西南航空 (LUV) 2020 Q4 法說會逐字稿

Good day, and welcome to the Southwest Airlines Fourth Quarter and Annual 2020 Conference Call. My name is Chad, and I will be moderating today's call. This call is being recorded, and a replay will be available on southwest.com in the Investor Relations section. (Operator Instructions)

At this time, I'd like to turn the call over to Mr. Ryan Martinez, Managing Director of Investor Relations. Please go ahead, sir.

Thank you, Chad, and I appreciate everyone joining us for our call today. In just a moment, we will share our prepared remarks and then open it up for Q&A.

First, you will hear a comprehensive update from our Chairman of the Board and CEO, Gary Kelly; Chief Operating Officer, Mike Van de Ven; our President, Tom Nealon; and Executive Vice President and CFO, Tammy Romo.

A few reminders. We will make forward-looking statements today, which are based on our current expectations of future performance, and our actual results could differ substantially from these expectations.

And we also had several special items in our fourth quarter results, which we excluded from our trends for non-GAAP purposes, and we will reference those non-GAAP results in our remarks. And we have more information in our press release this morning regarding forward-looking statements, non-GAAP reconciliations to GAAP results and other important risk factors. You can find our release and other helpful resources on our Investor Relations website.

So let's get started, and I will turn it over to Gary.

Thank you, Ryan, and good morning, everybody, and thanks for joining us for our fourth quarter 2020 call. We closed out the year as expected with no surprises. And even Southwest is not immune to COVID-19, and we recognized our first annual loss since 1972. It was a big one and with non-GAAP losses coming in at $3.5 billion. But having said that, we were and remain very well prepared to weather this continuing storm and especially important is that we want to emerge on top in the airline industry.

We have the strongest liquidity. We have $14.3 billion, including $13.3 billion in cash and equivalents, $12 billion in unencumbered assets, and that doesn't include our frequent flyer program. We have the strongest balance sheet, and pre-pandemic debt to total capital was a company record low at 24%. We have investment-grade credit ratings, and we have cash well in excess of our outstanding debt.

Third, we have the best business model. We have an unprecedented run of 47 years of profitability, and that was built on low cost and low fares and coupled with great service. And that, in turn, has resulted in unprecedented job security, especially unprecedented for an airline going on 50 years without a furlough, without a pay cut and the only major airline to avoid all of that during this pandemic. And I'm very, very proud of that.

We have the best operation. And as evidenced by the Wall Street Journal's annual ranking of airline performances, it was released this week, was Southwest as #1. And finally, we have the best customer service, and I base that on numerous brand surveys and my expectation that once again, we will be at the top of the industry in terms of the United States DOT Customer Satisfaction Index of fewest customer complaints.

Now no one can deny that, that is a powerhouse combination of attributes for any company. And it just reminded me, as I was recapping that, I was listening to Herb many years ago, he pointed out that most companies never achieve the best designation in a single category, much less 5. And I mentioned these things really not to brag, but just to put things in perspective. And that is to say that yes, these are bad times. Yes, we had our first loss since our start-up year. But we have much to be grateful for, and we have every reason to be hopeful that this, too, shall pass. And when it does, we will be ready.

And speaking of being ready, I mean a surge -- a resurgence in traffic and revenues. So we want to be ready for that. And we have to have that to achieve breakeven and then beyond that, prosperity. So there's a balancing act here, and we're balancing a desire to conserve cash and minimize our losses, which requires that we operate at a reduced schedule as compared to the need and the ability to achieve breakeven by generating more traffic, and we can only do that by offering more flights. So getting that balance is key, and we're intensely focused on that.

And I'll just add that we've got the talent, we've got the experience, and we have the tools that we need to execute and execute that well. Once we get past this January, February, winter doldrum, we'll see what happens, and we'll respond accordingly.

So we've got excellent updates prepared this morning for you from Mike Van de Ven, our COO; Tom Nealon, our President; and Tammy Romo, our CFO. So I don't want to steal any of their thunder, except to say one more thing. I mentioned before that we have a lot to be grateful for. And we do, and especially at Southwest.

And I mentioned gratitude last time in our third quarter call, but I think it's important to repeat it again. I am especially grateful for our people, their resolve, their resilience, their civility and their love. They've gotten us to this point. They will get us through this. They have performed superbly. And I know that everybody in this room with me could -- would join me and say how proud we are of them, and we all just want to thank them profusely. They are heroes.

So some of these heroes are sitting here with me. And Mike, I want to congratulate you on a magnificent operational performance. So why don't you kick us off this morning, Mr. Mike Van de Ven, COO.

Well, thanks, Gary, and I'd be happy to. As Gary was mentioning, in terms of our operation, the fourth quarter was exceptional. We built significant momentum throughout the quarter. The MAX was approved to return to service. We received much needed government support, and that allowed us to pivot away from those time-consuming discussions about furloughs and concessions and job security.

We were able to grow our city portfolio and the vaccines rollout began. And beneath all of those things, Southwest produced our overall best quarterly operational performance in our history.

And as Gary mentioned, I too have just -- I'm very proud and very grateful to our people. There's tremendous activity associated with all those items I just mentioned. And in addition to those things, though, our people still go to work every day and they deal with day-to-day issues of a pandemic environment, and yet they never lose their focus on our customers, on our company or each other. And they are just a great team.

So for the fourth quarter, our on-time performance of 93% was industry-leading and the best in our history. We finished the year at 86%, and that was the best since 2003. Our baggage handling was equally as impressive with just over 2 bags per 1,000 carried being damaged or mishandled. So if you flip that around, that's about a 99.8% accuracy rate. And again, the best in our history and in the top tier in the industry.

That reliability, coupled with our hospitality, produced Net Promoter Scores in the mid-70s for the fourth quarter and for the year. So again, the best performance in our history. And we do expect to lead the industry once more with the lowest DOT customer complaint ratio when those are published.

So to cap it all off, we finished 2020 with the best overall operational performance of any U.S. airline as measured by the Wall Street Journal's Middle Seat Scorecard. So as I've said before, just a great team.

Our fleet has been a particular focus as of late. We now have a combination of additional aircraft available to us from the MAX return to service as well as a lower demand environment from this pandemic. And that gives our tech ops department several options to optimize our maintenance costs by storing some of our older aircraft and replacing any necessary flying with our most efficient aircraft, the MAX.

The MAX is more reliable. It has a lower fuel burn. It's quieter. It's less expensive to maintain, and it's our most comfortable aircraft from a customer perspective. And it is a key component of our future.

So we took delivery of 7 leased MAXes from Boeing in December. And if you combine that with the 34 MAXes we had in storage in Victorville, that brought our MAX fleet to 41 aircraft by year-end. We also identified 20 of our older 737-700s that had an expensive near-term maintenance profile, and we accelerated their retirement at the year-end, and that brought our fleet total down to 718 aircraft for use in the operation as we go into 2021.

There are 60 NGs included in that year-end fleet count in a long-term storage program. And so the rest of the airplanes, they rotate through our operation and our short-term parking program or they're in heavy maintenance visits. And that approach gives us tremendous near-term flexibility to either slow down or accelerate flight activity as demand dictates.

So March 11 is when the MAX returns to revenue flying. All of our pilots will have been trained. We will have had over 200 validation or readiness flight tests completed. And we'll be starting out in a very small and focused manner for the first month with just 10 lines of flying. They'll be isolated to all MAX lines. We will not co-mingle the NG and the MAX fleet for that first month of service. After that, we'll have roughly 65 MAX aircraft available for service, and we expect to be in normal operational mode by mid-April. We'll end 2021 with 69 MAX aircraft.

In closing, with the fleet, we plan on running similar retirement analysis to optimize maintenance costs in 2021, just like we did in 2020. And we don't expect our fleet to grow in 2021 as compared to the 747 aircraft at year-end 2019. We do continue to evaluate our longer-term fleet needs, and we are in discussions with Boeing as to our order book beyond 2021.

