Title

Management

Ryan Martinez - Managing Director of Investor Relations

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

Michael G. Van de Ven - Chief Operating Officer

Tom Nealon - President

Tammy Romo - Executive Vice President and Chief Financial Officer

Linda Rutherford - Senior Vice President and Chief Communications Officer

Participants

Andrew Didora - Bank of America - Analyst

Savi Syth - Raymond James - Analyst

Hunter Keay - Wolfe Research - Analyst

Jamie Baker - JPMorgan - Analyst

Duane Pfennigwerth - Evercore ISI - Analyst

Helane Becker - Cowen & Co. - Analyst

David Vernon - Sanford C. Bernstein - Analyst

Kyle Arnold - The Dallas Morning News - Analyst

Alison Sider - The Wall Street Journal - Analyst

Evan Hoopfer - Dallas Business Journal - Analyst

Pilar Wolfsteller - FlightGlobal - Analyst

David Slotnick - Business Insider - Analyst

Presentation

Operator

Good day and welcome to the Southwest Airlines Fourth Quarter and Annual 2019 Conference Call. My name is Chad and I will be moderating today's call. [Operator Instructions]

At this time I'd 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

Thanks, Chad. And thank you all for joining us. I know it's a busy airline earnings day, but we're going to start out with prepared remarks from Gary Kelly, our Chairman and CEO; Mike Van de Ven, Chief Operating Officer; Tom Nealon, our President; and Tammy Romo, Executive Vice President and CFO, and then we will open it up for Q&A.

A few quick disclaimers. Before we get started here. We will make forward-looking statements in our remarks which are based on our current expectations of future performance. And of course, our actual results could differ from current expectations for a number of reasons. We call it out special items in 2018 and we will make reference to 2019 results that compared to prior year non-GAAP results. Both of these topics are covered in great detail as always in our earnings release disclosures as well as on our IR website. And we are also providing commentary today regarding the ongoing MAX groundings and our current estimations of timelines and current planning assumptions for 2020. Keep in mind these timelines and estimations could change materially with impacts on the amount of financial damages we incur, our published flight schedule beyond June 6th and our fleet capacity and capex assumptions to name a few.

With all of that said, we'll go ahead and get started. And I'll turn it over the call to Gary.

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

Thank you, Ryan and thanks to everyone for joining us for our fourth quarter and year end 2019 earnings call. Straight away I want to thank our employees. This is our 49th year and there, at least in my experience, there is no more remarkable year than 2019. The grounding of effectively 75 of our airplanes which is about 10% of our fleet presents a crisis like challenge, and our people are ready for it with the best planning, tools and technologies in our history, but more importantly with the right fortitude and the right resolve to get through this crisis.

Our objectives were to run a great airline, serve our customers exceptionally well, protect our finances and our jobs, and follow through with our capital projects that were underway, and we were able to do all those things. The MAX groundings reduced our annual operating income $828 million. Our earnings were still a record on a per share basis - non-GAAP basis at $4.27, and that is truly remarkable. But they would have been 28% higher and 20% - 27% more than a year ago, but for the MAX. When you can do the math on the stock price effect, but we settle with Boeing for the 2019 MAX groundings and the settlement seems to have zero effect on the price per share by the way. But we also intend to settle up 2020 as well.

So we're three months later since our last earnings call and unfortunately we're still talking about the MAX unhappily. I'm confident about the MAX. More importantly, our pilots are confident about the MAX. Boeing needs to get the work done to get the certification flight done, give the FAA a chance to do their work and unground this airplane. Right now we're scheduled for June 6th return which implies an ungrounding several months before. Boeing surprised us all this week with our June, July predictions about the grounding, and obviously that would make our and other airlines' June dates unworkable. So the timing remains uncertain. And we're working through all of that right now.

Our goals for 2020, given all of this are very straightforward. We want to return the MAX to service. We want to continue to run a great operation, in fact even better. We want to continue to serve our customers very well with exceptional hospitality and in fact even better. We want to protect our finances and our jobs and continue to keep costs low and slow the rate of inflation and do that even better. We want to settle with Boeing for 2020 compensation. We want to continue on with the capital projects that are underway. And then finally, we want to keep our network intact and continue making what modest tactical adjustments we're able to do.

Having said all those things and all assumes that demand in the economy remains strong and that oil prices remain stable and low. If we can continue to execute against all these goals, that means that we only have one problem, and that's fleet growth. So with regard to the fleet, we're assuming that the MAX grounding is short-lived, meaning there are months to go and not years to go. And with that in mind, we are aggressively pursuing a couple of tactical ideas. Number 1 is mainly our 700 retirement schedule where we have a lot of flexibility. So we're actively deferring retirements where it makes sense.

Secondly, we're always monitoring the used 737 aircraft market, we'll continue to do that. Our issue is simple. It is our seat growth is not keeping up with demand, much less allowing us to expand and we're losing share. But all that is temporary and we plan to aggressively recapture it once the MAX is ungrounded in our - in a superb position given our return on invested capital. There is no change in our efforts to evaluate the risk reward of a single aircraft type or supplier. We'll do that. It's just a lower 2020 priority. So there is no update there.

I'll also pre-empt the M&A question by repeating what I've said earlier. I do not agree that the MAX crisis compels us to acquire another carrier. We would not overpay. We would not commit us to a course and consistent with our strategy. And of course as is or a policy, we do not comment on rumors or speculation about any M&A activity. And then finally, I want to thank our Board for making an amendment for 2019 profit sharing. And even though the Boeing compensation is for 2019, it is not included in 2019 profits and that's not fair to our people for their profit sharing. So as a result of that, $124 million was added and of course that reduced our fourth quarter profits, but that makes the total annual profit sharing contribution, a record $667 million and our folks earned it and just wanted to congratulate them. So taking that notable item into account, we'd be consistent - consensus.

So with that quick overview. I'd like to turn it over to Mr. Van de Ven to take us through our operations.

Michael G. Van de Ven - Chief Operating Officer

Well, thanks, Gary. And as Gary was mentioning, given all of our headwinds that we are facing, it was extremely important that we want a reliable customer-friendly operation in the fourth quarter and our people certainly delivered. They produced the best overall operation we've had in over a decade. Our system-wide on-time performance for the fourth quarter was 82.4% and we accomplished that with the least amount of block and turn time in the industry. And that's a big factor in our operational efficiency that lowers our cost through superior aircraft utilization. It's a low cost, coupled with the great service that allows us to win.

On the service front, this was the first quarter where we had bag scanning implemented throughout our domestic network. We emplaned 30.9 million bags in the quarter, and 99.6% of those bags were carried on flights as checked. That is a record fourth quarter performance for Southwest Airlines. And our customers notice through November, Southwest again led the industry with the lowest customer complaint ratio as reported by the DOT. And based on our preliminary December results we expect to close out the year in a similar fashion.

And frankly, our people have been delivering this kind of exceptional service the entire year. And all the while dealing with the significant activities associated with the MAX grounding. So in that environment, we grew our Hawaii service to over 1 million customers in just 9.5 months. We implemented plane-side scanning for bags across the domestic network, and we continue to implement technology enhancements across all of our operating and functions. So for all of 2019 excluding Hawaiian Airlines Southwest finished in the top three in the industry, in on-time performance and bag handling and with the lowest customer complaint ratio, all as measured by the DOT, and that's the best combined yearly industry performance since 1999. And our people believed that they can improve from there. Through yesterday, our January on-time performance was 87.7% that is just a superb start to the year. It's one of our best. In fact, we've only achieved an 85% January on-time performance or better 5 times since 1988 and it's the on-time performance that sets the foundation for bag handling for customer complaints and for cost control.

There is no better team in this industry than our Southwest people and they support our customers, our Company each other and they are just relentless in execution. And they are the heart and the soul and the spirit of Southwest. Now, turning to the MAX for a moment, our guiding principle of relaunching this aircraft continues to be an orderly and controlled manner, one which we can execute with a high degree of confidence and uncertainty. And that's been a critical focal point for our team and we plan and we've re-planned our return to service activities as new information becomes available. So since the beginning of the year we have learned of two significant additional considerations.

