西南航空 (LUV) 2020 Q3 法說會逐字稿

Good day, and welcome to the Southwest Airlines Third Quarter 2020 Conference Call. My name is Chad, and I'll 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 you all joining us for our third quarter call. In just a moment, we will share our remarks with you and then open it up for Q&A.

So you will hear a comprehensive update today 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.

Just a few quick 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. We also had several special items in our third quarter results, which we excluded from our trends for non-GAAP purposes, and we will reference those non-GAAP results in our remarks today. We have all of this spelled out in our press release from this morning regarding special items, forward-looking statements non-GAAP reconciliations to GAAP results and other important risk factors. And of course, you can find our press release and other helpful resources at our Investor Relations website.

And now we'll go ahead and get started, and I will turn it over to Gary.

Thank you, Ryan, and good morning, everybody, and thanks for joining us for our third quarter earnings call for 2020. Obviously, we can't be happy or satisfied with the loss, but I'm going to tell you upfront some of the things that I'm happy and grateful for.

Number one, the record loss was significantly less than I feared 3 months ago. We got past the July wobble in demand. Number two, our outlook for fourth quarter reflects a continuation of this improvement, better revenues, lower cost compared to the third quarter and assuming our October trends hold for November and December, and that's, of course, also assuming that we have stable fuel prices. Number three, we've announced 9 new destinations to be added over the next 3 quarters.

I'm happy to have these opportunities. I'm happy to play offense. I'm happy to generate more revenue on minimal incremental cost, which means more cash, and I'm happy to put idle aircraft and excess staff to work.

Number four, I'm happy that there's still a chance that we can reserve pay, jobs and service by Congress extending the Payroll Support Program for another 6 months. Getting that support extended is a top priority. I'm hopeful it will happen quickly so we can terminate work on our Plan B, which is to press our unions to sacrifice with concessions in order to prevent furloughs as we currently are roughly 20% overstaffed.

Number five, I'm happy that, finally, we seem to be nearing the ungrounding of the MAX. Number six, I'm happy that we have the scientific evidence to provide comfort and assurance that it is safe to unblock the middle seats, which will happen on December 1, and the scientific support arrives as demand continues to improve, which should absorb our 50% increase in seats offered for sale. And our models show that this will be revenue, cost and operating profit positive, and that all makes me happy, too.

I'm happy that we have at least 3 years of cash, and I know it's borrowed money, but that should see us through this crisis. And if we have to, we can borrow more. Number eight, I'm happy that we're uniquely prepared for this environment with our business model. We have low cost, low fares, no hidden fees and nothing to hide. No second class, the nation's best route system, the nation's largest airline, 97% domestic and better prepared than ever to serve business travelers when they return to the skies.

And then finally, I'm enormously grateful for our people. They've done a phenomenal job monitoring and adjusting this airline. They've done a phenomenal job running a superb, safe, on-time, high-quality operation. They've done a phenomenal job serving our customers with industry-leading hospitality. And finally, I'm grateful for their resilience and their perseverance and their devotion to our cause. Our leaders are going to continue to do everything in their power to take care of all the people who have built and operate this airline and serve our customers every day.

Job one is keeping our company financially strong and healthy and with perpetual competitive advantages. So those are a sampling of my favorite things. And yes, the worst may be behind us, and I hope there are no more surprises. And yes, we have a long way to go, but we will get through this. We will survive this, and we will emerge with the best balance sheet and the best business model to compete and thrive in the post pandemic world.

And Mike, Tom and Tammy have a lot to share with you. So I'm going to wrap up and turn it over to Mr. Mike Van de Ven.

Well, thanks, Gary. And…

And go ahead and gloat well for the operation, Mike, because it is absolutely superb.

Well, I hope that's one of the things that's also made you happy.

So this quarter really was the first full quarter of the year where each day, our plan was to operate all the flights as scheduled. We were able to get out in front of the schedule changes that we made during the quarter, and we got our crew schedules and airport staffing adjusted. We had all of our customers reaccommodated well advance of that actual operation.

And so as a result, the operational performance was just magnificent. It was arguably the best overall performance in Southwest history. Pre-Labor Day, we were flying roughly 2,800 trips a day, post-Labor Day around 2,000 and we published just over 19,000 extra flight sections during the quarter. And our on-time performance for the quarter was 94.4%. That led the industry, our best performance since 1992. Our bag handling was the best in our history. We carried roughly 12.4 million bags and we only had a bag claim for a lost or damaged bag for about 0.02% of them. So that's 2 claims for every 1,000 bags carried. And that is superb service, and you don't have to pay extra for it.

The reliability of our service and the hospitality of our people resulted in a Net Promoter Score of 80.7%, and that's the highest in our history. So it's just a testament to our people. In this environment with full pandemic, politics or social issues, general anxiety and our people that come to work. They take care of our customers, they take care of each other. They take care of Southwest Airlines, and I'm just very, very proud of our Southwest team.

So in addition to running a very reliable operation, we are equally focused on cost efficiency. We executed both a voluntary separation and extended time-off programs in the third quarter. Those programs were very successful. They reduced our operational staffing just over 25% as we begin the fourth quarter.

We have roughly 734 airplanes on property. We have about 100 of those in long-term storage. That includes the 34 MAX aircraft, and those aircraft were selected based on their maintenance profiles and the near-term heavy checks. And so the point of all that is that we can cover the variation of daily flight activity in the fourth quarter at optimal staffing and optimal aircraft maintenance profiles, while continuing to produce very high on-time performance results.

We've actually been doing some extensive operations research into the cost of executing the flight schedules at varying staffing levels and aircraft productivity levels and on-time levels. And historically, we'd assumed that an on-time performance in the low 80s really optimized our cost profiles. But some of the most recent research that we've been doing is indicating that our optimal cost profile may occur when our on-time performance is in the upper 80s.

So that's really an exciting opportunity that we would have that would foundationally improve both schedule reliability for our customers and our employees as well as minimizing our operational cost execution.

So turning to the MAX. Several major milestones have been completed. The certification flights are done. The Joint Operations Evaluation Board has met. They've given their recommendations for training. The Flight Standardization Board has considered them. They've issued their draft report for pilot training requirements, and that report's out for comment through November 2. And after that, a final report needs to be issued. There's bound to be a couple of open regulatory items that they need to be addressed. But ultimately, an airworthiness directive and instructions need to be issued that would allow for an ungrounding.

As you know, there's no time line, but we're hopeful that, that happens before the end of the year, but it could be early next year. In any event, our process is the same as we've previously discussed. We have to put all these requirements into our manuals. We have to receive FAA approval. We have to schedule and complete pilot training for roughly 7,000 pilots. We have maintenance work to do to bring our own MAX aircraft out of long-term storage and into an operational status, and we'll be doing operational readiness and validation flights on the aircraft before they return to revenue service.

We also have 34 undelivered aircraft from Boeing that they had currently have built, and we're working with them on an updated delivery schedule. Our process is going to be deliberate, structured, and we're expecting it to take 3 to 4 months between an ungrounding and the aircraft being in revenue service.

When they are ready for revenue service, they'll replace the 700s. We've got significant operational experience with the aircraft. It is our most cost-effective aircraft. It is our most reliable aircraft. It is our most environmentally-friendly aircraft, and it's our most comfortable aircraft. So we really look forward to flying it again.

So in closing, I think we really settled into a rhythm in the third quarter with even more stability in our schedules in the fourth quarter. Our aircraft and our people resources are better aligned with our commercial needs. Our customers are getting the best value in the industry, low fares and superb reliability, and that's delivered by our kind and caring people that will treat our customers like family and keep them safe during their journey. And that's the Southwest team. And as I said, I'm just really, really proud of them.

And with that, Tom, over to you.

Okay. Well, thank you, Mike. Good morning, everybody, and I'm also very proud of the Southwest team. It's a quarter that we've never had operationally. So congratulations to all you guys.

There's a lot for me to cover. So I'm going to get right into it. So our third quarter revenues, as you've all read, were down 68% year-over-year, which is actually a pretty decent improvement versus the 83% decline we experienced in the second quarter.

Passengers declined 65% for the third quarter, and our fares were down roughly 20%, and we do expect that yields will continue to be under pressure. But having said that, we've actually seen some pockets of close and sequential yield improvement. That began in September, and that has continued into October, which is quite encouraging.

