Southwest Airlines Company (LUV) — Q3 2020 Earnings Call Transcript

Thank you, Chad. And I appreciate you all joining us for our third quarter call. In just a moment, we will share our remarks with you and then open it up for Q&A. So, you will hear a comprehensive update today from our Chairman of the Board and CEO, Gary Kelly; Chief Operating Officer, Mike Van de Ven; our President, Tom Nealon; and Executive Vice President and CFO, Tammy Romo. Just a few quick reminders. We will make forward-looking statements today, which are based on our current expectations of future performance and our actual results could differ substantially from these expectations. We also had several special items in our third quarter results, which we excluded from our trends for non-GAAP purposes. And we will reference those non-GAAP results in our remarks today. We have all of those spelled out in our press release from this morning regarding special items, forward-looking statements, non-GAAP reconciliations to GAAP results and other important risk factors and of course you can find our press release and other helpful resources at our Investor Relations website. And now we’ll go ahead and get started and I will turn it over to Gary.

Thank you, Ryan, and good morning everybody and thanks for joining us for our third quarter earnings call for 2020. Obviously, we can't be happy or satisfied with the loss. But I'm going to tell you upfront some of the things that I'm happy and grateful for. Number one, the record loss was significantly less than I feared three months ago. We got past the July wobble in demand. Number two, our outlook for fourth quarter reflects a continuation of this improvement, better revenues, lower costs compared to the third quarter and assuming our October trends hold for November and December and that's of course also assuming that we have stable fuel prices. Number three, we have announced nine new destinations to be added over the next three quarters. I'm happy to have these opportunities. I'm happy to play offense. I'm happy to generate more revenue on minimal incremental cost, which means more cash. And I'm happy to put idle aircraft and excess staff to work. Number four I'm happy that there is still a chance that we can preserve pay, jobs and service by Congress extending the Payroll Support Program for another six months. Getting that support extended is a top priority. I’m hopeful that it will happen quickly so we can terminate work on our plan B, which is to press our unions to sacrifice with concessions in order to prevent furloughs as we currently are roughly 20% overstaffed. Number five, I am happy that finally we seem to be nearing the ungrounding of the MAX. Number six, I’m happy that we have the scientific evidence to provide comfort and assurance that it is safe to unblock the middle seats, which will happen on December 1, and the scientific support arrives as demand continues to improve, which should absorb our 50% increase in seats offered for sale. And our models show that this will be revenue, cost and operating profit positive and that all makes me happy too. I'm happy that we have at least three years of cash and I know its borrowed money but that should see us through this crisis and if we have to, we can borrow more. Number eight, I’m happy that we're uniquely prepared for this environment with our business model. We have low cost, low fares, no hidden fees and nothing to hide, no second class, the nation's best route system, the nation's largest airline, 97% domestic and better prepared than ever to serve business travelers when they return to the skies. And then, finally, I am enormously grateful for our people. They've done a phenomenal job monitoring and adjusting this airline. They've done a phenomenal job running a superb, safe, on time, high-quality operation. They've done a phenomenal job serving our customers with industry-leading hospitality. And finally, I'm grateful for their resilience and their perseverance and their devotion to our cause. Our leaders are going to continue to do everything in their power to take care of all the people who have built and operate this airline and serve our customers every day. Job one is keeping our Company financially strong and healthy and with perpetual competitive advantages. Those are a sampling of my favorite things. And yes, the worst may be behind us. And I hope there are no more surprises. And yes, we have a long way to go, but we will get through this. We will survive this, and we will emerge with the best balance sheet and the best business model to compete and thrive in the post-pandemic world. And Mike, Tom and Tammy have a lot to share with you. So, I'm going to wrap up and turn it over to Mr. Mike Van de Ven.

