Hello, and welcome to the Southwest Airlines First Quarter 2021 Conference Call. My name is Kate, 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. After today's prepared There will be an opportunity to ask questions. 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, Keith, and I appreciate everyone joining today. In just a moment, we
will share our prepared remarks
And then open it up for Q and A. And on today's call, we have our Chairman of the Board and CEO, Gary Kelly Chief Operating Officer, Mike Vandevan our President, Tom Kneeland and Executive Vice President and CFO, Tammy Romo. We also have other senior He is with us for Q and A, including Andrew Watterson, Executive Vice President and Chief Commercial Officer and Bob Jordan, Vice President of Corporate Services. So a few quick reminders, and then we'll jump in. We will make Forward looking statements today, and those are based on our current expectations of future performance, and our actual results could differ substantially We also had several special items in our 4th quarter excuse me, 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 as well.
We have More information on both of these in our press release from this morning. So please make sure you check that out, as well as our Investor Relations Web So with that, we'll get started, and I'll turn over the call to Gary.
Thank you, Ryan, and good morning, everybody, and welcome to our first The Q1 results are notable, first of all, because they're a lot better than what we thought They would be back in January. But even with that improvement, we still lost $1,000,000,000 and it was worse than our 4th quarter Results due to the weaker seasonality of January February travel, and clearly, that's not sustainable. We're here to report that we believe the worst is now finally behind us. We have a much better outlook and report for 2nd quarter, And we'll give you all a full brief on the Q1 results and our Q2 outlook. But here are a few topside highlights Before I pass the call over to Mike, number 1, thankfully, we received a second round apparel Support our PSP from the federal government and effectively covering the Q1.
It was much needed. We're very grateful. We're the only airline who has avoided pay cuts, layoffs, furloughs and the like. And I'm very, very gratified that our 50 year record remains intact on that front. Now counting working capital changes in cash flow, our cash losses of $1,300,000,000 were More than offset by the PSP.
Number 2, beginning with a mid March inflection point, We finally began to see bookings improve from the 9 month down 65% flat line that we have been experiencing. Vaccines, vaccinations, case counts and spring break all converged in the right way. And sensing this, we boosted our capacity by 50% overnight or 1,000 daily departures in Since June, our staffing currently is at 92% of our June 2019 And in addition, we've had thousands of people on leave. And now that we're adding flights, We are smoothly recalling those that are needed on voluntary leaves and having avoided the mess associated with furloughs. And as a result, We plan to fly 96% of our June 2019 ASMs, albeit with a different route But the point being is that we're very well prepared to flex up our capacity.
And even having said that, I think that we're very well aware that it will still be messy and we'll have to carefully manage. Number 4, Now please understand that the path back to breakeven and beyond is dependent upon 2 things. Number 1, we have to have sufficient flight and activity and you need to read into that. That means more than what we've been doing prior And number 2, we've got to have more customers to fill those flights and obviously read into that revenue. So we have too much fixed costs for us to be profitable below roughly 3,000 here in the Q2.
So in summary, a lot of things here this morning. I'm relieved. I'm optimistic. I'm enthused. I'm grateful and I'm especially thankful to our tens of thousands of employees who have fought their way through this pandemic and got At least to this point, we've got a long way to go, but I'm very, very confident that we can all depend upon our Southwest They are very resilient.
And then finally, I'm pleased with the performances. The operation has been superb. The new cities are meeting or exceeding our expectations. I'm glad to have all of them as permanent additions to our route The addition of Global Distribution System capabilities could not have been a more timely add to our capabilities as we're pushing aggressively into the huge managed travel business market. And we've got a Great domestic network.
We've got great service. And finally, they're going to have access to low fares. The cost And the spending performance has also been excellent and we're making great progress towards restoring our historic productivity and efficiency. And then I'm absolutely delighted with the deal that we reached with Boeing last month that strategically secures our position as an all 737 operator with all And with that, I'm going to turn it over to our COO, Mike Vandevan, who I know will elaborate more on that, But among other things, Mike, great job, great performance. So take it away.
Well, thanks a lot, Gary. And Well, we really had an action packed at the start of the year, and I'm very proud of our people and how they just continue to rise to the occasion. They've opened up 4 new stations in the Q1 and 2 more in April, implemented a federal MAX mandate, returned the MAX We secured a new long term Boeing order book for both the MAX 7 and the MAX 8 and reached service agreements the GE and CFM International for the LEAP-1B engines and all of that while running an exceptional operation. So we ended the quarter with an on time performance of 86 point 2 percent and that was good for 3rd in the industry and that included a reduction of roughly 4.4 Due to weather, as you know, we've got large operations in Texas and the entire state froze for several days in mid February That impacted our network as well as a winter storm, Celia, which impacted Denver as we launched into our March base So speaking of our March schedule, we returned the MAX to revenue service on March 11. Once we completed all of the maintenance requirements, limited to 10 lines of flying, and the airplanes were separated from the rest of the fleet for the 1st month of service.
On April 12, we increased the lines of flying to 55 And the aircraft are now fully interchangeable across the network. We currently have 64 MAX aircraft in the fleet, and we have 32 of those aircraft currently out of service awaiting FAA approval of repair instructions from Boeing. The repairs will ensure that a sufficient ground path exists for certain components of the electrical power systems. These aircraft were identified by Boeing as part of a specific production run, and the impact of MAX lines of flying are being covered by aircraft in our next generation fleet. We're not experiencing any significant operational impact.
And once we receive FAA It will take 2 to 3 days per aircraft to make the repairs and then with all the aircraft work expected to be complete in roughly 3 weeks. So turning back to the Q1 performance. Our bag handling continues to produce all time best company results. We delivered 99.7 percent of all bags and planes without a mishandled claim. And as you know, we do that carrying more free bags And we continue to lead all marketing carriers with the lowest customer complaint ratio to the DOT.
Perhaps The highlight of the Q1 was securing a new long term order book with Boeing for the MAX 7 and the MAX 8 as well as our agreement with GE and CFM International to maintain the LEAP-1B engines. So we announced our order book on March 29, and There are just a couple of items that I'd like to highlight. First, we added 100 firm orders for the MAX 7, which will be the replacement aircraft For our 737-700s, we also converted 70 MAX 8 firm orders to MAX 7 firm orders and that brings our firm order book For the MAX 7 and the MAX 8 to 201 149 aircraft, respectively. We also added 155 options for either MAX 7 are MAX 8 aircraft and that brings our total number of options to 270 aircraft and the interchangeability of the options Between aircraft types, that just gives us tremendous flexibility. So when you put all that together, We are maintaining a substantial operational and economic efficiency as a result of a single fleet type And the LEAP-1B engine provides at least a 14% better fuel efficiency, quieter engines and it has excellent dispatch reliability to support our on time We intend to retire a significant number of our roughly 46737-700s over the next 10 to 15 years.
And the MAX 7 is best in class aircraft for us in that 150 seat category, just like the MAX Thanks to the best in class for us in the 175 seat category. The acceleration of our fleet modernization, I It makes great economic sense. It will also reduce carbon emissions and noise levels, which of course is better for the environment and it also provides a superb cabin Looking forward into the Q2, we have a couple of important capabilities that we're going to add to the 1st, we're in the final stages of obtaining ETOPS certification for our MAX 8 fleet. So the MAX and its fuel burn advantages will allow us not only to reduce our operating costs to Hawaii, but it's also going to allow us to fill all 175 And that's something that we can't always accomplish with the NextGen fleet. And that was our plan all along, But of course, the efforts were delayed as a result of the MAX crowding.
2nd, we're going to begin a fleet transition to an all new maintenance record keeping system beginning with our 737-700s later this month. And this system replaces our wizard And that system is nearly 30 years old. This new system provides us a foundation for real time maintenance record keeping, paperless records, Improved planning, better analytics and automated controls to enhance regulatory compliance. Once we complete the transition of the -seven hundred fleet, Then the Dash 800s and the MAX will follow later this year. So just in closing, I can certainly feel the operational Momentum building, and I tend to tell you, it feels good.