In terms of our monthly performance, demand in bookings stalled, stalled hard in July with the rise in COVID cases. And July operating revenues were down 71% year-over-year with a load factor of 43%, and that was on capacity that was down 31%. In August, we saw modest improvements in bookings and close in leisure demand, with operating revenues down 69% year-over-year, and that was on a load factor of 43%, with capacity at 27% -- down 27%.

The trend improvements continued into September with operating revenues down 66% year-over-year with a load factor of 52%, and that was on capacity that was down 41% as we reduced our schedules to rightsize our capacity for post-summer demand, and this certainly helped us to get to the better end of our guidance range.

And Labor Day travel was actually pretty solid, and leisure demand held up well for the remainder of the month, which was great to see, certainly relative to July. And in terms of the demand environment, what we're seeing continues to be heavily leisure-oriented, and bookings continue to trend closer in, mostly inside 21 days for the third quarter.

Now at this point, we're seeing a modest pickup in bookings beyond 21 days, especially for the Thanksgiving and Christmas holidays, which is great to see, and certain -- and seasonality certainly continues to be a key factor for demand. And I think, as you expect at this point, our business travel continues to be very weak, and our corporate managed travel was down 89% for the quarter, which is consistent with the second quarter, and we expect business travel to remain down significantly through the end of 2020 and well into '21. And I'll talk more about this in just a few minutes.

Now in terms of our capacity planning, demand continues to be inconsistent by market, which makes it pretty challenging. Our network planning team is doing a very, very incredible job, and they have the tools and they have the experience to make capacity and schedule adjustments quickly, and they're doing that quite routinely at this point.

However, in the third quarter, we did certainly continue to see strength in areas such as Southern California, intra-Cal, Las Vegas, Denver, Phoenix, Texas and Florida. And we're also seeing more signs of life in markets like Chicago, Kansas City and St. Louis as well as others. And we're also seeing demand for Hawaii beginning to come back as the state relaxes its quarantine requirements for travelers that tested negative for COVID. And you begin to see us add back our Hawaii flying. We'll have all of our California to Hawaii routes restored in November with the exception of Oakland and San Jose to Kona.

We're also adding new service to Honolulu from San Diego. And for the time being, our interisland service remains status quo. We're also continuing to see relative underperformance in markets with quarantine restrictions, such as New York, New England and other states.

Short-haul markets have also seen less strength, and we've added more connecting itineraries to compensate for this, and we're still maintaining service to all of our markets. We continued to adjust our flight schedules in 30-, 60-, 90-day increments, and at this point, we are in a very, very clean rhythm to do so effectively and efficiently. We're getting pretty good at this.

In terms of the third quarter financial impact from blocked middle seats, the impact in July and August was fairly immaterial, but we estimate the September impact was roughly $20 million, and that was from spilled revenue that we just weren't able to accommodate. But similar to what we did in the second quarter, we added nearly 19,000 additional flights, as Mike mentioned, during the third quarter, to capture as much of the demand that otherwise would have been spilled. And the results were pretty good, with over 75% of those flights covering their variable costs and helping to reduce our cash burn.

So to close out the third quarter, I just want to hit on our other revenue, which was down 19% year-over-year. And as you might expect, the ancillary revenues trended almost right in line with the faster decline that we've experienced, especially for products like early bird and upgraded boarding.

Now revenue from our Rapid Rewards program was down 43% year-over-year. We're actually continuing to see strong performance from our co-brand credit card. In fact, revenue from the card spend in the third quarter performed quite well and was down only 12% year-over-year. Obviously, cardholder acquisitions were down substantially simply due to fewer customer -- customers as well as tightened credit approval rates, but we still added new shareholder -- cardholders, and our attrition rate has held steady. So our overall credit card portfolio continues to perform very well despite some very clear and obvious challenges.

Okay. So enough on Q3. Fourth quarter. I would say that we are cautiously optimistic, about steady, modest improvements in leisure revenue trends going into the holidays. October demand and bookings have held up well, compare to September, and that's despite the lack of a big holiday weekend in October. We don't have much of October left to book at this point, and we expect operating revenues to be down approximately 65% to 70% year-over-year with an estimated load factor of 50% to 55%. And with ASM, it's expected to be down approximately 45% year-over-year.

At this point, November and Thanksgiving travel is booking pretty nicely. November operating revenues are currently expected to be in the down 60% to 65% range year-over-year with a load factor in the 50% to 55% range, and that's with capacity expected to be down roughly 35% year-over-year. So as you all know, the Thanksgiving travel dates fall completely in November this year, which gives November operating revenues a 3 to 4-point head start versus last year due to the calendar shift.

We have less visibility into December, but at this point, we're seeing a nice early trend in holiday demand. And I'd say at this point in the booking curve, our book load factor for the Christmas holiday period is roughly in line with prior years, but of course that's on much lower capacity. So we can't extrapolate that for the full month. But hopefully, virus case counts will stay under control, and that gives you a sense of the type of leisure demand that we're seeing for holiday peak travel periods.

We also expect a more significant negative financial impact from blocked middle seats in October and November as demand continues to improve. So for October, we're estimating a $20 million impact to pretax results and a $40 million to $60 million impact in November. So our ability to add flights during the Thanksgiving travel period is pretty limited. So we're not able to capture the customer demand that we're seeing in our markets. So we're spilling that revenue opportunity.

As you see from our most recent schedules, we've adjusted our December schedule to better match capacity to demand. We're expecting December ASMs to decrease 40% to 45% year-over-year. So in total, fourth quarter ASMs are expected to be down roughly 40% year-over-year. So we aren't ready to provide a lot of color on December at this point, but we will provide an 8-K investor update sometime in November.

I do want to share a few thoughts on corporate travel. First off, we achieved yet another milestone recently with the launch of the Amadeus GDS platform, which is the last of our 4 new GDS platforms. So Southwest fares is now available on Apollo, Galileo, Worldspan and now Amadeus. And I will tell you that throughout the entire pandemic, this entire experience, our corporate sales team hasn't slowed down a bit. In fact, they've been extremely active working with corporate customers and the travel management companies. And without a doubt, I can tell you, there is a lot of energy, and there's a lot of excitement about having Southwest fares available in the GDS channel.

So as it stands today, the vast majority of our corporate accounts continue to have travel restrictions in place, and they are telling us that they expect a modest return on travel over the next 6 months. But having said that, I can tell you that we're seeing over 90% of our large corporate accounts traveling today, although on a dramatically reduced level, but they are beginning to travel. We're also beginning to see the corporate booking curve flatten out a bit, which signals to us that customers are gradually becoming more confident in booking future travel.

Now we don't have a crystal ball, and you have the same data we have, but our expectation is that domestic business travel will continue to return slowly. And perhaps by the end of 2021, our assessment is that domestic business could be in the range of down 50% to 60%. Now whether or not business travel returns in 2019 levels in the next 2 or 3 years is anyone's guess, and there are a lot of opinions on this, but there could very well be a 10% to 20% structural reduction in business travel coming out of COVID that could take several, several years to rebuild.

But I got to tell you, from a Southwest standpoint, there is still a lot of upside for us since we're competing in a channel where we've never competed before. The Southwest experience -- or I'm sorry, the customer experience at Southwest is firing on all cylinders, and the Southwest promise is a very big part of that. And our customers are continuing to share very, very positive feedback about their travel experience.

And Mike mentioned this, but we continue to have the highest brand Net Promoter Score in the industry. But in addition to that, we are significantly outpacing the entire industry when it comes to the DOT customer satisfaction rankings. So in the last month's report published by the DOT, we were best in the industry with a ratio of 3.97 complaints per 100,000 passengers on board.

Now just to put that into context and perspective, our closest competitor was almost twice that, and the closest network carrier had a ratio of almost 6x more complaints than we did. And just as it's always been, that's because of our people. That's because of our hospitality. That's because of our culture. That's because of the quality of the operation, but that's who we are.

So I do want to spend a few minutes talking about the Southwest promise because I think it's a really important and really timely topic. So as you know, we require face coverings and a health declaration before traveling. We have extensive cleaning in airports with physical distancing at the gates as well as a physically-distanced boarding process. Every aircraft is equipped with an air distribution system that introduces fresh outdoor air and HEPA-filtered air into the cabin while in-flight. And what all that means is that the air in the cabin is being exchanged every 2 to 3 minutes and the HEPA filters remove 99.97% of airborne particles, and that's similar to what you find in hospital operating rooms.