Well, thanks, Gary. And go ahead and gloat over the operations, Mike, because it is absolutely superb. Well, I hope that's one of the things that's also made you happy. So, this quarter really was the first full quarter of the year where each day our plan was to operate all the flights as scheduled. We were able to get out in front of the schedule changes that we made during the quarter, and we got our crew schedules and airport staffing adjusted. We had all of our customers re-accommodated well in advance of that actual operation. And so as a result, the operational performance was just magnificent. It was arguably the best overall performance in Southwest history note. Pre-Labor Day, we were flying roughly 2,800 trips a day, post-Labor Day, around 2,000. And we published just over 19,000 extra flight sections during the quarter. And our on-time performance for the quarter was 94.4%. That led the industry, our best performance since 1992. Our bag handling was the best in our history. We carried roughly 12.4 million bags, and we only had a bag claim for a lost or damaged bag for about 0.02% of them. So, that's two claims for every thousand bags carried, and that is superb service, and you don't have to pay extra for it. The reliability of our service and hospitality of our people resulted in a Net Promoter Score of 80.7%, and that's the highest in our history. So it's just a testament to our people. This environment was full of pandemics, politics, social issues, general anxiety, and our people, they come to work, they take care of our customers, they take care of each other, they take care of Southwest Airlines, and I'm just very, very proud of our Southwest team. So in addition to running a very reliable operation, we are equally focused on cost efficiency. We executed both voluntary separation and extended time-off programs in the third quarter. Those programs were very successful. They reduced our operational staffing just over 25%, as we begin the fourth quarter. We have roughly 730 airplanes on property. We have about 100 of those in long-term storage. That includes the 34 MAX aircraft. And those aircraft were selected based on their maintenance profiles and the near-term heavy checks. And so, the point of all that is that we can cover the variation of daily flight activity in the fourth quarter at optimal staffing and optimal aircraft maintenance profiles, while continuing to produce very high on-time performance results. We've actually been doing some extensive operations research into the cost of executing the flight schedules at varying staffing levels and aircraft productivity levels and on-time levels. And historically, we'd assume that an on-time performance in the low-80s really optimized our cost profiles. But some of the most recent research that we've been doing is indicating that our optimal cost profile may occur when our on-time performance is in the upper-80s. So, that's really an exciting opportunity that we would have that would foundationally improve both schedule reliability for our customers and our employees as well as minimizing our operational cost execution. So turning to the MAX, several major milestones have been completed. The certification flights are done. The Joint Operations Evaluation Board has met. They've given their recommendations for training. The Flight Standardization Board has considered them. They've issued their draft report for pilot training requirements. And that report is out for comment through November 2. And after that, a final report needs to be issued. There's bound to be a couple of open regulatory items that they need to be addressed, but ultimately, an airworthiness directive and instructions need to be issued that would allow for an ungrounding. As you know, there is no timeline. But we're hopeful that that happens before the end of the year, but it could be early next year. In any event, our process is the same as we've previously discussed. We have to put all these requirements into our manuals. We have to receive FAA approval. We have to schedule and complete pilot training for roughly 7,000 pilots. We have maintenance work to do to bring our own MAX aircraft out of long-term storage and into an operational status. And we'll be doing operational readiness and validation flights on the aircraft before the return to revenue service. We also have 34 undelivered aircraft from Boeing that they've currently built, and we're working with them on an updated delivery schedule. Our process is going to be deliberate, structured, and we're expecting it to take three months to four months between the ungrounding and the aircraft being in revenue service. When they are ready for revenue service, they'll replace the 700s. We've got significant operational experience with the aircraft. It is our most cost-effective aircraft. It is our most reliable aircraft. It is our most environmentally-friendly aircraft. And it's our most comfortable aircraft. So, we really look forward to flying it again. So in closing, I think we really settled into a rhythm in the third quarter with even more stability in our schedules in the fourth quarter. Our aircraft and our people resources are better aligned with our commercial needs. Our customers are getting the best value in the industry, low fares and superb reliability, and that's delivered by our kind and caring people that will treat our customers like family and keep them safe during their journey. And that's the Southwest Team, and as I said, I’m just really, really proud of them. And with that, Tom, over to you.

