Southwest Airlines Co.
Q2 2020 Earnings Call Transcript

Published: 24 Jul 2020

[Operator:]

Good day, and welcome to the Southwest Airlines Second Quarter 2020 Conference Call. My name is Chad, and I will be moderating today's call. This call is being recorded, and a replay will be available on southwest.com in the Investor Relations section. 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:]

Thank you Chad, and thank you all for joining us today. Joining me on the call, we have Gary Kelly, our Chairman of the Board and CEO; Bob Jordan, Executive Vice President of Corporate Services; Mike Van de Ven, Chief Operating Officer; Tom Nealon, President; and Tammy Romo, Executive Vice President and CFO. So following our prepared remarks today, we will open it up for Q&A and just a few quick disclaimers before we get started. We will make forward-looking statements which are based on our current expectations of future performance, and our actual results could differ from these expectations for a variety of reasons. We also had special items in our second-quarter results which we excluded from our trends for non-GAAP purposes, and we will reference those non-GAAP results in our remarks. And of course, we have in-depth information and reconciliations in our earnings release from this morning on both forward-looking statements and GAAP and non-GAAP results, so please be sure to check those out. And now, we'll go ahead and get started, and I'll turn it over to Gary.

[Gary Kelly:]

Thank you Ryan, and good morning everybody, and thanks for joining us on our second-quarter earnings call. This is a record quarterly loss for us. And of course, that can never be something that we're pleased about. But since our last earnings call in April, we have accomplished a great deal and performed better than the goals that we laid out at the time. Most importantly, we've boosted our liquidity. We've cut operating costs. We've generated traffic momentum. We've cut our daily cash burn rate to $16 million a day in June. And importantly, our success in generating traffic was key and key to the next several quarters. We have a viable flight schedule for our customers to choose from. We're operating an extremely reliable airline. Our people are delivering exceptional hospitality. We committed to the Southwest Promise on May 1 to assure our employees and our customers that their safety comes first. And we're offering low fares with no hidden fees, and all that adds up to record high levels of customer satisfaction. And of course, that is crucial. We offered voluntary separation and extended leave program that closed on July 15, as we had planned. Almost 17,000 employees signed up. And we're working on reorganizing the company and adjusting our fourth-quarter flight schedule to roughly match our people capacity which year over year will be down roughly 25%. And the majority of the volunteers selected the extended leaves, and there'll be recalls if we need to add capacity quickly. And that gives us tremendous flexibility and significant cost savings over the next several years.

[Bob Jordan:]

All right. Well, thank you, Gary, and good morning, everybody. It's good to be with you, especially on this topic. As you know, we've been in the process of offering voluntary separation and extended leave options to our employees.

[Mike Van de Ven:]

Thanks Bob. In addition to all that work that Bob just covered, we made significant adjustments to our operation in this bleak COVID-19 world. We started the quarter navigating through cancellations and customer re-accommodations based on a weak demand. The lack of demand led us to implement aircraft parking and storage programs. The trip cancellations created crewing and hotel challenges. And in the midst of that, we also introduced the Southwest Promise which drove significant changes in our operational procedures. Throughout all those efforts, our people produced the best quarterly operation that I can remember. They were heroic. They were magnificent. Their teamwork was superb. So as I mentioned, the month of April, we were reducing flights and re-accommodating the few customers that flew on the other flight. We had nearly 4,000 flights a day scheduled in April, and we operate about half of those. All of those cancellations kind of begins with our on-time performance. And overall we were 98% on time on flights we did operate, our on-time performance for April was 47%. That pulled down our overall quarterly results to 71.5%. We were more than happy to make that trade-off given the cash savings of not operating those near empty flights. But from May 3 June 30, we were able to adjust our flight schedules for demand, and we operated those schedules as published. Our OTP for that period was 94.8%, and that's the best May and June performance in 25 years. Our bag handling continue to improve with the rollout of our bag scanning program last year, and we added cargo scanning here in the second quarter. We had the lowest level of mishandled bags in our history in second quarter.

[Tom Nealon:]

All right. Thank you, Mike. Let me jump right to it. So our second-quarter operating revenues were down right around 83% year over year, and that was on capacity that was down right at 55%. Now we did see stronger demand and sequential improvement each month throughout the quarter, and we've given you updates throughout the quarter regarding April and May. We've recapped those in months in the earnings release. So I'm just going to provide a few quick comments on June and then get right into the third quarter. So leading into June, May trends were an improvement over April with consistent net positive bookings and a steady improvement throughout the month.

