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Southwest will resume selling middle seats after reporting a $1.2 billion quarterly loss: CEO

Yahoo Finance’s Alexis Christoforous, Brian Sozzi, and Adam Shapiro speak with Southwest Airlines CEO, Gary Kelly, about the company’s latest earnings report and how it’s navigating through COVID-19.

Video Transcript

BRIAN SOZZI: Southwest Airlines posted a third quarter loss today, as the coronavirus continues to devastate the airline industry. Joining us now is Yahoo Finance's Adam Shapiro, who covers the airlines for us, along with Gary Kelly, CEO of Southwest Airlines. Adam.

ALEXIS CHRISTOFOROUS: Brian, thank you. And not only the CEO and Chairman of Southwest, Gary, but thank you for joining us today. Want to jump right into this report. And a couple of things that jump out-- because I was mentioning to you that Savi Syth, the analyst at Raymond James, actually says the report came in, despite the loss, better than expected.

And some of the things that investors are looking at are your cash burn, but your liquidity position. For instance, cash burn average, what was it, $16 million in the quarter. But you're projected to get it down to $11 million. And your liquidity position, $15.6 billion, she points out, is enough to get you well passed the pandemic. So what do you want investors to know about the financial position right now?

GARY KELLY: Well, again, thanks for having us. And first off, yeah, I agree with everything that Savi was pointing out there. So we're already at $12 million a day here in October. So hard for me to say that I'm happy about that cash burn per day, but it's a lot better than double that where we were in the second quarter. Liquidity position is very strong.

And you know, we're looking at a better revenue environment in the fourth quarter than what we experienced in third, so I think we'll see an improvement there. And we're also going to have lower costs in the fourth quarter. So we've got-- I think the worst is behind us. We've got a long way to go though.

We'll still be losing money in the fourth quarter, and I can't imagine we won't be losing money in the first quarter either. And beyond that, who knows? I think it's dependent upon when we get a vaccine, when we reach herd immunity, and then when people begin to behave more normally in terms of travel. So we just need to continue to manage cautiously in this environment and make sure that Southwest emerges very healthy and on top.

ADAM SHAPIRO: And with those issues in mind, you are very transparent with the employees. People watching right now should know you can go to the Southwest website and watch the Ask Gary videos that you post, where you discuss the hard issues with employees, such as concessions. You're approaching the unions right now for concessions.

In the report, you said, without concessions or additional help from the government, you might have to furlough people early part of 2021. Yet in one of these Ask Gary videos, you're talking about expanding Southwest into new markets like Palm Springs and Montrose. How do you reconcile both of those?

GARY KELLY: Well, great question. And I think it's really very straightforward. And first of all, you know, our number one goal here is to support the administration and Congress's efforts to have another stimulus package, and within that to have the payroll support for the airlines. That is our goal.

So we're only engaging our employees as a contingency if that does not happen, because we're way overstaffed. And the cost of that is very, very significant, certainly for all of 2021. So that's what that is about. But the challenge that we have, just starting with that overstaffing, we have resources. We don't have enough demand to put them to work.

And likewise, we have a lot of idle aircraft that we're obviously invested in, paying mortgages on, paying rent for, and they're idle with nothing to do. So we need to find something for them to do. And by adding new cities, they're coming at very incremental-- very low incremental costs, because we already have the airplane, and we already have the-- the employees that we can deploy for this new service. So it's very low hurdle.

And by actually putting those assets and people to work, we can generate more cash. You know, with the new cities that we're opening up in the fourth quarter of this year, they may add [INAUDIBLE] of revenue, so we won't solve all of our problems. But as time goes by and we add more and more new cities, I think by now if you counted them up there are nine new markets that we'll have-- we will have added by mid-year, and it will help [INAUDIBLE] idle employees. It will generate cash. And certainly, we're playing offense and [INAUDIBLE] and providing more competition.