As we do start this new year, we do have our eye on a couple of other critical operational areas. First, we are initiating operations in 8 new locations by June 6. There's quite a bit of coordination and facility build-out, staffing equipage and security-related actions that go into opening up a new location. And Gary, I think 8 between now and early June, is another all-time Southwest record. And that is a very impressive team.

Second, we are in a very reactive environment with respect to COVID restrictions. There are new international requirements with testing and attestation protocols. They are evolving domestic requirements, and there are various mask-related challenges that our teams are reacting to every day.

So it does take a special team to be able to deliver record-breaking operating results, managing a complicated fleet environment, bringing the MAX back into service and optimizing retirements of older airplanes to open up 8 new locations in 4 months and just to adjust on the fly to constantly changing COVID requirements.

And I think about our people, and they make all of that look so easy, and they do it every day. And as I said, they're just a special team, and I'm really proud to be a part of it.

And I think with that, Tom, I'll turn it over to you.

Okay. Very good, Mike. Thank you. Well, good morning, everybody. And I also really want to start by thanking all of our frontline employees. What a year, what a result and really proud of what we've accomplished with the team.

In prior calls, I've always made a point of recognizing our commercial teams, our network planning, revenue management, the marketing folks, Southwest business, the customer relations team and they deserve that again. I mean what they're doing is absolutely incredible. But I also do want to recognize a few teams. They are always in that ground, that if they aren't there, nothing else happens. Our technology teams, our finance teams, our strategy teams and so many others. So they've done incredible work over the past year, honestly, that I cannot even imagine or envision. So thanks so much for what you're doing.

So I do want to provide a quick recap of our fourth quarter revenue performance. And then I'll cover our near-term trends and guidance for the first quarter. So our fourth quarter operating revenue was down 65% year-over-year, which is a modest sequential improvement compared with the 68% decline that we experienced in the third quarter.

Fourth quarter passengers declined 64% year-over-year, and our average fares were down 14%, which is a favorable comp to fares being down 20% in the third quarter. We did see some pockets of sequential yield in premium, which was encouraging.

Our fourth quarter load factor was 54%, which was up from 45% in the third quarter. And this was driven primarily by a boost in the December load factor at 60%. And as you all know, you look at our CCAP on December 1. And this is all on fourth quarter capacity was down 41% year-over-year.

Just a few monthly performance highlights, if you will. October leisure demand and bookings held up well compared to September and that's despite September benefiting from Labor Day holiday travel. October operating revenues were down 64% with a load factor of 55%, capacity down 44% as all on a year-over-year basis. So given the environment, that was a pretty encouraging result for October.

November, though, we did begin to see a slowing of revenue trends. We expected to see that, that will coincide with the presidential elections, but we never got back on to our pre-election trends, which in hindsight, I suppose, is surprising, given that COVID cases and hospitalizations are on the rise, along with new quarantine requirements, travel restrictions, government orders, et cetera, et cetera, and all these are the primary drivers of the softness in demand. And coincidentally, we also saw an increase in trip cancellations in the weeks we have for Thanksgiving.

Relative to the rest of the month, leisure demand was more resilient to the Thanksgiving travel period, even with the worsening pandemic background. The November operating revenues benefited 1 to 2 points year-over-year due to the holiday timing shift from 2019.

So November finished with operating revenues down 63% with a load factor of 48% and capacity down 35%. Again, all on a year-over-year comp basis. December had many of the same challenges we saw in November, with a continued surge in COVID cases, a softness in leisure passenger demand and bookings and elevated trip cancellations.

And similar to Thanksgiving, leisure demand for December holiday travel outpaced non-holiday time periods. In December, leisure revenue trends were supported by some pockets of strength.

Operating revenues for December were down 67% year-over-year with a load factor of 60%, both of which were in line with our guidance, and that was on capacity that was down 43% year-over-year. And just as a reminder, the holiday shift in 2019 had a negative impact of 6 to 7 points year-over-year for December.

Let's see, regarding middle seats, we estimate an operating income penalty of $30 million in October and a $10 million penalty in November. So really no surprise there. And as you know, and as referenced, we opened up all seats for availability beginning December 1. So for December, we estimate a revenue boost of around $80 million as a result of selling all seats.

Our December load factor was up 12 points versus November. And our yields were down month-over-month. But if you adjust for the year-over-year calendar impact of holidays, December's year-over-year revenues improved 4 points sequentially as compared to November. And again, this was very much in line with what we were expecting.

In terms of the demand environment, it clearly continues to be heavily leisure oriented. Business demand continues to be very weak, and our corporate managed travel was down 87% in the fourth quarter, which was actually a slight improvement in the third quarter, but we have no real movement to speak of. And we expect business travel to be down -- to remain down significantly this year. I don't think that's surprising to anybody.

As you know, January and February are typically heavy business travel months, but the absence of business travel is making a weaker leisure travel period even more challenging, and I'll talk about that in just a few minutes here.

I do want to hit on very quickly a few highlights of our other revenue, which was down 18% year-over-year, which is obviously much less than the decline we experienced in passenger revenues. And as you expect, for products like early bird and upgraded boarding, revenue has trended almost right in line with the passenger decline that we're seeing.

However, we've seen a much stronger revenue performance for our Rapid Rewards program. Revenue from our Rapid Rewards program is down 38% year-over-year, which, again, is a solid improvement from the decrease of 43% in the third quarter. And aside from that, for card redemptions, rather, for travel, our loyalty program continues to perform very, very well.

Our credit card portfolio is a real point of strength for us, I think, a differentiator, and we're continuing to see strong performance from our co-brand credit cards, which reinforces what I've said many times, which is that our cards really are top of the wallet for customers for everyday purchases as well as for air travel.

In fact, revenue from card spend in the fourth quarter performed well and was down only 11% year-over-year. We're also continuing to acquire new Rapid Rewards members and new cardholders, although at a slower rate, simply because there are fewer people traveling. So in spite of the environment, the size of our program is essentially unchanged, which I think is a pretty powerful statement given the environment.

You may have seen we recently provided all Rapid Rewards members with a boost. They're qualifying points towards A-List to A-List Preferred and Companion Pass status. And these, as you know, are very -- most valued customers, and we value them tremendously, and they value us, and they certainly value their tier status.

So to close out Q4, I just -- I do want to hit a few things that Gary and Mike referenced, and that's our brand NPS score as well as our DOT customer sat rankings. Both were the best scores in the industry, and we are very proud of that. But I will tell you that we don't take it for granted. We worked really hard to get those results. And our people worked really hard to get those results.

Specifically to the DOT customer sat score, we had a ratio of 2.91 complaints per 100,000 passengers boarded, which is far, far ahead of our competition. And it's just an incredible result. And again, it comes down to our people, to our hospitality, and to our customer service, to our culture and what we believe in. So I just want to say, thanks to our folks for that.

So that's it for the fourth quarter. We'll move into the Q1. Well, at this point, we are nearly done with January and demand has remained, as you keep seeing, stalled. We expect January operating revenues to decrease 65% to 70% with a load factor of 50% to 55%, with ASMs being down 41%. And again, that's all on a year-over-year basis.

And this compares slightly favorably to our mid-December guidance ranges for both revenue and load factor. And January demand has held pretty steady over the past month or so. And I think in this environment, steady, honestly, isn't so bad. So I'll take that right now.

In February, we expect a fairly similar revenue performance in January, but January did benefit from stronger holiday return travel during the first week of the month. We really don't see a real catalyst for February demand at this point. And as you know, this is historically a low month for leisure travel. And the business travel that normally filled the demand simply isn't showing up.

We currently expect February operating revenues to decrease 65% to 75% year-over-year, with a load factor of 50% to 55% and capacity at 46% year-over-year -- down 46% year-over-year. And at this point, we aren't providing March revenue guidance, but we'll be certainly providing an 8-K in mid-February, and we'll cover all that. But I did think it's worth sharing a few thoughts about what we're seeing beyond February at this point in time.