We are in the process of bringing our entire fleet back into an We're coordinating our staffing to ensure that we're resourced to fly at whatever our desired levels are and we're introducing new capabilities Navigating through an environment that continues to be impacted by COVID. And our people are just magnificent. I can't say enough about them. They do all of these things. They still run a great operation and it's amongst the best we've ever delivered.
And they're just the best team that I've ever been associated with and my deepest thanks To each and every one of them. And so with that, President Kneeland, over to you. Okay. Thanks, Mike. Good morning, everybody.
Well, we provided pretty detailed investor update each month throughout the quarter, and our earnings release certainly provided a lot of information this morning. So I'm going to try I'll repeat what you've already heard. But I do want to provide some color regarding Q1's revenue performance as well as some perspective on near term trends and Our outlook for the Q2. So as you know, in the Q1, operating revenues decreased 52% year over year and were down 60% compared with the Q1 of 2019, And this is better than we were expecting 3 months ago when we last spoke with you during the January call. February operating revenues ended up about 5 points better and March about 15 points better than our estimates from that same time.
And that has really been the story over the past few months. We have seen steady and very encouraging improvements in leisure travel Demand in bookings week after week really since about mid February. We saw a very nice improvement in March with Bringing revenues down 10% year over year and down 54% compared with March of 2019, which again was better than our guidance range of down March load factor was 73%, also better than guidance and passenger yield was Down 34% year over year. Yields were down quite a bit for the months or for the month once we got into March. But once we got into March, rather, fares improved each week as we saw Close end bookings held up well.
We also began to see the booking curve extend further out. Keeping in mind the Business travel remained fairly stagnant, which I'll hit on in just a few minutes. I'd say that we were really very pleased with March's overall performance. We were able to get a very good base So, bookings in place for March earlier in the booking curve and we did this through very targeted promotions that we ran back in December, January February And once we got into March, our revenue management team was able to do a really nice job of managing our inventory close rate and managing yields. And as expected, spring break performed really nicely, very well.
It's bigger than just the spring break story. The entire month of March really saw a steady build in passenger And just to give some perspective, March's load factor was 20 points higher than what we experienced in January, and that was actually on higher As you as well, which I think really highlights the pent up demand for leisure travel that we're seeing. And what's encouraging is that this momentum continues into April and in our last Investor update that was in mid March, we estimated April operating revenues to decline 45% to 55% versus 2019. But since that update, we've experienced Steady improving passenger volumes and fares. So we're now estimating April operating revenues to decline in the 40% to 45 Set range versus 2019, and that's with a load factor between 75% 80%.
Now the Easter holiday weekend at the beginning of the month performed very well as we Expected in leisure traffic and bookings for the remainder of April hasn't slowed down a bit. In our earnings release, we We have our first estimate for May revenues, which shows further improvement in comparison with April's outlook. We estimate May operating revenues to decline in the 35%, 40% range versus 2019 with a load factor in the 75% to 80% range. And as we experienced in April, May, Holiday and non holiday time periods are both booking very well in terms of our leisure demand. And with these improving demand trends Holding their pattern since mid February, it really has provided us a much better opportunity to manage the booking curve for April, May and beyond.
Our revenue guidance for April May includes the expectation of sequentially improving load factors and also improving passenger yields when compared with March. We expect that yields will still be down compared to 2019 levels, but that should be fairly intuitive given that we are almost Solely reliant on leisure travelers at this point in the recovery. Now that being said though, we have been pleased how close the demand performed in March and is trending so far Great. At this point, we aren't quite ready to provide an outlook for June, but I will say that we're seeing bookings increase further out in the booking curve And we're building fast. Now it's still pretty early in the curve for June July, but I will tell you that bookings are building nicely at this point and shaping up Easily as you expect for leisure travel.
So in a normal year, at this point, we would expect to be around 60% booked for May, roughly 35% or so booked for June and around 20% booked for July and we are currently in the hunt with those levels of bookings. Now with June being one of our highest demand summer months, our current expectation would be for June's revenue performance to be better than May relative to 2019. But we'll provide you with the June revenue outlook as part of our investor update in mid May. Now as vaccination counts rise and travel restrictions ease and leisure demand increases, we are obviously pretty encouraged. It feels good and there's a feeling of optimism.
But as you know, the improvements are the improvements rather skew heavily towards leisure demand now into the summer and simply too early to make much of a prediction on travel demand for the fall. And we are very mindful of the fact that the demand recovery may not be a straight and quick path back to pre pandemic levels, Which brings us to business travel. Our corporate managed travel revenues were down 88% in the 1st quarter versus Q1 of 2019, which is consistent with our Q4 2020 results. However, we did see some modest improvement later in the quarter, In particular, in March, where corporate revenues were down 85% versus March of 2019. And based on what we're seeing and hearing from our corporate customers, It continues to be very clear that domestic business travel will certainly continue to significantly lag leisure recovery.
And for now, we are planning for where business travel will still be down 50% to 60% by the end of this year. Now having said that, we are in fact seeing more and more Our customers are beginning to allow their employees to get off the bench and fly and travel and they're beginning to unfreeze or relax their travel policies. But although that's We just aren't seeing the volumes come back at this point. Now if you buy into surveys and I guess I sort of buy in the surveys, the most recent GBTA Business Travel Survey suggests that roughly 60% of respondents expect to resume domestic business travel in the 3rd in Q4 of the year. So I guess we'll see.
Time will tell in terms of the pace of business trial And it's also not clear, to be honest with you, what percent of traditional business travel ultimately returns. Our view is that there could be a 10% 10% to 20% reduction in business travel either permanently or at least for some extended period of time. But having said all that, However, the business demand curve shapes back up, I can tell you, as Gary alluded to just a moment ago, that we are really well positioned. In fact, this is the best Positioning we've already had in terms of going after corporate business travel. You're all very aware of the GDS initiatives.
I'm not going to quarant on about that, but it closes a huge gap in Our corporate travel capabilities, as you guys know, we are live on Amadeus, Apollo, Galileo and Worldspan today. And we are very far down the path to implement the Sabre GDS platform in the coming months and we have a targeted go live date that we will implement prior to Labor Day. So really good progress on this front and the teams are doing an incredible job. So we're feeling very good about where we are. Our sales teams are out in the market.
We are engaging with our customers at a very high level and a very frequent level and the response It's been incredible. So I think we are really well positioned to gain some revenue and perhaps a little bit of share. Shifting gears To regional demand, I just want to give you a little bit of color on what we're seeing in terms of the different parts of the network. In general, our Leisure markets where restrictions have remained low continue to outperform the rest of the system very nicely. Beaches, mountains, sun and ski are all Performing very well, which is totally consistent with what you're hearing from the other carriers as well.
A little more specifically to our network, we are seeing strength in our Texas Markets, Austin, Houston, Dallas, San Antonio, we're also seeing strength in really all of Florida, but in particular on the Gulf Coast of Florida, which includes Panama City, Pensacola, Fort Myers, Tampa. The Desert Mountain region is performing really nicely, which includes Phoenix, Salt Lake City, Boise, Denver is also performing very well. So there's a lot of strength within the network. Demand continues to lag In areas such as the Northeast, Chicago is lagging a bit. California is lagging a bit, although it's really improving since the restrictions are being lifted.
So So we are seeing improvements across the system, which is encouraging. And honestly, whether our city has been lagging or outperforming, What we are seeing is that all markets have improved fairly significantly recently compared to where they were in January February. So as a result of what you just heard, we are Comfortable adding back flights to capture additional demand, including Hawaii. And it's great to see demand from California to Hawaii as well as between the islands Ramp back up. And we're finally at a point where we can get to our Hawaii flight schedules up to where we'd hoped we'd be a year ago before the As you know, international testing remains in place overall.
I'd say our international demand is performing just fine, Now a lot to report. At this point, we are only serving 8 of our 14 international stations and we'll intend to bring the remaining 6 back online as Makes sense and as restrictions ease. A little color and perspective on new stations. At this point, we have opened 10 or announced 17 new airports and all of them are performing terrific. In fact, there's not a clunker in the bunch.
