Southwest Airlines Co
NYSE:LUV
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Good day and welcome to the Southwest Airlines Second Quarter 2021 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. [Operator Instructions] At this time, I would like to turn the call over to Mr. Ryan Martinez, Managing Director of Investor Relations. Please go ahead, sir.
Thank you, Chad and thank you all for joining us today. In just a moment, we will share some brief remarks and then open it up for Q&A. And you will hear from our Chairman of the Board and CEO, Gary Kelly; Executive Vice President and Incoming CEO, Bob Jordan; Executive Vice President and CFO, Tammy Romo; President, Tom Nealon; and Chief Operating Officer, Mike Van de Ven. We also have a few other senior executives with us for Q&A, including Andrew Watterson, Executive Vice President and Chief Commercial Officer.
We will make forward-looking statements today, which are based on our current expectations of future performance and our actual results could differ substantially from these expectations. And we also had several special items in our first quarter results, which we excluded from our trends for non-GAAP purposes and we will reference those non-GAAP results in our remarks. So, please see our press release from this morning and our website for more information on both topics our cautionary statement and a lot of helpful information about our results and trends. And before we get started, I want to let you all know that we are planning an investor event in December and I will send out more information soon, so stay tuned for that. So, Gary, over to you.
Thank you, Ryan and good morning, everybody and thank you all for joining us for our second quarter earnings call. We are obviously very delighted at the turnaround in our business from the previous four quarters of billion dollar losses and our revenues nearly doubled in the second quarter from first quarter levels and that was on a capacity bump of 44%. Our revenues were much stronger than we had been forecasting just 90 days ago, and all of that of course flowed through to better margins and better cash.
Yesterday’s cash was over $17 billion and that’s plus $1 billion line of credit, well in excess of our $11.4 billion of debt. So, while our bookings and revenue trends are even better than the month of June and certainly better than the second quarter as a whole, we are very well prepared to manage and muddle our way through if the Delta variant affects our business. And so far, we are not detecting any impact at all, again very strong bookings and revenue trends in the third quarter.
So right now, I am very pleased with all of that, very pleased with our revenue, our July business and the outlook for the rest of the quarter. This has been a long struggle to get to this point, profitability in the month of June. The pandemic of course turned everybody’s world upside down and it’s still not completely right side up, but I must thank our employees once again for their heroic and very hard work. Normal summer demand is always a challenge to manage and it’s of course even more so here in 2021, especially in June when we had technology issues and bad weather combined, it made it very difficult.
Things are much better in July, still not where I want us to be, but we will continue to improve and I am very confident that we will adjust as necessary and if necessary. So, our immediate focus is on running a very high quality on-time airline and then gradually restoring our traditional efficiencies that are attendant with our low fare point-to-point high utilization business model. And given the revenue recovery, obviously, our next focus is to sustain our profitability that we have achieved here in June and maintain stability going forward.
Next year, we plan to resume new aircraft deliveries, with the desire to restore our route network as needed to pre-pandemic levels. And clearly, the network restoration will depend upon travel demand, which may in turn depend upon the state of the pandemic. So worst case, we will reduce our growth and early retire our oldest aircraft, which will be accretive to earnings with the trade-out with the MAX. So, we are very well positioned and very well prepared to manage pretty much any scenario here in the next couple of years. So, things aren’t back to normal yet, but clearly, they have stabilized and are much improved and we are at a point now where we can actually plan and work on managing and spend less time on surviving the intensive care unit.
And then finally, I did want to congratulate and welcome Bob Jordan. He will be our next CEO come February 1 of next year and the reception so far has been terrific. The transition work is well underway. Bob is very busy and he may comment on that, but it’s going very, very well. Very proud of Bob. He is going to do a terrific job. And I am going to hang around to support our team in anyway that I can.
So with that, Bob, let me just turn it over to you.
Alright, Gary. Hey, thank you and good morning everybody. It’s really good to be with you today and I am looking forward to reconnecting with many of you over the next few months as I begin to attend more Investor Relations activities. I am going to make just a few brief remarks. But I am just – as Gary said, I am just super excited for the opportunities to serve Southwest as the next CEO beginning in February. And I am very glad that Gary will continue to serve as Executive Chair. Many of you know Gary has been my mentor and friend for over three decades. And the two of us, along with Tom and Mike, are already working very hard to ensure that the transition will be a smooth and orderly one. Since the announcement on June 23, I have had the chance to visit and talk with hundreds of our employees around the company. As an example, I was at – got to spend the day in Atlanta yesterday with our wonderful team there. And I am just amazed by their spirit, their enthusiasm, their heart for each other and for our customers, and I am just energized by being with them.
I am also focused on continuing to work with our leadership as we continue to lead through the pandemic recovery. And as we start to work on our 2022 planning efforts as we evaluate the post-pandemic environment and the many, many opportunities that are ahead of us here at Southwest. I have been part of the strategy here as we develop our strategy each year and I am very confident about our purpose and vision and where we are headed. And I will be very purposeful in how we plan for the next several years.
Our strategy is sound. We are a low-fare low-cost growth airline that prides ourself in terrific customer service and being a great place to work for our employees. That business model and our people have been the enduring strength for 50 years now and we have enjoyed unparalleled success in the airline industry. We now have the nation’s most robust point-to-point network and we have at least a decade’s worth of attractive growth opportunities in front of us with the Boeing 737. Our customer and brand rankings remained really high year after year and our commitment to transparency continues with no bag fees and no change fees. We are committed to that.
We have opportunities in the pipeline to continue enhancing the customer experience as just one example and that will be a focus, along with our commitments to both diversity and leadership and in the workplace and to environmental sustainability. We will remain focused on maintaining our strong financial position and our investment grade balance sheet. As always, we will balance our commercial opportunities, our operational flexibility and reliability and/or financial performance. You know we want new itineraries for our customers. We want growth opportunities and job security for our employees. And we want to create significant value and returns for our shareholders. That formula has worked so well for Southwest for decades and I expect that it will be and continue to be what works for us for decades to come.
We have a very deep bench of terrific leaders here at Southwest, that are ready to lead for the future. And as a team, we are all very aligned on the future of Southwest Airlines. But I want to say, above all, it’s our people that bring our vision and our purpose to life every single day and I am just honored to serve them and to support them on a daily basis.
And with that, I will turn it over to you, Tammy.
Thank you, Bob and hello everyone. I will provide a quick overview of our overall financial results and some color on our outlook. On a GAAP basis, we generated a $348 million profit in second quarter, or $0.57 per diluted share. In addition to improving revenue trends, the primary driver of our GAAP profit for the quarter was the $724 million of PSP proceeds that offset a sizable portion of salaries, wages and benefits expenses. Excluding this temporary PSP benefit and our usual hedge-related special items, our non-GAAP net loss was $206 million, or a $0.35 loss per diluted share.
Second quarter operating revenues, non-fuel operating costs, fuel costs and available seat miles were all within our most recent guidance ranges. And I am pleased with our overall financial performance in second quarter. With the strong pent-up summer demand and a solid cost performance, June marked a key milestone as we generated both average daily core cash flow and profits as we had hoped. This is our first monthly profit since February 2020 when soon after the negative financial impact of the pandemic began to impact our results and this is excluding the benefits of PSP proceeds, which is more reflective of our base business. These second quarter results, though not where we need to be, represent a significant recovery for our business and are a testament to our amazing employees who are simply the best in the industry and make us proud each and everyday. And by all indications, it appears that we outperformed the industry again in second quarter.
We provided a lot of color in our press release regarding revenue and cost trends. I will just add that our trips flown are estimated to be down 11% in third quarter compared to third quarter 2019. And as such, we have several cost categories that are expected to continue to trend lower than 2019 levels such as maintenance expense, advertising expense, technology expenses and passenger and personnel-related expenses. These cost categories are expected to ramp up as trips and passengers increase and as we resume a more normal investment agenda moving forward.
We are mindful of the tight job market as well as general inflationary pressures. We expect to have wage rate inflation beyond our normal annual wage rate increases as we want to be competitive to retain and attract talent. Including the decision to increase the minimum hourly wage to $15 per hour across all workgroups, we now estimate $5 million to $10 million of additional salary, wages and benefits cost pressure in third quarter and approximately $15 million in fourth quarter.
We are also mindful of bottlenecks, shortages and ramp up inconsistencies across the travel industry as we restart after more than a year of little activity and we are not immune. That said, we will continue our focus on ramping up costs, along with flight activity as efficiently as possible, while being nimble to adjust and add where needed. We are hopeful to generate net income again in third and fourth quarters on a GAAP and non-GAAP basis. And our ability to do so will largely be dependent on the revenue environment, which Tom will cover in a minute.
