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

Good morning, everybody, and thank you very much for dialing in this morning or logging in. I'm Helane Becker, Cowen's airline -- senior airline analyst. And welcome to our 14th Annual Global Transportation and Sustainable Mobility Conference. And this morning, we are joined by Bob Jordan. Let's get that name right.

It's hard to say. That's all right.

It's hard to say. It shouldn't be, though. And Bob is the Executive Vice President, incoming CEO at Southwest Airlines. And I'm really excited to be here and chat with you. I don't know why we call them fireside chats. There's no fire going on here, but we do for this chat. Before we get started, did you want to make any comments? You guys issued an 8-K this morning and updated third quarter guidance. Again, I don't know if you want to make any comments regarding that before we go into the Q&A.

Yes. Helane, I will. And by the way, thanks for doing this. And yes, I wish we were in person sitting across a table or sitting in a room, but we will be soon. I'm hopeful of that. But -- and I'm with you on the fireside. I keep joking, I don't have the jacket on because I'm formal. I've got the jacking on because my office is freezing. So I would take the fireside with you just as much. But yes, a couple of quick things. I'll give you 2 minutes on the transition, and then, yes, I'll cover a couple of things in the investor update. So because I'm asked a lot, how is the transition going, and I think it's going really well. The -- that's a testament to the company, to our people and some of that, obviously, to the fact that Gary and I worked together for 30-plus years. So it's really -- it's actually really easy, but it is going quickly. Any change, you announce a change, and the pace is rapid. So it feels like it's going 1,000 miles an hour right now, which is just fine. I'm focused on a couple of things, really basic things right now, communicating a ton. So a lot of that's internal. But obviously, external when you have change, change is hard no matter what. And so you just need to communicate a lot. Focused on getting out. I feel like I really need to be with our people. They had a tough summer. So I want to be with them a lot and just listen. I was in Denver all day yesterday. So my voice sort of wanes in and out. It's because I think I talked to close to 1,000 folks or something. So anyway, it was a blast, but my apologies if that happens. And then just put some pace behind the transition. Again, changes -- uncertainty, change, whatever is difficult. So I think pace is helpful. We want to be super thoughtful, but we want to make sure we're moving through this with pace, and we are. And then last, just a lot of focus on getting 2022 organized. Some of that's getting -- continuing to emerge from the pandemic. Some of that had some priorities, and we're going to share a lot of that with you at Investor Day here in December. The priorities aren't super different. I mean the DNA of the company is not changing, but I do have things that I want to focus on that maybe be a little -- might be a little bit different, and you're going to hear a lot about that at the Investor Day. And then on the investor update this morning, it -- just a couple of basic things. We are continuing to see more of an impact from the Delta variant than we had thought. So that -- you had an update there. We're all hopeful that we have bottomed out in terms of the impact. I'll talk more about that later, I'm sure, as we have questions, but that was part of the update. And then the capacity updates for the third and the fourth quarter. And the -- I would couch them both as obviously adjusting to the impact of the variant, especially the closer -- the third quarter capacity changes. And in the fourth quarter, which I think was down 2 points from prior, and then the fourth quarter is down more like 5 as compared to 2019. And obviously, that was adjusting for the pandemic as well. But because we're hopeful that bookings come back, a lot of it really was just getting our operation aligned to what we can staff the operation. You've seen us -- we had a tough summer, operating sometimes in the 60s, and a lot of that was due to being understaffed. And there are all kinds of reasons for that, that we'll talk about. But we need to get the operation and the staffing matched so that we can operate reliably like our customers and employees expect and get our employees out of mandatory overtime and these things that are just tough for them. And so a lot of that fourth quarter adjustment, which is getting the capacity and the staffing and the operation better aligned so that we can operate as our customers and our employees would like us to operate. So that's really what a lot of that was, plus the adjustment to the impacts of the COVID -- of the Delta variant. So -- but really excited to see everybody at Investor Day here in December. It feels like a long ways away, but time moves really quickly. So it'll be here soon. So we'll be sharing a lot about all this at the December day.