First, the Boeing recommendation for both simulator and CBT training for our pilot prior to their operation of the airplane. And then secondly Boeing's most recent estimate of a mid-2020 return to service date. As you know, we have presently removed all MAX flying from our schedules through June 6th. And with this new information, it seems pretty clear that we're going to need to make further schedule adjustments into the summer. So we're re-planning yet again using the best set of facts and insights into all of the necessary activities and we'll make the appropriate adjustments well in advance, so that our customers' travel plans aren't significantly disrupted.

We have 34 MAX aircraft on our operating certificate. They are in Southwest Airlines' control and they're stored in Victorville, California. Those aircraft must go through maintenance and make ready work before they're ready for service. We also have 27 MAX aircraft that Boeing has built and are being stored by Boeing until the aircraft are certified to fly. Those 27 must still go through the delivery and acceptance process, in addition to any make-ready work to be added to the Southwest Airlines operating certificate. Those combined 61 aircraft are our most reliable source of lift once the aircraft is clear to fly.

And as I've stated in earlier calls, we believe that we can manage around 5 to 10 aircraft a week from this collective pool to be reintroduced to the operation. So it will take at least a couple of months for those aircraft to return to service. And our crewing is in place today to operate them. Boeing still contractually owes us 51 more aircraft this year. That's the 2019 carryover, plus the 2020 deliveries. And with their production line shutdown, the delivery quantities and the dates are in flux. We're going to continue discussions with them to work through what's reasonable for both of us as their plans become better defined.

So turning to training. Our initial training plans include the 30-day period for all of our pilots to complete the expected CBT training before we begin flying the aircraft and revenue service. Boeing is now recommending the additional simulator training, and the training requirements will be finalized at a later date, after the JOEB completes their testing. These requirements will dictate the time it takes for us to complete our pilot training. We currently have three MAX sims on property, and we have worked with our simulator manufacturer CAE to provide us with three additional MAX simulators to be trading ready before the summer. That will give us at least six MAX simulators available for training by the time the aircraft is released to fly, and that will significantly reduce our training times from where we started.

Beyond the six, we have three more simulator deliveries planned for the second half of 2020, and we're working on expected in-service dates for them. That will close 2020 for us with 9 MAX simulators. I cannot thank CAE enough for their partnership and support. We have had a strong relationship with them for many, many years, and they have helped create one of the leading flight ops training centers in the world. Assuming for a second to the simulator training may be two hours. This as a baseline, it will take us at least of a couple of additional months from where we were to get all of our pilots through that training. So there is still a lot of moving parts to nail down the return to service plan. The FAA is in control of the regulatory ungrounding process, and our plans begin once they clear the aircraft to fly. From that date, we are assuming it will take several weeks to get our manuals updated in our CMO to approve our changes and then once that is accomplished, we can begin training our pilots and bringing the aircraft into their operational state. And as I mentioned, it will take at least a couple of additional months before the aircraft are ready for revenue service when our pilots are trained.

In the meantime, we still plan on performing extensive validation flights to work out any effects of the aircraft presenting so long to also reintroducing to our people and to make sure we are completely comfortable with the aircraft performance before any customer set foot on the aircraft.

Wrapping up, our operation is running very, very well. We have a detailed plan to relaunch the MAX, and we'll be adjusting and as we get better information. Our people are taking great care of our customers and each other, and they're delivering a safe, reliable product. They are the best team that I have ever been around, and it is a pleasure to support them.

And with that, over to you, Tom.

Tom Nealon - President

Okay. Thank you, Mike. Hey, I just really have to like to echo Mike and Gary, and also share my congratulations and my thanks to all of our employees. They are absolute warriors, and they are Southwest heroes. 2019 was a very challenging year with the MAX. But we also had a great year. We really to have a great year and our people across every workgroup just kept rising to the challenge time-and-time-and-time again.

When the MAX is grounded as Gary said in March of last year, we were very clear about our priorities. First, we are absolutely committed to running a great operation. We're absolutely focused on taking great care of our customers and third, we are very focused on delivering very strong financial results, and we did all three. And we did it very, very well. As Mike said, the operation was rock solid, arguably the best operation in a decade. Also, as Mike said, our DOT customer SAT scores at the very top of the industry, or when you didn't say is, keep in mind, that's the year we had to proactively we accommodate literally, literally millions of customers.

And our brand scores also remain the highest in the industry and among the highest in the world for any company, not just airlines. So the customer service and the hospitality that we're still famous for is stronger than ever and our people just continue to take great care of our customers and one another.

Our fourth quarter RASM results were right in line with our original October guidance of flat to up 2%. Our fourth quarter revenue grew 40 basis points to a record of $5.7 billion, and that was despite a nearly 1% declining capacity, and we also grew our RASM 1.3%, which is also a record performance. Our base business was very strong and was a driver of our Q4 RASM performance, and this was really the result of strength in both demand and yield. We also had very strong performance in our other revenues, more specifically our rep rewards program performed very well, which we'll talk about more just a minute. We also had very strong performance from our early bird and upgraded boarding products, both of which had double-digit growth for the quarter.

Now, they said on our third quarter call, we made the decision in the fall of 2019 to republish our November and December schedules really with two objectives in mind. First, I want to minimize any customer disruption and inconvenience during the holiday travel season. And second, we want to ensure - ran a great operation with lower capacity. And we achieved both objectives. But we also knew that we weren't optimizing RASM for the peak versus off-peak seasonality of the fourth quarter. And as expected, the 2 points to 3 points of temporary year-over-year RASM benefit that we saw on the third quarter from the removal of the MAX. It didn't occur in the fourth quarter because of the sub-optimized Q4 schedules. Now, none of that was a surprise to us. The net effect of this is that there was no material year-over-year MAX impact to Q4 RASM, which again is what we expected and share with you in the last call. And I got to say once again our network planning team just did a phenomenal job of developing workable solutions to protect the strength of our network and to minimize customer disruption and the same call out to our revenue management team, did equally incredible job of managing the revenue, yields droving the quarter. We also had very strong revenue growth in our other revenues.

Our Rapid Rewards program continues to perform extremely well. For the full year, our other revenue grew nearly 1% [Phonetic] and the fourth quarter performance was a strong 9% growth. And we are continuing to see record passenger mix continued - I'm sorry, we're seeing the reward pass-through mix continue to grow, which really speaks to the strength and the value of the program to our customers.

Now, we're also continuing to see very strong growth in spending on our co-brand credit cards and the sheer size and growth of our credit card portfolio is very healthy, with nearly double-digit growth and very low attrition. So we continue to be very pleased with the economics and the structure of our program, as well as with our partnership with Chase.

So to sum up Q4, the bottom line is very simple, very steady, strong demand for both leisure and business, continued strength in pricing, strengthening our other revenues and continued industry-leading strength in our customer and brand scores. The story line for Q1 is very similar to what we experienced in Q4. The underlying trends around demand and pricing that we experienced in Q4 have continued into Q1. Everything that we're seeing for the quarter shows very solid shopping and bookings. So demand remained solid for both leisure and business travel, and pricing also remains steady and strong. So we have a very good read on first quarter revenue and RASM trends. Obviously, we continue to be impacted by the MAX, we pull the MAX out of our April schedule, which runs through June 6.

And as you know, marches the peak month in the first quarter and our MAX aircraft deficit grows from 34 aircraft in March of 2019 to roughly 60 aircraft short by March of 2020. Now that said in Q1, we don't have the flight schedule variations and the capacity demand mismatch complications that we had in the fourth quarter. So because of that, we expect to 2-point year-over-year RASM benefit in Q1 from the MAX cancellations. We also have roughly 1.5 points year-over-year RASM tailwinds in the first quarter from prior year negative impacts, one point due to the government shutdown and 0.5 points, due to the unscheduled maintenance cancellations in Q1 of last year.