Thank you, Mike. Good morning, everyone. I'm very proud of the Southwest team. This quarter has been unlike any we've experienced operationally, so congratulations to everyone. I'll dive right in. Our third quarter revenues fell by 68% year-over-year, which is an improvement from the 83% decline in the second quarter. We saw a 65% drop in passengers during the third quarter, and our fares were approximately 20% lower. While we anticipate continued pressure on yields, we have observed some encouraging signs of yield improvement starting in September and continuing into October. In July, demand and bookings took a substantial hit due to rising COVID cases, with operating revenues down 71% year-over-year and a load factor of 43% on 31% less capacity. August brought slight improvements, with a 69% decrease in operating revenues and a load factor still at 43%, though capacity was down 27%. We experienced further improvements in September, with operating revenues down 66% year-over-year and a load factor of 52%, supported by a 41% reduction in capacity as we adjusted our schedules for post-summer demand. Labor Day travel was strong, and leisure demand remained robust throughout the month compared to July. Demand has remained heavily leisure-focused, with bookings trending closer in—mostly within 21 days for the third quarter. However, we are seeing a slight increase in bookings for travel beyond 21 days, particularly for the Thanksgiving and Christmas holidays. Seasonality remains an important factor for demand. Business travel, on the other hand, remains weak, with corporate managed travel down 89% for the quarter, consistent with the second quarter, and we expect it to remain significantly down through the end of 2020 and into 2021. Demand varies by market, making capacity planning challenging, but our network planning team has been effectively adjusting capacity and schedules as needed. We're seeing strength in regions such as Southern California, Las Vegas, Denver, and Texas, while signs of improvement are emerging in cities like Chicago and Kansas City. Internationally, demand is returning as quarantine requirements ease, and we plan to restore nearly all our routes to Hawaii by November, except for specific routes. In the third quarter, the financial impact from blocking middle seats was minimal in July and August, but we estimate about $20 million in September due to lost revenue. As we did in the second quarter, we added nearly 19,000 extra flights to capture demand, resulting in over 75% of these flights covering variable costs and aiding cash burn reduction. As for other revenue, it declined by 19% year-over-year, with ancillary revenues following the same trend, particularly for products like Early Bird and Upgraded Boarding. Revenue from our Rapid Rewards program was down 43%, although our co-brand credit card performed relatively well, down only 12% year-over-year. We observed a decrease in cardholder acquisitions due to fewer customers and stricter credit approvals, but we still added new cardholders and maintained a steady attrition rate. Looking ahead to the fourth quarter, we are cautiously optimistic about gradual improvements in leisure revenue trends as we approach the holiday season. Demand and bookings in October have been strong compared to September, despite the lack of major holidays. We expect operating revenues to decline by about 65-70% year-over-year with a load factor between 50% and 55%, while capacity may decrease by roughly 45%. November bookings are looking promising with operating revenues anticipated to fall by 60-65% year-over-year and a load factor in the same range, with a 35% reduction in capacity. The holiday season brings strong early trends, particularly for Thanksgiving, which falls entirely within November this year, giving revenue a boost. We foresee a more significant negative financial impact from blocked middle seats as demand rises, estimating a $20 million impact for October and $40-60 million for November. We can only add limited flights during Thanksgiving, causing us to miss potential revenue opportunities. We are adjusting our December schedules to align capacity with demand, expecting a 40-45% decrease in ASMs for the quarter. On corporate travel, we recently launched the Amadeus GDS platform, completing our setup on four GDS platforms. Our corporate sales team has been highly active during the pandemic, generating excitement about having our fares available on the GDS channel. Most of our corporate accounts still have travel restrictions but expect a gradual return to travel over the next six months. Currently, about 90% of our large corporate accounts are traveling, albeit at reduced levels. The corporate booking curve is starting to stabilize, indicating that customers are growing more confident in making future travel plans. While we don't have precise predictions, we expect domestic business travel to slowly recover, potentially down 50-60% by the end of 2021. Some analysts suggest a structural reduction in business travel of 10-20% post-COVID, which may take years to rebuild. Nevertheless, we believe there’s significant growth potential as we compete in new channels. The customer experience at Southwest is strong, and our safety measures—part of the Southwest Promise—are receiving positive feedback. We continue to lead the industry in customer satisfaction, with the lowest complaint ratio reported recently by the DOT, significantly outperforming our competitors. Our commitment to the Southwest Promise includes health measures such as requiring face coverings, enhanced cleaning procedures, and blocking middle seats until the end of November. With new data affirming the safety of the aircraft environment, we are confident starting December 1 to sell all available seats while maintaining customer safety. We will communicate with customers about this change and offer full refunds to those uncomfortable with it. Lastly, we are expanding our route map, having planned these new additions long before the current environment. These expansions strengthen our presence in key markets, and we’ve recently announced year-round service to Miami and Palm Springs and seasonal service to Colorado locations, with further expansions planned for 2021. I'll now hand it over to Tammy for the financial details.

