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Southwest Airlines (NYSE:LUV)
Q1 2021 Earnings Call
Apr 22, 2021, 12:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

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. [Operator instructions] At this time, I would like to turn the call over to Mr.

Ryan Martinez, managing director of investor relations. Please go ahead, sir.

Ryan Martinez -- Managing Director of Investor Relations

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 Van de Ven; our president, Tom Nealo;, 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 fourth quarter -- or excuse me, 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.

Gary Kelly -- Chairman of the Board and Chief Executive Officer

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 $1 billion 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 have been experiencing. So vaccines, vaccinations, case counts and spring break all converged in the right way. And sensing this, we boosted our capacity by 50% overnight or 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 furloughs. And as a result, we plan to fly 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 breakeven 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 three to three, 3,000 to 3,300 flights a day. At least now it's realistic for us to project breakeven cash flow scenarios, which are possible here in the second quarter. So in summary, I'm -- 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 at 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 toward 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 Van de Ven, who I know will elaborate more on that, but among other things. Mike, great job, great performance. So take it away.

Mike Van de Ven -- Chief Operating Officer

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 continued to rise to the occasion. They've opened up four new stations in the first quarter and two more in April; implemented a Federal MAX mandate; returned the MAX to service; 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-1B 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 a third in the industry, and that included a reduction of roughly 4.4 points due to weather. As you know, we've got large operations in Texas and the entire state froze for several days in mid-February, and that impacted our network, as well as a winter storm Xylia, which impacted Denver as we launched into our March-based schedule. So speaking of our March schedule, we returned the MAX to revenue service on March 11.

Once we've completed all of the maintenance requirements, the pilot training and we had a filled-in post 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 12, 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. The 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 the specific production run and the impact of MAX lines of flying are being covered by spare aircraft in our next-generation fleet. We're not experiencing any significant operational impact 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 work expected to be complete in roughly three weeks.

So turning back to the first-quarter performance, our bag handling continues to produce all-time best company results. We delivered 99.7% of all bags and claims without a mishandled claim. 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 order book with Boeing for the MAX 7 and the MAX 8, as well as our agreement with GE and CFM International to maintain the Leap-1B engines. So we announced our order book on March 29, 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 of -- between aircraft types, that just gives us tremendous flexibility. So when you put all 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 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. Looking forward into the second quarter, 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 burn advantages roll out is not only to reduce our operating cost 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 grounding.

Second, we're going to begin a fleet transition to an all-new maintenance recordkeeping 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 us a foundation for real-time maintenance recordkeeping, paperless records, improved planning, better analytics and automated controls to enhance regulatory compliance. Once we complete the transition of the -700 fleet, then the -800s 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 among 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.

Tom Nealon -- President

OK, thanks, Mike. Good morning, everybody. Well, we provided a pretty detailed investor update each month throughout the quarter, and our earnings release certainly provide 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 and our outlook for the second quarter.

So as you know, the first-quarter operating revenues decreased 52% year over year, we're down 60% 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. Annual operating revenues ended up about five points better, in March about 15 points better than our estimates in that same time. And that has really been the story over the past few months. We have seen steady and very encouraging improvements in 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% year over year and down 54% compared with March of 2019, which again was better than our guidance range of down 55% to 60%. March load factor was 73%, also better than guidance, and passenger yield was down 34% year over year. Yields were down quite a bit for the months -- 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-end 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're 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 December, January and February time frame.

And once we got into March, our revenue management team was able to do a really nice job of managing our inventory close rate of managing yields. And as expected, spring break performed really nicely, very well. It's bigger than just the spring break story. The entire month of March really 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 hasn't slowed 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 estimate 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 nonholiday time periods are both looking very well in terms of our leisure demand.

And with these improving demand trends holding their patterns 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 the recovery. Now that being said, though, we have been pleased how well-closed the demand performed in March and is trending so far for April.

At this point, we aren't quite great 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 the June revenue outlook as part of our investor update in mid-May.

Now as vaccination counts rise, the 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 improvement -- the improvements rather skew heavily toward 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 strength and quick path back to prepandemic 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 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 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 swore to buy into surveys, the most recent TBTA Business Travel Survey suggested 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 shapes 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 already had in terms of going after corporate business travel.

You're all very aware of the GDS initiatives. I'm not going to go on about that, but it closes a huge gap in our corporate travel capabilities. As 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 and very frequent level.

And the response has been incredible. So I think we are really well-positioned to gain some revenue and perhaps even share. 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 continue 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 a 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 to our Hawaii flight schedules up to where we'd hopefully 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 and perspective on new stations.

At this point, we have opened 10 or announced 17 new airports and all of them are performing terrific. In fact, there's not a clunker in the bunch. All of them are generating new customers, additional revenue in collectively are contributing positively to our cash performance. We feel really good about what we are seeing in here first hand.

And more to come. So we'll begin service in Fresno on April 25; Destin-Fort Walton Beach on May 6; Myrtle Beach on the 23rd of May; Bozeman, Montana on the 27th; Jackson, Mississippi on June 6. And we also just announced last week, Eugene, Oregon will begin service at August 29, 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 adding more leisure-oriented longer-haul flying, as well as work nights in our itineraries. which is driving higher capacity with newer aircraft, and this makes up roughly four to five 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 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 or 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 Rapid Rewards program. And the first-quarter total revenue from our loyalty program was down 19% year over year or 22% versus 2019. When you look at it at just the royalty revenue that flows through other revenue, revenue was down 12% versus 2019.

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. 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 rapid rewards members, more credit card holders and 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 continued to rank at the very top of the industry, which is something that we focus on and watch a lot, we watch very closely.

Our trip NPS, which measures individual flight 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, and I am so grateful with our frontline employees. They 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.