All of them are generating new customers, additional revenue and collectively are contributing positively to our cash performance. We feel really good about what we are seeing in our And more to come. So we'll begin service in Fresno on April 25, destined Fort Walton Beach on May 6 Myrtle Beach on the 23rd May Bozeman, Montana on 27 Jackson, Mississippi on June 6 and we also just announced last week that June Oregon will begin service on August 29th, and we will begin service in Bellingham, Washington later this year. So all the new stations that are operating today are meeting or exceeding our expectations. They've been on our radar for years and it's great to And honestly, it's kind of it's pretty interesting.
I think our network planning team is batting 1,000%. So this is really something and the operations are starting up really In terms of our capacity, for the Q1, capacity decreased 35% year over year and it was down 39% compared with the Q1 2019, which was consistent with our expectations. And as planned, we added, as Gary alluded to, we added additional capacity in March, equated to roughly 1,000 flights each day beginning mid month and that really paid off as demand improved. And these incremental flights improved our March by roughly $150,000,000 that's revenue performance by $150,000,000 Our April capacity is expected to decline 24 And May capacity is expected to decline 18% relative to 2019 levels. Now this includes a modest increase in April and about 3 points of incremental capacity in May compared with our previous guidance, which is really just the result of a stronger demand outlook.
At this point, we are in the process of adjusting our June flight schedules. And once the revisions are complete, we expect June ASMs to decline 4% versus 2019. And as you've seen throughout the pandemic actually, we've cut more business oriented short haul flying and added more leisure oriented longer haul flying as well as more connecting itineraries, which is driving higher capacity with newer aircraft and this makes up roughly 4 to 5 points of the 14 point sequential capacity increase from May to June. Assuming the current trends continue, our preliminary plans for July call for similar levels of capacity as June relative to 2019 And we'll be finalizing our July plans here very shortly. So in terms of passenger revenue and capacity, our focus remains on managing the next few months with as much precision as possible, which is what we've been doing throughout the year and improving our revenue performance as well as improving our cash performance toward breaking unit or better with an emphasis on or better.
That's our goal. In terms of other revenues, our other revenues performed better than revenue in the Q1 and was down 15% year over year. For March though, our other revenue was actually up 3% year over year. Our ancillary products, Specifically commissions from car, hotel and vacation bookings performed about in line with passenger revenue, no surprise there. But the biggest Trigger to our other revenue performance was our Rapid Rewards program.
In the Q1, total revenue from our loyalty program was Down 19% year over year or 22% versus 2019. When you look at it at just the royalty revenue that flows Through other revenue, revenue was down 12% versus 2019. This is a very strong performance, especially relative to passenger revenues. And I think it just speaks very clearly to the strength of the program as a whole and to the high level of engagement that we have with our customers and they with The sequential improvement in Q4 was primarily driven by increases in retail sales and commissions on new Card acquisitions. Total co brand card spend in March was only down 1% versus March of 2019.
And for the first time since the pandemic began, our credit card portfolio size grew in the Q1, again, 2019, so we're thrilled to see that. So our credit card portfolio remains very strong. We're seeing the average spend per cardholder continue to improve. Attrition continues to be very, very low, and we are really very pleased with the performance of our program. And I think you can see in our results, we have more Rapid Rewards members, more credit card holders, more engagement from our customers.
And now we have more place for them to go with And building on that, our brand remains very strong. Our brand NPS scores continue to rank at the very top of The industry, which is something that we focus on and watch a lot and watch very closely, our trip NPS, which Measures individual play experiences is trending even higher right now as well, which speaks to our people's focus on hospitality and producing great So as Mike said, I am so grateful for our frontline employees. They execute every day with precision and grace and I'm thankful for that. And finally, I do want to share a few comments and our perspective regarding our focus on the environment, Which seems appropriate since today is Earth Day. Gary has already shared our long term goal to be carbon neutral by 2,050, which is aligned With Afora's goal as an industry.
And this isn't a new topic for us, though this is something that we've been focused For a long time, our focus has certainly intensified over the past year. But just for perspective, since 2002, We've invested more than $620,000,000 in fuel efficiency initiatives and that's independent of new aircraft. And in 2019, we saved more than 1,000,000 gallons of fuel through flight planning initiatives. So this is something that again is not new to us. And as Mike discussed earlier, we plan on retiring a significant number of our roughly 46730seven-700s over the next 10 to 15 years and we'll be investing 1,000,000,000 of dollars on new aircraft that are 14% And as it stands today, the carbon emissions that we generate on a per ASM basis is among the very best Industry and our fleet modernization program gives us a massive opportunity to continue to significantly reduce our CO2 emissions over the next 10 to 15 years.
So that's all great. We also know that fleet mod alone isn't nearly enough to get us to our goal of carbon neutral by 2,050. And our views, the most promising path over the next 10 to 15 years is a combination of fleet modernization, Operation operational fuel efficiency initiatives, air traffic control modernization and the introduction of economically viable Sustainable Aviation Fuels or SAF at Scale. Today, we have a SAF offtake agreement in place with Red Rock Biofuels and our teams continue to work with the National Renewable Energy Lab or NREL on the development of new SAF feedstocks and We've also recently signed MOUs with both Marathon Petroleum and Phillips 66 to accelerate the production of SAF with the objective of achieving affordable saff with low carbon intensity scores at scale. And the crux of the agreement to work together toward the production of 300,000,000 gallons of Saff in the 2025 timeframe.
This is a very ambitious target and there's a tremendous amount of work to be done, but it's also a really important step forward And we intend to work very closely with both Meritha and Phillips 66 throughout the process with the intent to secure large Offtake agreements represent a significant share of the SAPS that's produced. But to be honest, this effort is not just about Southwest securing more SAC for Southwest. It's also about getting large energy producers into the market and getting production to scale at We also believe that the use of carbon offsets can be appropriate and helpful, but we see this as a bridging technique. Our use of offsets so far has focused on renewable energy credits, which are natural gas offsets to complete our Headquarter Campus 100% Renewable Energy Plan. And up to this We have not been using carbon offsets, but if used appropriately, again, they can be helpful when it's making offsets available to customers or corporations who are looking to offset their travel emissions.
So So more to come on this, but again, we see offsets as a bridging solution. Direct air capture, New airframe and engine technologies and new energy sources such as hydrogen, power to liquid or PTL also have tremendous promise, But we see these things being much further out, call it, 2,035 and beyond. And our objective is to focus Things that we feel like we can have a real impact on over the next 10 to 15 years. So this is something that we are Absolutely committed to achieving, but to be really clear, the industry is going to have to work together. No single airline can Do it alone, it's just impossible.
So it's going to take a lot of work with a variety of organizations, including the private sector and nonprofits, As well as strong support and policies in the federal government and state governments. And we'll need innovation and scale from the energy industry, And we'll also need continued advancements for the aerospace industry to become carbon neutral by 2,050. Gary has asked me to be the executive sponsor We're environmental efforts and I've asked Stacy Malphurs, our Vice President of Supply Chain, who happens to be extremely knowledgeable of Seth And the end to end fuel supply chain to take this on with me as well. So to wrap it up, we'll be providing a comprehensive report of What we're doing and the progress that we're making in our annual sustainability report, which we call the Southwest One Report. And we'll be publishing this online to our investor So with that, Tammy, I'm going to hand it over to you.
All right. Thank you, Tom, and hello, everyone. I'll round out Today's comments with a few remarks on our performance and an overview of our cost, fleet, liquidity and cash burn before we move on to Q and A. This morning, We reported 1st quarter net income of $116,000,000 or $0.19 per diluted share, which included $1,200,000,000 in payroll Sure. Excluding this benefit and other special items detailed in this morning's press release, our 1st quarter net loss was $1,000,000,000 or a $1.72 loss per diluted share.