So based on the strength of our base business as well as the Q1 MAX RASM impact and the year-over-year tailwinds, we expect a strong Q1 RASM performance in the range of up 3.5% to 5.5%. I've said this before by thinking us worth repeating, as we continue adjusting the quite schedules of the MAX cancellations. Our focus is to maintain depth and frequency of service to key markets, and we're also very focused on maintaining a high degree of point-to-point direct flying as well as maintaining high-quality connecting itineraries. Now when you look at our schedule, you'll see that we've trimmed some capacity from longer-haul markets. We've added more capacity into our short and medium offline, which is a real core strength of our network.

Just to be clear in no way, we're walking away from long-haul flying. But with the MAX out of service, we have opportunities to replace profitable, but below system average RASM long-haul, non-stop itineraries with high-quality connecting itineraries. We will do that. And with the strength of our point-to-point network, we have the flexibility to do that. Now once the MAX returns to service, we'll certainly restore the vast majority of flights have been taken out of our schedules and will do so in a way that lines up with our operations and commercial objectives.

We have the world's largest and strongest point-to-point network, and we intend to leverage our cost structure and our scale and we certainly intend to resume our growth. And we tell you we have a long runway of growth opportunities still in front of us. Now despite the MAX cancellations, we have continued to add additional place in the some of our key markets. We have near-term growth focus. We will continue to be in Baltimore, Denver, Houston, Hawaii. Hawaii continues to perform very well for both long haul and inter-island markets, and this is totally consistent with our plans and our expectations. Looking beyond Q1, obviously our 2020 growth will be determined by the MAX return to service and until that occurs, this continued to adjust our plans accordingly. And our objectives are no different than what they were in 2019. We run a great operation. We'll take great care of our customers and will deliver strong financials.

And as Mike alluded to, if we need to make further adjustments to our June schedule, which runs from June 7 through early August, we'll do so and that would likely include further trends toward non-stop long-haul flights and potentially a modest thinning of high frequency markets, which is essentially the same playbook that we've been running for the past several schedules. We also have a full pipeline of revenue and cost initiatives, most of which we won't discuss yet for competitive reasons, but I can tell you the run track implement our new GDS capabilities for corporate travel by midyear with Travelport and Amadeus, which we expect to drive incremental EBITDA between $10 million and $20 million in the second half of 2020. And there is clearly a very large opportunity to grow that substantially over the next several years.

So that's where we are. Q1 is off to a strong start. Trends remain strong. And we're guiding our RASM be up 3.5% to 5.5%. And once the MAX returns to service, we are ready to bring it back into service with all the operational and commercial discipline that you are expecting Southwest Airlines.

So with that, I'm going to turn it over to Tammy.

Tammy Romo - Executive Vice President and Chief Financial Officer

Thank you, Tom, and hello everyone. I'd also like to thank all of our employees for their tremendous effort, managing through a very challenging year. The MAX groundings have had a significant impact on our Company. But our employees continue to rise to the occasion, and the strong results we reported this morning simply would not have been possible without their hard work and incredible focus and teamwork. With the MAX returned to service timeline shifting frequently, it has been difficult to anchor our full-year 2020 forecast to support meaningful guidance for the full year, so I'll focus primarily on first quarter guidance and my comments today regarding our cost performance, fleet capacity and capex plans, and our strong financial position.

During fourth quarter, as Gary covered, we reached a confidential agreement with Boeing for compensation related to 2019 financial damages due to the MAX groundings, the compensation from Boeing will be accounted for as a reduction of the purchase price of our 31-owned MAX aircraft and future MAX from orders, which reduces property and equipment on our balance sheet and will result in lower depreciation expense over the useful life of the aircraft.

In light of this agreement, our Board of Directors authorized a $124 million pre-tax profit sharing awards. This incremental award was accrued in fourth quarter and reduced fourth quarter earnings by $97 million or $0.18 per diluted share as we covered in the release. A record $264 million in fourth quarter profit sharing expense included a $124 million discretionary award and will be paid later this quarter as part of the record $667 million full-year 2019 profit sharing distribution to employees.

Now that I've covered profit sharing, I'll go ahead and cover fuel costs before I move into our cost performance, excluding fuel and profit sharing. Our fourth quarter fuel price of $2.09 per gallon decreased $0.16 or 7.1% year-over-year and that's primarily due to a roughly an 8% decrease in market prices. We have a great fuel hedging protection in place this year with a 60% hedge for first quarter and a 59% hedge for full-year 2020.

We've been adding some protection to future years and are currently about 54% hedged for 2021 and about 31% hedged for 2022. We also recently began adding modest protection to 2023 and expect to continue our systematic approach to building a meaningful multi-year hedging portfolio at a reasonable cost to provide some insurance on - around - was about a third of our cost structure. For first quarter 2020, based on market prices as of January 17, we expect our fuel price to be in the range of $2.05 to $2.15 per gallon, with a modest $0.01 hedging gain at current prices.

Our fuel efficiency continues to be significantly impacted by the MAX groundings. We came into 2019 expecting a solid year-over-year improvement in our fuel efficiency, largely driven by the operating performance of the 75 MAX aircraft we should have had in 2019. As a reminder, the MAX produces a 20% fuel burn improvement over our retired classic fleet and a 14% improvement over our NG fleet. However, our fourth quarter and full-year 2019 ASMs per gallon declined 0.8%, so we lost some ground last year.

We'll continue to be impacted until the return of the MAX and first quarter 2020 ASMs per gallon are also expected to decline year-over-year in the range of down 2% to 3%. We look forward to reversing this trend and getting back on track with our fuel efficiency improvement goal. Excluding fuel and profit sharing, the 5% year-over-year increase in our fourth quarter CASM-ex was right in line with our most recent guidance. And as we outlined in our release, the primary driver of the year-over-year increase was the temporary underutilization of overhead, combined with the lower-than-planned capacity from the MAX grounding. For full-year 2019, our CASM-ex increased 7.7% year-over-year. The MAX grounding impact drove approximately 5 points of this year-over-year inflation, which is what we expected.

Excluding the MAX impact, our cost control was very solid with core year-over-year 2019 unit cost performance slightly below our original CASM-ex guidance range of 3% to 3.5%. And that includes the incremental $10 million of maintenance expense to keep seven of the -700 aircraft that we were originally going to retire in 2019, as well as the incremental $42 million ratification true-up for our mechanics contract.

Looking at first quarter of 2020, we expect our CASM-ex to increase in the 6% to 8% range year-over-year. Our outlook includes an estimated 7 point unit cost penalty from the MAX groundings as our fleet deficit grows relative to our cost base. We will continue to have temporarily unabsorbed overhead that will be utilized upon the MAX return to service. Setting the MAX aside, our first quarter CASM-ex outlook would also include 1 point to 2 points of inflation, primarily due to increases in salary wages and benefits, maintenance expense and operating expenses related to technology and facility investments. As you know, we have year-over-year tailwinds related to the first quarter of 2019 impacts, associated with the ratified labor agreement with our mechanics and costs associated with unscheduled maintenance disruption and flight cancellations, which offsets inflationary pressures here in first quarter.

Turning to an overview of our fleet plan, this has obviously been a focus for us this year with the MAX grounding. So, I'll spend a little more time walking you through all the moving parts. Prior to the MAX groundings, our 2019 plans were for 44 MAX deliveries, that was 37 MAX 8s and seven MAX 7s, along with 18 -700 retirements. This would have resulted in a fleet of 776 at year-end 2019. Instead, we had three MAX 8 deliveries, plus six -700 retirements and therefore ended 2019 with a total fleet of 747 aircraft. We took delivery of three 737 MAX 8 aircraft in first quarter before the MAX groundings in mid-March. We have not taken any delivery since then and as a result, we decided to postpone seven of the 18 planned retirement for 2019 to help mitigate a portion of our fleet deficit. We'll operate these seven aircraft for around two more years and they are scheduled to retire by the end of 2021. Of the remaining 11 -700 retirements planned for 2019, we retired six of them, one in third quarter and five during fourth quarter. The remaining five retirements have shifted to first half of 2020.