[Tammy Romo:]

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

[Operator:]

And our first question will come from Hunter Keay with Wolfe Research. Please go ahead.

[Hunter Keay:]

Hi everybody. Thank you. Gary, do you view not taking the Cares Act loan and consequences that may come with it, whether that's brain drain or regulatory, as a potential competitive advantage for Southwest over the next two to three years?

[Gary Kelly:]

Yes, Hunter. I would say that that is one element of it. I think we're trying to rack up as many competitive advantages as we can. Fortunately, Tammy got this question earlier this morning, but we've got very high-quality financings in place. We've done two senior unsecured deals at very reasonable interest rates. So it's evidence of our ability to access the capital markets. We've got -- we've unleashed some collateral that we had to pledge early on during the crisis with a couple of different bank term loan deals that we were doing, but all that has been freed up. So at this point, we've got $12 million in collateral available, $10 million of that is in airplanes. So the -- as I'm sure you know, the terms of the government loan are pretty onerous including a significant file of warrants. So yes, I think we would much rather avoid those. And I think what's near and dear to shareholders' hearts is it puts restrictions on dividends which I object to, and share repurchases. I object to that as well. We're not paying dividends and share -- buying back shares now. But obviously, we'd like to have that flexibility in the future, and I'm sure you would too. So there's a lot of reasons why we'd like to avoid that. And if our competitors have it, absolutely, I think it puts them at a disadvantage.

[Hunter Keay:]

Thank you. And then it's interesting, the MAX problem probably made you question whether or not you should continue with the single fleet type, but now in the coronavirus, you're probably relieved that you don't have a second fleet type. So first of all, is that a fair statement? And then would love your updated thoughts on how you're thinking about that going forward? Thank you.

[Gary Kelly:]

I think -- and Tom may want to chime in too, from a strategic standpoint. But if you just look at our overall business model, we looked at it again and challenged ourselves whether we needed to make fundamental changes in this environment. And we have concluded quite the opposite, that we're in a very strong position. And I would put the fleet strategy in that conceptually as well. I know that Mike believes that the MAX is the best narrow-body airplane in the world. It's frustrating that it's been on the sidelines all this time. But certainly, the lack of complexity oriented around having a single fleet type is extremely helpful. This is a low cost environment. It's another opportunity to sustain that. We'll have to continue to evaluate our fleet strategy separate from our overall business model going forward, but it's a high hurdle to overcome to commit to a second fleet type. One of these days, I assume that the company will, but it's certainly not obvious that that's anything we need to do anytime soon. So yes, short answer is I do think that that's a welcome advantage currently.

[Tom Nealon:]

It is kind of interesting when you step back going through this COVID thing, you get it -- you're pretty introspective sometimes. You have to step back and look at it. I'll tell you what I think, and this is part of the restructuring work. But I feel like our network is fundamentally very, very sound and very, very strong. I feel like our business strategy, but you have to go back and look at is you're looking at restructuring is very, very fundamentally sound and secure. And a measure of how it couldn't be is based on a very efficient operation which is where the 737 comes in. It's based on low cost which is where the 737 comes in. It's based on low fares which does drive our low cost which is where the 737 comes in. So as we go back as part of our restructuring, think about our fundamental strategy. Our core corporate strategy remains very, very sound and intact, and that's what we're going to build on in terms of the restructuring work going forward. And maybe even believe that it's more appropriate than ever for the current environment. So actually, we're very, very confident, but we've got to get more passengers. There's no getting around that.

[Operator:]

And the next question will come from Darryl Genovesi with Vertical Research Partners. Please go ahead.

[Darryl Genovesi:]

Hi everybody. Thanks for the time. Hey Tammy, I don't think you guys provided a reconciliation table for your cash burn number for the second quarter. Can you just help us understand exactly how you're getting to that $23 million per day because -- I mean it says in your -- it says in your footnote that you're backing out debt service obligations, but I think you also paid -- you made a few principal payments that weren't necessarily obligations. They were early payments. So can you just comment on the extent to which those are included? And generally, how you're getting to that number?

[Tammy Romo:]

Yes and no. I'd be happy to take you through that. Really, just to kind of start off with, our core cash burn, as I mentioned, is really intended to be our ongoing spend. So we include -- our operating expenses are a good proxy for our cash expenses. And then we include our kind of normal amortization of debt. So we do factor that in as well. So really, it's just, for the most part, our operating expenses, cash operating expenses less our revenue, and we adjust that for the amortization of debt and interest and so forth.