Now Gary has already shared our long-term goal to be carbon-neutral by 2050, which is aligned with A4A's goal as an 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 about 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 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 model alone isn't nearly enough to get us to our goal of carbon neutral by 2050. In our views of 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 both 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 time frame. 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 both Marathon and Phillips 66 throughout the process, with the intent to secure large offtake 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 offset so far has been focused on renewable energy credits, which are natural gas offsets to complete our headquartered campus 100% renewable energy plan.

And up to this point, we have not been using carbon offsets. But if used appropriately again, they can't be helpful where it's making offsets available to customers or corporations who are looking to offset their travel emissions. So more to come on this, but again, we see offsets as a bridging solution. Direct air capture, new airframe, engine technologies and new energy sources such as hydrogen, power liquid or PTL 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 for the aerospace industry to become carbon neutral by 2050.

Now Gary has asked me to be the executive sponsor for our environmental efforts, and I've asked Stacy Malphurs, our vice president of supply chain, who is extremely knowledgeable in SAF and end-to-end 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 are 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.

Tammy Romo -- Executive Vice President and Chief Financial Officer

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 per diluted share, 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 cost 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 Brent 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 15, 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 place -- fuel hedge in place with a similar level of protection.

But we would start recognizing hedging gains around the $60 per barrel Brent 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 toward our long-term environmental goals.

Excluding fuel, special items and profit sharing, first-quarter operating cost 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 and first-quarter salaries, wages and benefits driven by the benefits of our employee voluntary lead 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 onetime 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 three costs is an estimated $325 million in cost savings from our voluntary separation and extended leave programs 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 billion 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 increase. 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 deliveries.

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 cost 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 CFM International for their tireless work to develop agreements that extend and support our long-term relationships and that supports all our Boeing 737 -- our all-Boeing 737 business model. 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 burn. 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 payroll support program proceeds during first quarter and expect to 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 improvement 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 define for you in our earnings release, 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 million to $4 million per day. And we continue to expect to achieve cash burn breakeven with roughly -- with revenue of roughly 60% to 70% of 2019 levels.

Barring any unforeseen changes in current demand trends, our cost trends and assuming revenue and booking trends continue to build throughout second quarter, we are hopeful that we can achieve core cash breakeven results or better by June. In closing, while the effects of the pandemics 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 lag 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 toward breakeven and managing tight cost control and seeking efficiencies, especially as we began to revamp 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.

Questions & Answers:


Operator

Yes, thank you. [Operator instructions] And our first question is with Stephen Trent with Citi.

Stephen Trent -- Citi -- Analyst

Good afternoon, everybody and thank you very much for taking my questions. Just one quick one for you. Tammy, I was intrigued by what you mentioned about your hedging policy. And you guys also mentioned the approach to climate change with renewable energy credits.

Are you thinking about the energy credits and lower emissions, and your fuel hedging policy going forward, are you thinking about them in conjunction with one another as, let's say, a holistic approach to these topics?

Tammy Romo -- Executive Vice President and Chief Financial Officer

Yes, absolutely. We'll -- they're kind of really two different topics in mind, but we are certainly thinking about them all holistically. Our fuel hedging program, as you know, we've had that in place for many years to provide us protection about -- against rising fuel prices. And looking forward, a component of that will be sustainable aviation fuels.

We're just not at a point today where we're at significant volumes there with sustainable aviation fuels. So I see that being more relevant with time. But as we look here, this year, over the next several years with the hedging position that we have in place, the purpose of that is really to protect against conventional fuel, which is, obviously, gonna be what we're heavily reliant on.

Stephen Trent -- Citi -- Analyst

Appreciate that.

Tom Nealon -- President

Yeah, Steve, I think that to get SAF up to where it needs to be, there's gonna have to be some sort of market making going on. And there's going to be some level of incentive, tax credits for the producers or the blenders or the consumers. So I'm not sure -- I think Tammy and I are both kind of early in exactly what the tax benefits are for all these various ESG-oriented elements we are going to be investing in. But I think that that's part of what we have to create in order to make SAF really viable and economically viable, if you will, going forward.

So I think it's kind of an open question, to be honest with you, at this point.

Stephen Trent -- Citi -- Analyst

Appreciate the color. Thank you.

Operator

Thank you. And the next question comes from Hunter Keay with Wolfe Research.

Hunter Keay -- Wolfe Research -- Analyst

Hey, everybody. Good afternoon. So Gary, as you -- Southwest has a long track record of looking out for your shareholders. Obviously, you and others diluted a lot during COVID.

So what do you think is the best way to sort of repay your shareholders? Is it through buying back that stock? Is it through special dividends? Or is it really just sort of just taking the money, investing it back in the business and just trying to grow the stock price through your earnings?

Gary Kelly -- Chairman of the Board and Chief Executive Officer

I think it's really a ways away before it's a real question for us, obviously, because we've got CARES Act limitations that Tammy go -- went through '23?

Tammy Romo -- Executive Vice President and Chief Financial Officer

September of '23.

Gary Kelly -- Chairman of the Board and Chief Executive Officer

2023. As you're well aware, so it's opposed that environment. So I do think we've tried to be clear that our priorities would be pay down the debt, number one; and then number two, grow the business. And obviously, we think that that's the best way to maintain the health of the enterprise, but also the best way to take care of all of our stakeholders, certainly our shareholders.

And I'll let Tammy add if she wants to. I just think it's premature to telegraph what our thoughts might be ultimately in terms of shareholder returns. I'm not a fan of special dividends. I don't mind sharing that.

So I also don't mind sharing that I haven't had that thought that we would be doing a special dividend, and we couldn't do it until post September '23 or 2023 anyway. But it's -- we've got four phases, I don't know, that we're thinking of. One is survival; second is stabilize; third would be repair; and then fourthly, would be back to prosperity. So we've sort of declared that until we stop losing money, we're still in the survival mode.

