Southwest Airlines Company (LUV) — Q2 2020 Earnings Call Transcript

Thank you Chad, and thank you all for joining us today. Joining me on the call, we have Gary Kelly, our Chairman of the Board and CEO; Bob Jordan, Executive Vice President of Corporate Services; Mike Van de Ven, Chief Operating Officer; Tom Nealon, President; and Tammy Romo, Executive Vice President and CFO. So following our prepared remarks today, we will open it up for Q&A and just a few quick disclaimers before we get started. We will make forward-looking statements which are based on our current expectations of future performance, and our actual results could differ from these expectations for a variety of reasons. We also had special items in our second-quarter results which we excluded from our trends for non-GAAP purposes, and we will reference those non-GAAP results in our remarks. And of course, we have in-depth information and reconciliations in our earnings release from this morning on both forward-looking statements and GAAP and non-GAAP results, so please be sure to check those out. And now, we'll go ahead and get started, and I'll turn it over to Gary.

Thank you Ryan, and good morning everybody, and thanks for joining us on our second-quarter earnings call. This is a record quarterly loss for us. And of course, that can never be something that we're pleased about. But since our last earnings call in April, we have accomplished a great deal and performed better than the goals that we laid out at the time. Most importantly, we've boosted our liquidity. We've cut operating costs. We've generated traffic momentum. We've cut our daily cash burn rate to $16 million a day in June. And importantly, our success in generating traffic was key and key to the next several quarters. We have a viable flight schedule for our customers to choose from. We're operating an extremely reliable airline. Our people are delivering exceptional hospitality. We committed to the Southwest Promise on May 1 to assure our employees and our customers that their safety comes first. And we're offering low fares with no hidden fees, and all that adds up to record high levels of customer satisfaction. And of course, that is crucial. We offered voluntary separation and extended leave program that closed on July 15, as we had planned. Almost 17,000 employees signed up. And we're working on reorganizing the company and adjusting our fourth-quarter flight schedule to roughly match our people capacity which year over year will be down roughly 25%. And the majority of the volunteers selected the extended leaves, and there'll be recalls if we need to add capacity quickly. And that gives us tremendous flexibility and significant cost savings over the next several years. Implementing this program is a major objective in the third quarter. And while we have a plan for pay cuts, benefit cuts, furloughs and layoffs, we do not intend to pursue any of those at least through the end of this year. COVID-19 cases surged unexpectedly this month, and the U.S. is an outlier, and of course, that is disappointing. And we've seen a dramatic impact to our trends as far as traffic revenue and bookings this month, and we've had to reduce what was a very credible revenue forecast for the third quarter by hundreds of millions of dollars. And we would have easily beaten our second-quarter daily cash burn number but for that. We'll have to work harder now and adjust August and September capacity in order to meet our goal of continued reduction in daily cash burn. We were on a path to breakeven by the end of the year. That is still my goal, but first quarter may be more realistic. This year and probably the first half of next year will be a game of tactics and iterations. We're going to execute, we'll monitor and we'll constantly adjust. And that means the schedule, and our fares, and our spending. Overall, I'm very pleased. I'm very encouraged. We knew this would be a long sawtooth slog with a lot of unexpected twists and turns, and it's proving to be so. Our country and the world needs to beat this virus. Until then, we're going to have to be resilient. We're going to have to persevere, and we're going to have to manage. And I think everybody needs to understand that we know enough now to know that we have a long, long way to go. And we will manage to sustain the health of our company accordingly. We were very well prepared for this. We're prepared for a prolonged war against this pandemic. Our people have literally done all they have been asked and I could not be more proud. And I have never seen anything like this in my life. But after these many months of battle, I am more confident than ever that we will not just survive, but we will thrive. So we have a lot to cover this morning before we get to your questions. So with that very quick overview, let me quickly turn the call over to Bob Jordan, our executive vice president, who, among other things, is going to talk about our voluntary separation program and extended time off.