[Darryl Genovesi:]

Okay. I'm still having a little trouble getting into them. Maybe Ryan and I can talk about it. We can talk about it offline after.

[Tammy Romo:]

Yes. We'll be happy to take you through that in detail, but that's essentially it.

[Darryl Genovesi:]

Okay. And then I think you said that you're still working through some things with Boeing. Does that mean that that 48 delivery number for the next couple of years is still subject to meaningful downward revision?

[Tammy Romo:]

Yes. We're -- right now, based on the demand environment, we would likely shift some of those out, as I mentioned earlier. We -- of course, right now, we don't have a firm date on getting the MAX back into service. As Mike mentioned, that's probably kind of a best case maybe the end of December, that could shift into next year. We just don't know yet. So we've got some work to do with Boeing, but to really -- the point is, and we have the flexibility to shift that out. So that's -- so the quick answer to your question is yes, we have flexibility there.

[Operator:]

The next question comes from Jamie Baker with JP Morgan. Please go ahead.

[Jamie Baker:]

Good afternoon everybody. First question, probably for Gary. So American believes that its intellectual property and its website are worth about half as much as their loyalty program which is a source of liquidity that at least we had not been contemplating. Why wouldn't your IP co similarly represent several billion dollars of potential liquidity?

[Gary Kelly:]

I suppose it is. I think again we're able to do senior unsecured, where we don't have to pledge anything and other than our good looks and our credit. So we -- I'm happy that those things are potentially available to us, but I don't think we need them. We've got $15.5 billion in liquidity. That needs to be more than enough to see us through. And we've got a pristine balance sheet, still low overall interest carrying. So that's all good, but we don't need it.

[Jamie Baker:]

All good points. Second question, a topic that came up on the Alaska call was the compstat of getting back to pre COVID ex fuel CASM, but on lower than pre-COVID capacity. And I admit it's something that I hadn't really been thinking about. Basically, the idea was that a smaller industry wouldn't face the same operational constraints as it once did. There's probably some pilot juniorization in there given early retirements. We didn't really dive into the moving pieces. I guess my question is whether your internal plan has Southwest returning to pre-COVID CASM before you get to pre-COVID capacity? And if it doesn't, why shouldn't it?

[Gary Kelly:]

Pre-COVID CASM or earlier than pre-COVID capacity?

[Jamie Baker:]

Yes. Basically, you'd get back to pre COVID ex fuel CASM before, you grew the network. You grew the area status up to the corresponding level. Yes.

[Gary Kelly:]

We -- I agree with that. The only thing that I -- because I know that we have incurred some cost -- some significant cost reductions would be point number one. What I think we would be -- to give your question serious consideration, I think what we would need to -- what I would at least need to think through is what things are timing and simply deferred as opposed to more permanent reductions. One thing that I would want to -- first of all, I think it's fair to admit, we don't have a plan per say. So this has turned the world upside down. So we're in -- we're like a patient in intensive care. And we are working to get out of intensive care, and it's a 30, 60, 90 kind of a time horizon. We're debating right now, as an example, what kind of "plan" that it's worth even working on for fiscal 2021. So right now, we've got a laser focus on getting the company to breakeven cash flow. So that's -- and that's going to take -- it's a volatile -- more volatility than we've ever experienced. That's going to take a lot of management. It's going to take a lot of iterations. And certainly, one way or the other, it's got to take more passengers. You just can't cut your way to breakeven. So hopefully, that's instructive. However, I like the direction that you're headed because we do -- we have discovered some efficiencies. The working from home as an example, is pretty interesting. I think that it will allow us the opportunity to consider avoiding some capex in the future, whether it's building a parking garage or expanding buildings or whatever it might be. So I think there are clear opportunities there. I think that the way that Bob Jordan has led the voluntary separation program has probably allowed us some structural cost reduction across our pay scales because they're very senior people that are electing to take that. So yes. It's probably -- again, it's a somewhat stream of consciousness to your question, but that -- I like your thought, and that ought to be an objective of ours. I just think in fairness to your question, we have not done the work to be able to prove that. But clearly, in this environment, we need to keep our cost -- we need to crush the cost down and need to be imagining and innovating like never before so that we can pull that off. One of the things I worry about, quite frankly, is that we've cut investments to the bone. And in terms of just the digital world and opportunities there which we have significant ones, we put those on hold. So at the appropriate time, we'll want to come back to that and make sure that we're not shooting ourselves in the foot on that. But that's a question that's a little too early to give you a specific answer.