But based on our current revenue outlook and even with the additional cost pressures we noted, our third quarter bottom line outlook is over $200 million better than it was back in April. We have flight schedules currently out through early January and we will continue evaluating growth opportunities and fleet and capacity decisions to construct the most efficient route network for 2022, being mindful that our network has evolved from what it was pre-pandemic. With leisure travel levels where they are today, it is easy to forget that less than 6 months ago the environment was drastically different. Over the past year, we were most focused on raising capital and building liquidity, minimizing significant cash burn and drastically cutting capacity and cost. And the changes that we made to our network are producing the revenue we had hoped or even better than hoped and we are now evolving our focus areas.
First, we are focused on managing through the current environment with adequate resources to deliver a reliable operation. We then need to optimize our cost profile with our route network in 2022. And beyond that, we will be focused on producing sustainable levels of profitabilities, margins and returns. We plan to continue managing the business closer in at least for the remainder of this year, but we have begun the 2022 planning process at a very high level.
Although I don’t have any specifics to share with you today, I can reaffirm that we have tremendous flexibility, perhaps the most flexibility we have ever had going into any year in my nearly 30 years at Southwest. We have flexibility with our cost efficient Boeing order book with a significant number of MAX options remaining in 2022. We have flexibility in terms of where to deploy our aircraft in the network and how much capacity to fly in 2022. And we have a strong cash balance, modest debt requirements and discretion over how quickly we want to resume non-aircraft investments in 2022. So, we have flexibility with our capital. And aside from our people, our biggest core strength is our balance sheet and financial preparedness even coming out of this pandemic.
So, with that, I will turn it over to Tom.
Okay. Well, thank you Tammy. Good morning, everybody. While our second quarter operating revenue performance was very much in line with our expectations, we saw improving monthly trends throughout the quarter in both leisure demand and yields and we also saw a steady improvement in business demand, which I will talk about in just a minute. And we are also pleased to see broad-based improvement across the entire network. So, this was not concentrated improvement in certain regions or cities, but it really was across the entire system, which was terrific to see.
June’s leisure passenger traffic was actually higher than June 2019 levels and June’s passenger fares were in line with June 2019 levels, very much as we expected. And we also saw significant improvement in business travel revenues as well, improving from down 77% in May to down 69% in June versus 2019. And just keep in mind that on our Q1 call, we reported that our business revenues were down 88%, so throughout the second quarter, we saw a very steady sequential improvement in business travel from the first quarter. And just as you know, when I talk about business revenue, I am really referring to managed business travel.
In terms of third quarter trends, we are continuing to see strong leisure travel throughout the summer. And as I said, June’s leisure traffic performance exceeded 2019 numbers and we are seeing that strength continue into July. In fact, we are estimating that both leisure traffic and fares will trend higher in July relative to 2019 based on the trends that we have seen so far. And we are also seeing continued improvements in close-in demand and yields for business travel as well. So in total, that results in an improving July revenue outlook of down 10% to 15% versus 2019.
In our earnings release, we also introduced our August revenue outlook of down 12% to 17% versus 2019 and we are estimating that August has a 1 to 2 point headwind compared to August of last year and this is simply due to the calendar shift that pushes all of Labor Day into September. I think that when you adjust for the calendar shift, we are pleased with the way the booking curve was shaping up for the month and demand and fares are also shaping up really nicely for August. And this is very consistent with our expectations as we move from our highest leisure demand month, which is July, by the way, into August.
Now, with respect to business travel, the recovery path is less clear, but it’s also clearly improving. So, if you look back to Q1 and then to every month in Q2, we have seen consistent sequential improvements over the past 6 months. So we are encouraged by what we are seeing and we are expecting a continuation of steady weekly improvements in business bookings. It’s also very clear that more and more companies are returning to the office. You are seeing that, we are seeing that. And without doubt, we are also seeing that corporate travel restrictions are beginning to be relaxed or removed altogether, which is great to see.
And as you would expect, we are doing plenty of our own surveys with our travel management company partners and our business customers, so we are talking with them frequently, we are talking with them directly. And we are very encouraged by what we are hearing from them, but we are also probably more encouraged actually by what we are seeing in terms of travel activity. So, business volumes and fares were both down in the second quarter, but both showed improvement in April, May and June and we are expecting sequential improvements in Q3 as well, though we do expect overall yields will continue to be pressured in the third quarter versus 2019.
Our booking curve rather for business, as you know, was naturally closer in, so now it’s mostly about improving volumes as the booking window tightens up. And I will say that and I will just reiterate what Gary said, the guidance that we are giving today doesn’t include any impact from the Delta variant. What I will say is though we have not seen any impact on the Delta variant at this point, so our outlook is based on trends that we are currently seeing, all of which by the way are very encouraging.
Just a quick comment or two on our Rapid Rewards and ancillary business, we had a great quarter. We saw another strong performance in Q2 in both our Rapid Rewards loyalty program as well as in our Chase co-brand credit card program. And we have more Rapid Reward members today than we did in Q2 of 2019. And June was actually the highest new member acquisition month in the history of the program, which was terrific to see. And our co-brand credit card program is larger now than it was pre-pandemic and retail sales for second quarter were up nearly double-digits versus 2019 and the spend per card also beat Q2 of 2019 levels. So, as you can imagine, we continue to be very, very pleased with the strength and performance of our loyalty and card programs. Our ancillary revenue trends, such as upgraded boarding and EarlyBird, also performed extraordinarily well in the second quarter, which is what we expect to see as load factors improve to historic levels.
Just a quick comment on our GDS initiatives, which continue to rollout and as you know, we’ve already gone live with Travelport and Amadeus and we will be going live on Sabre on July 26, which is this coming Monday. This is a big accomplishment. It’s been a tremendous amount of work, it’s a big deal and creates a big opportunity for us and this does complete the implementation phase of our industry standard GDS works. So, we now have a full array of distribution channels, which gives our business customers a channel of choice, whether it’s a GDS platform or a Direct Connect/API channel or our Swabiz self-service platform.
So without a doubt, our Southwest business team is pretty energized. They are pretty jazzed up. They have a great product to sell. We are in the right channels and they are really focused on driving new business. And now that the barrier is removed, there is a big opportunity for us to win more business, both from existing customers, which by the way, we have a lot of under-indexed as well as new customers and this is a tough sell for us before moving to industry standard GDS platforms. So, I think we are in a great position. We have a great business product. We have a great value. As of Monday, we will be in all the managed travel distribution channels. We have a great sales team. So I am looking forward to all the products we are going to make here.
Just a quick comment on the network, Tammy alluded to it, but before I wrap up, I just want to talk about that for a second to give just a bit of perspective, I am sure we will get into it in Q&A. And as you have seen, we have made some pretty meaningful changes in additions to our network as soon as the pandemic began 14, 15 months ago. And over the past year, we have announced service to 18 new airports. And at this point, 15 of the 18 are now up and running. And all the new markets are either performing within our expectations or ahead of our expectations and each one is a very strong, very natural addition to our network that we have wanted to do for quite some period of time. And as you know, new stations have a development curve and we understand that and we get that. And we are very pleased with where these stations are at this point. They will have the time to develop. And as I said, all of them are meeting or exceeding our expectations. And we also have the objective and again, Tammy alluded to this, of restoring many of our pre-pandemic routes and O&D frequencies while also maturing in new markets.
So in terms of aircraft investments, our 18 new airports represent nearly 100 nonstop markets and over 280 new trips per day. And by the end of the year, they will utilize roughly 55 aircrafts. And with our recent additions to Hawaii, which really is the culmination of the original plan, which is suspended because of the pandemic, we are at 37 trips per day from the Mainland U.S. to Hawaii, with nearly 40 inter-island trips per day and that utilizes roughly 37 aircraft. So we have committed substantial amounts of aircraft to new city opportunities and to Hawaii and both investments are paying off and meeting our expectations. It was the right decision.
Our Boeing order book gives us a tremendous amount of optionality and that allows us to fund our current network investments, while also allowing us to pursue the planned restoration of our network, all of which we will be working through in our 2022 planning process that Tammy just alluded to. So I will tell you, I think that we are very, very well positioned for the future.
And with that, I am going to turn it over to my friend, Mike, to talk about the operation.
Well, hi, thanks, Tom and welcome, everyone. From an operational perspective, I would say this is a pivotal quarter for us. We moved from, I would describe, managing and moderating our operation in the first quarter to really an acceleration focused in the second quarter. If you would compare just March to June, those 2 months, we added about 650 additional daily trips, so that’s a 25% increase. And then our customer and bag volumes far surpassed that. They were up nearly double that with a 45% increase between those 2 months. And that is just a monumental increase and it’s – we have done in a short period of time. And inside an airport environment that I would say is really still adapting and everything in that environment seems to take a bit more time today.