Thank you, Gary, and good morning, everyone. It's great to be here, especially to discuss this important topic. We have been offering voluntary separation and extended leave options to our employees. These programs are voluntary and crucial as we work on reducing staffing, operating costs, and cash burn. These are the most generous programs we have ever provided. The response from our employees has been fantastic, and I want to express my sincere gratitude. These decisions are challenging, and our employees have approached them seriously. Each person who chooses to separate or take extended leave helps reduce our cash burn, preserving other jobs. I appreciate everyone who considered these options, especially those who opted in and participated. Regarding the numbers, which are still being finalized and should remain consistent, around 16,900 employees requested either voluntary separation or an extended leave, with about 4,400 opting for voluntary separation and 12,500 requesting an extended leave of 6, 12, or 18 months or more. The 4,400 voluntary separations account for approximately 7% of the active workforce, while the nearly 17,000 combined requests represent about 27% of the active workforce. Of the 12,500 requesting extended leave, over 60% requested a year or more. The combination of voluntary separations and leaves of a year or longer represents about 20% of the active workforce, providing significant flexibility. I want to highlight our pilots, who played a pivotal role. With over 2,300 participating, they represent about 25% of all active pilots. I am extremely proud of them and all our employees. We will fulfill all requests for separation, with the majority completed before September 30. The requests for extended leave are not evenly distributed throughout the company, so we have some adjustments to make there. However, our goal is to allow everyone who wishes to take extended leave the opportunity to do so, effective September 1. If the business recovers more quickly than anticipated, the program allows employees to be recalled with reasonable notice. On the financial side, as mentioned in our earnings report this morning, we expect around $1.7 billion in accruals in the second and third quarters tied to these programs. Nearly half of the cash payments for voluntary separation will occur this year, with the rest spread over several years for benefits and extended leave. We anticipate significant cost savings in salaries, wages, and benefits in the fourth quarter, exceeding $400 million. Our cost savings are expected to escalate in 2021. The flexibility of the extended leaves may cause some variability in financial impact if we see a significant rebound in business, but we currently project 2021 cost savings of more than $1 billion. Given the varying lengths of the leaves, the financial benefits may reduce over time. Most employees requested a leave of a year or more, and these programs are designed to address our staffing needs as our capacity changes in the next 12 to 18 months. While our capacity plans may vary, I am pleased with how the numbers align our costs with a lower level of flying. I am grateful to the people of Southwest Airlines for their response; every work group has exceeded our expectations. This provides essential flexibility just when we need it. I hope we won’t have to take further action, but should demand continue to decline, we will evaluate additional steps to further reduce staffing, operating costs, and cash burn. Now, I will hand it over to Mike.