We have not updated our contractual delivery schedule with Boeing. The 41 MAX aircraft that we didn't receive in 2019, are still in flux. But in our contractual order book schedule shown in our earnings release this morning, we reflected 40 of those deliveries as part of our 2020 firm orders and one as a 2021 firm order. However, I will provide some context as far as our current planning assumptions, because we do not expect to receive 78 aircraft deliveries at this point in 2020. The news from Boeing two days ago that the MAX will likely not return to service until mid-2020 has us now reevaluating our fleet and capacity plans further. Mike has already taken you through some of the details of our MAX return-to-service plans and he referenced the two sources of MAX aircraft that we are currently focused on as part of our 2020 fleet planning assumptions. Mike is working through the plan to safely return the 34 MAX 8s already in our fleet and we will also be working with Boeing and the FAA to deliver the 27 MAX 8 aircraft that are built and in storage.

At this juncture, our current planning scenario is for 27 MAX deliveries in 2020. That brings us to around 60 MAXs which we are currently staffed to operate. We also expect to retire 16 -700 aircraft this year, the five that shifted from 2019 and 11 more planned throughout the year. This is less than the 20 to 25 that we previously communicated and that's simply due to the slower assumed ramp up of MAX production and delivery catch up. We will invest approximately $12 million this year into those 11 aircraft that we're extending for a few years. Based on our planning assumption that I walked through, we would add a modest 11 net aircraft to our fleet in 2020 at 758 total aircraft.

Of course, we don't have certainty on the timing of the MAX return to service, the production timeline from Boeing or our aircraft delivery timeline. So, this is all subject to change and we'll keep you updated accordingly. Shifting to capacity, fourth quarter 2019 ASMs declined 0.9% year-over-year, which as expected, was about 8 points lower than our original plan. Our full-year 2019 capacity declined 1.6% year-over-year and was significantly lower than our original plan to grow nearly 5% in 2019. For first quarter 2020, we currently expect our ASM capacity to decline in the range of down 1.5% to 2.5% year-over-year. We currently have MAX flying removed through June 6, but with Boeing's latest guidance, we'll likely extend our MAX-related flight adjustments further. So, based on the flight schedule adjustments through June 6, we expect second quarter 2020 capacity to increase no more than 2%.

So, now turning to the balance sheet and cash flow, we ended the quarter with robust cash and short-term investments of approximately $4.1 billion. Our cash balance continues to be higher than what we usually carry, as we haven't been making aircraft delivery payments since mid-March 2019. Delayed delivery payments also lowered our capex to $1 billion in 2019 versus our original plan of $1.9 billion to $2 billion. The majority of the 2019 spend related to technology and facility investment. And, we also received a $400 million in supplier proceeds, which we consider an offset to our capital expenditures. For 2020, if you assume we get the 27 MAX 8s from Boeing that are already built for us, that would result in total capex of approximately $1.4 billion to $1.5 billion, which is net of a supplier proceeds owed to us at year-end 2019.

Our cash flow generation in 2019 was very strong, despite the $828 million operating income reduction due to the MAX groundings. During 2019, we generated $4 billion in operating cash flow and a record $3.4 billion in free cash flow, with $2 billion of share repurchases and $372 million in dividends. We have $1.35 billion remaining on our current share repurchase authorization, net of the $550 million accelerated share repurchase currently underway, that is expected to wrap up no later than mid-February. We have very healthy cash and liquidity, low leverage, manageable debt obligations this year and remain focused on a balanced approach to investing in our employees and the Company and returning cash and value to our shareholders.

In closing, I'd like to extend another huge thank you to all of our employees. Taking into consideration the significant impact the MAX grounding had on our operational and financial performance, our 2019 results were truly superb. We did not lose ground on our very strong financial position, maintaining our investment-grade balance sheet, ample liquidity, strong cash flows and healthy shareholder returns. And we also continue investing in our business and we're well positioned for the future.

Absent the impact of the MAX groundings and first quarter 2019 unique items, we achieved our unit revenue growth goal of greater than 3% for 2019. Likewise, we beat our unit cost guidance for 2019, which is just tremendous. Of course, the MAX did significantly impact 2019 and 2020 will also be significantly impacted by the ongoing MAX situation, but our focus on solid execution remains unchanged.

We look forward to getting past these near-term challenges and temporary headwinds, safely returning the MAX to commercial service and leveraging our low cost and robust route network to resume our growth. So, with that, Chad, we are ready to take analyst questions.

Question & Answers

Operator

Certainly. We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Andrew Didora with Bank of America. Please go ahead.

Andrew Didora - Bank of America - Analyst

Hi, good afternoon, everyone, and thank you for the questions. Tammy, seems like you were able to offset the 1 point to 2 points of inflationary pressures in 1Q, partially due to some of the easier comps, I think, partially due to maybe some of your - the cost initiatives that you have. But going forward, do you think you have a similar ability the rest of the year, which would allow you to keep - I guess, do you think you have a similar ability the rest of the year to continue to offset these cost pressures and keep it more contained to what the MAX impact is or do you think the inflation will continue to ramp over the course of the year? Thanks.

Tammy Romo - Executive Vice President and Chief Financial Officer

Thanks for your question, Andrew. So, yes, we certainly have abnormal capacity trends this year again, but as we drill down into our core costs and strip out the estimated impact of the MAX grounding and all the other noise, we do see core business unit cost inflation in that, call it, close to 2% range. That said, we don't know exactly when the MAX will return and our second half 2020 capacity plan is very much in flux. So, again, that's our best read at this point.

We've reported our analysis of the unit cost impact each quarter from the MAX groundings. So along those lines, we've done our best to get a sense of what our true CASM-ex run rate is from 2019 to 2020. So, normalizing for the MAX and the other unique items for both 2019 and 2020, we believe we could have reached our CASM-ex year-over-year growth in 2020 of less than 2%, which is in line with our goal, but admittedly we have a lot of moving parts to try to tease out.

So, I guess, in summary, I'd just say I'm very pleased with how we executed against our cost plan in 2019 and we are very focused on being even more efficient. So, I think it's reasonable to assume or think we should be able to improve our trajectory here in '20 relative 2019 excluding the MAX. But just again, including the MAX, obviously the year-over-year comparisons are very skewed and we're incurring costs that we didn't expect such as extending retirement and incurring the related maintenance investment and have some timing items such as deferring flight crew hiring from 2019 into 2020, etc. But overall, I'm just really proud of our folks there, really doing a great job with their budgets in controlling costs.

And I'll add by just saying, we're all definitely looking forward to be the safe return of the MAX, resuming our growth, utilizing our unabsorbed overhead and beginning to reverse the temporary unit cost penalties of that we're incurring. So thank you again for your question.

Andrew Didora - Bank of America - Analyst

Great. Thank you for that detail, Tammy. And then maybe my second question, just for Gary or for Mike. Okay. I know it's difficult to comment on full year capacity given by the moving pieces, but based on what Mike explained in his prepared remarks, what could growth look like once the MAX returns to service? Could it be that high single-digit growth rate that I think many were maybe expecting few months back. And then how does sim training change the timeline for a full kind of return to optimal utilization for your fleet? Thanks.

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

Tammy, you're probably in the best position to answer that. We - Andrew, as you know, we didn't put - we purposely did not put any guidance for the year being for the obvious reasons, but Tammy, would you like to answer that?

Tammy Romo - Executive Vice President and Chief Financial Officer

That's right. Yeah. It is tough to answer, for other reasons we've all laid out. In terms of the second quarter, we've given you our guidance there for ASM growth. If you strip out the - if you assume the MAX gets pushed beyond the second quarter. I just offer that probably gets you to roughly flat capacity year-over-year for the second quarter. And then really is just a function of the return to service plan.

And we told you, we've got a good line - line of sight on the 61 airplanes. Mike has walked you through the ramping of all of that, which is several month process. And from there, it's really, I think based on the production rates from Boeing, which we just don't know the answer to that question, yet. So it's just premature to try to guess what the capacity ramp up year-over-year could be here in the second half of the year.