Our travel mix as you know has been reported as primarily leisure, so our pre-check customers from a TSA perspective were down over 10% from – as compared to June 2019. If you go out to the airport restaurants, lot of them have reduced hours or staffing levels, so there are longer lines. The third-party providers for wheelchair services have been able to scale with customer demand. The hotel shuttle services are less frequent. And of course, the airport is one of the last experiences across the country, where masks are required throughout the travel day. And considering all that, that’s just a tough environment to live in everyday and I am tremendously proud of our employees. They continue to answer the call and they really are Southwest warriors. And in fact, they produced a very solid second quarter operation.
So in the midst of that increasing customer volume, we also launched service to 7 new cities. We rolled out our new maintenance IT system. We launched Hawaii service from Las Vegas and Los Angeles and Phoenix. We expanded our existing Hawaii service. And we accomplished of all that while delivering an on-time performance of 76.3% and that was right in line with our 2017 through 2019 results pre-COVID. The bag handling remained exceptional. It was our best quarterly performance outside of last year’s second quarter when travel demand was really low. And we continue to lead the industry with the lowest customer complaint ratio to the DOT for all the marketing carriers. So just – again, I am just very, very proud of our employees.
Now, June was our most difficult month of the quarter. Our April and May outperformed previous years in all of our key operational metrics. And even with the customer volume increase, June was off to a solid start. Mid-month, we did run into a combination of technology issues, followed by weaker weather challenges across our entire network. And those introduced some extreme delays into the network and it caused significant crew availability concerns as well as delays and cancellations that impacted our customers and that dropped our OTP to 62.4% for June. And we need to and we will do better than that moving forward.
As we moved through July, weather is still a bit of a concern as is the overall tempo of the airport environment. But the entire industry is feeling the impact of those things and that’s reflected in the overall industry OTP thus far in July. We expect our operational reliability to continually improve from our June performance. We use planning models that require an adequate level of airplanes and people and facilities to run our schedules. As we entered into the second quarter, we had all those resources aligned and we were on track until roughly mid-June. And so there are a couple of focus areas for the operation as we move forward.
First, the passenger demand is very strong and our load factors going in and out of our large cities are 90% plus most days and we are still ramping up the operation and we have 16 fewer flights than we did in June of 2019, which for us means there are fewer ways to re-accommodate customers when we have delays or cancellations, while higher volumes and fewer re-accommodation options translate for us into a longer operating day. So we are adding staffing in several of our large cities to have additional resources to cover those longer operating days and reduce the need for a premium pay. We have increased our minimum starting pay to $15 an hour to better source applicants for those positions. And we are offering premium pay for our employees to pickup open shifts on their scheduled time-off just in the meantime.
The second thing that we are focused on is sourcing flight instructors, so we can ensure that we can support the training needs for our pilots returning from extended time-off as well as our recurrent training needs as we continue to add flying to the network throughout this year and then set ourselves up for 2022. It feels really good to finally be in a position where we can add flights and pickup our operating momentum. It was a bit messy as we have throttled down our activity and it doesn’t surprise me that it’s a bit messy as we are accelerating it. But our employees have navigated those – through those things heroically. They have great hearts for our customers and for each other. And I am just so proud and thankful for their efforts everyday.
And with that, Ryan, I think I will turn it back over to you.
Thank you, Mike. Chad, we will turn it over to you to give instructions on how to queue up for analyst questions.
Thank you. [Operator Instructions] And the first question will come from Hunter Keay with Wolfe Research. Please go ahead.
Hey, everybody. Thanks for getting me on. I think there is probably a couple for Tammy but I am not sure. So first one is where are you right now on average daily utilization and when do you plan on getting back to 2019 levels?
Yes. Yes, I can take that. So we are – our utilization is currently around 11 hours per day roughly. And in terms of just getting back, we are working through our schedule as we look into 2022. So we are hoping to get back more in line with levels in 2019, but we are not too terribly far off either. Obviously, a lot of that will just continue to be based on demand and as Tom took you through largely a function of how quickly we see corporate demand returning.
We still have what, 39 airplanes in storage as well.
Yes, absolutely.
So if you look at the total fleet, Hunter, in addition just to what’s scheduled, we still have some slush in there, which we will try to wring out with future schedules, obviously correlating with what Mike was describing, which is making sure we have the proper resources to support the additional flight activity.
I got you. And then sort of in the same vein on that, I know you said you are going to continue to evaluate the 44 options. Given the ESG benefit you highlighted, is it fair to assume that the bar is very high for you not to exercise those, meaning whether it’s COVID-related or whatever, things would probably get a lot worse for you not to exercise those options? Is that a fair default way to think about it?
I think that it’s absolutely fair. As pointed out, we have a very cost efficient Boeing order book. Obviously, we have a very strong balance sheet with ample cash. And we can – there is a strong ROI on those options either way. And obviously, we are hoping we can continue to grow the airline here, but if not, it’s compelling business case for us to retire the older -700. So, I think that is a fair assumption.
Thank you.
And the next question will be from Ravi Shanker with Morgan Stanley. Please go ahead.
Thank you. Good afternoon, everyone. Maybe just sort of the question on corporate, I think you said that your June corporate was down 69% and that’s a pretty nice step up from where it was a couple of months before that. I think some of the legacy peers are down a little bit less than that. So I am just wondering if that’s kind of normal given your mix of business and kind of how do you see that trending over the next several months, given that you are now complete with all your GDS integration? Thanks.
Well, so this is Tom. What we are seeing is I think we are seeing something very similar actually to what I am hearing and reading from the other carriers as they report. But just to give you some context roughly, call it, 30% of our passengers or so are business travelers and probably 35% of our revenues is generated by business travel. And I think that the opportunity for us, I think this kind of gets to your point or the answer to your question, we have a lot more opportunity to drive a lot more depth within the current accounts we have with GDS. So, I think that you will see that begin to drive up our Southwest business numbers, if you will. But very consistently, we are seeing about 5 points of improvement in Southwest business bookings each month over the past 4 or 5 months. We said, I guess this was the first quarter call, Ryan, we said that we – our expectation was Southwest business or business travel will be down about 50% by year end. If you just kind of extrapolate where we are right now, we would beat that. I think our expectation would probably be at 50% by the end of this quarter and certainly beat that by the end of the year, assuming things keep going. So I am not sure if we are behind our competitors or not, to be honest with you. I feel like going from down 88% to down 69% on the path towards down 50% by the end of the quarter is pretty much in line with the market. But I think we are going to see more and more penetration with the GDS implementations and again, we just under-indexed significantly in these big accounts. So that’s an opportunity for us.
So I am not going to say anything different than what Tom said, so it’s probably unnecessary for me to say anything. But just to offer you my own opinion, which is we are using the corporate accounts that we know as a proxy. And so our total business travel is far beyond this proxy. And I think one could assume that they are smaller companies, maybe sole proprietors or what have you. But our frequent flyer credits and there are just other inputs that we look at it would suggest that, that is a conservative number. So, I agree with Tom. We are the largest airline in the country. We carry more people than any other airline. I think we carry more business travelers than any other airline. So, I find it hard to believe that we are inconsistent with anybody else. But admittedly, we hear the same numbers that you hear and we just can’t – when out surveying people, we can’t be for sure what their purpose of travel is. But our frequent flyers, those flight credits are down far less than 69%, which is some indication. Of course, it could be a businessperson who is traveling for personal reasons. We just don’t know, but it’s probably more information than you wanted, but I can’t imagine that we are out of step with anybody else in the industry.
No, that’s great color and then that makes a lot of sense. Maybe a follow-up for Tammy, kind of just given some of the labor issues that are hitting virtually every industry and every company out there, maybe you can talk about kind of what Southwest is seeing on the ground and maybe some of the initiatives that you guys are taking to make sure that you guys are fully staffed for back half of the year? Thank you.
Yes. I will chime in there and Mike may want to chime in as well. But yes, we are – so couple of things. As I already mentioned, we are increasing salaries across our system, the minimum wage there, so I think that will certainly be helpful. We are – and just to kind of step back, we are actually staffed appropriately coming into the quarter. Now, there are some locations where we are wanting to boost our hiring and we will continue our efforts there. And then as we also mentioned, we have recalled our employees that were on the voluntary leave programs and we will recall all of those employees by the end of third quarter, certainly by the end of the year. So, Southwest is known as one of the best employers in America, so we don’t anticipate any issues there on the hiring front. So, we will – as we ramp up capacity here, make those decisions, we will be able to hire the employees that we need, but those are few of the things that we are doing. Mike anything that you wanted to add to that?