Our enhanced overnight aircraft cleaning requires 6 to 7 hours of labor each night on every plane in our fleet. We are applying an electrostatic disinfectant and antimicrobial spray on every surface that's been certified to last 90 days, but we're applying it every 30 days or 3x what's required. We clean the lavatories and tray tables at every aircraft before every flight and we're blocking middle seats through November 30.

So that's the Southwest promise. And we just know a lot more today than we did 7 months ago, and now we're seeing all the medical and the scientific research and it's very clear that the aircraft environment is one of the safest indoor environments anywhere in the world. When you think about what we do every day, whether it's shopping, going out to eat, live sporting events, there really is no other environments where you're going to find the conditions and all precautions that you're going to find on an airplane.

Gary talked about our partnerships with UT Southwestern, Stanford University School of Medicine. Both of these organizations are serving us expert resources to us to help us shape our policies so we can continue to deliver our Southwest promise going forward. The latest bulletin by Harvard School of Public Health concluded that wearing face masks is part of a multilayer approach that offers significant protection. We also have new research from the Department of Defense on how airflow systems, combined with HEPA filters, effectively make the risk of contracting COVID-19 on an aircraft extremely, extremely low even if every seat is occupied.

So the science on the issue is pretty clear at this point. And with the data and knowledge that we now have, we feel very confident making the decision to begin selling all available seats beginning December 1.

Now I do want to be really clear, we would not have made this decision without the overwhelming data that makes clear that this does not put our employees or our customers at risk. We couldn't possibly do that with a clear conscience, and we wouldn't do that. But we do have confidence in our decision based on all the medical expertise, studies, research and partnerships that are in place, that this is safe and that this is the right approach going forward.

So tomorrow, we will begin communicating with every customer who is booked to flight beyond November 30. And if a customer is uncomfortable with us selling all seats and wants to cancel their flight, we'll give them a full refund. No questions asked. And they'll have this option in place throughout the month. We'll also notify customers at least several days before their flight if the flight is booked beyond 65%. And if they choose to change their flight, we'll do our best to reaccommodate them as well. That's just what we do.

So the Southwest promise is real. It's a commitment we've made, and it's important to us, and it's important to our customers and it's important to our employees. So we're going to continue to be proactive and transparent in communicating with our customers, and we're just going to keep taking great care of them.

So lastly, I just wanted to talk about our recent announcements of new additions to our route map. Gary alluded to them, and you've read about them. These new airports aren't recent thoughts, and they certainly aren't reactive thoughts to the current environment. In fact, they've been in the list of commercial opportunities for years. But as you all know, with retirement of the 737 classic fleets and the grounding of the MAX aircraft, we've been in an aircraft deficit position for the past several years now.

At this point, with COVID, we're actually in an aircraft surplus position, and now we're able to put idle aircraft and our people to work, while at the same time, strengthening existing markets in our network that are already very, very strong. Markets like South Florida, California, Denver, Chicago and Houston, these are markets where we have a significant presence and these are cornerstones of our network, and these additions only make them stronger still.

So here's a recap of what we've announced. Year-round service to Miami and Palm Springs begins November 15. These are leisure-oriented markets that strengthen our successful operations in Southern Florida and California. Seasonal service to Hayden, Colorado and Montrose, Colorado begins December 19. These are markets that expand on our successful Denver operation and provide really strong seasonal revenue opportunities when we typically have idle aircraft time.

And in the first half of 2021, we'll add service to Chicago O'Hare and Bush Intercontinental, and this allows us to reinforce our commitment to these cities and markets similar to how we operate in the L.A. Basin, Oakland, San Francisco, the Boston area and in D.C. and Baltimore.

And as part of our earnings release today, we've also announced our intent to begin serving Colorado Springs, Colorado, Savannah, Georgia and Jackson, Mississippi, all slated to begin service in the first half of 2021. And all these new airports are great opportunities for Southwest, and we have a long list of others that we intend to tackle as it makes sense. And each of these new airports are natural extensions that plug in really well to our existing network.

So with that, I'm going to turn it over to Tammy to take us through the financials.

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 move on to Q&A.

Before I begin, so I'd like to extend a huge thank you to all of our Southwest warriors. You all are performing magnificently despite the challenges of this pandemic. The $1.2 billion net loss we reported on both a GAAP and non-GAAP basis this morning certainly speaks to the staggering impact the pandemic has had on air travel demand and our business.

Our GAAP results included 2 large special items: Payroll Support Program proceeds of $1.2 billion, which was mostly offset by $1.1 billion in charges for our voluntary separation and extended emergency time-off programs; as well as our normal fuel hedge special items.

Speaking of our voluntary programs, I'd also like to thank our more than 15,200 employees who participated in these important programs to reduce our cost and cash burn. It has been emotional to see so many of our Southwest family members depart, and we are very, very grateful for their dedication and service to our incredible company. We are determined to make them proud and are focused on emerging from this pandemic stronger than ever.

We had a strong 25% total participation rate by our employees in these 2 programs combined. And in addition to helping us cut our cost, the extended leave program gives us a lot of flexibility should the business recover faster, and we determine we need to recall employees.

We had more than 4,200 employees elect the voluntary separation program. Our September 30 headcount of nearly 58,000 full-time equivalent employees is down nearly 3,200 compared with June 30, which illustrates about 75% of voluntary leave participants left the company during third quarter. Virtually all of the remaining employees have separation dates by year-end. The total cost of these 2 voluntary programs could be up to approximately $1.7 billion if none of the pilots on extended time-off are recalled before the end of those that selected a 5-year election period.

The NPV of the program through 2025 exceeds $2 billion if there are no employees recalled early from the extended emergency time-off program. In terms of the accounting, we have now accrued approximately $1.4 billion in 2020 of the $1.7 billion potential cost of these programs, which 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 of 2022, which is 18 months from the beginning of that program.

We accrued approximately $300 million in second quarter and $1.1 billion in third quarter, which are reflected as special items in our non-GAAP results in both quarters. The remaining $300 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 closely monitor the demand environment and record further accruals, if appropriate.

We made cash payments to employees of approximately $195 million in the third quarter, leaving our accrued program costs at about $1.2 billion. We expect our cash payments to be approximately $300 million in fourth quarter, about $500 million in 2021 and up to approximately $700 million in 2022 and beyond. In terms of the cost savings from these programs, we expect salary, wages and benefit cost savings of approximately $550 million in second half 2020, $143 million realized in the third quarter and over $400 million in fourth quarter.

For 2021, we expect $500 million in incremental savings over 2020 for approximately $1.1 billion in total savings next year or over $90 million per month. We expect the annual run rate savings from our voluntary separation program to be roughly $500 million beginning in 2022 and beyond. And savings for the voluntary extended emergency time-off program could be up to almost $600 million in total for 2022 through 2025, if no employees are recalled from the extended emergency time off program. So the savings opportunity and flexibility the programs provide are substantial.

We also recently shared that we are seeking the equivalent of a 10% pay reduction across all work groups in 2021, which would represent cost savings of at least $500 million beginning next year. These cost savings are crucial, especially in our largest cost category, as we aim to preserve jobs while achieving necessary and meaningful cost efficiencies in this suppressed capacity environment so that we are better positioned for a healthy and faster recovery.

For third quarter, our overall cost performance was strong as we remained laser-focused on managing our costs. Excluding special items, our operating cost decreased 30.1% year-over-year to $3.4 billion and increased only 4.1% year-over-year on a unit basis.

Our third quarter capacity was down 33% year-over-year, which resulted in approximately $330 million in reduced costs for our variable flight-driven nonfuel expenses, and that's primarily in salary, wages and benefits, maintenance expense and airport costs.

We realized further cost savings driven by the actions we've taken in response to the pandemic. I already covered the cost savings from our voluntary leave program, which was $143 million in third quarter. By parking aircraft, we were able to defer flight hour-driven maintenance activities and further reduced our maintenance expense, which was included in the $330 million I mentioned previously.

We also reduced our third quarter other operating expenses by more than $100 million by cutting advertising spend, technology projects and discretionary spending.