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

And I think Mike pointed this out. But so, Mike, you might want to comment, but we - just to be clear, we're staffed, we're resourced. We got gates etc., for 61 more airplanes. And so, but what we have a line of sight on is, you got the 34 we own, 27 that Boeing has. The issue is, there are 16 retirements that are coming. So to get to fill up 61 airplanes worth of flying. We'd have to get 16 more beyond the 61 airplanes from Boeing and whether we will get those in 2020 Mike, I don't think we know. So I think that's possible. So the point that I wanted to make with that is, we want to get 31 airplanes into service as fast as we can and that is all understanding that it needs to be safe. It needs to meet all of our other objectives, etc. But we'll want to get to that 61. Just as fast as we can. We just don't know what that speed will be and some of it may be us. We may find that we want to gate. We want to gate the flow of airplanes back into that operation. More than what we know right now, but hopefully that gives you a little bit of insight.

But if you draw any 31% one is certainly not going to be 10%. There is no way. Nothing close to that. And 2021 as I get the same, same kinds of concern, so we're not so worry about the percent right now through as much as you are. But we're certainly not going to be growing rapidly here in 2020.

Andrew Didora - Bank of America - Analyst

Understood, thanks for the color.

Operator

The next question will come from Savi Syth with Raymond James. Please go ahead.

Savi Syth - Raymond James - Analyst

Hey, good afternoon. Just a follow up, Mike to clarify the color that you gave about the MAX. And I know there's a lot of uncertainty there on the return to service but the color is helpful, but make sure I understand. It sounds like including the manual updates and kind of the concurrent training and maintenance assuming it's only a two hours, there is a lot assumptions there, it's about four weeks from certification to or at least four weeks from certification to when you can get the aircraft - sorry four weeks more than the kind of two months that you had mentioned before, to get the aircraft up and running. Is that right. And then also just, would you be willing to kind of train a subset of pilots if it means that you can get to the MAX off the ground sooner.

Michael G. Van de Ven - Chief Operating Officer

Yeah, so just maybe to give you a little bit more color on that, when there were - what we were thinking about when there was just a requirement of CBT time. There is a period of time. There are really three things, getting the manuals approved, so once there is a return to service date, we need to get the manuals, we get it - you get all changes in our manuals and we need to have the - our CMO sign-off on all that. And that could take three weeks, let's say, three to four weeks to get that done. Once that's done, we can begin executing on the plan. And the plan is twofold, get the airplanes into their proper maintenance state, get the pilots trained.

When there was just CBT training, we could get pilots trained within 30 days. Now that there is a potential for simulator training, I think that could add at least a couple of months to that date. So that is the - that's the challenge with the CBT training. And that lays over really with the aircraft time at the same time. So that - hope that gives you a little bit of color from where we were to kind of where we are today. To be able to subset a group of pilots to bring the airplanes back earlier, we would need systems, we would mean procedures, and then we would need an adjustment to our - a pilot contract to allow how all that works. So there is a lot of work with that. We're exploring opportunities in that area, but there is just a lot of risk and uncertainty with all of that. So that's not an easy task, either.

Savi Syth - Raymond James - Analyst

That makes sense. Sorry…

Michael G. Van de Ven - Chief Operating Officer

But in the end, you mash all that together and really compared to what we were assuming before, compared to simulator training and again another shout out to CAE who has been terrific to work with. We'll have a significant amount of simulator capacity, if that's the route that we need to go. And it will add a couple of months. Yeah, did work for you [Phonetic]. So based and you said it, there are lot of assumptions there, but just trying to give you some guidance, so we won't be up and running immediately after an ungrounding, it will be several months later.

And the other - and then lastly, I just want to make clear also is, we will have the year before that - that, we're talking about revenue service there, which I know that's what you're interested in. Before that, we're going to try it. We will do validation flights out there, so that we can make sure that everything that is occurred on those airplanes - they're flying, they're maintained, we've got all the cobwebs knocked out of them for such a long-term storage. So we will also be - so the airplanes will be - up in the air flying before them.

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

So we can do that, in other words, without having trained our entire core pilots.

Savi Syth - Raymond James - Analyst

Thanks. Now that's helpful. And I think I misspoke, I meant four months. So it sounds like roughly speaking from some recertifications. And then maybe, Tammy, just a clarification on the kind of Boeing, the kind of lower cost that you're going to get from these compensation. Is some of that already flowing through for the aircraft that you own and are grounded today. So it's - some of it's already reflected and that will continue to build as you go out. And then also just wondering if you could provide the - a breakout of the fair value for the fuel hedges between - for 2021.

Tammy Romo - Executive Vice President and Chief Financial Officer

Sure, Savi. The - just to answer your question first on the compensation. So it's really pretty straight forward. The compensation will be allocated to the 34 aircraft that we have grounded. So we'll get some benefit of that here more immediately, and is more for next year, actually for this year now in the millions, call it, maybe $5 million for this year. And then -

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

Lower depreciation.

Tammy Romo - Executive Vice President and Chief Financial Officer

Lower depreciation expense, and then as we bring on the aircraft deliveries in the future that will simply be spread over the useful life of the aircraft. So the benefit will be realized or obviously over many years here. So, but that's kind of short and simple explanation of how that's going to rollout.

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

And so, and we don't have, for the 2020 settlement that we keep talking about, there is nothing factored into any of our…

Tammy Romo - Executive Vice President and Chief Financial Officer

That's right.

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

Forward comments for that. So the only thing that's in 2020 is related to the deal that was done for 2019.

Tammy Romo - Executive Vice President and Chief Financial Officer

That's correct. So thanks, Gary. And then on your second question, I guess we laid out in terms of the fair value that, it was $2 million for the first quarter and $31 million for the remainder. So, just the way that rolled out is in 2021. There is - we'll call it roughly another $40 million, 2022. It's in the same neighborhood of $40 million. And then in '23, it's less than $10 million.

Savi Syth - Raymond James - Analyst

All right. Very helpful. Thanks, guys.

Operator

The next question will come from Hunter Keay with Wolfe Research. Please go ahead.

Hunter Keay - Wolfe Research - Analyst

Hey, everybody. Thank you for the time. Hey, Gary, you are a never say never guy, so you might not like this question. But I would challenge you, what were some things, one or two things that you think you're fairly sure, Southwest will never do as long as you're CEO? And I asked this question, because I'm pretty sure something like we're never going to have basic economy, a month or two ago. So just, I'd like to know what is in that never category as long as you're CEO?

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

Hunter, I'd love all your questions always. And I don't know - I don't know if I can give you a comprehensive list of the nevers. And you are right, I am a never say never, but I don't see us ever charging for bag fees. And obviously one of these days, somebody else could view that differently. We're not going to do basic economy. We've tried - there's been a couple of media stories that were way off. So we've tried to clean some of that up, but we won't be doing basic economy. And I don't know, Tammy, I'm sure, there's some of the things that we won't do. I don't - I don't see us certainly in the near future doing, well, I don't know, I was going to say something I probably shouldn't say. So I won't say it.

Hunter Keay - Wolfe Research - Analyst

My follow-up question then, Gary is, yeah, sorry, my follow-up is that, please tell me what you're going to say just now.

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

Let me say, you're always asking questions. And that one, I won't answer.

Hunter Keay - Wolfe Research - Analyst

All right. All right, thanks. And then just real quick, I mean obviously you said second fleet type decision is not for now. That's later discussion, I get it. But can you just run me about just the CBA restrictions around adding a second fleet type? Is that a gating item, just for a decision to be made across multiple CBAs? Or is that something that can happen concurrently, just sort of pragmatically order of operations with regard to your CBAs? Thanks a lot.

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

Well, yeah, we would need to collaborate with our employees and especially our pilots. I think all that is contemplated with what Mike and I have been thinking about, whether it's a gating factor, it needs to be collaborative. So yeah, I don't know if gating is exactly the right word, but we would need to be thinking about it comprehensively. I think our pilots would be interested in supporting the Company in terms of growth in the most economical manner, because selfishly it means more jobs for them. It means more upgrades for captain.

So as long as we can conclude that and then convince them that, that is the right case, I think we can come to an agreement on that. But Tammy and I were talking earlier this morning about this. And for us to have to arrive at a different course of action here with the fleet, we've got to have the right timing to meet our needs in terms of additional airplanes. We've got to have the right product. And it's got to come at the right price. So those are all the three, maybe two of the three at least, are pretty big hurdles to overcome. I think if we were to reverse this and we hadn't shared with you all that we're going to explore the risk reward and having a single fleet type/single supplier, I think you'd be asking us. This sort of illustrates the risk of having all of your eggs in one basket. So I think we have a duty to look at that. We are going to look at it very seriously. And I think we have to be realistic that this can be a hard hurdle to overcome.

