Southwest Airlines Co
NYSE:LUV
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
23.7
34.83
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Southwest Airlines Co
You don't have any saved screeners yet
Ladies and gentlemen, welcome to today's Southwest Airlines Second Quarter 2019 Conference Call. My name is Greg, and I'll 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.
Thanks, Greg, and thank you all for joining us today. We need to cover a few disclaimers before today's comments. First, we will be making forward-looking statements based on our current expectation of [Technical Difficulty]. We'll also reference non-GAAP results, which exclude special items both in our earnings release. Also given the ongoing MAX groundings our current outlook is based on the most recent guidance from Boeing. That includes an assumption of regulatory approval of the MAX return to service during fourth quarter 2019. Any changes to these assumptions could result in additional adjustments to our flight schedule beyond January 5th, as well as further aircraft delivery delays and that could result in additional financial impacts. Please also check our IR website for more detailed information and disclosures.
So we've got a great lineup of speakers today including Mike Van de Ven, our Chief Operating Officer; Tom Nealon, our President; Tammy Romo, our Executive Vice President and CFO.
And to kick us off, I will turn over the call to our Chairman and CEO, Gary Kelly.
Thank you, Ryan. And thanks everybody for joining us for our second quarter earnings call. This year turned out to be quite a wild ride. We had some subplots earlier in the year, but the story is overwhelmed by the MAX grounding. The good news is we were exceptionally well prepared for the unexpected. We are healthier than ever and that's despite the body blow from the MAX, and we'll get through it, and we will get back on track.
The frustrating thing since our last call is that the MAX grounding has extended much longer than we had anticipated. Of course that's no surprise now given that this news was revealed last month. Boeing won't have the latest software fix done until September. And in the meantime, we will be operating a great airline and produce very strong financial results all without any amounts from a Boeing settlement.
Our people have done a heroic job, and I don't use that word lightly. And not only are they resilient, they're tough, they are brilliant, they are compassionate, and I want to thank them for a job well done. Our frontline employees have truly risen to the occasion dealing with 20,000 flight cancellations. But you don't hear a lot about our back office folks and we have numerous unsung heroes, so I want to sing for them. The frontline is at a hard time – they certainly have a hard time completing their mission without a plan.
And our planners that, I'm going to have to rename re-planners have done an amazing job and I would lead that off with network planning, our operations planning, our financial planning groups, just to name a few. They have worked grueling hours, they have improvised, and they have really, really delivered. And I'm very proud of everybody.
While the financial results are remarkably strong, strong margins, strong cash flow, revenues, and a really good cost performance, there's a lot of news in the press release. You're going to get a lot of excellent insights from Mike, Tom and Tammy, but I would like to point out just a few things.
Number one, it's really all about the MAX. That's the only issue that we are dealing with and of course, it's helpful just to have one thing to be able to focus on. So everything else within the company is rock solid.
Secondly, business is strong. Second quarter came in as expected. We had strong RASM. Third quarter is forecasted up 3% to 5%, which is right where it should be relative to second quarter.
Thirdly, our cost management is solid. Taking into account the MAX and the out-of-service aircraft we are where we expect to be, if not better for the second third and – quarters and in the full year. We told you all at the beginning of the year that we were looking at flat CASM-Ex in the second half and that's where we think we will be taking again the MAX into account.
Fourthly, Newark, any student of Southwest will quickly understand our approach here and this is a tactical decision forced by the MAX groundings and the painful cut of 8% of our capacity. As a little bit of background, we acquired 18 Newark slot pairs in 2010 and that was a consequence of the United Continental merger where they were required to divest some slots. So we did that deal in about 24 hours.
At that time, we had virtually no presence at LaGuardia, and in fact had only been there for about a year. On the LaGuardia side of things in 2011, we acquired more slots at LaGuardia with our AirTran acquisition. In 2013, we acquired yet again more slots from the divestiture caused by the U.S. Airways and American merger. So we find ourselves with a significantly larger presence at LaGuardia than we had contemplated back in 2010 when we went into Newark. We also find ourselves in a magnificent facility, which is certainly significantly better than what we started with in 2009.
So, we currently offer 37 daily departures from LaGuardia that will be as of October. New York is a huge market, but for us it is a destination market. Given our relatively small position at Newark and LaGuardia, and our inability to add any meaningful number of flights to these market, it makes sense for us to consolidate our New York City flying into one airport.
LaGuardia is the choice for the vast majority of our New York City bound customers. And it's not out of character for us. We consolidated our operations in a couple of Ohio locations in 2017. We consolidated Flint Michigan into Detroit in 2018. And then with larger markets like Chicago, Houston, Dallas, we served one airport. Newark underperforms financially, and to offset our reduction in service there we'll be able to add seats at LaGuardia, and be more productive with a superior financial result. So that's what's happening with Newark.
The other thing, I could add is that as to the timing, it's very straightforward. We need the airplanes. We can't afford in this highly competitive environment where our capacity overall is cut to have underperforming assets, which leads to my fifth point, which is Hawaii. We'll be resuming our expansion without having to wait on the MAX any further and as we described in the press release. Adding Hawaii and quickly becoming relevant is strategic for us, and this move better supports execution of that strategy.
So to be clear, we aren't backing off of New York City with this move, but we are accelerating our growth in California and Hawaii.
So those are the high points. And to kick us off with more details and better insights, I'm going to turn the call over to first, our Chief Operating Officer, Mr. Mike Van de Ven.
Well thanks, Gary. I want to start just by reiterating what Gary said about our people. They are indeed resilient and they make this company great by taking care of our customers, our operations and each other. And I am immensely thankful for their efforts. Well in an environment where we have 34 MAX aircraft out of service, our performance for the quarter, I believe was very good.
Most importantly, we took very good care of our customers. First, we used all of our spare aircraft to cover any scheduled MAX flying through June 7. We then reaccommodated the remaining impacted customers to other flights where possible. So we ran an all-time quarterly record load factor of 86.4%. And we did that without any spare aircraft from April 1 to June 7.
And just to state the obvious, spares are important. They protect against unexpected events like the unforecasted hail event we had in Denver on May 28. And that took 24 aircraft out of service for a period of up to two weeks in a time we were already without spares. So in that kind of environment, with no margin for recovery for any unexpected events like that, our people found a way to get 85% of our customers to their destinations within 30 minutes per scheduled arrival time.
Through aircraft swaps, crew changes, extending the operating day just whatever it took. And just as a reminder, we schedule our operations with less block and turn time than any other carrier in the industry to begin with. We carried 99.5% of the checked bags on the flights they were checked on. We led all marketing carriers with the lowest DOT customer complaint ratio and our Net Promoter Score was still industry-leading at about 59% for the quarter.
Now all those numbers were down a bit from last year, but given the impacts of the MAX grounding to have our overall operations results still in the upper tier of the industry is really a testament to the people of Southwest Airlines. Going into the third quarter in the peak summer travel month, we are focused on continuing to improve all aspects of our operational liability. So we've operated with the appropriate spare levels beginning in June eight and we're going to carry that throughout the year. And we're already seeing improvements in the reliability of our service. So our on-time performance which was really the most significantly impacted item has rebounded nicely since adding back the spares.
