Southwest Airlines Company

Hello and welcome to the Southwest Airlines first quarter 2021 conference call. My name is Keith and I will be moderating today's call. This call is being recorded and a replay will be available on southwest.com in the investor relations section. After today's prepared remarks, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To try a question, please press star then two. At this time, I would like to turn the call over to Mr. Ryan Martinez, Managing Director of Investor Relations. Please go ahead, sir.

Thank you, Keith, and I appreciate everyone joining today. In just a moment, we will share our prepared remarks and then open it up for Q&A. And on today's call, we have our Chairman of the Board and CEO, Gary Kelly, Chief Operating Officer, Mike Vanderman, our President, Tom Nealon, and Executive Vice President and CFO, Tammy Romo. We also have other senior executives with us for Q&A, including Andrew Watterson, Executive Vice President and Chief Commercial Officer, and Bob Jordan, Executive Vice President of Corporate Services. So a few quick reminders, and then we'll jump in. We will make forward-looking statements today, and those 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 first quarter results, which we excluded from our trends for non-GAAP purposes, and we will reference those non-GAAP results in our remarks as well. We have more information on both of these in our press release from this morning, so please make sure you check that out, as well as our investor relations website. So with that, we'll get started, and I'll turn over the call to Gary. Thank you, Ryan. And good morning, everybody, and welcome to our first quarter 2021 call. The first quarter results are notable, first of all, because they're a lot better than what we thought they would be back in January. But even with that improvement, we still lost a billion dollars, and it was worse than our fourth quarter results due to the weaker seasonality of January and February travel. And clearly, that's not sustainable. But fortunately, we're here to report that we believe the worst is now finally behind us. We have a much better outlook and report for second quarter. And we'll give you all a full brief on the first quarter results and our second quarter outlook. But here are a few topside highlights before I pass the call over to Mike. Number one, thankfully, we received a second round of payroll support, or PSP, from the federal government. and effectively covering the first quarter. It was much needed. We're very grateful. We're the only airline who has avoided pay cuts, layoffs, furloughs, and the like. And I'm very, very gratified that our 50-year record remains intact on that front. Not counting working capital changes in cash flow, our cash losses of $1.3 billion were more than offset by the PSP. Number two, beginning with a mid-March inflection point, we finally began to see bookings improve from the nine-month down 65% flatline that we had been experiencing. The vaccines, vaccinations, case counts, and spring break all converged in the right way. And sensing this, we boosted our capacity by 50% overnight, our 1,000 daily departures in the middle of March. Number three, taking into account our voluntary separation program and attrition since June, our staffing currently is at 92% of our June 2019 levels. And in addition, we've had thousands of people on leave. And now that we're adding flights, we're smoothly recalling those that are needed on voluntary leaves and having avoided the mess associated with furlough. And as a result, we plan to apply 96% of our June 2019 ASMs, albeit with a different route network. But the point being is that we're very well prepared to flex up our capacity. And even having said that, I think that we're very well aware that it will still be messy and we'll have to carefully manage. Number four, please understand that the path back to break-even and beyond is dependent upon two things. Number one, we have to have sufficient flight and seat activity, and you need to read into that. That means more than what we've been doing prior to March. And number two, we've got to have more customers to fill those flights and obviously read into that revenue. So we have too much fixed costs for us to be profitable below roughly 3,000 to 3,300 flights a day. At least now it's realistic for us to project break-even cash flow scenarios, which are possible here in the second quarter. So in summary, a lot of things here this morning. I'm relieved. I'm optimistic. I'm enthused. I'm grateful. And I'm especially thankful to our tens of thousands of employees who have fought their way through this pandemic and gotten us at least to this point. We've got a long way to go, but I'm very, very confident that we can all depend upon our Southwest warriors. They are very resilient. And then finally, I'm pleased with the performances. The operation has been superb. The new cities are meeting or exceeding our expectations. I'm glad to have all of them as permanent additions to our route network. The addition of global distribution system capabilities could not have been a more timely add to our capabilities as we're pushing aggressively into the huge managed travel business market. And we've got a great domestic network. We've got great service. And finally, they're going to have access to low fares. The cost and the spending performance has also been excellent, and we're making great progress towards restoring our historic productivity and efficiency. And then I'm absolutely delighted with the deal that we reached with Boeing last month