Thank you, Tom, and, hello, everyone. I'll round out today's comments with an overview of our cost performance, fleet, liquidity and cash burn before we move on to Q&A. Before I begin though, I'd like to extend a huge thank you to all of our Southwest warriors. You all are performing magnificently, despite the challenges of this pandemic. The $1.2 billion net loss we reported on both a GAAP and non-GAAP basis this morning certainly speaks to the staggering impact the pandemic has had on air travel demand and our business. Our GAAP results included two large special items, payroll support program proceeds of $1.2 billion, which was mostly offset by $1.1 billion in charges for our voluntary separation and extended emergency time-off program as well as our normal fuel hedge special item. Speaking of our voluntary programs, I'd also like to thank our more than 15,200 employees who participated in these important programs to reduce our cost and cash burn. It has been emotional to see so many of our Southwest family members depart, and we are very, very grateful for their dedication and service to our incredible company. We are determined to make them proud and are focused on emerging from this pandemic as stronger than ever. We had a strong 25% total participation rate by our employees in these two programs combined. And in addition to helping us cut our costs, the extended leave program gives us a lot of flexibility should the business recover faster and we determine we need to recall employees. We had more than 4,200 employees elect the voluntary separation program. Our September 30 headcount of nearly 58,000 full-time equivalent employees is down nearly 3,200 compared with June 30, which illustrates about 75% of voluntary leave participants left the Company during third quarter. Virtually all of the remaining employees have separation dates by year-end. The total cost of these two voluntary programs could be up to approximately $1.7 billion, if none of the pilots on extended time-off are recalled before the end of those that selected a five-year election period. The NPV of the program through 2025 exceeds $2 billion, if there are no employees recalled early from the extended emergency time-off program. In terms of the accounting, we have now accrued approximately $1.4 billion in 2020 of the $1.7 billion potential cost of these programs, which includes all costs associated with the voluntary separation program and an assumption that there would be no material recalls of employees that elected extended time-off, at least through February of 2022, which is 18 months from the beginning of that program. We accrued approximately $300 million in second quarter and $1.1 billion in third quarter, which are reflected as special items in our non-GAAP results in both quarters. The remaining $300 million of program costs are related to employees who elected extended time-off for longer than 18 months, which consists solely of pilots. Due to the uncertainty of the current environment, no accruals were recorded for extended time-off elections beyond this 18-month period. We will closely monitor the demand environment and record further accruals, if appropriate. We made cash payments to employees of approximately $195 million in third quarter, leaving our accrued program costs at about $1.2 billion. We expect our cash payments to be approximately $300 million in fourth quarter, about $500 million in 2021, and up to approximately $700 million in 2022 and beyond. In terms of the cost savings from these programs, we expect salaries, wages and benefit cost savings of approximately $550 million in second half 2020, $143 million realized in the third quarter, and over $400 million in fourth quarter. For 2021, we expect $500 million in incremental savings over 2020 for approximately $1.1 billion in total savings next year or over $90 million per month. We expect the annual run rate savings from our voluntary separation program to be roughly $500 million beginning in 2022 and beyond. And savings for the voluntary extended emergency time-off program could be up to almost $600 million in total for 2022 through 2025, if no employees are recalled from the extended emergency time-off program. So, the savings opportunity and flexibility the programs provide are substantial. We also recently shared that we are seeking the equivalent of a 10% pay reduction across all work groups in 2021, which would represent cost savings of at least $500 million beginning next year. These cost savings are crucial, especially in our largest cost category as we aim to preserve jobs while achieving necessary and meaningful cost efficiencies in this suppressed capacity environment, so that we are better positioned for a healthy and faster recovery. For third quarter, our overall cost performance was strong, as we remain laser focused on managing our costs. Excluding special items, our operating costs decreased 30.1% year-over-year to $3.4 billion and increased only 4.1% year-over-year on a unit basis. Our third quarter capacity was down 33% year-over-year, which resulted in approximately $330 million in reduced cost for our variable, flight-driven, non-fuel expenses and that’s primarily in salary, wages and benefits, maintenance expense and airport costs. We realized further cost savings driven by the actions we've taken in response to the pandemic. I already covered the cost savings from our voluntary leave program, which was $143 million in third quarter. By parking aircraft we were able to defer flight hours and maintenance activities and further reduced our maintenance expense, which was included in the $330 million I mentioned previously. We also reduced our third quarter other operating expenses by more than $100 million by cutting advertising spend, technology projects and discretionary spending. Our cost performance continues to benefit from significantly lower energy prices which saved us $257 million in third quarter alone, compared with our expectations for third quarter fuel costs at the beginning of this year. Our third quarter fuel price was $1.23 per gallon, down $0.84 or 41% year-over-year and based on our current fuel hedge and fourth quarter market prices we estimate continued and welcomed fuel price relief year-over-year with that estimated fourth quarter fuel price in $1.20 to $1.30 per gallon range compared with $2.09 per gallon in the fourth quarter last year. Our fuel hedging portfolio continues to provide insurance against spikes in jet fuel prices with material upside protection, no floor risk and very manageable fuel hedging premium expense. We have not made material changes to our 2020 portfolio and our premium cost per gallon has increased this year simply as a direct result of lower fuel gallons being consumed. Our third quarter premium expense of $24 million equates to $0.08 per gallon and full-year 2020 premium cost remains at $97 million also $0.08 per gallon. For 2021, we expect premium expense to be similar to 2020 based on our current portfolio. Our hedging protection for 2021 is solid with hedging gains that we began at Brent prices around $65 per barrel with more material gains once you get to $80 per barrel. In addition to the cost relief from lower market fuel prices, our third-quarter fuel efficiency improved 10% year-over-year driven by many of our older aircraft