We finished the month of June fourth place in the industry with respect to marketing carriers and we expect to finish July either third or fourth. And of course, one of the carriers ahead of us is Hawaiian and they benefit by a larger percentage of their network being interisland service in Hawaii. So, in terms of delivering our product in a reliable and a hospitable manner, I'm very pleased with our performance thus far.
Turning to the MAX. While the operational challenges are manageable, they do grow in complexity as the groundings extend. So Boeing, as Gary mentioned still has work, they must complete. The FAA must review and improve that work before granting regulatory approval of the return to MAX to service and we are in continued conversations with Boeing and the FAA. And as Ryan said earlier, we are dependent on them for a timeline to return the MAX to service.
As we mentioned in the press release, we're in the process of removing all MAX aircraft from service through January 5. So, I'll walk you through a high level outline of our approach to reintroducing the MAX to our regularly scheduled service on January 6.
Before I start with that just for context when the MAX grounding is lifted, we're going to have three groups of aircraft to address and each of them have a unique process. So first, we have a 34 aircraft, MAX aircraft that Southwest has in long-term storage in Victorville, California. Second, we're going to have a group of aircraft that Boeing is storing that have not yet been through the delivery process to Southwest Airlines. So we don't own those airplanes and they're not on our operating certificates.
And then lastly, there will be aircraft coming from the Boeing production line after the grounding is lifted which we will want to except as delivered in the normal course of business. The first step in the process regardless of the grouping is instruction from the FAA as to the specific requirements that will be mandated to make the fleet operational. That will likely include software uploads and/or other technical requirements to the aircraft along with some required pilot training.
Now we're going to assume that the pilot training requirements will not include additional simulator training. We have an agreed-upon 30-day time frame with our pilot union to complete the expected computer-based training and we plan to -- we plan to time the work to bring the aircraft back into the operational fleet to correspond to the end of our pilot training period, so that every pilot is prepared to fly every aircraft in the fleet.
In addition to those mandated activities, there will be additional maintenance procedures to transition the aircraft from long-term storage into an operational readiness state. And at this point, we believe that those activities and approvals could take one to two months to complete for the Victorville aircraft and that we could intake up to three Boeing storage aircraft per week once they're ready to begin their storage deliveries.
So as I mentioned, we plan to take production aircraft as they're available for delivery. Our delivery schedule with Boeing continues to evolve as their production and their schedules change. And we expect the majority of our 41 contracted deliveries for the remainder of this year which by the way would have been in the Boeing storage grouping and will likely be moving into 2020.
Assuming regulatory approval to return the MAX to service by early November, our baseline plan will be to control the process, so we can provide the network at least 30 MAX aircraft to the operational fleet by January 6 schedule and then we would ramp from there in a controlled fashion depending on the delivery schedules. So that approach is intended to balance as best we can aircraft availability with customer demand in early 2020, then match the crew staffing to the aircraft availability.
In terms of the pilot staffing, given the removal of the MAX line through January 5, we're going to defer our October pilot new hire class and the associated captain upgrade class until March or April next year. And so, while there is some cost savings in 2019 from deferring those classes, the primary driver was to better match flight crews with their flying needs to give them more productive schedules.
In closing, I'm very proud of our people and our performance this quarter. And as it relates to the MAX, we have a plan to remove MAX flying for the remainder of the year. We have the detailed plans for the ungrounding of the fleet once that occurs. We have an idea of how we can resume taking deliveries from Boeing and we're ready to make adjustments to those plans if we need to.
So, just as our people are doing this summer, we really want to be prepared to provide exceptional customer service to our customers for the holidays later this year. So, we remain focused on running a safe, reliable, and on time, and an enjoyable operation and I really think we've got the best team in the industry to do just that.
And with that, I will turn it over to Tom.
Okay. Well, thanks Mike. Good morning -- or I guess good afternoon everybody. So, as Gary and Mike both said this has been a challenging quarter. But I think in spite of the issues we've had to deal with our results were very strong. We produced record passenger revenues, record operating revenues in the quarter, along with a record load factor of 86.4%, which I think by any measure is a pretty impressive set of results, especially considering what we're going through.
I think what's equally impressive just to reemphasize what Mike said was simply the quality of the operation in spite of the MAX cancellations. Our on-time performance was strong, our customer satisfaction scores, our brand scores remain at the very top of the industry. I know that you guys hear this a lot and you may think it's a throwaway line, but these results truly are because of our people.
Mike and Gary and I have spent a lot of time in the stations this past quarter. And I can tell you the morale is high and the focus of our people is very clear eyes on running a great operation and taking care of our customers. And you can see it in our metrics and you can see it and read it and here it in the feedback from our customers. It's pretty amazing.
From a schedule perspective, we've been very focused on maintaining the strength of our network, albeit with significantly fewer aircraft than we've planned. Our network team, as Gary has already alluded to, has done an absolutely incredible job of adjusting and republishing our schedules.
And our revenue management team has done an equally incredible job of managing the revenue environments. And there's no doubt that we're continuing to benefit the revenue management capabilities that were enabled by our new reservation system.
Overall, I'm very pleased with our second quarter RASM result of 6.8% year-over-year growth which is right in line with the improved guidance that we provided in our June 19th Investor Update.
And just as a reminder on the April 25th earnings call, we expected Q2 RASM to increase in the range of 5.5% to 7.5%. And as you might recall, there were several key things that we entered in that original guidance.
Just a quick summary of that. First, we were expecting an improvement in leisure demand trends as compared to the first quarter. We also had expectations of solid demand for both leisure and business travel and both of these held true throughout the second quarter and actually improved each month during the quarter. So, we're pleased with that.
Second, we were expecting a strong yield environment, especially with close-in fares which we did in fact experience. And we actually saw a slight improvement in our base business as we progressed through the second quarter as supported by our system-wide fare increase in mid-May.
Third, we are expecting a one point year-over-year RASM benefit from our reservation system which occurred as expected. Next we are expecting a one point year-over-year RASM benefit in the lower capacity due to the removal of MAX flights in the schedules. This action ended up being about two points.
Fifth, we had three points of year-over-year tailwinds from second quarter 2018 items including Flight 1380 as well as last year's suboptimal flight schedule. And finally no surprise we had a half point year-over-year benefit in the Easter shift out of Q1.
So, these six drivers net out for a 6.8% RASM growth for Q2 which again is a very strong performance, especially considering the challenges. Both our domestic and international businesses performed well in the quarter with international RASM performance being especially robust in particular in our Mexican beach markets.
Obviously, Q2 was not without execution risk. Our network planning team has the challenge of removing MAX flying from Q2 and we had to manually work our way through March and republish our April and our June base schedules in such a way that best maintains the integrity of our network.
Our revenue management team had to manage through a bit more due to grounding of the MAX which reduced our higher yielding inventory due to past -- passenger re-accommodations in particular with close-in inventory during April. But the impact also carried them through the first half of May.
So, we had a lot of moving parts to manage to throughout the quarter and I think the commercial team's execution was simply extraordinary. They were incredibly focused and the result was that they were able to produce flight schedules that mitigated as much risk as possible. And these schedules work for our customers, but they also work for Southwest both operationally and commercially.
Our ancillary products also performed very well in Q2 with other revenue being up 11% year-over-year. And we continue to have a lot of success with our EarlyBird variable pricing product which we implemented last fall and which was enabled by our new reservation system.
We also launched a new business-oriented credit card last month as we planned which is targeted at our small to medium-sized business customers. And so far the early results are very, very strong.