So it is still pretty early in our booking curve for March and April, but relative to January and February, we are seeing a slight uptick in bookings for both months. We're behind in the booking curve. We've said that previously. versus where we'd normally be. But given the situation, I don't think that's a surprise. I think that's to be expected.

You likely saw that we've had more promotional activity than usual, including a recent air sale that included the March and April travel period. That's unusual for us. In fact, we're talking about this the other day, and I don't think any of us could recall doing a wild sale in January. But that's where we are and the goal is simple, we need to stimulate travel. We need to get more bookings in place.

And I'd say the sales performed pretty much in line with our expectations. But for now, we're not seeing a material boost in bookings for March. But having said that, we are continuing to build load factors every week, and the booking curve continues to be skewed close in, so we do expect bookings to continue to fill in.

What's not clear though is to what degree. We could be surprised to the upside, but at this point, there's no real clear revenues on that quite yet. We've shared this with you all before, but once we get back to operating revenues, they're roughly 60% to 70% of what they were in 2019, we should be at cash breakeven. But until we get to that point, we'll continue focusing on managing our capacity, our inventory, our pricing, our costs, our operations. Those things that we control, we will manage and control well.

In terms of regional trends, beach and nature inspired destinations continue to outperform. We're seeing strength in Florida throughout Texas, Colorado, Arizona. California and Hawaii both began the fourth quarter with encouraging momentum. The quarantine and stay-at-home orders will reverse some of that. Some of our larger markets in the Northeast, Midwest, like New York and Chicago, are underperforming. So I'm not trying to give you an exhaustive list, but it does give you some perspective of what we're seeing.

As you know, the international testing requirements, Mike alluded to this, took effect on Tuesday. Our teams are ready to go, and we really have very few, if any, operational issues. We did see international cancellations increase a bit just prior to the new requirements go into effect. But we're actually continuing to slowly build load factors for March and beyond. So we're keeping a close eye on all of that, but the loads keep managing accordingly.

In terms of our flight schedules, we're in the process of making more scheduled adjustments to March to better match capacity to current booking trends. Our outlook for Q1 capacity, I characterize as remaining cautious, and we're expecting first quarter ASM to decrease around 35% year-over-year.

Just real quick, I do want to give a quick update on our new markets. As you know, over the past several months, we've announced 12 new airports, with 4 of these airports up and running and 8 more coming online over the coming months. We've outlined all this in the earnings release, so I'm not going to repeat it all here. But I will say that I think this is the bread and butter of Southwest Group. The question of why now is very, very easy to answer. First, we have the aircraft, we have the people that do it. And second, we're going after new revenue pools.

And the airports that we're adding fit into our network very cleanly and they leverage our strong Southwest customer base in very strong Southwest markets. When you think about the new markets such as Bush Continental in Houston, Chicago O'Hare, Miami, these are also very important for business travel, which is very relevant.

The response to our new service so far has been very good. Performance Miami, Palm Springs, Montrose, Yampa Valley was strong in the fourth quarter. So we're quite pleased with what we're seeing. Our start-up costs were very modest and new revenue from these airports, even this early on, more than cover the incremental cost of bringing airports online and the cost of operating the flights.

Looking ahead, we expect to continue to strengthen and mature these new stations, and we see the long-term outlook as being very, very strong, very positive. In the near term, though, just like the rest of the system, there's always demand risk. But again, we're very pleased with early signs to these new markets and cities.

One last thing. I just want to quickly cover where we are with our corporate travel work as I reported last quarter. Right now, we are live with 4 GDS platforms, Amadeus and Travelport's Apollo, Galileo and Worldspan platforms.

And I'm also very pleased and happy that we're able to reach an agreement with Sabre at the end of last year. Our new agreement with Sabre is similar to those with Amadeus and Travelport, full participation and industry-standard capabilities that will allow teams using their full GDS function. Now only 4 weeks into this and we're working through our implementation plan, where our target is to go live in the second half of 2021, which I think will coincide with return to business travel.

In terms of content, we'll certainly have more than 90% of our content available through Sabre. And again, this is consistent with what we're currently doing with booked travel for in Amadeus. And we'll always have 100% of our content available through our SWABIZ and API business channels.

And I said this before, I think it is worth repeating. 90% of domestic business travel being booked is coach. And I really think we have the best coach product in the industry. We have a great point-to-point network, and that's strengthening with our new cities. We have low fares with incredible flexibility. We have industry-leading customer service and hospitality. You've heard about that today. We have a great loyalty program, and we deployed our Southwest sales teams to our key markets.

Our challenge in the past is that we weren't in the GDS channel, which is where most business travel is booked and that gap is closed. We intend to compete aggressively, and that's what you expect of us and that's what we expect of ourselves.

Based on what we're seeing and learning from our customers and also from outside research, our expectation is that domestic business travel will continue to return slowly and by the end of 2021 perhaps it could still be in the range of down 50% to 60%. But again, from our perspective, even if business revenue is smaller, post pandemic, there's still a lot of upside for Southwest.

So these 2 commercial focus areas: first, adding new markets to our network; and second, our entry into GDS ultimately means that more itinerary combinations exist with our network. We have more passengers, more revenue opportunities, and very simply, more opportunities to grow Southwest Airlines.

So with that, I'm going to turn it over to you, Tammy.

All right. Thank you, Tom, and hello, everyone. I'll round out today's comments with an overview of our cost performance, fleet, liquidity and cash burn before we open it up for Q&A.

Before I start, I'd be remiss if I did not acknowledge our wonderful team of Southwest warriors for their incredible efforts over the past year as we all dealt with the unimaginable impacts of this pandemic. The effects of the pandemic resulted in our first annual loss since 1972, ending our streak of 47 consecutive years of profitability, a record unmatched in aviation history.

Our 2020 net loss was $3.1 billion. Excluding special items, our annual net loss was $3.5 billion or a $6.22 loss per diluted share. The biggest drivers of 2020 special items were payroll support proceeds of $2.3 billion that were an offset to salary wages and benefits, which was offset by $1.4 billion in accruals for our voluntary separation and extended emergency time-off programs as well as $222 million gain from sale-leaseback transactions.

While our bottom line results were disheartening, we made great progress last year in reacting to the pandemic and cutting costs, reducing capacity and significantly bolstering our liquidity. For fourth quarter, our overall cost performance was strong as we continued to meticulously manage spending. Excluding special items, our operating cost decreased 37% year-over-year to $3.2 billion and increased 7% year-over-year on a unit basis.

Fuel expense was the largest driver of the year-over-year decrease, down 67% with gallon consumption down 45% and price per gallon down 40%. Our fourth quarter fuel price was at the midpoint of our guidance range at $1.25 per gallon, down $0.84 year-over-year.

Following 3 quarters of lower fuel prices, energy market prices have increased recently. We currently expect a sequential increase of roughly $100 million in our first quarter economic fuel cost compared with fourth quarter, despite slightly lower gallon consumption estimates in first quarter. We estimate our first quarter fuel price to be in the $1.60 to $1.70 per gallon range.

Our 2020 fuel hedging portfolio remained materially unchanged throughout the year, and our premium cost per gallon increased in 2020, simply as a direct result of lower fuel gallons consumed. Our fourth quarter premium expense of $24 million equated to $0.08 per gallon and our full year premium expense was $98 million, also $0.08 per gallon. Our 2020 portfolio outlook is similar to 2020 with estimated first quarter premium expense of $25 million and full year estimated premium expense of $100 million.

Our hedging protection for 2021 currently reflects hedging gains that would begin at Brent prices around $65 per barrel with more material gains once you get to $80 per barrel.

In addition to the cost tailwind from lower market fuel prices, our fourth quarter fuel efficiency improved 8% year-over-year, driven by many of our older aircraft remaining parked and out of service, given our capacity cuts.

Fuel efficiency is also being helped by lower load factors as well as strong on-time performance. We expect this trend to continue in first quarter and currently estimate fuel efficiency to improve by 6 -- by 5% to 6% year-over-year.