being parked. We are also benefiting from lower load factors and better on-time performance and we expect for this trend to continue in fourth quarter and currently estimate our fuel efficiency to be similar to what we realized in third quarter year-over-year. Excluding fuel, special items, and prior-year profit sharing, third quarter operating costs were down 17% year-over-year, which was towards the better end of our guidance range and increased 23.4% year-over-year on a unit basis driven primarily by the significant reduction in capacity. Based on current plans for fourth quarter 2020 capacity to decrease approximately 40% year-over-year, fourth quarter operating expenses, excluding fuel and oil expense, special items, and profit sharing expense, are expected to decrease in the range of 20% to 25% year-over-year. This represents a sequential improvement from the third quarter, driven primarily by lower capacity and additional cost savings from our voluntary leave programs. Our swift self-help actions have reduced our 2020 cash outlays by approximately $8 billion compared with our original plan. Our 2020 operating expenses, excluding fuel, special items, and profit sharing are expected to be down $2.8 billion this year compared to plan. The benefit of fewer fuel gallons consumed from less capacity has driven fuel savings of more than $1.5 billion. We have reduced capital spending by $2.4 billion taking into account proceeds from sale leaseback transactions and supplier proceeds received and the remaining savings are driven primarily by the suspension of dividends and share repurchases. In addition to these self-help actions, we benefited from the significant drop in fuel prices this year, which we estimate will save us another $1 billion in fuel cost compared with our expectations at the beginning of the year. That brings our total fuel savings compared with plan to more than $2.5 billion and our total cash outlay savings to approximately $9 billion compared with original plans. I am very proud of the Southwest team and their diligence to realize these meaningful cash savings. Our effective tax rate for third quarter was 25%. The CARES Act allows any losses created in 2020 to be carried back five years for a refund of taxes paid beginning in 2015. And as a full cash taxpayer for the past five years, we will be able to take advantage of this CARES Act provision without projected 2020 net losses. Further as our corporate tax rate was 35% part of the passage of tax reform in 2017, our 2020 tax rate is trending higher than our year ago rate. This was due to the net loss carryback provision being applied to a higher prior year tax rate that drives the larger tax refund. We currently estimate our annual 2020 effective tax rate to be in the range of 24% to 26%. Turning to fleet and CapEx. We continue to be well-positioned with our fleet flexibility over the next several years whether through retirements to adjust to lower demand or through our ability to return aircraft to service to ramp up capacity if the environment supports growth. As a reminder, our interim agreement with Boeing from earlier this year is that we will take no more than 48 aircraft through the end of 2021. The environment has not improved since then and is certainly safe to say that we do not need 48 aircraft next year at least for growth. We are in the process of restructuring our order book with Boeing and do not have a revised delivery schedule to share with you today. But we do hope to nail down the specifics soon. Our 2020 capital spending forecast remains unchanged. We have more than offset the $1.4 to $1.5 billion of CapEx originally planned for this year. We have been successful and aggressively managing our capital spending throughout this pandemic and our goal is to do the same in 2021. While we are not prepared to provide 2021 CapEx guidance today, it's our full intention to keep 2020 CapEx to a minimum and low level, including any revision to our order book. Before I wrap up and open the call up for questions, I'll provide an overview of our liquidity. We ended third quarter with cash and short-term investments of $14.6 billion and including our fully available $1 billion revolver, liquidity of $15.6 billion. Since our last earnings call, we issued an additional $1 billion of unsecured debt, raised $121 million through an aircraft secured financing and received our full allocation of Payroll Support Program proceeds. We ended the quarter with a total of $10.9 billion in debt on our balance sheet, leaving us in a net cash position of $3.7 billion with leverage of 54%. We continue to have approximately $12 billion in unencumbered assets with approximately $10 billion in aircraft. And this doesn't include the significant value from our Rapid Rewards loyalty program. We remain laser-focused on reducing our core cash burn. And for third quarter, our average core cash burn was $16 million per day, which was a sequential improvement from our rate of $23 million per day in the second quarter. This improvement was driven primarily by strengthening close-in leisure demand and booking trends. And based on the strengthening of our fourth quarter revenue trends thus far, coupled with cost savings from our voluntary employee leave programs, we currently estimate core cash burn for October to be approximately $12 million per day and fourth quarter to be approximately $11 million per day. And remember that our core cash burn calculation does not factor in certain changes in working capital. During fourth quarter, we expect the most notable working capital change not included in our average daily core cash burn of $11 million to be driven by payments made for our voluntary employee leave program, which will be nearly $300 million. We also anticipate normal seasonal swings in our air traffic liability balance, with an expected seasonal drop-off in bookings later in the quarter due to the post-holiday slower time period, which could cause our cash burn including working capital to be higher than our core cash burn estimate of $11 million per day. Our current cash balance is $13.7 billion, which factors in a $500 million bullet maturity debt payment that we repaid earlier this month. Factoring in all the moving parts I just mentioned, we currently estimate our cash balance to be roughly $13 billion at the end of this year. And finally, we expect to have about 590 million weighted average shares outstanding in fourth quarter, which is an increase of 27 million shares from second quarter due to the May 1 issuance of 80.5 million shares, which was included in the weighted average calculation for only two months in the second quarter. So in closing, we are proud to still 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. And our goal remains to protect our balance sheet and investment-grade rating. We must see a significant rebound in revenues as we cover today, but our efforts to boost liquidity, add new low-risk pools of revenue and ongoing focus to reduce cost and cash burn provide a solid foundation when they do allow us to rebuild our predominantly domestic network. While we've got a ways to go, our people have the grit, resolve and determination to carry us through this pandemic. And with any luck, the worst is hopefully behind us. So with that, Chad, we are ready to take analyst questions.

