Southwest Airlines Company (LUV) — Q1 2021 Earnings Call Transcript

Thank you, Keith, and I appreciate everyone joining today. In just a moment, we will share our prepared remarks and then open it up for Q&A. And on today’s call, we have 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. We also have other senior executives with us for Q&A including Andrew Watterson, Executive Vice President and Chief Commercial Officer; and Bob Jordan, Executive Vice President of Corporate Services. So, a few quick reminders and then we’ll jump in. We will make forward-looking statements today; those are based on our current expectations of future performance and that our actual results could differ substantially from these expectations. We also had several special items in our first quarter results, which we excluded from our trends for non-GAAP purposes and we will reference those non-GAAP results in our remarks as well. We have more information on both of these in our press release from this morning. So please make sure you check that out as well as our Investor Relations website. So with that, we’ll get started and I will turn over the call to Gary.

Thank you, Ryan, and good morning, everybody, and welcome to the first quarter 2021 call. The first quarter results are notable, first of all, because they are a lot better than what we thought they would be back in January. But even with that improvement, we still lost $1 billion, and it was worse than our fourth quarter results due to the weaker seasonality of January and February travel. And clearly, that’s not sustainable. But fortunately, we’re here to report that we believe the worst is now finally behind us. We have a much better outlook and report for the second quarter. And we’ll give you a full brief on the first quarter results and our second quarter outlook. But here are a few topside highlights before I pass the call over to Mike. Number one, thankfully, we received a second round of payroll support or PSP from the federal government effectively covering the first quarter. It was much needed. We’re very grateful. We’re the only airline that has avoided pay cuts, layoffs, furloughs, and the like, and I’m very, very gratified that our 50-year record remains intact on that front. Not counting working capital, changes in cash flow, our cash losses of $1.3 billion were more than offset by the PSP. Number two, beginning with a mid-March inflection point, we finally began to see bookings improve from the nine-month down 65% flat line that we had been experiencing. So vaccines, vaccinations, case counts, and spring break all converged in the right way. And sensing this, we boosted our capacity by 50% overnight or 1,000 daily departures in the middle of March. Number three, taking into account our voluntary separation program and attrition since June, our staffing currently is at 92% of our June 2019 levels. In addition, we’ve had thousands of people on leave, and now that we’re adding flights, we’re smoothly recalling those who are needed on voluntary leaves and having avoided the mess associated with furloughs. As a result, we plan to apply 96% of our June 2019 ASMs, albeit with a different route network. The point being is that we’re very well prepared to flex up our capacity. And even having said that, I think we’re very well aware of it; it will still be messy, and we’ll have to carefully manage. Number four, now please understand that the path back to breakeven and beyond is dependent upon two things. Number one, we have to have sufficient flight and seat activity, and you need to read into that, that means more than what we’ve been doing prior to March. And number two, we’ve got to have more customers to fill those flights, and obviously read into that revenue. So we have too much fixed cost for us to be profitable below roughly 3,000 to 3,300 flights a day. At least now, it’s realistic for us to project breakeven cash flow scenarios, which are possible here in the second quarter. So in summary, a lot of things here this morning. I’m relieved, I’m optimistic, I’m enthused, I’m grateful, and I’m especially thankful to our tens of thousands of employees who have fought their way through this pandemic and gotten us at least to this point. We’ve got a long way to go, but I’m very, very confident that we can all depend upon our selfless warriors; they’re very resilient. Finally, I’m pleased with the performances. The operation has been superb. The new cities are meeting or exceeding our expectations. I’m glad to have all of them as permanent additions to our route network. The addition of our global distribution system capabilities could not have been a more timely add to our capabilities as we’re pushing aggressively into the huge managed travel business market. We’ve got a great domestic network, we’ve got great service, and finally, they will have access to low fares. The cost and spending performance has also been excellent, and we’re making great progress toward restoring our historic productivity and efficiency. Finally, I’m absolutely delighted with the deal that we reached with Boeing last month that strategically secures our position as an all-737 operator with all the attendant competitive benefits that it enables. With that, I’m going to turn it over to our COO, Mike Van de Ven, who I know will elaborate more on that. But among other things, Mike, great job, great performance, so take it away.