that strategically secures our position as an all 737 operator with all the attendant competitive benefits that that enables. And with that, I'm going to turn it over to our COO, Mike Mandevin, who I know will elaborate more on that, but among other things. Mike, great job, great performance, so take it away. Well, thanks a lot, Gary. And, well, we really had an action-packed start of the year, and I'm very proud of our people and how they just continue to rise to the occasion. They've opened up four new stations in the first quarter and two more in April, implemented a federal mask mandate, returned the masks to service, suspended. secured a new long-term Boeing order book for both the MAX 7 and the MAX 8, and reached service agreements with GE and CFM International for the LEAP-1V engines, and all of that while running an exceptional operation. So we ended the quarter with an on-time performance of 86.2%, and that was good for starting the industry, and that included a reduction of roughly 4.4 points due to weather. As you know, we've got large operations in and the entire state froze for several days in mid-February, and that impacted our network, as well as a winter storm, Zelia, which impacted Denver as we launched into our March space scheduling. So speaking of our March schedule, we returned the MAX to revenue service on March 11th. Once we completed all of the maintenance requirements, the pilot training, and we had a self-imposed set of 200-plus readiness flights on the airplane, the launch was limited to 10 lines of flying, and the airplanes were separated from the rest of the fleet for the first month of service. On April 12th, we increased the lines of flying to 55 lines, and the aircraft are now fully interchangeable across the network. We currently have 64 MAX aircraft in the fleet, and we have 32 of those aircraft currently out of service awaiting FAA approval of repair instructions from Boeing. So repairs will ensure that a sufficient ground path exists for certain components of the electrical power systems. These aircraft were identified by Boeing as part of a specific production run, and the impacted mass lines of flying are being covered by spare aircraft in our next generation fleet. We're not experiencing any significant operational impacts, and once we receive FAA approval, it will take two to three days per aircraft to make the repairs, and then with all the aircraft, we're expected to be complete in roughly three weeks. So turning back to the first quarter performance, our bag handling, it continues to produce all-time best company results. We delivered 99.7% of all bags and planes without a mishandled plane. And as you know, we do that carrying more free bags than anyone in the industry. And we continue to lead all marketing carriers with the lowest customer complaint ratio to the DOT. Perhaps the highlight of the first quarter was securing a new long-term orders book with Boeing, for the MAX 7 and the MAX 8, as well as our agreement with GE and C&M International to maintain the LEAP-1B engines. So we announced our order book on March 29th, and there are just a couple of items that I'd like to highlight. First, we added 100 firm orders for the MAX 7, which will be the replacement aircraft for our 737-700s. We also converted 70 MAX 8 firm orders to MAX 7 firm orders. And that brings our firm order book for the MAX 7 and the MAX 8 to 200 and 149 aircraft, respectively. We also added 155 options for either MAX 7 or MAX 8 aircraft, and that brings our total number of options to 270 aircraft. And the interchangeability of the options between aircraft types, that just gives us tremendous flexibility. So when you put all of that together, We are maintaining a substantial operational and economic efficiency as a result of a single fleet type. And the LEAP-1B engine provides at least a 14% better fuel efficiency, quieter engines, and it has excellent dispatch reliability to support our on-time operation. We intend to retire a significant number of our roughly 460 737-700s over the next 10 to 15 years. and the MAX 7 is best-in-class aircraft for us in that 150-seat category, just like the MAX 8 is the best-in-class for us in the 175-seat category. The acceleration of our fleet modernization, I think, makes great economic sense. It will also reduce carbon emissions and noise levels, which, of course, is better for the environment, and it also provides a superb cabin experience for our customers and our employees. we have a couple of important capabilities that we're going to add to the operation. First, we're in the final stages of obtaining ETOPS certification for our MAX 8 fleet. So the MAX and its fuel-burning bandages will allow us not only to reduce our operating costs to Hawaii, but it's also going to allow us to fill all 175 seats in winter wind conditions. And that's something that we can't always accomplish with the next-gen fleet. And that was our plan all along. But, of course, the efforts were delayed as a result of the max crowding. Second, we're going to begin a fleet transition to an all-new maintenance record-keeping system, beginning with our 737-700s later this month. And this system replaces our wizard system, and that system is nearly 30 years old. This new system provides a foundation for real-time maintenance record-keeping, paperless records, improved planning, better analytics, and automated controls to enhance regulatory compliance. Once we complete the transition of the DASH 700 fleet, then the DASH 800 and the MAX will follow later this year. So just in closing, I can certainly feel the operational