So I don't know at least, Hunter, in the way I'm thinking about it. I don't see the threshold question being the CBA. I think the threshold question is, does this makes sense for us or not and if it does, we'll then - you sort of knock down the other barriers that are out there, but our pilots are great and they're fantastic, and I certainly don't see that as a hurdles or obstacle.

Hunter Keay - Wolfe Research - Analyst

Okay. Thank you, Gary.

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

Yes sir.

Operator

The next question will come from Jamie Baker with JPMorgan. Please go ahead.

Jamie Baker - JPMorgan - Analyst

Are you're saying there's a chance for hot meals.

Michael G. Van de Ven - Chief Operating Officer

How did you know?

Jamie Baker - JPMorgan - Analyst

That's what I heard. Sorry, I was - the confidentiality around the Boeing settlement, so let's focus on 2020 which has not been settled. How do you calculate or try to calculate the impact? You merely look at a pre-shutdown business plan and compare it to actual results? Do you focus on some trailing pre-tax margin calculus? Do you make adjustments for the fact that your growth-abled competitors. Now, we'll have over a year's jump in certain markets, and it's going to cost something to win that share back. I'm not asking about what you and Boeing might settle on. I'm just wondering how you think about what your entitlement is?

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

Well, I think it's a very fair question. I don't know that - you know and we know that this is in the negotiation. This is not contractual. This is in negotiation, so I don't see being selfish about this. I don't see a lot of merit or wisdom and as laying out our entire strategy about this, I also don't want to give our competitors a roadmap. What I don't - if you just simply talk about the harm that the Company has incurred, I wouldn't quarrel with anything that you put out there. And as I mentioned in my remarks, there is a lot of years, Jamie, where we've had a dozen issues that we needed to deal with. And right now, we've been blessed with having one. The operation is fantastic. And I won't tick through everything that, that the four of us have been trying to drive home today, but the Company is in a really, really good shape. We have one problem. And it's a serious one, and the sitting here or dog paddling for a year, while our competitors grow right past us is costing us this year 6 million or 7 million customers.

Yeah, I'm very worried about that. And that's not anything that we can mitigate. We can deal with the operation. We can deal with always other things. We got the finances whole, so to speak. But that we can't do anything about until we get airplanes, until we can grow again. And it's - so am I - do I think we've been harmed? Absolutely. And everybody knows, we're going to see compensation from Boeing and I'll just - if you don't mind, I'll just put a period on it.

Jamie Baker - JPMorgan - Analyst

Okay. Sure, sure. That helps. I appreciate it. When I think about MAX impacted airlines around the globe, you're clearly one of the most profitable if not the most profitable. So put differently, other customers are desperate to get MAX as there is no doubt that you want them, but as you point out, it's not like your margins have collapsed. So as Boeing jiggers around the Skyline, would Southwest have any interest in letting some of your delivery slots go to the needy for lack of a better term, or is it mandatory that you get what you are entitled to as fast as humanly possible?

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

Yeah. It's somewhat philosophical I assume. But I think this is a really good company, and I think part of the reason that we're able to absorb the blow is because of five decades worth of preparation. And we went through 9/11 and I can vividly remember our competitors whining about their state and that was their fault they weren't prepared work for the unexpected without trying to be too harsh here, but we shouldn't be penalized because we have run a great company for five decades taking care of all of our constituents, especially our shareholders, we shouldn't be penalized for that. I wouldn't be - I wouldn't be serving all of our stakeholders today if we simply said, oh, well, because we're not on the verge of collapse, we should forfeit these positions that makes no sense to me. So, no, I wouldn't do that at all. I would say quite the contrary, I think that Boeing has benefited in the 737 program, has benefited mightily because of Southwest Airlines, and our success over five decades.

Jamie Baker - JPMorgan - Analyst

Very clear. Thank you, Gary.

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

Yes, sir.

Operator

And the next question will come from Duane Pfennigwerth with Evercore ISI. Please go ahead.

Duane Pfennigwerth - Evercore ISI - Analyst

Thank you. Understand estimates are exactly that and I think we understand how you get your arms around the cost impact from the MAX being out. But just for argument sake, how you estimate the RASM benefit. As I think about some of the hard choices, you've had to make, cutting your worst flying, focusing on your best and combined with basically no capacity growth. It feels like the RASM benefit could be very, very substantial. So for example, in the fourth quarter in the press release, I think you called out 2 point to 3 point tailwind from the MAX being grounded, what does that compare to like? What would capacity growth have been and how do you get to that number?

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

Well, it's - you're right. Our estimates, and I think by definition is sort of a with and without and you don't know what it - we admit, we don't know exactly what life would have been like with 75 more airplanes as of the end of the year, but I think our folks through - Tom through the year has been consistent and pointing out that, yeah, we are not growing capacity and arguably, there is some benefit from that at least temporarily, but the way we've had to reproduce schedules has been grossly inefficient and put our revenue management and a really tough position, because we're not building up bookings in a normal way, and we're re-accommodating people at low prices. The fourth quarter, of course, was unique with the gosh, over 3% was added back for lack of precision in the scheduling. So it was wholly inefficient in the fourth quarter.

So anyway, I think that we have laid all of that out and it's - at most in the quarters two, quarters three and quarters one of 2020, it might be 2 points. In quarter four, I think it's zero because it was only offset by having a very inefficient schedule. So I think that answers your question.

Tammy, I don't know if you heard or Tom, any differently than I do?

Tom Nealon - President

No, I don't disagree that you said, but I do think there - I think if you just start with the fundamentals and the trends that we saw in Q4 just flowing into Q1, and you take - I'm not giving guidance on Q2, by the way. The E&P begin to look at the early piece of Q2. The trends just continue to look pretty solid, so that fundamentals are good. I think back to the MAX out of our 2019 performance, we still have performed really, really well, not mistaken, there is about point of MAX RASM benefit, so you backed that out, we're still in the 3% range. I think if you look at 2020, I think it will be a lot more modest than that, but we still have strong positive growth. I think what's interesting is what we can't lose sight of - I'll tell you what the problem I'd love to have is a huge capacity plan coming. We have a RASM problem to deal with. All right. So we need to grow. All right. But misunderstand, we are still flying a very, very strong schedule. In fact, just the 2020 base schedule - April base schedule has 4,000 daily flights and 4,016 to be precise, and that's in comparison to last year's 4,078.

So we still have - and these are little factoids that I want you guys know because we still have a very, very strong schedule and what is also interesting is, and Mike and I and the operation and commercial teams are very, very tightly linked on this whole RTS thing, meaning literally daily are going through this stuff. And what I do know is as Mike and the operations team sort through the reality and the information becomes clearer and clearer, it's really up to them to tell us when the capacity is available. And the reason I say that is, it's not unusual to all for us in normal circumstances as we move between schedules from high utilization or low utilization or vice versa. It's not unusual at all for us to flex up 40, 50 aircraft at a time, right.

So our work in terms of building the MAX back in from a commercial standpoint, I'm not saying it's easy, but we know where we put it back in. So it's going to be governed by how fast the aircraft coming back into service and they will just balance, so three things we keep talking about, operational stability, financial results and customer, but I think the base trends are solid. We know how to put the capacity back in. In fact, you can see where we put it back. So it's going to tick it out. All right. So I think - we're ready to go once, once Mike says, okay, here's your grant.

Duane Pfennigwerth - Evercore ISI - Analyst

Thanks for that and then thinking ahead optimistically to that maybe someday where you're spooling back up for growth, what spending, if any, and I'm talking opex here, not capex, have you deferred as you wait around the basket for Boeing to get its act together. Thanks for taking the questions.