Thanks a lot, Gary. We really had an action-packed start to the year, and I’m very proud of our people and how they just continue to rise to the occasion. They’ve opened up four new stations in the first quarter and two more in April, implemented a federal mask mandate, returned the MAX to service, secured a new long-term Boeing order book of MAX 7 and MAX 8, and reached service agreements with GE and CFM International for the LEAP-1B engines, all while running an exceptional operation. We ended the quarter with an on-time performance of 86.2%, which was good for third in the industry, and that included a reduction of roughly 4.4 points due to weather. As you know, we’ve got large operations in Texas, and the entire state froze for several days in mid-February, impacting our network, as well as the winter storm, which impacted Denver as we launched into our March base schedule. Speaking of our March schedule, we returned the MAX to revenue service on March 11 once we completed all of the maintenance requirements and the pilot training, and we had a self-imposed set of over 200 readiness flights on the airplane. The launch was limited to 10 lines of flying, and the airplanes were separated from the rest of the fleet for the first month of service. On April 12, we increased the lines of flying to 55 lines, and the aircraft are now fully interchangeable across the network. We currently have 64 MAX aircraft in the fleet, and we have 32 of those aircraft currently out of service, awaiting FAA approval of repair instructions from Boeing. The repairs will ensure that a sufficient ground path exists for certain components of the electrical power systems. These aircraft were identified by Boeing as part of the specific production runs, and the impact of MAX lines of flying is being covered by spare aircraft in our next-generation fleet. We’re not experiencing any significant operational impact, and once we receive FAA approval, it will take 2 to 3 days per aircraft to make the repairs and then expect all the aircraft work to be complete in roughly 3 weeks. So turning back to the first quarter performance, our bag handling continues to produce all-time best company results. We delivered 99.7% of all bags in plane without a mishandled claim, and as you know, we do that carrying more free bags than anyone in the industry. We continue to lead all marketing carriers with the lowest customer complaint ratio to the DOT. Perhaps the highlight of the first quarter was securing a new long-term order book with Boeing for the MAX 7 and MAX 8, as well as our agreement with GE and CFM International to maintain the LEAP-1B engines. We announced our order book on March 29, and there are just a couple of items that I’d like to highlight. First, we added 100 firm orders for the MAX 7, which will be the replacement aircraft for our 737-700s. We also converted 70 MAX 8 firm orders to MAX 7 firm orders, bringing our firm order book for the MAX 7 and MAX 8 to 200 and 149 aircraft, respectively. We also added 155 options for either MAX 7 or MAX 8 aircraft, and that brings our total number of options to 270 aircraft. The interchangeability of the options between aircraft types gives us tremendous flexibility. So when you put all of that together, we are maintaining substantial operational and economic efficiency as a result of a single fleet type, and the LEAP-1B engine provides at least a 14% better fuel efficiency, quieter engines, and it has excellent dispatch reliability to support our on-time operation. We intend to retire a significant number of our roughly 460 737-700s over the next 10 to 15 years since the MAX 7 is the best-in-class aircraft for us in that 150-seat category. Just like the MAX 8 is the best-in-class for us in the 175-seat category. The acceleration of our fleet modernization makes great economic sense; it also reduces carbon emissions and noise levels, which is better for the environment. It also provides a superb cabin experience for our customers and our employees. Looking forward into the second quarter, we have a couple of important capabilities that we’re going to add to the operation. First, we’re in the final stages of obtaining ETOPS certification for our MAX 8 fleet. So the MAX and its fuel burn advantages rollout is not only to reduce our operating cost to Hawaii but it’s also going to allow us to fill all 175 seats in winter wind conditions. That’s something we can’t always accomplish with the next-gen fleet. That was our plan all along, but the efforts were delayed as a result of the MAX grounding. Second, we’re going to begin a fleet transition to an all-new maintenance record-keeping system beginning with our 737-700s later this month. This system replaces our old system, which is nearly 30 years old. This new system provides us a foundation for real-time maintenance recordkeeping, paperless records, improved planning, better analytics, and automated controls to enhance regulatory compliance. Once we complete the transition of the -700 fleet, then the -800s and the MAX will follow later this year. In closing, I can certainly feel the operational momentum building, and I have to say it feels good. We are in the process of bringing our entire fleet back into operational status. We’re coordinating our staffing to ensure that we’re resourced to fly at whatever our desired levels are. We’re introducing new capabilities and navigating through an environment that continues to be impacted by COVID. Our people are magnificent. I can't say enough about them. They accomplish all of these things while running a great operation, and it’s among the best we’ve ever delivered. They’re just the best team that I’ve ever been associated with, and my deepest thanks to each and every one of them. With that, President Nealon, over to you.