momentum building, and I have to tell you, it feels good. We are in the process of bringing our entire fleet back into an operational status. We're coordinating our staffing to ensure that we're resourced to fly at whatever our desired levels are. And we're introducing new capabilities and navigating through an environment that continues to be impacted by COVID. And our people are just magnificent. I can't say enough about them. They do all of these things. They still run a great operation. And it's amongst the best we've ever delivered. And they're just the best team that I've ever been associated with. And my deepest thanks to each and every one of them. And so with that, President Nealon, over to you. Okay, thanks, Mike. Good morning, everybody. Well, we provided a pretty detailed investor update each month throughout the quarter, and our earnings release certainly provided a lot of information this morning, so I'm going to try not to repeat what you've already heard. But I do want to provide some color regarding first quarter's revenue performance, as well as some perspective on near-term trends in our outlook for the second quarter. So as you know, the first quarter operating revenues decreased percent year over year. We're down 60 percent compared with the first quarter of 2019. And this is better than we were expecting three months ago when we last spoke with you during the January call. February operating revenues ended up about five points better. In March, about 15 points better than our estimates from that same time. And that has really been the story over the past few months. We have seen steady and very encouraging improvements of leisure, travel, demand, and bookings week after week, really since about mid-February. We saw a very nice improvement in March with operating revenues down 10 percent year over year and down 54 percent compared to March of 2019, which again was better than our guidance range of down 55 to 60 percent. March note factor was 73 percent, also better than guidance, and passenger yield was down 34 percent year over year. Yields were down quite a bit for the month once we got into March. But once we got into March, rather, fares improved each week as we saw demand steadily increase. Close-in bookings held up well. We also began to see the booking curve extend further out. Keeping in mind that business travel remained fairly stagnant, which I'll hit on in just a few minutes, I'd say that we were really very pleased with March's overall performance. We were able to get a very good base of bookings in place for March earlier in the booking curve, and we did this through very targeted promotions that we ran back in the December, January, and February timeframes. And once we got into March, our revenue management team was able to do a really nice job of managing our inventory closer and managing yields. And as expected, spring break performed really nicely, very well. It was bigger than just the spring break story. The entire month of March, we saw a steady build in passenger traffic. And just to give some perspective, March's load factor was 20 points higher than what we experienced in January. And that was actually on higher capacity as well, which I think really highlights the pent-up demand for leisure travel that we're seeing. And what's encouraging is that this momentum continues into April, and in our last investor update that was in mid-March, we estimated April operating revenues to decline 45% to 55% versus 2019. But since that update, we've experienced steady improving passenger volumes and fares. So we're now estimating April operating revenues to decline in the 40% to 45% range versus 2019, and that's with a load factor between 75% and 80%. Now, the Easter holiday weekend at the beginning of the month performed very well as we expected, and leisure traffic and bookings for the remainder of April had to slow down a bit. In our earnings release, we gave our first estimate for May revenues, which shows further improvement in comparison with April's outlook. We estimated May operating revenues to decline in the 35% to 40% range versus 2019, with a load factor in the 75% to 80% range. And as we experienced in April, May holiday and non-holiday time periods are both working very well in terms of our leisure demand. And with these improving demand trends holding their pattern since mid-February, it really has provided us a much better opportunity to manage the booking curve for April, May, and beyond. Our revenue guidance for April and May includes the expectation of sequentially improving load factors and also improving passenger yields when compared with March. We expect the yields will still be down compared to 2019 levels, but that should be fairly intuitive given that we are almost solely reliant on leisure travelers at this point in recovery. Now, that being said, though, we have been pleased at how close the demand performed in March and is trending so far for April. At this point, we aren't quite ready to provide an outlook for June, but I will say that we're seeing bookings increase further out in the booking curve and they're building faster. Now, it's still pretty early in the curve for June and July, But I will tell you that bookings are building nicely at this point and shaping up seasonally as you expect for leisure travel. So in a normal year at this point, we would expect to be around 60% booked for May, roughly 35% or so booked for June, and around 20% booked for July. And we are currently in the hunt with those levels of bookings. Now, with June being one of our highest demand summer months, our