Southwest Airlines Co., Q2 2020 Earnings Call, Jul 23, 2020

Southwest Airlines Co.
NYSE:LUV
FQ2 2020 Earnings Call Transcripts
Thursday, July 23, 2020 4:30 PM GMT
S&P Global Market Intelligence Estimates
-FQ2 2020- -FQ3 2020- -FY 2020- -FY 2021-
CONSENSUS ACTUAL SURPRISE CONSENSUS CONSENSUS CONSENSUS
EPS Normalized (2.75) (2.67) NM (1.44) (4.80) 2.01
Revenue (mm) 886.11 1008.00 13.76 2147.52 10402.05 17091.49

Currency: USD
Consensus as of Jul-23-2020 1:14 PM GMT
- EPS NORMALIZED -
CONSENSUS ACTUAL SURPRISE
FQ3 2019 1.08 1.23 13.89 %
FQ4 2019 1.09 0.98 (10.09 %)
FQ1 2020 (0.32) (0.15) NM
FQ2 2020 (2.75) (2.67) NM
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Contents
Table of Contents
Call Participants .................................................................................. 3

Presentation .................................................................................. 4
Question and Answer .................................................................................. 13
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SOUTHWEST AIRLINES CO. FQ2 2020 EARNINGS CALL | JUL 23, 2020
Call Participants
EXECUTIVES
Gary C. Kelly
Chairman & CEO
Linda B. Rutherford
Senior VP & Chief Communications
Officer
Michael G. Van de Ven

Chief Operating Officer
Robert E. Jordan
Executive Vice President of
Corporate Services
Ryan Martinez
Managing Director of Investor
Relations Alison Sider
Tammy Romo David Slotnick

Executive VP & CFO
Edward Russell
Thomas M. Nealon
President Leslie Josephs
ANALYSTS Randy Diamond
Darryl J. John Genovesi Tracy Rucinski