There's a word out there for what we're thinking. Once we get to prosperity, I'd love for us to get back to handsome shareholder returns, and I just feel like we need to prepare the balance sheet first. I got the question this morning on CNBC, and I thought it was a good one. We do share repurchases as you well know.

We had a healthy dividend going into pandemic, as you well know. Now we also had the strongest balance sheet and the lowest leverage in our history coming into 2020 and all of that is key in terms of thinking in the future about what we would do with shareholder return. So we've got to get our balance sheet back in order. It's not broken, but we do have some work to do.

And that's -- I know we are all aligned here that that's our top priority.

Hunter Keay -- Wolfe Research -- Analyst

Yeah. No, I appreciate that color. And just a quick one here for you, Gary as well. I know this is -- seems like a crazy question, but if demand sort of doesn't get a whole lot worse, but it doesn't get a lot better either when we find ourselves looking at PSP 4 maybe attached to the Infrastructure Bill or something like that, is that something that you expect to happen or would advocate for? Or would actively say we don't need it?

Gary Kelly -- Chairman of the Board and Chief Executive Officer

That -- well, not any -- I will admit that's not anything that I've contemplated. I'm very grateful that we've gotten not one, not two, but three PSPs. And to -- I guess, to be totally open on the question, we're -- we feel like we're on the cusp here of achieving breakeven. It's hard for me to argue that Southwest would need any further support.

Now the premise that you raised, of course, is that if I could sort of extrapolate that isn't achieved and we sort of bump along -- with my comments initially, yes, our first quarter turned out better than we thought it would be, but we still lost $1 billion. Well, that can't go on indefinitely for any company and certainly for an airline. So I don't think that that's what we're staring down. I don't think we are looking at $1 billion loss second, third, fourth quarter.

So given that, I -- which is the only way I can really answer the question, I don't think we're in that scenario. So therefore, no, because this is a live question on this infrastructure bill. And then, finally, no, we're not advocating for anything different other than just trying to provide our input on the spending and the investments that are being contemplated in that bill, along with the prospect of corporate tax increases. So that's our focus.

Hunter Keay -- Wolfe Research -- Analyst

Thank you.

Operator

Thank you. And the next question is from Ravi Shanker with Morgan Stanley.

Ravi Shanker -- Morgan Stanley -- Analyst

Thanks. Gary, can you just share a little more detail on what the early conversations with your corporate customers or potential corporate customers have been now that you have widespread GDS integration? Is it different from your existing corporate customers, given that kind of you're one of the first LCCs to enter the space? Kind of how are those conversations trending? And how is that customer base looking versus what you initially envisioned?

Gary Kelly -- Chairman of the Board and Chief Executive Officer

Yes, they're -- the managed travel accounts definitely are behaving differently than our nonmanaged travel accounts. And I'm going to let Tom and Andrew speak to that.

Tom Nealon -- President

I was hoping you would. So the -- let me just talk about the business travel for just a second. So the industries that are starting to pop back up again, I consider business demand is falling as opposed to leisure demand, which is hot. But the areas of the business demand that are starting to travel, it's a lot of government DoD.

It is manufacturing, some transportation, the areas that are not traveling are the big consulting firms, which by the way, are the biggest consumers we have of air travel. So that's what's really not happening yet. I think that in terms of the conversations with the large accounts at this point, given that we are now on the GDS platforms, we're talking about this before, we're starting to see the channel shift that we expect to see, given that we are now on four GDS platforms and I guess, the honest answer is the volumes are so low, it's just hard to know if we're seeing what we would have expected to see in terms of channel shift from one to the other. We are seeing a little bit of a shift.

I think, Andrew jump in, if I'm not correct here, is a little bit of shift from the Sabre BBR basic product into more of the standard GDS platform. So that's working well. But I guess, just in general, the commentary we, our teams, talk with, in fact, they did a great piece with Hunter. I'm not sure if you guys read it.

Took a while to read it, it's pretty long but it was really good. But the conversation was really such that the customer really gets our products. They really want the product. We've just been so hard to do business with, etc., etc.

So I think the conversations with our large corporates are really very, very positive and they just want us to be on the shelf in Sabre and the others, and we will be. So we have seen a fall in business travel, I think.

Andrew Watterson -- Executive Vice President and Chief Commercial Officer

Ravi, this is Andrew. The only thing I'd add to that is that these TMCs and corporations, we already have relations with them because through our Direct Connect and our SWABIZ platforms, their customers now, just was not their preferred platform. So I would think about more of expanding our book of business with them rather than introducing ourselves to these new corporates and TMCs. So the fact we're moving to something that's more their liking has received good returns from them.

So that's why we expect to do better post-pandemic than prepandemic with the largest corporations who had more of a standardized process that would go through the GDSs.

Ravi Shanker -- Morgan Stanley -- Analyst

Very helpful. Thank you.

Operator

Thank you. And the next question comes from Mike Linenberg with Deutsche Bank.

Mike Linenberg -- Deutsche Bank -- Analyst

Oh, yeah, hey, good morning, good afternoon, everyone. Gary, I -- earlier, I saw a headline out about you making a comment about business travel rebound not taking place for about 10 years. And I'm just curious the context within that comment. And I don't know if it was a misquote or maybe there's some analysis that you guys have done? Or maybe it's to your point, referencing that maybe some portion of business is never gonna come back.

Can you just sort of clarify or qualify that statement?

Gary Kelly -- Chairman of the Board and Chief Executive Officer

I'd be happy to, Mike. And honestly, there's nothing new. I've said 10 years for a year. And my only point was it was really in -- and you're an expert at all of this.

We've just lived through an environment where it is impossible to forecast. It's impossible to predict. We can all pontificate. And so all I've been saying is really in response, Mike, to a question about will business travel ever recover.