Thanks. Good morning. Thanks for taking the call. The question – I'm curious, could you comment on the moves, Houston and O’Hare in the context of the aspirations of the corporate travel, and how much those two are interconnected? I understand what you said about having the capacity of planes that you didn’t used to have and now you have a surplus and you put them there. But it does seem like the two are probably more connected than not. Could you just elaborate?

Yes, I’ll try, and then Tom will add his thoughts. We've been considering Houston for a significant time. Houston is a large Metroplex. While Hobby serves the area well, it overlooks the northern part of Houston, which has experienced substantial growth over the years. Therefore, I decided in 2005 to step back from Bush because we had other priorities at that time. We did debate whether we were giving up access to a growing market. The company has progressed significantly over the last 15 years, and we've taken advantage of numerous opportunities and accomplished various positive things. At some point, we wanted to re-enter Houston instead of remaining with Bush. This is our third attempt. Interestingly, the original Houston Airport was part of our company history starting back in 1971. It was planned for 2021, and the forecasts look promising. We will have an excellent schedule from there. The City of Houston and the airport system have been very supportive of Southwest, making it pleasant to collaborate. We have the necessary real estate access. In contrast, the situation in Chicago is different. As we grow back from Houston Hobby, we will invest and expand, although we won't be doing that immediately due to the pandemic, but this will change. The circumstances in Chicago are distinct. We find it challenging to grow at Midway once the pandemic is behind us, and you’re likely aware of the limitations there. It does not seem strategic for our company to suggest that we can’t grow in Chicago over the coming years. We can consider the available options, and I assure you that expanding Midway is not feasible; it simply isn’t an option that could be realized in a short timeframe, and it would be prohibitively expensive. This leads us to O'Hare, which previously faced real estate restrictions, but the situation has changed, and we are now ready to move forward. I’m looking forward to this opportunity. Like Houston, O'Hare will connect us to a part of the metro area we don’t currently serve well in the north. We will likely develop a route system that leverages our strengths, which should perform well and complement Midway effectively. Lastly, while O'Hare may not be a leisure destination, there are still many consumers across our system who are flying with us. This outlines why the timing is critical for O'Hare; if we don't act now, we risk missing out on the opportunity altogether.

Thanks for the color.

Hey, thanks. Just on your views on corporate, of course, nobody knows exactly how this is going to play out. But I think I heard you say you’re planning for it still to be down 50% to 60% by the end of next year. And if that's the case, what are the implications for Southwest restoring profitability? And certainly, appreciate you've managed through long periods of impaired corporate where your earnings snapped back and your revenue snapped back a lot more fast, a lot more quickly than the industry broadly. So just from a Southwest perspective, what are the implications for profitability if that view plays out?

Well, I didn't give Tom a chance to answer last time, so I will this time. I'll just make one point, Tom, which is we are positioned in the corporate market to be a real player. As that market begins to recover, we will capture a larger share than our few competitors. Additionally, we are low cost and low fare, which makes us well suited to serve the consumer. I'm pleased to see our yields improving even without the business customer. So I wouldn't assume we can't be successful with a smaller mix of business travelers or the impact on fares. I believe we are well equipped to operate in this environment, having previously performed well during downturns when business travel was depressed.

I think you described it quite well. We have a significant opportunity in the large corporate and managed travel sector, and I feel we are currently underrepresented there. We are poised to capture more than our fair share. This is important, but it also means we may have to rely more heavily on leisure travel for a while. That’s why we are looking for new sources of revenue, which is a key part of our strategy. We have established clear criteria for the markets we are considering, which have been on our whiteboard for some time. We have already evaluated these options financially and operationally. Our objective is for them to deliver results quickly. They need to contribute rapidly to reducing cash burn compared to longer startup timelines of two to three years. These should have low startup costs and quick return on investment, while also enhancing our existing network and increasing connectivity from new locations. We are exploring ways to address capacity gaps. I believe the corporate market will return, and we will be stronger than in the past, which is why we are focusing on these new markets as well.

Thanks. And then, if I could sneak in a follow-up. Can you just remind us on the 48 MAX you were slotted to take and understand that number may change? How many of those 48 are built today? Thanks for taking the questions.

Yes. There's 34 that are currently built that have not been delivered to Southwest.

Thank you very much, operator, and thank you everyone for taking the time. I have a follow-up question regarding business traffic. What milestones should we monitor to assess your performance in this new segment? I'm not referring to recovery but rather to increasing market share and understanding the indicators that would show us that your efforts are effective.

Well, I’ll share what our team is focusing on. We are examining contracts and ensuring compliance with them. We are tracking the number of new business travelers we are acquiring, as well as our relationships and interactions with our corporate travel partners. I’m not certain what specific metrics you should monitor, but I have a clear strategy for running the business. We are carefully observing the number of engagements, interactions, new contracts signed, contract compliance, and year-over-year revenue growth. Additionally, we are committed to ensuring customer satisfaction, which may involve making any necessary adjustments to meet their needs. Our intent is to capture more market share. While I can’t specify how I would approach it from your perspective, we will provide updates on our business performance compared to leisure travel. Internally, we have a focused and precise set of objectives that we are diligently working towards.

Yes, Helane. I’m not sure if I'm adding much to the conversation. We will manage this as expected, and I’ll let Tammy and Ryan decide how they want to communicate the information. However, we want to track our growth, which we anticipate will easily be in the double digits. We will set ambitious goals for ourselves, but the positive aspect is that our customers are distinct and identifiable. We can monitor their traffic, unlike the general business travel segment where we aren’t aware of the reasons for their travel unless we inquire. This situation is different; it involves a specific group of corporate travelers. We know these clients and their travel managers, making it very measurable. At this point, we don't have enough experience to establish a significant yearly goal beyond a target. As we gain experience, we will better understand the effectiveness of our strategies and make necessary adjustments. The pandemic has complicated this, as we all know. We will stabilize our operations and eventually set realistic objectives, and Tammy and Ryan will determine how to share all of that information.