Vertical Research Partners, LLC
Hunter Kent Keay

Wolfe Research, LLC
Jamie Nathaniel Baker

JPMorgan Chase & Co, Research
Division
Jose Caiado De Sousa

Crédit Suisse AG, Research
Division
Myles Alexander Walton

UBS Investment Bank, Research
Division
ATTENDEES
Copyright © 2020 S&P Global Market Intelligence, a division of S&P Global Inc. All Rights reserved.
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Presentation
Operator
Good day, and welcome to the Southwest Airlines Second Quarter 2020 Conference Call. My name is
Chad, and I will be moderating today's call. This call is being recorded, and a replay will be available on
Southwest.com in the Investor Relations section. [Operator Instructions]
At this time, I'd like to turn the call over to Mr. Ryan Martinez, Managing Director of Investor Relations.
Please go ahead, sir.
Ryan Martinez
Managing Director of Investor Relations
Thank you, Chad, and thank you all for joining us today.
Joining me on the call, we have Gary Kelly, our Chairman of the Board and CEO; Bob Jordan, Executive
Vice President of Corporate Services; Mike Van de Ven, Chief Operating Officer; Tom Nealon, President;
and Tammy Romo, Executive Vice President and CFO.
So following our prepared remarks today, we will open it up for Q&A. And just a few quick disclaimers
before we get started. We will make forward-looking statements, which are based on our current
expectations of future performance, and our actual results could differ from these expectations for a
variety of reasons. We also had special items in our second quarter results, which we excluded from our
trends for non-GAAP purposes, and we will reference those non-GAAP results in our remarks.
And of course, we have in-depth information and reconciliations in our earnings release from this morning
on both forward-looking statements and GAAP and non-GAAP results, so please be sure to check those
out.
And now we'll go ahead and get started, and I'll turn it over to Gary.
Gary C. Kelly
Chairman & CEO
Thank you, Ryan, and good morning, everybody, and thanks for joining us on our second quarter earnings
call.
This is a record quarterly loss for us. And of course, that can never be something that we're pleased
about. But since our last earnings call in April, we have accomplished a great deal and performed better
than the goals that we laid out at the time. Most importantly, we've boosted our liquidity. We've cut
operating costs. We've generated traffic momentum. We've cut our daily cash burn rate to $16 million
a day in June. And importantly, our success in generating traffic was key and key to the next several
quarters.
We have a viable flight schedule for our customers to choose from. We're operating an extremely reliable
airline. Our people are delivering exceptional hospitality. We committed to the Southwest Promise on May
1 to assure our employees and our customers that their safety comes first. And we're offering low fares
with no hidden fees, and all that adds up to record high levels of customer satisfaction. And of course, that
is crucial.
We offered voluntary separation and extended leave program that closed on July 15, as we had planned.
Almost 17,000 employees signed up. And we're working on reorganizing the company and adjusting our
fourth quarter flight schedule to roughly match our people capacity, which year-over-year will be down
roughly 25%.
And the majority of the volunteers selected the extended leaves, and there'll be recalls if we need to add
capacity quickly. And that gives us tremendous flexibility and significant cost savings over the next several
years. Implementing this program is a major objective in the third quarter. And while we have a plan for
pay cuts, benefit cuts, furloughs and layoffs, we do not intend to pursue any of those at least through the
end of this year.
COVID-19 cases surged unexpectedly this month, and the U.S. is an outlier, and of course, that is
disappointing. And we've seen a dramatic impact to our trends as far as traffic revenue and bookings
this month, and we've had to reduce what was a very credible revenue forecast for the third quarter by
hundreds of millions of dollars. And we would have easily beat our second quarter daily cash burn number
but for that.
We'll have to work harder now and adjust August and September capacity in order to meet our goal of
continued reduction in daily cash burn. We were on a path to breakeven by the end of the year. That is still
my goal, but first quarter may be more realistic. This year and probably the first half of next year will be a
game of tactics and iterations. We're going to execute, we'll monitor and we'll constantly adjust. And that
means the schedule, and our fares, and our spending.
Overall, I'm very pleased. I'm very encouraged. We knew this would be a long sawtooth slog with a lot of
unexpected twist and turns, and it's proving to be so. Our country and the world needs to beat this virus.
Until then, we're going to have to be resilient. We're going to have to persevere, and we're going to have
to manage. And I think everybody needs to understand that we know enough now to know that we have
a long, long way to go. And we will manage to sustain the health of our company, accordingly. We were
very well prepared for this. We're prepared for a prolonged war against this pandemic. Our people have
literally done all they have been asked and I could not be more proud. And I have never seen anything like
this in my life. But after these many months of battle, I am more confident than ever that we will not just
survive, but we will thrive.
So we have a lot to cover this morning before we get to your questions. So with that very quick overview,
let me quickly turn the call over to Bob Jordan, our Executive Vice President, who, among other things, is
going to talk about our voluntary separation program and extended time off. Bob?
Robert E. Jordan
Executive Vice President of Corporate Services
All right. Well, thank you, Gary, and good morning, everybody. It's good to be with you, especially on this
topic.
As you know, we've been in the process of offering voluntary separation and extended leave options to
our employees. They are voluntary, and they're hugely important as we work to reduce our staffing our
operating cost and our cash burn, and these are the most generous programs we have ever offered as a
company. The response from our employees was terrific, and I just want to say a huge thank you. These
are really hard decisions, and our employees took them very seriously. Each person electing to separate
or take an extended leave reduces our cash burn, and that helps preserve other jobs. I just want to say
thank you to everybody that considered the options and especially to those that chose to opt in and
participate.
First on the raw numbers, and these are still being finalized, but I don't expect that they will change
materially. Approximately 16,900 employees requested either voluntary separation or an extended
leave of absence, and of those, about 4,400 requested voluntary separation. And the remaining 12,500
requested an extended leave of 6, 12 or 18 months and longer. The 4,400 voluntary separations represent
7% or so of the workforce -- of the active workforce, and the nearly 17,000 total between the 2 programs
represent about 27% of the active workforce. And of the 12,500 request for an extended leave, over 60%
are for a year longer. So the way I think about that, the combination of voluntary separation and leaves of
a year or longer represent 20% of the active workforce was just a huge amount of flexibility.
While the response from every group was really good, I do want to call out our pilots. Because of the
relative financial value, it was key to have them participate, and our pilots really came through, with over
2,300 electing one of the 2 programs, and that represents about 25% of all active pilots. And I'm just
really proud of them, and I'm really proud of all of our employees. We will be granting all requests for
separation, and the vast majority of those will be separated before September 30.
Extended leave requests aren't perfectly balanced across the company as you would expect and the
operation, so there's a little bit of work to do there. But our goal is to allow every employee that wants
to take an extended leave to take it. And those extended leaves are effective on September 1. Should
the business recover faster than expected, the program allows for employees to be recalled within a
reasonable notice time.
Now with a quick update on the expected financial benefits. As outlined in our earnings release this
morning, we estimated around $1.7 billion of accruals in the third -- in the second and third quarter
related to the 2 programs. In terms of cash payments, nearly half will be paid out this year for voluntary
separation and the remainder over several years as it relates to benefit costs and extended leave.
However, we will see a material cost savings in salaries, wages and benefits in the fourth quarter of over
$400 million.
Our cost savings are expected to grow substantially in 2021. The recall flexibility that I discussed with
extended time off could create some variability in the financial impact. Should we see a significant
rebound in our business, but we currently estimate 2021 cost savings to be more than $1 billion.
Because the leaves offer varying length, the financial benefits will decrease over an extended period of
time. Again, the vast majority of employees requested a leave of a year or longer, and these programs are
really about solving our staffing as our capacity moves over the next 12 to 18 months.
So while our capacity plans may fluctuate, I'm just super happy with the numbers and how they help
better align our cost to a lower level of flying. And I'm just totally grateful to the people of Southwest
Airlines for their response. Every single work group responded better than we had forecasted. So that's
just really gratifying. It provides critical flexibility right when we need it. And I'm hopeful we won't need
additional actions, but if demand continues to stall, we will begin to assess actions to further reduce
staffing, operating costs and cash burn.
And with that very brief update, I will turn it over to Mike.
Thanks, Bob. In addition to all that work that Bob just covered, we made significant adjustments to
our operation in this bleak COVID-19 world. We started the quarter navigating through cancellations
and customer reaccommodations based on a weak demand. The lack of demand led us to implement
aircraft parking and storage programs. The trip cancellations created crewing and hotel challenges. And
in the midst of that, we also introduced the Southwest Promise, which drove significant changes in our
operational procedures.
Throughout all those efforts, our people produced the best quarterly operation that I can remember. They
were heroic. They were magnificent. Their teamwork was superb.
So as I mentioned, the month of April, we were reducing flights and reaccommodating the few customers
that flew on the other flight. We had nearly 4,000 flights a day scheduled in April, and we operate about
half of those. All of those cancellations kind of begins with our on-time performance. And overall we were
98% on time on flights we did operate, our on-time performance for April was 47%.
That pulled down our overall quarterly results to 71.5%. We were more than happy to make that trade-off
given the cash savings of not operating those near empty flights. But from May 3 June 30, we were able
to adjust our flight schedules for demand, and we operated those schedules as published. Our OTP for that
period was 94.8%, and that's the best May and June performance in 25 years.
Our bag handling continue to improve with the rollout of our bag scanning program last year, and we
added cargo scanning here in the second quarter. We had the lowest level of mishandled bags in our
history in second quarter. Our customer Net Promoter Score was also the highest that we have on record.
So our network design and our decision support tools that we're using in our operations create a solid
foundation for whatever the future holds. We have the ability to add or cut flights close in as desired, and
that operational flexibility is just critical in this environment.
So turning to the fleet. We had roughly 400 aircraft in long-term storage or temporary parking programs
in April, and that included our 34 MAX aircraft. Since April, our daily scheduled trips increased throughout
the quarter and into July. And then additionally, our loads were increasing on each flight. And so we added
roughly 6,900 extra sections beyond those scheduled as a result. Those items required more aircraft
availability. So we added 300 aircraft back into the active fleet. And at this point, we have about 100
aircraft, including the MAX, and long-term storage or temporary parking programs.
We remain committed to the MAX. We look forward to its return to service. It is our most cost-effective
airplane, and having it back into service will give us more certainty in terms of fleet planning. Given the
most recent Boeing and FAA comments, we're hopeful to begin revenue service in late December. But
given the history of delays, it certainly could slide into the first quarter. It will take at least a couple of
months from the date the FAA formally ungrounds the aircraft for it to fly in revenue service. And that
time will be needed for manual updates coordination with our certificate management office, required
maintenance on the aircraft, pilot training and then validation on readiness flights that we want to
perform.
So wrapping up one of the most active, action-packed quarters that we've ever had, we navigated through
the activities exceptionally well, producing superb operating results and customer accolades for our
service. And as I said during the last quarter call, we are at war with COVID-19, and we are blessed to
have a ferocious group of warriors that are ready for the fight. And they inspire me and our customers
every day.
So Tom, with that, over to you.