Thank you, Mike. Good morning, everyone. We have provided a detailed investor update each month this quarter, and our earnings release offers extensive information this morning, so I will avoid repeating what you've already heard. However, I want to share insights on the revenue performance of the first quarter, along with some perspective on near-term trends and our outlook for the second quarter. Operating revenues in the first quarter dropped 52% year-over-year and were down 60% compared to the first quarter of 2019, which is better than we anticipated three months ago during the January call. February's operating revenues were approximately 5 points better, while March improved around 15 points over our estimates made at that time. This has been the trend in recent months, with steady and encouraging growth in leisure travel demand and bookings week after week since mid-February. March experienced a good reduction in operating revenues, down 10% year-over-year and down 54% compared to March 2019, outperforming our guidance range of a decrease of 55% to 60%. The March load factor stood at 73%, also exceeding expectations, and passenger yield was down 34% year-over-year. Yields fell significantly in March, but fares improved weekly as demand increased steadily. Close-in bookings remained strong, and we began observing an extension of the booking curve. Although business travel has remained mostly stagnant, we were happy with March's overall performance. We secured a solid base of bookings for March early on, thanks to targeted promotions run in December, January, and February. Our revenue management team effectively managed inventory and yields once we entered March. As expected, spring break performed well, but overall passenger traffic throughout March saw a steady increase. March's load factor was 20 points higher than January's, even with increased capacity, illustrating the strong pent-up demand for leisure travel. This positive momentum has continued into April. During our last investor update in mid-March, we estimated April operating revenues to decline 45% to 55% compared to 2019. Since then, we have seen consistent improvements in passenger volumes and fares, and we now project April operating revenues to decline in the range of 40% to 45% compared to 2019, with a load factor between 75% and 80%. The Easter holiday weekend performed as expected, and leisure traffic and bookings for the rest of April have remained robust. In our earnings release, we first estimated May revenues, reflecting further improvement compared to April’s outlook. We anticipate May operating revenues to decline 35% to 40% compared to 2019, with a load factor ranging from 75% to 80%. Both holiday and non-holiday periods in May are looking strong in terms of leisure demand. With these favorable demand trends continuing since mid-February, we can better manage the booking curve for April, May, and beyond. Our revenue guidance for these months accounts for improving load factors and higher passenger yields than March. Yields are expected to remain lower than 2019 levels, as we now primarily rely on leisure travelers during this recovery phase. Despite this, we've been pleased with the strong close-in demand we experienced in March and so far in April. Currently, we are not ready to provide an outlook for June, but we are seeing bookings increase further out, building at a faster pace. It's still early for June and July, but bookings are increasing nicely and aligning with seasonal expectations for leisure travel. Ordinarily, we would expect to be about 60% booked for May, approximately 35% for June, and around 20% for July, and we are on track with these levels. With June being one of our highest-demand summer months, we expect June’s revenue performance to improve compared to May relative to 2019. We will provide the June revenue outlook during our mid-May investor update. As vaccination rates increase, travel restrictions ease, and leisure demand rises, we are quite optimistic. However, improvements are primarily centered around leisure travel for the summer, and it's still early to predict travel demand for the fall. We're aware that the recovery in demand may not mirror a rapid return to pre-pandemic levels when it comes to business travel. Our corporate managed travel revenues were down 88% in the first quarter compared to Q1 of 2019, reflecting results similar to our fourth-quarter figures from 2020. Yet, we observed some moderate improvement later in the quarter, especially in March when corporate revenues were down 85% versus March 2019. Feedback from our corporate clients indicates that domestic business travel will continue to lag behind leisure recovery significantly. For now, we are preparing for a scenario where business travel remains down by 50% to 60% through the end of this year. Nonetheless, more customers are starting to allow their employees to travel again, easing or relaxing previous travel restrictions. Even as this occurs, volume has yet to return fully. According to recent surveys, about 60% of respondents from the latest GBTA business travel survey anticipate resuming domestic business travel in the latter half of the year, but we will have to wait and see how that unfolds. The exact percentage of traditional business travel that will return remains uncertain, and we believe there could be a 10% to 20% long-term reduction in business travel. However, as business demand begins to rebound, we believe we are in a strong position, especially with the GDS initiatives that close a significant gap in our corporate travel capabilities. We are now live on Amadeus, Apollo, Galileo, and Worldspan, and we're advancing towards implementing the Sabre GDS platform soon, with a targeted go-live date before Labor Day. This marks significant progress, and our teams are executing this successfully. Our sales teams are engaging frequently with customers, and their response has been very promising. I would like to provide insight into what we're observing across different parts of our network. Generally, our leisure markets, where restrictions remain low, are outperforming the rest of the system. Areas like beaches, mountains, and ski resorts are thriving, which aligns with reports from other carriers. Specifically, our Texas markets, including Austin, Houston, Dallas, and San Antonio, are performing strongly, as well as Florida's Gulf Coast, which includes Panama City, Pensacola, Fort Myers, and Tampa. The Desert Mountain region, including Phoenix, Salt Lake City, and Boise, is thriving, and Denver also continues to deliver strong performance. Demand is lagging in regions like the Northeast, with some weaknesses in Chicago and California, although there has been improvement since restrictions were lifted. Overall, all markets have shown considerable improvement