Okay. And just on the staffing, what could you have done -- like what surprised you, I guess, about the summer months, not -- that caused the operation to not be as strong issue we'd like to get it down to the -- whatever in the 60s? And what could you have done differently and -- that or what lessons that you may have learned that you can take to next summer or to the next peak?

I think we typically do a really good job. It's just the variability and issues are just -- they're just off the charts different than normal. I mean nothing is normal right now. So I think -- and again, I'm not go back and digest the past. We need to learn from the past, but I'm not trying to make excuses for anything. I'm really focused on making sure we're much better going forward. But combo of things. So you've heard these -- I mean the leisure demand, in particular, just came sailing back. So the demand came back. We were running a lot of 90-plus percent load factor days. And so the demand was more than we expected. The system just seemed to be slower. Gary has used the -- I think he's used the line that we just -- the airline industry needs to get back to our sort of our fighting capability or fighting way because we're -- just things in a lot of cases just weren't running as efficiently as possible. Some of that has a lot of new customers, but it just is. We were bringing a lot of employees back off of extended leave. So we recalled everybody. So they have to go back to recurrent training and some of that took a little longer than expected. We had some behavioral changes. It's just -- we had, in some cases, an increase in leaves and those kinds of things. So it's a whole -- we did have things like weather, ATC. So it's a whole pile of factors, many of which probably were hard to predict. I think if I had -- if we had to do over, I think we could have been less optimistic about how quickly we could get folks back off of leave and trained and all that. So in terms of anticipating when they would be available. So I think we were probably a little optimistic there. And then second, we did anticipate some hiring. And -- in order to operate the schedules. And so the hiring market is just way tougher than anything we've ever experienced. And then second, our hiring teams, just like every other team -- obviously, we hired nobody in the last year during COVID. And so a lot of those folks took long term. They took early retirement -- or we had them working in other parts of the company to stay busy. And so in addition to hiring, we had to rebuild the hiring team, and that took -- that was predictable, and I'm not sure we took enough into account in terms of that. So it just took longer to get folks in -- new hires into the system as well. So a whole variety of factors. I'm not trying to make excuses at all. Our employees and our customers don't deserve 65% on time. So we can do better there. It's just that -- it's just a lot of things that are just really unusual, hard to predict because they're really related to COVID and the broader environment. But we will get staffed, and we will be better.

Got you. Have you had to like do hiring bonuses? Or is there -- are there places geographically in the country that are easier or harder to hire?

It's -- we could talk about staffing and hiring for 30 minutes, and I won't do that to you. But the -- I've been at the airline for 33 years. And to grow, we -- our issues -- constraints have always been can you get aircraft, can you get airports, facilities, gates? This is the first time where the constraint is staff. Can you get hired? I think that's going to be the key for a year, maybe 18 months. I think we're in this hiring challenge for a long time because it's broader -- it's a broad economic question. You've got a lot of jobs. You got the economy roaring. You've got folks that haven't come back into the labor market, 9 million that have not come back in. So I think it's with us for a while here. The staffing issues are broad. They're all across the -- they are worse in a few places. Probably, our chief areas are largest, the Baltimore, the Denver, Chicago, Orlando, et cetera. But there are hiring challenges all across the country, and I think that's just a -- it's a factor of -- I mean how many help wanted signs do you see? They're everywhere, or I mean things that you never thought you would see. Restaurants close early because there's no staff where you walk in and half the restaurants closed or -- it's just amazing. And a lot of those jobs -- so where we're short in a lot of cases, it's things like on the ramp. So those are, for us, entry level positions. And so you're competing with Lowe's, Home Depot, Amazon. You're competing with everybody. On the what we've done, we've done all kinds of things. So there's -- part of why I was in Denver yesterday was we got a hiring event and hiring fair coming up next week, and I wanted to help promote that. But you've seen us raise entry level wages, even in our unions where it's contractual. We raised the entry level. We are doing -- we've been doing a lot of premiums for folks that are here to get them to work and to cover shifts. We've been doing a lot of premiums. We're doing referral bonuses. So they're -- I'd just tell you, we're pulling out all the stops, and we will likely add even more in terms of how we're thinking about trying to staff. I mean it's a great company. We've never struggled to get people, and we're still getting a lot of applications. We're just getting a lot less than we have historically.