Thomas M. Nealon
President
All right. Thank you, Mike. Let me jump right to it. So our second quarter operating revenues were down
right around 83% year-over-year, and that was on capacity that was down right at 55%. Now we did see
stronger demand and sequential improvement each month throughout the quarter, and we've given you
updates throughout the quarter regarding April and May. We've recapped those in months in the earnings
release. So I'm just going to provide a few quick comments on June and then get right into the third
quarter.
So leading into June, May trends were an improvement over April with consistent net positive bookings
and a steady improvement throughout the month. And that continues in June, and we saw another steady
improvement in trends, which was very encouraging. With June operating revenues down 73% year-over-
year and a load factor of 50%, and that was on capacity that was down 44%.
Our business travel has been much more severely impacted than leisure travel, as you'd expect, and the
result was that second quarter revenue in passengers for business travel fell roughly 90% to 95%. We've
had a lot of discussions with corporate travel managers, and we have been hearing some pretty cautious
optimism about travel resuming back in the third and fourth quarters, but certainly, with the recent spike
in COVID cases, that is far from what's going to happen. It's going to be much lower than we thought.
Back in May, Gary has alluded to this, Mike's alluded to this, we introduced the Southwest Promise. And
the purpose of the promise was to do everything that we could to make sure that we're taking care of our
employees and taking care of our customers and giving them the confidence and the comfort to travel with
us again.
And as you expect, we're doing customer research every week. And the things that are the most
important to them, and there are a lot of things we're doing with the Southwest Promise. But the things
that really stand out, first, is the wearing of masks by both employees and customers. The second, this is
a big deal, is limiting the seats available for sale and promoting social distancing in the gate area as well
as during the boarding process and during the flight.
And finally, the works that our tech ops and ground ops teams are doing around enhanced cleaning of
the aircraft is right at the top of the list as well. So those are the 3 big things. The awareness among
travelers of the Southwest Promise is very high. And the feedback that we're getting from our customers
after they travel with us is that their confidence in Southwest and the likelihood they fly with us again in
this environment is extraordinarily high. And they attribute that specifically to what we're saying and what
we're doing with the Southwest Promise.
We previously announced that we'll continue to block the middle seats through at least September,
which caps our lids or percentage of seats sold at 65%, and we made the decision to extend this through
October. As you may recall, as loads picked up back in late May and into June, we actually began to add in
extra flights, as Mike alluded to, to catch the demand that we're spilling with the load factor restrictions.
And for the quarter, we added roughly 6,900 flights. And the vast majority, roughly 80%, covered their
flying costs, which far outweighed those that didn't. The point being is, as Mike alluded to, again, we have
the ability. We have the tools and the capability to adjust our schedule up or down as demand changes,
while doing a very good job managing our overall cash burn.
This week, we've also announced a change to our mask or face-covering policy. It doesn't begin next
week. So beginning on July 27, we will be requiring all customers to wear face covering throughout the
flight, except for the brief period where someone is taking a drink or eating a snack. The only exception of
this will be for children under the age of 2, and medical exemptions will no longer be accepted as a reason
not to wear mask. The reason we're doing this is we're simply seeing too many exceptions to the policy
and this put our flight crews in a really tough spot and also made our customers pretty uncomfortable. So
this is something that goes in effect next week.
So we are continuing to get very positive feedback from both our employees and our customers in the
Southwest Promise. We are very committed to it. It's a big piece of what we're doing right now. And you
can see in our data travel customer and Net Promoter Scores, which is, as Gary alluded to, it's a -- it's an
all-time quarterly record of 79, which is pretty darn amazing, given the environment that we're in. So our
customers are certainly appreciating what we're doing with the Southwest Promise.
All right. Turning to Q3. With our mid-June investor update, we estimated another modest improvement
for July. And at that point, we're expecting operating revenues to be down roughly 65% to 70% with
capacity down 30% and a load factor in the 45% to 55% range. Obviously, as COVID cases began to
spike again in late June across the country, that -- areas of the country that have been performing with
relative strength, such as Texas and Florida, began to slow very dramatically. And now we're estimating
July operating revenues to be down roughly 70% to 75% year-over-year, with a load factor in the 40% to
45% range.
Over the past several weeks, we've seen our net bookings decline 10 to 15 points year-over-year versus
what we're seeing coming to the month, which is a pretty significant change, very quickly, very abrupt.
The trends are similar in August. Demand is much softer than we anticipated, and we're estimating August
operating revenues to be down 70% to 80% year-over-year with the load factor of 30% to 40% range,
and that's on capacity that's currently down 20% year-over-year.
So we clearly have more work to do to bring our August capacity down further. But we have to keep in
mind, we actually have a fair number of bookings for August already. So we need be careful of making any
major adjustments to the schedule. It could actually do more harm than good. But having said that, we do
have opportunities to bring our capacity down for August.
At this point, it's pretty challenging to give you a real clear estimate for September, but the demand
environment that we're seeing in August is carrying over into September, and demand for fall travel has
slowed considerably over the past several weeks as well.
The September schedule was originally published with capacity down 10% to 15% year-over-year. We
just recently republished September and brought it down an additional 11 points. So September's current
public schedule is down roughly 20% to 25% year-over-year. But again, given the demand environment,
we intend to be more aggressive in reducing the September schedule.
So over Q3, capacity is currently planned, down 20% to 30%, but we know we have more work to bring
it down further. And the approach that we take with capacity cuts is very specific, and we're going right
down to the market and the flight level. And if we have a flight that covers variable costs and maintain
strong itineraries in the market, it probably makes sense, and we're probably better off continuing to
have that flight in the schedule in most cases. But at the end of the day, the demand environment has to
support the capacity and vice versa. And our focus right now continues to be on achieving a sustainable
level of cash breakeven or better.
Very quickly, I want to give you a quick update on our Southwest business initiatives, and it's very obvious
that business travel is down dramatically right now, and we think it's going to take several years for
business travel to recover. But we also know that we under-indexed in a pretty significant way in the
managed corporate travel business. So as business travel begins to recover, the size of the market, the
size of the pie may be smaller for a period of time, but we intend to have a bigger slice of that pie.
So we're continuing to make a lot of progress with our GDS deployments. We are now live in Travelport's
Apollo, Worldspan and Galileo platforms, and we will be live on Amadeus before year-end. And we're
taking advantage of the slowdown in business travel. We're doing a lot of work with the TMCs and
corporate travel managers across the country. And we're seeing tremendous, tremendous support to have
the Southwest product available to them on industry standard GDS platforms.
You may have seen that earlier this week, we announced that we will be terminating our GDS relationship
with Sabre at the end of the year. We have been working with Sabre for, I don't know, nearly 2 years,
trying to get a contract in place that will allow us to have a full functionality within the Sabre platform.
And we just have not been able to get there, so we are terminating our contract. We'll be sunsetting
our Sabre GDS channel at the end of the year. The Sabre product that we're currently using has very
limited functionality and it's part ministry standard, which makes it difficult for TMCs and corporate travel
managers to work with. It's also, by far -- and this is important, it's also by far the smallest by a long
shot of our business channels. And most of the customers that use this channel also book on Southwest
through our other channels as well. So we feel confident that we'll be able to recapture most of the
revenue through our new GDS platforms.
So we've announced this 6 months in advance, so we can begin working with our customers on a
conversion process. We want to have them up and going as the business recovers, and I think we're going
to be in a very strong position to grow our market share and our presence in the corporate market.
So with that, I'm going to turn it over to Tammy.