And I think it will. I think it's silly to sit here and say it will never recover. I mean, that's a bold statement. But Mike, it could be a long time.

And that's where I've thrown out the 10 years, and I've done that consistently. You know that a typical recessionary recovery is five years for business travel. And we've lived through a lot of recessions together. So that, I feel confident of.

What I'm not confident about is whether this is a typical recession, number one, and it's got some pluses compared to a typical. It has the negative because of everything that we know about being able to work now with technology virtually and remotely. And that is a huge question mark. I'm on another board besides Southwest.

I talk to other CEOs, talk to all my friends and colleagues here at Southwest, and we get plenty of anecdotal information that suggests that business travel will not recover to prepandemic levels anytime soon. So there's just no way to know. So no, I'm not predicting it's 10 years. Really, what I was trying to do is sort of tamp down the argument that it will never recover and just simply to say that, who knows? It could be a long recovery time period, but we're going to be prepared, Mike, regardless.

And so Tom and Andrew were just talking about GDS. And for Southwest, I think that we will recover business travel faster because we have a new avenue to gain business travelers. And we dramatically under-indexed the managed travel market. And that was because we weren't a part of the GDS.

We remedied that. We're the largest airline in the United States. By virtue of that, I would argue that we're the largest business airline in the United States. And as I said in my remarks, now the managed travel accounts will have wide access to a great network, great service, no bag fees, no change fees and low fares.

They will finally have access to low fares. I think we will do extremely well there.

Mike Linenberg -- Deutsche Bank -- Analyst

Great. That context was very helpful. Just my second question to Andrew, with the cities, 10 that have been announced, I think, out of 17, interesting, when you think back historically, Southwest was an airline that was very sort of tactical and methodical in sort of additions, maybe one, two a year, maybe some years, no cities. And now all of a sudden, a deluge of cities, and some of these are actually small markets.

And if I think back to Southwest in the past, some small markets, the company historically may have struggled. What -- it sounds like the ramp-up is going fairly well. Andrew, maybe what has changed that you feel much stronger in moving into some of these smaller markets and more quickly? Maybe it's just the pandemic, you strike when the iron is hot, maybe it's the density of the Southwest network, small cities can plug in and you can turn on and be successful far easier today than the Southwest of 10 years ago? Maybe I answered the question, but if you could just give us some color because this is kind of a different mode for Southwest with respect to new city development.

Andrew Watterson -- Executive Vice President and Chief Commercial Officer

Certainly, I'll be happy to answer, and Tom, feel free to join in. We are methodical. And so prior to the pandemic, we have a practice every year of going through and looking at every place we could fly our aircraft and evaluating them at least in desktop, if not in-person visit. So all these cities were ones that were known to us and evaluated prior to the pandemic.

And so when the pandemic, as Gary talked about -- we are unsure about the pace of business travel return. And so because we have a lot of business travelers, if they were not to return in a timely manner, we would have a shortfall in revenue activity to deploy our people and assets against, and with the operating leverage model, you don't want that. So we wanna make sure we have enough new cities to cover any potential shortfall in that return. So that led us to go at a bigger scale than normal.

The cities we chose, we chose also to have a low risk as far as our maturation. And we've been in plenty of small cities for a long time. So a lot of Western Texas cities and Pac Northwest cities, they're modest, and we do quite well, Upstate New York. And the key is a small city that is relevant to a place where we have a large customer base.

And so if you look at all these small cities, they're either in marquee destinations under themselves or they're relevant to a nearby large Southwest city, where we have a large customer base who would be big purchasers of tickets through small cities. And so that's what's important to us. And then, we want to make sure we go in with at least a level of flight activity that allows for crew efficiencies so that we have originators and terminators that make us not to have crude deadheads that would undermine inefficiency. So all those things must come together for us to add those new cities.

So I think prepared and it fits with our model, I think, is the answer.

Gary Kelly -- Chairman of the Board and Chief Executive Officer

Mike, I just want to pile on very quickly. If we kind of reconcile to 1992 when you worked on our secondary offering in those states, if you remember our rule of thumb, but it's -- we didn't want to go into a city in the early 1990s unless we thought we could do, let's say, eight departures a day. And so I wouldn't translate what we're doing with these 17 cities as being a violation of even that old rule of thumb, because some of these "small cities," I think, Andrew -- I won't name names because we may not want to telegraph yet, but there are a handful that I can think of that you might think are small. We're thinking there are going to be a dozen or more daily departures into a number of nonstop destinations.

So you can make the fact that we now have such a large U.S. presence, it makes a lot of these "smaller markets" much more viable today in terms of flight activity than it did 30 years ago. But the other thing I would point out is that Miami isn't small. Bush isn't small.

Commonwealth Spring isn't small. O'Hare is not small. So we do have a few cities that have three or four daily departures on the route map. And I would -- Mike would call those small.

And we have experience with them, and we know that they can work. I don't think that that means that every city like that would work. But anyway, it's -- we have been delighted that we could actually have the capacity to put them on the route network here. I got asked earlier today about whether we'll continue this.

And I think Andrew is gonna need -- assuming that we continue on our recovery path, he's going to need to take a lot of these airplanes and put them back into restoring flight activity into our existing network. So that will challenge our ability to continue doing this play, but they're permanent adds and we're delighted with the performance that we're seeing.

Tom Nealon -- President

I think at least just to give a little more -- this is one question, so we'll move on quickly. So we've got about 45 aircraft or so, Andrew, I think, committed to the new states so far, about 8% of the trips. But as I talk about the business demand thawing. As it begins to thaw, we are going to need to begin to get our network back in business travel shape.