Our cost performance continues to benefit from significantly lower energy prices, which saved us $257 million in third quarter alone compared with our expectations for third quarter fuel costs at the beginning of this year. Our third quarter fuel price was $1.23 per gallon, down $0.84 or 41% year-over-year. And based on our current fuel hedge and fourth quarter market prices, we estimate -- continued and welcomed a fuel price relief year-over-year with an estimated fourth quarter fuel price in the $1.20 to $1.30 per gallon range compared with $2.09 per gallon in the fourth quarter last year.

Our fuel hedging portfolio continues to provide insurance against spikes in jet fuel prices with material upside protection, no floor risk and very manageable fuel hedging premium expense. We have not made material changes to our 2020 portfolio, and our premium cost per gallon has increased this year simply as a direct result of lower fuel gallons being consumed.

Our third quarter premium expense of $24 million equates to $0.08 per gallon, and full year 2020 premium cost remains at $97 million, also $0.08 per gallon. For 2021, we expect premium expense to be similar to 2020 based on our current portfolio. Our hedging protection for 2021 is solid, with 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 relief from lower market fuel prices, our third quarter fuel efficiency improved 10% year-over-year driven by many of our older aircraft being parked. We are also benefiting from lower load factors and better on-time performance, and we expect for this trend to continue in fourth quarter and currently estimate our fuel efficiency to be similar to what we realized in third quarter year-over-year.

Excluding fuel, special items and profit -- prior year profit sharing, third quarter operating costs were down 17% year-over-year, which was towards the better end of our guidance range and increased 23.4% year-over-year on a unit basis, driven primarily by the significant reduction in capacity.

Based on current plans for fourth quarter 2020 capacity to decrease approximately 40% year-over-year, fourth quarter operating expenses, excluding fuel and oil expense, special items and profit sharing expense, are expected to decrease in the range of 20% to 25% year-over-year. This represents a sequential improvement from third quarter driven primarily by lower capacity and additional cost savings from our voluntary leave programs.

Our swift self-help actions have reduced our 2020 cash outlays by approximately $8 billion compared with our original plan. Our 2020 operating expenses, excluding fuel special items and profit sharing, are expected to be down $2.8 billion this year compared to plan. The benefit of fewer fuel gallons consumed from less capacity has driven fuel savings of more than $1.5 billion. We have reduced capital spending by $2.4 billion, taking into account proceeds from sale-leaseback transactions and supplier proceeds received, and the remaining savings are driven primarily by the suspension of dividends and share repurchases.

In addition to these self-help actions, we benefited from the significant drop in fuel prices this year, which we estimate will save us another $1 billion in fuel costs compared with our expectations at the beginning of the year. That brings our total fuel savings compared with planned to more than $2.5 billion and our total cash outlay savings to approximately $9 billion compared with original plans. I am very proud of the Southwest Team and their diligence to realize these meaningful cash savings.

Our effective tax rate for third quarter was 25%. The CARES Act allows any losses created in 2020 to be carried back 5 years for a refund of taxes paid -- and beginning in 2015. And as a full cash taxpayer for the past 5 years, we will be able to take advantage of this CARES Act provision with our projected 2020 net losses.

Further, as our corporate tax rate was 35% prior to the passage of tax reform in 2017, our 2020 tax rate is trending higher than our year ago rate. This was due to the net loss carryback provision being applied to a higher prior year tax rate that drives the larger tax refund. We currently estimate our annual 2020 effective tax rate to be in the range of 24% to 26%.

Turning to fleet and CapEx. We continue to be well positioned 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 if the environment supports growth.

As a reminder, our interim agreement with Boeing from earlier this year is that we will take no more than 48 aircraft through the end of 2021. The environment has not improved since then, and it's certainly safe to say that we do not need 48 aircraft next year, at least for growth.

We are in the process of restructuring our order book with Boeing and do not have a revised delivery schedule to share with you today, but we do hope to nail down the specifics soon.

Our 2020 capital spending forecast remains unchanged. We have more than offset the $1.4 billion to $1.5 billion of CapEx originally planned for this year. We have been successful in aggressively managing our capital spending throughout this pandemic, and our goal is to do the same in 2021. While we are not prepared to provide 2021 CapEx guidance today, it's our full intention to keep 2020 CapEx to a minimum and low level, including any revision to our order book.

Before I wrap up and open the call up for questions, I'll provide an overview of our liquidity. We ended third quarter with cash and short-term investments of $14.6 billion, and including our fully available $1 billion revolver liquidity of $15.6 billion. Since our last earnings call, we issued an additional $1 billion of unsecured debt, raised $121 million through an aircraft secured financing and received our full allocation of Payroll Support Program proceeds.

We ended the quarter with a total of $10.9 billion in debt on our balance sheet, leaving us in a net cash position of $3.7 billion with leverage of 54%. We continue to have approximately $12 billion in unencumbered assets with approximately $10 billion in aircraft, and this doesn't include the significant value from our Rapid Rewards loyalty program.

We remain laser-focused on reducing our core cash burn. And for third quarter, our average core cash burn was $16 million per day, which was a sequential improvement from our rate of $23 million per day in second quarter. This improvement was driven primarily by strengthening close end leisure demand and booking trends. And based on the strengthening of our fourth quarter revenue trends thus far, coupled with cost savings from our voluntary employee leave programs, we currently estimate core cash burn for October to be approximately $12 million per day and fourth quarter to be approximately $11 million per day.

And remember that our core cash burn calculation does not factor in certain changes in working capital. During fourth quarter, we expect the most notable working capital change not included in our average daily core cash burn of $11 million to be driven by payments made for our voluntary employee leave programs, which will be nearly $300 million.

We also anticipate normal seasonal swings in our air traffic liability balance with an expected seasonal drop-off in bookings later in the quarter due to the post-holiday slower time period, which could cause our cash burn, including working capital, to be higher than our core cash burn estimate of $11 million per day.

Our current cash balance is $13.7 billion, which factors in a $500 million bullet maturity debt payment that we repaid earlier this month. Factoring in all the moving parts I just mentioned, we currently estimate our cash balance to be roughly $13 billion at the end of this year.

And finally, we expect to have about 590 million in weighted average shares outstanding in fourth quarter, which is an increase of 27 million shares from second quarter due to the May 1 issuance of 80.5 million shares, which was included in the weighted average calculation for only 2 months in the second quarter.

So in closing, we are proud to still have the U.S. industry's strongest balance sheet. We are the only domestic airline to be rated investment-grade by all 3 rating agencies, and our goal remains to protect our balance sheet and investment-grade ratings. We must see a significant rebound in revenues as we've covered today, but our efforts to boost liquidity, add new low-risk pools of revenue and ongoing focus to reduce cost and cash burn provide a solid foundation when they do allow us to rebuild our predominantly domestic network.

While we've got ways to go, our people have the grit, resolve and determination to carry us through this pandemic. And with any luck, the worst is hopefully behind us.

So with that, Chad, we are ready to take analyst questions.

(Operator Instructions) And the first question will come from Myles Walton with UBS.

I'm curious. Could you comment on the moves at Houston and O'Hare in the context of the aspirations of the corporate travel? And how much those 2 are interconnected? I understand what you said about having the capacity of planes that you didn't used to have. And now you have a surplus and you put them there. But it does seem like the 2 are probably more connected than not. Could you just elaborate?

Yes, I'll try, and then Tom will chime in. The -- we've been thinking about Houston for quite some time. Houston is sort of a sprawling metroplex, and Hobby serves Houston well, but it doesn't serve the north part of Houston, which is where the growth has been over a long period of time. So I made the decision in 2005 to pull out of Bush. We had other priorities at the time, and we debated at the time whether or not we were going to be giving up access to a growth region.

So companies come a long way in 15 years. We've had a lot of opportunities, done a lot of good things. But I just felt like, at some point, we wanted to get back into Houston and in -- or rather at Bush, and it's our third time. I don't know if you know our history there, but it was actually the original Houston airport when the company started, funny enough, back in 1971. But it was in our plan for 2021, and it forecasts very well. We're going to have a great schedule out of there. Houston -- the City of Houston and the airport system are very supportive of Southwest. They were a delight to work with. So we've got the real estate access.

I would contrast that, so again, it's a great opportunity. If it's a leisure oriented world for a while, there'll be plenty of leisure customers that we'll be able to take to and from and through Houston Intercontinental.