While our losses persisted in first I feel good about the progress we are making, in particular, as we move through our second quarter here. I want to commend our people on another solid cost performance as we have to remain Extra diligent with our spending. Excluding special items, our first quarter total operating costs decreased 24 year over year to $3,300,000,000 and increased 17% year over year on a unit basis. Fuel represented about 30 5% of that decrease. Our first quarter economic fuel price of $1.70 per gallon was at the midpoint of our guidance And our fuel expense declined 44% year over year.
Reduced Capacity levels resulted in gallon consumption down 37%, the largest driver of our year over year decline And economic price per gallon down 11%. We realized a modest hedging gain of approximately $1,000,000 or 0.1 $0.08 per gallon and our hedging program premium costs were $25,000,000 or $0.09 per gallon. While fuel price With still below year ago levels, energy prices have been creeping up over the past few quarters, which only serves as a reminder of the importance Having a consistent and meaningful fuel hedging program. We have great hedging protection in place with hedging gains beginning At Brent prices in the $65 to $70 per barrel range and more material gains once you get to $80 per barrel and higher. Based on market prices as of April 15, we expect our 2nd quarter fuel price to be in the range of $1.85 to $1.95 per gallon, including another modest hedging gain level of protection, but we would start recognizing hedging gains around the $60 per barrel Brent range with more meaningful hedging gains beginning at $70 per barrel and higher.
Last year, we took the opportunity to add our 2022 hedge position while prices were lower. Our first quarter fuel efficiency improved 5% year over year, Primarily driven by many of our older aircraft remaining parked. Some of the current fuel efficiency gains are temporary as We'll see some sequential pressure as we return more of our older 737-seven 100 aircraft to service this summer. However, we currently estimate our 2nd quarter fuel efficiency to be sequentially in line with 1st quarter's ASMs per gallon, partially due to returning the MAX to service last month. The MAX It's our most fuel efficient aircraft and we have a line of sight to more significant improvements over many years as we plan to retire A significant amount of our 730seven-seven 100 aircraft in the next 10 to 15 years.
We get at least a 14% Fuel efficiency improvement on a per aircraft basis each time we replace an end of life 737-seven 100 aircraft with a new Excluding fuel special items and profit sharing, 1st quarter operating costs decreased 19% year over year on the better end of our guidance range. On a unit basis, the increase was 23% year over year, primarily driven by the 35% reduction in capacity. We continue to realize Cost savings from our actions taken in response to the pandemic, including $412,000,000 of savings and 1st quarter Salaries, wages and benefits driven by the benefits of our employee voluntary leave programs implemented last year. We had Pay rate increases for our people that are flowing through this year, but the voluntary program savings far offset that rate Outside of salary, wages and benefits, we had year over year decreases in most other Categories due to reduced capacity and the related cost relief, primarily in the areas of maintenance, landing fees And employee, customer and revenue driven cost. In terms of a few other notable items in items in Q1.
Aircraft rental expense was $52,000,000 down 9% year over year driven by the return At least 730seven-seven 100 Aircraft. Advertising spend has increased Sequentially from Q4 as we ramp up some marketing, but our Q1 advertising spend was down 8% year over year. And we realized one time favorable settlements in Q1, primarily property taxes and those are reflected Again, our first quarter cost performance was solid, and I appreciate All the work our teams are doing to manage costs in this unprecedented environment. Turning to second quarter, we currently expect operating expenses excluding fuel and oil expense special items and profit sharing to increase in the range of 10 to 15% year over year and also to increase sequentially compared with 1st quarter. We To make that 60% to 70% of the expected sequential increase is due to variable Flight driven expenses as we plan to increase capacity to near 2019 levels by June.
To support the increased flight activity, we are recalling a portion of our employees who had elected our voluntary Extended emergency time off program. In terms of salaries, wages and benefits expense, Sequential cost increases from a few items account for about a third of the total sequential increase. We have increases driven by a higher number of active employees in 2nd quarter, including the impact of call. Roughly half of our recalled employees will return in 2nd quarter and some training will be required For those employees that we recall as we prepare for them to go back Partially offsetting our second quarter cost pressure from these recalls is an estimated $325,000,000 in cost savings from our voluntary separation and extended leave programs for those employees that took a Voluntary separation last year and those employees that remain on extended time off. With some early recalls, We now estimate annual 2021 cost savings from our employee voluntary program to be in the range of $1,100,000,000 to $1,200,000,000 down from our previous estimate of 1 point $2,000,000,000 Outside of salary, wages and benefits, the largest drivers of our sequential cost Our flight driven cost increases and landing fees, employee, customer and revenue related costs and maintenance expense as we prepare air that have been parked for a return to revenue service as well as higher flight driven maintenance expenses as flights We do.
These ramp up costs combined represent the other 2 thirds of our capacity driven Outside of capacity driven cost increases, we expect sequential cost pressure driven by airport cost And higher aircraft ownership costs due to the MAX deliveries. And this rounds out the majority of the While we are facing expected sequential cost increases that naturally With increased flight activity, we expect our 2nd quarter operating costs to remain below 2nd quarter 2019 And we expect that our ramp up cost pressures will vary and persist until we get capacity That said, we remain laser focused on cost control as we navigate through this recovery. Our first quarter interest expense was $114,000,000 in line with 4th quarter. And assuming our current momentum continues, we don't currently anticipate raising additional debt.
And based
on current levels of debt outstanding and current interest rates, we expect 2nd We expect 2nd quarter interest expense to be approximately $115,000,000 Our first quarter effective tax rate was 21%, which was in line with our And we currently estimate our annual 2021 effective tax rate to be approximately 23 Thanks. Mike covered the highlights of our Boeing agreement. I just want to add My thanks to the teams at Southwest Boeing and GE and CSM International for their tireless work to develop agreements that And support our long term relationships and that support all our Boeing 737 our all Boeing 737 Business Model. Based on the refreshed order book and our retirement plans over the next For 10 to 15 years, I feel very comfortable with our ability to manage the size of our fleet, support fleet modernization and pursue growth And we can do this in a cost effective manner in particular with manageable CapEx. We ended 1st quarter with 7 30 aircraft, including 61 MAX For the Q2, we expect to receive 7 MAX-eight deliveries and retired 3 737-seven And we will have one more MAX-eight delivery in 3rd quarter and retire up to 6 more 7 100s by the end of the year.
Beyond 2021, we are going to wait a bit longer before we make a decision about 2022 fleet plans and 2022 CapEx. That said, We are well positioned to begin retiring roughly 30 to 30 5, 737-700 a year beginning next year. Our firm orders should cover the majority of our fleet modernization plans and we will make decisions on As Mike As expected, our first quarter capital spending was 90 $5,000,000 and we currently expect our full year 2021 capital spending to be roughly $500,000,000 with an immaterial amount of aircraft CapEx and driven mostly by technology, facilities and operational investments. We have plenty of flexibility to manage CapEx with our order book with aircraft CapEx on firm orders of $700,000,000
Thank you.
Before I wrap up and open the call up for questions, I'll provide An overview of our liquidity and cash burn. We currently have approximately $14,300,000,000 in cash and short term investments in line with where we ended Q1. We are thankful to our federal government for providing continued economic relief to protect jobs As the pandemic persists, we received $1,700,000,000 in payroll support program proceeds during Q1 And expect to soon receive an additional $259,000,000 as our final distribution of the second We are Currently working to finalize our agreement with the Treasury on the 3rd round of PSP support and expect to receive an additional $1,900,000,000 Our liquidity position provides A solid foundation as we operate in the wake of 2020 substantial losses and on the heels of another substantial non GAAP loss and the Q1. Our first quarter average core cash burn was 13,000,000 Today, a $1,000,000 sequential increase from 4th quarter with rising fuel prices offsetting improving revenue trends. The material improvement in revenue began substantially in March, resulting in an $8,000,000 improvement from February cash burn of $17,000,000 per day to a March cash burn of $9,000,000 per day.