And just to give you a little view, I guess people are asking -- ask us, so what does the -- so when does the network get back to normal? Well, the network is not going to get back to what it was because we have 17 new cities on the network. But what I can tell you is when you think about the principles in the characteristics of the Southwest network, those will be intact. Point-to-point, you should expect to see a very similar mix as short, medium, long, a similar mix of direct and connecting traffic. And our focus, once we begin to see business on thaw is we got to begin to put the depth back into the markets like the St.

Louis and Milwaukee's and intra-Cal business markets and such. So it's gonna be an interesting -- but that's also why we're getting more aircraft. So we're going to retire some and are going to have some incrementals. So it's gonna take time which is fine because business traffic is not going to show up on one Sunday and all of a sudden, it's back.

It's going to take time, and we'll begin to build our fleet back in our network depth back. You spurred a lively topic there, Linenberg. So thank you.

Mike Linenberg -- Deutsche Bank -- Analyst

Yeah, I appreciate everyone. I appreciate the responses. And especially the early '90s reference, Gary. I remember carrying everyone's bag.

So it was a fun time.

Gary Kelly -- Chairman of the Board and Chief Executive Officer

The thing that really pisses me off about you, you don't look any different.

Mike Linenberg -- Deutsche Bank -- Analyst

You can't see me.

Gary Kelly -- Chairman of the Board and Chief Executive Officer

I can't.

Operator

Thank you. And the next question comes from Brandon Oglenski with Barclays.

Brandon Oglenski -- Barclays -- Analyst

Hey, guys. Well, I wasn't in the early '90s, right, so sorry about that. But Gary, you did mention four phases here, survival, stabilize, prepare, grow, I think it's the way you laid it out. It sounds like you're going to go through stabilize and prepare pretty fast here just with your June capacity outlook.

So I guess, I just have one question because I know it's been a long call, but investors are wondering how are you gonna take advantage of your net debt position, especially relative to some of your larger competitors that have other capital priorities in front of them? Is the view here that potentially you're going to grow into a marketplace? Potentially take share? Could that sustain lower fares in the future? Or should we be thinking, what -- we really wanna get back to prior profitability before we push a lot of these fleet and network expansion opportunities that you guys just discussed?

Gary Kelly -- Chairman of the Board and Chief Executive Officer

I think we want to keep all options available and we've got a great balance sheet as it stands today. We will absolutely have to get back to profitability regardless. We've got to get back to profitability. And I already conceded the balance sheet repair will be an objective.

Tammy is already rethinking liquidity targets as well that will be more robust perhaps than what we had before. So there are several things that we'll want to think through. But clearly, we're in a position where we have that option. We can pay down more debt more quickly or we can think about expanding more rapidly as compared to some baseline.

And it's just too early to judge that yet. But we have tons of opportunities. We're a growth company. We know how to manage growth, and we would be foolish to pass on what I think is the opportunity of a lifetime to grow this airline in this environment.

We are so well-positioned. If, in fact, the business travel stays modest over the next five to 10 years, we are perfectly positioned to prosper in that environment with our low cost and our low fares.

Brandon Oglenski -- Barclays -- Analyst

Thank you, Gary.

Operator

Thank you. And the last question in the session comes from Jamie Baker with J.P. Morgan.

Jamie Baker -- J.P. Morgan -- Analyst

Hey, everybody. I got to tell you, I really like Mike's question. I remember being in Telluride with him about 20 years ago and betting on the one market that you might open that year, and I'm sure the idea of mantras never crossed either of our youthful minds. But it's a good segue into my question.

Is there a reservation or IT issue that prevents you from flying to Canada?

Gary Kelly -- Chairman of the Board and Chief Executive Officer

Tom, do you want to talk about that?

Tom Nealon -- President

Yeah, there is. So to make Canada work for us, that's both the business and leisure market, and we've got to be able to sell -- it's back to the whole foreign currency, foreign point of sale and we talked about for a long time. That's the thing we need to get done. And Jamie, it's not like it's a unconquerable technical task we don't know how to do, it's just a question that we keep putting to GDS.

And GDS, they have these other priorities, the kind of topping up, they have the ETOPS. It's not that we don't know to do it, just that it keeps getting knocked down the list in terms of priority. But it's just a piece of work around the foreign currency and forward language that we keep talking about that we just keep deprioritizing because it's a bigger idea. But it's really as simple as that.

But we think there's probably five, six, seven really nice markets, which, by the way, is part of the reason Bellingham, is now in the schedule, right? So there's some nice Canadian markets that can really do very well on the Southwest network. It's just going to take us -- just got to get a little more time to get that on top of the list, I think, really.

Gary Kelly -- Chairman of the Board and Chief Executive Officer

I totally agree with everything Tom has said, but I would just reemphasize our previous conversation to his question, which is, OK, we've added these 17 destinations. We got a lot more we'd like to add. I don't know that we would have airplanes. Even if we tackle that technology challenge, I don't know that we would have airplanes to be able to add those new markets.

So I guess, the point is, Jamie, I don't consider it to be an IT obstacle for Southwest at all. It's whenever we're ready, we'll commit to that. We'll get the work done. We'll add it to our route network.

Right now, we got all we can eat with the current capabilities we have.

Jamie Baker -- J.P. Morgan -- Analyst

Got it. And a follow-up to an earlier point, you mentioned that consultants are still pretty much grounded. Pre-COVID, can you remind me what your top three businesses were that make up corporate revenue? And what percentage of your corporate spend they represented, top three or four?

Gary Kelly -- Chairman of the Board and Chief Executive Officer

Specific companies or industries?

Jamie Baker -- J.P. Morgan -- Analyst

I doubt you're going to give me the companies. Industries. I meant industries.

Gary Kelly -- Chairman of the Board and Chief Executive Officer

I can't remind you because I've never told you, but I'll see what Tammy and Tom have to say.