O'Hare is different in the sense that we're going to continue to grow back to the Houston example out of Houston Hobby. We'll continue to invest and grow not right now because of the pandemic, but this will pass. Chicago is very different. We are not able to continue to grow, once the pandemic has passed, at Midway. And I'm sure you're familiar with the constraints there.

So I just can't fathom that it's a good strategy for our company to sit here and say for the next generation we cannot grow in Chicago. So you can kind of go through the middle list of what the options are, and I can assure you that trying to expand Midway is not an option. It is just literally not a feasible option. Certainly, it's nothing that could happen in a short period of time. It would cost a bloody fortune.

So that leaves O'Hare, and O'Hare was real estate-restricted, and now it's not. And so we're there, and I'm very much looking forward to that opportunity, like Houston, will also offer access to a section of the metro area that we probably don't serve very well in the north. But I think we'll likely have a similar route system to begin to plug in to our strengths. And I think we'll do very well there and will complement Midway very well.

And then finally, I guess, yes, they're not leisure destinations per se, but there are plenty of consumers that we're getting on our airplanes all over our system. And again, I think pretty much explains why the timing is what it is with O'Hare. If we don't move now, we risk never getting in there. So we're moving now.

And the next question will come from Duane Pfennigwerth with Evercore ISI.

Just on your views on corporate, of course, nobody knows exactly how this is going to play out. But I think I heard you say you're planning for it still to be down 50% to 60% by the end of next year. And if that's the case, what are the implications for Southwest restoring profitability?

And certainly appreciate you've managed through long periods of impaired corporate where your earnings snapped back and your revenue snapped back a lot more fast -- a lot more quickly than the industry broadly. So just from a Southwest perspective, what are the implications for profitability if that view plays out?

Well, I didn't give Tom a chance to answer on the last. So I will this time. I would -- I'll just make one point, Tom, which is we are positioned now in the corporate market to be a real player. And I think as that corporate market begins to recover, we will capture a larger share of that recovering market than our handful of competitors, number one. But number two, it's what I covered in my overall remarks, which is we are low cost. We're low fare. We are very well suited to serve the consumer. And I have been delighted to see how our yields have been improving here without the business customer.

So I wouldn't at all assume that we can't be successful with a smaller mix of business travelers and the implication on the fares there at all. I think we're perfectly suited to operate in this environment and have. We've operated in recessionary environments before where business travel was depressed and recovering, and performed very nicely. But Tom, what…

Well, I think you kind of characterized it pretty well. I think that we've got a -- I really do feel like we have a great opportunity in the large corporate and managed travel business. I just feel like we've been so under-indexed there. We're going to get more than our fair share. So I think that's a big deal.

But I think this is part of the reason. We're going to have to live longer, if you will, off of leisure travel, and that's part of the reason we're looking for new revenue pools. That's part of the various strategy we have and we have some pretty clear criteria for the markets that have been on the whiteboard for a while and that we've chosen. We've already embedded these things financially and operationally. But what they've got to do for us is deliver quickly.

So first we need to contribute quickly to reduce cash burn versus longer start-up markets, 2-, 3-year start-up markets. These have got to be low start-up costs with quick payback, and they've got to strengthen the existing network, and we've got to have more connectivity coming from these other new stations.

So we're trying to find ways to fill in the capacity gaps, if you will. But I think that the corporate market will come back, and we're going to be stronger than you might have seen in the past. But that's why we're doing these new markets as well, I think.

And then if I could sneak in a follow-up. Can you just remind us on the 48 MAX you were slotted to take? And I understand that number may change. How many of those 48 are built today?

34.

Yes. Hi, Duane. There's 34 that are currently built that have not been delivered to Southwest.

The next question comes from Helane Becker with Cowen.

Just on -- a follow-up question on the business traffic. What milestones do you think we should watch to see how you're doing in that new segment? And I don't mean it from a recovery perspective as much as I mean it for increasing share and seeing what we should look at so that we know that you're -- what you're doing is working, I guess.

Well, I'll say what I'm looking at and what our team is looking at is we're looking at contracts. We're looking at contract compliance. So we're looking at just the sheer number of new business travelers that we're getting. We're looking at the relationships, the interactions with our corporate travel partners.

So externally, I'm not sure exactly what you should be looking at but I know how we're going to run the business, and it is really -- it's a pretty tight way to run the business, but we are really looking at number of engagements, number of interactions, new contracts signed, contract compliance and just year-over-year revenue growth.

And by the way, what are we doing to make sure that customers are really satisfied? So I mean any one-off kind of things we need to be doing to satisfy that customer, we're going to do it to satisfy because we intend to take market share.

So I'm not sure exactly how I'd look at our review. Certainly, we'll report on that for you in terms of our business performance versus leisure. But internally, we've got a pretty myopic and pretty -- very narrow set of things we're looking at that we're executing against.

Yes, Helane, the only -- I don't know if I'm really adding anything. I think we will manage that like you would expect. And then I'll defer to Tammy and Ryan to decide how they want to share the information, but we would want to measure our growth. And we would expect that growth rate to be easily double-digit.

So we'll set high goals for ourselves, but the -- we're -- the other nice thing about this is these are discrete customers. We know them, and we can monitor the traffic. So it's -- unlike the so-called business travel segment, we don't know what people are traveling for unless we ask them.

So this is different. This is a subset of corporate travelers. We know them. We know the travel managers, and it's something that is very, very measurable. I don't think we have enough experience right now to set a meaningful goal for a year other than a target. So as we gain some experience here, I think we'll know better whether our -- or how effective our approach is and be able to make adjustments. But the pandemic has messed all that up, as we all know. So we'll get our feet under us here and I think be able to set some realistic goals, and Tammy and Ryan will decide how they want to share all that.

Right. But I do think that just as we do, you'll be looking at -- this is GDS data. This is GDS data. If you look at the ARC data, just like we look at the ARC data and see how we're doing, picking up share, not picking up share.

But Gary's right. It's growth, and we intend to grow.

Okay. That's really helpful. Would you look at signing up or partnering with an international airline at some point? As a predominantly domestic airline, do you think your business travelers would want that? Or are your business travelers and corporate customers predominantly domestic U.S.?

Well, I think that at some point, I think we've talked about this several times, I think.

Oh, many times. Yes.

I'm sorry?

Many times.

Yes. We think that code share partners and airline partners would be a good thing for us, both inbound and outbound. Certainly, as we start to work with the more international corporate customers, they do a lot of international travel, which is really unaddressable by us today. So having a good code share partner would be a good thing.

It's not our priority right now given what's going on with international and given what we're trying to do with some other priorities. But yes, I mean, it'll absolutely be a nice thing for us to have in our back pocket, if you will.

Next question will be from Hunter Keay with Wolfe Research.

I'd like to continue this theme of the corporate stuff. And Tom and Gary, I want to push you a little bit on a couple of things.

Tom, last year, I asked you about agencies, commissions and their roles. And you implied to me that you weren't really interested in paying a lot of commissions to them. But history would suggest that you're going to have an uphill battle with those people unless they're really incentivized to participate.

So do you still feel the same way about that, knowing now what you know? So that's part one.

Yes. I think once you get in the GDS world, you're going to be working with TMCs, and that's -- yes, part of what we do. Now we do want to make sure that we protect our core business and our core channel, which is southwest.com. So you're going to see us be very restrictive in terms of white label agencies that will -- and that would be allowed to work with us in GDS, but I think that's -- you want to be in that world, Hunter. I think that's part of the deals. We just want to make sure we're working with the right ones and we're working with the right clients.

But yes, that's not something we tend to turn out into our leisure traveler, if you will.

And Hunter, it's a very fair question. I think the other thing that we would argue is we've got a great route network. We have great service. We have great policies. There's just more to it and we have traditionally been, as you well know, very successful by the customer driving the demand and not the intermediary.

So it's our classic now near 50-year-old Southwest Airlines play. So we feel like we're in a stronger position than ever to be able to execute well on this. But that's a fair question. And we're kind of just getting started at this. But I agree with Tom. I think that's the right way to do this, and I think we're going to be very successful.

