23-jan-2020 southwest airlines co./media/files/...southwest airlines co. (luv)q4 2019 earnings call...
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Southwest Airlines Co. (LUV)
Q4 2019 Earnings Call
Southwest Airlines Co. (LUV) Q4 2019 Earnings Call
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CORPORATE PARTICIPANTS
Ryan Martinez Managing Director, Investor Relations, Southwest Airlines Co.
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co.
Michael G. Van de Ven Chief Operating Officer, Southwest Airlines Co.
Thomas M. Nealon President, Southwest Airlines Co.
Tammy Romo Executive Vice President & Chief Financial Officer, Southwest Airlines Co.
Linda B. Rutherford Senior Vice President and Chief Communications Officer, Southwest Airlines Co.
.....................................................................................................................................................................................................................................................................
OTHER PARTICIPANTS
Andrew G. Didora Analyst, Bank of America
Savanthi Syth Analyst, Raymond James & Associates, Inc.
Hunter Keay Analyst, Wolfe Research LLC
Jamie N. Baker Analyst, JPMorgan Securities LLC
Duane Pfennigwerth Analyst, Evercore ISI
Helane Becker Analyst, Cowen and Company
David Vernon Analyst, Sanford C. Bernstein & Co. LLC
Kyle Arnold Reporter, The Dallas Morning News
Alison Sider Reporter, The Wall Street Journal
Evan Hoopfer Reporter, Dallas Business Journal
Pilar Wolfsteller Reporter, FlightGlobal
David E. Slotnick Reporter, Business Insider
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MANAGEMENT DISCUSSION SECTION
Operator: Good day, and welcome to the Southwest Airlines Fourth Quarter and Annual 2019 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. After today's prepared remarks, there will be an opportunity to
ask questions. [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, Investor Relations, Southwest Airlines Co.
Thanks, Chad, and thank you all for joining us. I know it's a busy airline earning day. But we're going to start out
with prepared remarks from Gary Kelly, our Chairman and CEO; Mike Van de Ven, Chief Operating Officer; Tom
Nealon, our President; and Tammy Romo, Executive Vice President and CFO. And then, we will open it up for
Q&A.
A few quick disclaimers before we get started here. We will make forward-looking statements in our remarks,
which are based on our current expectations of future performance and, of course, our actual results could differ
from current expectations for a number of reasons. We called out special items in 2018 and we will make
reference to 2019 results that compare to prior year non-GAAP results. Both of these topics are covered in great
detail, as always, in our earnings release disclosures as well as on our IR website. And we are also providing
commentary today regarding the ongoing MAX groundings and our current estimations of timelines and current
planning assumptions for 2020. Keep in mind these timelines and estimations could change materially with
impacts on the amount of financial damages we incur, our published flight schedules beyond June 6, and our fleet
capacity and CapEx assumptions, to name a few.
With all of that said, we'll go ahead and get started, and I'm turning over the call to Gary. .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co.
Thank you, Ryan, and thanks to everyone for joining us for our fourth quarter and year-end 2019 earnings call.
Straight away, I want to thank our employees. This is our 49th year, and there – at least in my experience, there is
no more remarkable year than 2019. The grounding of effectively 75 of our airplanes, which is about 10% of our
fleet, presents a crisis-like challenge, and our people were ready for it with the best planning, tools and
technologies in our history, but more importantly, with the right fortitude and the right resolve to get through this
crisis.
Our objectives were to run a great airline, serve our customers exceptionally well, protect our finances and our
jobs, and follow through with our capital projects that were underway. And we were able to do all those things.
The MAX groundings reduced our annual operating income $828 million. Our earnings were still a record on a per
share basis, non-GAAP basis, at $4.27. And that is truly remarkable. But they would have been 28% higher and
27% more than a year ago but for the MAX. You can do the math on the stock price effect, but we settled with
Boeing for the 2019 MAX groundings and the settlement seems to have zero effect on the price per share, by the
way. But we also intend to settle up 2020 as well.
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So, we're three months later since our last earnings call, and unfortunately, we're still talking about the MAX
unhappily. I'm confident about the MAX. More importantly, our pilots are confident about the MAX. Boeing needs
to get the work done, get the certification flight done, give the FAA a chance to do their work and unground this
airplane. But right now, we're scheduled for a June 6 return, which implies an ungrounding several months before.
Boeing surprised us all this week with their June/July predictions about the ungrounding, and obviously, that
would make our and other airlines' June dates unworkable. So, the timing remains uncertain, and we're working
through all of that right now.
Our goals for 2020, given all of this, are very straight forward. We want to return the MAX to service; we want to
continue to run a great operation, in fact, even better; we want to continue to serve our customers very well with
exceptional hospitality and, in fact, even better; we want to protect our finances and our jobs and continue to keep
costs low and slow the rate of inflation and do that even better; we want to settle with Boeing for 2020
compensation; we want to continue on with the capital projects that are underway; and then, finally, we want to
keep our network intact and continue making what modest tactical adjustments we're able to do.
Having said all those things, it all assumes that demand in the economy remains strong and that oil prices remain
stable and low. If we can continue to execute against all these goals, that means that we only have one problem,
and that's fleet growth. So, with regard to the fleet, we're assuming that the MAX grounding is short-lived,
meaning there are months to go and not years to go. And with that in mind, we are aggressively pursuing a
couple of tactical ideas. Number one is mainly our Boeing 737-700 retirement schedule where we have a lot of
flexibility. So, we're actively deferring retirements where it makes sense.
Secondly, we're always monitoring the used 737 aircraft market. We'll continue to do that. Our issue is simple. It is
our seat growth is not keeping up with demand, much less allowing us to expand, and we're losing share. But all
that is temporary, and we plan to aggressively recapture it once the MAX is ungrounded and are in a superb
position given our return on invested capital.
There is no change in our efforts to evaluate the risk-reward of a single aircraft type or supplier. We'll do that. It's
just a lower 2020 priority, so there's no update there. I'll also preempt the M&A question by repeating what I've
said earlier. I do not agree that the MAX crisis compels us to acquire another carrier. We would not overpay. We
would not commit us to a course that's inconsistent with our strategy and, of course, as is our policy, we do not
comment on rumors or speculation about any M&A activity.
And finally, I want to thank our board for making an amendment for our 2019 profit sharing. And even though the
Boeing compensation is for 2019, it is not included in 2019 profits. And that's not fair to our people for their profit
sharing. So, as a result of that, $124 million was added and, of course, that reduced our fourth quarter profits, but
that makes the total annual profit sharing contribution a record $667 million, and our folks earned it, and I just
wanted to congratulate them.
So, taking that notable item into account, we beat consensus. So, with that quick overview, I'd like to turn it over to
Mr. Van de Ven to take us through our operations. .....................................................................................................................................................................................................................................................................
Michael G. Van de Ven Chief Operating Officer, Southwest Airlines Co.
Well, thanks, Gary. As Gary was mentioning, given all of our headwinds that we were facing, it was extremely
important that we run a reliable, customer-friendly operation in the fourth quarter, and our people certainly
delivered. They produced the best overall operation we've had in over a decade. Our system-wide on-time
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performance for the fourth quarter was 82.4%, and we accomplished that with the least amount of block and turn
time in the industry. And that's a big factor in our operational efficiency that lowers our cost through superior
aircraft utilization. It's the low cost coupled with the great service that allows us to win.
On the service front, this was the first quarter where we had bag scanning implemented throughout our domestic
network. We enplaned 30.9 million bags in the quarter and 99.6% of those bags were carried on flights as
checked. That is a record fourth quarter performance for Southwest Airlines. And our customers notice. Through
November, Southwest again led the industry with the lowest customer complaint ratio as reported by the DOT,
and based on our preliminary December results, we expect to close out the year in a similar fashion.
And frankly, our people have been delivering this kind of exceptional service the entire year, and all the while
dealing with the significant activities associated with the MAX grounding. So, in that environment, we grew our
Hawaii service to over 1 million customers in just 9.5 months. We implemented plane side scanning for bags
across the domestic network, and we continue to implement technology enhancements across all of our operating
functions.
So, for all of 2019, excluding Hawaiian Airlines, Southwest finished in the top three in the industry in on-time
performance and bag handling and with the lowest customer complaint ratio, all as measured by the DOT. And
that's the best combined yearly industry performance since 1999. And our people believe that they can improve
from there.
Through yesterday, our January on-time performance was 87.7%. That is just a superb start to the year. It's one
of our best. In fact, we've only achieved an 85% January on-time performance or better five times since 1988.
And it's the on-time performance that sets the foundation for bag handling, for customer complaints, and for cost
control. There's no better team in this industry than our Southwest people, and they support our customers, our
company, each other, and they are just relentless in execution. And they are the heart and the soul and the spirit
of Southwest.
So, turning to the MAX for a moment, our guiding principle of re-launching this aircraft continues to be an orderly
and controlled manner, one which we can execute with a high degree of confidence and certainty. And that's been
a critical focal point for our team, and we've planned and we've re-planned our return to service activities as new
information becomes available.
So, since the beginning of the year, we have learned of two significant additional considerations. First, the Boeing
recommendation for both simulator and CBT training for our pilots prior to their operation of the airplane; and then
secondly, Boeing's most recent estimate of a mid-2020 return to service date.
As you know, we have presently removed all MAX flying from our schedules through June 6. And with this new
information, it seems pretty clear that we're going to need to make further schedule adjustments into the summer.