When you include the benefits From future cash bookings and other changes in working capital, as we defined for you in our earnings release, we flipped Positive in March and produced cash flows of $4,000,000 per day. Assuming the continuation of Positive revenue trends, we expect our average core cash burn in second quarter to be in the range of $2,000,000 to $4,000,000 per day. And we continue to expect to achieve cash burn breakeven with roughly with revenue of roughly 60% to 70% of 20 Barring any unforeseen changes in current demand trends, our cost trends and Assuming revenue and booking trends continue to build throughout Q2, we are hopeful that we can achieve core Core cash breakeven results are better by June. In closing, while the effects of the pandemic persist, Our Southwest team continues to conquer both the familiar and unfamiliar challenges of the day. While we aren't out of the woods yet, We are encouraged by the rise in vaccinations that seem to be unlocking the pent up leisure demand that we all believed was there.
We are optimistic and hopeful that the worst is behind us, but we are mindful that business travel continues to significantly lack leisure. We will continue to manage our business closer in to focus on what we can control, maintaining a strong balance sheet and liquidity position, reducing our cash Earn as we work towards breakeven and managing tight cost control and seeking efficiency, especially as we began to revamp capacity levels. I am immensely proud of how our people continue to persevere and show up For our company, our customers and each other. Working together, I am confident that our best is yet to come. With that, Keith, we are ready to take analyst questions.
Yes. Thank We will now begin the question and answer session. And our first Question is with Stephen Trent with Citi.
Good afternoon everybody and thank you very much for taking my questions. Just one quick one for you. Tammy, I was intrigued by what you mentioned about your hedging policy and you guys Also mentioned the approach to climate change with renewable energy credits. Are you thinking about the energy credits and lower emissions and your fuel hedging policy going forward. Are you thinking about them In conjunction with one another or is, let's say, a holistic approach to these topics?
Yes, absolutely. We'll they're kind of really 2 different topics in mind, but we are certainly thinking About them all holistically. Our fuel hedging program, as you know, we've had that in place For many years to provide us protection about against Rising fuel prices and looking forward a component of that will be Sustainable Aviation Fuel. We're just not at a point today where we're at significant volumes there with Aviation fuel. So I see that being more relevant with time.
But as we look here this year Over the next several years with the hedging position that we have in place, the purpose of that It's really to protect against conventional fuel, which is obviously going to be what we're heavily Relianton. Yes,
Steve, I think that to get SA up to Where it needs to be, there's going to have to be some sort of market making going on. And there's going to have to be some level of incentive Tax credits for the producers, for the blenders, for the consumers. So yes, I'm not Sure. I think Tammy and I are both kind of early in exactly what the tax benefits are for all these This is ESG oriented elements we're going to be investing in. But I think that that's part we have to create in order to make SAF Really viable and economically viable if you move going forward.
So I think it's kind of an open question to be honest with you at this point.
I appreciate the color. Thank you.
Thank you. And The next question comes from Hunter Keay with Wolfe Research.
Hey, everybody. Good afternoon.
Hey, Hunter.
Hey, so Gary, as you Telkis has a long track record of looking after your shareholders. So you and others diluted a lot during COVID. So what do you think is the best way to sort of repay your shareholders? Is it through buying back that Doc, is it through special dividends? Or is it really just sort of just taking the money, investing it back in the business and just trying to grow the stock
I think it's really A ways away before it's a real question for us, obviously, because we've got CARES Act Limitations that Tammy go what through September of 2023. 2023. 2023, as you're well aware. So it's a post that environment. So I do think we've tried to be clear that our priorities It would be pay down the debt, number 1, and then number 2, grow the business.
And obviously, we I think that's the best way to maintain the health of the enterprise, but also the best way to take care of all of our Stakeholders, certainly our shareholders. And I'll let Tammy add if she wants I just think it's premature to telegraph what our thoughts might be ultimately in terms of I'm not a fan of special dividends. I don't mind sharing that. So I I also don't mind sharing that I haven't had that thought that we would be doing a special dividend and we couldn't do it until post September 23 or 2023 anyway. But it's we've got 4 phases, Hunter, that we're thinking of, 1 is survival, second is stabilize, third would be prepare And then fourthly would be back to prosperity.
So we've started to declare that until we stop losing money, We're still in the survival mode. So that's a little out there for what we're thinking. Once we get to prosperity, I'd love For us to get back to handsome shareholder returns and I just feel like we need to prepare the balance sheet first. I got a question this morning on CNBC and I thought it was Good one. We view share repurchases, as you well know.
We had a healthy dividend going into pandemic, as you well know. We also had The strongest balance sheet and the lowest leverage in our history coming into 2020 and all of that It's key in terms of thinking in the future about what we would do with shareholder return. So we've got to get our balance sheet back in order. It's not But we do have some work to do. And that's I know we're all aligned here that that's our top priority.
Yes. No, I appreciate that color. And just a quick one here for you, Gary, as well. I know this is a it seems like a crazy question, but if demand sort of doesn't get a whole lot worse, but doesn't get a whole lot better either and we find ourselves looking at PSP-four maybe attached to the infrastructure Bill or something like that, is that something that you expect to happen or would advocate for or would actively say we don't need it?
Well, not any I will admit, that's not anything that I've contemplated. I'm very grateful that we've gotten not 1, not 2, but 3 PSPs. And I guess to be totally open on the question, We feel like we're on the cusp here of achieving breakeven. It's hard for me to argue that Southwest would need any further support. Now the premise that you raised of course is that If I could sort of extrapolate that, that isn't achieved and we sort of bump along With my comments initially, yes, our Q1 turned out better than we thought it would be, but we still lost $1,000,000,000 Well, that can't go on indefinitely for any company and certainly for an airline.
So I don't think That's what we're staring down. I don't think we're looking at $1,000,000,000 loss second, 3rd, 4th quarter. So given that, Which is the only way I can really answer the question. I don't think we're in that scenario. So therefore, no, Because this is a live question on this infrastructure bill.
And then finally, no, we're not advocating for anything different other than just Trying to provide our input on the spending and the investments that are being contemplated in that bill, along with the prospect of corporate tax increases. So that's our focus.
Thank you.
Thank you. And the next question comes from Ravi Shanker with Morgan Stanley.
Thanks, Doug and everyone. Gary, can you share a little more detail on what The early conversations with your corporate customers or potential corporate customers have been now that you have widespread GDS integration. Is it different from your existing corporate customers given that kind of you're one of the first LCCs to enter the space? Kind of how are those conversations trending and how is the customer base looking versus what you initially envisioned?
Yes, the managed Travel accounts definitely are behaving differently than our non managed travel accounts, and I'm going to let Tom and Andrew speak to that. I was hoping you would. Let me just talk about the business travel for just a second. So the industries that are starting to pop back up again, I consider Business demand is falling as opposed to leisure demand, which is hot. But the areas of the business demand that are Starting to travel, a lot of government DoD, it is manufacturing, some transportation.
The areas that are not traveling are The big consulting firms, which by the way are the biggest consumers we have of their travel. So that's what's Really not happening yet. I think that in terms of the conversations with the large accounts at this point, given that we are now On GDS platforms, we're talking about this before. We're starting to see the channel shift that we'd expect to see given that we're now on 4 GDS platforms. And I guess the honest answer is the volumes are so low, it's just hard to know if we're seeing what we would have expected to see in terms of channel shift From one to the other, we are seeing a little bit of shift.
I think, Andrew, jump in if I'm not correct here, is a little bit of shift From the Sabre BBR basic product into more the standard GDS platform. So that's working well. But I guess just in general, the commentary when our teams talk with in fact, Dave did a great piece with Hunter. I'm I'm not sure if you guys read it. It took a while to read it.
It's pretty long. It was really good. But the conversation was really such that the customer really gets our product. They really want the product. We've just been so hard to do business with, etcetera, etcetera.
So I think the conversations with our large corporates are really Very, very positive and they just want us to be on the shelf in Sabre and the others and we will be. So we have seen it follow This is Andrew.
The only thing I'd add to that is that these TMCs and corporations, we already have relations with Because through our Direct Connect and our Swabas platforms, their customers now just was not their preferred platform. So I would think of it more of Expanding our book of business with them rather than introducing ourselves to these new corporates and TMC. So the fact we're moving to something that's more than their liking Has received good returns from them. So that's why we expect to do better post pandemic than pre pandemic with the largest corporations who We had more of a standardized process that would go through the GSS.