We had another extraordinarily strong performance from our Rapid Rewards program this past quarter. Our total loyalty program revenue grew 15% in the second quarter and we continue to have strong credit card acquisitions. And our credit card retention rates also continue to be very high.
So, we're obviously very pleased with the performance of our Rapid Rewards program which by the way continues to be recognized most recently as program of the year by the Freddie Awards for Best Loyalty Card, Best Airline Redemption Building, and Best Customer Service.
The economics of the program are very, very strong. The customer benefits are best-in-class and we see a tremendous number of opportunities to significantly grow the Rapid Rewards program going forward. So, that's it for Q2.
So, let's talk about Q3. So, our third quarter business trends continue to be very strong as well. We continue to see healthy leisure and business travel demand across the booking curve and a positive year-over-year yield trend thus far. And we're expecting a strong Q3 RASM performance in the range of up 3% to 5%.
And just as a reminder, the MAX aircraft are already on the schedule through the entire third quarter which means we don't have the same closed-in re-accommodation challenges we had coming into Q2.
Our Q3 RASM outlook does have a one point benefit due to headwinds from Q3 2018, which is made up of 0.5 point from 1380 and 0.5 point again from our suboptimal schedule from last year.
Similar to the second quarter, we are estimating a year-over-year RASM benefit in Q3 of about two points from the reduced capacity due to the MAX grounding and we expect a 0.5 year-over-year RASM benefit from our new reservation system.
We are seeing a slight negative impact to Rapid Reward redemptions and ancillary revenue as a result of MAX-related flight cancellations, but we still expect another strong year-over-year performance of both categories.
Turning to Hawaii, well I can tell you this, Hawaii is off to a fantastic start. And although we're early on in our expansion, our results so far are exceeding our expectations in every category. So, we're now up to 14 daily flights, six in California two Hawaii, and eight interisland round-trip flights.
Demand for our service to Hawaii is very, very strong and our load factors are far exceeding our system average. Our Hawaii in-flight product and customer experience is performing extremely well with our Net Promoter Scores above our system average which as you know were also very high.
Demand for our interisland service is also very strong and is made up of a very strong mix of local customers. And the brand and customer experience for us for the interisland service is actually above our total system performance which again leads the industry.
And our fares are where we'd expect them to be at this point. It is fair to say that we're seeing the Southwest Effect in the markets that we're serving and this is obviously enabled by our low-cost structure.
Now regarding the eventual transition of Hawaii flight to MAX, we're obviously very eager to realize the cost efficiencies. But we can fly the 800 NGs to Hawaii as long as we need to while the MAX is grounded. As we announced this morning we have more Hawaii service plan to go on sale soon, so we'll talk about that more later.
Now looking forward, our commercial team will continue to be very proactive in managing any additional MAX flight cancellations and network adjustments through the end of the year. And as you'd expect, we'll continue to be very focused on our execution. And our 2019 RASM outlook continues to be year-over-year growth in excess of 3%.
Now regarding the capacity impact to Q4 RASM, we'll be at a point where we are approaching a 75 MAX aircraft deficit by year-end and as such the estimated revenue penalty from second quarter grow sequentially into the third quarter and grows further in the fourth quarter.
So, when combined with the normal seasonality in the peak versus off-peak nature of Q4 and the complexity of the holiday schedule, we simply still have work to do over the next month or so. So, it's too early for us to give any guidance or perspective on the impact to our fourth quarter RASM. But one of our priorities clearly is to protect holiday travel and minimize the impact for our customers. But as you know the schedule changes and the decisions get tougher as our fleet deficit grows.
And finally, despite the challenges that we faced, the Southwest brand remains very strong. Our Net Promoter Scores are tremendous, and we remain at the very top of the industry in spite of our challenges. And we expect to continue to grow revenues, despite declining year-over-year capacity here in the near-term. And as with our Q2 results, our Q3 RASM outlook should also put us at or near the top of the industry.
So with that update, I'll turn it over to Tammy.
Thank you, Tom and hello everyone. Thank you for joining us today and I'd like to add my thanks to all of our terrific employees for their focus and hard work. Our people are simply the best, and they have proven that time and time again.
Gary, Mike and Tom have outlined the challenges that we've been managing through with the MAX groundings and I will round out our remarks with some commentary on the MAX impact on our cost, fleet and capacity plans and our balance sheet and cash flow.
Starting with cost. I'd like to commend our people for a great job at managing cost in a challenging quarter. Our second quarter nominal cost, excluding fuel and profit sharing, came in a little better than we expected at the beginning of the quarter.
On a unit basis, ex-fuel special items and profit sharing, our cost increased 10.9% year-over-year. The impact of the MAX groundings drove six points of this year-over-year increase with the remainder of the increase primarily related to planned increases in salary wages and benefits, maintenance spend, and airport cost.
Our second quarter CASM-Ex increase was favorable to the guidance we provided in our June investor update when we were expecting a year-over-year increase in the 11.5% to 12.5% range. Following our investor update, the combination of the grounded MAX aircraft and weather resulted in a lower completion factor than expected which drove ASMs down further. However, the incremental unit cost pressure was more than offset by lower-than-expected airport cost, shifting of advertising and maintenance expenses to future quarters, and solid cost controls.
Turning to third quarter. The year-over-year unit cost pressure due to the MAX groundings continued. We started the year expecting about two points of inflation in CASM-Ex in third quarter 2019. We now expect seven points of the year-over-year CASM-Ex impact from the groundings in this quarter compared with the previously communicated three-point impact I mentioned on our April earnings call, when we had the MAX aircraft removed from our flight scheduled through August 5.
When combined with about a one point increase in year-over-year CASM-Ex from cost shifting from first half 2019, we now expect our third quarter 2019 CASM-Ex to increase in the 9% to 11% range year-over-year. Sans shifting and the MAX impact, our third quarter CASM-Ex is relatively in line with our cost plan at the beginning of the year.
The good news is that we have gained some non-fuel cost offsets for third quarter, as our flight schedule changes were well in advance of our flight crew bidding process and we also had temporarily lowered landing fees.
As Mike mentioned, we've also temporarily delayed some flight crew hiring. These offsets pale in comparison to the year-over-year unit cost penalty, but we are doing what we can to mitigate near-term pressure and we will continue to do so.
Looking at the full year, our current guidance is based on MAX cancellations through January 5. The MAX groundings are driving an incremental six points to full year CASM-Ex year-over-year as we are six to seven points off our original capacity growth plan to grow 2019 ASMs nearly 5%. Therefore, we currently estimate annual 2019 CASM-Ex to increase in the 8% to 10% range year-over-year.
As a reminder, our annual CASM-Ex increase also includes the previously communicated 0.5 point increase year-over-year from cost related to the ratified agreement with our mechanics and approximately $10 million of incremental maintenance expense for seven of our 737-700 aircraft that we have decided to keep instead of retire this year, which I'll cover in a moment.
I won't spend too much time on fuel as the market held fairly steady through second quarter. Our second quarter economic fuel price was right around the mid-point of our most recent guidance at $2.13 per gallon which included hedging gains per gallon of $0.06 and premium expense per gallon of $0.05.
We have a great fuel hedging protection in place this year, with about a 65% hedge in both third and fourth quarters. Our hedging premiums for this year remain at approximately $95 million or about $0.05 per gallon, and we have a 58% hedge position for 2020. So, we are well prepared.