Got you. And this is the last labor question I'm going to ask you, and we're going to move on to talking about more interesting -- or other interesting things, not necessarily more interesting. Does this give you an opportunity to really think about the culture, diversity, the whole, I guess, the buzzwords are DEI, diversity, equity, inclusion? Does this give you that opportunity to really go out and hire people into the airline that might not have been -- not have gotten those opportunities in the past?

Oh, you bet. So the -- I mean our hiring predictions are lock thousands, thousands and thousands that we need to hire. We need to hire thousands this fall, a bigger number next year and potentially a bigger number the year following. So we have a lot of hiring to do. I'm really passionate about our DEI goals and not just because they are goals, but because we need to make progress. It's the right thing to do. What you tend to see is that the wider workforce is more diverse than leadership. I think you see that in lots of companies. So our stated goals, our progress, especially in leadership, and we're focused on that. But no, you're right, we need to make progress. It's a whole variety of things. It's in hiring. It's in how we develop and sponsor and bring to the forefront leaders. So there's a whole list of things, but I just want you to know it's a huge priority here at Southwest. But yes, any time you hire thousands of folks, you have an opportunity to work on your diversity mix and to work on our hiring processes to make sure that they are inclusive and all those things. But yes, absolutely, we've got an opportunity to move the needle here with DE&I as we hire so many folks. Absolutely.

Yes, yes. Southwest historically has been on the leading edge, right, because Colleen Barrett was President. I think she was the first woman President of an airline. And before Tammy as CFO, there was Laura Wright, was CFO, another female. After Gary, it was Laura. So it's not like you guys have been lax in the area in the -- in upper management, it's just -- I guess this gives you a chance to give even more, right?

It does. We've always -- if you look at that, we've always had, I think, a great mix even in leadership, especially in terms of gender. Maybe the mix has maybe not been so strong in terms of racial diversity. And our values -- if you go back to the core values of the airline, they're all about doing the right thing, the golden rule being inclusive, treating others the way you would expect to be treated. So our values are the values of DEI. But if you -- so that is absolutely true. But at the same time, do we need to make progress, especially in leadership is also absolutely true. And so you're right, we -- I think we have a great track record, which is a little different than we need to make some more progress. That's all I'm saying, and we are absolutely committed to that.

That's great. Okay. So let's shift gears, talk about operations, talk about the fleet, as you mentioned earlier, for a long time, you were constrained because the MAX wasn't coming in as it was supposed to, and then now it is. What are you thinking about in terms of your sweet spot? How many aircraft can you successfully induct into the airline in any given year? And what are you thinking about as a percent of markets that can be new versus existing? I think the peak after Love Field opened, you were at something like 20% of markets were new.

Right.

And I'm not sure that's the right number, but I'm also not sure like 2% or 3% a year is the number. So maybe talk about broadly speaking what opportunities you have.

You're right. And a lot of that number it was high, and a lot of that was due to the expansions at Love Field and others. But I think you got about 4 questions in there.

I know. It's the typical analyst. One question with 25 parts.

So you may have to remind me, but the -- on the fleet, I think the assumption would be as we sit here today that we're going to -- that we would in all likelihood take the 114 aircraft that we would take if we exercise all the options in '22. So that's a lot, and I think that would be a record year for us. We can absolutely do it, but it is a lot of work. And you net out of that maybe somewhere in the range of 30%, 35% retirement. So it's going to be a big growth year for us in terms of net new aircraft. The -- we need them, though. If you think about what the -- restoring the network, the -- which I think is one of our biggest needs right now because we -- the network is terrific, but we just don't have the network structure that we had before COVID. The network depth just isn't there in all cases, which means you don't have recoverability. The network is a little wider. So we've added the 18 cities. And I'm sure we talked about this. If you put together the aircraft invested in the 18 cities and the aircraft invested in Hawaii, sort of across COVID here, it's 92. So of your 114 net retirements, it takes 92 aircraft just to cover the aircraft that went somewhere else during the pandemic. So went to these other growth opportunities. So that's why there's just a tremendous focus on both recovering or sort of "getting the network back to normal," and then second, why we would be considering 114 deliveries next year because it's going to take that, plus more just to restore the network back to where we were in 2019 in terms of depth and recoverability. So we need to do it. In terms of your question of just mix of new and sort of -- mix of new markets, we have a lot with the 18 cities and the Hawaii growth. So we're still continuing to obviously mature those, and they'll be maturing across the next few years, sort of our typical pace. If you think about new, I -- you won't see us opening 18 more cities. I think you'll see some net new, for sure, but the focus really is on getting the network restored to the proper level of depth in the network. So it -- the vast majority of the focus is on restoring the network versus new opportunities, which doesn't mean there aren't new opportunities. They just won't be to the level that you've seen here over the last 18 months.