Tammy Romo
Executive VP & CFO
Thank you, Tom, and hello, everyone. I'll round out our comments today with an overview of our cost
performance, our liquidity, cash burn and fleet before we open it up for questions.
Before I begin, I also want to say a big thank you to all of our incredible teams. This might be the
toughest challenge we've ever faced in our history, at least during my career at Southwest. But there is
a reason we refer to our employees as warriors. I just couldn't imagine a more talented and determined
group of people to be working alongside as we fight to overcome this crisis to keep southwest healthy and
strong for decades to come.
Coming into the second quarter, our top financial priority was to boost liquidity and reduce cash burn to
minimize the impact of COVID-19 on our business. With our revenue production down dramatically, we
took swift action to reduce spend. We essentially eliminated our capital spend, apart from key investments
in important projects, such as GDS we deferred or canceled nonessential discretionary spend. And we
implemented voluntary and unpaid fleet program with strong take rates, as Bob already covered. And as
Mike covered, we did all of this while running a high-quality operation, and our people took great care of
our customers.
For our second quarter alone, our actions resulted in savings of $3.5 billion in spend versus what we
were planning coming into this year. Our second quarter cost performance and cash spending were in line
with the expectations we laid out at the time of our last earnings call. And excluding several items, our
second quarter nominal expenses decreased 36% year-over-year and decreased nearly 40% versus our
pre pandemic plan. And that was on a year-over-year capacity decline of 55%. And our average course
cash spend came in around $34 million per day in second quarter.
As a reminder, our original pre-pandemic outlook for second quarter core cash spend was in the range of
$60 million to $65 million per day. So the swift actions taken to reduce our costs were very meaningful.
In addition to the operating expense relief as a result of lower capacity, lower fuel prices continued to help.
Our second quarter fuel price was $1.33 per gallon, down $0.80 or 38% year-over-year. And while recent
fuel prices have increased from the low seen in first quarter, we're continuing to see significant year-over-
year relief from lower energy prices. Lower market fuel prices saved us $153 million in second quarter
alone compared to market price outlooks at the beginning of this year.
For our third quarter, we estimate a fuel price in the $1.20 to $1.30 per gallon range with nearly $300
million in savings from the decrease in market prices since the beginning of the year and significantly
lower than last year's third quarter fuel price of $2.07 per gallon.
We do not have forward risk. So our fuel hedging program allows us to fully participate in falling market
prices. While we have not made material changes to our 2020 portfolio, the percentage hedged in our
premium cost per gallon have increased as a direct result of lower fuel gallons being consumed. Our
second quarter premium expense, albeit $4 million lower year-over-year at $24 million, spiked to $0.12
per gallon compared with $0.05 per gallon in second quarter last year. This higher premium cost per gallon
will continue to be higher by default as long as capacity is down. But the $97 million fuel hedging premium
cost this year remains unchanged.
In addition, to lower fuel prices, our fuel efficiency improved 14.5% year-over-year, driven by many of our
older aircraft being parked. Lower load factors and a less congested airspace leading to less taxi and idle
ground time and better on-time performance.
Excluding fuel and special items, second quarter operating costs were down 24% year-over-year. We saw
significant relief in our variable flight driven nonfuel expenses, primarily in salary wages and benefits,
maintenance expense and airport costs. We have cut spending in virtually every category. Our 2020
operating expenses are now expected to be down over $2.7 billion this year compared with original plans,
and this includes the benefit of fewer fuel gallons consumed from lower capacity.
We had several special items in second quarter that we covered in this morning's press release. First, we
had a fuel hedge special item that resulted in $21 million of expense that has been excluded from our
second quarter results. Second, we recognized a 225 -- $222 million gain from sale-leaseback transactions
and other operating expenses. And as a reminder, this covered 10 737-800 aircraft and 10 737 MAX 8
aircraft. These were essentially financing transactions as part of our efforts to bolster liquidity, and the
quality of the aircraft and market conditions resulted in the sizable gain.
And third, we had $1.1 billion of payroll support program proceeds allocated to second quarter that were
an offset to salary wages and benefits net against an accrual of $307 million related to our voluntary
separation program. We've already covered the specifics on the take rates on the voluntary programs, but
I want to add my thank you to the employees that elected to participate.
Looking at third quarter, we expect the remaining $1.2 billion in payroll support program proceeds to be
recorded as an offset to salary wages and benefits as well as an estimated charge in the range of $1.3
billion to $1.4 billion related to voluntary employee programs, as Bob covered. Nearly half of the cash
payouts for the voluntary separation program will occur by year-end, and we expect overall savings of
both programs to far exceed the upfront cost.
Overall, we had a stellar second quarter cost performance, and it is truly a testament to the swift actions
and intense focus by the entire Southwest team.
Based on current plans for third quarter 2020 capacity to decrease in the range of 20% to 30% year-
over-year, third quarter operating expenses, excluding fuel and oil expense, special items and profit
sharing expense, are expected to decrease in the range of 10% to 20% year-over-year. This represents
a sequential increase from second quarter, driven primarily by higher flight-driven expenses and certainly
are modest relative to the sequential increase in capacity.
With regard to our capital spend forecast, we have more than offset the $1.4 billion to $1.5 billion
of CapEx originally planned for this year. The reduction is driven by our 2020 and 2021 fleet delivery
agreement with Boeing, canceling or deferring the majority of capital investment projects originally
planned for this year; and supplier proceeds and sale leaseback proceeds, both of which we consider as
reductions to aircraft CapEx.
In regards to our fleet, I continue to feel very comfortable with our fleet flexibility over the next several
years. Our latest agreement with Boeing and our current planning assumptions are that we will take no
more than 48 aircraft through the end of 2021. We don't have the specifics finalized with Boeing yet, and
that is by design, as the agreement gives us time and flexibility to continue monitoring demand and fleet
needs for the next 18 months.
There have been no formal updates to our contractual book order with Boeing yet, and the order book
included in our first quarter 10-Q is still reflective of the overall contractual agreement with orders and
options for more than 330 MAX aircraft through the end of 2026, in addition to the no more than 48 we
are evaluating for 2020 and 2021 combined.
At some point, we'll need to adjust 2020 and 2021 deliveries down and shift delivery slots by year, but we
have not canceled any of our orders or options with Boeing over the life of the agreement. We are well
positioned to be nimble and rightsizing our fleet, whether through retirements to adjust to lower demand
or to return aircraft to service and ramp up our capacity once the environment allows.
Moving now to liquidity. We ended second quarter with cash and short-term investments of $14.5 billion,
and we currently have a cash balance of $14 billion. Since our last earnings call, we have raised more than
$10 billion to further bolster our cash reserves. In addition to financing and sale-leaseback transactions,
we raised $2.2 billion through a common stock offering and have received $2.9 billion in payroll support
program proceeds. And the remaining $326 million is expected by the end of this month.
We also paid back our $1 billion revolver and paid off our $3.7 billion 1 year secured term loan, which
released $4.5 billion in aircraft collateral. We now have approximately $12 billion in unencumbered assets
with approximately $10 billion in aircraft. And that doesn't include the significant value from our Rapid
Rewards loyalty program, I'll just point out.
In addition, we noted in our press release this morning that we have signed a letter of intent with the U.S.
treasury to apply for a $2.8 billion loan as part of the CARES Act. We are not committed to taking this
loan, and we haven't decided that we will take the loan yet. Signing the letter of intent was just part of the
process to keep this loan as a backstop, should we determine we need it down the road.
Taking into account 2020 operating expense. Savings of over $2.7 billion, the cash saved through the
suspension of dividends and share repurchases and reduce capital spending, we have reduced our 2020
cash outlays by over $7 billion versus plan. That is very meaningful, and it took the teamwork of all of our
employees to make such a big and impactful shift in such a short amount of time.
Of course, these changes are necessary to manage our core cash burn, and we are doing just that. To
clarify, our core cash spend, I already covered for second quarter, is meant to quantify the true run rate of
our ongoing cost. Our average core cash burn takes our spending and incorporates the benefit of operating
revenues net of trip cancellations.
For second quarter, our average core cash burn was $23 million per day with a rate of $16 million per
day in June, a little ahead of the guidance due to solid cost control and revenue trends holding up well
for the vast majority of the month. Our current estimate for core cash burn for July is approximately $18
million per day, with third quarter estimated to be similar to second quarter's $23 million per day. As core
cash burn remains our focus, we will continue to explore opportunities to improve our burn rate as we are
currently doing with our reevaluation of our August and September flight schedule.
In closing, we have the U.S. industry's strongest balance sheet. We are the only domestic airline to be
rated investment-grade by all 3 rating agencies even after debt raises. We are in a net cash position of
over $4 billion with a leverage of 49%, and our goal remains to protect our balance sheet and investment-
grade rating.
We came into this crisis in a strong position and have bolstered our liquidity to put us in an even stronger
competitive position to manage through this uncertain time and to thrive out on the other side of this
crisis.
While no one knows how the pandemic will continue to unfold in the coming months, from where we sit
today, I am encouraged by the resilience and determination of our people, and we remain laser-focused on
taking care of our employees customers and our shareholders.
With that, Chad, we are ready to take questions.
Question and Answer

