All Southwest Employees:
Up front, I want you all to know we will not furlough or layoff any Southwest Employees on October 1, unlike our major competitors.
Further, we have no intention of seeking furloughs, layoffs, pay rate cuts, or benefits cuts through at least the end of this year. We have never had any of these in our 49-year history. I can't guarantee it will never happen, especially during these dark pandemic times. I can promise you it will be the last thing we do to keep Southwest financially healthy and viable. You all have helped to build the greatest airline in history, and I value and appreciate every single one of you. You are the reason we are prepared for the siege ahead, and you are the ones who will dig us out of this crisis. I can never thank you enough.
At this roughly mid-year point, I want to give you a thorough update on our year to date, where we stand today, and what is ahead for us. It is absolutely critical that we all stay informed and together.
First Half 2020 In Review
We had exciting plans for 2020. We had tremendous momentum with our business, our operations, and our Customer experience. We were focused on bringing the MAX back into service and continuing our Hawaii expansion. It was destined to be an epic, record year. January and February results were strong. And then everything changed.
One of the hallmarks of Southwest has been our preparedness—for the unexpected. Recessions, wars, oil price spikes, terrorism, brutal competition. You name it, we were prepared financially with a strong balance sheet, plenty of cash, low costs, and sensible affordable future commitments. In January of this year, we had the lowest amount of debt to total capital in our history and a surplus of cash from 2019's strong profit. We were prepared for the unexpected, once again. This time "the unexpected" turned out to be the worst crisis by far in our history, and, for the world and our country, the worst crisis since World War II.
Year to date, we've lost almost $1.6 billion, with 95 percent of that occurring in the second quarter. That amount of losses for only one quarter almost wipes out our profits for an entire year. Because of the pandemic, almost no one flew in April, as you all witnessed. We're carrying more Customers than that now, but our revenues are still down roughly 70 percent in June versus a year ago. To deal with the financial crisis, we scrambled to cut spending and raise more cash from multiple sources:
- Cut capital projects, shareholder returns, and operating costs accounting to $7 billion for 2020
- Worked with the U.S. Government to secure $3.2 billion in cash proceeds to Southwest under the CARES Act
- Sold common stock of Southwest to investors for $2.2 billion in cash
- Borrowed $12.2 billion in cash from lenders and via aircraft sales and leasebacks
Our Company is in intensive care. We're losing roughly $20 million a day, and this massive and unprecedented amount of fresh cash is crucial to fund these losses. Without it, we run out of cash, and literally, shut down.
The other critical task has been to radically restructure our flight schedule to adjust to the breathtaking loss of business. At our peak of the crisis this spring, we had 400 aircraft idled and out of service. As of today, we have about 100 aircraft parked or in storage with our second quarter trips down 56 percent versus a year ago.
Finally, and most importantly, we've had to develop and deploy new safety protocols to protect the health of our Employees and our Customers. We look first to the Centers for Disease Control for guidance. We also retained our own medical expert from the University of Texas Southwestern Medical Center for advice and counsel. These efforts culminated in the Southwest Promise, which requires, among other things:
- Face coverings
- Physical distancing
- New cleaning and disinfecting protocols, daily and between flights
- Bookings per flight limited to allow for open middle seats
Where possible, our Employees are working remotely, which was enabled with the new technology tools and processes not previously deployed or utilized. Company facilities are also all subject to the new access, screening, and cleaning protocols. Contact tracing and quarantine procedures have been implemented to manage COVID-19 Employee cases and to help prevent the spread of the virus. As with the rest of our country, and the world for that matter, we have scrapped dozens of in-person Company events and meetings to avoid large gatherings and the major risk of a super-spreader event.
All these actions were urgent and required swift decisive action. I am very proud of all of you for what you have accomplished in first half 2020. While one can always second-guess the speed of our actions, I can't think of a single thing that we should have done differently. You all have done a superb job.
The last action we took was to begin to plan for the prospect of a prolonged pandemic and depressed air travel. We began with a renewed review of our business model and strategy. That will continue but, thus far, we have simply affirmed that the Southwest business model is not just strong, but perfectly suited for this depression: low-cost, low-fare, high service; single fleet of narrow-body aircraft; point-to-point network; open seating; and primary direct distribution via southwest.com. After 9/11, Herb and I agreed that no airline would go out of business by being too small; we didn't shrink, but we did suspend our growth for about a year while the air travel market recovered. Of course, our current scenario is vastly worse, and we must not just suspend growth—we need to shrink to adjust to depressed demand. That decision led to offering the voluntary separation and extended time off programs.
As you all know by now, almost 17,000 Employees applied for VSP/ExTO, which will allow us to cost-effectively reduce our capacity in fourth quarter roughly 25 percent. We implemented the VSP/ExTO programs to avoid the pain of involuntary furloughs and layoffs, and at a cost of $1.7 billion. It was the right thing to do, and I'm grateful we had the resources to able to be generous with our People, even in these most difficult of times. Hopefully traffic demand will recover and match that capacity; remember it's currently running down 70 percent. We need to double traffic from here to break even, and close to triple to be profitable.