compared to January and February. As a result, we feel comfortable adding flights to capture additional demand, including in Hawaii. Demand from California to Hawaii and between the islands is ramping up, and we're finally at a point where we can restore our Hawaii flight schedules to pre-pandemic levels. It's important to mention that international testing is still in effect. Our international demand is doing well; we are currently serving 8 out of our 14 international stations and plan to reactivate the remaining 6 as conditions permit. In terms of new stations, we have opened or announced 17 new airports, all of which are performing excellently, generating new customers and positive revenue. We are excited about the operational startup of these stations. We will begin service in Fresno on April 25, Destin/Fort Walton Beach on May 6, Myrtle Beach on May 23, Bozeman, Montana on May 27, and Jackson, Mississippi on June 6. We also just announced that service in Eugene, Oregon will start on August 29, and Bellingham, Washington will follow later this year. The performance of the new stations operating so far has met or exceeded expectations; they are places we’ve targeted for a long time, and we're pleased to see them starting up. In the first quarter, capacity decreased by 35% year-over-year and was down 39% compared to the first quarter of 2019, which was in line with our expectations. As planned, we increased capacity in March, adding roughly 1,000 flights daily beginning mid-month, which paid off as demand improved, boosting March revenue performance by about $150 million. Our April capacity is projected to decline by 24% year-over-year, and May's capacity is expected to drop by 18% compared to 2019 levels. This includes a slight increase in flying in April and about 3 points of additional capacity in May due to a stronger demand outlook. We are currently adjusting our June flight schedules, expecting June ASMs to decline by 4% compared to 2019. Throughout the pandemic, we’ve shifted away from business-oriented short-haul flights to focus on leisure-oriented long-haul flying, which has driven higher capacity with new aircraft. This initiative accounts for about 4 to 5 points of the 14-point capacity increase from May to June. Assuming current trends persist, our preliminary plans for July call for capacity levels in line with June compared to 2019. We will finalize our July plans soon. Our focus remains on managing the next few months with precision, improving both our revenue and cash performance towards breakeven or better, with a goal of exceeding breakeven. Our other revenue streams outperformed passenger revenue in the first quarter, decreasing by 15% year-over-year. In March, however, our other revenue rose by 3% year-over-year, with our ancillary products, particularly commissions from car, hotel, and vacation bookings, aligning closely with passenger revenue. The main contributor to our other revenue performance was the Rapid Rewards program. For the first quarter, total revenue from our loyalty program fell by 19% year-over-year and 22% versus 2019. Specifically, the royalty revenue flowing through other revenue declined by 12% compared to 2019, which is a strong outcome, especially against passenger revenues. This reflects the strength of our program and the high level of engagement we maintain with our customers. Total co-brand card spending in March was only down 1% compared to March 2019. For the first time since the onset of the pandemic, our credit card portfolio size grew in the first quarter relative to 2019, which is exciting news. Our credit card portfolio remains strong; we're seeing increased average spend per cardholder, low attrition, and positive performance from our program. We have more Rapid Rewards members, additional credit card holders, and greater customer engagement. We're also expanding the number of destinations available for visits, offering many leisure options. Our brand remains robust, and our NPS scores are among the best in the industry, which we monitor closely. Our trip NPS, measuring individual flight experiences, is currently trending even higher, demonstrating our team's commitment to hospitality and exceptional on-time performance. I'm incredibly grateful for our frontline employees, who execute their responsibilities with precision and dedication daily. I also want to mention our environmental focus, particularly relevant today, Earth Day. Gary has already discussed our long-term goal of achieving carbon neutrality by 2050, in line with industry objectives. While this focus isn't new to us, it's become even more pronounced over the past year. Since 2002, we've invested over $620 million in fuel efficiency initiatives separate from new aircraft. In 2019, we saved more than 7 million gallons of fuel through flight planning efforts. Our commitment to fleet modernization will further reduce carbon emissions. We plan to retire many of our 737-700s over the next 10 to 15 years, investing billions in new aircraft that offer 14% greater fuel efficiency. Currently, our carbon emissions per ASM are among the industry leaders; our fleet modernization presents a tremendous opportunity for further CO2 reductions in the upcoming decade. However, we also recognize that merely updating our fleet won't achieve our 2050 carbon neutrality goal. The most promising strategy involves a mix of fleet modernization, operational fuel efficiency improvements, air traffic control upgrades, and the widespread adoption of sustainable aviation fuels (SAF). We have an SAF offtake agreement with Red Rocks Biofuels and are collaborating with the National Renewable Energy Lab to develop new SAF feedstocks and pathways. Recently, we've signed MOUs with Marathon Petroleum and Phillips 66 to expedite SAF production, targeting 300 million gallons by 2025. This plan is ambitious but represents a critical step forward, and we intend to collaborate closely with both companies throughout the process. While we believe that carbon offsets can be beneficial, we view them as a temporary measure. Our current offsets have primarily been renewable energy credits. Although they can be useful when applied correctly, our main focus remains on actionable solutions. Strategies such as direct air capture, advancements in airframe technology, and new energy sources hold significant promise, albeit as longer-term solutions. Gary is our executive sponsor for environmental efforts, and Stacy Malphurs, our VP of Supply Chain, will co-lead this initiative due to her considerable expertise in SAF and the fuel supply chain. We will publish a comprehensive report on our progress and actions in our Annual Sustainability Report, the Southwest One Report, available online on our Investor site in the coming weeks. With that, Tammy, I’ll turn it over to you.