current expectation would be for June's revenue performance to be better than May relative to 2019. But we'll provide you with a June revenue outlook as part of our investor update in midday. Now, as vaccination counts rise and travel restrictions ease and leisure demand increases, we are obviously pretty encouraged. It feels good, and there's a feeling of optimism. But as you know, the improvements rather skew heavily towards leisure demand now into the summer and simply too early to make much of a prediction on travel demand for the fall. And we are very mindful of the fact that the demand recovery may not be a straight and quick path back to pre-pandemic levels. Which brings us to business travel. Our corporate managed travel revenues were down 88% in the first quarter versus Q1 of 19, which is consistent with our fourth quarter 2020 results. However, we did see some modest improvement later in the quarter, in particular in March, where corporate revenues were down 85% versus March of 2019. And based on what we're seeing and hearing from our corporate customers, it continues to be very clear that domestic business travel will certainly continue to significantly lag leisure recovery. And for now, we are planning for a scenario where business travel will still be down 50% to 60% by the end of this year. Now, having said that, we are, in fact, seeing more and more of our customers beginning to allow their employees to get off the bench and fly and travel, and they're beginning to unfreeze or relax their travel policies. But although that's happening, we just aren't seeing the volumes come back at this point. Now, if you buy into surveys, and I guess I sort of buy into surveys, the most recent TPTA business travel survey suggests that roughly 60% of respondents expect to resume domestic business travel in the third and fourth quarter of the year. So I guess we'll see. Time will tell in terms of the pace of business travel recovery. And it's also not clear, to be honest with you, what percent of traditional business travel ultimately returns. Our view is that there could be a 10% to 20% reduction in business travel either permanently or at least for some extended period of time. But having said all that, however, the business demand curve shakes back up. I can tell you, as Gary alluded to just a moment ago, that we are really well positioned. In fact, this is the best positioning we've ever had in terms of going after corporate business travel. You're all very aware that GDS initiatives, I'm not going to go on and on about that, but it closes a huge gap in our corporate travel capabilities. And you guys know we are live on Amadeus, Apollo, Galileo, and WorldSpan today. And we are very far down the path to implement the Sabre GDS platform in the coming months, and we have a targeted go-live date that we will implement prior to Labor Day. So really good progress on this front, and the teams are doing an incredible job. So we're feeling very good about where we are. Our sales teams are out in the market. We are engaging with our customers at a very high level, a very frequent level, and the response has been incredible. So I think we are really well positioned to gain some revenue and Perhaps we'll do a show. Shifting gears to regional demand, I just want to give you a little bit of color on what we're seeing in terms of the different parts of the network. In general, our leisure markets, where restrictions have remained low, continued to outperform the rest of the system very nicely. Beaches, mountains, sun and ski are all performing very well, which is totally consistent with what you're hearing from the other carriers as well. A little more specifically to our network, we are seeing strength in our Texas markets, Austin, Houston, Dallas, and San Antonio. We're also seeing strength in really all of Florida, but in particular on the Gulf Coast of Florida, which includes Panama City, Pensacola, Fort Myers, Tampa. The desert mountain region is performing really nicely, which includes Phoenix, Salt Lake City, Boise. Denver is also performing very well. So there's a lot of strength within the network. Demand continues to lag in areas such as the Northeast. Chicago is lagging a bit. California is lagging a bit, although it's really improving since the restrictions are being lifted. So we are seeing improvements across the system, which is encouraging. And honestly, whether our city has been lagging or outperforming, what we are seeing is that all markets have improved fairly significantly recently compared to where they were in January and February. So as a result of what you just heard, we are comfortable adding back flights to capture additional demand, including Hawaii. And it's great to see demand from California to Hawaii, as well as between the islands, ramp back up. And we're finally at a point where we can get our Hawaii flight schedules up to where we hope we'd be a year ago before the pandemic. As you know, international testing remains in place. Overall, I'd say our international demand is performing just fine. Not a lot to report. At this point, we are only serving eight of our 14 international stations, and we'll intend to bring the remaining six back online as it makes sense and as restrictions ease. A little color of perspective on new stations. At this point, we have opened 10 of our announced 17 new airports, and all of them are performing terrific. In fact, there's not a clump in the bunch. All of them are generating new customers, additional revenue, and collectively, are contributing positively to our cash performance. We feel really