So, we're re-planning yet again using the best set of facts and insights into all of the necessary activities, and we'll
make the appropriate adjustments well in advance so that our customers' travel plans aren't significantly
disrupted.
We have 34 MAX aircraft on our operating certificate. They're in Southwest Airlines' control and they're stored in
Victorville, California. Those aircraft must go through a maintenance and make-ready work before they're ready
for service. We also have 27 MAX aircraft that Boeing has built, and they're being stored by Boeing until the
aircraft are certified to fly. Those 27 must still go through the delivery and acceptance process in addition to any
make-ready work to be added to the Southwest Airlines operating certificate. Those combined 61 aircraft are our
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most reliable source of lift once the aircraft is cleared to fly. And as I stated in earlier calls, we believe that we can
manage around 5 to 10 aircraft a week from this collective pool to be reintroduced to the operation. So, it'll take at
least a couple of months for those aircraft to return to service. And our crewing is in place today to operate them.
Boeing still contractually owes us 51 more aircraft this year. That's the 2019 carryover plus the 2020 deliveries.
And with their production lines shut down, the delivery quantities and the dates are in flux. We're going to continue
discussions with them to work through what's reasonable for both of us as their plans become better defined.
So, turning to training, our initial training plans included a 30-day period for all of our pilots to complete the
expected CBT training before we begin flying the aircraft in revenue service. Boeing is now recommending the
additional simulator training. And the training requirements will be finalized at a later date after the JOEB
completes their testing. These requirements will dictate the time it takes for us to complete our pilot training.
We currently have three MAX sims on property, and we have worked with our simulator manufacturer CAE to
provide us with three additional MAX simulators to be training-ready before the summer. That will give us at least
six MAX simulators available for training by the time the aircraft is released to fly, and that will significantly reduce
our training time from where we started. Beyond these six, we have three more simulator deliveries planned for
the second half of 2020, and we're working on expected in-service dates for them. That will close 2020 for us with
nine MAX simulators. I cannot thank CAE enough for their partnership and support. We have had a strong
relationship with them for many, many years, and they have helped create one of the leading flight ops training
centers in the world.
Assuming for a second that the simulator training may be two hours, we set a baseline, it will take us at least a
couple of additional months from where we were to get all of our pilots through that training. So, there's still a lot
of moving parts to nail down to the return to service plan. The FAA is in control of the regulatory ungrounding
process, and our plans begin once they clear the aircraft to fly. From that date, we are assuming it will take
several weeks to get our manuals updated and our CMO to approve our changes. And then, once that is
accomplished, we can begin training our pilots and bringing the aircraft into their operational state. As I
mentioned, it will take at least a couple of additional months before the aircraft are ready for revenue service and
our pilots are trained.
In the meantime, we still plan on performing extensive validation flights to work out any effects of the aircraft for
sitting so long, to also reintroduce them to our people, and to make sure that we are completely comfortable with
the aircraft performance before any customers set foot on the aircraft.
Wrapping up, our operation is running very, very well. We have a detailed plan to re-launch the MAX, and we'll be
adjusting it as we get better information. Our people are taking great care of our customers and each other, and
they're delivering a safe, reliable product. They are the best team that I have ever been around, and it is a
pleasure to support them.
And with that, over to you, Tom. .....................................................................................................................................................................................................................................................................
Thomas M. Nealon President, Southwest Airlines Co.
Okay. Thank you, Mike. See, I just really have to echo Mike and Gary, and also share my congratulations and my
thanks to all of our employees. They are absolute warriors and they are Southwest heroes. 2019 was a very
challenging year with the MAX, but we also had a great year. We really did have a great year. And our people
across every work group just kept rising to the challenge time and time and time again.
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When the MAX was grounded, as Gary said, in March of last year, we were very clear about our priorities. First,
we were absolutely committed to running a great operation; we were absolutely focused on taking great care of
our customers; and third, we were very focused on delivering very strong financial results. And we did all three,
and we did it very, very well.
As Mike said, the operation was rock solid, arguably the best operation in a decade. Also, as Mike said, our DOT
customer sat scores at the very top of the industry. And what he didn't say is, keep in mind that's the year when
we had to proactively re-accommodate literally, literally millions of customers. And our brand scores also remain
the highest in the industry and among the highest in the world for any company, not just airlines. So, the customer
service and the hospitality that we're so famous for is stronger than ever, and our people just continue to take
great care of our customers and one another.
So, our fourth quarter RASM results were right in line with our original October guidance of flat to up 2%. Our
fourth quarter revenue grew 40 basis points to a record of $5.7 billion. And that was despite a nearly 1% decline
in capacity. And we also grew our RASM 1.3%, which was also a record performance.
Our base business was very strong, and was the driver of our Q4 RASM performance. And this was really the
result of strength in both demand and yield. We also had very strong performance in our other revenues. More
specifically, our Rapid Rewards program performed very well, which we'll talk about more in just a minute, and we
also had very strong performance from our EarlyBird and upgraded boarding products, both of which had double-
digit growth in the quarter.
Now, as I said on our third quarter call, we made the decision in the fall of 2019 to republish our November and
December schedules really with two objectives in mind. First, we wanted to minimize any customer disruption and
inconvenience during the holiday travel season. And second, we wanted to ensure we ran a great operation with
lower capacity. And we achieved both objectives, but we also knew that we weren't optimizing RASM for the peak
versus off-peak seasonality in the fourth quarter. And as expected, the 2 to 3 points of temporary year-over-year
RASM benefit that we saw in the third quarter from the removal of the MAX didn't occur in the fourth quarter
because of the sub-optimized Q4 schedules. Now, none of that was a surprise to us. The net effect of this is that
there was no material year-over-year MAX impact to Q4 RASM, which again is what we expected and shared with
you on the last call.
And I got to say, once again, our network planning team just did a phenomenal job of developing workable
solutions to protect the strength of our network and to minimize customer disruption, and the same call out to our
revenue management team. They did an equally incredible job of managing the revenue and yields throughout
the quarter.
We also had very strong revenue growth in our other revenues. Our Rapid Rewards program continues to
perform extremely well. For the full-year, our other revenue grew nearly 11% and the fourth quarter performance
was a strong 9% growth. And we're continuing to see record passenger mix continue – I'm sorry, we're seeing the
reward passenger mix continuing to grow, which really speaks to the strength and the value of the program for our
customers.
Now we're also continuing to see very strong growth in spending on our co-brand credit cards. And the sheer size
and growth of our credit card portfolio is very healthy, with nearly double-digit growth and very low attrition. So we
continue to be very pleased with the economics and the structure of our program, as well as with our partnership
with Chase.
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So to sum up Q4, the bottom line is very simple; very steady, strong demand for both leisure and business;
continued strength in pricing; strength in our other revenues; and continued industry-leading strength in our
customer and brand scores.
The storyline for Q1 is very similar to what we experienced in Q4. The underlying trends around demand and
pricing that we experienced in Q4 have continued into Q1. Everything that we're seeing for the quarter shows very
solid shopping and booking, so demand remains solid for both leisure and business travel, and pricing also
remains steady and strong. So we've a very good read on first quarter revenue and RASM trends.
Obviously, we continue to be impacted by the MAX. We pulled the MAX out of our April schedule, which runs
through June 6. And as you know, March is a peak month in the first quarter, and our MAX aircraft deficit grows
from 34 aircraft in March of 2019 to roughly 60 aircraft short by March of 2020.
Now, that said, in Q1 we don't have the flight schedule variations and the capacity demand mismatch
complications that we had in the fourth quarter. So because of that, we expect a 2 point year-over-year RASM
benefit in Q1 from the MAX cancellations. We also have roughly 1.5 point of year-over-year RASM tailwinds in the
first quarter from prior-year negative impacts, 1 point due to government shutdown and 0.5 point due to the
unscheduled maintenance cancellations in Q1 of last year.
So based on the strength of our base business, as well as the Q1 MAX RASM impact and the year-over-year
tailwinds, we expect a strong Q1 RASM performance in the range of up 3.5% to 5.5%. I've said this before, but I
think it's worth repeating, as we continue adjusting the flight schedules for the MAX cancellations, our focus is to
maintain depth and frequency of service to key markets. And we're also very focused on maintaining a high
degree of point-to-point direct flying, as well as maintaining high quality connecting itineraries.
Now, when you look at our schedule, you'll see that we've trimmed some capacity from longer haul markets, and
we've added more capacity into our short- and medium-haul flying, which is a real core strength of our network.
But just to be clear, in no way are we walking away from long-haul flying, but with the MAX out of service, we
have opportunities to replace profitable, but below system average RASM long-haul, nonstop itineraries with high
quality connecting itineraries. We will do that. With the strength of our point-to-point network, we have the
flexibility to do that.
Now, once the MAX returns to service, we'll certainly restore the vast majority of flights that have been taken out
of our schedules, and we'll do so in a way that lines up with our operations and commercial objectives. We have
the world's largest and strongest point-to-point network, and we intend to leverage our cost structure and our
scale, and we certainly intend to resume our growth. And let me tell you, we have a long runway of growth
opportunities still in front of us.
Now, despite the MAX cancellations, we've continued to add additional flights in some of our key markets. We
have near-term growth focus will continue to be in Baltimore, Denver, Houston, and Hawaii. Hawaii continues to
perform very well for both long-haul and interisland markets, and this is totally consistent with our plans and our
expectations.