Yes. No, I don’t have much. I would say that across the network, we are appropriately staffed. We have got pockets where we need more people. We have got pockets where we have too many people. One of the great things that we can do and that we are doing is we can incent people temporarily to go fill in where we are short. So we are doing that in our large locations. And as Tammy mentioned, we have a handful of our large locations where we had very aggressive recruiting efforts going on. And as Tammy mentioned, with our $15 minimum pay increase, we have really good pay packages with our union contracts out there. And we feel like we will be able to get those people as we ramp up the network.
And we have just gotten back into the game. So, I don’t know when you started trying to recruit and hire Mike, but it can’t be that [indiscernible]. It is more challenging. So we acknowledge that. And I am worried about it, but I agree with Tammy and Mike moved – the minimum is up to $15 an hour, which will certainly help. But pilots, flight attendants, we are not sensing that we are going to have any problem there. I think it’s more just hiring in our ground operations where there is just a lot of competition or that pool of potential employees as well.
It’s interesting, too, the staffing challenges, a lot of times that we find ourselves padding our problems. It’s the industry. It’s everything around the industry, whether its van drivers or maid services to clean hotel rooms or people to work at restaurants. And it just makes that entire environment difficult for our employees or customers to navigate through.
Very good. Thank you.
The next question will come from Stephen Trent from Citi. Please go ahead.
Hi, good afternoon everybody and thanks for taking my question. Just a very quick one from me. Any sense whether, not just you guys, but any sense whether you think the industry might need to step up its IT spend post pandemic, not only in terms of facilitating customer interface, but also considering cybersecurity. You have this a few months ago, the Southeast pipeline incident. I had two or three people tell me today that your website happen to be down. I don’t know if that’s true, but I would just love to hear your thoughts.
Well, I guess I will take that one. This is Tom. I think that’s – I think we are all struggling, not just airlines, but I think every company is struggling trying to figure out where to invest its cybersecurity dollars, what elements are the most exposed, where is the biggest risk, how do you defend against that. And it’s kind of a moving target, but that is a real source of focus. I know – I am sure it is for our competitors as well. It certainly is for me in my role. And so we are spending a lot of time on cybersecurity. I think that the – I think that’s the primary thing. I think that this is a network that is so technology-dependent and so network-dependent that I think that’s an area of investment that everyone is probably investing more in. But I think beyond that, I think every company has their own business strategy and their own set of technology requirements for that. But the big common thing, I think, is just the cybersecurity investment spend is very important, it’s very real and it’s significant and it’s hard.
Just to pile on to Tom’s comment and actually, I am stealing his words, but we are very technology-dependent as an industry and it’s probably stating the obvious. But that does suggest that we need to be top drawer when it comes to our technology. And obviously, the cyber risk everyone is aware of, and it is sort of a bottomless pit when it kind of comes down to how much does one need to do. But not really trying to speak for the industry, I am just talking for us. But absolutely, we view ourselves as a technology company. We have an excellent team. We have ample dollars allocated for that effort. And one thing that the pandemic has done for us is it’s made us a lot more efficient with our technology investment and management. And it’s enabled a lot within the workforce as well. So, I feel like we are better than ever at Southwest, and you can be sure that we are going to continue to make that a high strategic focus.
Gary, if you don’t mind, since you just said we view ourselves as a technology company and an airline and service company, but we just did have an outage. So, I think rather than wait for a question on it or not address, let me tell you how we feel about that and what happened. So just to be really clear, we did have a technology outage, which was pretty impactful. In fact, we really hindered Mike in the operation in a very significant way. And yes, just...
Back in June.
Yes, back in June. And it really clogged things up and just made for a very rough situation. And I just want you guys know that first of all, it was not a cybersecurity issue. It was not a hardware failure. It was not an engineering failure or architecture issue. It was a human error. And it’s just something that was a mistake made and we are dealing with it. But it was not a structural issue or investment level issue. It was just a simple human error. And we feel terrible about that. We got to be better than that, especially if you are going to be so dependent upon technology, you can’t have mistakes like that. But this was not a failure of technology, if you will, it was a human mistake. So, we will do better. But I just wanted to get that out before the question was asked.
Stephen, you mentioned one – this is Bob, customer experience, investment just an example of IT. And I would just chime in for a second because it is kind of on my list of focus items I would like to look at for ‘22 and beyond because they are just win-win. They typically tend to be things that relatively low spend. You can put more and more decisions and transactions in the hands of our customers on mobile devices, especially when we have things like irregular operations, the ability to handle it that way, give them choices without standing in line, making a call to our wonderful CS&S employees as an example. Those are just terrific things that I would love to look at and we will look at because more and more customers and our employees expect that they will be able to manage their lives, interruptions on the mobile devices. And it’s just good all the way around because the – it’s good for our customers because then they can handle more and more things via self-service. And it’s good for us because it moves those transactions from potentially long lines or a long phone call wait time into a much shorter handling period. So, it is a focus of something that I would like to look at is just how we can continue to take our terrific customer experience to an even greater level.
That was a super helpful. Thanks very much everybody.
The next question will be from Duane Pfennigwerth with Evercore ISI. Please go ahead.
Hi. Thanks for the time. Question for Gary and Bob, and I am not sure if you all intended Bob to have pesky analyst questions at this point. But can you give us a sense for any differences in priorities, leadership styles or relative strengths? I appreciate you two have worked together for a long time, but maybe you could highlight some differences or previous indifferences.
I think the biggest difference is that Bob is an aggie and I am not longhorn. And other than that, we are sort of joined at the hip. But Bob mentioned it in his remarks that he has been a part of this and he has been a part of it for a long, long time. 33 years is a long time. He has had a number of different executive jobs. So, I think you all should just know that he has been a part of coming up with and defining our purpose and our vision and translating that into a strategy and he has been a huge part of the execution. But at the same time, what we have got to be careful here is the task of a leader is to have the wisdom to know what to change and what not to change. And at the same time, I need to – selfishly, I need to empower him and get out of his way. So, I had a good teacher in Herb Kelleher. He was Executive Chair for me. And I wasn’t necessarily thinking at the time that, “Okay, well, I need to learn from this because I will do it someday.” But fortunately, I have lived through that. And I do have a good idea of what I need to do to support him. But Bob, that’s really more of a question for you.
Yes, and we have been able to work through that whole aggie/longhorn thing. It’s taken two decades of the three decades, but we got there. But no, I am just kidding. But yes, I think a couple of things. One, we – at the end of the day, as the CEO, you cannot do it all yourself. It’s all about the team and we have a wonderful team of leaders here. And I think we are both very passionate about focusing on that, developing our team, developing our leaders, developing the “next generation” of leaders and preparing people. And so I think that – I feel like we are very similar in that way. Yes. In the same way that Gary invested in me and many others for decades, but I think at the passion point of mind to be able to continue to do that because it’s all about not just what we can do as we have this change, it’s about what we can do to set Southwest Airlines up for success for 20 years and 30 years and even more years. On the style front, in addition to that, I think our styles are, again, very similar. We are very collaborative. We love bringing the team into the conversation and the decisioning. If there is a difference probably, I – and this can be good and bad, I am probably a little more of a driver, maybe a little more impatient sometimes, which is probably the way a lot of my assignments over the years have been go do things, go get the integration underway and push through completion as an example. So, that can be a benefit in terms of driving and getting things accomplished in our plan. But I also have to work on sometimes slowing down, being collaborative and just make sure we make wise decisions here as we – as of course, we will. How we would approach the plan and our strategic plan, in particular, were very similar. I think there – as you know, we are very focused on things like GDS and modernizing the fleet. Plans change though. You complete a set of things and you roll into the next set of things, and you want to be very thoughtful about what those are. We want to be, again, collaborative with our team about developing that set of next strategic initiatives. And so we will work, as part of our ‘22 planning, to think about that next set of things. I mentioned this upfront, I am focused around things that are just maybe part of what is an expectation today. So our customers expect us to work with them and engage with them and produce the customer experience that is maybe again terrific. Our employees are just terrific, but they expect a lot of things to be quick, delivered over mobile platforms, easy to resolve, even in Iraq situation. Our employees expect the same thing. They want it to be very easy to work with Southwest Airlines, manage their shifts off of their iPhone, for example. And so I will be very focused on some of those things. The other – and again, this is a focus that both Gary and myself and our whole team, I am very focused on our diversity commitments. We laid some of that out next – last year. We have things that we need to focus on. We, in particular our diversity in our senior leadership group. And so you will likely hear me talking a lot about that. As Tom mentioned, we have a lot of focus in our sustainability commitments. And so plans change over time. They always do. The initiatives we have on the table right now are what I and Gary and others were involved in 10 years ago and so they are always going to shift. But we are going to make sound judgments. We are going to develop the team. We are going to stand by the principles that make Southwest Airlines great, our business model, our people balancing our results with our operations and with our customer experience. And so maybe a long-winded answer, but I think we have – we are generally a lot of similarities in how we approach the business and the problems and our people.