good about what we are seeing in our first 10. And more to come. So we'll begin service in Fresno on April 25th, Destin-Fort Walton Beach on May 6th, Myrtle Beach on the 23rd of May, Bozeman, Montana on the 27th, Jackson, Mississippi on June 6th, and we also just announced last week in Oregon we'll begin service on August 29th, and we will begin service in Bellingham, Washington later this year. So all the new stations that are operating today are meeting or exceeding our expectations. They've been on our radar for years, and it's great to see them open operational, and honestly, it's kind of, it's pretty interesting. I think our network planning team is batting 1,000%, so this is really something, and the operations are starting up really cleanly. In terms of our capacity, for the first quarter, capacity decreased 35% year over year. It was down 39% compared with the first quarter of 2019, which was consistent with our expectations. And as planned, we added, as Gary alluded to, we added additional capacity in March, which equated to roughly 1,000 flights each day beginning mid-month. And that really paid off as demand improved. And these incremental flights improved our March performance by roughly $150 million. That's revenue performance by $150 million. Our April capacity is expected to decline 24%, and May capacity is expected to decline 18% relative to 2019 levels. Now, this includes a modest increase in flying in April and about three points of incremental capacity in May compared with our previous guidance, which is really just the result of a stronger demand outlook. At this point, we are in the process of adjusting our June flight schedules, and once the revisions are complete, we expect June ASMs to decline 4% versus 2019. And as you've seen throughout the pandemic, actually, we've cut more business-oriented short-haul flying and added more leisure-oriented longer-haul flying, as well as more connecting itineraries, which is driving higher capacity with fewer aircraft. And this makes up roughly 45 points of the 14-point sequential capacity increase from May to June. And assuming the current trends continue, our preliminary plans for July call for similar levels of capacity as June. as June relative to 2019 levels, and we'll be finalizing our July plans here very shortly. So in terms of passenger revenue and capacity, our focus remains on managing the next few months with as much precision as possible, which is what we've been doing throughout the year, and improving our revenue performance as well as improving our cash burn performance toward breaking even for better, with an emphasis on or better. That's our goal. In terms of other revenues, Our other revenues performed better than passenger revenue in the first quarter and was down 15% year-over-year. For March, though, our other revenue was actually up 3% year-over-year. Our ancillary products, specifically commissions from car, hotel, and vacation bookings, performed about in line with passenger revenue, no surprise there. But the biggest contributor to our other revenue performance was our WRAP rewards program. And the first quarter total revenue from our loyalty program is down 19% year-over-year, or 22% versus 2019. When you look at it at just the loyalty revenue that flows through other revenue, revenue is down 12% versus 2019. And this is a very strong performance, especially relative to passenger revenues. And I think it just speaks very clearly to the strength of the program as a whole and the high level of engagement that we have with our customers and they with us. The sequential improvement from Q4 was primarily driven by increases in retail sales and commissions on new card acquisitions. Total co-brand card spend in March was only down 1% versus March of 2019. And for the first time since the pandemic began, our credit card portfolio size grew in the first quarter, again, relative to 2019. So we're thrilled to see that. So our credit card portfolio remains very strong. We're seeing the average spend per cardholder continue to improve. Our attrition continues to be very, very low, and we are really very pleased with the performance of our program. And I think you can see in our results that we have more RAPI rewards members, more credit card holders, more engagement from our customers, and now we have more places for them to go with a lot more leisure destinations. And building on that, our brand remains very strong. Our brand NPS scores continue to rank at the very top of the industry, which is something that we focus on and watch a lot and watch very closely. Our trip NPS, which measures individual play experiences, is trending even higher right now as well, which speaks to our people's focus on hospitality and producing great on-time performance. So as Mike said, man, I am so grateful for our frontline employees. They just execute every day with precision and grace, and I'm thankful for that. And finally, I do want to share a few comments in our perspective regarding our focus on the environment, which seems appropriate since today is Earth Day. Gary's already shared our long-term goal to be carbon neutral by 2050, which is aligned with A4A's goals in industry. And this isn't a new topic for us, though this is something that we've been focused on for a long time. Our focus has certainly intensified over the past year. But just for... perspective, since 2002, we've invested more than $620 million in fuel efficiency initiatives, and that's independent of new aircraft. And in 2019, we saved more than 7 million gallons of fuel through flight planning initiatives. So this