For third quarter 2019 based on market prices as of July 19 and given our current hedge, we expect our fuel price per gallon to fall in the $2.05 to $2.15 range.
As I mentioned last quarter, our fuel efficiency has been significantly impacted by the MAX grounding. Second quarter ASMs per gallon declined 1.7% year-over-year and third quarter ASMs per gallon are also expected to decline year-over-year in the 1% to 2% range.
This decline highlights the fuel efficiency of the MAX which is about 14% better than the 737 NG fleet. Once the MAX returns to service, we expect to get back on track with our desired fuel efficiency gains.
Turning to fleet and capacity. We have not taken delivery of any aircraft since the MAX groundings in mid-March and we didn't retire any aircraft this quarter. So we started and ended the quarter with 753 airplanes. We don't have an update to our contractual delivery schedule with Boeing at this point, which shows 41 remaining deliveries this year. But we expect the majority of these will shift to 2020.
We have been working through the delivery delays with Boeing. Based on their guidance, we are currently assuming, we will get 16 aircraft deliveries during fourth quarter 2019 which includes seven leased aircraft. To help mitigate the impact of the delivery delays, we are postponing the retirement of seven of our own -700s. With this in mind, we now expect to retire 11 -700s this year versus original retirement plan of 18.
Turning back to second quarter, our ASMs declined 3.6% year-over-year. For third quarter, given the absence of the MAX aircraft for the entire quarter, we expect capacity to be down in the 2% to 3% range year-over-year. With the extension of the MAX cancellations through year-end, fourth quarter 2019 capacity is expected to be flat to down 1% year-over-year.
So looking at our second half 2019 plans versus where we are now, the impact of the groundings is far greater in the back half of the year and, of course, that's a function of the growing number of MAX aircraft we had planned to have in our fleet. For full year 2019, we now estimate capacity to be down in the 1% to 2% range year-over-year.
And finally, turning to the balance sheet and cash flows. We ended the quarter with very healthy cash and short-term investments of approximately $4 billion. We originally estimated our total 2019 CapEx spend would be in the $1.9 billion to $2 billion range, with approximately $1 billion in aircraft-related spend.
Based on Boeing's most recent guidance for our remaining deliveries this year, we now expect total 2019 CapEx to be in the $1.2 billion to $1.3 billion range with aircraft-related CapEx to be in the $400 million to $500 million range. The $500 million to $600 million reduction in this year's aircraft CapEx will shift to 2020, assuming the deliveries delays are caught up next year.
Despite the year-to-date operating income penalty of $225 million from the MAX groundings, $175 million of which was in the second quarter, we generated strong operating cash flows in the first half of the year of $2.1 billion, with free cash flow of $1.7 billion, allowing us to return $1.2 billion to our shareholders through share repurchases and dividends.
In closing, I'd like to extend another huge thank you to all of our employees who are managing through all the challenges the MAX groundings have presented. I am tremendously pleased with our financial results this quarter. Despite the negative financial impacts and operational challenges from the MAX groundings and the 20,000 canceled flights, we still managed to produce strong margins and all-time high quarterly revenues, load factors and earnings per diluted share.
Our pre-tax return on invested capital was a strong 23.4% even with a 1 to 2 point year-to-date penalty from the MAX grounding. Our balance sheet and cash flows remained strong, allowing us to continue to provide meaningful shareholder return.
Our revenue production is strong and we continue to benefit significantly from our new revenue management system our Rapid Rewards program and ancillary revenues. We have a great fuel hedging protection in place in 2019 and beyond to mitigate fuel price pressure. While lower capacity is putting year-over-year pressure on our non-fuel unit costs, we remain diligent on controlling the cost we can.
Based on what we know today, we continue to expect solid margins in 2019 at or near industry-leading FX, even with the MAX penalty, with the opportunity to continue delivering stellar returns on capital. We will get past our near-term challenges from the MAX groundings and our second quarter 2019 financial results demonstrate the strength of our low-cost business model, our network and our amazing people.
With that, Greg, I'll turn it back to you now to take questions. Thank you.
Thank you, ma'am. [Operator Instructions] We'll now begin with our first question from Andrew Didora with Bank of America.
Hi. Good afternoon, everyone. Thank you for taking my questions. Gary, I know you've got versions of this question on the last call, but just given everything that's going on with the MAX I thought it was important to ask again. I guess when does the risk tied to having a single fleet type offset the economics of that single fleet type?
Andrew, yes, thanks for the question. It's something that we'll want to explore. There's no way to avoid risk with a fleet. Period. If we had one manufacturer that's 50% today and the other is 50%, 50% of our fleet being grounded would be a huge problem. So I don't have anything new to tell you today. We think that Boeing is a very strong company, a great partner and believe that the MAX 8 is the best airplane in its category. We haven't learned anything different in 90 days to change our view on that.
I think the nuance of your question is something that we'll want to explore, because in the current scenario some of our competitors who do have a diversified fleet aren't having their growth plans impacted as drastically as we are. But the odds of having this unique scenario again and then executing a plan that's so narrowly focused on avoiding this, I don't -- right now, I just don't think that would be very wise.
But the short answer is, right now, we don't see that we need a change in strategy. The longer answer is, I think, it's something that needs to be fully explored and debated and that's not something we're going to do in 90 days. As a practical matter, if we want to diversify the fleet, it would take us years. So absent going out and acquiring another carrier and operating a separate airline in that sense, there's just no easy way around that.
Fair enough. Thank you for that color there, Gary. My second question maybe for Tammy. Just want to get your thoughts around IMO 2020 and your hedging policies. The 58% hedge in 2020 how much of that is just a WTI as compared to jet tracks and just curious to get your expectations for the potential impact of this regulation on jet fuel? Thanks.
Yes – no, thanks for the question. We've been contemplating IMO 2020 for quite some time and that has certainly involved – informed our hedging strategy. We have about a 10% position in heating oil for 2020 and we have a combination of Brent and WTI. So we have a diversified portfolio, and we feel like we're positioned well should we see prices increase – or the crack spreads rather increase from current levels. And just in case you missed it in our earnings release, we have a 58% hedge for 2020. So, again very well hedged.
Okay. That’s it for me. Thank you.
You’re welcome.
Moving on, from Stifel, we have Joseph DeNardi.
Yeah. Thanks. Good afternoon. Gary, I'm wondering, if you can just talk about given the plan that Mike laid out for reintroducing the MAX how we should think about capacity growth and if you'd like to discuss that CASM-Ex kind of into next year just given all the moving pieces? Thank you.
Mike has a lot of work to do, when you think about the variability in the Boeing delivery schedule from here. So all we can do at this point is put a stake in the ground make some assumptions. I think we've been clear what our assumptions are here for the near-term. I think when you then under the assumption that we hit those dates, Mike, where Boeing has done in September FAA signs off in October, and we begin taking deliveries I guess that would be sometime in December let's say. Right now, we're making assumptions as to how many airplanes we can physically un-ground ourselves, how many Boeing can physically unground and then how many Boeing can deliver.
So there is three different sources of MAX 8s and there's always so many. We can do in a day or in a week. And we just don't know. We're in uncharted territory there. So I think that has some bearing. We've got a retirement plan for some number of Tammy MAX or rather a 737-700s planned for next year. We have some interest in either accelerating or decelerating the retirements. So we'll just have to see.