[Jamie Baker:]

Sure. Sure. A lot of moving pieces, but I really, really appreciate your commentary, Gary. Thank you very much.

[Operator:]

The next question comes from Joe Caiado with Credit Suisse. Please go ahead.

[Joe Caiado:]

Hey. Good afternoon. Thanks very much. My first question is on the MAX, probably for Mike. How did the latest steps by the FAA this week in their recertification effort, based on everything that you've seen, how do the proposed changes to things like pilot training compared with your expectations relative to the rough time lines and the phases that you've described for us in the past, Mike, in terms of what you need to do once you get the green light from the FAA? And I'm really asking about changes to the proposed -- I'm not asking about sort of the delays driven by something like the addition of a public comment period or anything like that.

[Mike Van de Ven:]

So are you asking whether or not our into service plan is increased or extended because of harsher requirements?

[Joe Caiado:]

Yes, in any way or shortened. I mean...

[Mike Van de Ven:]

Or shortened. Yes, we have constant communication with the project teams over there. And what I would tell you is that there's nothing in the return-to-service work, whether it's maintenance work on the aircraft or pilot training or other things like that that are adding any significant length to our time frame. So as I said, I think it will take us a couple of months to get that airplane back into service. And the biggest thing on the time line, it really is the pilot training. We think that we can get that training event done per pilot in a day, and we have nine simulators available to go do that. So we think it will take us somewhere around nine or 10 weeks to get our pilots trained. And then after that, we can get most of the rest of the work done within that time frame.

[Joe Caiado:]

Got it. Okay. Thank you. That's helpful. And then my second question is a GDS question. Are you walking away entirely from discussions with Sabre? Are you just saying it's not going to happen, so let's sever all ties or do you sort of continue discussions between now and the end of the year? I'm just curious, even if you can reach a new agreement with Sabre, what's the downside to leaving the old sort of BBR agreement in place?

[Mike Van de Ven:]

Yes. I think the downside to continue on BBR is just a continuation of an old platform that we want to begin to move our customers to industry standard platforms, and that's where they want to go. So that's one of it. But I think in terms of continuing on with the conversations with Sabre, I've worked with Sabre since 2001 or 2002. It's always a challenge. It's a good company, but they're challenging to work with. We've been working for two years to get a contract. And at some point, you just need to call it and move forward. And again, to move forward with platforms and to companies you can do business with. So we're still using Sabre to get their product. We are still using some data -- or some of Sabre's data translation and migration products. So Sabre is a good technology company. We've just had a really tough time cracking the nut on how we conduct business, one with the other, in this GDS world. So that's where we are. So there are no conversations going on at this point. I don't expect there to be any conversations going at this point for some period of time. But we felt we can't do it, so.

[Gary Kelly:]

And we have options. We've got lots of others. We have fantastic options. And we're going to push these new options we have really, really aggressively.

[Mike Van de Ven:]

Yes. It's interesting. Amadeus is the world's largest GDS. They have a very, very small presence in the U.S. today. They are quite hungry to build a very strong U.S. presence. Now we're going to have them up and live well before the end of the year. Travelport is resurgent, and they have three good platforms. So to Gary's point, we do have options. This -- back to Sabre is a good company. It's just not working out for us with them in this category. But I'm OK with where we are. We'll be able to hit our objectives. It may take a little bit longer, but we'll be able to hit our objectives.

[Operator:]

We have time for one more question. We'll take our last question from Myles Walton with UBS. Please go ahead.

[Myles Walton:]

Thanks. Good afternoon. Maybe just a clarification first and then another question. On the clarification side, with the Cares loan, is this a situation where the treasury is allowing you to finalize the loan if you wanted to and then defer the draw so you don't have to issue warrants?

[Tammy Romo:]

We are in discussions with the treasury now. We have signed the term sheet, as you all know, but we're really still in discussions to finalize that. It may be that we have to take a small percentage of the loan on September 30, but we're just -- we're -- it's just a little too early to say for sure because we haven't finalized that yet with treasury.

[Gary Kelly:]

But we're not obligated too.