Got you. And then do you think there's an opportunity to grow internationally from your markets, Baltimore, Atlanta, Dallas?

Do you have any in particular you're angling for?

No. Just -- no. I feel like in my life, I've done Europe, so I'm working on South America and Central America now. My goal is to kind of visit all those countries.

You and a lot of other folks. I think there's a lot of -- especially leisure transition from long-haul international to the short haul or closer -- near international, which is good for us, by the way. I think that's obviously a good pivot for us. But we do have -- well, we've got a lot of opportunities, period. You've always heard us talk about all the cities -- the list of cities that we could continue to add, even past the 18. And we have a lot of new international opportunities as well. I think the -- again, just like the other discussion, the priority is lower in terms of adding new just because we need to get the network restored. Also, the sort of the pace of those -- of our current near international dots on the network coming back has been sort of up and down depending on the location. So we need to get those -- we need to get the traffic restored in terms of the cities that we have. But no, we've got a lot of near international new city opportunities. I just think, again, it's secondary generally to getting the network back to where we were in 2019 in terms of recoverability.

Got you. And then you mentioned 114 aircraft. How will this be financed? And how are you thinking about the balance sheet going forward in terms of -- I mean you've always had a fortress balance sheet.

Right.

So how are you thinking about maintaining it, winning back investment -- you might still have your investment-grade credit, actually.

We do.

Strengthening it going forward, keeping cash balances, I mean it's like 25 questions in there, but...

Well, if I missed some, please let me know because yes, you -- it's sort of a capital structure kind of question.

Right, right. It's more about capital allocation.

Yes. So I think I would start with a couple of things. If we -- obviously, we're the only carrier with a -- that's come out of all of this with a strong balance sheet. So yes, we have a lot of debt compared to normal, but we have a lot of cash in excess of debt, which, obviously, we're the only carrier in that strong position. And our financings that we did create during COVID are really reasonable. And so there aren't a lot of prepayment options that make sense, but we've got a good plan to take the debt down over a very reasonable time and get our leverage from the current, I think, 56 back down into the, say, the 30s. That's the plan. If you think about that related to -- so that just generally gives us lots of flexibility because we've got -- we're starting with cash well in excess of that and we've got a plan to pay that debt down over a very reasonable time to get back to a much more modest leverage just as a starting point. And we're unique in terms of that capability. So it gives us lots of flexibility. If you think about the 114, if we -- and I'm not sure we've said this before, but the -- I think we've talked about our CapEx being -- aircraft CapEx being $1.6 billion in '22. If we exercise all 114, that roughly doubles. So the good thing is that's very affordable. We have a lot of financing opportunities. Again, we have cash over debt that's well in excess of debt. So we've got -- we won't have any issues in dealing with that, and that's very affordable for us. And again, that's really to restore the network. So the opportunities already exist. It's not like all of those aircraft are going into markets that have to be developed. They're going into markets that are strong for Southwest Airlines already because we're going back into areas where we were in 2019. On -- I think I forgot your last question.

I think it was just on debt paydown and keeping cash balances going forward given what happened to last year.