is something that, again, is not new to us. And as Mike discussed earlier, we plan on retiring a significant number of our roughly 460 737-700s over the next 10 to 15 years. And we'll be investing billions of dollars on new aircraft that are 14% more efficient. more fuel efficient. And as it stands today, the carbon emissions that we generate on a per ASM basis is among the very best in the industry, and our fleet modernization program gives us a massive opportunity to continue to significantly reduce our CO2 emissions over the next 10 to 15 years. So that's all great. We also know that fleet not alone isn't nearly enough to get us to our goal of carbon neutral by 2050. Again, our view is that the most promising path over the next 10 to 15 years is a combination of fleet modernization, operational fuel efficiency initiatives, air traffic control modernization, and the introduction of economically viable sustainable aviation fuels, or SAF, at scale. Today we have a SAF offtake agreement in place with Red Rock Biofuels, and our teams continue to work with the National Renewable Energy Lab, or NREL, on the development of new SAF feedstocks and pathways. We've also recently signed MOUs with Marathon Petroleum and Phillips 66 to accelerate the production of SAF with the objective of achieving affordable SAF with low carbon intensity scores at scale. And the crux of the agreement is to work together toward the production of 300 million gallons of SAF in the 2025 timeframe. This is a very ambitious target, and there's a tremendous amount of work to be done but it's also a really important step forward, and we intend to work very closely with Naritha and Phillips 66 throughout the process with the intent to secure large off-take agreements that represent a significant share of the SAF that's produced. But to be honest, this effort is not just about Southwest securing more SAF for Southwest. It's also about getting large energy producers into the market, getting production to scale at affordable prices. We also believe that the use of carbon offsets can be appropriate and helpful, but we see this as a bridging technique. Our use of offsets so far has been focused on renewable energy credits, which are natural gas offsets, to complete our headquarter campus 100% renewable energy plan. Up to this point, we have not been using carbon offsets, but if used appropriately, again, they can be helpful, whether it's making offsets available to customers or corporations who are looking to offset their travel emissions. Some more to come on this, but again, we see offsets as a bridging solution. Direct air capture, new airframe and engine technologies, and new energy sources such as hydrogen, power liquid, or PTO, also have tremendous promise, but we see these things as being much further out, call it 2035 and beyond. And our objective is to focus on things that we feel like we can have a real impact on over the next 10 to 15 years. So this is something that we are absolutely committed to achieving, but to be really clear, the industry is going to have to work together. No single airline can do it alone. It's just impossible. So it's going to take a lot of work with a variety of organizations, including the private sector and nonprofits, as well as strong support and policy from the federal government and state governments. And we'll need innovation and scale in the energy industry. And we'll also need continued advancements from the aerospace industry to become carbon neutral by 2050. Gary's asked me to be the executive sponsor for our environmental efforts, and I've asked Stacey Melfers, our vice president of supply chain, who happens to be extremely knowledgeable of SAP and fuel supply chain, to take this on with me as well. So to wrap it up, we'll be providing a comprehensive report of what we're doing and the progress we're making in our annual sustainability report, which we call the Southwest One Report. and we'll be publishing this online to our investor site in the coming weeks. So with that, Tammy, I'm going to hand it over to you.

All right. Thank you, Tom, and hello, everyone. I'll round out today's comments with a few remarks on our performance and an overview of our cost, fleet, liquidity, and cash burn before we move on to Q&A. This morning, we reported first quarter net income of $116 million, or $0.19 for diluted shares, which included $1.2 billion in payroll support. Excluding this benefit and other special items detailed in this morning's press release, our first quarter net loss was $1 billion, or a $1.72 loss per diluted share. While our losses persisted in first quarter, I feel good about the progress we are making in particular as we move through our second quarter here. I want to commend our people on another solid cost performance as we have to remain extra diligent with our spending. Excluding special items, our first quarter total operating costs decreased 24% year-over-year to $3.3 billion and increased 17% year-over-year on a unit basis. Fuel represented about 35% of that decrease. Our first quarter economic fuel price of $1.70 per gallon was at the midpoint of our guidance range, and our fuel expense declined 44% year over year. Reduced capacity levels resulted in gallon consumption down 37%, the largest driver of our year over year decline, and economic price per gallon down 11%. We realized a modest hedging gain of approximately $1 million or $0.01 per gallon, and our hedging program premium costs were $25 million or $0.09 per gallon. While fuel price was still below year-ago levels, energy prices have been creeping up over the past