[Tammy Romo:]

We're not obligated. We have on September 30. There may be some small draw required on September 30, but we would have until later, close to the end of March, to draw down on that. So still working through all that. And we should obviously have that process worked through in the coming weeks.

[Gary Kelly:]

But again, our intent right now is to take zero and not have the any government loan, just to be clear.

[Tammy Romo:]

That's right. That's right.

[Gary Kelly:]

And so until September 30, that is our option.

[Myles Walton:]

Makes perfect sense. Okay. And then maybe another one on the blocked middle seats, you've extended it until October. I'm just curious, do you have a cost or lost revenue that's actually impacting over that period of time, in any way, shape or form?

[Gary Kelly:]

It's kind of interesting. The -- our intent is not to do this forever, nor do our customers expect for us to do this forever. So we're going to have play this by ear and see what sentiment looks like on that kind of thing. But honestly, at this point, if we weren't blocked in the middle seat, our load factors aren't such that we're foregoing any revenue, right? So it's not really costing us right now. What has cost us something is adding in the 6,900 additional sections or flights to cover those flights that did reach capacity, why lose the demand? So we put flights in to capture that. As I said, 80% cover their costs, so we're profitable. It was a handsome profit. 20% didn't. In that 20%, probably represented $5 million or so for the quarter, and it's probably 4% or 5% near capacity points of ASMs, if you will. So pretty modest, but net the 80% that was favorable against the 20% of the cost was $5 million, it was an easy decision. So I think we're in a good position with that.

[Myles Walton:]

That's perfect. Thanks.

[Ryan Martinez:]

All right. Well, that wraps up the analyst portion of the Q&A. If you guys have any other questions, please feel free to reach out to me, and thank you for joining today.

[Operator:]

Thank you. Ladies and gentlemen, we will now begin our media portion of today's call. I'd like to first introduce Ms. Linda Rutherford, Senior Vice President and Chief Communications Officer.

[Linda Rutherford:]

Thank you, Chad and welcome to all of our media members who are on the call today. We'll go ahead and get started with the media Q&A portion of our call today. So Chad, if you'll give them instructions on how to queue up for a question.

[Operator:]

And our first question will come from Leslie Josephs with CNBC. Please go ahead.

[Leslie Josephs:]

Hope you are well. On the payment support, just given the number of people that are taking voluntary time off or separating from the company, do you expect to have any money left over? I'm just looking at how the labor bill or the salaries bill costs were cheaper in Q2 '20 versus 2019? I'm just not sure how you recognize that.

[Gary Kelly:]

No. No, they're -- if you're saying, will -- once we pay our salaries through to September 30, will there still be PSP money? The answer is no. I think going into this, the way the treasury department kind of sized it all up is that Tammy Romo, our CFO, and her folks, put in a grant request for an amount of money. And basically, the treasury came back and said, we'll give you 76% of what you asked for. And that was all based on again projections for what our spending would be. But the point being is the PSP, while is very welcome and very appreciated, it's far below what our actual spending for salaries, wages and benefits will turn out to be. So there's no leftover. It's the opposite.

[Leslie Josephs:]

Okay. I just wasn't sure. The way the salaries, wages benefits is lower than last year. So I wasn't sure.

[Operator:]

Your next question comes from Alison Sider with The Wall Street Journal. Please go ahead.

[Alison Sider:]

Hi. I was wondering if you could -- if you could share anything about kind of where things stand with discussions with TSA about temperature checks? It seems like there's a lot of energy behind that. And then lately, it's been pretty quiet.

[Gary Kelly:]

Well, there is energy behind that, speaking for Southwest Airlines. And personally, I'm a huge advocate for it. And Linda I think just this week, if not today, we are beginning our prototype with Dallas Love Field to test that. And Alison, it is for the sole purpose of trying to demonstrate to the TSA the efficacy of the process and so forth. So the Airlines for America is unanimous in its support for the temperature checks. So we have not lost our enthusiasm. I can't speak for the administration. So I wish they would take it up and get this done. It's one more layer of safety and defense against spreading the virus. Obviously, things aren't going the way we'd like in the United States in terms of cases, so I'm anxious to get moving on this. So no lack of enthusiasm on our part.

[Alison Sider:]

Thanks. And if I could ask you one more on the MAX. Just curious, under their new CEO this year, if you've noticed any sort of improvement or change in communication or scheduling or sort of how that whole process is going?