Excluding fuel, special items and prior year profit sharing, fourth quarter operating costs were down 23% year-over-year, which was right in line with our guidance range. On a unit basis, the increase was 29% year-over-year, driven primarily by the significant reduction in year-over-year capacity.

Our fourth quarter capacity was down 41% year-over-year, which resulted in a reduction of approximately 300 -- of $340 million of variable flight-driven costs, excluding fuel, primarily related to flights driven maintenance expense, the landing fees and revenue-related and personnel costs.

We also realized cost savings from the actions we've taken in response to the pandemic. We saved $425 million in salary wages and benefits in fourth quarter, driven by our employee voluntary leave programs; and we have reduced advertising expense and cut or deferred most of our projects and investments as well as discretionary spending.

We did have a few areas of increases in inflationary pressure such as contractual pay rate increases, increases in airport rates and a greater pro rata share of airport expenses and higher aircraft rents from the sale leaseback transactions that we completed in 2020.

In total, I am very pleased with our cost performance and continued cost control in fourth quarter. I'll spend a few minutes recapping our employee voluntary leave programs since they are such a key component in managing our near-term cost. We had a strong 25% total participation rate by our employees, and that is 7% in the voluntary leave program with 18% participating in extended time off.

I would also like to thank our 15,000 employees who participated in these very crucial programs to reduce our cost and cash burn. The total cost of these 2 voluntary programs is approximately $1.8 billion, if none of the pilots on an extended leave are recalled before the end of 2025, for those that selected a 5-year time horizon. In that case, the NPV of the program through 2025 exceeds $2 billion.

In terms of the accounting, we accrued approximately $1.4 billion of the total cost of the programs in 2020, and that covered the time period from second quarter 2020 through the end of 2021. The $1.4 billion accrual is reflected as a special item in our annual 2020 non-GAAP results and includes all costs associated with the voluntary separation program and an assumption that there would be no material recalls of employees that elected extended time-off at least through February 2022, which is 18 months from the beginning of that program.

The remaining $400 million of program costs are related to employees who elected extended time off for longer than 18 months, which consists solely of pilots. Due to the uncertainty of the current environment, no accruals were recorded for extended time off elections beyond this 18-month period. We will continue to closely monitor the demand environment and, of course, record further accruals, if appropriate.

We made cash payments to employees of approximately $450 million in 2020, pretty evenly split between third and fourth quarters. We expect 2021 cash payments for the program to be about $500 million, $175 million of that in first quarter.

So those are the basics of the accounting for the program. And in terms of cost savings from these programs, we recognized lower salaries, wages and benefits of approximately $425 million in fourth quarter 2020 and $565 million for full year 2020.

For 2021, we expect $600 million in incremental savings over and above 2020 for an estimated $1.2 billion in total savings from these programs this year or roughly $100 million per month.

We continue to expect the annual run rate savings from our voluntary separation program to be roughly $500 million beginning in 2022 and beyond. We are very happy with the success of these programs, which provide significant savings. In addition, the extended lead programs give us a lot of flexibility should the business recover fast, and we determine we need to recall employees.

Our swift self-help actions reduced our 2020 cash spending and outlays by approximately $8 billion compared with original plans. Breaking that down, our 2020 operating expenses, excluding fuel special items and profit sharing, were down $2.8 billion compared to plan.

The benefit of fewer fuel gallons consumed from less capacity drove fuel savings of more than $1.5 billion. We reduced capital spending by $2.4 billion, taking into account proceeds from sale-leaseback transactions and supplier proceeds received.

The remaining cash savings were driven primarily by the suspension of dividends and share repurchases. This is a tremendous testament to our people for their swift action and laser focused on strict cost control.

Based on our current cost trends and capacity plans for first quarter 2021, we expect first quarter operating expenses, excluding fuel and oil expense and special items, to decrease in the range of 15% to 20% year-over-year. On a nominal basis, our estimated first quarter operating expenses, excluding fuel and oil expense and special items, are relatively in line with our fourth quarter results as capacity remains down, and we continue to benefit from savings driven by reduced capacity levels as well as similar quarterly cost savings from our employee voluntary leave programs.

While we are not providing full year 2021 cost guidance, as long as capacity remains muted, we expect continued savings in variable flight driven expenses such as salary wages and benefits, fuel consumption, flight-driven maintenance expense and landing fees.

We expect $600 million of incremental cost savings from our voluntary leave and extended time-off programs this year. And in terms of areas of pressure, we will have contractual pay rate increases. We anticipate rate inflation and airport costs. We expect an increase in depreciation and amortization as well as aircraft rentals as we resume a mix of owned and leased MAX deliveries and as we continue crucial technology and facility investments.

We will also have more heavy maintenance checks in particular for our -800 fleet. Overall, changes in our nonfuel spending relative to 2020 will be mainly dependent on how our capacity plan evolves. To the extent costs are rising as a function of more flight activity, it will need to be supported by a recovery in revenue and the focus will be on operating margin and cash burn improvements.

On a fuel constant CASM basis, we continue to believe it is reasonable that we could get back to 2019 levels even with less capacity by the end of 2021. We had some cost inefficiencies this year from carrying excess staffing, which will impact our cost, although we are economically covered with the PSP extension. There have been significant cost reductions across the industry. And I would just caution that many of them are temporary during this depressed environment.

For Southwest, we are a growth airline with the cost structure to support growth, and we don't believe we need to make structural changes to our strategy, business model, fleet and product offering.

We are very well positioned for a recovery in travel demand and our focus on our long-term health and position within the industry rather than managing to a particular point in time during this pandemic.

Our annual 2020 effective tax rate was 27.8% and being higher than the federal statutory tax rate. As we mentioned on our call last quarter, the CARES Act allows any losses created in 2020 to be applied to prior tax years beginning with 2015.

As a full cash taxpayer for the past 5 years, we are able to take full advantage of this CARES Act provision and currently estimate a tax refund from our annual 2020 net loss carryback of approximately $470 million, which we expect to receive later this year. The higher tax rate is due to the net loss carryback provision being applied to a higher corporate tax rate of 35% in 2015 and 2016 until the passage of tax reform in 2017.

For first quarter 2021, we expect our tax rate to subside back to normal levels and be in the range of 21% to 22%, as the NOL carryback provisions available in the CARES Act are not applicable to years beyond 2020.

Turning to fleet and CapEx. I continue to feel very comfortable with our fleet flexibility over the next several years, whether through retirements to adjust to lower demand or through our ability to return aircraft to service to ramp up capacity when the environment supports growth.

As Mike covered, we are focused on returning the MAX to revenue service on March 11. During fourth quarter, we reached an agreement with Boeing to take delivery of 35 MAX 8 aircraft through the end of 2021, including 16 leased aircraft.

In December, we received 7 of those, which were leased aircraft, and we expect the remaining 28 aircraft in 2021. Our current plan is to return 17 leased aircraft that expired this year, which would bring us to 729 aircraft at the end of this year, well below our fleet of 747 aircraft at the end of 2019. We do not have an updated order book to provide beyond 2021 as we are still in discussions with Boeing to restructure our longer-term order book.

During 2020, we returned 12 leased -700 aircraft and retired 24 owned -700s, including the accelerated retirement of 20 owned -700s. Our decision to early retire these 20 aircraft resulted in an impairment charge of $32 million during fourth quarter, treat it as a special item, and we estimate that the operating savings will exceed this charge. And they will be replaced with new, more fuel-efficient MAX 8 aircraft. We ended 2020 with 718 aircraft in our fleet.

Our annual 2020 capital spending totaled $515 million, which was more than offset by cash proceeds of $815 million from sale-leaseback transactions and $428 million in supplier proceeds received during 2020.

When also factoring in minimal aircraft deliveries and the cancellation or deferral of the majority of our originally planned capital investment project for 2020, we significantly offset the $1.4 billion to $1.5 billion of CapEx originally planned for the year. We were successful in aggressively managing our capital spending throughout the pandemic in 2020, and we will continue to do the same in 2021.