Now, looking beyond Q1, obviously, our 2020 growth will be determined by the MAX return to service. And until
that occurs, we'll just continue to adjust our plans accordingly. And our objectives are no different than what they
were in 2019. We'll run a great operation, we'll take great care of our customers, and we'll deliver strong
financials.
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And as Mike alluded to, if we need to make further adjustments to our June schedule, which runs from June 7
through early August, we'll do so. And that would likely include further trims to our nonstop long-haul flights and
potentially a modest thinning of high-frequency markets, which is essentially the same playbook that we've been
running for the past several schedules.
We also have a full pipeline of revenue and cost initiatives, most of which we won't discuss yet for competitive
reasons. But I can tell you that we're on track to implement our new GDS capabilities for corporate travel by
midyear with Travel Board and Amadeus, which we expect to drive incremental EBIT of between $10 million and
$20 million in the second half of 2020, and there's clearly a very large opportunity to grow that substantially over
the next several years.
So that's where we are. Q1 is off to a strong start, trends remain strong, and we're guiding our RASM to be up
3.5% to 5.5%. And once the MAX returns to service, we are ready to bring it back into service with all the
operational and commercial discipline that you would certainly expect from Southwest Airlines.
So with that, I'm going to turn it over to Tammy. .....................................................................................................................................................................................................................................................................
Tammy Romo Executive Vice President & Chief Financial Officer, Southwest Airlines Co.
Thank you, Tom, and hello, everyone. I'd also like to thank all of our employees for their tremendous efforts
managing through a very challenging year. The MAX groundings have had a significant impact on our company,
but our employees continue to rise to the occasion, and the strong results we reported this morning simply would
not have been possible without their hard work and incredible focus and teamwork.
With the MAX return to service timeline shifting frequently, it has been difficult to anchor our full year 2020
forecast to support meaningful guidance for the full year. So, I'll focus primarily on first quarter guidance in my
comments today regarding our cost performance, fleet capacity and CapEx plans, and our strong financial
position.
During fourth quarter, as Gary covered, we reached a confidential agreement with Boeing for compensation
related to 2019 financial damages due to the MAX groundings. The compensation from Boeing will be accounted
for as a reduction of the purchase price of our 31 owned MAX aircraft and future MAX firm orders, which reduces
property and equipment on our balance sheet and will result in lower depreciation expense over the useful life of
the aircraft.
In light of this agreement, our board of directors authorized a $124 million pre-tax profit sharing award. This
incremental award was accrued in fourth quarter and reduced fourth quarter earnings by $97 million, or $0.18 per
diluted share, as we covered in the release. A record $264 million in fourth quarter profit sharing expense
included the $124 million discretionary award and will be paid later this quarter as part of the record $667 million
full year 2019 profit sharing distribution to employees.
So now that I've covered profit sharing, I'll go ahead and cover fuel costs before I move into our cost performance,
excluding fuel and profit sharing. Our fourth quarter fuel price of $2.09 per gallon decreased $0.16, or 7.1%, year-
over-year, and that's primarily due to a roughly an 8% decrease in market prices. We have a great fuel hedging
protection in place this year with a 66% hedge for first quarter and a 59% hedge for full year 2020.
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We've been adding some protection to future years and are currently about 54% hedged for 2021 and about 31%
hedged for 2022. We also recently began adding modest protection to 2023 and expect to continue our
systematic approach to building a meaningful multiyear hedging portfolio at a reasonable cost to provide some
insurance on around what's about a third of our cost structure. For first quarter 2020, based on market prices as
of January 17, we expect our fuel price to be in the range of $2.05 to $2.15 per gallon, with a modest $0.01
hedging gain at current prices.
Our fuel efficiency continues to be significantly impacted by the MAX groundings. We came into 2019 expecting a
solid year-over-year improvement in our fuel efficiency, largely driven by the operating performance of the 75
MAX aircrafts we should have had in 2019. As a reminder, the MAX produces a 20% fuel burn improvement over
our retired classic fleet and a 14% improvement over our NG fleet.
However, our fourth quarter and full year 2019 ASMs per gallon declined 0.8%, so we lost some ground last year.
We'll continue to be impacted until the return of the MAX, and first quarter 2020 ASMs per gallon are also
expected to decline year-over-year in the range of down 2% to 3%. We look forward to reversing this trend and
getting back on track with our fuel efficiency improvement goal.
Excluding fuel and profit sharing, the 5% year-over-year increase in our fourth quarter CASM-ex was right in line
with our most recent guidance. And as we outlined in our release, the primary driver of the year-over-year
increase was the temporary underutilization of overhead combined with the lower than planned capacity from the
MAX groundings.
For full year 2019, our CASM-ex increased 7.7% year-over-year. The MAX grounding impact drove approximately
5 points of this year-over-year inflation, which is what we expected. Excluding the MAX impact, our cost control
was very solid, with core year-over-year 2019 unit cost performance slightly below our original CASM-ex guidance
range of 3% to 3.5%. And that includes the incremental $10 million of maintenance expense to keep seven of the
dash 700 aircraft that we were originally going to retire in 2019, as well as the incremental $42 million ratification
true-up for our mechanics contract.
Looking at first quarter 2020, we expect our CASM-ex to increase in the 6% to 8% range year-over-year. Our
outlook includes an estimated 7 point unit cost penalty from the MAX groundings as our fleet deficit grows relative
to our cost base. We will continue to have temporarily unabsorbed overhead that will be utilized upon the MAX
return to service.
Setting the MAX aside, our first quarter CASM-ex outlook also includes 1 to 2 points of inflation primarily due to
increases in salary, wages and benefits, maintenance expense, and operating expenses related to technology
and facility investments. As you know, we have year-over-year tailwinds related to the first quarter of 2019 impact
associated with the ratified labor agreement with our mechanics and costs associated with unscheduled
maintenance disruptions and flight cancellations, which offsets inflationary pressures here in first quarter.
Turning to an overview of our fleet plans, this has, obviously, been a focus for us this year with the MAX
groundings, so I'll spend a little more time walking you through all the moving parts. Prior to the MAX groundings,
our 2019 plans were for 44 MAX deliveries, that was 37 MAX 8s and seven MAX 7s, along with 18 -700
retirements. This would have resulted in a fleet of 776 at year-end 2019. Instead, we had three MAX 8 deliveries
less six -700 retirements, and therefore, ended 2019 with a total fleet of 747 aircraft.
We took delivery of three 737 MAX 8 aircraft in first quarter before the MAX groundings in mid-March. We have
not taken any deliveries since then and, as a result, we decided to postpone 7 of the 18 planned retirements for
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2019 to help mitigate a portion of our fleet deficit. We'll operate these seven aircraft for around two more years,
and they are scheduled to retire by the end of 2021. Of the remaining 11 -700 retirements planned for 2019, we
retired six of them, one in third quarter and five during fourth quarter. The remaining five retirements have shifted
to first half 2020.
We have not updated our contractual delivery schedule with Boeing. The 41 MAX aircraft that we didn't receive in
2019 are still in flux. But in our contractual order book schedule shown in our earnings release this morning, we
reflected 40 of those deliveries as part of our 2020 firm orders and one as a 2021 firm order. However, I will
provide some context as far as our current planning assumptions because we do not expect to receive 78 aircraft
deliveries at this point in 2020.
The news from Boeing two days ago that the MAX will likely not return to service until mid-2020 has us now
reevaluating our fleet and capacity plans further. Mike has already taken you through some of the details of our
MAX return to service plan, and he referenced the two sources of MAX aircraft that we are currently focused on
as part of our 2020 fleet planning assumptions. Mike is working through the plan to safely return the 34 MAX 8s
already in our fleet, and we will also be working with Boeing and the FAA to deliver the 27 MAX 8 aircraft that are
built and in storage.
At this juncture, our current planning scenario is for 27 MAX deliveries in 2020. That brings us to around 60 MAXs
which we are currently staffed to operate. We also expect to retire 16 -700 aircraft this year, the 5 that shifted from
2019 and 11 more planned throughout the year. This is less than the 20 to 25 that we previously communicated,
and that's simply due to the slower assumed ramp-up of MAX production and delivery catch-ups.
We will invest approximately $12 million this year into those 11 aircraft that we're extending for a few years.
Based on our planning assumption that I walked through, we would add a modest 11 net aircraft to our fleet in
2020 at 758 total aircraft. Of course, we don't have certainty on the timing of the MAX return to service, the
production timeline from Boeing, or our aircraft delivery timeline. So, this is all subject to change, and we'll keep
you updated accordingly.
Shifting to capacity, fourth quarter 2019 ASMs declined 0.9% year-over-year, which, as expected, was about 8
points lower than our original plan. Our full year 2019 capacity declined 1.6% year-over-year and was significantly
lower than our original plan to grow nearly 5% in 2019. For first quarter 2020, we currently expect our ASM
capacity to decline in the range of down 1.5% to 2.5% year-over-year. We currently have MAX flying removed
through June 6, but with Boeing's latest guidance, we'll likely extend our MAX-related flight adjustments out
further. So based on the flight schedule adjustments through June 6, we expect second quarter 2020 capacity to
increase no more than 2%.