Operator
[Operator Instructions] And our first question will come from Hunter Keay with Wolfe Research.
Hunter Kent Keay
Wolfe Research, LLC
Gary, do you view not taking the CARES Act loan and consequences that may come with it, whether that's
brain drain or regulatory, as a potential competitive advantage for Southwest over the next 2 to 3 years?
Gary C. Kelly
Chairman & CEO
Yes, Hunter, I would say that, that is one element of it. I think we're trying to rack up as many competitive
advantages as we can. Fortunately, Tammy got this question earlier this morning, but we've got very high-
quality financings in place. We've done 2 senior unsecured deals at very reasonable interest rates. So it's
evidence of our ability to access the capital markets. We've got -- we've unleashed some collateral that
we had to pledge early on during the crisis with a couple of different bank term loan deals that we were
doing, but all that has been freed up.
So at this point, we've got $12 million in collateral available, $10 million of that is in airplanes. So the
-- as I'm sure you know, the terms of the government loan are pretty onerous, including a significant
file of warrants. So yes, I think we would much rather avoid those. And I think what's near and dear to
shareholders' hearts is it puts restrictions on dividends, which I object to, and share repurchases. I object
to that as well. We're not paying dividends and share -- buying back shares now. But obviously, we'd like
to have that flexibility in the future, and I'm sure you would, too. So there's a lot of reasons why we'd like
to avoid that. And if our competitors have it, absolutely, I think it puts them at a disadvantage.
Hunter Kent Keay
Wolfe Research, LLC
And then it's interesting, the MAX problem probably made you question whether or not you should
continue with the single fleet type, but now in the coronavirus, you're probably relieved that you don't
have a second fleet type.
So first of all, is that a fair statement? And then would love your updated thoughts on how you're thinking
about that going forward?
Gary C. Kelly
Chairman & CEO
I think -- and Tom may want to chime in too, from a strategic standpoint. But if you just look at our
overall business model, we looked at it again and challenged ourselves whether we needed to make
fundamental changes in this environment. And we have concluded quite the opposite, that we're in a very
strong position. And I would put the fleet strategy in that conceptually as well. I know that Mike believes
that the MAX is the best narrow-body airplane in the world. It's frustrating that it's been on the sidelines
all this time. But certainly, the lack of complexity oriented around having a single fleet type is extremely
helpful. This is a low cost environment. It's another opportunity to sustain that.
We'll have to continue to evaluate our fleet strategy separate from our overall business model going
forward, but it's a high hurdle to overcome to commit to a second fleet type. One of these days, I assume
that the company will, but it's certainly not obvious that that's anything we need to do anytime soon.
So yes, short answer is I do think that that's a welcome advantage currently.