Our recent agreement with Boeing included the settlement of 2020 damages related to the MAX grounding. And as a result of delivery credits provided in the agreement as well as progress payments made to date on undelivered delayed aircraft, we estimate an immaterial amount of aircraft capital spend in 2021, and we currently estimate our annual 2021 capital spending to be no more than $500 million, driven primarily by technology, facilities and operational investments. Compared with our original planning projections prior to the pandemic, we have reduced our combined 2020 and 2021 capital spending by approximately $5.5 billion.

Before I wrap up and open the call up for questions, I'll provide an overview of our liquidity and cash burn. We ended fourth quarter with liquidity of $14.3 billion, including cash and short-term investments of $13.3 billion and our fully available $1 billion revolver.

Since the onset of the pandemic, we were quick to reduce spend and bolster our cash position. We raised approximately $18.9 billion through debt issuances, sale-leaseback transaction, a common stock offering and payroll support program proceeds. Net of repayments, we ended the year with $10.3 billion in debt on our balance sheet, and we were in a net cash position of $3 billion and have leverage of 56%.

We continue to have approximately $12 billion in unencumbered assets, and that doesn't include the significant value from our Rapid Rewards program. I am very pleased with our significant liquidity and substantial dry powder should we need it as the pandemic persist here in 2021.

We are grateful for the recent PSP extension of the PSP funding. We reached an agreement with the U.S. Treasury for at least $1.7 billion, of which $864 million has been received thus far in January. The remaining proceeds of $864 million are expected to be funded here in first quarter.

The total proceeds will be funded as $1.2 billion in cash and $488 million in the form of a loan. We will also issue warrants to purchase nearly 1.1 million shares of common stock. And including the PSP funds received thus far, our cash balance as of yesterday was $13.9 billion.

Turning to cash burn. Our fourth quarter average core cash burn was $12 million per day as expected. And this was a sequential improvement from our rate of $16 million per day in third quarter and a continuation of the sequential improvement seen through 2020, despite the deceleration in revenue trends in November and December.

Given current revenue trends, coupled with a seasonally weaker travel period in January and February and rising fuel prices, we currently estimate average core cash burn for first quarter to be approximately $17 million per day. The $5 million per day sequential increase from fourth quarter is mostly driven by lower revenue and higher fuel prices.

And keep in mind that our average core cash burn calculation does not factor in certain changes in working capital. Including changes in working capital, as we defined in our earnings release, our fourth quarter 2020 cash burn was $15 million per day, $3 million per day higher than our primary core cash burn, driven almost entirely by fourth quarter payments made for our voluntary employee leave programs.

We currently estimate our first quarter cash burn, including working capital to be in the range of $10 million to $15 million per day with the improvement driven primarily by changes in our ATL balance as bookings begin to build again, albeit not building at historical rates. One of our key goals is to achieve a cash burn breakeven in 2021. However, the timing of the necessary rebound in travel demand to meet this goal remains unpredictable.

In closing, while 2020 was unpredictable and unprecedented to say the least, we are prepared for the current environment. And I am immensely proud of how our entire Southwest team is managing through it all.

Coming into 2020, we had the strongest balance sheet in the U.S. airline industry, and we maintain that position today. As we navigate through the ongoing challenges presented by the pandemic, we remain focused on maintaining our financial strength and substantial liquidity.

With encouraging news on the vaccine front, we are hopeful that demand will rebound at some point this year. But until that occurs, we will remain focused on what we can control. We will continue to adjust capacity to varying demand levels, and we will continue the momentum from 2020 in terms of our cost control and focus on efficiency.

We are managing our cash burn and have made good progress despite the revenue environment. We are pursuing new revenue pools through network expansion in GDS and have continued to make prudent investments for future growth. We are preparing for the return of the MAX in March. And with the much-needed PSP extension, we have another year of job security for our people.

As our people have demonstrated again and again, they have what it takes to carry us through this pandemic and we'll continue to be nimble as we manage through the uncertainties. We are blessed with many strengths, the greatest of which are our people. And I believe we will emerge from this environment with even more competitive advantages and opportunities for growth over the next decade.

As our founder, Herb Kelleher would say, "We will not sit on our laurels." And our track record speaks for itself. Our people are fighters, and we are all up for the challenges ahead.

With that, Chad, we are ready to take analyst questions.

(Operator Instructions) And the first question will come from Savi Syth with Raymond James.

Tammy, this might be for you. As we get back to a bit more of a sustained demand recovery, what are your targets for liquidity levels, debt, CapEx? As you think about the priorities for cash as we get to more of a stable path to a recovery?

Yes. Savi, I'll start with liquidity because obviously, as we manage through this pandemic, I think that's goal number one. So of course, our goal there is to maintain sufficient liquidity. And it's tough to predict, as we've been saying, exactly when we'll hit an inflection point, but we intend to maintain a high level of cash until we are comfortably past the pandemic.

In the current environment, we have agreed with our Board that a cash target for now of at least $10 billion is reasonable. And we can go down from there post pandemic as we return to profitability and repay debt. One thing for sure, this crisis has certainly reinforced our long-term imperative to maintain a strong balance sheet and manage our debt.

And of course, we'll want to satisfy the adequate reserves for investments as we prepare for the recovery and our future growth. As always, we'll want to maintain adequate liquidity to weather a crisis, which seems to happen once a decade. As we set our targets here post pandemic, we'll want to be mindful that a large portion of our working capital is advance ticket purchases, which may not serve as a definite source of liquidity when we're in a crisis.

So there are a lot of factors to consider with regard to liquidity, and we'll continue to be thoughtful as we work together to maintain the financial health of Southwest. And as we manage through that on the CapEx side, I think we've done an incredible job so far, but we want to be well positioned for the recovery, and that we'll have some level of CapEx that we'll need to spend to continue to be prepared for the future.

As I've already stated, we have very minimal requirements this year. And we'll want to manage that into next year, while at the same time, we'll want to continue to invest in projects that are important for our future such as our GDS capabilities that Tom took you through.

So we're going to continue to manage that. But as our profitability returns to normal levels, I would expect our CapEx to return more to normal levels. And we're just going to have to manage that here as we go.

Helpful. And if I might just have a quick follow-up on the comment on ATL. Just kind of curious, your current sales, how much of that is coming from credits versus kind of new cash and how that compares to a more of a normal environment?

Yes. So just to give you just a little insight of what -- where our ATL balance is, to help there. At the end of -- at the end of 2020, our ATL balance was about $7 billion. And the current -- we had a current liability of $3.8 billion and a noncurrent liability of $3.3 billion.

About $4 billion of that was from our loyalty program or a little more. And about $2 billion represented travel credits that we've already issued. And then we had about $522 million that consisted of tickets, and with the remainder being things like gift cards and our early bird revenues, et cetera.

So that, hopefully, Savi, will give you a little bit of help as you're thinking about what the breakdown might be ahead.

I guess in terms of usage, though, are you seeing a lot heavier -- I'm guessing you're seeing a lot heavier use of credits in current purchases. That's what I was kind of curious.

Yes. During the fourth quarter, we had the credit redemptions. That was about 18% of our non-loyalty sales during the fourth quarter. And our hope, Savi, is that, that would return to something more normal like 5%.

And the next question will come from Hunter Keay with Wolfe Research.

Tammy, can you elaborate a little bit on the CapEx plans. You said -- I think you said $5.5 billion out. Can you bracket in the CapEx high and low possibilities for '22, '23? And also, if you would, how that ties to your fleet count outlook, both high and low?

Yes. Sure. As I said earlier, as we return to profitability, I would expect our CapEx to return to more normal levels. And if you go back historically, I'm going to call that about $2 billion. And I'm not saying today that's our guidance yet. We're still, as I said earlier, working with Boeing to restructure our order book.