I believe you will be examining this data closely. When reviewing the information, we can see how we're performing in terms of gaining or losing market share. Gary is correct; it’s about growth, and our goal is to continue expanding.

Hi, everybody. I'd like to continue to steam off the corporate stuff, and Tom and Gary; I want to push you a little bit on a couple of things. Tom, last year I asked you about agency commissions and their roles, and you implied to me that you weren't really interested in paying a lot of commissions to them. But history would suggest that you're going to have an uphill battle with those people unless they're really incentivized to participate. Do you still feel the same way about that knowing now what you know? That's part one.

Yes, I think, once you get into the GDS world, you're going to be working with TMCs and that's part of what we do. We do want to make sure that we protect our core business and our core channel, which is southwest.com. So you're going to see us be very restrictive in terms of white label agencies that will be allowed to work with us in GDS. But I think if you want to be in that world, Hunter, I think that’s part of the deals. We want to make sure that we're working with the right ones and we're working with the right clients. But, yes, that's not something we intend to turn on to our leisure traveler, if you will.

And Hunter, it's a very fair question. I think the other thing that we would argue is we've got a great route network, we have great service. We have great policies. There is just more to it, and we have traditionally been, as you well know, very successful by the customer driving the demand and not the intermediary. So it's a classic, now near 50-year-old Southwest Airlines play. So we feel like we're in a stronger position than ever to be able to execute well on this, but that’s fair question, and we're kind of just getting started at this. But I agree with Tom, I think that's the right way to do this, and I think we’re going to be very successful.

As a follow-up, I understand your point about the customer being in control. However, regarding the ease of use for the TMCs, if they aren't given the capability to confirm they have complete content and are consistently seeing the lowest fares, how can we truly simplify their experience? If they still need to visit your website to verify they're securing the best rates during the booking process, will there be instances where TMCs, due to only having partial content, won't be able to access the full range of fares available through the GDS channel?

Hi, Hunter. It's Andrew. Right now, zero to 13 days, all of our content is in the GDS. The TMCs can access our content through the GDS through our direct connect as well as through other platforms. And our competitors also have content which is not in the corporate travel environment. They find them in GDS but they're blocked in corporate travel. So if the corporate travel wants to access their lowest fare, they also have to go outside the GDS environment to find those basic economy fares, which usually line up with the fares that we don't have in the corporate environment. So I think our content is like for like overall and within zero to 13, it’s 100%.

Another good question, Hunter. We had to call in a lifeline on that one. So, thank you.

Thanks. Good afternoon. Gary, you spoke pre-COVID about the desire to have a more economical smaller gauge airplane and talked a little bit about the 220. I'm wondering if the opportunities to gain share as a result of COVID, whether that makes the case for the 220 more compelling. When you think about playing offense and gaining share, how much more of an opportunity would there be, if you had a plane like the 220?

I'm reflecting on your question regarding the pandemic's impact. I don't believe the pandemic itself changes our situation significantly, except for the fact that we have reduced the size of our airline. Tammy mentioned our commitment to Boeing, and currently, we are uncertain about when we will expand, as we have an excess of aircraft. The only thing I can say is that if there were ever a time to consider changing aircraft types, it would be now since we aren’t in a rush to grow the airline and may not be for quite a while. However, this doesn’t directly address your question. I think Mike and Tammy are focused on ensuring we will have the best 150-seat narrow-body airplane in terms of performance, economics, and compatibility with our operations. If we need to make a change, the current environment does provide the timeframe necessary for such an investment. Outside of that, I don’t believe there’s anything fundamentally different regarding your question. We have been clear that we are in discussions with Boeing on various topics, including the 737 MAX 7, which is a significant part of these conversations. Tammy, Mike, do you have anything else to add?

Yes, the only thing I would add, Joseph, is that within our network, there is definitely a need for an airplane with around 140 to 150 seats rather than one with 175 seats. Currently, we are primarily focused on the MAX 8, which has 175 seats. The A220 and the MAX 7 are the two options available in the market, and both have their strengths and weaknesses. We have been evaluating both airplanes and will continue to do so; however, we don't need to make any decisions regarding them until 2025 or later. For now, our focus is on getting the MAX back into service and ensuring that we have the correct delivery schedule with Boeing.

I want to reiterate what Mike said, which may relate to your question. We definitely still need smaller aircraft for the future. We have a significant number of 737-700s that are due for retirement in the next five to ten years, and we will certainly want to replace them. However, we are not planning to only acquire 175 seaters. While I’m hesitant to make a guess now, assuming a mix of half and half might be a reasonable estimate for the future. We will require a considerable amount of the smaller aircraft.

