Southwest Airlines Co. (LUV) Earnings Call Transcript & Summary

Welcome to Southwest Airlines' Virtual Shareholder Meeting. You may not record or rebroadcast any portion of this meeting without Southwest Airlines' consent. Please note this meeting will be recorded and will be available within 48 hours following the meeting in the Investor Relations section of southwest.com. I will now turn the call over to Mr. Gary Kelly.

Okay. Thank you, and good morning, everyone, and welcome to the Southwest Airlines 2021 Annual Meeting of Shareholders. I'm Gary Kelly, Chairman of the Board and CEO of Southwest Airlines. Before we begin, please note the agenda for today's meeting is shown on the screen in front of you. The proxy statement, annual report and rules of conduct for the meeting are posted in the Materials section and can be viewed by clicking the Materials button at the bottom right of the screen. If you've not read the rules of conduct, please take a minute to read them, and these are the rules we're going to follow this morning. Please also note there will be 3 opportunities for appropriate shareholder questions to be addressed. Our independent auditors will be available to address appropriate questions as part of Item 5 of the agenda. I'll address appropriate questions regarding any of the proposals presented for this meeting after all of the proposals are presented. And in addition, you'll see that Item 7 of the agenda provides for a question-and-answer session after the polls are closed. [Operator Instructions] The meeting will now come to order and the polls are open for voting. If you're a shareholder or hold a proxy for a shareholder and would like to vote, you may click on the Voting button at the bottom right of your screen. The polls will be closed after all proposals to be voted on have been presented as indicated in the meeting agenda. Before we address the official business of the meeting, I'd like to welcome our other members of the Board of Directors: David Biegler, Veronica Biggins, Doug Brooks, Bill Cunningham, John Denison, Tom Gilligan, Grace Lieblein, Nancy Loeffler, John Montford and Ron Ricks. I'd also like to welcome our President, Tom Nealon; our Chief Operating Officer, Michael Van de Ven; our Executive Vice President; Bob Jordan; Alan Kasher; Tammy Romo; Mark Shaw; and Andrew Watterson. In addition, Ryan Martinez, our Managing Director of Investor Relations, is present to facilitate the question-and-answer portions of this meeting. And I'll now move on to the formal business of the meeting. Tony Carideo joins us online, and he's been appointed to act as an inspector of election on behalf of Broadridge Financial Solutions. And I'd now like to introduce Marilyn Post, who is our Corporate Secretary. And Marilyn is going to report on some formal matters relating to the holding of this meeting.

Thank you, Mr. Chairman. First, I have received an affidavit of distribution from Broadridge Financial Solutions. The affidavit certifies that the notice of this meeting as well as the other proxy materials for this meeting were distributed to all shareholders of record commencing on April 9, 2021. In addition, for our shareholders who are attending this meeting online, you may access the list of our shareholders of record by clicking the Materials button at the bottom right of your screen. This list will remain available for shareholder inspection during the meeting. The list has also been available for inspection at the company's offices for over 10 days prior to the meeting. Finally, the inspector of election has signed an oath of office and has determined that the holders of more than the majority of the shares entitled to vote at this meeting are present in person or by proxy. And this is sufficient for a quorum to conduct business.

Thank you, Marilyn. I declare this meeting is duly constituted and convened. And as stated in the notice of the meeting, there are 5 proposals to be voted on today, each of which is identified in the proxy statement. Proposal 1 is the election of directors. Proposal 2 is the advisory vote to approve named executive officer compensation. Proposal 3 is the ratification of the selection of Ernst & Young LLP as the company's independent auditors for the fiscal year ending December 31, 2021. Proposal 4 is the advisory vote on a shareholder proposal to permit shareholder action by written consent. Proposal 5 is the advisory vote on a shareholder proposal to permit shareholder action to remove directors without cause. Each of these proposals is discussed in detail in the proxy statement. Regarding proposal #3, ratification of the selection of Ernst & Young as the company's independent auditors for the fiscal year ending December 31, 2021, Ernst & Young also served as the company's independent auditors for fiscal year 2020. Mr. Bill Guess, our Ernst & Young audit partner; and Ms. Lindsay Goodreau, Senior Manager at Ernst & Young, are present and have been given the opportunity to make a statement if they so desire. They're also available to respond to appropriate questions. Ernst & Young has already informed me they do not desire to make a statement, so we'll move on to any questions for them.

Gary, there are currently no questions for Ernst & Young.