Thank you, Tom, and hello, everyone. I’ll round out today’s comments with remarks on our performance and an overview of our cost, fleet, liquidity, and cash burn before we move on to Q&A. This morning, we reported first quarter net income of $116 million or $0.19 per diluted share, which included $1.2 billion in payroll support. Excluding this benefit and other special items detailed in this morning’s press release, our first quarter net loss was $1 billion, or a $1.72 loss per diluted share. While our losses persisted in the first quarter, I feel good about the progress we are making as we move through the second quarter here. I want to commend our people on another solid cost performance as we have to remain extra diligent with our spending. Excluding special items, our first quarter total operating costs decreased 24% year-over-year to $3.3 billion and increased 17% year-over-year on a unit basis. Fuel represented about 35% of that decrease. Our first quarter economic fuel price of $1.70 per gallon was at the midpoint of our guidance range, and our fuel expense declined 44% year-over-year. Reduced capacity levels resulted in gallon consumption down 37%, the largest driver of our year-over-year decline, with the economic price per gallon down 11%. We realized a modest hedging gain of about $1 million or $0.01 per gallon, and our hedging program premium costs were $25 million or $0.09 per gallon. While fuel prices remained below year-ago levels, energy prices have been creeping up over the past few quarters, underscoring the importance of having a consistent and meaningful fuel hedging program. We have great hedging protections in place, with hedging gains beginning at Brent prices in the $65 to $70 per barrel range, and more material gains once you reach $80 per barrel and higher. Based on market prices as of April 15, we expect our second quarter fuel price to range from $1.85 to $1.95 per gallon, including another modest hedging gain of $0.01 per gallon. Looking at 2022, we also have a high-quality fuel hedge in place with a similar level of protection; however, we would begin recognizing hedging gains around the $60 per barrel Brent range, with more meaningful gains at $70 per barrel or higher. Last year, we took the opportunity to add to our 2022 hedge position while prices were lower. Our first quarter fuel efficiency improved 5% year-over-year, primarily driven by the current aging aircraft. Some of these gains are temporary; we’ll see some sequential pressure as we return more older 737-700 aircraft to service this summer. We currently estimate our second quarter fuel efficiency will remain aligned with the first quarter’s ASMs per gallon, partly due to returning the MAX to service last month. The MAX is our most fuel-efficient aircraft, and we have visibility on significant improvements over many years as we plan to retire a significant number of our 737-700s in the next 10 to 15 years. We get at least a 14% fuel efficiency improvement for each replacement of an end-of-life 737-700 with a new MAX. This will be a big driver of progress towards our long-term environmental goals. Excluding fuel, special items, and profit sharing, first quarter operating costs decreased 19% year-over-year, on the better end of our guidance range. On a unit basis, the increase was 23% year-over-year, mainly driven by the 35% reduction in capacity. We continue to realize cost savings from our actions in response to the pandemic, including $412 million in savings and first quarter salaries, wages, and benefits due to voluntary separation programs implemented last year. We had pay rate increases for our people that will flow through this year, but the voluntary program savings far offset that rate inflation. Aside from salary wages and benefits, we saw year-over-year decreases in most other categories due to reduced capacity and related cost relief, primarily in maintenance, landing fees, and employee customer and revenue-driven costs. In terms of a few other notable items, first quarter aircraft rental expense was $52 million, down 9% year-over-year, driven by the return of leased 737-700 aircraft. Advertising spend has increased sequentially from the fourth quarter as we ramp up marketing, but our first quarter advertising was down 8% year-over-year. We also realized one-time favorable settlements in the first quarter, primarily in property taxes. Again, our first quarter cost performance was solid, and I appreciate the work our teams are doing to manage costs in this unprecedented environment. Turning to the second quarter, we expect operating expenses, excluding fuel and oil expense, special items, and profit sharing to increase 10% to 15% year-over-year and also to increase sequentially compared with the first quarter. We estimate that 60% to 70% of the expected sequential increase is due to variable flight-driven expenses, as we plan to increase capacity to near 2019 levels by June. To support the increased flight activity, we are recalling some employees who previously elected our voluntary program. The sequential increases will be driven by several factors, accounting for about one-third of the total sequential increase, including salary, wages, and benefits expenses due to the higher number of active employees. About half of our recalled employees will return in the second quarter, requiring