Thomas M. Nealon
President
It is kind of interesting when you step back going through this COVID thing, you get it -- you're pretty
introspective sometimes. You have to step back and look at it. I'll tell you what I think, and this is
part of the restructuring work. But I feel like our network is fundamentally very, very sound and very,
very strong. I feel like our business strategy, but you have to go back and look at is you're looking at
restructuring is very, very fundamentally sound and secure. And a measure of how it couldn't be is based
on a very efficient operation, which is where the 737 comes in. It's based on low cost, which is where the
737 comes in. It's based on low fares, which does drive our low cost, which is where the 737 comes in.
So as we go back as part of our restructuring, think about our fundamental strategy. Our core corporate
strategy remains very, very sound and intact, and that's what we're going to build on in terms of the
restructuring work going forward.
Gary C. Kelly
Chairman & CEO
And maybe even believe that it's more appropriate than ever for the current environment. So actually,
we're very, very confident, but we've got to get more passengers. There's no getting around that.
Operator
And the next question will come from Darryl Genovesi with Vertical Research Partners.
Darryl J. John Genovesi
Tammy, I don't think you guys provided a reconciliation table for your cash burn number for the second
quarter. Can you just help us understand exactly how you're getting to that $23 million per day because
-- I mean it says in your -- it says in your footnote that you're backing out debt service obligations, but I
think you also paid -- you made a few principal payments that weren't necessarily obligations. They were
early payments.
So can you just comment on the extent to which those are included? And generally, how you're getting to
that number?
Tammy Romo
Executive VP & CFO
Yes and no. I'd be happy to take you through that. Really, just to kind of start off with, our core cash burn,
as I mentioned, is really intended to be our ongoing spend. So we include -- our operating expenses are a
good proxy for our cash expenses. And then we include our kind of normal amortization of debt. So we do
factor that in as well.
So really, it's just, for the most part, our operating expenses, cash operating expenses less our revenue,
and we adjust that for the amortization of debt and interest and so forth.
Okay. I'm still having a little trouble getting into them. Maybe Ryan and I can talk about it. We can talk
about it offline after.
Tammy Romo
Executive VP & CFO
Yes. We'll be happy to take you through that in detail, but that's essentially it.
Okay. And then I think you said that you're still working through some things with Boeing. Does that mean
that, that 48 delivery number for the next couple of years is still subject to meaningful downward revision?
Tammy Romo
Executive VP & CFO
Yes. We're -- right now, based on the demand environment, we would likely shift some of those out, as
I mentioned earlier. We -- of course, right now, we don't have a firm date on getting the MAX back into
service. As Mike mentioned, that's probably kind of a best case maybe the end of December, that could
shift into next year. We just don't know yet. So we've got some work to do with Boeing, but to really -- the
point is, and we have the flexibility to shift that out.
So that's -- so the quick answer to your question is yes, we have flexibility there.
Operator
The next question comes from Jamie Baker with JPMorgan.
JPMorgan Chase & Co, Research Division
First question, probably for Gary. So American believes that its intellectual property and its website are
worth about half as much as their loyalty program, which is a source of liquidity that at least we had not
been contemplating.
Why wouldn't your IP co similarly represent several billion dollars of potential liquidity?
Gary C. Kelly
Chairman & CEO
I suppose it is. I think, again, we're able to do senior unsecured, where we don't have to pledge anything
and other than our good looks and our credit. So we -- I'm happy that those things are potentially
available to us, but I don't think we need them. We've got $15.5 billion in liquidity. That needs to be more
than enough to see us through. And we've got a pristine balance sheet, still low overall interest carrying.
So that's all good, but we don't need it.
All good points. Second question, a topic that came up on the Alaska call was the compstat of getting
back to pre COVID ex fuel CASM, but on lower than pre-COVID capacity. And I admit it's something that I
hadn't really been thinking about.
Basically, the idea was that a smaller industry wouldn't face the same operational constraints as it once
did. There's probably some pilot juniorization in there given early retirements. We didn't really dive into
the moving pieces. I guess my question is whether your internal plan has Southwest returning to pre-
COVID CASM before you get to pre-COVID capacity? And if it doesn't, why shouldn't it?
Gary C. Kelly
Chairman & CEO
Pre-COVID CASM or earlier than pre-COVID capacity?
Yes. Basically, you'd get back to pre COVID ex fuel CASM before, you grew the network. You grew the area
status up to the corresponding level. Yes.
Gary C. Kelly
Chairman & CEO
We -- I agree with that. The only thing that I -- because I know that we have incurred some cost -- some
significant cost reductions would be point number one. What I think we would be -- to give your question
serious consideration, I think what we would need to -- what I would at least need to think through is
what things are timing and simply deferred as opposed to more permanent reductions.
One thing that I would want to -- first of all, I think it's fair to admit, we don't have a plan per say. So this
has turned the world upside down. So we're in -- we're like a patient in intensive care. And we are working
to get out of intensive care, and it's a 30, 60, 90 kind of a time horizon. We're debating right now, as an
example, what kind of "plan" that it's worth even working on for fiscal 2021.
So right now, we've got a laser focus on getting the company to breakeven cash flow. So that's -- and
that's going to take -- it's a volatile -- more volatility than we've ever experienced. That's going to take
a lot of management. It's going to take a lot of iterations. And certainly, one way or the other, it's got to
take more passengers. You just can't cut your way to breakeven.
So hopefully, that's instructive. However, I like the direction that you're headed because we do -- we have
discovered some efficiencies. The working from home as an example, is pretty interesting. I think that it
will allow us the opportunity to consider avoiding some CapEx in the future, whether it's building a parking
garage or expanding buildings or whatever it might be. So I think there are clear opportunities there.
I think that the way that Bob Jordan has led the voluntary separation program has probably allowed us
some structural cost reduction across our pay scales because they're very senior people that are electing
to take that. So yes. It's probably -- again, it's a somewhat stream of consciousness to your question,
but that -- I like your thought, and that ought to be an objective of ours. I just think in fairness to your
question, we have not done the work to be able to prove that.
But clearly, in this environment, we need to keep our cost -- we need to crush the cost down and need to
be imagining and innovating like never before so that we can pull that off.
One of the things I worry about, quite frankly, is that we've cut investments to the bone. And in terms of
just the digital world and opportunities there, which we have significant ones, we put those on hold. So at
the appropriate time, we'll want to come back to that and make sure that we're not shooting ourselves in
the foot on that.
But that's a question that's a little too early to give you a specific answer.
Sure. Sure. A lot of moving pieces, but I really, really appreciate your commentary, Gary.
Operator
The next question comes from Joe Caiado with Credit Suisse.
Crédit Suisse AG, Research Division
My first question is on the MAX, probably for Mike. How did the latest steps by the FAA this week in their
recertification effort, based on everything that you've seen, how do the proposed changes to things like
pilot training compared with your expectations relative to the rough time lines and the phases that you've
described for us in the past, Mike, in terms of what you need to do once you get the green light from the
FAA?
And I'm really asking about changes to the proposed -- I'm not asking about sort of the delays driven by
something like the addition of a public comment period or anything like that.
So are you asking whether or not our into service plan is increased or extended because of harsher
requirements?