Thank you, Ryan. Turning to our shareholder proposals. As stated in our rules of conduct, each shareholder proposal presenter will have 3 minutes to present their proposal and the presenter must limit their presentation to the substance of their proposal. With respect to proposal #4, regarding an advisory vote on a shareholder proposal to permit shareholder action by written consent, the shareholder proponent or their authorized representative is now invited to present the proposal.

Hello. This is John Chevedden. Can you hear me okay?

Loud and clear.

This is proposal 4, adopt a mainstream shareholder right, written consent. Shareholders request that our Board of Directors take such steps as may be necessary to permit written consent by the shareholders entitled to cast the minimum number of votes that would be necessary to authorize an action at a meeting at which all shareholders entitled to vote thereon were present and voting. Written consent thrives on overwhelming shareholder support and give shareholders an important means to take action between annual meetings. Written consent could only accomplish something if 75% of the shares that normally voted at our annual meeting give approval. In resisting this proposal, management is opposed to listening to the voice of 75% of shares. Management makes the outlandish claim that this proposal would make Southwest an irresistible target for investors that have nothing better to do than spend money out of their own pockets to get a token vote when a 75% vote is needed. And Mr. Cunningham, who chaired the Southwest Governance Committee and who is responsible for management resistance to this proposal to enhance to all the rights, seems to be unaware that written consent can be structured so that all shareholders receive notice. And management now suspiciously claims that it's more in favor of a special shareholder meeting at a time that shareholder meetings are losing their impact with the onslaught of online shareholder meetings. For instance, the Kohl's Annual Meeting last week was 9 minutes and AT&T would not even let shareholders speak at 2 consecutive online shareholder meetings. Please vote yes, adopt a mainstream shareholder right, written consent, proposal 4.

Thank you, sir. With respect to proposal #5, regarding an advisory vote on a shareholder proposal to permit shareholder action to remove directors without cause, the shareholder proponent or their authorized representative is now invited to present the proposal.

Hello. This is John Chevedden. I'm presenting proposal 5 for Kenneth Steiner, shareholder right to renew directors without cause at any time. Shareholders ask our Board of Directors to take the steps necessary to permit removal of a director by a majority vote of shareholders with or without cause. Our present rule gives job security to nonperforming directors because directors can be removed only for cause, like a felony conviction, between annual meetings. It is not appropriate that when employees in the airline business do not necessarily have job security that the directors would have enhanced job security regardless of their job performance or after-hours illicit activities. The Delaware Court of Chancery issued a decision in 2015, in which the court said that a company may not have bylaws that state that directors may be removed only for cause. This sets a good example no matter where a company is incorporated. Not adopting this proposal could lead to the distraction and reputation damage to Southwest of a director or group of directors hanging around for up to a year, when they clearly needed to be terminated. In resisting this proposal, management is saying that if there is a group of directors who are on the borderline of violating their fiduciary duty, such directors should be given a free pass to hang around for up to a year and disrupt Southwest. Please vote yes, shareholder right to remove directors without cause at any time, proposal 5.

Thank you, sir. While we allow time for shareholders to complete their voting, I'd like to remind you that as noted in the rules of conduct for this meeting, the Q&A portion of meeting may include financial information not prepared in accordance with GAAP, may also include forward-looking statements. A link to our reconciliations of non-GAAP to GAAP results as well as a list of factors that could cause our actual results to vary materially from our forward-looking statements can be found on the Annual Meeting page of the Investor Relations section of southwest.com. So we'll now pause for another minute or 2 to allow for voting to wrap up and to allow me time to survey the questions that have been submitted. [Voting]

So Ryan, what questions do we have?

So there are no questions regarding the proposals.

All right. In that case, Ryan, I hereby declare that the polls are closed. So let's now turn to the question-and-answer portion of today's meeting. Shareholders have had an opportunity to submit questions this morning through the virtual meeting website. And Ryan has informed me that we received several questions. And I think we'll be able to address all those questions here this morning. But if in case you have a question still, you're always welcome to contact our Investor Relations department after today's meeting. So I'll now turn the call back over to Ryan for this morning's questions.

All right. Thank you, Gary. And I just want to remind everyone that we have -- we issued a Form 8-K this morning, which you can find on the Investor Relations website under the Investor Updates tab. It just gives you an update on current trends. So in terms of the questions, Gary, our first one is, what percent of employees are vaccinated?

And I will ask our Executive Vice President, Corporate Services, Mr. Bob Jordan to address that. Bob?