some training before they go back to work. Partially offsetting the sequential cost pressure is an estimated $325 million in savings from our voluntary separation programs. These early recalls mean our 2021 annual cost savings from our employee voluntary program are now estimated to range from $1.1 billion to $1.2 billion, slightly down from the previous estimate of $1.2 billion. Other sequential cost increases will be driven by flight-driven expenses and landing fees, maintenance expenses, as we prepare aircraft that have been parked for a return to service, along with higher airplane owner expenses due to MAX deliveries. While we expect sequential cost increases associated with increased flight activity, our second-quarter operating costs should remain below second quarter 2019 levels. We expect the ramp-up cost pressures will vary and persist until we reestablish capacity back to 2019 levels. That said, we remain focused on cost control as we navigate this recovery. Our first quarter interest expense was $114 million, consistent with the fourth quarter. Assuming our current momentum continues, we don’t anticipate raising additional debt. Based on current levels and interest rates, we expect second-quarter interest expense to be approximately $115 million. Our first quarter effective tax rate was 21%, which met our expectations, with a current estimate for 2021’s effective tax rate around 23%. Mike covered the highlights of our Boeing agreement, and I’d like to add my thanks to the teams at Southwest, Boeing, GE, and CFM International for their tireless work on developing agreements that reinforce our long-term relationships and support our all-Boeing 737 business model. Based on the refreshed order book and our retirement plans over the next 10 to 15 years, I feel comfortable with our ability to manage fleet size, support fleet modernization, and pursue growth opportunities as they arise. We ended the first quarter with 730 aircraft, including 61 MAX 8. For the second quarter, we expect to receive 7 MAX 8 deliveries and retire 3 737-700s. One more MAX 8 will be delivered in the third quarter, with plans to retire up to 6 more 737-700s by year-end. Beyond 2021, we’ll wait before deciding our 2022 fleet plans and CapEx. We are poised to retire approximately 30 to 35 737-700s annually starting next year, with firm orders covering most of our modernization plans. Our options give us tremendous flexibility. As expected, our first quarter capital spending was $95 million, and we anticipate $500 million in full-year 2021 capital spending, mostly driven by technology, facilities, and operational investments, with negligible aircraft CapEx. We have flexibility to manage CapEx with our order book, and we’re looking at firm orders for $700 million next year. Before I conclude and open the call for questions, I’ll provide an overview of our liquidity and cash burn. We currently have approximately $14.3 billion in cash and short-term investments, consistent with where we ended the first quarter. We’re thankful for the federal government’s continued economic relief to protect jobs as the pandemic persists. We received $1.7 billion in payroll support during the first quarter and expect an additional $259 million as our final payment from the second round of PSP support, totaling $2 billion. We’re working to finalize our agreement with the Treasury on the third round of PSP support and anticipate receiving another $1.9 billion. Our liquidity position provides a solid foundation as we operate in the wake of 2020’s substantial losses. Our first quarter average core cash burn was $13 million per day, an increase of $1 million sequentially from the fourth quarter, with rising fuel prices offsetting improving revenue trends. Revenues improved dramatically in March, resulting in a drop in cash burn from $17 million per day in February to $9 million in March. Including benefits from future cash bookings and other changes in working capital, we flipped positive in March, averaging cash flows of $4 million per day. Assuming continued positive revenue trends, we expect our average core cash burn in the second quarter to be between $2 million to $4 million per day. We anticipate achieving cash burn breakeven with revenue of roughly 60% to 70% of 2019 levels. Barring unforeseen demand changes, our current cost trends and assuming continued upward revenue and booking patterns, we’re hopeful to achieve core cash breakeven results or better by June. In closing, while the pandemic’s impacts persist, our Southwest team continues to navigate familiar and unfamiliar challenges. While we’re not out of the woods yet, we’re encouraged by the rise in vaccinations unlocking the pent-up leisure demand we all believed existed. We remain optimistic that the worst is behind us, yet we recognize the business travel continues to lag significantly behind leisure. We will continue to manage our business closely, focusing on controllable aspects, maintaining a strong balance sheet, reducing cash burn on the path to breakeven, tightly controlling costs, and seeking efficiency as we ramp capacity levels. I’m immensely proud of how our people continue to persevere and show up for our company, customers, and each other. Working together, I am confident our best is yet to come. With that, Keith, we are ready for analyst questions.