At this point, I'll tell you our overarching goal is we want as many MAXes as we can practically deploy as soon as possible. And if we don't like the resulting capacity then I think we would then lean more heavily to perhaps accelerate some of the -700s. As we look at all of our route performance, and just market after market after market it is obvious that we're short capacity that we're spilling traffic and leaving money on the table and helping our competitors. And I will also tell you that that is not anything that we will leave unattended.
So if there's a range of behavior that you would expect from us next year from never reckless from being aggressive, to being passive, I can assure you we're going to want to restore our operation and our system just as quickly as again we can safely and efficiently do that. But a lot of questions and right now its unproductive to try to give you any number about what that might be. My goal would be by the time we get to the end of next year to hope that we were back smoothly on our delivery schedule and our operation. And I think it's possible that we beat that by six months just depending on, whether – again whether we meet the current time frame and whether Boeing can deliver at the rate that we are assuming next year.
And just to maybe jump in to help with what all this means for our 2020 cost, well the MAX groundings are obviously creating a material impact on our year-over-year ASM growth in CASM-Ex trends for 2019, and our long-term unit cost target is unchanged. Our unit cost goal excluding fuel and profit sharing is annual year-over-year growth below 2% as I discussed on last quarter's call. And I just do want to point out that this cost target includes our estimates for salary, wages and benefits, and increases for our people.
We are experiencing pressure on our 2019 unit cost, due to the lower capacity as a result of the MAX groundings. And that's about again six points to the full year. And while this does create some near-term challenges for us, these pressures are one-time, and will pass. The year-over-year comparisons for next year obviously would be more favorable given this year's impact from the grounding. So in terms of just a target for next year, it would be to absolutely drive towards declining year-over-year CASM-Ex in 2020.
That's very helpful. And then Gary, just another one for you, given your tenure at the airline can you just talk about over the last 25 years how the economics of your partnership with Chase have changed? What that means for helping the durability of your business over a cycle? And then, where your economics are now relative to the industry given that you most recently did the deal in 2015? And it's pretty clear that the economics have become more favorable for airlines over the past few years? Thank you.
Yeah. So I'll give you a quick comment. And then Tom would love for you to opine on that topic. But just starting with 25 years, I think 25 years ago we didn't have an affinity card and saw that as a great opportunity.
And so in the industry I don't know that I have as much of a perspective there. But certainly for us, yeah, we've come a long way in 25 years. When I started as CEO in 2004 we quickly concluded that the number one enhancement that we needed to make for the Southwest brand was to overhaul our frequent flyer program, and Tom covered a lot of material in his remarks, but I'll just cover it again. It is an award-winning industry-leading frequent flyer program and that is the foundation for the obviously driving the revenues.
We have a great plan. Our customers love it. They take our credit card in droves and we obviously factor all of that into our economics. So we are far more stable I would say in terms of our revenue generation today than we were before. Then the new program was launched in 2011 very proud of that. That may be even the single biggest accomplishment that Southwest had over the last 10 years to 15 years. It was really, really significant.
Tom, you want to -- anything you want to add on the economics? Obviously, we hold a lot of that very close to the vest, but it seems that…
We do all the economics really close to vest. What I can tell you is just the growth of the program has continues to be incredible. It's just a massive growth engine for us. The retention, the customer affinity, the value of that customer is just so much greater than our non-card-holding customer. But we don't get into the economics of it. What I can tell you is we are really thrilled with the partnership. We're thrilled for a long time. We did as you know -- well not going to get into that either. But we are really thrilled with Chase. It's a good partnership.
Thank you.
Next we have Helane Becker with Cowen and Company.
Thanks very much, operator. Hi, everybody. Thank you so much for the time. I'm not sure who can answer this question. But when you talk about the pilot training and taking one to two months, do you have to put them through the simulator? Can you just sort of maybe address that?
Hi, Helane. This is Mike. We're not expecting to have to put them through the simulator for the pilot training on the MAX. What we believe is that there needs to be an awareness of the MCAS system, how that works what it's doing in the airplane and that there can be -- my understanding is there can be sufficient computer-based training that shows the pilots of what is going on there.
We have for x Southwest, we've been doing training with our pilots in terms of hand-flying the airplanes since kind of really the inception of the airline. And over the last two years we've introduced this training called the -- envelope training. And our pilots have been through scenarios where the airplanes are at the boundaries of their performance limits. And they've been in situations like the Ethiopian and Hawaiian Air incident and they've already been through simulator training for those kind of things. So this will be the second year that they've completed all of that.
So when you bundle all that together that's why we think that the computer-based training coming out of this grounding is appropriate. And then we supplement that ongoing with the recurrent training in the simulator.
Helane, the other thing that I would add which is really beyond your question, but it does -- it sort of explained the environment here. I think Southwest is the gold standard for the industry. We hire first officers that on average have 6,000 hours of flight experience. And in addition to that, we hire first officers that have captain experience. So you start with a very experienced cockpit crew.
Then we obviously only fly the 737, we are the industry leader when it comes to training and operations and Mike covered our philosophy about flying the airplane and training for certain scenarios. So we'll be very well prepared to take on this new training requirement. Our pilots, I think -- more importantly our pilots are very comfortable and love the MAX and are looking forward to restoring it to service.
And they'll play a key role obviously, when we communicate and when we're reintroducing the MAX to our customers. But we factored all of that into our plans. We're allowing more than ample time for the training and the reintroduction of the fleet.
And I think as we were talking earlier, what is going to be as much of a challenge, if maybe not more of a challenge is just the maintenance and the reintroduction of all the airplanes back into service will be a task. And again, I think that Mike has allowed more than enough time for that with our January 5th target date.
Got you. And then can I just ask you one question about Newark, so I understand this? So this is not just a suspension of service. And when the MAX does come in you're going to go back? This is just leaving the market returning the slots?
Those -- right now, it's not slotted anymore. It was when we acquired them in 2010. But the FAA whatever that term is they unslotted them several years ago. But no this is a decision where -- and that's why I like the word consolidate. So we'll have a significant New York City presence. It will be focused where our customers want to go which is LaGuardia. And we have -- actually with the new facility and the 800s and the MAX 8 we have an opportunity to grow our seat capacity there by I don't know 10%, 20% over time.
So we have ample opportunity to do that, and we'll have a far more efficient cost-effective operation and revenue production by consolidating into one airport as opposed to having it diluted over two. So again, it's two still relatively small operations today that will consolidate into a much more efficient and arguably larger operation at LaGuardia.
That's very helpful. Thank you everybody. Thanks Gary.
And next from JPMorgan, we have Jamie Baker.
Hey, good afternoon, everybody. Gary, I'm already kicking myself for asking this question last quarter because I'm basically going to ask it again today and probably will continue to do so for as long as the MAX remains grounded. Have you give any further thought to how long you can tolerate or would choose to tolerate year-on-year capacity declines before you potentially consider non-organic growth? You're clearly agitated by funneling profits and market share into your competitors' coffers. You've said as much today and I respect that. So I've got to imagine there's a breaking point out there somewhere.
Does that mean, I get to kick you too? Just kidding.
And right after you said that things about my employer for a change on the call.
