Travel demand is back and — absent some change — here to stay: Southwest CEO

Southwest Airlines CEO Gary Kelly joins Adam Shapiro to discuss the company’s second-quarter results, state of airline industry, travel demand, and upcoming changes at the company.

Video Transcript

ADAM SHAPIRO: Welcome back to Yahoo Finance Live, I'm Adam Shapiro. Southwest Airlines reported second quarter earnings this morning. Revenue of $4 billion beat expectations. And the company also posted a profit with the help of some of the payroll support program and government support in the month of June. But to help us break down where the airline is headed, we invite back into the stream CEO Gary Kelly from Southwest Airlines. And Gary, it's always good to see you. Thank you for joining us.

GARY KELLY: Good morning, it's great to be back.

ADAM SHAPIRO: You called the second quarter a pivotal quarter in the pandemic recovery for the airline. And you also pointed out that in June leisure travel demand exceeded 2019 levels. Is this sustainable going through the third quarter?

GARY KELLY: It looks like it is. We lost, if you take out the government support, we lost a billion dollars in the first quarter. And we cut that to a loss of only $200 million in the second quarter. So it's a substantial improvement. Our revenues almost doubled, compared to the first quarter. So, yeah, I think that we can sustain that going into the third quarter. I think we're all worried about this Delta variant. But right now, we're not seeing any impact whatsoever on our bookings from that.

So it's-- it's very encouraging. And we're in a stronger position here in July than I thought we would be 90 days ago. So we're feeling really good. We've got some operational challenges that we're working through. And we'll certainly get things smoothed out there. But, yeah, demand looks really good. And I think that we've got good momentum for the rest of this quarter, at least.

ADAM SHAPIRO: I want to talk about the return of international flights as well. Because you have destinations to Mexico to Cancun, as well as to the Bahamas and to Jamaica. But real quick, you also announced in the earnings report a return or the $85 million of profit-sharing for the employees. And we should point out not one, not one Southwest employee lost their job during this terrible pandemic we've all been going through.

Wouldn't it have made sense perhaps to preserve some of that cash and maybe wait just a little bit longer before profit-sharing?

GARY KELLY: Well, that's the contract we have with our employees, so to speak. And it's a moral contract. Yeah, it's a discretionary decision by our board of directors. But we do include the proceeds from the federal government in our earnings, as you know. We were profitable in the first quarter, including those. We were profitable in the second quarter, including those numbers. So we feel like it's only fair to let our employees share, as they always have, in the profits of the airline.

So-- and by the way, on your comment about the month of June, we were profitable in June without the payroll support from the government. So it's a very good sign going forward.

ADAM SHAPIRO: Will you be able to be profitable do you think for the full third quarter without the-- I don't believe there's more payroll support-- but will other-- some of your peers have talked about profitability in the third quarter. Is that in the future for the airline?

GARY KELLY: There actually is payroll support that is roughly equivalent to what we earned in the second quarter again in the third quarter, just the way the accounting works. But without that, yeah, I think we have a good shot at profitability, assuming that demand continues to be strong.

ADAM SHAPIRO: Let's talk about some of the demand. Because you've also set a goal of total resumption of international flights, such as those to Cancun and to the Bahamas, come early 2022. I realize that there are some unknowns with these new variants. But do you think that you will achieve that goal in early next year?

GARY KELLY: I think we will. We're having good results with our international flights as we speak. And of course, every destination is a little different. But that's the plan. And we haven't seen anything thus far that would cause us to want to change our plan.

ADAM SHAPIRO: Want to talk to you, too, about the news of the transition that's coming in 2022 and the choice of Mr. Jordan to take the role as CEO. You talked about this being bittersweet in a chat you posted on the Southwest website for you. Because after 18 plus years, you've seen the best, the worst, and then, let's say, the best again of the airline. Why make this transition now?

GARY KELLY: Well, 18 years is a long time. And I think change is always good. And new and fresh energy is always a good thing. And change in that regard is inevitable. I'll be 67 next year. And Bob's not getting any younger either. He's got a 33-year career under his belt already. He is very well-prepared to take on the CEO role. We have a very strong leadership team as well.

And, you know, as we've been discussing, our finances have stabilized here. So we're in a really strong position. So it's a great time for us to go through that kind of a transition. It's going very well. We didn't want to rush that Bob is very busy working on the transition. But it just felt like the time was right. So February 1, I'll hand him the keys, and he'll do a great job.