Tom Nealon -- President

I think I'm -- and you probably know which one more, but certainly, defense is a big deal. It's not a industry, but DoD is a big traveler for us. Certainly, financial services, banking is big. It's certainly professional services consulting.

In fact, if you look at the BTN 100, I bet every major Tier 1, Tier 2 consulting firm is in there, they're big. Transportation and manufacturing. So the list goes on and on, higher ed actually. The state of California, higher ed is a pretty big deal.

So there's a long list, I guess, is the point. There's a lot of money tied up in it as well, so.

Andrew Watterson -- Executive Vice President and Chief Commercial Officer

I think what's more important is it's not 80-20. Our largest ones make up a very, very small percentage of our corporate book of business. Our corporate book of business is a long list with each one can -- we appreciate them all, but it's a modest number compared to our overall revenue line item.

Jamie Baker -- J.P. Morgan -- Analyst

Sure. That's very helpful. Thank you very much, everybody. Take care.

Ryan Martinez -- Managing Director of Investor Relations

All right. OK, well, that wraps up the analyst portion of our call today. And as always, if you have any follow-up questions, give me a call at (214) 792 4415. Thank you all for joining us.

And Keith, I'll send it back to you.

Operator

Yes. 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 Rutherford -- Senior Vice President and Chief Communications Officer

Thank you, Keith, and I'd like to welcome the representatives of the media to our call today. We can go ahead and get started. So Keith, if you would give them the instructions on how to queue up for questions.

Operator

[Operator instructions] And the first question comes from Dawn Gilbertson with USA today. I'm sorry, the question is with Alison Sider of the Wall Street Journal.

Alison Sider -- Wall Street Journal -- Air Travel Reporter

Thank you. Hi. Yeah. I wanted to ask about the latest issues with the MAX.

Just curious how you're thinking about this? How you -- if it affects your ability to build confidence in the plane, given that there was a lot of vetting and a new issue just cropped up?

Mike Van de Ven -- Chief Operating Officer

Yes, Alison, this is Mike. And the issue with the airplane was it was specific tail numbers that were identified by Boeing as part of a production run. And they made certain changes in that production run and may have caused some electrical ground and bonding issues in a couple of different components. And the risk there really is -- was just inconsistent electrical currents through those systems.

I think that we haven't had -- we had no issues or any identification of that being an issue with our own operating experience in the airplane. And I think the issue is well understood by Boeing. It's well understood by our engineers. And I think it's a relatively straightforward repair on the airplane.

And as soon as the FAA comes out and approves Boeing service bulletins, we are ready to execute that repair. And I think, like I said, it's just a one- or two-day repair on the airplanes, and it's relatively straightforward.

Alison Sider -- Wall Street Journal -- Air Travel Reporter

Got it. And I'm curious, is there any -- when you found out about the issue a couple of weeks ago, what was the reaction? Was there any frustration to be kind of in this position again so soon after bringing the plane back?

Mike Van de Ven -- Chief Operating Officer

Well, Yeah, I mean, I think it's frustrating to have to go through that process again. I don't know if lucky is the right word to it, but we had a we had plenty of spare airplanes where the -- in terms of an operational issue, it was not a concern for us. But overall, Dawn, I think Boeing is a good company. I think they've clearly suffered over the last several years, maybe with various quality issues across some of their product lines.

But at heart, they're an engineering company, and I feel like they need to be leaders in the aerospace in the commercial businesses for our country. And I think they understand that, and I think they're gonna get back to the roots. And I have a lot of confidence that the MAX airplane is going to lead the way there.

Alison Sider -- Wall Street Journal -- Air Travel Reporter

Thank you.

Operator

Thank you. And the next question comes from Dawn Gilbertson with USA Today.

Dawn Gilbertson -- USA Today -- Consumer Travel Reporter

Hi, good morning. I have two questions. First question is for Tom. Have you guys seen any impact from the State Department's alert level that they raised, as you did back when the CDC started the testing requirement? Or is it too early? What are you seeing there, if anything?

Tom Nealon -- President

Could you go ahead and just elaborate a little bit on what you're talking about? Not really familiar with what you're saying, Dawn.

Dawn Gilbertson -- USA Today -- Consumer Travel Reporter

This week, the State Department has been raising the alert level for international countries, including such popular places as Mexico to better align with the CDC rankings. So now more than 80% of countries including, like I said, some popular destinations have a higher alert level. And I know sometimes bookings take a hit when that happened. I wondered if you've seen any impact at all or expect it?

Gary Kelly -- Chairman of the Board and Chief Executive Officer

I know what you're talking about now because -- where Mike is booked.

Tom Nealon -- President

So the answer is, well, I don't think we're really seeing much of an impact on that at all at this point. What's your second question?

Dawn Gilbertson -- USA Today -- Consumer Travel Reporter

The second question, I'm not sure who it's for. When you guys were recalling flight attendants recently, one of the things you cited in one of the memos was an increase in people calling in sick. I'm curious why you're seeing an increase in people calling in sick? Are you seeing an increase in infections as -- COVID infection as travel has rebounded? Or is there reluctance among flight attendants to return? Can someone talk about that a little bit? Thank you.

Mike Van de Ven -- Chief Operating Officer

I'll jump in there with that and then anybody else can add a little bit of color. But our labor contracts have a very -- were very flexible for our people in terms of their sick banks and how they use sick. And it could be a variety of things. It could be family issues that they're dealing with.

It could be day care issues that they're dealing with. It could be illnesses of themselves, it can be doctors' appointments. And as we're recalling people and they're coming back into work, I would argue that they don't have all of their personal lives all laid out as neatly as they normally would. And so I think we will see a spike in that as people are coming back to work.

But I don't think that it's in the indication of a long-term trend or a big operational hiccup for us. We have reserves that will cover those lines. And we navigated through that pretty well.