I appreciate that perspective from you both. Maybe just a quick follow-up with respect to the labor availability tightness you are seeing frontline ground ops. Can you comment if that’s broad-based versus specific regions? And how do you think about solving what may prove to be a transitory cost issue with permanent solutions or how do you – what’s your view on sort of transitory versus sort of fixed? Thank you.
Mike, you want to comment on that?
You bet. Yes, the – and it’s a complicated question because there are so many factors. I mentioned I was in Atlanta yesterday, so you could see the hiring and labor complexity firsthand there. So, I think you are – multiple things, you are in a broad-based market with supply shortages. So, there is just not enough people to fill the jobs that are open. I might – the stat that I think I have heard it, we went into the pandemic with open – a lot of open jobs here in the U.S. And I think we have had 9 million or 10 million folks exit the workforce at this point. So, we all see that the help wanted signs everywhere. So, you are competing in a market that is just tougher. As an example, we are getting fewer applications for open position than we are used to. So, it’s just going to take a lot of vigor around the focus on hiring. Some of the differences are regional. I would say they are more about how to triage critical positions. So, we have places where it’s more critical to the operation than others. For example, we are really – we have got a full press on to hire on the Denver ramp as an example because there are needs there. We have full – we have a full press to hire flight instructors because we have plenty of pipeline – a pipeline of pilots we feel like, but we need to get them trained. We have folks coming off of the ExTO, and it just takes time to train and get them back into the workforce. So, there needs to rebuild our training capacity just like our hiring capacity. So, I think I would tell you the – I am probably more focused on this being a broad-based problem in terms of just labor availability than a narrow issue in terms of a specific job. The biggest question to me, I think we are fighting our way through because we will get through rebuilding, recruiting teams and training teams and that short-term, those are short-term issues is, how long does this persist. Do we plan against this being a three-month issue as the folks are really going to return to the workforce, for example, once school starts or are we planning, against a multiyear issue where it’s going to be folks coming back into the workforce very slowly. And that’s a difficult question, which means you just have to be nimble in your planning, how we think about bringing aircraft into the schedule, which I am very pleased we have the flexibility, how you think about planning your schedules and how you think about staffing your schedules. The last thing we want to do is put a schedule out there where we cannot staff. And so there is just – there is a lot of focus on this. I will tell you, if it’s not the #1 focus right now, it is 1A, which is getting – getting our hiring in place and our staffing in place.
And the good news is there are techniques doing to do what Bob described and that is the philosophy that we are going with. But I am sure you glean this. I mean the effort per hire is I don’t know what Bob, double what it is to be?
At least double.
So – and that’s money and – so all of that, I think that’s what Bob means in addition to just how do you plan the next schedule. But Mike, anything you want to add?
Not much. I would just say for me in the operation, I would say that there are six to eight big locations in big cities that if I could snap my fingers and we could go add ramp agents to those locations, that’s what we want to go do. I think we have got a great package to offer them. And so when we get that in front of them, I think we will be very successful at doing that. But there is – just to be transparent with you, there are also frustrations that people have to go through to get on the ramp. There are background checks. There are – is managing at airports, they are driving out to the airports. So, those are the things that we have to overcome with the compensation package, career and benefit and travel privileges. And I think we will be really successful with that, but it might take us six months or so to kind of get into the swing of things.
And that’s as contrasted, Mike, to like Amazon, it doesn’t require near the – they don’t have to and obviously we do.
Okay. Thank you.
The next question will be from Catherine O’Brien with Goldman Sachs. Please go ahead.
Good afternoon everyone. Thanks so much for the time. Maybe just coming back to the discussions we had earlier on fleet, you have placed a couple of incremental orders for aircraft since the pandemic, including one since we last spoke last quarter. It would look like some pretty attractive economics. I am not asking for capacity guys, which I know will also be influenced by retirement, as you noted. But off of that 2019 base that was so impacted by the MAX grounding, how should we be thinking about your ability to produce ASMs based on the MAX return to service and these incremental deliveries over the next couple of years? Thanks for any color.
I think the – and I am sure there are several thoughts in the room here. I think that the company – you are talking about technology and physical plant and facilities and things like that, I think the company is very well prepared to increase volume. We are very – so to me, you kind of think about it, if we want to grow, we need airplanes, we need airports, we need money and we need people. Those are sort of the four big categories. We have got – the Boeing deal, as I mentioned to you all back in the first quarter, that was a huge strategic positioning for us. I am very, very pleased with that. So check. I think the airport capacity that we have around the country is in great shape. And where it’s not, for the most part, we have a line of sight to address it, number two. So, I check that one. We have got money. We – and as I was trying to share with you all in my introductory remarks, we have more money right now than I thought we would three months ago or six months ago. So, I am feeling really good about the balance sheet and our liquidity. And I think you are down to what we have been talking about the last 15 minutes, which is people resources and that, I think, will be our constraint. So, I hope that answers your question, but I will just open it up.
I think the thing I would add – and Catherine, this is Tom. The thing I would add is assuming you can get past the people constrained piece of it in terms of how we want using the capacity. And by the way, I think back to Hunter’s question, it seems to me we would take those aircraft, because we want to retire, you still are going to retire. Its NPV positive kind of stuff, you have a better customer experience that all works. So, I don’t think there is a fear or concern of us taking too much aircraft and being stuck, right. So, we have plenty of flexibility, the ability to retire, the ability to retain and keep growing. But I guess what I am really getting at is our ability to produce good ASMs and productive ASMs are going to be somewhat impacted is largely dependent upon when does business traffic begin to come back, and let me explain, why. The composition of our network, our point-to-point network, it’s our principal around the point-to-point network has not changed with the pandemic. How that’s been executed for the past year, it’s been shifted a little bit just by virtue of the environment. But our philosophy is the same. So, we do want to get back to the pre-pandemic mix of direct versus connecting flights, call it, 75-25 historically. We are a little bit skewed off of that’s probably, I don’t know, Andrew, 72-28 or something like that. So, we want to get that back. We also want to get back to our mix of short, medium and long haul flying, call it, rough terms 40-40-20, short, medium, long as percent. And right now, it’s more like 30-40-30, because those short-haul flights, those are the business-driven flights. And the business traffic wasn’t there. We need to create the leisure capacity. It came from short haul. So, as the business comes back, you will begin to see us just reinstate that kind of flying. So, there are many, many productive uses of the capacity. And again, the capacity – if the demand does not show up, we have the ability to retire 737, 700s, right, and just continue to improve the fleet. So, I think we have got in fact, either Mike said this or Tammy said this or we have all said this, the flexibility we have on the upside and the downside is really positive. It’s really strong.
I think the redeployment and you all checked me on this, but the redeployment is to try to go back to where we were in 2015. That’s 15% of our route system, as I recall. That we have reallocated from call it more business-oriented markets, i.e., short to the longer, more leisure oriented. So, I think that speaks somewhat to what you are describing. But – the other thing I would comment on 2019, in 2019, we were close to providing the network that we wanted, because we were constrained in that scenario by the fleet. And so we are already trying to get back to where we were plus. And all of this is, as we have all said, it’s all dependent upon demand materializing like we are thinking. But yes, I think we have got a great opportunity. And as long as we can get it, I think at this point, the people, we will be able to deliver.
That’s great. Thank you for the color. And I think Gary someone needs for retirement present to get you that recipe for capacity growth on a pillar or something. That was great. I like that. If I could just maybe sneak one more modeling type question shorter term in, looking through the monthly revenue forecast, we see August step down a little bit from July. I think there is some holiday movement in there, as you mentioned, and perhaps second half of August is a little bit more back-to-school given you are kind of South and Southeast part of your network. If that’s right on the return to school, driving a little bit less leisure demand, while corporate is still depressed, would it follow that September should also see a sequential step-down in performance versus August or are there other factors at play? Thank you so much for the time.