Thanks Bob. In addition to all that work that Bob just covered, we made significant adjustments to our operation in this bleak COVID-19 world. We started the quarter navigating through cancellations and customer re-accommodations based on weak demand. The lack of demand led us to implement aircraft parking and storage programs. The trip cancellations created crewing and hotel challenges. And in the midst of that, we also introduced the Southwest Promise which drove significant changes in our operational procedures. Throughout all those efforts, our people produced the best quarterly operation that I can remember. They were heroic. They were magnificent. Their teamwork was superb. So as I mentioned, the month of April, we were reducing flights and re-accommodating the few customers that flew on the other flight. We had nearly 4,000 flights a day scheduled in April, and we operate about half of those. All of those cancellations kind of begin with our on-time performance. And overall we were 98% on time on flights we did operate, our on-time performance for April was 47%. That pulled down our overall quarterly results to 71.5%. We were more than happy to make that trade-off given the cash savings of not operating those near-empty flights. But from May 3 to June 30, we were able to adjust our flight schedules for demand, and we operated those schedules as published. Our OTP for that period was 94.8%, and that's the best May and June performance in 25 years. Our bag handling continued to improve with the rollout of our bag scanning program last year, and we added cargo scanning here in the second quarter. We had the lowest level of mishandled bags in our history in the second quarter. Our customer Net Promoter Score was also the highest that we have on record. So our network design and our decision support tools that we're using in our operations create a solid foundation for whatever the future holds. We have the ability to add or cut flights close in as desired, and that operational flexibility is just critical in this environment. So turning to the fleet. We had roughly 400 aircraft in long-term storage or temporary parking programs in April, and that included our 34 MAX aircraft. Since April, our daily scheduled trips increased throughout the quarter and into July. And then additionally, our loads were increasing on each flight. And so we added roughly 6,900 extra sections beyond those scheduled as a result. Those items required more aircraft availability. So we added 300 aircraft back into the active fleet. And at this point, we have about 100 aircraft including the MAX, in long-term storage or temporary parking programs. We remain committed to the MAX. We look forward to its return to service. It is our most cost-effective airplane, and having it back into service will give us more certainty in terms of fleet planning. Given the most recent Boeing and FAA comments, we're hopeful to begin revenue service in late December. But given the history of delays, it certainly could slide into the first quarter. It will take at least a couple of months from the date the FAA formally ungrounds the aircraft for it to fly in revenue service. And that time will be needed for manual updates, coordination with our certificate management office, required maintenance on the aircraft, pilot training and then validation on readiness flights that we want to perform. So wrapping up one of the most active, action-packed quarters that we've ever had, we navigated through the activities exceptionally well, producing superb operating results and customer accolades for our service. And as I said during the last quarter call, we are at war with COVID-19, and we are blessed to have a ferocious group of warriors that are ready for the fight. And they inspire me and our customers every day. So Tom, with that, over to you.

Thank you, Mike. Let's get straight to it. Our second-quarter operating revenues decreased approximately 83% compared to last year, while our capacity was down about 55%. However, we observed a stronger demand and an improvement each month during the quarter. We provided updates on April and May, and I'll briefly discuss June before moving into the third quarter. In June, we saw an improvement from May, with consistent positive bookings and steady growth throughout the month. Operating revenues were down 73% year over year, with a load factor of 50% and capacity reduced by 44%. Business travel has been impacted more severely than leisure travel, resulting in a decline of about 90% to 95% in passenger revenue for business travel. We've spoken with corporate travel managers who express some cautious optimism about a potential travel recovery in the third and fourth quarters, although the recent rise in COVID cases indicates that recovery may be lower than expected. Back in May, we introduced the Southwest Promise to ensure the safety and comfort of our employees and customers as they travel with us again. We've been conducting weekly customer research on key concerns, with standout measures including mask-wearing by both staff and customers, limiting seat availability for social distancing, and enhanced cleaning procedures for our aircraft. Awareness of the Southwest Promise among travelers is high, and we're receiving positive feedback about their confidence in flying with us. We previously announced that we would block middle seats through at least September, maintaining a load cap of 65%, and we've decided to extend this through October. In response to increased loads, we added approximately 6,900 flights for the quarter, with around 80% covering their operating costs. This demonstrates our ability to adjust our flight schedule according to demand while effectively managing cash burn. This week, we updated our mask policy, requiring all customers to wear face coverings during flights, except for short periods while eating or drinking. Medical exemptions will no longer be accepted. We're implementing this change due to the challenges caused by numerous exceptions to the previous policy. We're committed to the Southwest Promise, which is central to our current operations, reflected in our all-time quarterly record Net Promoter Score of 79, indicating strong customer appreciation. Looking at Q3, we estimated a modest improvement for July, with expectations of operating revenues down approximately 65% to 70% and capacity down by 30%, with a load factor of 45% to 55%. However, following a spike in COVID cases in late June, demand from key areas like Texas and Florida slowed significantly, leading us to now estimate July operating revenues down around 70% to 75% year over year, with load factors of 40% to 45%. We've seen a notable decline in net bookings of 10 to 15 points year over year. The trends for August are similar, with operating revenues projected to decrease 70% to 80% year over year and load factors of 30% to 40%, based on capacity reduced by 20% year over year. Though we need to adjust August capacity further, we also have a substantial number of existing bookings to consider. Estimating for September is challenging, but we see that weakened demand for August is impacting September as well. The current September schedule reflects a 10% to 15% year-over-year capacity reduction, which we recently modified to a 20% to 25% reduction. We plan to further reduce September flights based on demand. Throughout Q3, we're focusing on achieving sustainable cash breakeven. Although business travel remains significantly down and we anticipate a slow recovery, we recognize the opportunity to expand our presence in the managed corporate travel sector. We're making progress with our GDS deployments and have launched on Travelport's platforms, with plans to go live on Amadeus by year-end. This unprecedented slowdown in business travel has allowed us to collaborate closely with travel managers. We announced our decision to terminate our relationship with Sabre at year's end after unsuccessful negotiations for a functional contract. The current Sabre product lacks functionality, making it difficult for corporate travel managers, and is our smallest business channel. We are confident in recapturing most revenue through the new GDS platforms we are implementing. By announcing this transition six months in advance, we aim to prepare our clients for the upcoming recovery, positioning ourselves strongly within the corporate market. Now, I’ll turn it over to Tammy.