Dawn Gilbertson -- USA Today -- Consumer Travel Reporter

And again, thank you.

Operator

And the next question comes from Kyle Arnold with the Dallas Morning News.

Kyle Arnold -- Dallas Morning News -- Aviation Writer

Hey, guys, what are you seeing in the airfare environment? And are you going to be able to hit some of your financial goals with the leisure travelers still the leisure travel is very fickle in terms of airfares still leading the way?

Gary Kelly -- Chairman of the Board and Chief Executive Officer

Well, I guess, I'll start, and Andrew, feel free jump in, but like I described earlier in the call is, I think the leisure side is pretty hot right now. I think the business demand side is starting to thaw. But I literally have right in front of me what our -- what the booking curve and the fare curve looks like for the upcoming months. And they're pretty solid, and they're really encouraging.

So barring a trend shift, I feel pretty good about where we are, and it's kind of back to what we said in the call. Barring a trend change, we feel good about the opportunity to break even, perhaps you can make a little bit of a profit sometime in June or beyond. So I think that's kind of how I'd answer at this point. As the booking curve begins to get more extended out further out, it just gives us a lot more flexibility in terms of how we manage the inventories and the fares and it's starting to take on a normal booking distribution shape, if you will, the level is too low, but the shape is normal.

So we're able to manage our pricing more effectively, and that's kind of where we are. So we feel good barring a trend change.

Andrew Watterson -- Executive Vice President and Chief Commercial Officer

The guidance that Tammy and Tom gave you includes the -- what we saw in the spring of the leisure affairs getting stronger from the bottom of the winter wave through toward the summer. However, the lack of business travel that Gary and Tom talked about mean some of the higher fares that they pay will be absent. So you can -- our fares overall will still be down year over year -- over two years and year over year as a result of that. So those are the trends.

Gary Kelly -- Chairman of the Board and Chief Executive Officer

So Kyle, this is just talking about -- our peers on average were down 20% in the first quarter. So this is -- we're not -- we never give information about what we're gonna charge. So that's -- they're not speaking to that. We're just talking about how the array of fares that we have average out with the demand that we have.

But I would just say this, the industry has more seats than it does passengers. And Economics 101 tells you that pricing will settle that but at a softer level. So we were down 20% this quarter. And what we'll be prepared for is a very low fare environment for a long time, which gets back into the discussion that we've been having all day about business travel demand.

And that is our wheelhouse. We are low cost. We are low fare. And we can live on low fares and we'll certainly make sure that we manage our business accordingly.

Kyle Arnold -- Dallas Morning News -- Aviation Writer

Thank you.

Operator

And the next question comes from Leslie Josephs with CNBC.

Leslie Josephs -- CNBC -- Airline Reporter

Hi, thanks for taking my question. Two quick things. On the MAX, are you getting any compensation from Boeing either in the form of payment or discount on other planes? Do you have any sense of how much not having those planes in service is costing Southwest? And then, my second question, if you want, I could wait till after.

Tammy Romo -- Executive Vice President and Chief Financial Officer

Yes, this is Tammy. In terms of the pricing on our aircraft with Boeing, that is confidential. We have shared with you that the capex that we have with regard to our firm order book for next year is about $700 million, and that is for 30 aircraft. But it's just not that simple.

There's a lot going into that. And as you've alluded, that incorporates discounts from previous settlements that we've had with MAX, with Boeing on the MAX grounding, as well as the terms of our most recent agreement. But the actual trends itself are confidential.

Mike Van de Ven -- Chief Operating Officer

Yes. And are you talking more specifically to this most recent grounding?

Leslie Josephs -- CNBC -- Airline Reporter

Yes, the electrical issue. You get a [Inaudible] and is there -- do you know what the financial impact is on the --

Mike Van de Ven -- Chief Operating Officer

Yeah, we've got our arms around what we think that impact is. I will tell you just in the scope of our operation, it's not material. But there are new airplanes. The airplanes are warrantied by Boeing.

And I think that we have -- I don't think that will be a concern for us at all.

Leslie Josephs -- CNBC -- Airline Reporter

OK. And then, my other question is, what are your staffing needs for this year? And then, going into next year, do you expect to hire? And do you think that many employees might have left the company permanently? Because I know some employees were temporarily were getting called back early.

Mike Van de Ven -- Chief Operating Officer

Well, I think I can maybe start with this, and I'll maybe have some of my friends around the table talk. But the real question is, is we're looking for the commercial side of the business to be able to go since the demand out there, and we're looking out five and six months. And then, be able to lay out a schedule that responds to that demand. And I feel like we have a lot of flexibility on the airplane side and on the staffing side with plenty of notice to be able to go fund that.

So just to be honest, we can do any of the things. If demand falls off from here, we're in a good position. If demand stays flat, we're in a good position. If it increases, we have ability to recall people on ExTO and if it really explodes, we have the ability to go hire people.

And so it's just -- it's tricky, and we are trying to make those decisions as close in as possible. So we haven't really thought about the second half of the year yet.

Gary Kelly -- Chairman of the Board and Chief Executive Officer

I'll just summarize some comments that I made at the outset of our analyst call, which is we are currently at about 92% of our prepandemic staffing. And of course, you pick a point in time and you can dodge that number around. But that just gives you some sense. And what Tom was talking about was flying our June schedule at 96% of what we were prepandemic for June.

We've had a little bit of attrition. We've had a voluntary separation program, and that's what gets us down from 100% down to this 92% level. So we are comfortable -- we're overstaffed right now in March, April. Projecting forward to June, we would be right at the proper staffing, if not a little bit short.

So there's pluses and minuses. One department might be a little over, one department might be a little under. But I think beyond -- to Mike's point, beyond June, I think what we're all anxious to see is, well, what do things look like when we get to June. Are we going to hit our forecast as we've anticipated it, with the bookings for July, August, September look as good as we hoped.