Well, you are asking good questions. So I think that the – first of all, I think that the calendar shift from two points from August and September is just that it’s a calendar shift. It doesn’t really belie the underlying strength of the business. So, August is performing well. So, I am not concerned about August. There are no red flags in August, but it does have the natural seasonality. The first half is strong leisure. The second half is back-to-school, and that’s where the business traveling begins to kick in and pick up the slack and that kind of thing. So, we are waiting to see that. We feel pretty good about that. In terms of September, we did something this year that was really creative. So, I am kind of smiling at Andrew right now because he and his team sorted this out and worked through it. But we had a 50th anniversary sale that was really all about driving leisure demand in the back half of September. September, call it, second week of September through November 3rd, some such date, but it’s basically trying to fill in upfront the leisure bookings early to secure a nice solid foundation book of business. And from that point forward throughout the rest of September and October, you are able to begin to manage just the remaining booking window, if you will. So, that has worked really well. In fact, the 50th anniversary sale, the three day sale. I think two days of the three days, Andrew, worked two of the top in fact #1 and #2 in terms of our history over 50 years of bookings, right. So, this thing really worked. Point being, we have a very solid foundation of leisure bookings in place for September. I am very curious to see what’s going to happen with business travel post Labor Day. Everything we are sensing, feeling, hearing is suggesting that you are going to see it begin to come back. What I am really encouraged by is, I got to be quick, I am taking too much time, on the top 50 or so corporate travel accounts, seven are professional services consulting firms, they are all traveling. The lockdowns are removed. So, they are traveling, and that’s a big deal for us, and that just begins to generate more and more. So, I think it’s beginning to pick up some steam. So, I am nonplussed by the August issue you raised. I don’t think that’s an issue. September, we have built a good solid book of leisure, and I feel good about where we are.
Yes. And Tom, the only other thought that I will just tag on really quickly is we have got some exciting things happening in just a few days as we turn on Sabre. So obviously, there is going to be a ramp-up, but we are super excited about that. And we think we are uniquely positioned in that regard with respect to corporate business travel. So, a lot to look forward to. We are really excited about it. And as I think Gary and Tom have already alluded to, is you shouldn’t read anything different into our September forecast versus what you are hearing like some of our competitors. We are – we are just – we are coming out of a pandemic. It’s as simple as that, but we feel really good about where we are headed.
Yes. And we have just continued our sort of pandemic rhythm here of providing 60 days outlook – but we are not – we don’t see anything that suggests that September is going to drop off. So, I think that’s just to make sure that, that comes through. We are reluctant to provide a forecast yet because it’s just far enough out. But the August is just the timing of the holiday is all that is.
The next question will come from Savi Syth with Raymond James. Please go ahead.
Hi, good afternoon everyone. Just a question on the cost side, if I might ask again, if I pick-up the hopefully, what our shorter term rebuild near-term pressures. It looks like unit costs are flat to down 4% or so versus 2019. And capacity being back to 2019 levels, I was just wondering if this is a fair base level. And I ask this because I know in 3Q ‘19, I think there was about seven points of pressure from the MAX-related grounding. So, I was just curious how we should think about what we – what’s been achieved in terms of getting costs out?
Yes. Savi, I can start, and I am sure others will want to chime in here as well. But just to take you through our thought process here. As we laid out for you in the release, absent the operational cost impact that we called out, our third quarter non-fuel unit costs, excluding special items and profit sharing would be forecast to trend in line or below 2019 unit cost levels. So, while most of these near-term cost pressures should be one-time or non-recurring as we move beyond this ramp-up period, we have always really considered getting back to 2019 unit cost levels at sort of a point in time target. And we have shared that sentiment with you, I know before. As far as the cost base in 2019, we were hearing extra employees, as you pointed out, due to the MAX grounding. However, when you think about that, the nominal cost of that was really overshadowed by the seven points of capacity that we were unable to fly back in 2019 that caused the outsized inflation. So, if you fast forward to where we are today, we have a lower overall headcount due to voluntary retirements, but just keep in mind, we have had 2 years of right inflation for our employees. And as we have already covered with you, we have recalled the vast majority of those employees from extended time off. The recall will help us, of course, as we continue adding trips here in the third quarter and the fourth quarter, but it does reduce the benefit from our voluntary leave program by about $50 million in both third quarter as well as fourth quarter. And the other thing to consider is that we are now back to 2019 levels and we are building toward 2019 trip levels, as I pointed out earlier. So just – so we will have some noise here as we have already covered with you all. It’s just not as clean as we would like as we are adding back in capacity. And we will need to do some hiring as we have already covered with you all for our work – for many of our work groups to support that true growth in the second half and as we restore our network next year. But what I really wanted to get to is as we get back to restoring our network and we kind of get in a rhythm here, we should have more operating leverage as we bring back on more capacity. So, I think that’s a really key point for you all. We are just – it’s just a little messy here. But that is obviously our goal. Our goal is to scale as efficiently as we can as we restore our network. So, I think, hopefully, that’s helpful. We are going to be really focused on our productivity metrics like employees for aircraft, and we are going to all work together just to be as efficient as we can and really go back to more of our history of having very highly productive employees and that will be anchored around our point-to-point network and our all Boeing 737 fleet. So, I feel like our competitive cost advantages are very much intact, and we are going to work really hard to make sure that we scale efficiently and offset inflationary pressures, which is not unique to Southwest as best we can.
Yes, really, Savi, I think Tammy’s last point is the important one which is our – we want to strive at hissing with Hunter’s initial question about aircraft productivity to schedule efficiency, and that will be somewhat dependent upon demand and how many flights we can put in. But 2018, 2019, coming into 2020, we had great momentum running the operation. We had great plans to improve the turn times and improve our efficiency, and we have not yet had a chance to test those out. I am very excited about that opportunity. So, I think that’s really key and that its guess work is to when we are going to have the opportunity to actually do that. We will need more airplanes. We need more flights. We – all the things that we have been talking about all morning here, so.
To make sure I understood that. And if I kind of – there is a lot of moving parts, clearly, but more of a realistic way to think about a sustainable level and there will be inflation beyond that. But maybe getting to slightly below 2019, is there a realistic view on once things have normalized?
Well, I would be shooting from the hip to answer that question. I think we can be – I could be thoughtful in answering that. Tammy may already know the answer, but 2019 was not optimized either. And as you have pointed out, I think the question is if it were, what would that benchmark be. And how realistic is that given the inflation, so...
Yes, I agree, Gary. And Savi, just we are not ready to provide fourth quarter guidance, and we will be meeting later this year, and we will be more prepared at that point to lay out our plan for 2022. But I will try to just provide you just a couple points, just to give you a little color. We do – just to be clear, though, we do expect the current cost inflation and salary wages and benefits from our operational strain to be temporary. And here in the near-term, we anticipate some ongoing cost pressures and other cost categories as we ramp up our flying and that’s obviously like maintenance, airport and other operating costs. So there will be some costs that come back on as we add capacity as we recover. And then there will be some choppiness, too, as we bring back our flying. Just looking ahead to fourth quarter, as an example, our maintenance cost will be burdened more in fourth quarter due to just bringing the 700s that Gary mentioned out of storage and back into service. And we’re realizing airport cost pressures as well. And then the inflation we’ve already covered. So again, I think it really goes back to as we scale up, we will have more operating leverage and we will – I think the key here is to get back to those 2019 productivity levels. So, again, a lot of moving parts. And as we get through the year, have more visibly into next year we will be prepared to give you all a better guidance there.
Appreciate all the color. Thank you.
We have time for one more question, and we will take our last question from Helane Becker with Cowen. Please go ahead.
Thank you very much operator for squeezing me and thank you, guys. So I have two questions. One is, you talked about the level of credit card acquisitions in, I guess, the June quarter. And I’m wondering if you can say what you attribute that to? Why you’re seeing such a strong recovery in that area versus maybe what you would have expected pre-pandemic?
Yes. Well, it’s pretty simple, actually when we have a lot more people traveling, so you have the opportunity to get them to sign up. We also marketed it really hard. We had a very 60,000 point offer out there, sign-up offer and with more people being out there, it’s just that much more feeling, I guess, or it’s easier to get more people to sign up, but it’s also just a great card. I mean, it’s part of the Rapid Rewards program, which is an incredible program. There is no blackout dates. The points never expire and on and on. It’s just a very, very valuable card in the form of currency and is performing extraordinarily well. It’s – I’m not going to get into the Chase performance numbers, but man, we are performing very, very well. So I think obviously just people being out there traveling again and being able to acquire and we have marketed this pretty hard.
Yes.
Yes. They are out, they want to spend money.
I think that’s right.
Get a credit card. We’ve been very pleased with that.