So we haven't really locked that down yet. Obviously, we want to see how the demand environment evolves. And then also we do -- we will be focused on renewing our fleet, and we'll want to pick up with our fleet modernization efforts. So as Gary said at the beginning, it's all a balancing act. So -- but I would expect our CapEx levels to pick up as we get past the pandemic to more normal levels that you've seen in the past.

But right now, I'm just not prepared to give you exact guidance because we haven't locked down our delivery book with Boeing. And as you know, our largest -- the largest portion of our CapEx goes to aircraft. And -- but we'll want to continue to invest in technologies and our facilities and so forth. And as I've said already, in total, we're below $500 million.

So we may need to pick that up here at some point because we certainly want to be prepared and ready when we see that rebound in demand.

And Hunter, I'll just pile on here very quickly. I think that's a very fair question. And we -- I'm just not comfortable that we have an answer to that yet. So it's -- nobody likes the answer it depends. Obviously, you already acknowledge that there's a high-low kind of a scenario. So we owe you that bracketing.

One of the things that I want us to do this year is to not think that we're starting over as a company, but there are some start-up-like aspects to this environment. And we're well-funded. We've got a lot of -- we've got a lot of institutional capabilities. We've got a lot of opportunities. We just don't have a lot of current demand.

So we don't want to behave as if we're going out of business, and there are things that we would definitely like to invest in outside of the fleet, which Tammy was referring to. So all that, I want us to relook at, rebaseline our capital plan, and it really applies to both. It's not just aircraft, but it will also be the non-aircraft category.

What we've been focused on so far, obviously, is survival, and making sure that we screw down the spending, that we're taking care of the health and welfare of our people and our customers. And those very appropriate questions you have aren't -- they're not pressing for 2020 and 2021, but soon, they'll be important.

I think the most pressing thing, just to reiterate what Tammy said, is that we are in a retirement phase. So we will need to make some judgments about whether we want to keep airplanes longer, whether we want to stick with our pre-pandemic plan about retirements, whether we need to follow through with replacing. There is great opportunity with fleet modernization. So those are all good questions.

And then, finally, Mike and Tammy are working with Boeing, as you all know, and we're right in the middle of that negotiation. That obviously factors in to answering your question. So that's not complete yet either.

So there's work to be done there, and we owe you an answer. We're just not quite ready to offer it up yet.

Yes. No, understood. And then as you think about rebaselining things, the operation and even for -- it's a fleet question, too. How do you think about Hawaii now in light of what's happening with COVID and with the MAX? What does the MAX give you in Hawaii that the NGs don't?

Oh, wow, I think we're more enthused about a lot of things as we emerge from this, and Hawaii is certainly one of those. But I don't know if I'm exactly on point, but -- with the way you're thinking about it, but we -- and maybe that's all you were looking for.

I mean we're -- we think the MAX will be better to serve the market, and then the MAX 7 is also a factor in the way we're thinking about Hawaii. So I think we're going to do -- we're off to a great start there. Yes, I think we're going to do extraordinarily well. Tom, I don't know if you or Mike want to...

Actually, Andrew and I were just talking about this before we came in. I just want to...

Yes. Certainly, the MAX gives us, certainly, a better cost performance. So immediately, the contribution of that sector of our network improves with the improved aircraft. Also, the NGs have payload restrictions going westbound and the high wind time of the year, which is actually right now.

So demand -- so the aircraft right now, so we're not really having to restrict the payloads. But normally, we would have to restrict the payloads this time of the year with the NG. The MAX, with the greater range, will be able to go full year-round to all the airfields we service. So that will also be an increment to our business gates in Hawaii.

Actually, just back to demand for a second. We haven't really talked about demand. The whole story is demand in my mind. We can talk about lots of stuff that's all demand, and the Hawaii demand is actually pretty darn strong.

And what we've seen is Hawaii, they've gone through, I'm not sure how many executive orders we've actually had out of Hawaii. I think, 12, 13, something like that. A lot of executive orders with different ways of managing through the quarantines and such.

The precleared program that they've put in place now that several carriers are leveraging, it really does make the experience pretty straightforward. And the demand for Hawaii is actually very, very solid. So we think there's a tremendous amount of opportunity there.

We're excited about Long Beach, what we're doing there. We're excited about opening up the San Diego service that was delayed. I guess, it was initially last fall, Andrew, we just started that up. So I think the upside for us in Hawaii continues to be really significant.

So excited about that. And the MAX 8 as makes it even better. So it actually expands the territory we can cover as well. So new cities with that, so. Good to hear from you, Hunter.

And our next question will come from Duane Pfennigwerth with Evercore.

Gary, I wanted to ask you about your recent leadership role at A4A. How does your involvement potentially change the posture at A4A? And how might priorities change given you're coming from a position of strength?

Duane, we're -- we have one boat. And obviously, I never take my Southwest hat off, but this is my second stint as chair. So I think we all understand how this works. It's a relatively small association. We have some new members. So there's some administrative things to be addressed and some team building, if there's such a thing among competitors, to do.

But basically, we need to arrive at a strategy that we can all agree to. And then logic would tell you then there's things that we can't agree to. And then therefore, that falls outside of the scope of what the association would work for -- or work on.

So I don't know that it's so much driven by Southwest business or our strength or weaknesses so much as it is just what I'll try to do to lead the organization in a fair-handed way to be as productive as we can.

I think the A4A is a very talented organization. We've been members since, I think, 1990. There was a time -- therefore, there was a time that we were not members. So it's a long horizon. We think it's better to be -- have a seat at the table and be a part of that as opposed to not. And I thought the association did a great job in 2020, in particular.

You got a new administration, which is a task in and of itself as well as another stimulus that's being bandied about. So there's plenty of work to be done and I'm looking forward -- I was honored to be asked to do it and happy to volunteer, and I'll be spending more time in Washington as a consequence of that.

I appreciate you biting on that and the thoughts. Just for my follow-up, and maybe you covered it, and obviously, everybody is trying to ask the same flavor question in 20 different ways.

But given the cost savings that you have locked in and the fleet mix benefits, when you get back to 2019 capacity levels, how much better do you think your CASM profile will be?

Yes. I'll let Tammy give you -- she is working on that, and she no doubt can give you a more thoughtful answer. But I -- the way you asked the question is a good way to do it.

I was really very pleased with the operational performance in 2020. And we got a bounce -- the ball bounced our way in some ways because we were underutilizing the fleet. We had longer turn times. You had lower load factors and some things like that. But it doesn't really reveal all the work that Mike and Andrew and the rest of the organization has been working on to improve our operational performance.

What was intended to be addressed in 2020 and 2021 is further efficiency efforts with the schedule. And that's the real magic here in terms of being able to improve our cost effectiveness. And so I think we're all curious -- I'm just not ready to -- I don't really know what 2019 capacity looks like. We are horribly inefficient right now and still doing a pretty good job relative to our peers. So what we've got to do is get back to some kind of aircraft productivity and efficiency and then layer on top of that our initiatives that we had planned to see where we get.

I'm very enthused about the progress we've made with the cost so far. I think you got this from Tammy's update. But basically, if you strip out fuel, the costs are -- they don't vary much from fourth quarter to first quarter, which is pretty darn encouraging.

So we've definitely stripped out a lot of costs, I think, in terms of a lot of the more discretionary investment like programs and projects, especially that were technology driven. We feel like we've gained significant efficiencies there post pandemic compared to where we were before. So good for us. And so I think a lot of those things should stick.

Then you just get down to, are you going to have 85% load factors again? Are we going to have a dense scheduling opportunity again? Can we improve the turn and the ground time and continue on with some of the block time efficiencies that we were realizing?

And if we can do all that, I think we'll beat 2019 costs handily, quite frankly. But that's, in fairness, I think that's speculative right now. I think we have a long way to go. Right now, it's taking more people and more airplanes to produce an ASM than any of us like and far more than what it was in 2019. So I'm more determined to get us back there than I am so worried about what all the arithmetic adds up to.

So that's -- Tammy, I don't know how you would answer that question.