Again, I'm just trying to be pragmatic without being overly legalistic here with you. Obviously, we can't comment on anything like that in substance. I mean, I'm just trying to play the game a little bit. As a practical matter, we came into this in March with a view that this was a short-term problem. And one of the things that I think we've tried to emphasize or clarify here today is that we've got a strategy we're executing the strategy and this is really not affecting any of that.
So all of that is a view that it’s going to be ungrounded by the summer. And again it was disappointing to find yet another delay which essentially pushes it out to early next year. But all that we can handle and we can manage. So I think the tolerance -- and in fairness to your question the tolerance for this scenario goes well beyond that because then the nature of your question moves into a huge strategic question.
Correct.
And that -- so hopefully I made answer to your question. We're -- we can work our way through this. Obviously, the financial results that we've got right now are superb even in -- relative to our competitors it's actually incredible that we're -- that we compare so strongly and we'll get through this. We're going to end the year healthier than we started the year. And we've actually exercised a few new muscles here and there in really good shape. If we have to continue to manage a ragged schedule we're doing pretty well at that. So I just don't think that that's going to be an issue for us.
Okay. Fair enough. I appreciate that. As a -- and just as a follow-on to that I mean, I have a real quick question for Tammy you talked about some soul-searching as to this whole fleet-type structure. Should we assume that Boeing competitors are circling you more aggressively in the current environment than they ordinarily do? Or is that not the case?
That's always the case. And -- yes that's always the case. And again we've been open -- Mike has been looking at other airplanes and there's nothing. That's a duty we have. We want to know what's out there in the marketplace and we need to be comfortable that we've made the best decision for our company our shareholders our customers on and on and on. But -- so hopefully I answered that question.
And then a quick follow-up or a quick housekeeping for Tammy. How should we think about the engine overhaul expense on the 700s that you're keeping? Just wondering if that will hit the P&L or if the plan is to run them down before you park them? I suppose MAX I mean might impact that calculus. And thank you both. It's been an exceptionally thorough conference call, best one this season.
Well, thank you Jamie. And I don't want to kick you after that. So -- but we -- on your question on the maintenance expense there is about $10 million associated with pushing those seven aircraft and that's all contemplated in the guidance that we provided to you this morning. And that's going to hit fourth quarter as we pull….
Okay. Perfect. Thank you.
Thank you.
And next we have Duane Pfennigwerth with Evercore.
Hey, thanks. So just this replanning challenge that you've been managing through in broad brush strokes you are going to grow mid-single digits in 4Q. By our math the MAX was more than 100% of that. The MAX was like 11 points of that growth. So ex-MAX your plan was actually to just shrink the fleet maybe shrink stage maybe shrink utilization. So can you just talk about how you practically unwind that? I assume in 4Q some of the aircraft were going away related to maintenance events that are due. Just in broad brush strokes how do you unwind that and minimize the schedule damage?
Tammy, would you mind if I take a swing at that? You can clean it up. Is that okay?
I do not mind at all.
Well, we're in the middle of the sausage-making with that. I would say that as the -- if we were to take the MAX out of the schedule gross for the fourth quarter I believe that is close to 11%. So again as a reference point we're talking about a reduction in the second quarter because of the MAX of 7%, 8% in third quarter. So it goes up because we have more airplanes. Now the holiday schedules are really complicated because of the vast difference between a peak day and an off-peak day.
And it's really complicated for our network planners. And they've really honed those schedules over the years and it's fully automated. And so this scenario blows all that up and they have to go back and now try to do it manually. We don't want to eliminate 10% to 11% of our capacity. And because of the off-peak days and the off-peak nature of some of the days there's an opportunity to add back some flying maybe fly the day longer and a few things like that where we could trim that back instead of being down 10% or 11% to something less.
And until we figure out what that is I'd rather not give you a number. But we do have that choice. It won't be the greatest schedule. It might come with some RASM penalty because some of those flights won't be optimal for our customers. But we will do it with and without here. What's more productive from a profit perspective versus narrowly focusing on CASM or RASM independently and that's the way we're thinking about it.
But I don't know if that's where you were coming from with your question. But you are correct that the fourth quarter is more complicated because of the number of different schedules and because I think Tom said we're looking for 75 airplanes at that point. And that's why as time goes by it gets more challenging for us. So having said all that no matter what we're still going to have a solid quarter. We'll have a solid profit. We will publish a schedule that we're proud of in the sense that Mike can operate it. It'll be well staffed et cetera, et cetera. It just won't be tuned and operated or optimized rather like it normally is. Tom?
Well, yes. I just want to add to that. I think your -- part of your question was so how are you going unwind this not just financially but from the quality of the schedule perspective? I think that's how I interpret it. Obviously, when I get the customers we need to -- we're going to need to be in that kind of thing. But we weren't thinking about it as to -- and on to Gary's comments where we had to take a shorter-term view perhaps with some routes that have lower RASM performance as well as routes that are poor CASM performers.
And the way we're working through it in our network team is just -- as Gary said, we haven't got through this manually. There's not a process to do this on this kind of scale. So we've had to pare back some of our long-haul routes that are underperforming against the average.
There are also routes that were -- long-haul routes where there are alternative options. We can pare those back. And we're also reducing some of the international frequencies. So we're being very opportunistic. We happen to look at it line by line and that's how we're doing it. But it's about profitability. It's about getting our customers where they needed to be.
But to Gary's point about the unsung heroes that's the network planning role right now and they are the heroes. That's what they're doing. So...
Tammy anything you want to clean up there?
No. I don't think there is much to add to all of that. All of that -- just in terms of what we're expecting for capacity just to maybe, put a bow around all of that. And again we're obviously still working through all of this as we sit here today. But we did give you our full year ASM guidance of down 1% to 2% year-over-year.
So just backing into that it does imply exactly as you're coming up with there Duane that we'd be maybe down a little bit maybe down a point or so for our fourth quarter. But again a lot of moving parts and I will firm up any of that guidance as we go here.
Great. Thanks for that generous answer. And then just real quick on the follow-up, really appreciate all the moving parts on 2020 outcomes and appreciate your commentary about that you want to make up, in any lost ground that you gave up this year.
But based on your current knowledge of the approvals, based on your current knowledge of Boeing's ability to deliver, do you really think you'll end next year at that same shell count you expected to end 2020 before this MAX grounding?
Well, based on what we know today, we're aware that six deliveries, Tammy would slip into 2021. So just trying to take your question literally here. And yes, it'll be less than what we thought.
But I think - I'm fine with that. That's plenty close enough. And as everybody is aware, we're talking about putting a lot of airplanes into service next year. So if six slipped out of 2020 into 2021 from that perspective, that's fine as well. It's not going to make a huge difference.
I think what's more in play again is, whether we want to try to accelerate some retirements. And there's just work to be done there and our teams do a tail-by-tail analysis to see what maintenance cost could be avoided and whether that's sensible and whether it really is profit-accretive to try to do that. There's just a lot that goes into that.
Our staffing plan for next year looks really good Mike. So we haven't slowed our hiring such that we have a real snapback next year to catch up. So that's another I guess a fancy way of saying, we're a bit overstaffed. I don't think it's unproductive. But we have had to defer a couple of flight attendant and pilot classes as you pointed out earlier into next year.
So all the way around, again, I think we're set up very well. We can manage this. We're getting good at it. So hopefully it will – hopefully, we'll hit the assumed timeline that we shared with you. And I think if that's the case, we'll be reasonably back in-line with where we should have been by midyear, if not earlier. So we could potentially recover quickly which will be very welcome.