Okay. And then as a follow-up, I get your point about the customer driving it. But when you think about the ease of use for the TMCs, right, if you're not giving these TMCs the ability to know that they've got full content and to know that they're seeing the lowest fare every time. How are you making their life easier if they're still -- for the -- during the booking process, they still have to go to your website and check that they're getting the lowest fare.

Is there a scenario where TMCs, because of partial content, are not going to be able to see the full spectrum of fares that are available to them through that GDS channel?

Hunter, it's Andrew. Right now, 0 to 13 days, all of our content is in the GDS. The TMC is going to access our content through the GDS, through our direct connect as well as through SWABIZ. And our competitors also have content which is not in the corporate travel environment. They filed in the GDS, but they're blocked in the corporate traveler.

So if the corporate traveler wants to access their lowest fare, they also have to go outside the GDS environment to find those base economy fares, which usually line up with the fares that we don't have in the corporate environment. So I think our content is like-for-like, overall, and within 0 to 13, it's 100%.

Another good question, Hunter. We had to call in a lifeline on that one. So thanks, again.

No, I appreciate all the color. Sorry for the -- it's a little left field, but I appreciate all the color guys.

No -- no, not at all. Very good questions.

The next question is from Joseph DeNardi with Stifel.

Gary, you spoke pre-COVID about the desire to have a more economical, smaller gauge airplane and talked a little bit about the 220. I'm wondering if the opportunities to gain share as a result of COVID, whether that makes the case for the 220 more compelling. When you think about playing offense and gaining share, how much more of an opportunity would there be if you had a plane like the 220?

Well, I'm just reflecting on your pre and post, the nature of your question. I don't -- Mike, I don't know that the pandemic in and of itself changes things, except that -- I mean, let's just -- we've shrunk the airline. So -- and Tammy was referring earlier to our Boeing commitment, and we don't know when we're going to grow. And we have a surplus of aircraft.

So the only thing that I would willingly admit is that if there were ever a scenario for us to consider making a change in aircraft type, it would be now because we're not desperate to grow the airline and may not be for a long time. That doesn't really address the essence of your question. I think what Mike and Tammy are working on is to make sure that we're comfortable that we're going to have the best 150-ish seat narrow-body airplane in the world in terms of performance, in terms of economics, in terms of fit into our system.

And it just makes, -- if we have to make a change, it just -- again, I'm just admitting that the environment lends itself to the time that would be required for us to make that kind of an investment. Absent that, Mike, I don't know -- or Tammy, I don't know that there's anything that's really different in addressing that question.

We've been very forthcoming that we're talking about -- to Boeing about a variety of things, and obviously, we're talking to them about the 737 MAX 7. That's a component of these -- a major component of these conversations.

But Tammy, Mike, anything you all would add to that?

The only thing I would add, Joseph, is in our network, there's definitely a need for, what I would say, 140, 150-seat airplane versus 175-seat airplane. Today, at the present time, we're mostly focused on the MAX 8, the 175-seat airplane. And the A220 and the MAX 7, they are the 2 players in the marketplace, and both of those airplanes have their strengths and their disadvantages. And we're -- made no -- we've been looking at both airplanes. We'll continue that evaluation.

We're just not at a point in our network. We don't really need to make those decisions until probably 2025 and beyond time frame. So today, we're just really focused on the MAX, getting them back into service, making sure that we have the right delivery schedule with Boeing.

Yes. I'll just emphasize the point that Mike made, which is -- and this may be in the essence of your question, we absolutely still need the smaller airplane prospectively. We have a ton of 737-700s that are coming up for retirement over the next 5 to 10 years. And we will absolutely want to replace them.

But we're certainly not thinking that we want all 175 seaters. We'll want -- and I hesitate to guess today, but I mean, if you assumed it's half and half, that's probably as good a guess as anybody's right now about what the future is there, but we'll need a large number of the smaller gauge.

And the only thing I would just chime in on is, yes, the MAX 7 and the 220 are both fine airplanes. I think both of them certainly serve the mission, and obviously, as always, just the economics, of course, come into play. And we have long been an all-Boeing carrier. And there are certainly efficiencies that come with that. And -- but all that gets factored into our valuation. But agree that on smaller gauge aircraft, like the 220 or MAX 7, certainly, our aircraft that we will need to fly those shorter to medium-haul markets.

But my only point there is, obviously, the economics are a piece of this, and we'll make sure that we have economics that will serve us well and where we can maintain our long, low cost position.

That's all very helpful. And then, Gary, you talked about, obviously, the capacity you all have to play offense along with your expectation for a structural reduction in demand over a period of time. I'm wondering if that makes the case for M&A more compelling, all else equal, whether M&A is a means for you all to restore earnings power, restore employment to pre-COVID levels and whether you think the DOJ should change the way they consider further consolidation in the industry.

Well, I think M&A is always on the table. We've participated every 10 years roughly in M&A. And so I think there's a time and a place for that. Literally, today, I think it's a nonstarter, personally. I mean, all you would do is take on massive losses, and the only restructuring that could be done profitably is to buy and shut down. And that -- I don't think that that's feasible or palatable.

But -- and I realize we're all -- with your question, you're assuming about, well, what's -- we're all assuming we're going to get back to normal here at some point. So I do think it's a very fair question as to whether or not we're -- well, as for us, as it has been for quite some time, we're not dependent upon an acquisition to grow at all. And I think the number of new markets that we'll be deploying here are evidence of that. And that doesn't even hit the large number of beyond 48 state markets that we were interested in as priorities to these, and we are behind before the pandemic in investing in a lot of our domestic markets, quite frankly, that we were complaining to each other about.

So I think we have ample opportunities for growth under the assumption that things begin to get back to normal. If they don't, then I think your question is much more relevant but only when you can be comfortable that you're not just buying losses that would sink the company. So we're just in this uncertain time period, where there are just a lot of question marks.

On the DOJ aspect of this, there is a failing carrier doctrine that we're all very familiar with. And every airline right now is failing in that sense. So they're not insolvent because of the massive amounts of debt that's been taken on by the industry. But yes, who knows how all this will play out. Right now, you have far too many seats that are available chasing far too and few customers. So all this has to get corrected.

And I don't know. Our General Counsel is sitting here. So I don't -- Mark Shaw, I don't know if you want to comment, but it seems to me you've got all the mechanisms you need to be able to entertain M&A in this environment as it exists today because everybody is in distress.

I agree. I think it is a matter, like you said, of getting back to a post-COVID world, see where things are.

Ladies and gentlemen, we have time for one more question. And we'll take our question from Jamie Baker with JPMorgan.

Gary, if we think about the industry excluding Southwest, post pandemic cost structures are expected to improve, given some level of labor juniorization, fewer aircraft families and so forth.

In Southwest's case, you may experience some juniorization yourself, but you obviously won't participate in any fleet rationalization. So the question is, if your ex fuel CASM advantage relative to your competitors narrows, what sort of influence does that have on how you operate the airline? Or are you just completely agnostic about what competitor CASM looks like?

Gosh, great question. I don't think that we -- no, we are not agnostic. Absolutely not. No, we want to use this as an opportunity to widen our cost advantage. And I think it's a little too early to intelligently argue the prospects for that because as usual, Jamie, you make excellent points. But as we think about late '21, once capacity -- under the assumption that capacity begins to get back to absorbing our overhead, we're very enthused about the cost environment that we'll find ourselves in at that point.

The other thing that I just don't mind sharing is that, as we've said several times, we're negotiating with Boeing. And what we want is to have the lowest cost narrow-body operation in the world when it comes to an airplane.

So the other thing that I know you know very well is that all of our -- again, you talked about an industry except Southwest. Well, the whole industry has made investments to match a certain size, and that size is now much lower. So by definition, the cost pressure is going to be there. And I think it just remains to be seen whether what you were describing actually turns out to be true because that's going to be a difficult challenge to have built an airline for 100 and then to operate at 80 and to think that you're going to have a lower cost structure. So we'll just have to see.

I think one of the opportunities that -- again, we'll just be blatant about this. This is an opportunity for us to gain share, to get back quicker than our competitors to where we were in terms of our operation. And we're -- as I said in my opening remarks, we are the best suited for the current environment, which is more heavily weighted towards the consumer and leisure travel.

We've got tremendous opportunities to add new pools of revenue, which we were not able to attend to before because we didn't have enough airplanes. And now we find ourselves in this opposite position.