Yes. I don't know that I have really a whole lot more to add to that. But in addition to the opportunities to improve our efficiency, as Gary took you through, we have delivered some permanent cost takeouts such as our voluntary separation program. And we have accelerated the retirement of some aircraft here in 2019. And I think we have a proven track record on just the overall cost management side. So we'll continue to work hard there through the recovery.

I did just want to note fuel because, obviously, part of that is dependent on fuel, which has spiked recently. So we'll just continue to manage costs at a pace that I think makes sense relative to the capacity that we're adding back.

The MAX return to surface will also be a factor. But as you all know, there's a lot of efficiencies that we're going to gain as we start bringing the MAX back and replacing our older aircraft given the significant efficiency of the MAX.

And so we -- again, it's hard to commit to a specific CASM at a specific ASM level. That is time-based. So we're not going to give guidance there. But we do believe we could hit 2019 CASM levels, as Gary said, even while our ASMs are down.

So again, just as I said in my remarks, very proud of what everybody has done. Everybody's just rallied together here to reduce our costs, and we're going to carry that on here until we get to the other side of this pandemic.

And I know you -- I'm sure you didn't take it this way, Duane, but I wasn't criticizing what we're doing or complaining about our efficiency right now. It is what it is. So we have very thin demand. And we've done an outstanding job of sustaining a viable network, but it is not nearly as -- what we're forced to do is far less efficient than what we know we can do.

And I'm a little afraid that some of our -- well, I think trying to make a commitment on cost right now is getting the cart before the horse. So we need to know what demand is. We need to schedule to that. We need to make it as efficient as we can and then strive to get back to the level of efficiency that we had with our schedule back in 2019 and then add some.

As Tammy said, there's some overhead and things we've taken out, but it's going to be all about the schedule. I think we're set up beautifully to be able to execute better in the future on cost. And I think we're all anxious to get there.

When we'll hit that? Don't know. But I think we're set up as well as any of our competitors. In fact, I would argue we're set up better.

The next question is from Jamie Baker with JPMorgan.

Gary, Duane's question is actually a good segue into mine. The good news, obviously, is that Southwest entered the crisis with an outstanding cost structure and your competitors didn't, for the most part.

The bad news, and I guess that's my question, is it bad news in your mind that some of your competitors are at least targeting pretty significant cost reductions. In their cases, getting back to 2019 CASM, but on significantly less capacity. So if your cost advantage narrows, what do you think this actually means for Southwest?

I know Tammy sort of deflected the question in her remarks. And if memory serves, I did ask you a variant of this back in the 2007 time frame during the bankruptcy era. So I'd love to hear your updated thoughts.

Well -- and of course, relative to the last 13 to 20 years, our cost to manage has narrowed. And so I think your question then and my concerns then proved to be valid.

I don't know what they're going to be able to do. I think at least in terms of what I'm seeing right now, our costs are stickier as we shrink. We don't outsource a lot of stuff, as you know, which is much easier to shed. And so we are more "fixed and sticky" on the way down.

I think several of you all have noted that as we grow back, that will be to our advantage. So we'll see margin expansion because we won't have the variable cost to attach to that as the revenue volumes come back.

That's one of the reasons I wanted to point out the operational performance for 2020. As we -- it's all about the operation when you get right down to it when it comes to cost. And we had tremendous learnings from 2020, just the fact that, I mean, we could quantify the value of an on-time performance point much more scientifically than what we've been able to do in the past. And it's things that we've all learned, if not in school then in our early years that when you have poor quality or you have waste, it is very expensive.

So we've got a lot of wonderful learnings from that and a lot of good tools and techniques to apply with a lot of good initiatives coming forward. I know I'm being a little bit redundant. So those are things that I know.

If our cost advantage narrows, I think I could point to the last 10 to 20 years and say, "We're still really good." And it's more than just that. It's the 5 things that I mentioned that Herb was so proud of 25 years ago. It's the strong balance sheet. It's the strong liquidity. It's the great culture that we have, the excellent customer service, coupled with having a low-cost structure and a low fare brand. It's all those things combined. So I don't see us losing that. We certainly won't lose it in the near term.

And the advantage is narrowed. My theory -- and you and I have talked about this. My theory is that those are going to ebb and flow and there may be a point in time where it will widen again. So it's kind of incumbent upon us to continue to innovate and look for those opportunities where we can beat the rest of the crowd.

Gary, I promise not to ask the question for the next 13 years. And that's my only question for today.

Well, we'll see how this looks in 2034.

Statute of limitations. All right. Take care.

Ladies and gentlemen, we have time for one more question. We'll take our last question from Brandon Oglenski with Barclays.

So Gary, I guess, I just want -- it's been a great discussion thus far. What is the focus for you looking forward? Is it getting back to full employment, getting back to the full schedule?

Obviously, reaching cash breakeven is important, but what about reaching prior profitability levels because you guys did drop to 60% to 70% of [man hours] to get to breakeven? What about returning back to margins and return on invested capital, are those still important as well?

Oh, yes, absolutely. And I think we'll just need to -- right now, it's all theory, right? It's just so theoretical because we're mired in this pandemic. So I hope you'll forgive me skirting the question a bit here because what we really urge our leaders to do is focus on the next 30, 60, 90 days. It's just like having a patient in intensive care.

So to be fair to your question, again, it links back to some of the earlier questions I was trying to answer from Hunter and Duane. If we get to the point where our demand is roughly what it was in 2019, I think there's an easier way to formulate answers to your questions.

If we've got a new normal that is significantly less than that, maybe we're breaking even and making a profit, but our traffic levels are 70% of what they used to be, there's not a lot we can do in the near term to honestly commit to you that, yes, we'll get back to the same return on capital there. I don't think it's possible at 70%.

If we get back to 100% of customer volumes, then it is a matter of where fares at that point, what's the mix of business and leisure. We can get wonky on all those things, but it's just so far -- it's so theoretical from where we are today.

My -- so I will answer your question. My focus is real simple, and that's why I crafted my opening remarks the way I did. We need to strike the right balance here, and we need to be realistic. We know that we can't generate the traffic we need unless we boost our flying. There is no reason to boost our flying if the traffic isn't going to be there. All we will do is waste money.

So we have to be very focused on getting that balance right and reacting as quickly as we can. What we've tried to do is maintain optionality so we don't prolong that recovery period. And I think that, that's worked out beautifully for us, better than -- it can't be any worse than any of our other competitors. So I think we're in a prime position to do that, and that is my focus.

Now once we get to that point, I think we need to work on resetting what our near-term targets need to be, what kind of profits -- there was a question about capital spending. I think the capital spending depends on what is our profitability and what can we afford to do and still maintain a strong balance sheet.

All that we'll need to iterate and I will welcome getting to the point where those are the kinds of things that we can then focus on. But our rally cry for our people this year is really simple. It is win more customers and stop the bleeding. That's what we've got to do.

And that will put us on a platform where we can then get to the next thing, which will be, let's pay down this debt, and let's make sure that we are at a sustainable level of profitability that will then lead to what can we afford from a capital program for the next 5 years.

So it's just an uncertain time like none of us have ever seen in our lives. And anybody that tries to give you a real specific answer to those kinds of questions, they're just -- they're not telling you the truth. And that's -- and that's the god's honest truth. We just -- we don't know, but we are prepared to manage and respond and we're determined to do it better than anybody else.

Okay. Well, that wraps up the analyst portion of our call today. I know we shared a lot of information. Thank you all for the great questions. And if you have any others, feel free to give me a call. Thank you all for joining and have a great day.

And thank you. Ladies and gentlemen, we'll now begin with our media portion of today's call.

I'd like to first introduce Ms. Linda Rutherford, Senior Vice President and Chief Communications Officer.

Well, thank you, Chad. I'd like to welcome members of the media to our call today. And I think we can get right to the Q&A portion. So Chad, if you would give them inspections on how to queue up for a question, we'll get started.