Yes. Just to add on to what Gary had said and we've talked about this a lot, we have tremendous flexibility in our fleet plan. So we'll work through this and obviously with the goal to produce financial results that we'll all be proud of and do it in a way that takes care of our customers.
So we -- as Gary said, we're working through our retirement plan, but we've got a lot of flexibility there. And so we'll work through all that. And I think you'll be really proud of the results when it's all said and done.
Thank you very much.
All right. We have time for one more analyst question. We'll take that last question from Rajeev Lalwani with Morgan Stanley.
Thanks for squeezing me in. Gary and Mike a question for you on the obvious with the MAX. Can you talk about the plan to make sure you get confidence from passengers in terms of flying the plane and how you're going to tackle that if you don't have the load factors and yields that are suffering in the first couple of months?
And then relating to that, can you talk about any dialogue that you're having with the FAA? And any color about whether you sense urgency on their part to sort of move this along, given some of the pressures that you're obviously highlighting?
Well, why don't I take them in reverse. And Tom if you want you can talk about the reintroduction. So -- and Mike can you help me out here on the FAA? Well, yes the answer on the FAA is yes. We have daily dialogue with the FAA.
And I think that the FAA is -- well these are Gary's words. I believe that the work of Boeing on MCAS is done and I believe that the FAA is signed off on it. Although they are -- they will clearly tell you that they're not going to sign off on the MAX 8 until it is "all done”. But I think the MCAS component is done.
I'll be shocked, if we learn anything different on that and I'd be disappointed to learn anything different. But I don't sense that the FAA is at all motivated to extend this grounding. I think they want to make sure that everything is covered, and they are doing their job quite frankly.
This other thing came up, and it is such a remote chance that anything would go wrong. But in this environment, no one wants that remote chance. So Boeing readily agreed with that. And we're fine with that as well, by the way. It's -- I wished we had known it sooner, so it could have been worked on sooner. And I will admit to those thoughts. But no, I think it's all set up very well. And so unless we learn something new, it feels like our assumed time line is a reasonable one. Anything you want to add there, Mike?
No, I think that's right. I think the FAA is just better focused on a high-quality review dotting their Is, crossing their Ts, making sure that they've addressed any type of unknown risk out there. And once they're comfortable with that, they will issue the guidance to go forward.
Tom, you want to talk about the reintroduction?
Yeah. I think -- so I think Rajeev, there's just so much media on the topic. I think it's going to increase as the aircraft begins to be reintroduced to service, and I think there are certainly going to be some people, who book away from the MAX for some period of time. I think it's going to be the less than we might expect, maybe shorter duration than we expect. And I think we've done a pretty good job honestly of understanding where not just our customer, but even non-Southwest customers' heads are at with respect to the MAX aircraft and their intent to fly in all of those kind of things.
And what's really interesting is our customers -- so there's different ways to break all this to vapour. We're spending a lot of time actually with cohort customers. And our customers' perception of Southwest has not changed one iota, not at all in terms of their intent to fly, their trust in Southwest, the confidence they have in Southwest, et cetera, et cetera. So, obviously based all that, we're working through a very robust -- part of our return-to-service plan if you will.
I mean there's a big piece for Mike in the operational side. There's a big piece for the commercial side, and there's a big piece for marketing and communication in terms of how we want to communicate. And we're going through that. It's going to be a very robust plan. I think one of the questions that's -- I've been asked several times is what if a customer doesn't want to fly, are you going to be flexible? And obviously, yeah, we're going to be flexible if the customer has an issue flying on a MAX initially.
And to be honest with you, we have customers change flights all the time, so it's not a big change for us. In fact, I'm not sure what percent, but a massive percent of our itinerary has changed. So that's not a big deal for us. I think that we're just going to have to be flexible for a while as our customers get comfortable, and those that aren't. But we're very aware of it. We're thinking through it all, and I feel pretty confident where we are.
Yeah. And I do too. And we're going to have to have a communications campaign. We're good at that. And just know that our pilots will play a key role in this communication. They're the ones obviously that have to be comfortable, and they're the ones that are credible. So, nobody in this company and especially our pilots is going to do anything that they deem to be unsafe. So then it's just a matter of convincing our constituents of that, and we're going to work hard to do that.
I’ll leave it there. Thank you.
All right. Well, that does it for the analyst portion of the call. Thank you guys for joining us. And of course if you have follow-ups just give me a ring.
All right. And ladies and gentlemen, we will now begin with our media portion of today's call. I'd like to first introduce Ms. Laurie Barnett, Managing Director of Communications and Outreach.
Thank you, Greg. I'd like to welcome members of the media to our call today. And before we begin taking questions, Greg, would you please give instructions on how everyone should queue up for a question?
Of course, Ma’am. [Operator Instructions] And ladies and gentlemen thank you for waiting. We'll take our first question from Mary Schlangenstein with Bloomberg News.
Hi. Thanks for calling on me. I just had two really quick questions. The first is Gary, in your earlier remarks you mentioned 20,000 cancellations. Are those all MAX cancellations? And over what time frame did those occur?
Mike, that was total. I think normally you'd have 3,000 cancellations. So to put it into perspective -- but I would attribute the vast majority of that excess to the MAX.
Yes. Mary, when we talk about the 20,000 cancellations, they really come into two forums, with the schedule out there to sell the MAX and we have change the schedule. So before we operated that schedule, we pulled a lot of flights. I don't know flights we pulled out we included in that 20,000 cancellation number.
And secondly, once we did operate the schedule, because we were so close into the booking curve and trying to re-accommodate as many customers as we could, we operated April and May without any spare aircraft, which I would attribute to the MAX.
Right.
And so, as you have weather events or unexpected maintenance events or hailstorms or other things like that, we just had no way to recover the airplanes and that drove the cancellations up also. So as Gary said, that was around 12,000, 11,000 – 12,000 cancellations for the quarter just in the operations. And those numbers are normally under 3,000. So the vast majority of that 20,000 cancellation number is MAX-related.
And that 20,000 is just for the second quarter?
That's right.
Okay. Okay. My other question real quick was on the Newark gates. What happens to those? Are you able to sublease those gates to somebody else?
It's a month-to-month lease, so no.
Okay. And are you re-leasing them from United?
I don't know. I don't think so. But it's -- No. No. It has to be -- yeah, it's with month-to-month and with the Port Authority. So…
With the -- okay, great. Okay, thank you very much.
Next from The Wall Street Journal, we have Alison Sider.
Hi everyone.
Hi.
My question is do you think -- do you feel that -- hi -- do you feel like Boeing misled or provided any incomplete information at Southwest about the MAX either about the -- disagree or it's about MCAS more broadly or about whether it was safe to fly after Lion Air or really anything else?
Well, I don't think there was any malintent at all. I think Alison, obviously, in hindsight, we wish that this never happened. We wish that all the things that are being done now were done then. And all the knowledge that we have now, yeah, we wish we had it then. So there were judgments made about the remoteness of the risk and I think that's why Boeing behaved the way they did.
Got it. So you don't from your perspective see that there was anything criminal that happened?
No. No. Now -- and again I get asked about Boeing a lot. Boeing is a great company and Boeing is important to not just Southwest but our country. And they have a problem. They recognize the problem and I'm very confident they're focused on addressing the problem and taking care of their customers.