Thank you Tom, and hello everyone. I'll round out our comments today with an overview of our cost performance, our liquidity, cash burn and fleet before we open it up for questions. Before I begin, I also want to say a big thank you to all of our incredible teams. This might be the toughest challenge we've ever faced in our history, at least during my career at Southwest. But there is a reason we refer to our employees as warriors. I just couldn't imagine a more talented and determined group of people to be working alongside as we fight to overcome this crisis to keep southwest healthy and strong for decades to come. Coming into the second quarter, our top financial priority was to boost liquidity and reduce cash burn to minimize the impact of COVID-19 on our business. With our revenue production down dramatically, we took swift action to reduce spend. We essentially eliminated our capital spend, apart from key investments in important projects, such as GDS we deferred or canceled nonessential discretionary spend. And we implemented voluntary and unpaid fleet program with strong take rates, as Bob already covered. And as Mike covered, we did all of this while running a high-quality operation, and our people took great care of our customers. For our second quarter alone, our actions resulted in savings of $3.5 billion in spend versus what we were planning coming into this year. Our second-quarter cost performance and cash spending were in line with the expectations we laid out at the time of our last earnings call. And excluding several items, our second-quarter nominal expenses decreased 36% year over year and decreased nearly 40% versus our pre-pandemic plan. And that was on a year-over-year capacity decline of 55%. And our average core cash spend came in around $34 million per day in second quarter. As a reminder, our original pre-pandemic outlook for second-quarter core cash spend was in the range of $60 million to $65 million per day. So the swift actions taken to reduce our costs were very meaningful. In addition to the operating expense relief as a result of lower capacity, lower fuel prices continued to help. Our second-quarter fuel price was $1.33 per gallon, down $0.80 or 38% year over year. And while recent fuel prices have increased from the low seen in first quarter, we're continuing to see significant year-over-year relief from lower energy prices. Lower market fuel prices saved us $153 million in second quarter alone compared to market price outlooks at the beginning of this year. For our third quarter, we estimate a fuel price in the $1.20 to $1.30 per gallon range with nearly $300 million in savings from the decrease in market prices since the beginning of the year and significantly lower than last year's third quarter fuel price of $2.07 per gallon. We do not have forward risk. So our fuel hedging program allows us to fully participate in falling market prices. While we have not made material changes to our 2020 portfolio, the percentage hedged in our premium cost per gallon have increased as a direct result of lower fuel gallons being consumed. Our second-quarter premium expense, albeit $4 million lower year over year at $24 million, spiked to $0.12 per gallon compared with $0.05 per gallon in second quarter last year. This higher premium cost per gallon will continue to be higher by default as long as capacity is down. But the $97 million fuel hedging premium cost this year remains unchanged. In addition, to lower fuel prices, our fuel efficiency improved 14.5% year over year driven by many of our older aircraft being parked. Lower load factors and a less congested airspace leading to less taxi and idle ground time and better on-time performance. Excluding fuel and special items, second-quarter operating costs were down 24% year over year. We saw significant relief in our variable flight-driven nonfuel expenses primarily in salary wages and benefits, maintenance expense and airport costs. We have cut spending in virtually every category. Our 2020 operating expenses are now expected to be down over $2.7 billion this year compared with original plans, and this includes the benefit of fewer fuel gallons consumed from lower capacity. We had several special items in the second quarter that we covered in this morning's press release. First, we had a fuel hedge special item that resulted in $21 million of expense that has been excluded from our second-quarter results. Second, we recognized a $222 million gain from sale-leaseback transactions and other operating expenses. And as a reminder, this covered 10 737-800 aircraft and 10 737 MAX 8 aircraft. These were essentially financing transactions as part of our efforts to bolster liquidity, and the quality of the aircraft and market conditions resulted in the sizable gain. And third, we had $1.1 billion of payroll support program proceeds allocated to second quarter that were an offset to salary wages and benefits net against an accrual of $307 million related to our voluntary separation program. We've already covered the specifics on the take rates on the voluntary programs, but I want to add my thank you to the employees that elected to participate. Looking at third quarter, we expect the remaining $1.2 billion in payroll support program proceeds to be recorded as an offset to salary wages and benefits as well as an estimated charge in the range of $1.3 billion to $1.4 billion related to voluntary employee programs, as Bob covered. Nearly half of the cash payouts for the voluntary separation program will occur by year-end, and we expect overall savings of both programs to far exceed the upfront cost. Overall, we had a stellar second-quarter cost performance, and it is truly