Very helpful. Thank you.
Thank And the next question comes from Mike Linenberg with Deutsche Bank.
Gary, Earlier I saw a headline out about you making a comment about business travel rebound not taking place for about 10 years. And I'm just curious the context within that comment and I don't know if it was a misquote or maybe there's some analysis that you guys have Don, or maybe it's your point referencing that maybe some portion of business is never going to come back. Can you just sort of clarify or qualify that statement?
I'd be happy to, Mike. And honestly, there's nothing new. I've said 10 years for a year. And my only point was, It was really in and you're an expert at all of this. We've just lived through an environment Where it is impossible to forecast, it's impossible to predict, we can all pontificate.
And So all I've been saying is really in response, Mike, to a question about will business travel ever recover. And I think it will. I think it's silly to I did hear and say it will never recover. I mean that's a bold statement. But Mike, it could be a long time And that's where I've thrown out the 10 years and I've done that consistently.
You know that a typical recessionary recovery is five For business travel. And we've lived through a lot of recessions together, so that I feel confident of. What I'm not confident about Whether this is a typical recession, number 1, and it's got some pluses compared to a typical. It has the negative because of everything that we know about being able to work now with technology virtually and remotely. And that is a huge question mark.
I'm on other Board besides Southwest, talked to other CEOs, talked To all my friends and colleagues here at Southwest and we get plenty of anecdotal information that suggests that business travel will not Recover to pre pandemic levels anytime soon. So there's just no way to know. So no, I'm not predicting it's 10 years. Really what I was trying to do was sort of tamp down the argument that it will never recover And just simply to say that who knows, it could be a long recovery time period, but we're going to be prepared, Mike, regardless. And So Tom and Andrew were just talking about GDS.
And for Southwest, I think that we will recover business travel faster because we have a new avenue to gain business And we dramatically under indexed the managed travel And that was because we weren't a part of the GDSs. We remedied that. We're the largest airline in the United States. By virtue of that, I would argue that we're the largest business airline in United States and as I said in my remarks, now the managed travel accounts will have Wide access to a great network, great service, no back fees, no change fees and low fares. They will finally Have access to low fares.
I think we will do extremely well there.
Great. That context is very helpful. Just My second question to Andrew, with the cities, 10 that have been announced, I think, out of 17. Interesting when you think back historically, Southwest was an airline that was very sort of tactical and Methodical and sort of additions, maybe 1, 2 a year, maybe some years no cities and now all of a Southern deluge of cities and some of these are actually small markets. And if I think back Southwest in the past, some small markets, the company historically may have It sounds like the ramp up is going fairly well.
Andrew, maybe what has changed That you feel much stronger in moving into some of these smaller markets and more quickly, maybe it's just the pandemic, you strike when the iron is hot, maybe it's the density of the South network, small cities can plug in and you can turn on and be successful far easier today than the Southwest of 10 years ago. Maybe I answered the question, but if you could just give us some color because this is kind of a different mode for Southwest with respect to new city development.
Certainly, I'll be happy to answer and Tom, feel free to join in. We are methodical. And so prior to the pandemic, we have a practice every year Going through and looking at every place we could fly our aircraft and evaluating them, at least the desktop, if not in person visits. So all these cities were ones We're known to us and evaluated prior to the pandemic. And so when the pandemic, as Gary talked about, we're unsure about the pace of business Travel return.
And so because we have a lot of business travelers, if they were not to return in a timely manner, we would have a Shortfall in revenue activity to deploy our people and assets against and with the operating leverage model, we don't want that. So we want to make sure we have enough new cities Cover any potential shortfall in that return. So that led us to go a bigger scale than normal. The cities we chose, We chose also to have a low risk as far as for maturation. And we've been in plenty of small cities for a long time.
A lot of West Texas Cities and Pac Northwest City, they're modest and we do quite well, Upstate New York. And the key is a small city that is relevant to a place where we have a large Customer base.
And so if you look
at all these small cities, they're either marquee destinations under themselves or they're relevant to a nearby large Southwest city where you have a large customer base who would The big purchasers of tickets in these small cities, and so that's what's important to us. And then we want to make sure we go in with at least a level of flight activity It allows for crew efficiencies, so we have originators and terminators that make us not to have crew deadheads that would undermine inefficiency. So All those things must come together for us to add those new cities. So I think we are prepared, and it fits with our model, I think that's the answer.
Hey, Mike. And I just want to follow on very quickly.
If we
kind of reconcile to 1992, when you worked on our secondary offering in those days, if you remember our rule of thumb, but it's we didn't want to go into a city In the early 1990s, unless we thought we could do, let's say, 8 departures a day. And so I wouldn't translate What we're doing with these 17 cities is being a violation of even that old rule of thumb, because some of these small cities, I think, Andrew, I won't name names because we may not want to telegram yet, but there are a handful that I can think of that you might think are Paul, we're thinking there are going to be a dozen or more daily departures into a number of nonstop destinations. So I do think the fact that we now have Such a large U. S. Presence, it makes a lot of these smaller markets much more viable today in terms of flight activity Than it did 30 years ago.
But the other thing I would point out is that Miami isn't small. Bush isn't small. Colorado's break is not small. O'Hare is not small. So we do have a few cities that have 3 or 4 daily departures on the route map and I would Mike would call those small.
And we have with them, and we know that they can work. I don't think that, that means that every city like that would work. But Anyway, we have been delighted that we could actually have the capacity to put them on the route I got asked earlier today about whether we'll continue this and I think Andrew is going to need assuming that we continue on our Recovery path, he's going to need to take a lot of these airplanes and put them back into restoring flight activity into our existing network. So That will challenge our ability to continue doing this play, but they're permanent adds, and we're delighted with the performance
I think that just to give
a little more this is one question, so we'll move by quickly. So we've got about 45 aircraft So Andrew, I think we're committed to the new stage so far, about 8% of the trips. But as I talk about the business demand thawing, as it begins to thaw, We're going to need to begin to get our network back in business travel shape. And just to give you a little view, because people are And then you're going to ask us, so what does the so when does the network get back to normal? Well, the network is not going to get back to It was because we have 17 new cities on the network.
But what I can tell you is when you think about the principles in The characteristics of the Southwest network, those will be intact. Point to point, certainly, you should expect to see a very similar mix of short, medium, long, A similar mix of direct to connecting traffic and our focus once we begin
to see business unthaw is
we got to begin to put the depth back into the markets Like the St. Louis' and Milwaukee's and intra kale business markets and such. So it's going to be an interesting, but that's Also, why we're getting more aircraft. So we've got entire summer, we're going to have some incremental, so it's going to take time, which is fine because business traffic is not going Show up on one Sunday and all of a sudden it's back. It's going to take time and we'll begin to build our fleet back and our network depth back.
You spurred a lively Topic there, Lindenberg. So thank you.
Hey, Gary. I appreciate everyone. I appreciate the responses and especially the early '90s reference, Gary. I remember carrying So it was a fun time.
Mike, the thing that really pisses me off about you is you don't look any different.
You can't see me.
Okay. Thank you. And the next question comes from Brandon Oglenski with
Hey guys, well I wasn't on the early 90s roadshow, sorry about that. But Gary, you did mention Four phases here, survival, stabilize, prepare, grow, I think it's the way you laid it out. It sounds like you're going to go Stabilize and prepare pretty fast here just with your June capacity outlook. So I guess I just have one question because I know it's been a long call, but investors are wondering how How are you going to take advantage of your net debt position, especially relative to some of your larger competitors that have other capital priorities in front of them? Is the view here that potentially you're going to grow into a marketplace, potentially take share, could that sustain lower fares in the future?
Or should we be thinking, look, we really want to get back to prior profitability before we push a lot of these fleet and network
I think we want to keep all options available and We've got a great balance sheet as it stands today. We will absolutely have to get back to profitability regardless. We've got to get back And I already conceded that balance sheet repair will be an objective. Tammy is already rethinking liquidity targets as well that will be more robust perhaps than what we had So there are several things that we'll want to think through, but clearly, we're in a position where we have that option. We can pay down more debt more quickly or we can think about expanding more rapidly as compared to some baseline.