I would like to add that both the MAX 7 and the 220 are excellent aircraft that effectively fulfill their intended roles. The economic aspects are always important to consider, and we have consistently been an all-Boeing airline. This strategy does bring certain efficiencies that are factored into our overall valuation. It is clear that smaller aircraft like the 220 or MAX 7 will be necessary for shorter to medium-haul routes. However, it is important to emphasize that economics play a crucial role in this decision-making process. We will ensure that the economics align with our goals while maintaining our position as a low-cost operator.

Well, I'm going to say this. We have a very limited appetite for taking on new aircraft models that we're not familiar with. As you know, our culture is very tied to our fleet. And again, that limits our decision set to a small number of options in that area. We are — again, we will be looking at everything for the future, but I think what we can say is we have a great position with the MAX and there was never a better time to do that. And I'm literally talking about an open field once again, with a stunningly low commercial risk to execute now as we can easily offset them. I think while we’ll dabble in some other things and continue to press forward, I think we’ll continue to spread across the 737 family or in a direction of using the new 737 MAX series simply because it works so well in our network. I'm reflecting on your question regarding the situation before and after the pandemic. I don't believe the pandemic itself changes much, but we have reduced the size of our airline. Earlier, Tammy mentioned our commitment to Boeing, and we are uncertain about when we will expand, especially since we have a surplus of aircraft. The only thing I can acknowledge is that if there were ever a time to consider transitioning to a different type of aircraft, it would be now, as we are not in a hurry to grow the airline and may not be for quite some time.

Hi, thanks. I just had a couple of quick follow-up questions. Tom, I want to ask you first, you mentioned about testing on the routes to Hawaii. Is that something that's in place for Southwest or you're working on to have the testing done at the airports prior to that? And then my second question is a follow-up. I'm sorry, go ahead.

No, I'm sorry, Mary. Go ahead, finish your question.

So I was just going to say my second question is to Mike. On the discussion of the A220s, you've talked a lot in the past about that, but you said a decision wouldn't have to be made until 2025. And I'm wondering, did you mean a decision not till 2025 or that 2025 would be when you would like to start getting some of the smaller aircraft?

We are focusing on three main areas. First, we are offering at-home tests. Second, we are informing people about which pharmacies in Hawaii are approved providers. Lastly, the airport in Oakland is providing free drive-through testing one or two days before travel. It will be interesting to see how many airports adopt similar practices and how travelers will find out about them. Our priority is to ensure that all the latest information is available on our website, clearly outlining the travel requirements from the Mainland U.S. to Hawaii. We do not aim to enter the testing business; instead, we want to inform customers about the three testing options available, including at-home tests. For example, CVS Pharmacy is our current partner for Hawaii, while Oakland is collaborating with another provider to offer testing at the airport. Overall, our main goal is to raise awareness among our customers.

We need to have the airplane on property around the 2025 timeframe. Therefore, we will need to make a decision before that. Over the next year, we will need to focus on our plans and consider all the advantages and disadvantages.

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

Hi, good morning. Dave just asked my first question about the link between coronavirus cases. So my other question is, regarding your switch in your selling middle seats beginning December 1, do you see any scenario under which you guys would reverse that decision, and also did you do any kind of consumer research or surveys before making this decision? Thank you.

Well, I would never say never. Our intention is not to reverse the policy decision, and there is ample evidence and good scientific data to support that. We certainly do not intend to do that. Could you please repeat the rest of your question? I missed part of it.

And Dawn, we're one of five airlines in the world doing this. There is ample evidence that changing is the right decision based on the scientific information we have now. The Department of Defense's conclusions are very compelling and unbiased; they want to ensure safety for troop movements. I find their conclusions very persuasive, alongside all the work we've been involved with.

To clarify, the open middle seat was not primarily a safety measure under the Southwest Promise; it was more focused on boosting customer confidence and comfort. The actual safety aspects of the Southwest Promise involved cleaning and mask-wearing, as we previously discussed. This was truly about reassuring customers and making them feel at ease when traveling again. If you ask my family, they would prefer to keep the middle seat open for extra space. We recognize, however, that it can't stay that way indefinitely. Waiting for customer sentiment to improve may be challenging since many people appreciate this arrangement.

Thank you all for taking my call. You announced a couple of new ski destination routes. I'm wondering how your total number of routes to ski towns and destinations this winter compares to last year and what the capacity to those areas is. What is your outlook on bookings for these ski areas considering that the ski resorts themselves are making changes and facing their own challenges?

Well, I know we're up at least two. They're brand new for us. Off the top of my head, I don't know what the industry capacity is there. I got to believe that it's probably down, but it's all about snow and sun right now is what I learned from our marketers.

And I think we have a good bit of ski business in Boise and Reno as well as Salt Lake City and Denver. So these two new ski destinations complement a substantial amount of ski business we had in Denver where people were then driving in the mountains. So those are our kind of big ski destinations.

Thank you for taking my call. You announced a couple of new ski destination routes. I'm curious about how your total number of routes to ski towns and destinations this winter compares to last year, as well as the capacity to those areas. What is your outlook on bookings for these ski areas, especially considering that the ski resorts themselves are making changes and facing their own challenges?