I think -- again, I think we're really well positioned for a lot of flexibility there. You've got a number of components over -- you got a couple of short-term questions and a number over the long term. So part of the question here, too, is what is your minimum cash? How do we think about minimum cash? And historically, that's been in the -- oh, gosh, I think it's been in the 2.5 to 3 range is my memory. And we've talked a lot about -- one of the things we saw during COVID was a lot of refunds, sort of a run on the bank on the ATL, which was very unusual. So you'll -- like everybody has caused us to rethink minimum cash. And we haven't given you a number. I think we said it's more than 3 and maybe less than 10. But again, this may be new. I would tell you something roughly in the $6 billion range is probably a reasonable target. Again, it's maybe it's 5 to 6, but there's a wider range there, but we do have to take into account this idea of ATL and the risk of ATL. So our new cash target is likely in that range, and we'll talk a lot more about that at our December Investor Day. And then further out, you got to get past the PSP restrictions, but we want to get back to a dividend. We've got a great track record with a reasonable dividend, I think, in the 1% to 1.5% range. And we'll be talking a lot about that as we get deep into '22 and early '23 and get past the restrictions, but we'd love to get back to a reasonable dividend, and we'd love to get back there at a reasonable pace, too. I just can't tell you right now because a lot of that depends on business performance. And also, it depends on getting past the restriction period.

Right, right. Exactly. So the dividend -- I think you had 50 years in a row of dividend payments. It was -- may have been longer than that, but I think it was -- for a long time, you're the only airline that paid a dividend, actually.

Right. Right. Absolutely.

How do you think about...

And at a decent yield. We worked it over the years to what I would call a really decent yield as well.

Right. Right. Exactly. So -- and then the other thing -- we only have a couple of minutes left. So as you think about technology opportunity, it's like what -- Andrew and his team did a lot in terms -- in the past few years, building out your technology capability or in the GDSs. So has that -- has being in the GDS helped and done everything you thought it was going to do? And then as you think about opportunities in the 2022 to 2025 time frame, what type of technology improvements do you think you can make that gets you to the next level?

The -- terrific question, by the way. The technology is hard, by the way.

And expensive.

I started in years in -- it feels like decades ago, which it is decades ago. I started in technology here at Southwest Airlines. We had 18 people, and we have thousands at this point just because, it's to your point, of the role of technology. But yes, you've seen a lot of investment in the commercial areas. And so -- and those aren't done. So the most recent investment that you've seen is the investment in GDS capabilities, and that's all relatively new. The -- it's all meant to remove the sort of the last bit of friction we have in terms of accessing our share of the market. We've talked about this a lot. I think the domestic -- 2019 domestic top 100 business revenue potential is something like $12 billion, and the vast majority of that is coach. The vast majority of that is on our network so we can compete for it, and we get a fraction, and I mean a real fraction of that. So it's too early to give you a target or a number on GDS, but I'm just telling you, it was the last hurdle that allows us to access our sort of our fair share. And again, we'll talk a lot about that at the Investor Day. There are also other revenue opportunities in front of us. I'm just not ready to share those. And so I don't feel like we're done on the revenue side. We are not. And again, we'll be talking about that at the Investor Day in December. On the flip side of the house in operations, we -- one of the things that I think the pandemic has helped reveal is that we do have a lot of needs for operational tools, especially at our scale. I've been calling it continue to modernize the operations. So we've got a terrific road map. We've implemented a lot of new things like the new maintenance system, which will give us leverage over time. I think there are opportunities to continue to, through technology, improve processes, work on things related to how a -- turn efficiency as an example. So there are a number of things that technology will help support and enable the operation. And again, we'll be sharing a lot of that at the Investor Day in December.

That's great. That's all very detailed. We didn't even get a fraction out of my questions.

Are we out of time?

We are out of time. We are indeed out of time. And I have to say, I'm looking forward to seeing you on Investor Day, and we'll, I guess, talk more on that -- on the October earnings call, but thank you very much for being here today and for supporting our conference. I really thought until 10 days ago, we were going to be in Boston. It was a disappointment and a surprise to me to find out I was doing this virtually again.

Next -- the word of the last 15 months is flexibility, right?

Yes. Yes.

And we'll get -- we'll be together next time. I'm confident of that.

Yes. And I'm looking forward to it. Thank you very much, Bob. I appreciate your time, and have a nice day.

Well, thank you. All right. Thank you so much.

Okay.