Just one quick one for you. Tammy, I was intrigued by what you mentioned about your hedging policy. You also mentioned the approach to climate change with renewable energy credits. Are you thinking about the energy credits and lower emissions, and your fuel hedging policy going forward, are you thinking about them in conjunction with one another as a holistic approach to these topics?

Yes, absolutely. They’re really two different topics, but we are certainly thinking about them holistically. Our fuel hedging program has been in place for many years to protect against rising fuel prices, and looking forward, a component of that will be sustainable aviation fuels. We’re just not at a point today with significant volumes there, so it will be more relevant with time. However, as we look this year and over the next several years with the hedging position we have, the purpose of that is primarily to provide protection against conventional fuel, which we’ll be relying on heavily.

Yes. To achieve much higher usage of sustainable aviation fuel and reach the necessary scale, we need incentives like tax credits for producers, blenders, or consumers. We may not fully understand the benefits of all the ESG-oriented investments yet, but those incentives will be essential for making sustainable aviation fuel economically viable.

Gary, Southwest has a strong history of prioritizing shareholder interests. Clearly, during COVID, there was significant dilution. How do you believe the company should best repay shareholders? Should it focus on buying back shares, distribute special dividends, or reinvest the funds back into the business to enhance stock value through increased earnings?

I think it’s really a long way off before it’s a real question for us, obviously, because we’ve got CARES Act limitations that go through September of ‘23. Our priorities would be pay down the debt first and then grow the business, which is one way to take care of all of our stakeholders, including our shareholders. I’d also share that I’m not a fan of special dividends. It’s premature to share any definitive thoughts on shareholder returns right now, but we have four phases we’re thinking of. One is survival, second is stabilization, third will be repair, and then finally will be back to prosperity. Until we stop losing money, we’re still in survival mode. I’d like for us to get back to handsome shareholder returns once we get our balance sheet back in order.