You bet. Thank you. And yes, there's nothing more important for us or for the country then to get as many people vaccinated as we can. I mean, that's how we achieve herd immunity. That's how we all return to normal as an industry and otherwise. And so we've had a robust campaign to encourage our employees to be vaccinated. And that's gone on for months now. We're also making vaccines very available. We had, as an example, we had an event at our corporate campus here last week, where you could literally drive-up and be vaccinated that day. The most recent thing we're doing is we launched this week a vaccine tracking tool, where our employees can go in and put their -- upload their vaccine status if they choose to, their vaccine card. And we're also incenting our employees to do that. So we're putting sort of all efforts behind in getting our employees vaccinated and then understanding what part of our employee population is vaccinated.

Great. Thank you. Maybe a question, Tom, for you. What are some examples of product innovations? And the question says since January, but maybe you just want to cover product lines and focus...

Yes. Well, I think some of the innovations you might be thinking about would be certainly our new cities. We're going into a lot of new markets. We've announced 17, we're in 12. We start 2 more this coming week, I believe. So we're excited about that. So we are expanding our network. I think that's -- what's interesting there is it's pretty heavily leisure-oriented, but we're also going into 3 very important business markets, which as you probably know is a big focus for us as well. So I guess, I'd say a second innovation in terms of the Southwest product is our entry into the global distribution system platforms, which is really about earning more corporate business travel. So we'll be going live with Sabre in the -- I guess, certainly before Labor Day. And that's a big deal for us. They have a 70% market share in terms of corporate bookings. And we intend to go into that and win some more business. So those are probably the 2 biggest things. Certainly, our innovation or expansion into Hawaii is a big deal as well. That's an important one. We've gone from -- just going back a little bit, we started in March 17, 2019, so St. Patrick's Day of 2019. And we had a plan to begin to build that out. And obviously, that was slowed down and really stopped because of COVID. And we went in with 16 mainland to the islands flying. And we've expanded that beginning in July -- actually June to 37 daily flights. So that's a major expansion into the Hawaii market for us. So those are just 3 examples of product innovation, schedule innovation and really going after new business.

Tom -- Ryan, it's not exactly on point with the question, but you might just mention the Southwest Promise as well because there was a lot of work and a very good work to protect our customers and our employees that, I think, would be appropriate to share.

Yes. You just think about when the pandemic began, really declared March 15 or so. By May 1, so within 6 weeks, we had introduced a set of practices, operational practices that were really aimed at just protecting our employees and protecting our customers in a big way. Part of that included initially the blocking of the center seats, which is a big deal for us. Our customers certainly appreciated that. We ran that through December 1 of this past year. We have things like the filtration system on the aircraft. That's something that no one ever talked about. It was always present, but I don't think anyone appreciated the significance of the cleansing of the air. And then things such as masking policy, the cleaning of the aircraft, we're cleaning it, we're disinfecting it every night, deep cleaning every night as well as between turns. And that's a lot of effort. I think nose to tail, every night, every aircraft was being deep cleaned, which was -- Mike, correct me if I'm wrong, I think that was about 8-hour effort per aircraft, right? So this is a really significant effort just to protect our customers and our employees, so -- and parts of that will certainly remain beyond the pandemic, right? And there are parts of that, that we think make a lot of sense and parts that over time will begin to recede. But that's an important part of the product as well.

Thank you. Next question, maybe for Tammy, what was the most successful cost-cutting measure since the beginning of the pandemic?

We had a number of cost reduction measures that we took since the onset of the pandemic, we reduced our cost and spending in total by about $8 billion last year. And that was from really a number of different areas. Obviously, we reduced -- we eliminated our dividends and share repurchases. But in terms of our cost performance, the most significant cost reduction, of course, was the reduction in capacity to respond to the significant drop in demand. Now of course, as we start to build back our schedule, we'll be bringing on cost, and we'll be working really hard to efficiently bring those costs in and efficiently scale as we bring back capacity. We expect our capacity to be just down 6% by the time we get to June. So the cost that we're bringing back online here currently, I would consider those very high-quality cost because those will bring on revenues and hopefully improve the bottom line here. So really just, we -- the most significant cost was just pulling out costs to reduce our schedule. And I just want to really thank all of our employees for their help with all of those measures. We had a significant -- a number of our employees participate in our voluntary separation program and our extended time-off programs, which results -- which we expect to result in savings of $1.1 billion to $1.2 billion this year. So very grateful to all of our employees who really pitched in to help us manage through this really tough time.

