Southwest CEO Believes First Week of April Was the Bottom

As it burns $900 million in net cash per month, Southwest Airlines is evaluating ideas to bolster public confidence in air travel, so more people will book and fly. Those ideas include requiring masks for passengers and flight attendants, distributing hand sanitizer and wipes, and booking flights to two-thirds capacity to promote distancing, executives said Tuesday on their first-quarter earnings call.

The changes, many of which may be announced soon, come as Southwest wrestles with some of the worst business conditions in its history. Southwest reported a net loss of $94 million for the first quarter, its first quarterly loss since 2011.

This current quarter likely will be much worse, as Southwest’s business did not decline until March, the quarter’s final month, when Americans moved, en masse, to cancel flights amid the coronavirus pandemic. For the past month, executives said Tuesday, load factors have been in the single digits, even though the airline has moved briskly to cancel flights, sometimes within a few days of departure.

“At this point, it is very, very tough to predict exactly how and when we’ll see trends turn around,” Southwest President Tom Nealon said.

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But with some U.S. states starting to open up, including Texas, where Southwest is based, the airline wants to push travel as much as is prudent, so it can pay its bills. CEO Gary Kelly said he’s optimistic the timing is right, with the worst possibly behind the airline.

“It does feel like we bottomed out the first week of April,” he said. “We’ve seen very gradual improvement in weeks two and three. I would hope that that would continue.”

Before the pandemic, Southwest had strong advanced summer bookings, and the airline is hopeful it can retain some of that business, Kelly said. If that doesn’t occur — if more people cancel than the airline expects — Southwest may need to take drastic action, Kelly said.

“The net cash burn without working capital changes in April is $900 million,” Kelly said. “We just we can’t continue on at that pace. So we would attack that with additional cost reductions and certainly cuts to the schedule.”

Consumer Confidence

Like many of its competitors, Southwest is scrambling to persuade customers it is safe to fly — no small feat considering many doctors say the Coronavirus may spread fastest in tight indoor spaces.

Southwest is now cleaning its airplanes more thoroughly and more often with hospital grade disinfectant. But executives said they know they must do more to persuade travelers not to cancel their summer vacations, which is why they are considering ideas such as handing out masks and sanitizer. (Several other U.S. carriers already have announced or implemented similar steps for flight crews and passengers.)

“Here in Texas, Governor Abbott announced yesterday that the state is opening back up for business and they do informal polls, and it shows three-quarters of the people think it’s too soon,” Kelly said. “We know that we have work to do to convince customers that are willing and able to travel that it is safe to come to the airport, and it’s safe to get on to the airplane.”

Still, there are no perfect solutions. For example, Southwest may sell two-thirds of seats to permit distancing, but the airline does not assign seats, and does not plan to block physical seats, Kelly said. Passengers still will be able to sit wherever they want, with the airline expecting most will leave middle seats open.

One reporter pointed out that Southwest’s plan isn’t true social distancing, because passengers, even in the best of scenarios, will be closer than six feet apart. But Kelly suggested this is the best it can can do under the circumstances.

“We’ve got to have some balance between social distancing and just the affordability for people to fly, right?” Kelly said.

The masks, distancing and cleaning regimens could be around for awhile, Kelly said, but the CEO said old norms could return in a few years.

“I’m not willing to accept that the flight experience is forevermore changed,” he said.

Long Recovery

While it wants to persuade customers to travel this summer, Southwest is not expecting a quick recovery. The airline, which has parked hundreds of airplanes temporarily, may even emerge from the crisis smaller.

“There’s every reason to have hope and confidence that we can get through this,” Kelly said. “Realistically, we just can’t expect that things are going to be back to normal in six or 12 months. I don’t believe that for a minute.”

The pandemic is a big enough problem, but Kelly said the airline closely watching the U.S. economic downturn. Southwest generally is not considered a business airline, but business travel accounts for roughly one-third of the airline’s traffic during normal conditions, Kelly said. And those passengers may not return for awhile.

“We’ve seen the same pattern in the previous three recessions that I experienced, where business travel is cut very sharply, and businesses can be very disciplined and they can issue orders like, ‘Thou shall not travel,”‘ Kelly said.

Still, Kelly said he expects business travel will return. He said he’s been using video conferencing, and finds it no substitute for face-to-face interaction.

“I know a lot of people are using Zoom and there’s predictions it will forevermore change meetings, and I just don’t believe that,” he said. “I think it’s just one more tool that people have. And if you’re like me, I’m sick of these Zoom calls.”