great, thank you for that detail, Tammy. And then maybe my second question is for Gary or Mike. I know it’s difficult to comment on full-year capacity given a lot of the moving pieces, but based on what Mike explained in his prepared remarks, what could growth look like once the MAX returns to service? Could it be that high single-digit growth rate that many were expecting a few months back? How does simulator training change the timeline for a full return to optimal utilization for your fleet? Thanks.

Tammy, you’re probably in the best position to answer that. We didn’t – we purposefully did not put any guidance for the year, for obvious reasons, but Tammy…

That’s right. Yes, it is tough to answer for all the reasons we’ve laid out. For the second quarter, we’ve given our ASM growth guidance if you assume the MAX gets pushed beyond the second quarter, probably getting you to roughly flat capacity year-over-year for the second quarter. It’s a function of the return-to-service plan. We’ve got a good line of sight on the 61 airplanes. Mike has walked you through the ramping of all of that, which is a several-month process. From there, it’s really based on the production rates from Boeing, which we don’t know the answer to yet, so it’s premature to determine the capacity ramp-up year-over-year here in the second half of the year.

Just to be clear, we’re staffed and ready to go for 61 more airplanes. We want to get them into service as quickly as we can, understanding it needs to be safe and meet our objectives. We just don’t know the speed right now, and some of it may be related to us gating the flow of airplanes back into operation more than what we know right now. That gives you a little bit of insight; you can throw percentages out there, but it’s certainly not going to be 10%. It won’t be anything close to that. And in 2021, we have similar concerns. We’re not as worried about percentages right now as we are, but we’re certainly not going to be growing rapidly here in 2020.

Understood. Thanks for the color.

Hey, good afternoon. Just a follow-up question, Mike, to clarify the MAX and the color you gave about it. It’s a lot of uncertainty around the return to service, but you talked about quite a bit. I know you're utilizing that training for the future, can you just clarify the timeline for each of those phases on how you expect to respond? Thanks for taking the time.

Yes. Just to clarify, the timeline before, we need to get the manuals approved; that could take about three to four weeks. We can begin execution once that’s done, as we train pilots under the new guidelines. When it was just CBT training, pilots could be trained within 30 days, but the simulator training could add at least a couple of months to that timeframe. We have to manage both the crew training and aircraft maintenance positively, and it’s a lot of moving parts.

Just to clarify, compared to what we previously assumed with simulator training, we would be out several months later than what we were assuming before. The FAA controls the regulatory ungrounding process, and it will take several weeks after that to train pilots and prepare the aircraft for their operational state.

Okay, great. That’s helpful. Thank you.

Thank you. We’ll be looking at all these aspects post-MAX ungrounding as we balanced focus on operational efficiency, employee investments, and shareholder returns.

Thank you for your questions.

Chad, thank you. I’d like to welcome the members of the media to our call today. We’ll go ahead and get started with the Q&A portion. So Chad, if you could just give them instructions on how to queue up, we’ll get started.