few quarters, which only serves as a reminder of the importance of having a consistent and meaningful fuel hedging program. We have great hedging protection in place, with hedging gains beginning at grant prices in the 65 to 70 per barrel range and more material gains once you get to $80 per barrel and higher. Based on market prices as of April 15th, we expect our second quarter fuel price to be in the range of $1.85 to $1.95 per gallon, including another modest hedging gain of $0.01 per gallon. Looking at 2022, we also have a high-quality fuel hedge in place with a similar level of protection, but we would start recognizing hedging gains around the $60 per barrel rent range with more meaningful hedging gains beginning at $70 per barrel and higher. Last year, we took the opportunity to add our 2022 hedge position while prices were lower. Our first quarter fuel efficiency improved 5% year-over-year, primarily driven by many of our older aircraft remaining parked. Some of the current fuel efficiency gains are temporary, as we'll see some sequential pressure as we return more of our older 737-700 aircraft to service this summer. However, we currently estimate our second quarter fuel efficiency to be sequentially in line with first quarter's ASMs per gallon, partially due to returning the MAX to service last month. The MAX is our most fuel-efficient aircraft, and we have a line of sight to more significant improvements over many years as we plan to retire a significant amount of our 737-700 aircraft in the next 10 to 15 years. We get at least a 14% fuel efficiency improvement on a per aircraft basis each time we replace an end-of-life 737-700 aircraft with a new MAX. This will be a big driver of progress towards our long-term environmental goals. Excluding fuel special items and profit sharing, first quarter operating costs decreased 19% year-over-year, on the better end of our guidance range. On a unit basis, the increase was 23% year-over-year, primarily driven by the 35% reduction in capacity. We continue to realize cost savings from our actions taken in response to the pandemic, including $412 million of savings in first quarter salaries, wages, and benefits, driven by the benefits of our employee voluntary leave programs implemented last year. We had pay rate increases for our people that are flowing through this year, but the voluntary program savings far offset that rate inflation. Outside of salary wages and benefits, we had year-over-year decreases in most other categories due to reduced capacity and the related cost relief. primarily in the areas of maintenance, landing fees, and employee, customer, and revenue-driven costs. In terms of a few other notable items in first quarter, aircraft rental expense was $52 million, down 9% year-over-year, driven by the return of leased 737-700 aircraft. Advertising spend has increased sequentially from fourth quarter, as we ramp up the marketing, but our first quarter advertising spend was down 8% year over year. And we realized one-time favorable settlements in first quarter, primarily property taxes, and those are reflected in our other operating expenses. Again, our first quarter cost performance was solid, and I appreciate all the work our teams are doing to manage costs in this unprecedented environment. Turning to second quarter, we currently expect operating expenses excluding fuel and oil expense special items and profit sharing to increase in the range of 10 to 15% year-over-year and also to increase sequentially compared with first quarter. We estimate that 60 to 70% of the expected sequential increase is due to variable flight-driven expenses as we plan to increase capacity to near 2019 levels by June. To support the increased flight activity, we are recalling a portion of our employees who had elected our voluntary extended emergency time off program. In terms of salaries, wages, and benefits expense, Sequential cost increases from a few items account for about a third of the total sequential increase. We have increases driven by a higher number of active employees in second quarter, including the impact of recalled employees. Roughly half of our recalled employees will return in second quarter, and some training will be required for those employees that we recalled as we prepare for them to go back to work. Partially offsetting our second quarter cost pressure from these recalls is an estimated $325 million in cost savings from our voluntary separation and extended leave program for those employees that took a voluntary separation last year and those employees that remain on extended time off. With some early recalls, we now estimate annual 2021 cost savings from our employee voluntary program to be in the range of $1.1 to $1.2 billion, down from our previous estimate of $1.2 billion. Outside of salary wages and benefits, the largest drivers of our sequential cost pressure are flight-driven cost increases and landing fees, employee, customer, and revenue-related costs, and maintenance expense as we prepare aircraft that have been parked for a return-to-revenue service, as well as higher flight-driven maintenance expenses as flights resume. These ramp-up costs combined represent the other two-thirds of our capacity-driven sequential cost increases. Outside of capacity-driven cost increases, we expect sequential cost pressure driven by airport cost inflation and higher aircraft ownership costs due to the MAX delivery. And this rounds out the majority of the remaining cost increases. While we are facing expected sequential cost increases that naturally come with increased flight activity, we