So now turning to the balance sheet and cash flow, we ended the quarter with robust cash and short-term
investments of approximately $4.1 billion. Our cash balance continues to be higher than what we usually carry as
we haven't been making aircraft delivery payments since mid-March 2019.
Delayed delivery payments also lowered our CapEx to $1 billion in 2019 versus our original plan of $1.9 billion to
$2 billion. The majority of the 2019 spend related to technology and facility investments. And we also received
$400 million in supplier proceeds, which we consider an offset to our capital expenditures.
For 2020, if you assume we get the 27 MAX 8s from Boeing that are already built for us, that would result in total
CapEx of approximately $1.4 billion to $1.5 billion, which is net of supplier proceeds owed to us at year-end 2019.
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Our cash flow generation in 2019 was very strong despite the $828 million operating income reduction due to the
MAX groundings. During 2019, we generated $4 billion in operating cash flow and a record $3.4 billion in free
cash flow, with $2 billion of share repurchases and $372 million in dividends. We have $1.35 billion remaining on
our current share repurchase authorization, net of the $550 million accelerated share repurchase currently
underway that is expected to wrap up no later than mid-February. We have very healthy cash and liquidity, low
leverage, manageable debt obligations this year, and remain focused on a balanced approach to investing in our
employees and the company and returning cash and value to our shareholders.
In closing, I'd like to extend another huge thank you to all of our employees. Taking into consideration the
significant impact the MAX groundings had on our operational and financial performance, our 2019 results were
truly superb. We did not lose ground on our very strong financial position, maintaining our investment grade
balance sheet, ample liquidity, strong cash flows, and healthy shareholder return. And we also continue investing
in our business and we're well positioned for the future.
Absent the impact of the MAX groundings and first quarter 2019 unique items, we achieved our unit revenue
growth goal of greater than 3% for 2019. Likewise, we beat our unit cost guidance for 2019, which is just
tremendous. Of course, the MAX did significantly impact 2019, and 2020 will also be significantly impacted by the
ongoing MAX situation, but our focus on solid execution remains unchanged. We look forward to getting past
these near-term challenges and temporary headwinds, safely returning the MAX to commercial service, and
leveraging our low cost and robust route network to resume our growth.
So, with that, Chad, we are ready to take analyst questions. .....................................................................................................................................................................................................................................................................
QUESTION AND ANSWER SECTION
Operator: Certainly. We will now begin the question-and-answer session. [Operator Instructions] And the first
question will come from Andrew Didora with Bank of America. Please go ahead. .....................................................................................................................................................................................................................................................................
Andrew G. Didora Analyst, Bank of America Q Hi. Good afternoon, everyone, and thank you for the questions. Tammy, it seems like you were able to offset the
1 to 2 points of inflationary pressures in 1Q partially due to some of the easier comps, I think partially due to some
of your – the cost initiatives that you have. But going forward, do you think you have a similar ability the rest of the
year, which would allow you to keep – I guess, do you think you have a similar ability the rest of the year to
continue to offset these cost pressures and keep it more contained to what the MAX impact is? Or do you think
inflation will continue to ramp over the course of the year? Thanks. .....................................................................................................................................................................................................................................................................
Tammy Romo Executive Vice President & Chief Financial Officer, Southwest Airlines Co. A Thanks for your question, Andrew. So, yes, we certainly have abnormal capacity trends this year again, but as we
drill down into our core costs and strip out the estimated impact of the MAX groundings and all the other noise, we
do see core business unit cost inflation in that, call it, close to 2% range. That said, we don't know exactly when
the MAX will return, and our second half 2020 capacity plan is very much in flux. So, again, that's our best read at
this point.
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We've reported our analysis of the unit cost impacts each quarter from the MAX groundings. So, along those
lines, we've done our best to get a sense of what our true CASM-ex run rate is from 2019 to 2020. So,
normalizing for the MAX and the other unique items for both 2019 and 2020, we believe we could have reached
our CASM-ex year-over-year growth in 2020 of less than 2%, which is in line with our goal, but admittedly, we
have a lot of moving parts to try and tease out.
So I guess in summary, I'd just say I'm very pleased with how we executed against our cost plan in 2019 and we
are very focused on being even more efficient. So, I think it's reasonable to assume or think we should be able to
improve our trajectory here in 2020 relative to 2019 excluding the MAX. But just again, including the MAX,
obviously, the year-over-year comparisons are very skewed and we're incurring costs that we didn't expect, such
as extending retirements and incurring the related maintenance investment and have some timing items, such as
deferring of flight crew hiring from 2019 into 2020, et cetera.
But overall, I'm just really proud of our folks. They're really doing a great job with our budgets and controlling
costs. And I'll end by just saying, we're all definitely looking forward to the safe return of the MAX, resuming our
growth, utilizing our unabsorbed overhead, and beginning to reverse the temporary unit cost penalties that we're
incurring. So, thank you again for your question. .....................................................................................................................................................................................................................................................................
Andrew G. Didora Analyst, Bank of America Q Great. Thank you for that detail, Tammy. And then maybe a second question just for Gary or for Mike. Look, I
know it's difficult to comment on full year capacity, given lot of the moving pieces. But based on what Mike
explained in his prepared remarks, what could growth look like once the MAX returns to service? Could it be that
high single-digit growth rate that, I think, many were maybe expecting a few months back? And then, how does
sim training change the timeline for a full return to optimal utilization for your fleet? Thanks. .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Tammy, you're probably in the best position to answer that. Andrew, as you know, we didn't put – we purposely
did not put any guidance for the year for the obvious reasons. But, Tammy, how would like to answer that? .....................................................................................................................................................................................................................................................................
Tammy Romo Executive Vice President & Chief Financial Officer, Southwest Airlines Co. A That's right, yeah. It is tough to answer for all the reasons we've all laid out. In terms of the second quarter, we've
given you our guidance there for ASM growth. If you strip out the – if you assume the MAX gets pushed beyond
the second quarter I'll just offer, that probably gets you to roughly flat capacity year-over-year for the second
quarter. And then, really it's just a function of the return to service plan.
And we've told you, we've got a good line of sight on the 61 airplanes. Mike's walked you through the ramping of
all of that, which is several-month process. And from there, it's really, I think, based on the production rates from
Boeing, which we just don't know the answer to that question yet. So it's just premature to try to guess what the
capacity ramp-up year-over-year could be here in the second half of the year. .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A And I think Mike pointed this out, so, Mike, you might want to comment. But, just to be clear, we're staffed, we're
resourced, we've got gates, et cetera, for 61 more airplanes. And so, what we have a line of sight on is you've got
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the 34 we own, 27 that Boeing has. The issue is there are 16 retirements that are coming. So to get to – to fill up
61 airplanes worth of flying, we'd have to get 16 more beyond the 61 airplanes from Boeing. And whether we'll get
those in 2020, Mike, I don't think we know. So I think that's possible.
So, the point that I wanted to make with that is we want to get 61 airplanes into service as fast as we can, and
that is all understanding that it needs to be safe, it needs to meet all of our other objectives, et cetera. But we'll
want to get to that 61 just as fast as we can. We just don't know what that speed will be. And some of it may be
us. We may find that we want to gate the flow of airplanes back into the operation more than what we know right
now.
But, hopefully, that gives you a little bit of insight. But you can throw any percent out there you want, it's certainly
not going to be 10%, there's no way; nothing close to that. And 2021, we've got the same kinds of concerns. So,
we're not so worried about the percents right now I'm sure as much as you are, but we're certainly not going to be
growing rapidly here in 2020. .....................................................................................................................................................................................................................................................................
Andrew G. Didora Analyst, Bank of America Q Understood. Thanks for the color. .....................................................................................................................................................................................................................................................................
Operator: The next question will come from Savi Syth with Raymond James. Please go ahead. .....................................................................................................................................................................................................................................................................
Savanthi Syth Analyst, Raymond James & Associates, Inc. Q Hey, good afternoon. Just a follow-up, Mike, to clarify the color that you gave about the MAX, and I know there's a
lot of uncertainty there on the return to service, but the color is helpful. But to make sure I understand, it sounds
like including the manual updates and kind of the concurrent training and maintenance, assuming it's only two
hours, there's a lot of assumptions there, it's about four weeks from certification to – or at least four weeks from
certification to when you can get the aircraft – sorry, four weeks more than the kind of two months that you had
mentioned before to get the aircraft up and running, is that right? And then, also just would you be willing to kind
of train a subset of pilots if it means that you can get the MAX off the ground sooner? .....................................................................................................................................................................................................................................................................
Michael G. Van de Ven Chief Operating Officer, Southwest Airlines Co. A Yeah. So just maybe to give you a little bit more color on that. What we were thinking about when there was just a
requirement of CBT training, there was a period of time – there are really three things. There is getting the
manuals approved. And so once there's a return to service date, we need to get the manuals, we need to get all
those changes in our manuals, and we need to have our CMO sign-off on all that. And that could take three
weeks, let's say, three to four weeks to get that done.
Once that's done, we could begin executing on the plan, and the plan is twofold: get the airplanes into their proper
maintenance space, get the pilots trained. When there was just CBT training, we could get the pilots trained within
30 days. Now that there is a potential for simulator training, I think that could add at least a couple of months to
that date. So that's the challenge with the CBT training, and that lays over really with the aircraft time at the same
time. So I hope that gives you a little bit of color from where we were to kind of where we are today.