So yes, the -- well, no, we are not agnostic and hopefully, you can see that we're behaving in a way that we're trying to make sure that we not just maintain our cost advantage, but we're going to be looking for ways where we can extend it. And the utilization and all of that is key when you have a high fixed cost business, as I know you know well.

And as a quick follow-up, I was just reading something from SWAPA before that referred to the proposed 10% pay cut as being arbitrary, and that's fine. I mean they're entitled to use that word. But it did make me curious what sort of calculus went into the decision to seek 10% as opposed to some other number and why it's not progressive across the various working groups?

Not asking you to negotiate in public. Just kind of curious about the genesis behind the 10% ask.

Well, it is progressive in the sense that we're not asking everyone to contribute the same flat dollar amount. So I think percentages, by definition, make it progressive in that sense. I know what progressive means. So I get that.

But no, it's not arbitrary. It's -- Tammy pegged the number at $0.5 billion or more. So it's a meaningful amount of money. Right now in just very raw numbers, we're roughly 20% overstaffed. Mike, I think that, that -- or Tammy, I think that, that number equates to roughly $1 billion a year carrying cost. So I want us to be in a position where we -- back to your previous question, where we can grow or at least grow from here when the time is right. If we downsize the airline, it's much more cumbersome to try to react to that and certainly much less humane to put a bunch of people on the street. So that is the last thing that I want to do, especially at a -- with the legacy that we have at Southwest Airlines that we all care about.

But if you -- there's a cost -- first of all, you can't implement a furlough effectively on January 1. So you get some slippage in 2021 in terms of getting a full year benefit of that. The other thing is there is a cost to implement a furlough, both with severance, moving costs, training, all of that is not free.

So you kind of do the arithmetic. And if we said, look, we need some relief in 2021, we don't need this for 2 years is the best judgment we've come up with. You can kind of get back to -- I'd take $0.5 billion because you're not going to get $1 billion in 2021 in the first place. So number one. But number two, the logic just says, "Look, hey, we just lost -- we had a record loss. We just lost $1.2 billion."

So the logic that I don't understand, which is to say, "Oh, well, if you can only do $0.5 billion, why do it?" Well, then you wouldn't do anything with that logic, number one. And number two is, well, if you come in and ask for a 25% concession or a 50% concession -- so you get the point.

I think a lot of our logic was, let's try to be reasonable and still empathetic that 10% is a lot to ask for, but it is a lot less than what airlines have traditionally done in terms of the sacrifice that they've asked of their employees. So it's a meaningful amount of money. I feel -- in terms of talking to our investors and our Board of Directors, I feel like it is an effective way to address our overstaffing and it provides us some optionality to be able to respond when demand comes back.

And I think, morally, I feel most strongly about this, that every one of the Southwest employees that are here has worked hard to build this company. They worked hard to serve our customers. And they -- the junior people are our future, and we owe it to them to do everything that we can with the rest of our company to share this sacrifice and not put the burden on just a few, and I feel very strongly about that. All that has to be negotiated with the union representatives. And then because these are contract changes in effect, they have to be ratified by our employees. So we have a long way to go before we can arrive at that.

Now that's an explanation on what we've asked for. My focus is on getting the payroll support extended. That is Plan A, and that solves all these issues. And I'm optimistic that, that still could happen. And if it does, we will terminate all of these requests. And I think it puts us in a very good position where we don't have to ask any of our people for a pay cut, much less seek a furlough.

Okay. Well, thank you for all the great questions. I appreciate everybody joining us today. That's the end of the analyst portion of our call, and have a nice afternoon.

Thank you. Ladies and gentlemen, we will now begin with our media portion of today's call. I'd like to first introduce Ms. Linda Rutherford, Senior Vice President and Chief Communications Officer. Linda?

Thank you, Chad. I'd like to welcome the members of the media to our call today, and I think we can go ahead and get started.

So Chad, would you give them the instructions on how to queue up?

(Operator Instructions) Our first question will be from Kyle Arnold with Dallas Morning News.

I'm going to kind of pick up where you left off a little bit, both the flight attendants and the pilot's unions have been skeptical and bristled a little bit at the idea of pay cuts. How likely do you think you are to get a deal before your deadline? And are there other options that could be on the table outside of that 10% reduction in pay?

Well, yes, Kyle, I wouldn't want to speculate on odds here. Obviously, I'm hopeful that we can get what we need to protect our people's jobs. This is an overstaffing challenge. It is huge. We have locations that have twice as many people as they need as an example. So -- and this is a problem that could persist for a long period of time, and it just carries a high cost.

Our union reps have a duty to represent. The company has a duty here to, first of all, maintain the financial health of Southwest Airlines, or it puts every job in peril. So we've got a long way to go. I'm obviously hopeful that we can arrive at something quickly, and the speed is necessary because we're losing money every day. And there's just no time to waste here.

What would be best, of course, is for Congress to act, in that way we could stop all of this and focus on operating a great airline here. But in any event, we're going to continue to -- we've had a great dialogue with our unions and they're almost all engaged, and I'm very grateful for that. And hopefully, we can arrive at what I've asked.

And our next question will be from Alison Sider with Wall Street Journal.

I want to talk about the role that testing could play in creating international travel corridors. I'm just curious kind of how you're seeing testing, how that might affect domestic travel and state level quarantine requirements, if there's a role for testing and eliminating some of those. And also kind of whether you're expecting any big changes if we have a new administration come in.

I do worry about all of that. I think that, that has, very much, has a dampening effect on air travel, which is probably stating the obvious. Tom or Mike, you guys want to -- I'm a huge proponent of the testing, and it's something that we're very engaged with.

Well, yes, sure. I think at this point, I think the smaller issue for us today is for the international network carriers. But having said that, I think that it can become an issue for Southwest as well as domestic travel and travel restrictions could, in fact, become a bigger deal.

In fact, today, is already -- I'm not sure, 8, 9 states and cities that have restrictions. So it's becoming a bigger deal for us as well. Hawaii, by far, is the most prolific of those. We have a testing and solution in place to handle our customers there. But I think what we really need is a more consistent, less patchwork-y kind of solution, right?

It's really hard for us to be dealing with Massachusetts and New York and Rhode Island and Connecticut, then dropped on New Mexico and Illinois. So you got to have some sort of consistency in terms of a testing regimen and protocol. I think that's important. And I think that honestly, test -- people -- I think customers, they know what they're expected to do, what test they need to take, where they go to get it done, how early before they travel and all that kind of stuff.

So there's a lot that we need to inform customers of to make it something as achievable. But I think that's where we are. So this is something that I know that is important for us. I think it's important for the industry. I think that's how to answer your question, Alison.

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

I wanted to -- I'm going to follow up on Alison's question on testing. Beyond the use of testing as a way to help ease travel restrictions or quarantine, given reports yesterday about a woman who died on a Spirit flight from Las Vegas to Dallas who later turned out to have COVID, can testing ensure that people are not getting on airplanes with COVID? And how important is that?

Well, I think it's a layered approach to begin with, and it's a pretty good step forward in determining who's positive and who is not. So -- and I think the only other thing I would throw in to Alison's -- or just an answer to Alison's question is, it's going to take some time to roll out a testing protocol, let's say, but I think it's well worth it. We were not prepared for this pandemic in this country or in the world, and we need to learn from this and be prepared for the next one.

Even if we don't find that we need these testing protocols for this pandemic, but I think there's a risk of another one. So it just defies logic to suggest that it's not a worthwhile effort to identify those people who are sick so they don't infect others.

So I think we definitely need to press forward on this. Tom and Mike are leading the efforts to do this, and it will help with our Hawaii traffic. And as recent as today I'm having conversations with acquaintances, talking about, well, I'm ready to travel, but where I want to go, I'd have to quarantine.

And Alison also asked about the change in administration. If that happens, we know what the current administration's view is on imposing quarantines. What we wouldn't know is what is -- what would a new -- if we have a new administration, what would they require? We just don't know. And so that would be a concern, and it would certainly blunt the air travel recovery, if you have to contend with quarantines, no question about it.

And Tom mentioned the word patchwork, which is the exact image that makes it really difficult as someone in the travel and tourism industry, much less for being a traveler. So you just -- if you're not really on top of this, you don't know what you're going to find. So all that needs to be addressed, absolutely.

And the next question is from Mary Schlangenstein with Bloomberg News.