Where We Stand Today
We accomplished everything we set out to do to adjust to the pandemic and air travel depression. We completed the financings we believed necessary to see us through.
Today, we have $14 billion in the bank, enough to fund losses for more than two years and short-term investments plus another $1 billion bank line of credit that we have ready access to. That's very good, but remember we now have record levels of debt; more than $11 billion. We owe that in addition to having to fund daily operating losses of $20 million, or roughly $1 billion every two months.
Even with the disaster at hand, we still have an investment-grade rating, which means we can continue to access the capital markets. Plus, we have $12 billion in assets we own free and clear that are available as collateral in the future if needed.
With the schedule adjustments in place, our operation is performing superbly, with ontime performance routinely above 90 percent and among industry leaders. Baggage handling is exceptional, as well.
Feedback from Customers has been exceptional with Net Promoter Scores routinely at record levels in the high 70s. Customers are especially pleased with the Southwest Promise, but disappointed when we (rarely) do not live up to it. Customers wearing face coverings onboard the aircraft is particularly important.
Our standing within the airline industry is tops. No one can top our financial position. Even more, no one can match our powerhouse combination of financial position; cost structure; low-fare brand; route system; frequent flyer program; Customer Service; and narrow-body fleet. We are superbly positioned for this depressed environment.
What's Ahead for Us?
We're losing $20 million a day, with no end in sight, all because of the pandemic. As we speak, the pandemic rages in the U.S., well ahead of where we were with new cases back in May/June. Experts tell me that, while our cases should plateau at 60,000-70,000 new per day, there is no evidence (based on behaviors) that the case counts will come down—until we have a vaccine. I've recently heard from CEOs of four large U.S. pharmaceutical companies racing to develop vaccines. All agree none will be available until early next year, at best. Based on that, all agree that things won't be "normal" until mid-year 2021, at best. That all suggests we're living with depressed air travel for another year.
So, I've recapped what happened in the first half of 2020 and where we stand today. Here's our immediate focus for the next 30-60-90 days:
- We need to manage through the permanent departure of 4,400 Employees who elected VSP and the temporary departure of 12,500 Employees who are taking short-term or extended time off. We've never had anything close to that scale of offboarding activity in our history. We will need to carefully examine opportunities for reorganizing and process improvements. Working with union representatives regarding ideas for work rule changes is on the list of opportunities. We are obviously not planning on hiring any replacements in this depressed environment. This will be hard work, and it must succeed.
- We must continue to tactically adjust our flights and seats offered to a volatile demand environment. Right now, bookings have softened significantly for August and September travel, and we have too many seats for sale. (Note: we did not have enough for June!) Travel demand, usually steady and predictable, is erratic and reactionary to COVID news. We are looking again at that capacity to see what reductions we can take, and we will need to adjust our staffing and salaries, wages, and benefits costs accordingly. We are going to continue to offer monthly Emergency Time Off (ETO) as long as we need it, and I highly encourage you to also consider LWOP/TOWOP for the upcoming months to help us preserve cash.
- We will continue to look for opportunities to cut spending. We have union contracts under negotiation and will endeavor to bring those to a close with an eye toward better cost effectiveness without resorting to pay-rate or benefits cuts.
- We really need to execute well in the operation, in our Customer Service, and with our Southwest Promise. We will have an excellent marketing campaign to keep Southwest top of mind as well as the best overall nationwide route system to choose from. More than ever, every Customer matters, and we should get absolutely zero complaints on Employee rudeness—we get very few, so let's make it zero!
- Just as we have no intention of involuntary furloughs or layoffs, we have no intention of closing any cities, at least through the end of this year.
- Planning will continue for the worst-case scenario, which is a prolonged pandemic and air travel depression. That means a significantly restructured and smaller Southwest. Obviously, that contingency plan is one that I never intend for us to execute.
I know that you all know, we are in the fight of our lives. It is now abundantly clear this will not be over this fall. We recovered to July levels, which was in line with my goals. That's good. Now, we need to continue to recover, with the next milestone in October. I need all of us to have a mindset of doing whatever it takes to get us through the pandemic. Changes, sacrifices, overtime, whatever it takes.
I stand by what I've been talking to you about for months. We're in a fight, and there are no guarantees. Yet, there is every reason to be hopeful. You have built a great Company. In fact, Southwest was built for this moment. Southwest Warriors, you can make this our finest hour. I'm counting on you and know you can count on me and your other Southwest Leaders.
I'm so grateful for all we have here at Southwest. I'm especially grateful for you. I believe in you, your resilience, and your perseverance. Do not despair; stay focused on the tasks at hand. Let's win this together!
LUV to all,