To be able to subset a group of pilots to bring the airplanes back earlier, we would need systems, we would need
procedures, and then we would need an adjustment to our pilot contract to allow how all that works. So there's a
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lot of work with that. We're exploring opportunities in that area. But there is just a lot of risk and uncertainty with all
of that. So that's not an easy path either. .....................................................................................................................................................................................................................................................................
Savanthi Syth Analyst, Raymond James & Associates, Inc. Q That makes sense. Sorry, and I... .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A But in the end, you mash it all together, and really compared to what we were assuming before, compared to
simulator training – and, again, another shout-out to CAE, who has been terrific to work with, we'll have a
significant amount of simulator capacity, if that's the route that we need to go, and it'll add a couple months. So
based – and you said it, there are lot of assumptions there, but just trying to give you some guidance. So we won't
be up and running immediately after an ungrounding. It will be several months later.
[indiscernible] (00:51:09) .....................................................................................................................................................................................................................................................................
Michael G. Van de Ven Chief Operating Officer, Southwest Airlines Co. A And then last aside, I just want to make clear also, we will have before that – we're talking about revenue service
there, which I know that's what you're interested in. Before that, we're going to try – we will do validation flights out
there, so that we can make sure that everything that has occurred on those airplanes, they're flying, they're
maintained. We've got all the cobwebs knocked out of them for such – for a long-term storage. So we will also be
– so the airplanes will be up in the air flying before then. .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A So we can do that, in other words, without having trained our entire core of pilots. .....................................................................................................................................................................................................................................................................
Savanthi Syth Analyst, Raymond James & Associates, Inc. Q That makes sense. No, that's helpful. And I think I misspoke, I meant four months, so it sounds like roughly
speaking from time of recertification. And then maybe, Tammy, just a clarification on the kind of Boeing – the kind
of lower cost that you're going to get from these compensation. Is some of that already flowing through for the
aircraft that you own and are grounded today? So some of it's already reflected and that'll continue to build as you
go out? And then also just wondering if you can provide a breakout of the fair value for the fuel hedges for 2021. .....................................................................................................................................................................................................................................................................
Tammy Romo Executive Vice President & Chief Financial Officer, Southwest Airlines Co. A Sure, Savi. Just to answer your question first on the compensation, so it's really pretty straightforward. The
compensation will be allocated to the 34 aircraft that we have grounded, so we'll get some benefit of that here
more immediately. And it's more for next year – actually for this year now, in the millions, call it maybe $5 million
for this year. And then as... .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A
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Lower depreciation. .....................................................................................................................................................................................................................................................................
Tammy Romo Executive Vice President & Chief Financial Officer, Southwest Airlines Co. A Lower depreciation expense. And then as we bring on the aircraft deliveries in the future, that will simply be
spread over the useful life of the aircraft. So, the benefit will be realized for obviously over many years here. But
that's kind of the short and simple explanation of how that's going to roll out. .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A And so we don't have – for the 2020 settlement that we keep talking about, there is nothing factored into any of
our... .....................................................................................................................................................................................................................................................................
Tammy Romo Executive Vice President & Chief Financial Officer, Southwest Airlines Co. A That's right. .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A ...forward comments for that. So the only thing that's in 2020 is related to the deal that was done for 2019. .....................................................................................................................................................................................................................................................................
Tammy Romo Executive Vice President & Chief Financial Officer, Southwest Airlines Co. A That's correct. So thanks, Gary. And then on your second question, I guess we laid out in terms of the fair value, it
was $2 million for the first quarter and $31 million for the remainder. So just the way that rolls out is in 2021, there
was, call it, roughly another $40 million. 2022, it's in the same neighborhood of $40 million. And then in 2023, it's
less than $10 million. .....................................................................................................................................................................................................................................................................
Savanthi Syth Analyst, Raymond James & Associates, Inc. Q All right. Very helpful. Thanks, guys. .....................................................................................................................................................................................................................................................................
Operator: The next question will come from Hunter Keay with Wolfe Research. Please go ahead. .....................................................................................................................................................................................................................................................................
Hunter Keay Analyst, Wolfe Research LLC Q Hey, everybody. Thank you for the time. Hey, Gary, you are a never say never guy, so you might not like this
question, but I would challenge you. What are some things – one or two things that you think you're fairly sure
Southwest will never do as long as you're CEO? And I ask this question because I'm pretty sure you said
something like we're never going to have basic economy a month or two ago. So just I'd like to know what is in
that never category as long as you're CEO. .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A
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Hunter, I love all your questions always. I don't know if I can give you a comprehensive list of the nevers. And you
are right, I am a never say never, but I don't see us ever charging for bag fees and, obviously, one of these days
somebody else could view that differently. We're not going to do basic economy. There's been a couple of media
stories that were way off, so we've tried to clean some of that up. But, yeah, we won't be doing basic economy.
And I don't know, Tammy, I'm sure there are some other things we won't do. I don't see us certainly in the near
future doing – well, I don't know, I was going to say something I probably shouldn't say, so I won't say it. .....................................................................................................................................................................................................................................................................
Hunter Keay Analyst, Wolfe Research LLC Q My follow-up question then, Gary, is – yeah, sorry, my follow-up is, please tell me what you were going to say just
now. .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Like I said, you always ask good questions. That one I won't answer. .....................................................................................................................................................................................................................................................................
Hunter Keay Analyst, Wolfe Research LLC Q All right. Thanks. And then just real quick, I mean, obviously you said second fleet type decision is not for now.
That's a later discussion. I get it. But can you just remind me about just the CBA restrictions around adding a
second fleet type? Is that a gating item, deferred decision to be made across multiple CBAs or is that something
that can happen concurrently? And just sort of pragmatically order of operations with regard to your CBAs.
Thanks a lot. .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Well, yeah, we would need to collaborate with our employees and especially our pilots. I think all that is
contemplated with what Mike and I have been thinking about, whether it's a gating factor – it needs to be
collaborative. So, yeah, I don't know if gating is exactly the right word, but we would need to be thinking about it
comprehensively. I think our pilots would be interested in supporting the company in terms of growth in the most
economical manner, because selfishly it means more jobs for them. It means more upgrades for captain. So, as
long as we can conclude that and then convince them that that is the right case, I think we can come to an
agreement on that.
But, Tammy and I were talking earlier this morning about this, and for us to have to arrive at a different course of
action here with the fleet, we've got to have the right timing to meet our needs in terms of additional airplanes.
We've got to have the right product, and it's got to come at the right price. So those are all three – maybe two of
the three at least are pretty big hurdles to overcome. I think if we were to reverse this and we hadn't shared with
you all that we're going to explore the risk/reward of having a single fleet type/single supplier, I think you'd be
asking us. This sort of illustrates the risk of having all of your eggs in one basket.
So I think we have a duty to look at that and look at it very seriously. And I think we have to be realistic that it's
going to be a hard hurdle to overcome. So I don't know, at least Hunter in the way I'm thinking about it, I don't see
the threshold question being the CBA. I think the threshold question is, does this make sense for us or not, and if
it does, well, then you sort of knock down the other barriers that are out there. But our pilots are great. They're
fantastic. And I certainly don't see that as a "hurdle or obstacle." .....................................................................................................................................................................................................................................................................
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Hunter Keay Analyst, Wolfe Research LLC Q Okay. Thank you, Gary. .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Yes, sir. .....................................................................................................................................................................................................................................................................
Operator: The next question will come from Jamie Baker with JPMorgan. Please go ahead. .....................................................................................................................................................................................................................................................................
Jamie N. Baker Analyst, JPMorgan Securities LLC Q So you're saying there's a chance for hot meals. .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A How did you know? .....................................................................................................................................................................................................................................................................
Jamie N. Baker Analyst, JPMorgan Securities LLC Q That's what I heard. Sorry, I respect the confidentiality around the Boeing settlement, so let's focus on 2020,
which has not been settled. How do you calculate or try to calculate the impact? Do you merely look at a pre-
shutdown business plan and compare it to actual results? Do you focus on some trailing pre-tax margin calculus?
Do you make adjustments for the fact that your growth-abled competitors now will have over a year's jump in
certain markets and it's going to cost something to win that share back? I'm not asking about what you and
Boeing might settle on. I'm just wondering how you think about what your entitlement is. .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Well, I think it's a very fair question. I don't know that – you know and we know that this is a negotiation. This is
not contractual. This is a negotiation. So, I don't see – I'm being selfish about this, I don't see a lot of merit or
wisdom in us laying out our entire strategy about this. I also don't want to give our competitors a roadmap. What I
don't – if you just simply talk about the harm that the company has incurred, I wouldn't quarrel with anything that
you put out there.
And as I mentioned in my remarks, there's a lot of years, Jamie, where we've had a dozen issues that we needed
to deal with. And right now, we've been blessed with having one. The operation is fantastic, and I won't tick
through everything that the four of us have been trying to drive home today. But the company is in really, really
good shape. We have one problem and it's a serious one. And the sitting here dog paddling for a year while our
competitors grow right past us is costing us this year 6 million or 7 million customers.
And, yeah, I'm very worried about that. And that's not anything that we can mitigate. We can deal with the
operation. We can deal with all these other things. We kept the finances whole, so to speak, but that we can't do
anything about until we get airplanes, until we can grow again. So do I think we've been harmed? Absolutely. And
everybody knows we're going to seek compensation from Boeing, and I'll just – if you don't mind, I'll just put a
period on it right there.