I just have a couple of quick follow-up questions. Tom, I wanted to ask you first, you mentioned about testing on the routes to Hawaii. Is that something that's in place for Southwest? Or you're working on to have the testing done at the airports prior to that?

And then my second question is a follow-up -- I'm sorry, go ahead.

No, I'm sorry, Mary, go ahead. Finish your question.

I was just going to say my second question is to Mike. On the discussion of the A220s, you've talked a lot in the past about that. But you said a decision wouldn't have to be made until 2025. And I'm wondering did you mean a decision not until 2025? Or that 2025 would be when you would like to start getting some of the smaller aircraft.

All right. So let me jump into the first one, which is how are we handling Hawaii and all that kind of stuff? So the approach we're taking is kind of 3 pieces. One is the at-home test. The second is we are making people aware of what pharmacies for Hawaii are approved. There are approved providers, if you will. And then the airport in Oakland is actually doing free drive-through testing, which is done day before -- 2 days before travel kind of thing.

So this kind of gets back to it's going to be interesting to see how many airports do it the same way and how do people know what's going on? So the first thing that Southwest needs to do is make sure we have all the most current information out on southwest.com, is very clear for travel from U.S. -- or from Mainland to Hawaii, what you got to do.

Our intent is not to get into the testing business. Our intent is to make customers very aware of what the 3 paths are, whether it's at-home. CVS Pharmacy, just as an example, is our partner of record right now with Hawaii. I think Oakland is working with a provider called Color. Is that correct, Andrew?

Well, they're working with a provider to provide the on-airport testing. So I think the -- I think I'm kind of forgetting exactly your question was, but there are 3 paths for us to be executing our testing with our customers, the big things for us, just to make them aware.

So hey, Mary. It's good to talk to you. Yes. So when I was talking about, we need the airplane on property coming in around that 2025 period. So obviously, we'll -- we'd have to make a decision before that.

So within the next year or so, we're going to have to narrow in on what we're going to go do there and weigh all the pros and cons. As you know, introducing a second fleet type to Southwest Airlines, if we decided to introduce an A220, it's a big undertaking for us, not only with pilot training, but with our systems and our maintenance program.

So yes -- so we need to spend the next year or so, really getting into a deep dive on all those kinds of things and then coming up with a decision.

And the next question comes from David Koenig of the Associated Press.

Okay. I think my question was asked and answered, but I had one other. And I'm a little bit curious, we're seeing a higher number of cases of the virus now in many states. And I wonder whether your fourth quarter planning, how much that takes into account the possibility of rise in cases, with another surge this fall or winter.

Do you have any idea what that might do to your Thanksgiving or Christmas bookings and your fourth quarter plans?

Dave, as I said, the bookings so far, here, we are still pretty far aways out from Thanksgiving, but Thanksgiving and December bookings are actually looking, as I said, modestly optimistic. I mean things are getting a little better, and that's in spite of the rising cases right now, every day, you're seeing it.

What we aren't seeing and Andrew and our revenue management team are looking every day, going back to what does the trend look like in July as an example, when bookings -- prior to the spike, bookings were trending really nicely, cancellations were coming down. And we are going back and looking at what happened in terms of the early warning system, if you will, in terms of when we began to see a change, a demand signal change, and we've identified that. We kind of understand what that is.

We are not seeing that right now at all. With the spike in cases, we are not seeing the same kind of dynamic that we saw back in July and prior to July, and perhaps that's because you start getting to the mindset of the consumer, perhaps people just aren't as concerned about it at this point, perhaps because you're not seeing as many hospitalizations as deaths -- and deaths, although both are rising right now, I get that, but perhaps people haven't been as concerned about it as they were in the past.

Whatever the reason is, what we're seeing in terms of our demand and cancellations is not reflective of an increase in cases that we might have seen in July, as an example.

And the next question is from Dawn Gilbertson with USA Today.

Dave just asked my first question about the link between coronavirus cases. So my other question is, is there -- regarding your switch in your selling middle seats beginning December 1, do you see any scenario under which you guys would reverse that decision? And also, did you do any kind of consumer research or surveys before making this decision?

Dawn, this is Tom. Well, I guess the first thing is I would never say never. Certainly, our intent is not to reverse the policy decision. And I think there's a lot of ample evidence for that, good scientific data for that. So I don't think we -- and we certainly don't intend to do that. Just give me the rest of your question again because I had a…

Customer research.

Oh, customer research. Yes. So we do customer research, I'd say, every week, whether it's online or chats, that kind of thing. And our customers totally get the fact that you guys are a business and you cannot survive and make money if you're only selling 2/3 of your inventory.

So they don't expect us to do this forever. What they want to understand is our rationale for making the change, and the rationale is the data. And so we have to communicate that. We're not going to be marketing all this, but we need to communicate the rationalization for why we are doing this to our customers, and our customers tend to get it. I mean, they really do.

But I guess the answer to your question is I can't imagine us reversing course based on everything we know, and we have talked to our customers, and we're trying to be as generous as possible in terms of extending -- you want a refund, you get a refund. So we're being very generous there. So we're just going to have to manage our way through it, and we'll begin communicating pretty aggressively tomorrow with our passengers.

I can't -- I'm like Tom, I can't see a scenario where we're going to change our mind. And Dawn, you know, I mean, we're 1 of 5 -- I thought it was 4, but I was corrected earlier today -- is we're 1 of 5 airlines in the world who are doing this. So there is more than ample evidence that a change is the right thing to do based on all the science that we've got available to us now.

And the Department of Defense is very compelling and they're not biased. They're not -- there's nothing self-serving about it. They want to make sure it was safe for them to move their troops around. And their conclusions, I felt, were very, very compelling. In addition to all the work that we've had -- that we've been engaged with, with various…

Just to be clear, the middle seat, the open middle seat, it was really not one of our safety components or safety elements of the Southwest promise. It was all about customer confidence and comfort. The safety piece of the Southwest promise was the cleaning and the -- all of the masking all that we just talked about. So this was really about customer confidence and getting them comfortable traveling again.

Honestly, if you were to ask my family, do you want us to pull the middle seat back? They'd say, I kind of like having it open because I get more room. But we understand that you can't do that. I think that you're just waiting for customer sentiment to be positive. It's going to be hard to get that because people actually don't like it, right? So.

Ladies and gentlemen, we have time for just one more question, and that question comes from Robert Silk with Travel Weekly.

You've announced a couple of new key routes -- ski destination routes. I'm wondering, overall, how does your total number of routes to those ski towns and ski destinations this winter back up against last? And also, just capacity to those areas?

And what is the outlook you're seeing on bookings for these key areas, considering that the ski resorts themselves are going to have some -- are making changes that have their own challenges.

Well, I know we're up at least 2. Yes. They're brand-new for us. I -- off the top of my head, I don't know what the industry capacity is there. I got to believe that it's probably down, but it's all about snow and sun right now is what I've learned from our marketers.

And I would say that we have a good bit of ski business in Boise and Reno as well as Salt Lake City and Denver. So these 2 new ski destinations complement a substantial amount of ski business we had in Denver where people would then drive into the mountains. So those are our kind of big ski destinations.

Okay. And I guess you've moved -- so these are your first 2 real small town ski routes, and you're moving in, as Gary said, just because that's -- snow and sun.

Correct. Snow and sun.

Robert, years ago, we had -- I think we had charter-only service…

We did. Yes.

To Steamboat, out of Dallas, I believe.

I think we had Steamboat, maybe Jackson Hole, and -- but it's been decades since we've done that in a sort of a scheduled charter basis.

But there's enough traffic. It will support a few flights. And we've got a huge presence in Denver. You've got it tied-in to Texas. So it's all about giving our current customers new options and also all about trying to win some new customers on these routes. And all the research we've done will support this. And right now, the hurdle is not real high because we already have the airplanes, we already have the people.

So we're already paying for that. If we can just get enough customers onboard to pay for gas and there's a few extra costs, we're ahead of the game. And that's not a long-term viable business strategy, I will add, tongue and cheek, but for the time being, it will work really well, and we're planning to have these in our system for many, many, many, years. So.

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

Thanks, Chad, and thank you all for being with us today. If you have any follow-up questions, our Communications Group is standing by, (214) 792-4847 or online at swamedia.com. Thank you.

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