Southwest CEO Talks Payroll Shortfalls, Low Fares, Burning Cash, And Shrinking Airline

Southwest CEO Talks Payroll Shortfalls, Low Fares, Burning Cash, And Shrinking Airline

Last week, we reported on Southwest Airline CEO Gary Kelly’s remarks in his weekly “Ask Gary” segment for employees.  In the segment, Kelly tried to express optimism and his hope that furloughs and other impacts to employees won’t occur.  Yesterday, Kelly spoke to employees again, but this time seemed much more set on making his employees aware of the gravity of the situation.

The CEO began by saying they received $3.295 billion in grants and loans through the CARES Act.  According to Kelly, Southwest received the funds on Wednesday.

However, Kelly made clear that the stimulus money doesn’t change the situation and cautioned that it doesn’t cover payroll through September.  Kelly said, “I want to underscore this doesn’t solve our problem, though.  This gets us through the next five months.  It doesn’t fully cover our payroll costs through September and nor will it guarantee profitability.”

Kelly is making it clear that while the stimulus funds are great, the airline is still reliant on passengers to cover payroll and other bills that they owe.  The stimulus doesn’t cover all of their payroll needs through September.  Of course, employees are still guaranteed employment through September since that is a condition of the CARES Act funds.  However, even that might have a workaround, as Ben at One Mile at a Time covered earlier this week.

Traffic is Virtually Zero

Kelly told employees that the conditions they are going through are not expected.  Kelly said, “We knew April was going to be a bad month, and it is.”  Kelly continued, “Our traffic is virtually zero.  So we’ve cut our flight schedule by more than 50%; we’ve grounded hundreds of aircraft.  We are bringing though cash, and it is an alarming rate.  And that’s the reality we all know.”

Of course, this is not unique to Southwest Airlines.  Delta Air Lines CEO Ed Bastian said earlier this week that the airline is operating at less than 5% than normal capacity.

Quarter One Earnings

Kelly noted that the airline’s quarter one earnings will be released on Tuesday, April 28th.  Next week, the CEO plans on discussing future predictions for quarter two, which will likely be significantly worse than quarter one.  Both Delta and United released their quarter one earnings this week.  American Airlines has not yet released their quarter one earnings.

Commitment to Low Fares

We wrote last week about Southwest Airlines climb to the being the largest airline in the world, as a measure of available seats.  In that piece, we mentioned Southwest’s advantages over other domestic carriers, one of those being their low-cost maintenance.  Kelly took the time to point out they seem to still be committed to low fares during the downturn.

Kelly first noted the advantages the airline has saying, Kelly said, “We have cash, we have a strong balance sheet, we have low costs.  We have a great low-fare business model, extraordinary people, and award-winning customer service.  All those things we have.”

He then said to in order to get passengers back and return to normal, “We’ve got to have low fares.”

Smaller Airline

The CEO did note the possibility of a smaller airline if things don’t improve.  He said, “If things don’t improve dramatically over the May, June, July periods, we’ll have to prepare ourselves for a drastically smaller airline.”  Of course, with a smaller airline, there is a possibility for furloughs and other cuts to staffing.  Kelly didn’t allude to that, but it’s a harsh reality of the situation.

Bottom Line

Nothing is particularly shocking in what Gary Kelly said, but it did seem to be of a serious tone than the prior week’s discussion.  Kelly noted nothing has changed over the past month, but it does seem Southwest employees think they are immune to some of the problems faced by their domestic competitors.

That being said, Southwest definitely does have advantages being a mostly domestic airline and not as impacted by slowdowns in international travel.  That means they are more reliant on a  return to normal in the U.S., but can focus less on a return to normalcy in the international travel market.

One thing is certain: rhetoric from airline CEOs this week show they are preparing for a difficult time ahead.  Airlines are likely in this for the long run, and they will have to find ways to bring consumers back, while also make them feel comfortable with flying.