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Jamie N. Baker Analyst, JPMorgan Securities LLC Q Okay. Sure. Sure. That helps. I appreciate it. When I think about MAX-impacted airlines around the globe, you're
clearly one of the most profitable, if not the most profitable. So put differently, other customers are desperate to
get MAXs. There's no doubt that you want them. But as you point out, it's not like your margins have collapsed.
So, as Boeing jiggers around the skyline, would Southwest have any interest in letting some of your delivery slots
go to the needy, for lack of a better term, or is it mandatory that you get what you're entitled to as fast as humanly
possible? .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Somewhat philosophical, I assume, but I think this is a really good company. And I think part of the reason that
we're able to absorb the blow is because of five decades worth of preparation. And we went through 9/11, and I
can vividly remember our competitors whining about their state and that was their fault, because they weren't
prepared for the unexpected, without trying to be too harsh here. But we shouldn't be penalized because we have
run a great company for five decades, taken care of all of our constituents, especially our shareholders. We
shouldn't be penalized further than that.
I wouldn't be serving all of our stakeholders today if we simply said, oh, well, because we're not on the verge of
collapse, we should forfeit these positions. That makes no sense to me. So, no, I wouldn't do that at all. I would
say quite the contrary. I think that Boeing has benefited and the 737 program has benefited mightily because of
Southwest Airlines and our success over five decades. .....................................................................................................................................................................................................................................................................
Jamie N. Baker Analyst, JPMorgan Securities LLC Q Very clear. Thank you, Gary. .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Yes, sir. .....................................................................................................................................................................................................................................................................
Operator: And the next question will come from Duane Pfennigwerth with Evercore ISI. Please go ahead. .....................................................................................................................................................................................................................................................................
Duane Pfennigwerth Analyst, Evercore ISI Q Thank you. I understand estimates are exactly that, and I think we understand how you get your arms around the
cost impact from the MAX being out. But just for argument's sake, how do you estimate the RASM benefit? As I
think about some of the hard choices you've had to make, cutting your worst flying, focusing on your best, and
combined with basically no capacity growth, it feels like the RASM benefit could be very, very substantial. So, for
example, in the fourth quarter in the press release I think you called out 2 to 3 point tailwind from the MAX being
grounded. What does that compare to, like what would capacity growth have been and how do you get to that
number? .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A
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Well, you're right, they're estimates and I think, by definition, it's sort of a with and without, and you don't know
what it would have been. We admit we don't know exactly what life would have been like with 75 more airplanes
as of the end of the year. But I think our folks through – Tom through the year has been consistent in pointing out
that, yeah, we're not growing capacity, and arguably, there is some benefit from that, at least temporarily. But the
way we've had to reproduce schedules has been grossly inefficient and put our revenue management in a really
tough position because we're not building up bookings in a normal way and we're re-accommodating people at
low prices.
The fourth quarter, of course, was unique with the – gosh, over 3% was added back for lack of precision in the
scheduling. So, it was wholly inefficient in the fourth quarter. So, anyway, I think that we've laid all of that out, and
it's at most in the quarters two, quarters three, and quarters one of 2020, it might be 2 points. In quarter four, I
think it's zero because it was wholly offset by having a very inefficient schedule. So, I think that answers your
question. Tammy, I don't know if you heard it – or Tom – any differently than I did. .....................................................................................................................................................................................................................................................................
Thomas M. Nealon President, Southwest Airlines Co. A No, I don't disagree with anything you said. But I do think this, I think if we just start with the fundamentals, the
trends that we saw in Q4 just flowing into Q1, and even if you take – I'm not giving guidance on Q2, by the way,
but even if you get a look at the early piece of Q2, the trends just continue to look pretty solid. So the
fundamentals are good. I think if you backed the MAX out of our 2019 performance, we still performed really,
really well. Not mistaking there's about 1 point of MAX RASM benefit. So you back that out, we're still in the 3%
range.
And I think if you look at 2020, I think it would be a little more modest than that. But we still have strong positive
growth. I think what's interesting is what we can't lose sight of – I'll tell you what, the problem I'd love to have is a
huge capacity plan coming in so we have a RASM problem to deal with, right? So we need to grow, right? But
don't misunderstand, we are still flying a very, very strong schedule. In fact, just the 2020 base schedule – April
base schedule has over 4,000 daily flights on it, 4,016 to be precise. That's in comparison to last year's 4,078.
So we still have – these are little factoids that I want you guys to know because we still have a very, very strong
schedule. And what's also interesting is – and Mike and I and the operations and commercial teams are very
tightly linked on this whole RTS thing literally daily going through this stuff. And what I do know is, as Mike and the
operations team sort through the reality and the information becomes clearer and clearer, it's really up to them to
tell us when the capacity is available. And the reason I say that is, it's not unusual at all for us in normal
circumstances as we move between schedules from high utilization and low utilization or vice versa, it's not
unusual at all for us to flex up 40, 50 aircraft at a time, right.
So, our work in terms of building the MAX back in from a commercial standpoint, I'm not saying it's easy, but we
know where we put it back in. So, it's going to be governed by how fast are the aircraft coming back into service
and then we'll just balance the three things we keep talking about: operational stability; financial results; and
customer. But I think the base trends are solid. We know how to put the capacity back in. In fact, you can see
where we put it back in, because you can see where we took it out. So, I think we're ready to go once Mike says,
okay, here's the aircraft. .....................................................................................................................................................................................................................................................................
Duane Pfennigwerth Analyst, Evercore ISI Q
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Thanks for that. And then, thinking ahead optimistically to that maybe someday where you're spooling back up for
growth, what spending, if any, and I'm talking OpEx here, not CapEx, have you deferred as you wait around the
basket for Boeing to get its act together? Thanks for taking the questions. .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A On the – and I heard you clearly there. Just another opportunity for me to reinforce. We have not deferred – and
you all correct me – we haven't deferred any of our capital projects. So, we've got a lot of investment underway in
airports around the country. We just opened up a maintenance hangar in Houston, we've got other hangars that
we're working on, a lot of technology efforts. So, all of that continues.
On the OpEx side, we're not burning the fuel. We sort of stopped the hiring at – the fleet plan that we've shared
with you all, so we're suspending a lot of our hiring other than attrition. And, again, none of that is sub-optimized.
And even with that, again, the results are quite strong. But beyond that, Mike, I can't think of any – advertising
flops around here. We're going to obviously support the reintroduction of the MAX at the appropriate time. So, you
have things like that. But otherwise, I can't – unless you have something specific that you are probing on, I can't
think of anything that you all should expect that will be a large expenditure, except for the marketing and the
messaging and those kinds of things. And I'll leave it up to you, in how you want to speak to that. .....................................................................................................................................................................................................................................................................
Tammy Romo Executive Vice President & Chief Financial Officer, Southwest Airlines Co. A Yeah. And then there's timing maybe from quarter to quarter in terms of maintenance. But all of that, I think we've
got a good handle on and can manage. So, no, we feel like the costs are in good shape. And other than that, it's
just unique to the return to service of the MAX, storage cost, that sort of thing. But... .....................................................................................................................................................................................................................................................................
Duane Pfennigwerth Analyst, Evercore ISI Q Okay. Thank you very much. .....................................................................................................................................................................................................................................................................
Operator: The next question comes from Helane Becker with Cowen. Please go ahead. .....................................................................................................................................................................................................................................................................
Helane Becker Analyst, Cowen and Company Q Hi, everybody, and thank you very much for squeezing me in. I just have two questions. One is, Gary, have you
talked to your pilots or anybody in the team talked to the pilots about the potential of wet leasing aircraft on an
absolutely short-term basis to get through this to pick up some of those lost passengers?
And my second question is, as you think about shifting from long-haul to short-haul flying, do you worry about
what people will say about climate change and whether or not you're being a good steward of the environment?
So, thanks very much for the time. .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Well, Mike, I'll take them both, and you can chime in here. On the first one, Helane, to be honest with you, with
our executive team, we have not spent any time exploring the opportunity for wet leasing. So, since we haven't
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talked about it, no, we haven't talked with anybody else in the company. We're focused on the retirement plan and
then we're always tuned into the used market.
I think that makes the most sense because you just think about the effort involved trying to work with a third party
and all the complexities that that would bring is not going to be in our configuration. We've got a unique business
model, et cetera, et cetera. Everything is sort of predicated on agreeing with our assumption that this is a short-
lived issue and not something that we deal with for years. So, as long as it's months, I think we're making the right
judgment. So, that's a easy answer to your question. You may not agree with it, but it's – but I think we give you
an accurate answer.
And then, on the short versus the long, we're a short-haul specialist, and we've got more short-haul customers
than anybody else in the country and arguably more short-haul flights. So, the only point I'm making with that is,
what we're tweaking here in 2019 because of this is not fundamentally changing our long/short mix at all. We're
still very, very heavily weighted with short-haul flights.
With respect to our concern about that, yeah, I think we're concerned about sustainability, and I was asked on
CNBC about that this morning, and we are very focused on conservation, on fuel economy, the MAX is front and
center in terms of addressing that. It's important to get that airplane back in service because it consumes 15%
less gas. We need the air traffic control system modernized. And I think the most tangible thing our industry needs
to accomplish over the next ten years is commercially viable alternative fuels at adequate supplies and at
reasonable prices. And that would make a very significant impact.