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

On the - and I heard you clearly there, just another opportunity for me to reinforce. We have not deferred - and you all correct me, we haven't deferred any of our capital projects. So we've got a lot of investment underway in airports around the country. We just opened up a maintenance hangar in Houston. We've got other hangers that we're working on a lot of technology efforts. So all of that continues. On the opex side, we're not burning the fuel. We sort of stopped the hiring at the fleet plan that we've shared with you also where we were suspending a lot of our hiring other than attrition. And again, none of that is sub-optimized and even with that, again, the results are quite strong, but beyond that, Mike, I can't think of advertising flops around here. We're going to obviously support the reintroduction of the MAX at the appropriate time. So you have things like that. But otherwise, I can't - unless you have something specific that you are probing on, I can't think of anything that you all should expect that will be a large expenditure, except for the marketing and the messaging and those kinds of things [Speech Overlap].

Tammy Romo - Executive Vice President and Chief Financial Officer

And then, there is timing maybe from quarter-to-quarter in terms of maintenance, but all of that I think we've got a good handle on it and can manage so. So, no, we feel like the costs are in good shape and other than that, it fits unique to the return to service the MAX storage cost, that sort of thing, but…

Duane Pfennigwerth - Evercore ISI - Analyst

Okay, thank you very much.

Operator

The next question comes from Helane Becker with Cowen. Please go ahead.

Helane Becker - Cowen & Co. - Analyst

And Hi, everybody and thank you very much for squeezing me in. I just have two questions. One is Gary, have you talked to your pilots or anybody in the team, talked to the pilots about the potential of what leasing aircraft on an absolutely short-term basis to get through this to pick up some of those lost passengers? And my second question is, as you think about shifting from long-haul to short-haul flying, do you worry about what people will say about climate change and whether or not you're being a good steward of the environment? So thanks very much for the time.

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

Well, Mike will take them both. You can chime in here. On the first one, Helane, to be honest with you - with our executive team, we have not spent any time exploring the opportunity for wet-leasing. So since we haven't talked about it - no, we haven't talked with anybody else in the Company. We're focused on the retirements plan and then, we're always tuned into the use market. I think that makes the most sense, because you just think about the effort involved trying to work with a third-party and all the complexities that that would bring. It's not going to be in our configuration. We've got a unique business model, etc, etc. It's - everything is sort of predicated on agreeing with our assumption that this is a short-lived issue and not something that we deal with for year. So as long as it's months, I think we're making the right judgment. So that's a easy answer to your question. You may not agree with it, but it's - but I think we give you an accurate answer.

And then, on the short versus long, we're a short-haul specialist and we've got more short-haul customers than anybody else in the country and arguably more short-haul flights. So the only point I'm making with that is what we're tweaking here in '19 because of this is not fundamentally changing our long-short mix at all. We are still very, very heavily weighted with short-haul flights.

With respect to our concern about that, yeah, I think we're concerned about sustainability. And I was asked on CNBC about that this morning and we are very focused on conservation, on fuel economy, the MAX is front and center in terms of addressing that. It's important to get that airplane back in service because it consumes 15% less gas. We need the air traffic control system modernized and I think the most tangible thing our industry needs to accomplish over the next 10 years is commercially viable alternative fuels, adequate supplies and at reasonable prices, and that would make a very significant impact.

Carbon offsets are all great, but in my own opinion, there's only so much offsetting that the world can't do and eventually we need to get it consuming less emissions, but if you look at air transportation relative to other alternatives, it compares very, very well. And so, certainly, I don't see any challenge to our short-haul business anytime soon, if ever, especially if we continue to improve our carbon footprint as we have been doing.

Helane Becker - Cowen & Co. - Analyst

Thank you very much for those answers. I appreciate your time.

Operator

It appears we have time for one more question. We'll take our last question from David Vernon with Bernstein. Please go ahead.

David Vernon - Sanford C. Bernstein - Analyst

Hey guys, thanks for taking the time. Gary, I think if we go back before, every call was, sort of, dominated by the MAX. You guys had laid out a vision for implementing some revenue initiatives that you are very excited about. Have you guys had to delay the timeline or introduction of any of those initiatives as you've been kind of focusing on managing through the fleet deficit or is - and we should expect those to kind of come on as the MAX returns or has there been no change to the timeline on the commercial stuff?

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

No, sir. There has been no change on that. In fact, I don't - I can't recall a change that we've made because of the MAX with any of - again I'm lumping that in as a capital project. Given the fact that there is a financial penalty associated with the MAX and sort of encourages to maybe accelerate, as you know, some of these revenue and other cost initiatives. And Tammy made this point, but one of our cost initiatives is fleet modernization and what that means, at least for 2019, 2020 is the acceleration of MAXs into our fleet and the acceleration of retiring some of the older technology and obviously, we're not in a position to take advantage of that cost optimization opportunity right now. There was a question earlier about cost inflation.

So we'll have a little penalty because of that here in the next year or so and then hopefully, we can get back on track on getting more MAXs in as a percentage of the mix, but except for that, I can't think of anything that has been deferred. Certainly, as a headline, we've asked our officers to execute their plans and execute them well and was get them deployed and will start driving the value, especially on the revenue side.

David Vernon - Sanford C. Bernstein - Analyst

Okay. Thanks for that. And then maybe just as a quick follow-up, Tammy, the supplier proceeds number of $400 million, is that associated with the MAX payments or what exactly is that when you think about the cash flow numbers in the earnings release?

Tammy Romo - Executive Vice President and Chief Financial Officer

I would really say there is supplier proceeds - as we've already mentioned, the agreement with Boeing is confidential.

David Vernon - Sanford C. Bernstein - Analyst

Okay. So we will draw…

Tammy Romo - Executive Vice President and Chief Financial Officer

And just to be clear, we do consider that effectively an offset of capex. So - and I think we've made that clear as well.

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

It is a reporting requirement that could be broken out that way, and I think we would admit that with Boeing agreement, it makes the material enough that now it is a line item without describing what suppliers are in that line item.

David Vernon - Sanford C. Bernstein - Analyst

And as you think about the cash that might be created from this supplier proceeds category, it would just be cash that you'd be keeping on hand to fund future requirements or would this be something that you might accelerate into the buyback?

Tammy Romo - Executive Vice President and Chief Financial Officer

We will be looking at all of that. I'll just point back to the statement that I made earlier, which is we will continue to take a balanced approach to our capital deployment and I think if you look at what we've done in the past, we've used all of those. So again I'll just repeat. We're going to continue investing in the business at least at this point. We have no intentions to slow down our reinvestments back in the business, and I think our track record speaks to are our goal to also take care of our shareholders. That will just continue to take a balanced approach to all of that as always.

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

And I would just state the obvious, which is always better to have more care. Again, there's lots of options.

Tammy Romo - Executive Vice President and Chief Financial Officer

We love cash.

David Vernon - Sanford C. Bernstein - Analyst

Love cash. Thanks a lot guys.

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

Thank you.

Ryan Martinez - Managing Director of Investor Relations

Okay. That wraps the analyst portion of the call today. Thank you all for joining us. And as always, feel free to give us a call if you have any follow-up questions.

Operator

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. I'd like to welcome the members of the media to our call today. We'll go ahead and get started with the Q&A portion. So, Chad, if you could just give them instructions on how to queue up, we'll get started.

Operator

Sure. Thank you. [Operator Instructions] And our first question will come from Kyle Arnold with Dallas Morning News. Please go ahead.

Kyle Arnold - The Dallas Morning News - Analyst

Thanks. Can you talk a little bit about why you want to get that $124 million profit-sharing payment out to employees this year and whether as you go forward and negotiate with Boeing and move into 2020, where you're going to look and you kind of similarly for employees?

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

Well, Kyle, I think it's really, really easy - it's - we knew we were going to sell with Boeing. We also were quite sure that the settlement would not flow through earnings and in terms of the classic definition of profits for profit sharing. And that - so if you just put yourself in employee position here, so if you're here as an employee in 2019 and you may not be here for the next 30 to 40 years when this benefit is realized, then your harm. You will never see the benefit of that, and we actually got a settlement from Boeing. So it was - all of that was anticipated, we shared that early on that we were going to work to settle with Boeing and we have a precedent over decades of making amendments to the contribution to do what's right for our people, and that's either plus or minus for that matter.