a testament to the swift actions and intense focus by the entire Southwest team. Based on current plans for third quarter 2020 capacity to decrease in the range of 20% to 30% year over year, third quarter operating expenses excluding fuel and oil expense, special items and profit sharing expense, are expected to decrease in the range of 10% to 20% year over year. This represents a sequential increase from second quarter driven primarily by higher flight-driven expenses and certainly are modest relative to the sequential increase in capacity. With regard to our capital spend forecast, we have more than offset the $1.4 billion to $1.5 billion of capital expenditure originally planned for this year. The reduction is driven by our 2020 and 2021 fleet delivery agreement with Boeing, canceling or deferring the majority of capital investment projects originally planned for this year; and supplier proceeds and sale leaseback proceeds, both of which we consider as reductions to aircraft capital expenditure. In regards to our fleet, I continue to feel very comfortable with our fleet flexibility over the next several years. Our latest agreement with Boeing and our current planning assumptions are that we will take no more than 48 aircraft through the end of 2021. We don't have the specifics finalized with Boeing yet, and that is by design, as the agreement gives us time and flexibility to continue monitoring demand and fleet needs for the next 18 months. There have been no formal updates to our contractual book order with Boeing yet, and the order book included in our first-quarter 10-Q is still reflective of the overall contractual agreement with orders and options for more than 330 MAX aircraft through the end of 2026, in addition to the no more than 48 we are evaluating for 2020 and 2021 combined. At some point, we'll need to adjust 2020 and 2021 deliveries down and shift delivery slots by year, but we have not canceled any of our orders or options with Boeing over the life of the agreement. We are well positioned to be nimble and rightsizing our fleet, whether through retirements to adjust to lower demand or to return aircraft to service and ramp up our capacity once the environment allows. Moving now to liquidity. We ended the second quarter with cash and short-term investments of $14.5 billion, and we currently have a cash balance of $14 billion. Since our last earnings call, we have raised more than $10 billion to further bolster our cash reserves. In addition to financing and sale-leaseback transactions, we raised $2.2 billion through a common stock offering and have received $2.9 billion in payroll support program proceeds. And the remaining $326 million is expected by the end of this month. We also paid back our $1 billion revolver and paid off our $3.7 billion one-year secured term loan which released $4.5 billion in aircraft collateral. We now have approximately $12 billion in unencumbered assets with approximately $10 billion in aircraft. And that doesn't include the significant value from our Rapid Rewards loyalty program, I'll just point out. In addition, we noted in our press release this morning that we have signed a letter of intent with the U.S. treasury to apply for a $2.8 billion loan as part of the CARES Act. We are not committed to taking this loan, and we haven't decided that we will take the loan yet. Signing the letter of intent was just part of the process to keep this loan as a backstop, should we determine we need it down the road. Taking into account 2020 operating expense savings of over $2.7 billion, the cash saved through the suspension of dividends and share repurchases and reduced capital spending, we have reduced our 2020 cash outlays by over $7 billion versus plan. That is very meaningful, and it took the teamwork of all of our employees to make such a big and impactful shift in such a short amount of time. Of course, these changes are necessary to manage our core cash burn, and we are doing just that. To clarify, our core cash spend, I already covered for second quarter, is meant to quantify the true run rate of our ongoing cost. Our average core cash burn takes our spending and incorporates the benefit of operating revenues net of trip cancellations. For second quarter, our average core cash burn was $23 million per day with a rate of $16 million per day in June, a little ahead of the guidance due to solid cost control and revenue trends holding up well for the vast majority of the month. Our current estimate for core cash burn for July is approximately $18 million per day, with third quarter estimated to be similar to second quarter's $23 million per day. As core cash burn remains our focus, we will continue to explore opportunities to improve our burn rate as we are currently doing with our reevaluation of our August and September flight schedule. In closing, we have the U.S. industry's strongest balance sheet. We are the only domestic airline to be rated investment-grade by all three rating agencies even after debt raises. We are in a net cash position of over $4 billion with a leverage of 49%, and our goal remains to protect our balance sheet and investment-grade rating. We came into this crisis in a strong position and have bolstered our liquidity to put us in an even stronger competitive position to manage through this uncertain time and to thrive out on the other side of this crisis. While no one knows how the pandemic will continue to unfold in the coming months, from where we sit today, I am encouraged by the resilience and determination of our people, and we remain laser-focused on taking care of our employees, customers, and our shareholders. With that, Chad, we are ready to take questions.