Okay. That’s great. Yes. No. And then the other question is you talked about environmental issues and culture and diversity and things like that. And I thought you’ve got it pretty good and the company has had a pretty good track record. Tammy isn’t the first CFO, that’s the female and Colleen Barrett back in the day was President. So you have had a really good track record of supporting, I think, all of checking all this box as a young, still efficient fleet and diversity at every level. And I’m just kind of wondering what you’re thinking the are two things. What you need what you think you need to do to maybe get more credit for it? And then second, how we should measure you against it?
Bob, do you want it?
Yes, Helane, I think it’s – you’re right. We have – I think we have a really good track record. And what you saw for us last year, we came out with commitments that were really around diversity in particular, racial diversity in our senior leadership group. So I think what you find is that as you look at our broad employee base, we are very diverse. So particularly on the front line, I think I would – my guess would be that our diversity in our overall workforce, particularly the front line for the most part matches what you would see here in the United States. I think we’re in really good shape there. But as you move sort of up the leadership chain here, and again, I’m thinking about our senior leadership, it is hard to argue that we don’t have some work to do. While we have terrific leaders, we have a terrific pipeline of leaders, and it’s really just about making sure that as we think about our succession planning and our long-term pipelines that those are diverse. We – our hiring practices focus on thinking about diversity as a component where do we recruit, how do we think about hiring and how we choose to hire. And then, again, because if you just took our senior leadership group as an example, where we do have some work to do, I would argue, and that was part of our goal stated last year. It’s a long succession pipeline to move from a kind of an entry-level leadership position, ultimately into a senior leadership position. That may be a decade-long process. So it’s very focused on, to be honest, the processes we use to think about how we hire and how we recruit and where we hire now and where we recruit. And then how we think about just improving our diversity in senior leadership. And then again, that depends on the pipeline. We’re looking at things just classic sponsorship and mentorship programs, which we all do. And so again, I wouldn’t take that as, we have a big issue. I think we – historically, you’re right. We have, I think, produced really good results, but there is improvement that we think we need to focus on there.
That’s very helpful. Thank you.
You are welcome. I am looking forward to being with you at the conference here in a month or so, by the way.
Thanks. Looking forward to it, as well.
Alright. Well, that wraps up the analyst portion of our Q&A. I appreciate everybody joining us this morning. And if you have any follow-up questions, please give our Investor Relations team a call. Thanks so much, and have a good day.
Ladies and gentlemen, we will now begin with our media portion of today’s call. I’d like to first introduce Ms. Linda Rutherford, Executive Vice President People and Communications.
Chad, thank you very much. We will get underway with our media Q&A. If you’ll go ahead and give them some instructions to queue up for questions.
Thank you. [Operator Instructions] And our first question will be from Alison Sider with Wall Street Journal. Please go ahead.
Hi, thanks so much. I was wondering, I guess, with the benefit of hindsight, if there is anything you would do differently in planning for this summer or any additional sort of coordination that there might have been between kind of the network side and the operations side. Just as you look back, if you had the opportunity to kind of replan the summer all over again, if you would do anything differently?
Well, Alison, I’ll take that one. The – only with the benefit of hindsight, by the way, because the schedule was very well planned. It was very well coordinated between our financial objectives, our commercial opportunity and our operational capabilities. It was very well planned. It was planned based on our historic modeling of what kind of resources we need for what kind of activity, which we have 50 years of experience doing. And we included some cushion, for lack of a better word. So turn times as an example were actually planned to be higher than what we would otherwise expect. And in hindsight, there are some elements of our plan that were too tight. That being one of them at some of our locations. If you were listening to the analyst call, Mike mentioned his eight largest airports. So weather, I/we factored in weather as best we could, and the weather was more spring-like in June, in particular, than normal. And so that kind of whacked us. That’s out of our controlled technology or one-off things. And those are the two headline issues for June.
If we get into July, I think we’re in the middle pack most days, Mike. So we’re not first in the industry. We’re not last. So the industry is simply operating slower. And I think we want to be – we can see some elements of where that’s manifesting and what we do know is we have a different network than 2 years ago. We have a much higher proportion of consumers traveling that has translated into much heavier baggage loads and also buying itineraries that are complex, i.e., connecting, which also translates into more connecting bags. So we can see things today that we would not have known, when we put the schedule into effect. I can assure you, we will be factoring that in prospectively. So that’s the one very tangible thing that I’ve seen so far. And again, you’ve got experts in the room here that may want to chime in. But the overall allegation that we were understaffed is not true. That is incorrect, meaning that it wasn’t understaffing that’s led to delays. The problem becomes – the delays, whatever the reason for is puts pressure on the staffing, because the days are longer or as Mike was describing, how flight crews end up diverted in the wrong place and out a position and so do airplanes. So getting the airline back on the tracks obviously is job one. But our people have done a phenomenal job. They are working very hard. Mark – Mike described some of the challenges in the environment. It’s just – I blame it on the pandemic. It’s messy. It’s messy coming in. It’s certainly messy coming. Anything you guys want to add?
Yes. I’ll just – I’ll throw something in here, Alison. So our point-to-point network is it’s a different model than most other airlines out. And the way that we are able to absorb significant events in that kind of a model is we would generally cancel a flight, get the airline back on time and then we would reaccommodate customers through other alternatives that we had. And we do that very successfully year in and year out. The biggest change that I think we faced this year with 2020 hindsight is we can’t absorb those significant events as efficiently this year as we did in the past, because we don’t have as much frequency in our network today that we did yesterday, but we will in the future. And so what that is causing us to do is to run those flights a little bit later, and it extends the operating day. And so that’s really the crux of the issue. And then the solve for that is as we grow the network and add flights back, that solves itself. And then also, we’re going to come into a period of time where we don’t have the thunderstorms and these pop-up weather events that we do here in June and July. So I feel like the worst part of all that is behind us. And given all the information that we had, as Gary said, we were planned appropriately well, just not able to absorb those significant events like we could in the past. Saying all of that, we’re roughly in the middle of the pack in terms of dealing with those things today.
And Alison and I agree with Mike’s point on our network, but even having said that, we have no problem with this new network until mid-June. No problem whatsoever. We had great on-time performance all the way through May. So, yes, I will admit to you, and I take full responsibility for it. I was surprised – I wasn’t surprised that the impact of the technology outages had, but it took quite an effort to work our way through the second half of June and the weather events. And we’re closer to normal here in July, although we’re not satisfied with where we are. But long answer to your question, but it is complicated. I will say that, and it’s been 24/7, because it’s not obviously the customer service that we want to offer our customers. But I think the worst – clearly the worst of it is behind us in June.
Thanks for all the details. Appreciate it.
And the next question will come from Tracy Rucinski with Reuters. Please go ahead.
Hi, everyone. Thanks for taking my question. I was wondering if you have any updates on steps that you’re taking to address unruly passengers and better equip crew to deal with bad behavior in flight?
Yes. So Tracy, this is Mike. So our flight attendants, they have training on handling passenger disruptions and just how to deescalate events, and we have recurrent training with respect to that. And I think that they do a very, very good job with that. As you mentioned, there has been a marked increase in, what I would say, are abusive customer behaviors, and that’s throughout the whole industry. And I know that it’s a small subset of travelers to be sure. But we haven’t experienced these kinds of violent outbreaks before. And I can understand from a customer’s perspective, maybe how some of that frustration builds up. But we have no tolerance for customers to take out that frustration on our people or anyone else for that matter and especially if those are in physically threatening or assaulting manners. And so we try to be as hospitable as we can as part of our operating philosophy day in and day out. But we do have a responsibility to inform customers of the federal mask mandate. And we do participate in the enforcement of that mask mandate by reporting abusive and threatening behaviors to authorities. We have been very vocal with our unions about having these authorities follow-up and be as aggressive as they can on these abusive customers. And in addition to that, we will add customers to our restricted travel list if they are abusing our employees.
Will you make self-defense classes mandatory for flight attendants?
We have different defense mechanism – defense classes that we – defense techniques that we talk – that are already part of our recurrent training in our flight classes.
Okay, thank you.
The next question will be from Leslie Josephs with CNBC. Please go ahead.
Hi, thanks for taking my question. I was wondering what your expectations are for labor costs in the next few years, especially as you start renegotiating some contracts with some of the groups?
Leslie, I think we have a – there is been a lull in 2019 and – 2020 and 2021 getting through this pandemic. But I think as the economy recovers and the business in the United States grows back up to what everybody thinks that they are going to be. I think we will have the same type of labor pressures going forward than we did in the past. And generally, those are wage rating increases or scale increases that are along the line of inflation or GDP growth. And I think we will have those going forward.
Okay.