expect our second quarter operating costs to remain below second quarter 2019 levels. And we expect that our ramp-up cost pressures will vary and persist until we get capacity back to 2019 levels. That said, we remain laser focused on cost control as we navigate through this recovery. Our first quarter interest expense was $114 million in line with fourth quarter. And assuming our current momentum continues, we don't currently anticipate raising additional debt. And based on current levels of debt outstanding and current interest rates, we expect second quarter interest expense to be approximately $115 million. Our first quarter effective tax rate was 21%, which was in line with our expectations. And we currently estimate our annual 2021 effective tax rate to be approximately 23%. Mike covered the highlights of our Boeing agreement. I just want to add my thanks to the teams at Southwest Boeing and GE and CSM International for their tireless work to develop agreements, that extend and support our long-term relationships, and that support all our Boeing 737 business models. Based on the refreshed order book and our retirement plans over the next 10 to 15 years, I feel very comfortable with our ability to manage the size of our fleet, support fleet modernization, and pursue growth opportunities as they arise. And we can do this in a cost-effective manner, in particular with manageable capex. We ended first quarter with 730 aircraft, including 61 MAX 8s. For second quarter, we expect to receive seven MAX 8 deliveries and retire three 737-700s. And we will have one more MAX 8 delivery in third quarter and retire up to six more 700s by the end of the year. Beyond 2021, we are going to wait a bit longer before we make a decision about 2022 fleet plans and 2022 CapEx. That said, we are well positioned to begin retiring roughly 30 to 35 737-700s a year beginning next year. Our firm orders should cover the majority of our fleet modernization plans, and we will make decisions on exercising options based on the economic and demand environment and based on growth opportunities and capacity plans. As Mike mentioned, our options provide us tremendous flexibility. As expected, our first quarter capital spending was $95 million. and we currently expect our full year 2021 capital spending to be roughly $500 million, with an immaterial amount of aircraft CapEx and driven mostly by technology, facilities, and operational investments. We have plenty of flexibility to manage CapEx with our order book, with aircraft CapEx on firm orders of $700 million next year. Before I wrap up and open the call up for questions, I'll provide an overview of our liquidity and cash burns. We currently have approximately $14.3 billion in cash and short-term investments in line with where we ended first quarter. We are thankful to our federal government for providing continued economic relief to protect jobs as the pandemic persists. We received $1.7 billion in and payroll support program proceeds during first quarter and expect to soon receive an additional $259 million as our final distribution of the second round of PSP support, or $2 billion total from the PSP extension. We are currently working to finalize our agreement with the Treasury on the third round of PSP support. and expect to receive an additional $1.9 billion. Our liquidity position provides a solid foundation as we operate in the wake of 2020 substantial losses and on the heels of another substantial non-GAAP loss in the first quarter. Our first quarter average core cash burn was $13 million per day, a $1 million sequential increase from fourth quarter, with rising fuel prices offsetting improving revenue trends. The material improvements in revenue began substantially in March, resulting in an $8 million improvement from our February cash burn of $17 million per day to a March cash burn of $9 million per day. When you include the benefits from future cash bookings and other changes in working capital, as we defined for you in our earnings relief, we flipped positive in March and produced cash flows of $4 million per day. Assuming the continuation of positive revenue trends, we expect our average core cash burn in second quarter to be in the range of $2 to $4 million per day. And we continue to expect to achieve cash burn break-even with roughly $2 with revenue of roughly 60% to 70% of 2019 levels. Barring any unforeseen changes in current demand trends or cost trends, and assuming revenue and booking trends continue to build throughout second quarter, we are hopeful that we can achieve core cash breaking results or better by June. In closing, while the effects of the pandemic persist, our Southwest team continues to conquer both the familiar and unfamiliar challenges of the day. While we aren't out of the woods yet, we are encouraged by the rise in vaccinations that seem to be unlocking the pent-up leisure demand that we all believed was there. We are optimistic and hopeful that the worst is behind us, but we are mindful that business travel continues to significantly lack leisure. We will continue to manage our business closer in to focus on what we can control, maintaining a strong balance sheet and liquidity position, reducing our cash burn as we work towards break-even, and managing tight cost control and seeking efficiency, especially as we begin to rebound capacity levels. I am immensely proud of how our people continue to persevere and show up for our company, our customers, and each other. Working together, I am confident that our best is yet to come. With that, Keith, we are ready to take analyst questions.