[Gary Kelly:]

Do you want to talk about that, Mike?

[Mike Van de Ven:]

We know Mr. Calhoun well and have a long relationship with him. So our communication has been open with him. We knew Dennis well also, so we had good communications with Dennis. So I wouldn't say we've had -- Boeing has been a good partner with us through this. They've kept us informed of what's going on. They have -- the lines of communication are open. We talk to them each week about the process and have stayed pretty close with them on it, so no complaints in terms of the communication.

[Operator:]

And the next question comes from Tracy Rucinski with Reuters. Please go ahead.

[Tracy Rucinski:]

Aside from temperature checks, are there any other safety measures that you would like Washington to mandate?

[Gary Kelly:]

Mike, chime in. I don't -- none come to mind. We -- the only thing that I've been asked today several times is on mandating mask. And I don't agree with mandating mask for airline travel and singling it out. I think if we're going to mandate mask, we have to mandate masks everywhere. But aside from that, Mike, I don't know of anything else that we are pursuing. We're doing a lot. I mean we're doing deep cleaning. We've got the Hepa filters in the cabin. We're doing -- we're one of the few airlines in the world who is not booking airlines full for physical distancing. We've got Plexiglass shields up. We're doing physical distancing in the airport. I think that the missing piece to me is the temperature check. And you hear all these school districts and superintendents talking about going back-to-school in the fall and their list of protocols, they're following the airlines' leads, and they're all pursuing temperature checks. So I think that's the one thing that would be very sensible to add. Mike, is there anything you can point to?

[Mike Van de Ven:]

No. No. No other here.

[Operator:]

Thank you. Our next question will come from David Slotnick with Business Insider. Please go ahead.

[David Slotnic:]

Hi everyone. Hope everyone's doing well. I wanted to just clarify, you said that there were 48 aircraft that you'd be taking delivery of through 2021. Is that the original plan or is that after pushing some of those back?

[Mike Van de Ven:]

We -- this is Mike. We had -- we just had an agreement with Boeing that we would take no more than 48 aircraft in 2020 and 2021. And that was back at a time where the return to service was projected to be earlier for the MAX than it is today. So those are some of the discussions that we need to have with Boeing and with the COVID-19 environment that we have and the delay of the MAX, what that looks like. So it feels to us like 48 is the maximum. And that we probably have a need for something less than that. Okay.

[David Slotnic:]

Okay. So that would have involved deferrals or anything that would carry a financial penalty

[Mike Van de Ven:]

No, it's really just -- it's just really trying to get an order book, a delivery sequence that we all agree with.

[Gary Kelly:]

Yes. I think the way to visualize the situation with Boeing is that, basically, where we go from here needs to be negotiated, period. It's almost like we don't have a firm contract for deliveries. So all of that has to be completely reset because Boeing is out of compliance with their contract.

[David Slotnic:]

Got you. Okay. That makes sense. And then just the only other thing, if looking at the numbers of people who've taken the long-term leaves and the voluntary separations, is there a scenario in which any of the major work groups would not be furloughs or layoffs starting next year?

[Gary Kelly:]

Well, let me make sure I'm understanding your question. Are you -- so first of all, we have not decided that we will furlough or lay off anyone, OK? And then if your question is, could there be furloughs among certain work groups and not others I think certainly, conceptually, anything is possible there. In other words, we could find that certain work groups are not overstaffed, other work groups are. I think anything, at least in my mind, it's contract by contract. And then we have a large population of noncontract employees also where we have more flexibility as to how we can think about these things in their favor, quite frankly. So -- but we'll have -- we have plans and ideas about what we would pursue if we're faced with that prospect. But right now obviously we're working very hard to avoid it.

[Operator:]

Thank you. And our next question will come from Edward Russell with TPG. Please go ahead.

[Edward Russell:]

Hi. I was just wondering if you could provide a bit more clarity on how big you expect Southwest to be at the end of the year? I mean you talked about people being down about 25%. Does that mean capacity should be down about 25%? Just give more color to that.

[Gary Kelly:]

Yes. Yes, that's the way to think about it. And all of that is a work in progress. And as we were -- if you were listening to the analyst portion, we're -- we had, on June 30, we had a great plan for August. And now three weeks in, we're finding that August has changed significantly. And so we're just going to have to be prepared to have a lot of volatility and have to be prepared to make frequent adjustments because it's really almost impossible to plan right now. But yes, the rule of thumb that you should be using is that we'll be lowering our capacity in the fourth quarter, roughly 25%. And if demand is like it is today, that won't be enough. We'll need to be smaller than that. Tom, I don't know if -- and Mike, if we can be bigger than that. I.e., more capacity than that. I think you have some flexibility there, but we're probably capped at about 75%-ish, it seems to me, with our voluntary exit program.