Yes. I think the important thing to note, and Mike said it, I’ll just restate it a little bit different way is we’re coming off of $5 billion worth of losses. And we lost money again here in the second quarter. We are hoping to make money in the third quarter. So in that kind of environment, you kind of question the wisdom of increasing costs further. And I think our point is real simple, which is, no, we want to take care of our people. We want to continue to reward them. They have gotten us through this pandemic. They have got us set up for prosperity once again as we work our way out of this. And we’re certainly looking forward to concluding negotiations where we can reward our people going forward. The exact amount, which – I don’t know if you were driving for that, the exact amount, certainly for our contract in always is negotiated, and we wouldn’t speak to that. But the main thing is we want to get those done, so we can reward our employees.
Okay. And in the near-term, are you seeing any benefit or near and medium-term to having more junior employees join. I know the floor is higher now, but maybe lower rates than some of the senior people that left?
Yes, there is always – the growth is always helped because of that average wage rate effect. So yes, as we’re hiring, which is an element of growth, whether we actually literally grow or not, we were hiring people we will get some benefit there. But that does – that’s not really a driving – that’s not a strategic or even much of a tactical objective of ours. That’s just the arithmetic of the way that works out. I don’t know, Tammy, if you have – off the top of your head, what that effect might be? But just remember that for over a year, we weren’t hiring anybody. I was going the other way. So we’re just now getting back into the hiring mode, and I couldn’t tell you how many people we’ve actually hired here recently, but it’s not that many.
Yes. No, not much to add there, Gary. That’s exactly right. We’re just now really gelling up the hiring machine. But just in terms of the contracts that we have with our employees, we always – while we’re low cost, we don’t achieve those certainly on the backs of our employees. And just looking here at the current year, we would estimate rate increases in a couple of hundred million dollars for the full year this year just based on the current contractual increases. So it’s not like wages are standing still. There our rates embedded in the contract, which is what Mike was referring to as the step increases. And so that is call it a couple of hundred million that I was referring to.
Yes, our employees that are not under union contract, they got merit increases last year. They will get them – they had them this year, and we’re having promotions and promotional increases. So we’re – I think our folks are doing a good job of taking care of our people.
Thank you.
The next question will be from David Koenig with the Associated Press. Please go ahead.
Yes. Hi, good afternoon everybody. As a follow-up to Alison Sider’s question, you mentioned in the release and Tammy mentioned it here, that you’re going to save less money than you had previously expected, because you’re calling people back from leave a little earlier than you had thought. So I wondered do you feel now like you waited too long before recalling people and did that contribute to what’s happened over the summer?
No. David, we recalled everybody, I think, probably in the March, April time frame. We have about 400 pilots left on ExTO, and they are coming back to the company here between October and March but we – before the summer started, we had all of our people recalled.
Well, we have nearly – yes, we have nearly everybody back here in the next month or so. I mean the – I don’t know, I feel like we began to recall because we know the schedule far in advance.
Far in advance. And we know our training capacity far in advance. So all of that – the output of that is how many flights can you fly, right? And so, no, there is no implication at all that we needed to read that we should have recalled people earlier.
Okay, thank you.
And the next question will be from David Slotnick with The Points Guy. Please go ahead.
Hi, thanks for taking the question. I’m just wondering about the Delta variant. It sounds from everything that we’ve been hearing over the last 2 weeks, like it hasn’t been affecting bookings and the airlines aren’t really seeing any consequence from that yet. What I’m wondering is what red flags are you looking out for? What signs are you looking at for that there is damage if that ends up happening?
Well, I guess, transactionally, we’re just looking at bookings straight up. Are the bookings coming in or not? So that’s kind of real time, but prospectively, we’re looking back in trying to understand what is the customer sentiment and our customers are beginning to be less willing to travel or not, because of Delta variant. And to be honest with you, we have not seen that. It is very, very modestly, but almost statistically insignificant, to be honest with you. So we’re looking at the customer sentiment, but we’re also certainly looking at current bookings as well as forward bookings and the trends are the trends, and they are still solid trends. So we really have not seen it. If we did, we’d share that with you, but we are just not seeing at this point any issue or any impact from the Delta variant.
And I think further to that, our folks try to stay very well informed. And we’re aware like you are that the case counts have ticked up where we’re – locally at least we’re hearing predictions that the cases will rise significantly in the fall. I hope not, but we’re reading that too. But it’s not just the airline activity, you look more broadly, and there is no indication anywhere that I see that activity is being diminished because of the increase in the case counts, so far, so good. I’m worried about it. Just like your question implies. And I think what I’ve tried to share is that we’ve got to be very nimble and very flexible here. And we are very well prepared. If things do soften up, we’re ready, and we will adjust accordingly.
And I think the last thing is watching all the data that Gary mentioned. The big question is also where – I think we all feel like it’s the getting the vaccines out there and the vaccine efficacy is what drove the surge in demand and bookings starting in maybe late February and then the surge in demand here in the summer. The question would be, is the Delta variant or whatever variant comes in the future, somehow changing the efficacy of the vaccines. And there is no – as far as I know, there is no evidence of that. I mean the story is go get vaccinated, because if you were vaccinating, it’s working. I think in the Town Hall that President Biden had yesterday, the report was that of all the recent deaths and all of this is unfortunate, I think 99.5% of the folks were not vaccinated. So I think we’re also looking at is somehow the variant changing the efficacy of the vaccine, and so far, it is not.
Appreciate the insight. Thank you.
The next question will come from Dawn Gilbertson with USA Today. Please go ahead.
Hi, good morning. Allie asked the gist of my question about the operations, but I do have a couple of follow-ups on that front as, although it’s a question on the mask mandate. Bob, you mentioned in your remarks, you were talking about fewer flights to reaccommodate people. I broke down the number 16. Did you mean 16%? Or could you – what’s that statistic?
It was percent. Yes.
Percent, okay. And then also…
I heard the same thing you did. And you just left off percent.
I’m sorry.
Okay, because I know it wasn’t 16th year. And then your...
It was actually Mike, but that’s okay.
Sorry, I meant, yes, sir. And then on-time performance, what is it so far in July? You said at the middle of the pack. And basically, I guess the question is when can travelers expect – I know you said the worst is behind you, but when can travelers expect you guys to get back to normal operationally or at least to your standards operationally?
Well, it’s 67 month-to-date here in July at this point in time May 14th. And that’s let say, 67%. That means they were arriving within 14 minutes of the scheduled arrival time. We’re closer in the 80s there if you just expand that to the 30 minutes. So I think from a customer perspective, we’re still offering a decent experience. It’s not what we want, because it’s taking them a little bit longer to get to the destinations than what we would like them to. I think that as some of these weather events and these thunderstorms, disappear here in the August and September time frame. And then I think just the natural trends are for our load factors to tailor off just a bit. That will give us more recovery options than we have today. And so I expect this to be better here or better in July than we were in June. I think we will be better in August than we were in July. And hopefully, here by the end of the third quarter and the fourth quarter, we will be back to where we wanted to be.
Okay. And then the follow-up question, I don’t know if this is for Gary or Bob, who wants. On the mask mandate, the September 13 expiration date, do you expect that to be lifted or extended? And what is your stance on that? Thank you.
Well, I’ll take that one. That’s – well, that’s a political question to a degree. So I don’t know whether the mandate will be extended or not. What we have been consistently advocating is that we follow the CDC guidelines, which is if you are vaccinated, there is no mask required. And if you are not vaccinated, then you should wear the mask. And unless that changes from the CDC, we wouldn’t advocate from a Southwest perspective or the A4A for that matter, extending the mask mandate. You’ve got the Delta variant now that is somewhat new information at this point. So I’m sure that is being very carefully thought through and studied. But I’m not aware of any effort underway to extend the mask mandate. And we – at least at this – as of today, we’re not advocating an extension.
Thanks very much Gary.
We have time for one more question. We will take our last question from Mary Schlangenstein with Bloomberg News. Please go ahead.
Hi, I wanted to go back to the issue of the unruly passengers just real quickly and ask would Southwest advocate for more of those passengers to face criminal prosecutions versus civil penalties? And do you think that would have any impact on the level of disruptions?
Well Mary, I just – I have a hard time tolerating in passenger that physically abuses our employees. That feels criminal to me. And I think that is criminal.
If it’s a criminal activity that ought to have criminal prosecution.
And so there are extreme cases out there that is occurring. And I think that we would be for whatever the full enforcement in letter of the law, whatever is available, we would be in support of that.
Okay, thank you.
This concludes our question-and-answer session. I would like to turn the conference back over to Ms. Rutherford for any closing remarks.
Thank you so much, Chad. Thank you all for joining us today. If you have follow-up questions, you can reach out to our communications team, and you know that we’re always on at www.swamedia.com. Thank you all very much.
Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.