(Operator Instructions) And our first question will come from Alison Sider with The Wall Street Journal.

I wanted to see what you're hearing or if you're picking up anything about sort of additional requests for government aid when the existing PSP expires at the end of March. You've said that you won't -- you don't plan to furlough any employees through the end of this year regardless, and just curious if you see the industry kind of maintaining the same united front on the federal aid question, if not every airline equally needs the aid.

Yes. Great question, Alison. So I'll just speak for Southwest at this point because I don't have input from all of the member airlines within Airlines for America. But at this point, we would like to have a seat at the table. I know that unions have reached out like they did last year, urging leaders in the administration and Congress to provide more relief.

We -- I will just -- I know you know this, but I'll just acknowledge that the theory with the second payroll support program was to simply extend what was done the first time, which was through September for another 6 months. And the payroll support program in rough dollars was $25 billion, the first time around. Well, it was far less than that here the second time around. And we're staring down another -- in terms of cash flow, $1 billion losing quarter here in the first quarter, just like we had in the fourth quarter with higher fuel prices.

So this has certainly not ended, and it's anybody's guess what the second quarter will be. So this is all about protecting jobs. And we're the only airline to promise no job losses or pay cuts in 2020. We lived up to that. We promised the same thing again here in 2021. That doesn't mean that we won't have risk and concerns beyond this. So we're not promising this indefinitely. And all airlines are alike.

So I think the short answer is, it's too early to give you a specific answer, but it's definitely something that I'm glad the administration is looking at. I'm glad that Congress is looking at it. And I'm glad that we'll have a seat at the table here.

And the next question will be from Tracy Rucinski with Reuters.

The CDC said this week that it is actively looking at mandating COVID-19 test for domestic travel. Has it approached Southwest or A4A about this possibility?

I'll speak for Gary. But Tom, do you -- go ahead.

Well, I mean just to give you a few thoughts. I mean certainly, the international stuff kicked in this past Tuesday, the requirements there. And it was actually -- I wouldn't say it was a nonevent for us. We have your fairly underweight there, if you will, compared to OAs, but that wasn't a problem for us.

With respect to coming into the U.S., it's not clear -- first of all, it's not clear if, when, what, how we'd be asked to do that. But it's certainly something that we're thinking about. If it were something similar to what's being required internationally, how would we do that domestically? And right now, the international is -- it's a pretty manual process because it's sprung upon all of us so quickly, so you got to get the technology and to scale that domestically.

Well, I will say what I think, if that's -- if you don't mind. I think if we're ultimately going to be doing a domestic testing type of -- or type of protocol or regimen. I really don't think you want this being done by airport, by airline, by city, by state. I think, as we say in Texas, that could be a real go rodeo. I mean it's going to be a real challenging thing for customers to navigate all of that if it's not consistent across the country.

So I think that if we are going to do something, which, by the way, I don't think our government affairs team, our operations team or our customer experience team have really been given any indications coming. We're reading the same things you're reading, the CDC. And we're anticipating hearing something from somebody, but we're thinking about it. They want to figure it out fairly quickly.

So our technology teams and CX teams, customer experience is what CX is, are thinking through how might we do that if it did in fact come to fruition, but nothing known at this point.

Yes. And I'm -- so specific to your question, I'm not aware that the CDC has reached out to us. By extension, I'm not aware that they've reached out to the Airlines for America. But yes, I think it would be a mistake. It's very costly.

As Tammy was pointing out in an earlier interview to administer the test, we don't have adequate testing capacity for the country in the first place. Where our emphasis needs to be is on the 2 vaccines that are available and getting them rolled out and getting the country vaccinated. And I would hate for us to take our eye off of that ball.

But I would just make the argument that why pick on air travel? If you want to test people, test them, but test them before they go to the grocery store. Test them before they go to a restaurant. Test them before they go to a sporting event.

The -- I think it's been well recognized that the air cabin is extremely clean and healthy and safe. And with the new administration mandating mask in the transportation sector, that's what we need the most, which is hygiene, wearing mask, social distancing, which should now better extend in the airport and beyond. That's the right approach here.

And I just think with the millions of customers who fly or ride buses or trains or whatever, it's just unrealistic to expect that we can efficiently and effectively do testing on a large scale.

Well, if I could just follow up. I think that part of the concern may be the spread of the new variants, which are now in this country, and there have been really strong messages from leaders in Europe, for example, discouraging travel.

Do you see any kind of messaging like that coming either from the government or the industry, out of concern that the progress that we have made so far could really just be -- could go out the window if these new strains go -- like today, there was a case discovered in South Carolina. So if it's contained in South Carolina, that's better than if it reaches California, for example.

Well, no, that's a different question and a fair question. So -- and the answer is no. No one has reached out to us about what we might need to do in that kind of a scenario. It's something that needs to be discussed, quite frankly. But to your point, I don't know that testing would be an effective means to try to address that.

I don't know what your experience has been, but my experience in trying to get access to test through friends and family is extremely difficult. And that's before now you would mandate that you want more test administered. I just think it's wholly impractical.

And obviously, we -- selfishly, we hope that we don't get to a point where we're prohibited from flying, but that's a different question and something, obviously, that needs to be addressed. But fortunately, at this point, we're not dealing with a significant threat from these different strains.

We have time for one more question, and that question comes from Dawn Gilbertson with USA TODAY.

Switching gears for a second. You guys, now that you're filling your planes, just seeing a lot of chatter about when are you going to bring back regular food and drink service. Could someone walk me through the thought process there and any kind of timetable, especially including the sale of alcohol?

Well, we're -- at this point, we went back to selling the full middle seat to the full plane. We thought at that point with the surge, it probably made sense for us not to be having a lot of interactions between the flight attendants and the passengers, which is what's required for the alcohol, which by the way, is what people care about more than anything else is selling alcohol, which is not a huge surprise.

So we're working through that at this point with our customer experience team and our provisioning team and operations and in-flight team are working through when does it make sense for us to do it? It very well can be sometime in the first quarter.

I think a lot of it really does have to do though with what we're seeing in terms of case counts. And I just looked at the case counts before coming into the call, and every state, pretty much -- I shouldn't say every, I think there were 1 or 2 that were still going up. Case counts are down, hospitalizations are down, and so on and so forth. And that certainly has a bearing on how we think about it.

And so I'd say it's still a work in process. Our intent is to bring it back. We'd love to have it back in time for spring break. That is to be decided, to be chosen and determined. But Mike, do you have anything you want to add on that?

No, Dawn. It really is just a -- it's just an opportunity for us to limit face-to-face conversations with flight attendants and customers and people mingling throughout the cabin. And I think that, that does help reduce the risk and help us distance people more.

At some point in time, as Tom mentioned, it's going to be the right time to start bringing that back. Hopefully, that's sometime toward the middle of the year.

The other thing, though, that we've been very accommodating with for customers, if they want to bring food or colas from the airports onto the airplane, we're very accommodating with that.

But Tom and Mike have both covered it, but it's just to reemphasize, it is all about the health. I mean that's the only reason that we discontinued the service, is to limit the face-to-face interaction. And obviously, we're encouraging people to keep their mask on. So those are the only reasons.

The only thing I'd add, Dawn, is it's kind of interesting. Our customers miss their drinks, and our flight attendants actually miss the engagement with our customers. That's the fun part of the job, and that's where the person kind of sparkles through, and they really miss it.

So when we think it's time and it's safe. We can't wait to do it.

We're coming into the winter with the discounts coming up. I think our folks made exactly the right choice, which is to not do it right now. And you can tell by all 3 of our answers that we're continuing to talk about it, but it's not a high priority for us to get it back and in service here, until we're comfortable.

This concludes our question-and-answer session. I would like to turn the conference back over to Ms. Rutherford for any closing remarks.

Thank you, Chad, and thank you for joining us today. If you all have any other questions, you can certainly follow up with our communications group at (214) 792-4847 or using our online newsroom at www.swamedia.com. Thank you all very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.