Carbon offsets are all great. But in my own opinion, there's only so much offsetting that the world can do, and
eventually we need to get at consuming less emissions. But if you look at air transportation relative to other
alternatives, it compares very, very well. And so, certainly, I don't see any challenge to our short-haul business
any time soon, if ever, especially if we continue to improve our carbon footprint, as we have been doing. .....................................................................................................................................................................................................................................................................
Helane Becker Analyst, Cowen and Company Q Great. Thank you very much for those answers. I appreciate your time. .....................................................................................................................................................................................................................................................................
Operator: It appears we have time for one more question. We'll take our last question from David Vernon with
Bernstein. Please go ahead. .....................................................................................................................................................................................................................................................................
David Vernon Analyst, Sanford C. Bernstein & Co. LLC Q Hey, guys. Thanks for taking the time. Gary, I think if we go back before, I recall was sort of dominated by the
MAX. You guys had laid out a vision for implementing some revenue initiatives that you're very excited about.
Have you guys had to delay the timeline or introduction of any of those initiatives as you've been kind of focusing
on managing through the fleet deficit, or is the – and we should expect those to kind of come on as the MAX
returns, or has there been no change to the timeline on the commercial stuff? .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A No, sir. There's been no change on that. In fact, I don't – I can't recall a change that we've made because of the
MAX with any of – again, I'm lumping that in as a capital project. Given the fact that there is a financial penalty
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associated with the MAX, it sort of encourages to maybe accelerate some of these revenue and other cost
initiatives.
And Tammy made this point, but one of our cost initiatives is fleet modernization. And what that means at least for
2019/2020 is the acceleration of MAXs into our fleet and the acceleration of retiring some of the older technology,
and obviously we're not in a position to take advantage of that cost optimization opportunity right now. And there
was a question earlier about cost inflation. So, we'll have a little penalty because of that here in the next year or
so, and then, hopefully, we can get back on track on getting more MAXs in as a percentage of the mix. But except
for that, I can't think of anything that has been deferred. Certainly, as a headline, we've asked our officers to
execute their plans and execute them well, and let's get them deployed and let's start driving the value, especially
on the revenue side. .....................................................................................................................................................................................................................................................................
David Vernon Analyst, Sanford C. Bernstein & Co. LLC Q Okay. Thanks for that. And then maybe just as a quick follow-up. Tammy, the supplier proceeds number of $400
million, is that associated with the MAX payments, or what exactly is that when you think about the cash flow
numbers in the earnings release? .....................................................................................................................................................................................................................................................................
Tammy Romo Executive Vice President & Chief Financial Officer, Southwest Airlines Co. A The – all I can really say there is, is supplier proceeds. As we've already mentioned, the agreement with Boeing is
confidential. .....................................................................................................................................................................................................................................................................
David Vernon Analyst, Sanford C. Bernstein & Co. LLC Q Okay. So, we'll draw our own... .....................................................................................................................................................................................................................................................................
Tammy Romo Executive Vice President & Chief Financial Officer, Southwest Airlines Co. A And just to be clear, we do consider that effectively an offset of CapEx. So – and I think we've made that clear as
well. .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A It is a reporting requirement that it be broken out that way. And I think we would admit that with the Boeing
agreement, it makes it material enough that now it is a line item... .....................................................................................................................................................................................................................................................................
David Vernon Analyst, Sanford C. Bernstein & Co. LLC Q Okay. .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A ...without describing what suppliers are in that line item. .....................................................................................................................................................................................................................................................................
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David Vernon Analyst, Sanford C. Bernstein & Co. LLC Q Great. And as you think about the cash that might be created from this supplier proceeds category, would this be
cash that you'd be keeping on hand to fund future requirements, or would this be something that you might
accelerate into the buyback? .....................................................................................................................................................................................................................................................................
Tammy Romo Executive Vice President & Chief Financial Officer, Southwest Airlines Co. A We will be looking at all of that. I'll just point back to the statements that I made earlier, which is, we'll continue to
take a balanced approach to our capital deployment. And I think if you look at what we've done in the past, we've
used all of those. So, again, I'll just repeat, we're going to continue investing in the business at least at this point.
We have no intentions to slow down our reinvestments back in the business. And I think our track record speaks
to our goal to also take care of our shareholders. So, we'll just continue to take a balanced approach to all of that,
as always. .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A And I would just state the obvious, which is, it is always better to have more cash. .....................................................................................................................................................................................................................................................................
Tammy Romo Executive Vice President & Chief Financial Officer, Southwest Airlines Co. A I love cash. .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A It gives us lots of options. .....................................................................................................................................................................................................................................................................
Tammy Romo Executive Vice President & Chief Financial Officer, Southwest Airlines Co. A As Gary knows, we love cash. .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A We love cash.
[indiscernible] (01:19:39) .....................................................................................................................................................................................................................................................................
David Vernon Analyst, Sanford C. Bernstein & Co. LLC Q ...cash. Thanks a lot, guys. .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Thank you. .....................................................................................................................................................................................................................................................................
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Ryan Martinez Managing Director, Investor Relations, Southwest Airlines Co. A Okay. Well, that wraps up the analyst portion of the call today. Thank you all for joining us. And as always, feel
free to give us a call if you have any follow-up questions. .....................................................................................................................................................................................................................................................................
Operator: Thank you. Ladies and gentlemen, we will now begin with 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 Vice President and Chief Communications Officer, Southwest Airlines Co. A Chad, thank you. I'd like to welcome the members of the media to our call today. We'll go ahead and get started
with the Q&A portion. So, Chad, if you could just give them instructions on how to queue up, we'll get started. .....................................................................................................................................................................................................................................................................
Operator: Sure. Thank you. [Operator Instructions] And our first question will come from Kyle Arnold with Dallas
Morning News. Please go ahead. .....................................................................................................................................................................................................................................................................
Kyle Arnold Reporter, The Dallas Morning News Q Thanks. Can you talk a little bit about why you want to get that $124 million profit sharing payment out to
employees this year and whether as you go forward and negotiate with Boeing and move into 2020, whether
you're going to look at any kind of similarly for employees? .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Well, Kyle, I think it's really, really easy. It's – we knew we were going to settle with Boeing. We also were quite
sure that the settlement would not flow through earnings in terms of the classic definition of profits for profit
sharing. And that – so, if – and you just put yourself in an employee position here, so if you're here as an
employee in 2019 and you may not be here for the next 30 to 40 years when this benefit is realized, then you're
harmed. You'll never see the benefit of that, and we actually got a settlement from Boeing. So, it was – all of that
was anticipated. We shared that early on that we were going to work to settle with Boeing, and we have a
precedent over decades of making amendments to the contribution to do what's right for our people, and that's
either plus or minus for that matter.
So, going way back to 9/11 and then the government subsidies that were offered up, we paid profit sharing on
that. And it did not strictly meet the definition of profits for profit sharing. So, long history of doing things like that.
And it was a great year. It would have easily been a record year. It was actually a record year even though we
had these penalties, and I'm just delighted that we can do that, so – and so was our board. They were delighted to
do it for our people. .....................................................................................................................................................................................................................................................................
Kyle Arnold Reporter, The Dallas Morning News Q And are you going to look for more compensation back to employees as you continue negotiating with Boeing? .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A
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This is simply a question of how to treat the settlement for profit sharing purposes, period. And we will certainly do
in 2020 – attempt to do in 2020 what we were able to accomplish with Boeing in 2019. .....................................................................................................................................................................................................................................................................
Kyle Arnold Reporter, The Dallas Morning News Q Thanks. .....................................................................................................................................................................................................................................................................
Operator: And the next question will be from Alison Sider with The Wall Street Journal. Please go ahead. .....................................................................................................................................................................................................................................................................
Alison Sider Reporter, The Wall Street Journal Q Hi. Good afternoon. I was wondering – you mentioned that there've been a couple – just in the last couple weeks
a few things at Boeing that have been surprising or unexpected, big changes to sort of the assumptions that you'd
had. And I was wondering if you could say whether – how you think things have changed under their new
leadership, what's improved and what hasn't, what you're still looking for. .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Well, I think it's way too early. Boeing has been unstable since March of last year, and this is part of the instability.
You've got a new CEO. You've got a new CEO of the commercial organization. So, it's far too early to make an
assessment there. No, both of the – as you and I have talked, we know – all of us know Stan Deal and think a lot
of him, and some of us know Dave Calhoun and think a lot of him, so. .....................................................................................................................................................................................................................................................................
Alison Sider Reporter, The Wall Street Journal Q Great. I don't know if I can ask one follow-up, but just curious as you sort of look ahead to return to service,
curious if you've thought at all if there's any consideration of sort of discounting MAX flights, if that's something
we're likely to see, or if that's not on the table as a possibility. .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A I'll let Tom speak to that. But, no, I don't think that we would approach it in the way you described. You want to
talk about how you're thinking about reintroducing it to service? .....................................................................................................................................................................................................................................................................