Is there pent-up demand that is not sustained beyond that? I mean, there's just a number of good questions that can be posed at this point. So it's just a little bit premature. But if we get to the point where we've got some staffing challenges, I think everybody here would consider that to be a really high-quality problem. But Bob Jordan is here with us, and Bob heads up our corporate services, which includes HR.

So in terms of our current hiring our current hiring plans, you might just share whatever you're willing to share there.

Bob Jordan -- Executive Vice President, Corporate Services

Yeah, you bet. And on the recalls, so we gratefully we had about 11,000 folks take the ExTO and just a terrific response for our employees. And we've recalled just south of half of that to meet the demand that everybody's talked about here for the summer. And if you -- yes, if you see more demand, we can be in a position to continue the recall.

We have begun to ramp back up our hiring ability. So before you can hire, you've got to have people that went off and did their jobs come back and sort of rebuild that team. So we are ready to hire. That's very modest right now.

It's key positions. But I think if we see the demand continue, we are in a position to ramp that back up quickly.

Gary Kelly -- Chairman of the Board and Chief Executive Officer

I do think, again, to be straightforward about this, I think we're all prepared for this to be messy. It's just not easy to predict, and then it's not easy to execute and we also don't want to end up with excess staffing. So it's just trying to strike the right balance here. It was really messy a year ago trying to downsize the airline.

And I think we're all just going to have to recognize it will be -- I think we need to be up to the task here and manage well, but just recognize it may be messy. Now having said that, our operation went up 50% in terms of flight activity overnight back in March and had a flawless execution and outstanding performance. So we've got a basis, I think, for our confidence going forward. But we've been a hiring machine for 50 years, and I feel like we'll do well when we're ready to turn that back on.

But I'll look forward to that. I think that will be a high-quality problem.

Leslie Josephs -- CNBC -- Airline Reporter

Thank you.

Operator

Thank you. And the next question comes from Rick Velotta with Las Vegas Review Journal.

Rick Velotta -- Las Vegas Review-Journal -- Reporter

Thank you. I hope this is a little bit of a lighter topic than some of the heavy things you've been discussing. Does the company have any opinion on the city of Chicago's plan to enable the installation of slot machines at Midway and O'Hare International Airport. And as a follow-up, does the company have any position on legislative proposals to open --

Gary Kelly -- Chairman of the Board and Chief Executive Officer

I can't hear your voice, and I understand where you're coming from. I would say for Chicago, and I'm looking at our real estate guy here, I would say anything that lowers our operating costs at an airport, we would be all for it. I think Las Vegas has led the way with some really innovative techniques out there. So -- and beyond that, I don't know that I'll comment on what's going on in the state of Texas right now.

But I guess, by extension, anything that generates more travel, I bet everybody in this room would be all for it. So -- but good to hear from you, Rick.

Rick Velotta -- Las Vegas Review-Journal -- Reporter

Thank you.

Operator

Thank you. And we have time for one more question, and that comes from Jay Singh with Simple Flying.

Jay Singh -- Simple Flying -- Deputy Content Manager

Hi. Thanks. I just want to go back a little bit to your MAX comments earlier. So it seems like you have an appetite for expansion.

And you got an order book out until 2031. What's the argument against taking maybe a MAX 9 or MAX 10 and freeing up some smaller jets for expansion when you've got a pretty significant backlog with a lot of flexibility? Thank you.

Tom Nealon -- President

Well, I think the downside for us taking a MAX 9 or 10 is it doesn't fit our network. We have seen -- our network is built around point-to-point. We don't want to have too many connections and you start getting to a 9- or 10-, you're quickly into a 200 passenger aircraft, that's just too big for our network, the way we run our business.

Gary Kelly -- Chairman of the Board and Chief Executive Officer

Yeah, I think we'd rather see Boeing. If that's our challenge, we like the eight. We like the seven, as well as we like the eight. We're -- we don't -- we're not certain what mix of those model numbers will have in the future.

But just as a rule of thumb, call it, 50-50, 60-40, who cares, But if that is the issue, I think we'd be pressing Boeing to increase their production rates. And again, that would be a high-quality problem.

Jay Singh -- Simple Flying -- Deputy Content Manager

Great. Thank you.

Operator

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

Linda Rutherford -- Senior Vice President and Chief Communications Officer

Thank you all for joining us today. And if you have any other questions, our communications team is standing by, (214) 792-4847 of course, through our media website, www.swamedia.com. Thank you.

Operator

[Operator signoff]

Duration: 100 minutes

Call participants:

Ryan Martinez -- Managing Director of Investor Relations

Gary Kelly -- Chairman of the Board and Chief Executive Officer

Mike Van de Ven -- Chief Operating Officer

Tom Nealon -- President

Tammy Romo -- Executive Vice President and Chief Financial Officer

Stephen Trent -- Citi -- Analyst

Hunter Keay -- Wolfe Research -- Analyst

Ravi Shanker -- Morgan Stanley -- Analyst

Andrew Watterson -- Executive Vice President and Chief Commercial Officer

Mike Linenberg -- Deutsche Bank -- Analyst

Brandon Oglenski -- Barclays -- Analyst

Jamie Baker -- J.P. Morgan -- Analyst

Linda Rutherford -- Senior Vice President and Chief Communications Officer

Alison Sider -- Wall Street Journal -- Air Travel Reporter

Dawn Gilbertson -- USA Today -- Consumer Travel Reporter

Kyle Arnold -- Dallas Morning News -- Aviation Writer

Leslie Josephs -- CNBC -- Airline Reporter

Bob Jordan -- Executive Vice President, Corporate Services

Rick Velotta -- Las Vegas Review-Journal -- Reporter

Jay Singh -- Simple Flying -- Deputy Content Manager

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