ADAM SHAPIRO: You also pointed out in that chat that you know each other, you know the history of the airline. You are actually very good friends. Your quote I believe was, you finish each other's sentences. It's a corporate bromance I think that will serve the airline well. But why was it important for you to go within, as opposed to perhaps bringing in someone, and I don't want to sound ageist, but someone who might have had a fresher approach, a younger approach, and go outside the company?

GARY KELLY: Well, you know, I think those are fair questions. And you always have those pros and cons with a leadership transition like this. And I also intend to stay on. I'm going to continue to be involved with the company. I'll be executive chairman. I'll have some duties. And I don't want to leave. I love this place. And I love our people. So I'm excited that I can continue on. And I hope it'll be for many years. So we have a good partnership in place.

I think that the statistics are very, very clear that CEO's transitions are much more successful when they are with internal candidates. Because culture of companies is important. The business model here is unique and very important to our 50-year success and going forward. So I think we just have to surround ourselves with diversity, with diverse ideas, diversity of thought, diversity of backgrounds and experiences.

So there are other ways to achieve that goal than with the CEO. But Bob is very deeply experienced in Southwest in a number of different functions. And that's invaluable as a general manager, so to speak. You know, it's impossible for a CEO to be proficient in every single function. But the more functions you know, the better. And he'll be a great leader. And he's very innovative. He is very bright. He's very fast. He has a great capacity for work.

And I think, most importantly, he loves people. And he's calm. And he's steady. And all of the things that you would hope for in a leader, I think he's got. And he'll have his chance and his shot. And we're going to do everything we can do to support him.

ADAM SHAPIRO: Getting back to the numbers, because I think a lot of us are rooting for all of the airlines to recover. You've guided for July revenue to be better than originally thought, only down about 10% to 15%, compared to two years ago, August, perhaps 12% to 17%. Why not guide for September? Is it that uncertain given what's happening in the environment right now?

GARY KELLY: I think that, yeah, we still have a pandemic. We have a bump again in the case counts. And we've been in this rhythm for about a year, providing guidance that we're comfortable with, that we think is credible, in other words, about 60 days out. But, yeah, hopefully we're in this down 10% to 15% range for the foreseeable future. The only reason that August is a little bit worse, if you will, then July is because there's a holiday timing shift.

Last year, the Labor Day travel occurred somewhat in August. And this year, it will be all in September. So yeah, hopefully September will perform in that same range. But just to give you some sense of the booking information, usually we'll start a month with about half the bookings in place that we would expect to get for that month. So while, you know, we're 45 days away or so from September 1, we still have a long way to go in terms of accumulating bookings for flown revenue in that month.

ADAM SHAPIRO: And to wrap up, I promise you I will get it right when I write up this story about June's profitability without the payroll support. But what is the key do you think about this earnings report that you want everyone to know as to where Southwest is headed?

GARY KELLY: I think that that's really the key is that the demand, remarkably, has recovered. It is very strong. It's very heavily oriented towards the consumer right now. And that is a little bit different. So just in terms of the messiness of this pandemic, just be aware that everything isn't optimized yet. It was messy going into the pandemic. It is messy coming out. We still have supply chain challenges, and our route network is different.

And our customer is a little different. Consumers bring more bags. There are more transfers. There are more connections. And so it's just a little bit different experience right now. The airport experience is different, because all of the concessions aren't open. And the lines are long. So it just requires a little bit of patience. All these things will smooth out. And the cost penalties associated with that will also get smoothed out.

So we'll want to continue to run the best airline. That'd be our goal, to run the best airline in the country. And we have the best people. And they're working really hard. And I think the main thing is just to know that demand is back. And absent some change, it feels like it's here to stay.

ADAM SHAPIRO: Just to wrap this up, Mr. Kelly, it's Bob Jordan who said that the company is in great shape, pointing out to the cash break even in June. And we look forward to getting to know him. But as you pointed out in that June 23rd chat, you want to finish what you started. And the airline seems to be doing well as you've gotten through this really crisis that all of the airlines have hit. And we appreciate your joining us here on Yahoo Finance Live. All the best to you. Gary Kelly, CEO of Southwest Airlines.