Overall, a lot of streamlining and a lot of rightsizing. And we reoriented our technology, construction projects. And I agree, Tammy, I think everyone did a great job.

Excellent. Thank you. Switching gears to competition, so Gary, I'll send this one your way to start. What start-up airline presents the greatest potential challenge for Southwest?

I think all the competition is significant for us. And a lot of it will depend with what routes new airlines choose. For the most part, I don't think, Tom, that we're seeing any direct overlap with a lot of the -- well, what I've seen with 2 new entrants into the market. So they're -- and plus at this stage of their corporate lives, they're relatively small. I think overall, one should know though that our industry is brutally competitive. And we face very dramatic competition from the 3 large legacy airlines as we do from the smaller airlines and certainly the ULCCs. So there is no lack of competition. We know that what we've got to do to win is to provide great service at a low price. And so we focus on keeping our costs low and hiring great people that produce great service. So I feel like Southwest is in the strongest position ever in our history relative to our competition. We've got the people. We've got the cash. We have a great partner in The Boeing Company in a contract that was recently enacted between our company and Boeing, led by Mike Van de Ven and Tammy Romo. So while it's competitive, we will be very well prepared to face the competition going forward.

Okay. Thank you. One for you, Mike. So we have a question on additional training for pilots to fly the MAX. Maybe you could talk a little bit about the training as we put the MAX back in service earlier this year.

Sure. So we had a very deliberate and phased approach to putting the MAX back into service. It obviously included all the equipage and loading the software and bringing those airplanes out of their storage with all the maintenance. But then also a big part was the pilot training. So we have over 7,000 pilots. Every one of them were trained before we put the MAX back into service. And the training was a combination of computer-based training and then also a couple of hours in the full flight simulators. Our pilots only fly the 737. And we really focus on pitch, power and trim as we go through the training process with them. So they all were trained. And then even before we then put the airplanes back into revenue service, we had a series of validation flights on the airplanes to make sure that we had all the cobwebs knocked out of it. And they've been performing spectacularly.

Thank you, Mike. And Gary, we have one more question for you. Do you have a ballpark idea when we might reinstate a dividend?

Well, I'd say yes and no. Yes, in the sense that, first of all, we want to pay a dividend, we want to reward our shareholders and very much appreciate the support that we've had for what's almost 50 years now. We had a handsome dividend before the pandemic started. And I would welcome returning to the prosperity pre pandemic and would love to reinstate the dividend at that point. We do have restrictions under the CARES Act to avoid paying dividends. And I believe that deadline is September of 2022.

2022.

So obviously, we would not consider it before then. And we've got to be profitable. It makes no sense to be paying dividends if we aren't generating profits. And we would want the dividend to be sensible in relation to whatever level of profits that we're able to achieve. But we'll all look forward to that day. And I, for one, am very confident that, that day will come. And we're all working very hard to stabilize the company, to repair our balance sheet, which will be a priority, and then return to prosperity. And that would be a terrific time to reinstate the dividend. When that will occur, I'm not as obviously as certain. It's a very uncertain world that we've been living in. But we've certainly enjoyed great progress over the last couple of months. And Tammy, we're looking forward to hopefully breaking even in the next month. And then the question, of course, will be whether we can sustain that. But I can assure our shareholders, we'll be doing everything that we can to get back to prosperity and returning a dividend sometime after again September of '22.

Well, thank you. Thank you all for the great color. Thank you to our shareholders for the great questions. And with that, Gary, I will turn the call back over to you.

Thank you, Ryan. And Marilyn, will you please report on the preliminary results of the voting?

Yes, sir. The following results are from the preliminary report of the inspector of election. With respect to proposal 1, each of the 11 director nominees has received votes in favor of their election, constituting over 88% of the votes cast for or against their election. And each nominee for director has therefore been duly elected. With respect to proposals 2 and 3, these proposals have each received votes in favor of their approval, constituting over 93% of the votes cast for or against such proposals, which means each of these proposals has passed. With respect to proposal 4, such proposal has not received the majority vote in favor. And finally, with respect to proposal 5, such proposal has also not received a majority vote in favor.

Thank you, Marilyn. And the final results will be reported by the company on Form 8-K. And there being no further business to come before this meeting, I declare this Annual Meeting of Shareholders adjourned. And thank you all for attending today's meeting.