And It's just too early to judge that yet, but we have tons of opportunities. We're a growth company. We know how to manage growth and we would be foolish to pass on what I Thank you. It's the opportunity of a lifetime to grow this airline in this environment. We are so well positioned.
If in fact, The business travel stays modest over the next 5 to 10 years. We are perfectly positioned to prosper We're in that environment with our low cost and our low fares.
Thank you, Gary.
Thank you. And the last question in the session comes from Jimmy Baker with JPMorgan.
Hey, everybody. I got to tell you, I really liked Mike's question. I remember being in Telluride with him about 20 years ago and betting on the one market that you might open that year and I'm Sure. The idea of mantras never crossed either of our useful minds. But it's a good segue into my Question, is there a reservation or IT issue that prevents you from flying to Canada?
Tom, do you want to Yes, talk about that. Yes, there is. So to make Canada work for us, that's both the business and the leisure market and we've got to be able to sell Yes, it's back to the whole foreign currency foreign point sales that we've been talking about for a long time. That's the thing we need to get done. And Jamie, it's not like it's a Unconquerable technical task that we don't know how to do.
It's just a question that we keep putting GDS and GDS, we have these other priorities So it's not that we don't know how to do it, it's just that it keeps getting back down the list in terms of priority, but it's just a piece of work around the foreign currency language that we keep talking about that we just keep deprioritizing because it's a bigger idea. But it's really as simple as that, but we think there's probably 5, 6, 7 really nice markets, which by the way is part of the reason Bellingham is now in the schedule, right? So there's some nice Canadian markets that could really do very well on the Southwest network. It's just going to take us you always got to get a little more time to get that on top of the list, I think, really. Yes.
I totally agree with everything Tom said, But I would just reemphasize our previous conversation to his question, which is, okay, we've added these 17 destinations. We got a lot more we'd like To add, I don't know that we would have airplanes. Even if we tackle that technology challenge, I don't know that we would have airplanes to be able to add Those new markets. So I guess the point is, Jamie, I don't consider it to be an IT obstacle for Southwest at all. It's whenever we're ready, we'll commit to that.
We'll get the work done. We'll add it to our route And right now, we got all we can eat with the current capabilities we have.
Got it. And a follow-up to an earlier point, you mentioned that consultants are still pretty much Granted, pre COVID, can you remind me what your top three businesses were that make up corporate revenue and what percentage of Are your corporate spend represented top 3 or 4?
Specific companies or industries?
I I doubt you're going to give me the company's industry. I'm not in the industry.
Yes. I can't remind you because I've never told you, But I'll see what Tammy and Tom have
to say. I think I'm Andy,
you probably know as much, if not more, but Certainly, defense is a big deal. It's not a industry, but DoD is a big, big traveler for us. Certainly, financial services, banking is big, certainly professional services consulting. In fact, if you look at the BTN-one hundred, I bet Every major Tier 1, Tier 2 consulting firm is in there. They are big.
Transportation, manufacturing, so the list goes on and on. Higher Ed, actually, the State of California Higher Ed is a pretty big deal. So there's a long list, I guess is the point. There's a lot of money tied up in it as well. So I think what's more important is
it's not eightytwenty. Our largest ones make up a very, very small percentage of our corporate book of business. Corporate book of business is a long list with each one can we appreciate them all, but it's a modest number compared to our overall revenue line item.
Sure. That's very helpful. Thank you very much everybody. Take care.
All right. See you.
Okay. Well, that wraps up the analyst portion of our call And as always, if you have any follow-up questions, please give me a call at 214-792-4415. Thank you all Thank you for joining us. And Keith, I'll send it back to you.
Yes. Thank you. Ladies and gentlemen, we will now begin with our media portion of today's call. I'd like to first introduce Ms. Linda Ferd, Senior Vice President and Chief Communications Officer.
Thank you, Keith, and I'd like to welcome the representatives of the media to our call today. We can go ahead and get
And the first question comes from Don Gilbertson with USA Today. I'm sorry, actually, the question is with Alison Slider of The Wall Street Journal.
Thank you. Hi. Yes, I wanted to ask about the latest issues with the Just curious how you're thinking about this, how you if it affects your ability to build confidence in the plane given that there was a lot And a new issue just cropped up.
Yes. Hey, Don, this is Mike. And The issue with the airplane was it was specific tail numbers that were identified by Boeing as part of a production run. And they made certain changes in that production run and may have caused some electrical ground and bonding issues in a couple of different And the risk that really is it was just inconsistent electrical currents to those systems. I think that We haven't had we had had no issues or any identification of that being an issue with our own operating And I think the issue is well understood by Boeing.
It's well understood by our engineers. And I think it's a relatively straightforward repair on the airplane. And as soon as the FAA comes out and approves Boeing service bulletins, we're ready To execute that repair, and I think, like I said, it's just a 1 or 2 day repair on the airplanes, and it's It's really straightforward.
Got it. And I'm curious, is there any when you found out about the issue a couple of weeks ago, what was the reaction? And was there any frustration to be kind of in this position again so soon after bringing the plane back?
Well, Yes. I mean, I think it's frustrating to have to go through that process again. I don't know if lucky is the right word to it, but we had plenty of spare airplanes where in terms of an operational It was not a concern for us. But overall, Don, I think Boeing is a good company. I think they've clearly suffered over the last Several years maybe with various quality issues across some of the product lines.
But at heart, they're an engineering And I feel like they need to be leaders in the aerospace and the commercial businesses for our country. And I I think they understand that and I think they're going to get back to their roots and I have a lot of confidence that the MAX airplane is going to lead the way there.
Thank you.
Thank you. And the next Question comes from Dawn Gilbertson with USA TODAY.
Hi, good morning. I have two questions. First question is for Tom. Have you guys seen any impact from the State Department's Alert level that they raised, as you did back when the CDC started the testing requirement or is it too early? What are you seeing there, if anything?
Go ahead and just elaborate a little bit on what you're talking about. I'm not really familiar with what you're saying, Dawn.
This week, the State has been raising the alert level for international countries including such popular places as Mexico to better align with the CDC Rankings. So now more than 80% of countries, including
like I
said, some popular destinations, have a higher alert level. I know sometimes bookings take a hit when that happened. I wondered if you see any impact at all or expect it.
I know what you're talking about Well, because one of my kids has booked. So cancer is I don't think we're really seeing much of an impact on that at all at this point. What's your second question?
The second question, I'm not sure
who it's for. When you guys were recalling flight attendants recently, One of the things you cited in one of the memos was an increase in people calling in sick. I'm curious why you're seeing an increase in people calling in sick. Are you seeing An increase in infections as travel COVID infections as travel has rebounded or are there reluctant among flight attendants To return, can someone talk about that a little bit? Thank you.
I'll jump in there with that, And then anybody else can add a little bit of color. But our labor contracts We're very flexible for our people in terms of their SIC banks and how And it could be a variety of things. It could be family issues that they're dealing with. It could be Daycare issues that they're dealing with, it could be illnesses of their cells, it can be doctors' appointments. And as we're recalling people and they're coming back into work, I would argue that they don't have all of their personal lives all laid out as neatly as they normally would.
And so I think we will see a spike in that as people are coming back to work. But I don't think that it's any indication of a long Term trend or a big operational pickup for us. We have reserves that will cover those lines And we navigated through that pretty well.
Thank you.
Thank you. And the next question comes from Kyle Arnold with the Dallas Morning News.
Hey guys, what are you seeing In the airfare environment, are you going to be able to hit some of your financial goals With the leisure traveler still, the leisure travel is very fickle in terms of airfares still leading the way.
Well, I guess I'll start and Andrew feel free to jump in. But like I described earlier in call. I think the leisure side is pretty hot right now. I think the business demand side is starting to thaw. I literally have right in front of me what our what the booking curve and the fare curve looks like for the upcoming months and They're pretty solid and they're really encouraging.