Yes, in any way, or shortened. I mean...
Or shortened? Yes, we have constant communication with the project teams over there. And what I would
tell you is that there's nothing in the return-to-service work, whether it's maintenance work on the aircraft
or pilot training, or other things like that, that are adding any significant length to our time frame.
So as I said, I think it will take us a couple of months to get that airplane back into service. And the
biggest thing on the time line, it really is the pilot training. We think that we can get that training event
done per pilot in a day, and we have 9 simulators available to go do that.
So we think it will take us somewhere around 9 or 10 weeks to get our pilots trained. And then after that,
we can get most of the rest of the work done within that time frame.
Got it. Okay. That's helpful. And then my second question is a GDS question. Are you walking away
entirely from discussions with Sabre? Are you just saying it's not going to happen, so let's sever all ties?
Or do you sort of continue discussions between now and the end of the year? I'm just curious, even if you
can reach a new agreement with Sabre, what's the downside to leaving the old sort of BBR agreement in
place?
Yes. I think the downside to continue on BBR is just a continuation of an old platform that we want to
begin to move our customers to industry standard platforms, and that's where they want to go. So that's
one of it. But I think in terms of continuing on with the conversations with Sabre, I've worked with Sabre
since 2001 or 2002. It's always a challenge. It's a good company, but they're challenging to work with.
We've been working for 2 years to get a contract. And at some point, you just need to call it and move
forward. And again, to move forward with platforms and to companies you can do business with.
So we're still using Sabre to get their product. We are still using some data -- or some of Sabre's data
translation and migration products. So Sabre is a good technology company. We've just had a really tough
time cracking the nut on how we conduct business, one with the other, in this GDS world. So that's where
we are.
So there are no conversations going on at this point. I don't expect there to be any conversations going at
this point for some period of time. But we felt we can't do it, so.
Gary C. Kelly
Chairman & CEO
And we have options. We've got lots of others. We have fantastic options. And we're going to push these
new options we have really, really aggressively.
Yes. It's interesting. Amadeus is the world's largest GDS. They have a very, very small presence in the
U.S. today. They are quite hungry to build a very strong U.S. presence. Now we're going to have them up
and live well before the end of the year. Travelport is resurgent, and they have 3 good platforms. So to
Gary's point, we do have options. This -- back to Sabre is a good company. It's just not working out for us
with them in this category.
But I'm okay with where we are. We'll be able to hit our objectives. It may take a little bit longer, but we'll
be able to hit our objectives.
Operator
We have time for one more question. We'll take our last question from Myles Walton with UBS.
UBS Investment Bank, Research Division
Maybe just a clarification first and then another question. On the clarification side, with the CARES loan, is
this a situation where the treasury is allowing you to finalize the loan if you wanted to and then defer the
draw so you don't have to issue warrants?
Tammy Romo
Executive VP & CFO
We are in discussions with the treasury now. We have signed the term sheet, as you all know, but we're
really still in discussions to finalize that. It may be that we have to take a small percentage of the loan
on September 30, but we're just -- we're -- it's just a little too early to say for sure because we haven't
finalized that yet with treasury.
Gary C. Kelly
Chairman & CEO
But we're not obligated too.
Tammy Romo
Executive VP & CFO
We're not obligated. We have on September 30. There may be some small draw required on September
30, but we would have until later, close to the end of March, to draw down on that. So still working
through all that. And we should obviously have that process worked through in the coming weeks.
Gary C. Kelly
Chairman & CEO
But again, our intent right now is to take 0 and not have the any government loan, just to be clear.
Tammy Romo
Executive VP & CFO
That's right. That's right.
Gary C. Kelly
Chairman & CEO
And so until September 30, that is our option.
UBS Investment Bank, Research Division
Makes perfect sense. Okay. And then maybe another one on the blocked middle seats, you've extended
it until October. I'm just curious, do you have a cost or lost revenue that's actually impacting over that
period of time, in any way, shape or form?
Gary C. Kelly
Chairman & CEO
It's kind of interesting. The -- our intent is not to do this forever, nor do our customers expect for us to
do this forever. So we're going to have play this by ear and see what sentiment looks like on that kind of
thing. But honestly, at this point, if we weren't blocked in the middle seat, our load factors aren't such that
we're foregoing any revenue, right? So it's not really costing us right now. What has cost us something is
adding in the 6,900 additional sections or flights to cover those flights that did reach capacity, why lose
the demand? So we put flights in to capture that.
As I said, 80% cover their costs, so we're profitable. It was a handsome profit. 20% didn't. In that 20%,
probably represented $5 million or so for the quarter, and it's probably 4% or 5% near capacity points of
ASMs, if you will. So pretty modest, but net the 80% that was favorable against the 20% of the cost was
$5 million, it was an easy decision. So I think we're in a good position with that.
Ryan Martinez
Managing Director of Investor Relations
All right. Well, that wraps up the analyst portion of the Q&A. If you guys have any other questions, please
feel free to reach out to me, and thank you for joining today.
Operator
Thank you. Ladies and gentlemen, we will now begin our media portion of today's call. I'd like to first
introduce Ms. Linda Rutherford, Senior Vice President and Chief Communications Officer.
Linda B. Rutherford
Senior VP & Chief Communications Officer
Thank you, Chad, and welcome to all of our media members who are on the call today. We'll go ahead and
get started with the media Q&A portion of our call today.
So Chad, if you'll give them instructions on how to queue up for a question.
Operator
[Operator Instructions] And our first question will come from Leslie Josephs with CNBC.
Leslie Josephs
On the payment support, just given the number of people that are taking voluntary time off or separating
from the company, do you expect to have any money left over? I'm just looking at how the labor bill or the
salaries bill costs were cheaper in Q2 '20 versus 2019? I'm just not sure how you recognize that.
Gary C. Kelly
Chairman & CEO
No. No, they're -- if you're saying, will -- once we pay our salaries through to September 30, will there still
be PSP money? The answer is no. I think going into this, the way the treasury department kind of sized it
all up is that Tammy Romo, our CFO, and her folks, put in a grant request for an amount of money. And
basically, the treasury came back and said, "We'll give you 76% of what you asked for."
And that was all based on, again, projections for what our spending would be. But the point being is the
PSP, while is very welcome and very appreciated, it's far below what our actual spending for salaries,
wages and benefits will turn out to be. So there's no leftover. It's the opposite.
Leslie Josephs
Okay. I just wasn't sure. The way the salaries, wages benefits is lower than last year. So I wasn't sure.
Gary C. Kelly
Chairman & CEO
Yes.
Operator
Your next question comes from Alison Sider with The Wall Street Journal.
Alison Sider
I was wondering if you could -- if you could share anything about kind of where things stand with
discussions with TSA about temperature checks? It seems like there's a lot of energy behind that. And
then lately, it's been pretty quiet.
Gary C. Kelly
Chairman & CEO
Well, there is energy behind that, speaking for Southwest Airlines. And personally, I'm a huge advocate for
it. And Linda, I think, just this week, if not today, we are beginning our prototype with Dallas Love Field
to test that. And Alison, it is for the sole purpose of trying to demonstrate to the TSA the efficacy of the
process and so forth. So the Airlines for America is unanimous in its support for the temperature checks.
So we have not lost our enthusiasm.
I can't speak for the administration. So I wish they would take it up and get this done. It's one more layer
of safety and defense against spreading the virus. Obviously, things aren't going the way we'd like in the
United States in terms of cases, so I'm anxious to get moving on this. So no lack of enthusiasm on our
part.
Alison Sider
And if I could ask you one more on the MAX. Just curious, under their new CEO this year, if you've noticed
any sort of improvement or change in communication or scheduling or sort of how that whole process is
going?
Gary C. Kelly
Chairman & CEO
Do you want to talk about that, Mike?
We know Mr. Calhoun well and have a long relationship with him. So our communication has been open
with him. We knew Dennis well also, so we had good communications with Dennis. So I wouldn't say
we've had -- Boeing has been a good partner with us through this. They've kept us informed of what's
going on. They have -- the lines of communication are open. We talk to them each week about the process
and have stayed pretty close with them on it. So no complaints in terms of the communication.
Operator
And the next question comes from Tracy Rucinski with Reuters.
Tracy Rucinski
Aside from temperature checks, are there any other safety measures that you would like Washington to
mandate?
Gary C. Kelly
Chairman & CEO
Mike, chime in. I don't -- none come to mind. We -- the only thing that I've been asked today several
times is on mandating mask. And I don't agree with mandating mask for airline travel and singling it out. I
think if we're going to mandate mask, we have to mandate masks everywhere. But aside from that, Mike,
I don't know of anything else that we are pursuing.
We're doing a lot. I mean we're doing deep cleaning. We've got the Hepa filters in the cabin. We're doing
-- we're one of the few airlines in the world who is not booking airlines full for physical distancing. We've
got Plexiglass shields up. We're doing physical distancing in the airport. I think that the missing piece to
me is the temperature check.
And you hear all these school districts and superintendents talking about going back-to-school in the
fall and their list of protocols, they're following the airlines' leads, and they're all pursuing temperature
checks. So I think that's the one thing that would be very sensible to add.
Mike, is there anything you can point to?