[Edward Russell:]

Got it. So one quick follow-up. What about Hawaii? Do -- will Hawaii be part of -- will fly your main down or do you have any updates on your Hawaii service plan?

[Tom Nealon:]

Well, yes. Just real quick. This is Tom. We're pretty excited about getting back to Hawaii. And I think our -- I get the quarantines are moving so frequently. I'm getting them all confused. But I think Hawaii was -- were planned to having service return in September, if I'm not mistaken. And we're going to begin to restore so today, we're really kind of a final service level of service. Very -- two flights from the mainland to Hawaii and a few inner islands, that's about it. We're really excited to be in to get that back into our pre-COVID. We're going to build the Hawaii, California market and the inner island market. That's what we were slated to do. Governor Ige I think very appropriately, extended the quarantine. So we pulled that back. But we're excited to get back to Hawaii as soon as we're allowed. And I think the same thing is true with the international travel, as soon as things are good to go, we're anxious to get back in those businesses as well. But today, we're only serving I think Cancun, Montego Bay and Cabo. So we're anxious to get going, but it's just not time right now, but we will.

[Operator:]

And the next question comes from Randy Diamond with San Antonio Express News. Please go ahead.

[Randy Diamond:]

Thank you for your time. The -- originally, Southwest had said that by the end of the year, they hope to double the number of flights at San Antonio International and go back from about 20 a day to about 50. Is that now off with the demand not as great?

[Tom Nealon:]

Yes. I think what you're seeing is -- we're not picking out San Antonio. In fact, our CEO's from San Antonio...

[Gary Kelly:]

Love San Antonio and the Express-News.

[Tom Nealon:]

Yes. But we just had to pull back our network pretty significantly. So typically, we're running 4,000, 4,200 flights a day. We're somewhere around half of that. So we've had to contract. Now we've done this without closing any stations or any cities, but we've had to pull our flying in. So San Antonio is one of the markets where we're doing that. So we're anxious to get it back up to its prior capacity levels though once demand is there.

[Gary Kelly:]

And to just sort of inferring the perspective that you're coming from, well, this is one thing that we're trying to do for our customers. And I would say that we are in a stronger position than our competitors. We're trying to continue to offer your community a very good flight schedule. And that's the balance we're trying to strike here is match supply with lower demand, but not cut the supply so much where you have virtually no good flight options. So I think you'll still -- regardless. I think you'll still have a very good flight schedule in San Antonio. And I think like Tom mentioned, we haven't cut -- we haven't eliminated service to any of our domestic markets including Hawaii for that matter and don't intend to at this point. I can't promise that into perpetuity, but whether we're back to full capacity in San Antonio at year-end or not, you'll still have a good flight schedule.

[Randy Diamond:]

Well, just following up, if you have around 22 flights a day, would we see a further reduction by the end of the year or do you think it will stay steady?

[Tom Nealon:]

I'd rather not try to lead you. I think if we can get and stick with down 25%, I think you'll have a good flight schedule. Exactly how that will compare to where we are today, I don't think we know. It's just too complicated, trying to schedule an airline and optimize it as infinite solutions. And it is peculiar sometimes how things end up with some markets have more flights and less flights, and so I don't think there's any way to give you a good answer on that. I think just trying to -- like golf, just trying to get on the green here is just trying to say that you will still have a very viable flight schedule. And something that we -- again, you would be happy with and we'd be proud of. But I can't give you a specific answer.

[Randy Diamond:]

And finally, on the reservation center, we have a reservation center in San Antonio, where you employ 900 people. So the no layoffs, furloughs extends also to that reservation center?

[Gary Kelly:]

Yes, through the whole company through the end of the year.

[Randy Diamond:]

Okay. Thank you.

[Tom Nealon:]

And they are awesome.

[Operator:]

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Ms. Rutherford for any closing remarks.

[Linda Rutherford:]

Thanks Chad, and appreciate you all being with us today. If you have any other follow-up questions, please feel free to reach to our communications group, 214-792-4847 or you can visit us at www.swamedia.com. Thank you.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.