So barring a trend shift, I feel pretty good about where we are. And it's kind of back to what we said in the call. Barring a trend change, we feel good about the opportunity to breakeven, perhaps you will make a little bit of a profit sometime in June or beyond. So I think that's kind of how I'd answer at this point. As the booking curve begins to get more extended out further out, It just gives us a lot more flexibility in terms of how we manage the inventories and the fares and it's starting to take on a normal Booking distribution shape, if you will, the level is too low, but the shape is normal.
So we're able to manage our Pricing more effectively, that's kind of where we are. So we feel good barring
a trend change. The guidance that Tammy and Tom gave you And
it includes what we saw in
the spring of the leisure fares, getting stronger from the bottom of the winter wave through towards the summer. However, the lack of business travel that Gary and Tom talked about me some of the higher fares that they pay will be absent. So you can our fares overall will still be down year over 2 years and year over
So Kyle, this is just talking about our peers on average were down 20 in the Q1. So this is we're not we never give information about what we're going to charge. So that's they're not speaking to that. We're just talking about how the array of fares that we have average out with the demand that we have. But I would just say this, the industry has more seats than it does Passengers and Economics 101 tells you that pricing will settle that, But at a softer level.
So we're down 20% this quarter and what we'll be prepared for is A very low fare environment for a long time, which gets back into the discussion that we've been having all day about Business travel demand, and that is our wheelhouse. We are low cost. We are low fare, And we can live on low fares and we'll certainly make sure that we manage our business
Accordingly. Thank you. And comes from Leslie Joseph with CNBC.
Hi. Thanks for taking my question. Two quick things. On the MAX, are you getting any compensation from Boeing either In the form of a payment or discount on other planes, do you have any sense of how much not having those planes in service is costing Southwest? And then my second question, if you want to wait till after.
Yes. This is Tammy. In terms of the pricing on our aircraft with Boeing, that is confidential. We have shared with you that the CapEx that we have With regard to our firm, order book for next year is about $700,000,000 and That is for 30 aircraft. But it's just not that simple.
There is a lot going into that. And as you've alluded, that incorporates discounts from Previous settlements that we've had with Boeing on the MAX grounding as well as the terms of our most recent agreement, but the actual Terms themselves are confidential.
Yes. And are you talking more specifically to this most recent grounding?
Yes, the electrical issue.
Do you get any And is there do you know what the financial impact is
on Yes. We've got our arms around what we think That impact is, I will tell you, just in the scope of our operation, it's not material. But there are new airplanes. The airplanes are warrantied by Boeing. And I think that we have I don't think that will be a concern for us at all.
Okay. And then my other question is what are your Staffing needs for this year and then going into next year, do you expect to hire? And do you think that too many employees might have left the company permanently? Because I know some employees So temporarily, we're getting called back early.
Well, I think I can maybe start with this, and I'll Maybe had some of my friends around the table talk. But the real question is, is we're looking for the commercial side of the business to be able to go sense the demand out there, and we're looking out 5 6 months and then be able to lay out a schedule that responds to that demand. And I feel like we have a lot of flexibility on the airplanes side And on the staffing side, with plenty of notice to be able to go fund that. So just to be honest with you, we can do any of the things. If demand falls off from here, we're in a good position.
If demand stays flat, we're again in a good position. If it increases, we have ability to recall people on EXTO. And if it really explodes, we have The ability to go hire people. And so it's just it's tricky and we're trying to make those decisions as close in as possible. So we haven't really thought about the second half of the year yet.
I'll just summarize some comments that I made at the outset of Our analyst call, which is we are currently at about 92 of our pre pandemic staffing. And of course, you pick a point in time and you can nudge that number around, but that just gives you some sense. And what Tom was talking about was flying our June schedule at 96% of what we were pre pandemic for June. We've had a little bit of attrition. We've had A voluntary separation program and that's what gets us down from 100% down to this 92% level.
So we are comfortable. We're overstaffed Right now, in March, April. Projecting forward to June, we would be right at Proper staffing, if not a little bit short. So there's pluses and minuses. One department might be a little over, one department might be a little under.
But I think beyond to Mike's point, beyond June, I think what we're all anxious to see is, well, what do things look like When we get to June, are we going to hit our forecast as we've anticipated it? Will the bookings for July, August, September look as good as we hope? Is there pent up demand that is not sustained beyond that? I mean, there's just a number of good questions that can be posed at this point. So it's just a little bit But if we get to the point where we've got some staffing challenges, I think everybody here would consider that to be a really high quality No problem.
But Bob Jordan is here with us and when Bob heads up our corporate Services, which includes HR. So in terms of our current hiring plans, you might just share whatever you're willing to share there.
Yes, you bet. And on the recall, so we gratefully, we had about 11,000 folks take the EXTO, which is a terrific response for our And we recall just south of half of that to meet the demand that everybody's talked about here for the summer. And if you see yes, you see more demand, we can be in the
position to continue the recall.
We have begun to ramp back up our hiring ability. So before you can hire, you've got to People that went off and did their jobs come back and sort of rebuild that team. So we are ready to hire. That's very modest right now. I think if we see the demand continue, we are in a position to ramp that back up quickly.
I do think, again, to be straightforward about this, I think we're all prepared for this to be messy. It's just not easy to And then it's not easy to execute and we also don't want to end up with excess staffing. So Trying to strike the right balance here, it was really messy a year ago trying to downsize the airline. And I think we're all just going to have to recognize it will be I think we need to be up to the task here and manage well, but just recognize it may be messy. Now having said that, Our operation went up 50% in terms of flight activity overnight Back in March and had a flawless execution and outstanding performance.
We've got a basis, I think, for our confidence going forward. But we've been a hiring machine for 50 years and I feel like we'll do well when we're ready to turn that back on, but I'll look forward I think that will be a high quality problem.
Thank you.
Thank you. And the next question comes from Rick Filato with Las Vegas Review
Thank you. I hope this is a little bit of a lighter topic than some of the heavy things you've been discussing. Does the company have any opinion on the City of Chicago's plan to enable the installation of slot machines at Midway and O'Hare International Airport. And as a follow-up, does the company have any position on legislative proposals Texas to legalize gambling with Integrated Casino Resorts in Dallas, Houston, San Antonio and Austin.
Hey, Rick, it's great to hear your name and hear your voice, and I understand where you're coming from. I would say for Chicago, And I'm looking at our real estate guy here. I would say anything that lowers our operating costs at an airport, we will be all I agree. As I think Las Vegas has led the way with some really innovative techniques out there. So And beyond that, I don't know that I'll comment on what's going on in the state of Texas right now.
But I guess by extension anything that generates Travel, I bet everybody in this room would be all for it. So but good to hear from you, Rick.
Thank you.
Thank you. And we have time for one more question and that comes from Jaeson with Simple Flying.
Hi, thanks. I just want to go back a little bit to your Mac comments earlier. So it seems like you have an appetite for expansion and you've got an order book out until 2,031. What's the argument against taking maybe a MAX 9 or MAX 10 and freeing up some smaller jets for expansion Well, you've got a pretty significant backlog with a lot of flexibility. Thank you.
Well, I think The downside for us taking a MAX 9 or 10 is it doesn't fit our network. We just need our network is built around Point to point, we don't want to have too many connections and you start getting to a 9 or 10 year quickly into 200 passenger Graph measure is too big for our network the way we cover our business. Yes, I think we'd rather see Boeing, if that's Our challenge, we like the 8, we like the 7 as well as we like the 8. We're not Certain what mix of those model numbers we'll have in the future, Just as a rule of thumb, call it fifty-fifty, sixty-forty, who cares? But if that is the issue, I think we'd be pressing Boeing to increase their production rates.
And again, that would be a high quality problem.
Great. Thank you.
Thank you. And this concludes our question and answer session. I would like to return the conference back over to Ms. Rutherford for any closing remarks.
Thank you all for joining us today. And if you have any other questions, our communications team is standing by at 214-792-4847 Of course, through our media website, www.swamedia.com. Thank you.
Thank you.