No. No. No other here.
Operator
Our next question will come from David Slotnick with Business Insider.
David Slotnick
Hope everyone's doing well. I wanted to just clarify, you said that there were 48 aircraft that you'd be
taking delivery of through 2021. Is that the original plan? Or is that after pushing some of those back?
We -- this is Mike. We had -- we just had an agreement with Boeing that we would take no more than 48
aircraft in 2020 and 2021. And that was back at a time where the return to service was projected to be
earlier for the MAX than it is today.
So those are some of the discussions that we need to have with Boeing and with the COVID-19
environment that we have and the delay of the MAX, what that looks like. So it feels to us like 48 is the
maximum. And that we probably have a need for something less than that. Okay.
David Slotnick
So that would have involved deferrals or anything that would carry a financial penalty
No, it's really just -- it's just really trying to get an order book, a delivery sequence that we all agree with.
Gary C. Kelly
Chairman & CEO
Yes. I think the way to visualize the situation with Boeing is that, basically, where we go from here needs
to be negotiated, period. It's almost like we don't have a firm contract for deliveries. So all of that has to
be completely reset because Boeing is out of compliance with their contract.
David Slotnick
Got you. Okay. That makes sense. And then just the only other thing, if looking at the numbers of people
who've taken the long-term leaves and the voluntary separations, is there a scenario in which any of the
major work groups would not be furloughs or layoffs starting next year?
Gary C. Kelly
Chairman & CEO
Well, let me make sure I'm understanding your question. Are you -- so first of all, we have not decided
that we will furlough or lay off anyone, okay? And then if your question is, could there be furloughs
among certain work groups and not others, I think, certainly, conceptually, anything is possible there.
In other words, we could find that certain work groups are not overstaffed, other work groups are. I
think anything, at least in my mind, it's contract by contract. And then we have a large population of
noncontract employees also where we have more flexibility as to how we can think about these things in
their favor, quite frankly.
So -- but we'll have -- we have plans and ideas about what we would pursue if we're faced with that
prospect. But right now, obviously, we're working very hard to avoid it.
Operator
And our next question will come from Edward Russell with TPG.
Edward Russell
I was just wondering if you could provide a bit more clarity on how big you expect Southwest to be at the
end of the year? I mean you talked about people being down about 25%. Does that mean capacity should
be down about 25%? Just give more color to that.
Gary C. Kelly
Chairman & CEO
Yes. Yes, that's the way to think about it. And all of that is a work in progress. And as we were -- if you
were listening to the analyst portion, we're -- we had, on June 30, we had a great plan for August. And
now 3 weeks in, we're finding that August has changed significantly. And so we're just going to have to
be prepared to have a lot of volatility and have to be prepared to make frequent adjustments because it's
really almost impossible to plan right now.
But yes, the rule of thumb that you should be using is that we'll be lowering our capacity in the fourth
quarter, roughly 25%. And if demand is like it is today, that won't be enough. We'll need to be smaller
than that. Tom, I don't know if -- and Mike, if we can be bigger than that. I.e., more capacity than that. I
think you have some flexibility there, but we're probably capped at about 75%-ish, it seems to me, with
our voluntary exit program.
Edward Russell
Got it. So one quick follow-up. What about Hawaii? Do -- will Hawaii be part of -- will fly your main down?
Or do you have any updates on your Hawaii service plan?
Thomas M. Nealon
President
Well, yes. Just real quick. This is Tom. We're pretty excited about getting back to Hawaii. And I think our
-- I get the quarantines are moving so frequently. I'm getting them all confused. But I think Hawaii was
-- were planned to having service return in September, if I'm not mistaken. And we're going to begin to
restore so today, we're really kind of a final service level of service. Very -- 2 flights from the mainland to
Hawaii and a few inner islands, that's about it.
We're really excited to be in to get that back into our pre-COVID. We're going to build the Hawaii,
California market and the inner island market. That's what we were slated to do. Governor Ige, I think,
very appropriately, extended the quarantine. So we pulled that back. But we're excited to get back to
Hawaii as soon as we're allowed. And I think the same thing is true with the international travel, as soon
as things are good to go, we're anxious to get back in those businesses as well.
But today, we're only serving, I think, Cancun, Montego Bay and Cabo. So we're anxious to get going, but
it's just not time right now, but we will.
Operator
And the next question comes from Randy Diamond with San Antonio Express-News. .
Randy Diamond
The -- originally, Southwest had said that by the end of the year, they hope to double the number of
flights at San Antonio International and go back from about 20 a day to about 50. Is that now off with the
demand not as great?
Thomas M. Nealon
President
Yes. I think what you're seeing is -- we're not picking out San Antonio. In fact, our CEO's from San
Antonio...
Gary C. Kelly
Chairman & CEO
Love San Antonio and the Express-News.
Thomas M. Nealon
President
Yes. But we just had to pull back our network pretty significantly. So typically, we're running 4,000, 4,200
flights a day. We're somewhere around half of that. So we've had to contract. Now we've done this without
closing any stations or any cities, but we've had to pull our flying in. So San Antonio is one of the markets
where we're doing that.
So we're anxious to get it back up to its prior capacity levels though once demand is there.
Gary C. Kelly
Chairman & CEO
And to just sort of inferring the perspective that you're coming from, well, this is one thing that we're
trying to do for our customers. And I would say that we are in a stronger position than our competitors.
We're trying to continue to offer your community a very good flight schedule. And that's the balance we're
trying to strike here is match supply with lower demand, but not cut the supply so much where you have
virtually no good flight options.
So I think you'll still -- regardless. I think you'll still have a very good flight schedule in San Antonio. And I
think like Tom mentioned, we haven't cut -- we haven't eliminated service to any of our domestic markets,
including Hawaii, for that matter, and don't intend to at this point. I can't promise that into perpetuity,
but whether we're back to full capacity in San Antonio at year-end or not, you'll still have a good flight
schedule.
Randy Diamond
Well, just following up, if you have around 22 flights a day, would we see a further reduction by the end of
the year? Or do you think it will stay steady?
Thomas M. Nealon
President
I'd rather not try to lead you. I think if we can get and stick with down 25%, I think you'll have a good
flight schedule. Exactly how that will compare to where we are today, I don't think we know. It's just too
complicated, trying to schedule an airline and optimize it as infinite solutions. And it is peculiar sometimes
how things end up with some markets have more flights and less flights, and so I don't think there's any
way to give you a good answer on that.
I think just trying to -- like golf, just trying to get on the green here is just trying to say that you will still
have a very viable flight schedule. And something that we -- again, you would be happy with and we'd be
proud of. But I can't give you a specific answer.
Randy Diamond
And finally, on the reservation center, we have a reservation center in San Antonio, where you employ 900
people. So the no layoffs, furloughs extends also to that reservation center?
Gary C. Kelly
Chairman & CEO
Yes. Through the whole company through the end of the year.
Thomas M. Nealon
President
And they are awesome.
Operator
Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference
back over to Ms. Rutherford for any closing remarks.
Linda B. Rutherford
Senior VP & Chief Communications Officer
Thanks, Chad, and appreciate you all being with us today. If you have any other follow-up questions,
please feel free to reach to our communications group, (214) 792-4847 or you can visit us at
www.swamedia.com. Thank you.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now
disconnect.
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Southwest Airlines Co., Q2 2020 Earnings Call, Jul 23, 2020

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Southwest Airlines Co.

CONSENSUS ACTUAL SURPRISE CONSENSUS CONSENSUS CONSENSUS

EPS Normalized (2.75) (2.67) NM (1.44) (4.80) 2.01

Revenue (mm) 886.11 1008.00 13.76 2147.52 10402.05 17091.49

CONSENSUS ACTUAL SURPRISE

FQ3 2019 1.08 1.23 13.89 %

FQ4 2019 1.09 0.98 (10.09 %)

FQ1 2020 (0.32) (0.15) NM

FQ2 2020 (2.75) (2.67) NM

Call Participants .................................................................................. 3

Michael G. Van de Ven

Tammy Romo David Slotnick

ANALYSTS Randy Diamond

Darryl J. John Genovesi Tracy Rucinski

Hunter Kent Keay

Jamie Nathaniel Baker

Jose Caiado De Sousa

Myles Alexander Walton

So Tom, with that, over to you.

So with that, I'm going to turn it over to Tammy.

Question and Answer

So yes, short answer is I do think that that's a welcome advantage currently.

Jose Caiado De Sousa

Mike, is there anything you can point to?

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