Hi everybody. Thank you. Gary, do you view not taking the CARES Act loan and consequences that may come with it, whether that's brain drain or regulatory, as a potential competitive advantage for Southwest over the next two to three years?

Yes, Hunter. That is one aspect of it. We're focused on gaining as many competitive advantages as possible. Fortunately, Tammy addressed this earlier today, but we have secured high-quality financing. We completed two senior unsecured deals at favorable interest rates, demonstrating our ability to tap into the capital markets. We have also released some collateral that was pledged early on during the crisis with various bank term loan agreements, and that has now been freed up. Currently, we have $12 million in collateral available, with $10 million of that in airplanes. As you might know, the terms of the government loan are quite burdensome, with significant warrants involved. Therefore, we would much prefer to avoid those. One key concern for shareholders is the restrictions on dividends, which I strongly oppose, as well as limitations on share repurchases. We're not issuing dividends or buying back shares right now, but we certainly want the flexibility to do so in the future, and I'm sure you do as well. So there are many reasons to steer clear of that, and if our competitors opt for it, I believe it positions them at a disadvantage.

Thank you. And then it's interesting, the MAX problem probably made you question whether or not you should continue with the single fleet type, but now in the coronavirus, you're probably relieved that you don't have a second fleet type. So first of all, is that a fair statement? And then would love your updated thoughts on how you're thinking about that going forward? Thank you.

I think Tom may want to add his thoughts on this from a strategic perspective. We have reassessed our overall business model and challenged ourselves to determine if we need to make significant changes in this environment. We have concluded quite the opposite and believe we are in a very strong position. I also consider our fleet strategy to be part of this assessment. Mike believes that the MAX is the best narrow-body airplane in the world, and it is frustrating that it has been out of operation for so long. However, having a single fleet type simplifies our operations, which is beneficial in this low-cost environment. We will need to continue to evaluate our fleet strategy independently from our overall business model moving forward, but transitioning to a second fleet type presents a significant challenge. At some point, I assume the company will consider this, but it's not something we need to pursue in the near future. So, in short, I do see this as an advantage for us at the moment.