BRIAN SOZZI: Gary, also some-- some key news out from-- this morning. You will now start to sell all seats on the plane, including the middle seat. Now, I understand Southwest is seen as a leader on keeping customers safe, but are you now running the risk, when this kicks in in December, turning planes into potential super-spreader events?

GARY KELLY: [INAUDIBLE] aircraft is very, very safe. There is no evidence [AUDIO OUT] about this pandemic. So this is all based on scientific research from a number of different sources, starting with IATA, now with Harvard, we've been engaged with Stanford, with UT Southwestern. Of course, Boeing and Airbus have done their own testing.

And most recently what's been in the [INAUDIBLE] familiar with is the Department of Defense did their own study to make sure that they were keeping their troops safe. So it is-- it's all about the systems on the aircraft having hospital-quality HEPA filters, all forward-facing. And very importantly, we would require all customers to wear a mask.

I think finally, the thing that you-- that is without a doubt, we are one of four airlines in the whole world that is not booking the aircraft full. So you've got a live test, if you will, in the rear view mirror here that supports this. IATA reported 40 cases that were confirmed of COVID transmission on an airplane, and that was early in the pandemic before masks were required.

So no, I'm very comfortable with that. And it will also provide for better service because we won't make as many schedule changes to match demand. So we'll have a lot of good options for our customers at just the right time as demand is continuing to improve, and what it's all about is meeting our customers' needs--

ALEXIS CHRISTOFOROUS: Gary--

GARY KELLY: --and doing it in a very safe way.

ALEXIS CHRISTOFOROUS: Gary, talk to us about where you are seeing a pickup in travel right now. Where are people willing to go? And we're seeing these hot spots in different parts of the country. Are you seeing a pullback in demand in those particular cities?

GARY KELLY: Well, we were talking earlier about the [INAUDIBLE] heavy reliance on leisure destinations. I think you all know that business travel has been cut more sharply than consumer travel. So we're adding locations. And I think that it's fair to say that it's sort of a sun and snow environment right now. People are headed to the beaches, they're headed to the mountains, and very, very leisure or consumer-oriented.

The business markets, short-haul markets, the demand is weaker. And the other thing that impacts travel, of course, is quarantines. I think a lot of people would love to go to Hawaii, but with a 14-day quarantine that really depresses a lot of the demand. So concern about just managing through quarantines in the future, but for the most part, again, it's back to the sun and snow.

ADAM SHAPIRO: Gary, I think a lot of us wish we were in good enough shape because we can go to Telluride now with your service to Montrose. To wrap this up, is Congress listening? Because on one hand, you are projecting a stronger picture than a lot of your competitors. But Congress still, as you say, needs to act. So who there is listening because we're in a stalemate?

GARY KELLY: Well, I think, again, just specific to the airline industry, we just reported a record loss. And we're encouraged because the loss will be less in the fourth quarter. So we have a long way to [AUDIO OUT] through in how much sacrifice we'll have to demand of our employees to get through this.

So the other factor is if we can't afford to fly to places that air service is essential and certainly critical to having an economic recovery as we get into 2021. Those messages resonate very broadly. We have very broad support in the administration and in Congress for our people [INAUDIBLE], and I think they agree with all of those points.

Because now you're into the politics of what else goes into a stimulus package or would Congress be willing to do just a stand-alone bill for the airlines? All of that has been in play. And [INAUDIBLE], I just wish that we could get something done, because people's lives are dependent upon this. And you know, our country is hurting. We're in a war in normal times.

So what our country has done so far has worked to keep us out of a depression, I'm convinced. And [INAUDIBLE] is act one was really good, it just wasn't big enough and didn't go long enough. I think if we can just get into the early part of next year with the stimulus, my opinion is that that will put us in good shape to beat our way through this [INAUDIBLE] a very strong position.

BRIAN SOZZI: All right, let's leave it there. Southwest Chairman and CEO Gary Kelly, along with our very own Adam Shapiro. Thank you both.