Southwest CEO: we’re better positioned today than before COVID

Yahoo Finance’s Adam Shapiro speaks with Southwest Airlines CEO Gary Kelly about the company’s first quarter earnings report.

Video Transcript

ADAM SHAPIRO: The worst is behind us. That's the words that were used in this morning's Southwest Airlines first quarter earnings report. And to help us explain what that truly means and how the future is looking much better for the airlines and, in particular, Southwest, we invite into the stream Gary Kelly, who is the CEO from Southwest Airlines. The worst is behind us. What brings you to that conclusion?

GARY KELLY: Well, morning Adam. And great to be with you. And wow, what a difference a year makes. Well, we were-- if you go back a year, we were looking forward to having therapeutics, having a vaccine, getting people vaccinated. And then hopefully this thing would be over pretty quickly. It's not proven to be a quick fix, of course. But we all know that the vaccinations have been climbing. And the case counts have been declining. Hospitalizations are way down.

And the economy's picking up in terms of hospitality. So there was really an inflection point for us last month. We assumed that people would-- that there would be a natural increase in demand around spring break. So we had good bookings in place. We increased our flight activity by 50% overnight on March the 11th and added 1,000 daily departures with the appropriate traffic response.

So April is better than March. May looks better than April. We're actually-- we can actually forecast June to the point where we think it could be breakeven or even positive cash flow. So I think all those things combined, I think, you know, give us a lot of confidence that the worst is behind us. All that assumes that nothing bad happens again. It's unforeseen. And you know, in the world we're living in, I think we'd be crazy to get complacent and relax. And we won't.

But, you know, based on everything that we see, things are definitely looking up.

ADAM SHAPIRO: To put it in perspective for the people who are watching, operating revenue year-over-year was down 51%, compared to 2019 down 60%. But then you look at May, May, the projection for 2021, it's going to be down 35% to 40%. So yeah, the trend is going down. Before we jump into these numbers, I have to ask you personally. When you saw this developing, how did you feel? You had to breathe a sigh of relief.

GARY KELLY: Oh, it's euphoric. Because we had a feint last year in July, where00 June, July where things were improving. And we were extrapolating those improving trends into the fall and boosted our flight activity. And it turned out to be premature, so very disappointing. So we-- the recovery for us basically flatlined from June all the way until March, just no improvement whatsoever.

And you look back on that, and it's pretty common sense. Nothing was changing with the pandemic. It was getting either-- it was either getting worse, or it was just going into somewhat of a remission at very high levels. And so finally, January, February with the vaccines rolling out, we began to see a change. And, you know, it's very welcome. And we always believed it would happen.

But there was just no instant gratification along the way. So it's just wonderful to be able to see that. And, you know, I think the other thing, Adam, that we felt is it just secured our people's jobs. It secured the pay. And we've been able to avoid any furloughs, layoffs, any of those bad things. And I'm very grateful for that.

ADAM SHAPIRO: We should point out, even though 2020 is going to be an anomaly, no anomaly here, you were named number one US airline by the Wall Street Journal. Your Fortune's list of world's most admired companies, you're number 14. So going forward, and I love to quote from earnings reports, increasingly optimistic about our future. And you've used the pandemic to open new destinations.

What is it, 17 different airports? And you've added to the fleet with the purchase of 737 MAX. You'll be taking delivery in 2021. And committed to, what is it, 100 more? So tell us what the future looks like for Southwest?

GARY KELLY: You know, and those are all really great things. And I love to crow about them. Yeah, we found ourselves, obviously, in a situation with 2020 where we had a surplus of airplanes. And we can't get rid of them. The rental cars companies sold their fleets off. We can't do that. There's no buyer for them. Plus, one would assume that this is a relatively short-lived phenomenon. And soon as we get rid of the airplanes, we'd need them right back.

So point is, we were looking for places to put them to productive use and had 17 destinations that were on our list that we could never get to. There were always higher priorities. And so I've been delighted to get them onto the Southwest route map. And they'll be permanent additions. So that's been very exciting.

The deal with Boeing, it may be one of the proudest achievements for our company in a long, long time. It really positioned us very well for the next decade or more with, I think, the best narrow body operation and contract with a supplier in the world. So we need the MAX 8. We had that in place. What we were needing, in addition to that, was the smaller variant, a version of the 737, the MAX 7. And we got that done, very thankful to Boeing.

And so again, it really strategically positions us extraordinarily well with one aircraft type. And the efficiency and the cost effectiveness that flows from that is just-- no one can match that. And just again a very significant strategic step for us.

ADAM SHAPIRO: Gary, my last question to you is a two-parter. One, when you talk to investors, they're always looking at the future. So explain to us how important it is that business travel is not a necessity for your airline. And then as you close this, instead of talking to investors, what do you want to say to your employees? I miss the Ask Gary videos, by the way. I hope those are coming back.

GARY KELLY: Oh, they're still there. Yeah, I'm not sure to what version we're up to. But it's well into the 60s. So they're definitely all still there. But oh no, we're-- I think we're better positioned today competitively than we were coming into the pandemic, number one. And we're 97% domestic, which will, I think, benefit us significantly here coming out of this pandemic.

The single aircraft type that we've just been talking about, which we reaffirm with this most recent Boeing deal we talked about, so we're low cost. And we don't charge bag fees. We don't charge change fees. We're just very consumer friendly. And we can afford low fares. And that's what we're built on and what we're famous for. Now, don't get me wrong, we'll do better if business traffic is stronger. Because we're also a business airline.

I think a lot of people miss that point. Our routes are built on having short haul business routes that are convenient for business travelers. And I would argue that we carry in normal times more business travelers in the United States than any other airline. So it's all important to us. It's just that we haven't built the airline so that it is so dependent upon that one segment. And there are always more consumers than there are business travelers. So I think our business model is perfectly positioned for this.

I think it's the wise business model anyway, so that we have a great product for all sectors. And it just positions us, again, very, very well going forward. We have-- still today, we have investment grade credit ratings on the balance sheet. Our leverage is still in the 50s when you compare debt to total capital. And we have more cash than we have debt. So all of those things position us extraordinarily well to compete over the next 5 to 10 years.

ADAM SHAPIRO: Gary Kelly is the CEO of Southwest Airlines, the ticker symbol luv, L-U-V. We wish you and the team at Southwest all the best.