So it's a tough situation and I have no doubt that mistakes have been made. Some are harder for us to evaluate than others. But my focus at this point is to get the problem solved, get the MAX restored to service, have Boeing do its job in terms of establishing confidence with customers as in the flying public.
And, obviously, we just need to be comfortable that all the issues that have been raised have been adequately addressed. And I think that's where with what Mike was covering earlier we all want to see what the airworthiness directive provides for. We'll want to go through the training and we'll want to validate for ourselves that it all works as intended.
So -- but no they're a great company. They're great people to work with. This is a terrible situation and I hate that they're in it. And, obviously, there are many of us that have been affected not just Southwest. There are a lot of people that have been affected here. So we just -- we need to keep our eye on the ball and solve the problem and move forward.
All right. Thank you.
And next we have Tracy Rucinski with Reuters.
Hi, good afternoon. You've said that you expect some of your MAX deliveries to slip into 2020. How confident are you that you will receive those planes when you need them given that planes are stacking up at Boeing facilities? And can you tell us a little bit more about the technical kits that Boeing is preparing to help that delivery process?
Mike, I'll let you talk on the latter. Well, we're sort of in a range of we're not confident to we're 100% confident. I don't know where to put a percentage on it. But no there's no way we could be 100% confident that we're going to hit our assumed time line. And this is new territory for Boeing to unground airplanes so we're not quite sure of that. Then we've got -- we have to support that with our own resources and so does the FAA.
So, yeah, all that has to be estimated at this point and with a view towards we're going to have to be flexible. So we'll learn as we go I'm sure and I would assume that we'll get better at it as we start ungrounding the airplanes and that maybe it will accelerate. But no I mean there's – yeah, there's a lot of uncertainties surrounding exactly what that will look like when it starts.
Yeah. So Tracy this is Mike. We have 41 airplanes on a delivery schedule to take in 2019. And just my preference is -- and so if they made all those airplanes and they put them in a Boeing storage facility that just increases a pile of 700-ish airplanes out there. And to get those out of storage we have -- we're part of the bigger economy.
So it makes sense to us to have some of those airplanes rescheduled into 2020 where we can take them right off of production line in a normal course of business. That would give us more certainty and less complexity.
As to the airplanes that are coming out of storage what I understand is that most of the fixes at least at this point are software upgrades to the airplane. So there will be a service bulletin that will come out from Boeing that the FAA will mandate as an airworthiness directive. And then we will take that requirement and we will perform hopefully a software upgrade to the airplane. That is not complicated to do. There might be other work that we may need to do. And if we will we will do those things also.
And then as I mentioned earlier there's a second piece in terms of the airworthiness directive, which will be associated with pilot training. And so long as it is -- does not require simulator time, we will get our pilots through that training in 30 days.
Okay, thanks. So the technical kits, are those related to the software upgrade?
I'm not for sure what the technical kits are right now because I don't know what the final fix is going to be for the airplane.
But at least my interpretation of your question is what Mike is describing as a software is the technical package. So I don't know what else -- I'm with Mike. I don't know what else it would be. So all we know…
Okay.
So all we know is that we're going to update the MCAS software and then the software this piece of firmware in the flight control system. And then, the only thing I want to make -- yeah I don't know if you heard our earlier analyst call.
But the simulator training, we don't feel is necessary because our pilots are extensively trained in the simulator, and for the kinds of scenarios that this software is being modified for.
So, there will be training, but we think that it can be done on a computer-based approach. And that's what the FAA seems to be leaning towards anyway. But we're comfortable with that.
Next from the Associated Press, we have David Koenig.
Hi. This is really quick for Gary. Just to clarify, I think it was the last question on the analyst portion, that FAA you said that FAA is reviewing MCAS and signed off on it. And all that got left to check is that issue that came up last month.
I wasn't clear did you hear that from Boeing? Or did you hear that from the FAA?
And David that's not exactly what I said. So, those …
Okay.
…were Gary's words. That's not the FAA telling --they in fact will not tell us, whether they have quality …
Yeah.
…"signed off" on MCAS, because they want it all comprehensively together and I don't blame them. I think all I was saying is that, based on the status reports that we've gotten from Boeing and from the FAA on where they stand.
I don't think that there is any more work to be done by either the Boeing or the FAA on that piece. I'm not speaking for them. I'm just telling you that we're not getting any sense that there's any more continuing on those functions by either Boeing or the FAA.
What is still now in suspense is Boeing has gone off to work on this second issue. And until they get that done, we're all sitting here waiting for that construction to be completed. And then, I suppose they'll show it to us and they'll show it to the FAA and we'll know more. But I'm not expecting any activity on that with us until September.
Okay. All right, so you don't want to explain where you got that sense but that that's your reading of the situation?
Well I thought I did yeah. But based on…
Okay.
… the discussions that we've had with Boeing…
Okay. All right.
… and the FAA they've implied that if you will.
Okay.
So -- but they're -- but I've asked them if they would separate it. And they told me "We will not." So, I want to be -- I hopefully made that clear. No. They won't tell us officially that they have signed off.
And like I said, I don't blame them. They want to get the rest of it done and see it all together and make sure all those systems work as planned. But the good news is it's our sense that all of that work is in fact done and we're just waiting on the second piece.
Okay. Thank you for clarifying that.
All right and we have time for one more question. And we'll take that final question from Allison Schaefers with the Honolulu Star-Advertiser.
Hello, all of you?
Hello.
Hello.
I just wanted to see if you could be a little bit more specific about when you anticipate selling flights for Southwest Hawaii service for previously announced San Diego or Sacramento, Lihue and Hilo routes?
And is actual service on those as expected to start this year or not likely end of 2020 based on the ramp up time needed?
Well I should try I guess to disclose our schedule intent. I think I'm not going to do that today.
But thank you for ...
But we're really excited and we're very -- we're really making some announcements soon. And I will tell you that all the things we said previously, we still mean right? So, we still intend to serve Hawaii from Sacramento and San Diego and we still intend to serve Kona and Lihue.
And we still intend to have interisland between Hilo and the other islands. So, everything we said is still spot on. So, we just have a little more work to do still and we're working on our schedules right now. We're not ready to announce it. But we can't wait to begin those flights as well.
So -- and I'll tell you the reception we've had from the local communities has been phenomenal. And we could not be more excited as you heard from our very robust aloha when you said that. So thanks.
Okay. Any way you can elaborate a little bit with some specifics on the demand that you've seen for Hawaii?
Well, I don't have any at my fingertips. I don't have any specific demand numbers. What I can tell you is that, as I said in my comments earlier, the load factors are significantly higher than what we're experiencing across the system.
And keep in mind we just announced record load factors for the entire company and our Hawaii business is surpassing that. In terms of actual demand I kind of think about it in terms of load and it's just phenomenal.
And that's a true for interisland as well as for the California to the islands routes. So, as I said, we have six mainland, California to the islands and we have eight round trips and it's just -- it's going phenomenally. It really is. So...
Okay, thank you, gentlemen.
Thank you.
Thank you.
And ladies and gentlemen, that does conclude our question-and-answer session. At this time, I'd like to turn the call back over to Ms. Barnett for any additional or closing remarks.
Thank you. If you all have any other questions our communications group is standing by to assist at 214-792-4847. Thank you.
And ladies and gentlemen, that concludes today's call. Thank you for joining.