It’s interesting to reflect on the challenges posed by COVID. It prompts introspection and a need to evaluate our situation. I believe our network is fundamentally strong and reliable. Looking at our restructuring efforts, our business strategy remains solid and secure. This is evident through our efficient operations, particularly with the 737, which contributes to our low costs and fares. As we embark on our restructuring, we must consider our core strategy, which is sound and remains unchanged. We are optimistic that this strategy is well-suited for the current environment. However, it’s crucial that we increase our passenger numbers; that’s an unavoidable challenge we face.

Hi everybody, thanks for your time. Tammy, I noticed that you didn't provide a reconciliation table for your cash burn number for the second quarter. Can you clarify how you arrived at the $23 million per day figure? It mentions in the footnote that you're excluding debt service obligations, but I also noticed that you made a few principal payments that weren't necessarily obligations; they were early payments. Could you elaborate on how those are factored in? Additionally, how are you calculating that number?

Yes and no. I'd be happy to clarify that. To start, our core cash burn is primarily our ongoing expenses. Our operating expenses serve as a good proxy for our cash expenses, and we also include our regular amortization of debt. Essentially, the calculation involves our operating expenses, cash operating expenses minus our revenue, with adjustments for amortization of debt and interest.

Good afternoon everybody. First question, probably for Gary. So American believes that its intellectual property and its website are worth about half as much as their loyalty program which is a source of liquidity that at least we had not been contemplating. Why wouldn't your IP co similarly represent several billion dollars of potential liquidity?

I suppose it is. I think we are able to secure senior unsecured funding without having to pledge anything except for our strong reputation and creditworthiness. While I appreciate that these options might be available to us, I don’t believe we actually need them. We currently have $15.5 billion in liquidity, which should be more than enough to support us. Our balance sheet remains in excellent condition, with low overall interest expenses. So, while it's reassuring, we don’t require those options.

Good afternoon. Thank you very much. My first question is about the MAX, probably directed to Mike. How do the latest steps by the FAA this week in their recertification efforts align with what you've seen? Specifically, how do the proposed changes to areas like pilot training match your expectations concerning the timelines and phases you've previously outlined for us, Mike, once you receive approval from the FAA? I'm focusing on changes to what has been proposed and not on delays caused by factors such as the addition of a public comment period.

So are you asking whether or not our into service plan is increased or extended because of harsher requirements?

Yes, in any way or shortened. I mean...

Or shortened. Yes, we have constant communication with the project teams over there. And what I would tell you is that there's nothing in the return-to-service work, whether it's maintenance work on the aircraft or pilot training or other things like that that are adding any significant length to our time frame. So as I said, I think it will take us a couple of months to get that airplane back into service. And the biggest thing on the time line, it really is the pilot training. We think that we can get that training event done per pilot in a day, and we have nine simulators available to go do that. So we think it will take us somewhere around nine or 10 weeks to get our pilots trained. And then after that, we can get most of the rest of the work done within that time frame.

Thank you, Chad and welcome to all of our media members who are on the call today. We'll go ahead and get started with the media Q&A portion of our call today. So Chad, if you'll give them instructions on how to queue up for a question.

Hope you are well. On the payment support, just given the number of people that are taking voluntary time off or separating from the company, do you expect to have any money left over? I'm just looking at how the labor bill or the salaries bill costs were cheaper in Q2 '20 versus 2019? I'm just not sure how you recognize that.

No, once we pay our salaries through to September 30, there will not be any leftover PSP money. Initially, Tammy Romo, our CFO, and her team submitted a grant request for a certain amount, but the treasury department responded that they would provide 76% of what we requested. This decision was based on projections of our spending. While we truly appreciate the PSP, it falls significantly short of covering our actual expenses for salaries, wages, and benefits. Therefore, there is no surplus; in fact, it’s the opposite.