Thomas M. Nealon President, Southwest Airlines Co. A Yeah. Honestly, we've done a lot of research on this, right. So, Alison, I think that one of the things that is
interesting is, we are very, very, very focused on the MAX, as you are. What's interesting is, the general
population is nowhere near as zeroed in on this whole topic as we are in the industry. So, we are doing a lot of
work. We understand the customer perceptions there. So, our customers that we talk to and non-customers, they
are – it's interesting, it's really kind of a bell curve. I think I shared this with you at one point. It's kind of a bell
curve, and the vast majority of that bell curve is, we intend to fly the same as we've always flown. And then you
have the ends of the bell curve, it actually, the two ends, one end skews higher. And that's, we intend to fly more
on the 737 MAX. The proof or the thought being it's actually going to be the safest airplane out there because of
all the scrutiny. And then some portions say we're going to fly less. But I think we're going to see the customers
come back pretty nicely. Some may take a little longer than others, maybe a month, two months, but they're going
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to come back. And at this point, there's no notion of discounting MAX flights. That's not in our considerations at
this point. .....................................................................................................................................................................................................................................................................
Alison Sider Reporter, The Wall Street Journal Q All right. Thank you. .....................................................................................................................................................................................................................................................................
Operator: And the next question comes from Evan Hoopfer with the Dallas Business Journal. Please go ahead. .....................................................................................................................................................................................................................................................................
Evan Hoopfer Reporter, Dallas Business Journal Q Good afternoon, everybody. I just have a quick question for you regarding the potential renaming of the 737 MAX.
Gary, I think you said last year that, that is something that you would not be interested in. I'm just wondering, it the
consumer sentiment ever got so negative or the brand became just so toxic that you would consider that, or is
that kind of a moral line in the sand that you will not cross? .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Well, to me, it's just a matter of being transparent. Notwithstanding Tom's earlier comment, I think the awareness
of the MAX issue is very, very high. The importance they attribute to it I think is where Tom was headed. But
everybody knows the name, the 737 MAX, and so who is kidding who? To me, it's just disingenuous. Now, if it's a
different airplane and it's a totally different product, then it would be appropriate to rename it. But this is a –
ironically, it's a very minor change to a piece of software when you get right down to it, and it's Boeing's call. It's
not ours. That's what they call it. But we talked to them, at least the previous management team, and they weren't
interested in doing that, and we certainly haven't been lobbying them to do it, because I think it's just
disingenuous. .....................................................................................................................................................................................................................................................................
Evan Hoopfer Reporter, Dallas Business Journal Q Great. Thank you. .....................................................................................................................................................................................................................................................................
Operator: The next question comes from Pilar Wolfsteller with FlightGlobal. Please go ahead. .....................................................................................................................................................................................................................................................................
Pilar Wolfsteller Reporter, FlightGlobal Q Hi. I've got two questions about your Hawaii service. Number one, could you sort of talk a little bit about how
successful it's been or some of your plans for the future?
And the second question is, do you have any comment to the reports that the FAA gave Southwest preferential
treatment when it approved those routes? .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Well, Tom, I'll let you talk about Hawaii. I'll – since I'm talking, I'll answer the second one first. Yeah, we don't
know. We don't know what that's about. This is a whistle blower complaint, and we don't know who the whistle
blower is, we don't know what the complaint is. So, I think what I'm mostly focused on – it certainly didn't feel like
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we got preferential treatment, by the way, because we worked really hard and they worked us really hard. But I
was proud of the work that our team did. We were told going in that this is probably a 12- to 18-month effort. I
think in the end, we kind of came in around 14 months, which is about what one would expect. It was – the
government shutdown was in the middle of that which hampered some of the efforts. What I'm most interested in
is, what issues are there with our ETOPS. I'm not aware of any. Our folks I think have done a phenomenal job
developing it and then operating it on that point. So, I think it's a long way of saying we don't know what that's
about.
And then, Tom, I'll let you talk about Hawaii, please. .....................................................................................................................................................................................................................................................................
Thomas M. Nealon President, Southwest Airlines Co. A Yeah. Well, I think, first of all, it's – keep in mind, we've been doing this for 10 months. We've been flying to
Hawaii for 10 months. It is doing phenomenal, right. So, everything that we expected is at or better than our
expectation.
Keep in mind, it's a small piece of our business. It's right around 2%. But it has a very important role in that, it
really supports our California business. So, it's exceeding on every dimension. I think the demand and the load
factors have been very, very good. We're very satisfied with that, with long-haul as well as the interisland. Our
ramp-up honestly has been a little slower than we originally expected because of the MAX and the capacity issue.
But everything we've put into service we're thrilled with. At this point, we are – I think this is right, so I'll have to
check it, but we've got – let's see – 14 daily flights from California to Hawaii across four of our big cities: Oakland;
San Jose; Sacramento; and San Diego, and we have 38 dailies interisland. So, it's doing fantastic. We're really
happy with it.
What's interesting is, we're actually creating demand that we didn't even see was – as being there. So, we're
seeing more connecting itineraries within the West Coast, which is interesting because we're creating demand,
we're growing the market, and fares are lower. And what does that sound like to you? That is the classic
Southwest effect. So, it's happening again.
And I guess the last point, I'll be quiet here. Just, I think one of the questions we were asked a lot is, this is a
pretty long-haul flight, how do you feel like your product is going to perform on the long-haul flight. And, by the
way, it's not our longest long-haul flight. We have transcon that are longer. But having said that, the scores for the
customer experience and the brand scores are actually higher than our total system, all right, from the mainland
to Hawaii flights. So, net-net, we are very, very comfortable and thrilled where we are.
[indiscernible] (01:31:27) .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A ...to our flight attendants and the great job that they do. .....................................................................................................................................................................................................................................................................
Thomas M. Nealon President, Southwest Airlines Co. A Yeah. And just speaking real quickly to the ETOPS process, we are involved in that. And it was not a quick path, it
was very, very thorough and it was very, very challenging. And you look at the quality of what we're doing today, it
is phenomenal. So, I can't speak highly enough of the operations team of what they've accomplished in a short
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period of time. Actually, it wasn't short. It took us 14 or 15 months to get done, by the way, which is 12 to 18 is the
norm. So, that is not a fast path. .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A But Mike, at this point, no one from the FAA has come to you on any issues with ETOPS, have they? .....................................................................................................................................................................................................................................................................
Michael G. Van de Ven Chief Operating Officer, Southwest Airlines Co. A No, no, no. Like Gary said, it was a whistle blower complaint. I don't really know a lot about it. I just know, getting
an ETOPS authorization, that is automatic and there's a rigorous approach to that. There are advisory circulars
that the FAA lay out, you take that and you follow it. We did that, and over a 14-month period, have put new
procedures in place. After you start flying, you're in a heightened surveillance period for six months. We've had
over 3,000 flights since we started service there. And the indications are that the procedures that we were
authorized to perform, we're performing – we're executing them very well, and they're doing exactly what the FAA
and Southwest Airlines expected them to do. .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A So, it's all a surprise to us. And again, if there are issues, we want to know what they are, and we'd be happy to
address them, right. Right now, we don't know what it's about. .....................................................................................................................................................................................................................................................................
Pilar Wolfsteller Reporter, FlightGlobal Q Thanks. .....................................................................................................................................................................................................................................................................
Operator: It appears that we have time for one last question today. And that question comes from David Slotnick
with the Business Insider. Please go ahead. .....................................................................................................................................................................................................................................................................
David E. Slotnick Reporter, Business Insider Q Hi, everyone. Thanks for taking the call. I was just wondering because you were talking about the – I think you
said nine full flight simulators by the end of 2020. I was wondering if you could talk a little bit about your future
hiring plans once the MAX is ungrounded really over the next 10 years. I know that the simulators represent a big
investment, so sort of wondering how that fits into the whole thing. .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A You want to talk about that, Mike? .....................................................................................................................................................................................................................................................................
Michael G. Van de Ven Chief Operating Officer, Southwest Airlines Co. A Yeah. Yeah, David. So, we have a – as we bring airplanes into the fleet, we hire a certain number of pilots and
flight attendants for the airplanes that we bring into the fleet. And so, that's – there's just some math that we go
through, and we do that. The other thing that influences our pilot hiring are retirements. And so, we've got
probably around 300 to 400, and it grows every year as we age, the 300 to 400 pilots that go through retirement.
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And the, so we're adding our pilot hiring with – to replace retirements and airplanes that come on to the fleet. But
as Gary mentioned, we've got – if we don't have production airplanes from Boeing this year, we'll only have 45 net
new airplanes this year, and we're already staffed up to 61. So, we don't need a lot of additional hiring in 2019.
And that should start ramping up again in 2020 as the delivery process from Boeing resumes. .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A But we do plan to grow. We plan to grow and – roughly 15 to 20 airplanes a year. And we plan to hire thousands
of people every year. .....................................................................................................................................................................................................................................................................
Michael G. Van de Ven Chief Operating Officer, Southwest Airlines Co. A Yeah. .....................................................................................................................................................................................................................................................................
Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A So, even in recessionary times in our history, we've been able to grow and not shrink. Obviously, some years we
might grow less. But for the most part – 2009 maybe being an exception to that. But yeah, we definitely plan to
grow and continue to hire. .....................................................................................................................................................................................................................................................................
David E. Slotnick Reporter, Business Insider Q Great. Thank you. .....................................................................................................................................................................................................................................................................
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 Vice President and Chief Communications Officer, Southwest Airlines Co.
Thank you, Chad. If you all have any other questions, please feel free to reach out to our Communications Group,
214-792-4847, or via our online newsroom at www.swamedia.com. .....................................................................................................................................................................................................................................................................
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now
disconnect.
Southwest Airlines Co. (LUV) Q4 2019 Earnings Call
Corrected Transcript 23-Jan-2020
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