Gary, just a quick one as well. If demand doesn’t worsen significantly and you find yourself looking at PSP 4 attached to the infrastructure bill, is that something you expect to happen or would advocate for, or would you actively say you don’t need it?

I haven’t really contemplated that scenario. We’re grateful to have received three PSPs, and we feel we’re on the cusp of achieving breakeven. It’s difficult to argue that Southwest would need further support when I think we’re moving out of that realm. I would note our first quarter turned out better than we thought it would, but a $1 billion loss can’t continue indefinitely for any company.

Gary, can you share more about early conversations with corporate customers about GDS integration? Is it different for existing corporate clients, considering you’re now one of the first low-cost carriers to enter this space? How are those conversions trending versus your initial vision?

Managed travel accounts behave differently than our non-managed travel accounts. Tom and Andrew can elaborate more on this.

The industries now traveling mostly are government, DoD, manufacturing, and transportation, while consulting firms historically our biggest consumers are not traveling yet. Conversations are very positive with large accounts. They want our products, but we’ve been hard to work with due to prior limitations.

Adding to that, we’ve had relationships with these TMCs and corporations through our platforms. Their current needs are for standardized processes such as GDS; now they see we’re on platforms they prefer.

Can you clarify your comment regarding business travel not returning for about 10 years? Was there an analysis done, and what insight can you provide that leads you to believe some portion may never return?

My point isn’t that business travel will never recover. Rather, the recovery could be prolonged, possibly longer than we anticipate. Historical recessions tend to see recovery in five years. I’m unsure if this situation aligns with that pattern due to significant shifts towards remote work and other factors. I do believe business travel will recover, but there are many uncertainties going ahead. That being said, I think we will recover business travel faster because of our new avenues to gain those customers through GDS integration.

With the four phases you have outlined, it sounds like you’re moving ahead quickly with stabilize and prepare following your June capacity outlook. When thinking about net debt advantages, can you discuss your growth approach and whether you aim to take market share knowing your competitors have other capital priorities?

We need to ensure we’ve got a solid balance sheet, but I believe we have opportunities available for growth, and with our strong competitive position, we can be a growth company. To ignore opportunities for growth in this environment would be unwise; we want to be well-prepared for growth based on prevailing conditions, while maintaining a priority on profitability.

Thank you, Keith, and welcome media representatives to our call today. We can go ahead and start the media portion of the Q&A.

I wanted to ask about the latest issues with the MAX. How are you handling recent concerns? Does it affect confidence in the plane given past issues?

The issue pertains to specific tail numbers and was identified by Boeing. Although frustrating, our operational experience with the plane has been good. The problem is acknowledged and is a straightforward fix; FAA approval is pending. We’re ready to make the necessary repairs within two to three days once we get approval. I am confident in the MAX as it handles operations well.

Have you seen any impact from the State Department’s travel alert level increase for popular countries; is it too early to tell?

We’re not seeing any impact from the changes in alert levels at this point. What’s your second question?

Regarding the increase in flight attendants calling in sick recently, could you offer insight on that? Are you seeing an uptick in cases, or is there reluctance for some attendants to return?

Our labor contracts allow flexible sick leave, and there are many reasons for calling in sick like family issues or illnesses. As we recall employees, we see temporary spikes, but I don’t expect it will affect operations. We have reserves to maintain service levels.

What’s the current airfare environment? Will you be able to meet financial goals with leisure travel rates being so unpredictable?

As I mentioned earlier, leisure travel demand is picking up. Our booking and revenue curves for the upcoming months are solid and encouraging, which positions us well for possible breakeven or profit in June. However, the landscape could change, so we are monitoring closely.

The industry currently has more seats than passengers, indicating we might face a softer pricing environment for an extended period, which we are prepared to manage.

Regarding the MAX compensation, are you receiving any payouts from Boeing, and do you know the total financial impact of these service interruptions?

While the specifics on compensation are confidential, our capital spending and order book reflects terms negotiated due to prior MAX grounding; damages are manageable within operational context.