So going back to 9/11 and then the government subsidies that were offered up, we paid profit sharing on that and it did not strictly meet the definition of profits for profit sharing. So long history of doing things like that and it was a great year, it would have easily been a record year. It was actually a record year even though we had these penalties. And I'm just delighted that we can do that. So - and so as our Board, they were delighted to do it for people.

Kyle Arnold - The Dallas Morning News - Analyst

Are you going to look for more compensation back for employees, as you continue negotiating with Boeing?

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

This is simply a question of how to treat the settlement for profit sharing purposes period, and we will certainly do in 2020, attempt to do in 2020 what we were able to accomplish with Boeing in 2019.

Kyle Arnold - The Dallas Morning News - Analyst

Thanks.

Operator

And the next question will be from Alison Sider with The Wall Street Journal. Please go ahead.

Alison Sider - The Wall Street Journal - Analyst

Hi, good afternoon. I was wondering, you mentioned that there have been a couple - just in the last couple weeks, a few things that are Boeing that have been surprising or unexpected big changes to sort of the assumptions that you'd had, and I was wondering if you could say whether, how you think things have changed under the new leadership, what's improved and what hasn't, what you're still looking for?

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

So I think it's way too early. Boeing has been unstable since March of last year and this is part of the instability, you've got a new CEO, you've got a new CEO in the commercial organization. So it's far too early to make an assessment there. Both of these as you and I have talked, we know - all of us know Stan Deal and thank a lot of him and some of us know Dave Calhoun and thanks a lot of them.

Alison Sider - The Wall Street Journal - Analyst

Great. If I could ask one follow-up, I just was curious as you sort of look ahead to return to service, curious if you've thought at all if there is any consideration of sort of discounting MAX flights, if that's something we're likely to see or if that's not on the table as a possibility.

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

I'll let Tom speak to that. But I - no, I don't think that we would approach it in the way you described it. But you want to talk about how you're thinking about reintroducing it to service?

Tom Nealon - President

Honestly, we've done a lot of research in this, right. So Alison, I think that, one of the things that is interesting is we are very, very, very focused on the MAX as you are. What's interesting is the general population is nowhere near zeroed in on this whole topic as we are in the industry. So, we are doing a lot of work. We understand the customer perceptions there. So our customers that we talk to customers, they are non-customers. They are - it's interesting, it's really kind of bell curve. I think, I shared this with you at one point. It's kind of a bell curve. And the vast majority of that bell curve is we intend to fly the same as we've always flown.

And then you have ends with the bell curve. And actually the two ends, one end skews higher, and that's, we intend to fly more on the 737 MAX. The proof - or the thought being, it's actually been the safest airplane out there to all the scrutiny. And then it's important to say, we're going to fly less. But I think we're going to see the customers come back pretty nicely, some may take a little longer than others, maybe a month or two months, but they're going to come back. And at this point, there is no notion of discounting MAX flights. That's not - that's not in our considerations at this point.

Alison Sider - The Wall Street Journal - Analyst

Thank you.

Operator

And the next question comes from Evan Hoopfer with the Dallas Business Journal. Please go ahead.

Evan Hoopfer - Dallas Business Journal - Analyst

Good afternoon, everybody. I just have a quick question for you regarding the potential renaming of the 737 MAX. Gary, I think you said last year that is something that you would not be interested in. I'm just wondering, consumer sentiment ever got so negative where the brand became just so toxic that you would consider that or is that kind of a moral line in the sand that you will not cross?

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

Well. To me, it's just a matter of being transparent, notwithstanding Tom's earlier comment, I think the awareness of the MAX issue is very, very high. The importance they attribute to it, I think is where Tom was said, but everybody knows the name the 737 MAX. And so, who is kidding who, to me is just disingenuous. Now, if it's a different airplane and it's a - it's a totally different product and it would be appropriate to rename it, but this is a - you know, ironically, is a very minor change to a piece of software, when you get right down to it.

And it's Boeing's call, it's not ours and that's what they, that's what they call it, but we've talked to them, at least the previous management team and they weren't interested in doing that. And we certainly haven't been lobbying them to do it, because I think it's just disingenuous.

Evan Hoopfer - Dallas Business Journal - Analyst

Great, thank you.

Operator

The next question comes from Pilar Wolfsteller with FlightGlobal. Please go ahead.

Pilar Wolfsteller - FlightGlobal - Analyst

Hi, I've got two questions about your Hawaii service. Number one, could you sort of talk a little bit about how successful it's been or some of your plans for the future? And the second question is, do you have any comment to the reports that the FAA gave Southwest preferential treatment when it approved those routes?

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

Tom, I'll let you talk about Hawaii. I'll - since I'm talking, I'll answer the second one first. Yeah, we don't know. We don't know what that's about. This is a whistleblower complaint, and we don't know who the whistleblower is. We don't know what the complaint is. So I think what I mostly focused on, I assure that and feel like we got preferential treatment by the way, because we worked really hard to, and they worked as really hard. But I was proud of the work that our team did. We were told going in that this is probably a 12 to 18 month effort. I think in the end, we kind of came in around 14 months, which is about what one would expect.

It was the government shutdown, was in the middle of that which hampered some of the efforts. What I'm most interested in is, what issues are there with our ETOPS. I'm not aware of any our folks, I think have done a phenomenal job developing it and then operating it on that point. So I think it's a long way of saying, we don't know what that's about. And then Tom, I'll - would let you talk about Hawaii, please.

Tom Nealon - President

Well, I think, first of all, it's - keep in mind we've been doing this for 10 months, we've been flying to Hawaii for 10 months. And it is doing phenomenal, or is everything that we expected is at or better than our expectation. Keep in mind, small piece of our business is right around 2%, but it has a very important role that it really supports our California business, so it's exceeding on every dimension. I think the demand and the load factors have been very, very good. We're very satisfied with that, both the long haul as well as the interisland.

Our ramp up, honestly, has been a little slower than we originally expected because of the MAX and the capacity issue, but everything we put into service, we're thrilled with. At this point, we are, I think this is right, still have to check it, but we've got, see 14 daily flights from California to Hawaii across four of our big cities Oakland, San Jose, Sacramento and San Diego. We have 38 dailies, interisland. So it's doing fantastic. We're really happy with it.

What's interesting is, we're actually creating demand that we didn't even see was - is being there. So we're seeing more connecting itineraries within the West Coast, which is interesting because we're creating demand, we're growing the market and fares are lower. And what does that sound like to you? That is the classic Southwest effects. So it's happening again. And I guess the last point I'll be quiet here is, just and I think one of the questions we were asked a lot is - this is a pretty long-haul flight, how do you feel like your product is going to perform on a long-haul flight? Yeah, by the way, it's not our longest long-haul flight. We have transcon that are longer. But having said that, the scores for the customer experience and the brand scores are actually higher than our total system. All right, from the Mainland to Hawaii flight. So net-net, we are very, very comfortable and thrilled where we are. I think kind on a long answer.

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

To our flight attendants and the ratio, yes, they do, so. And just speaking real quickly to the ETOPS process, we are involved in that. And it was not a quick - it was very, very thorough, and it was very, very challenging and you look at the quality of what we're doing today. It is phenomenal. So I can't - I can't speak highly enough of the operations team, what they've accomplished in a short period of time. Actually it wasn't short, took us 14 and 15 months to get it done by the way, which is 12 to 18 is the norm. So that is not a fast-path. But Mike, at this point, no one from the FAA has come to you on any issues with ETOPS, had they?

Michael G. Van de Ven - Chief Operating Officer

No, no. Like what Gary said, it was a whistleblower complaint. I don't really know a lot about it. I just getting an ETOPS authorization, that is automatic and has a rigorous approach to that. There are advisory circulars at the FAA layout. We take that and you follow it. We did, we did that and over a 14 month period have put the procedures in place. After you start flying you're in a high surveillance period for six months. We had over 3,000 flights since we started service there.

And the indications are that the procedures that we were authorized to perform - we're performing, we're executing them very well. And they're doing exactly what the FAA and Southwest Airlines expected them to do.

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

So it's all surprise to us. And again, if there are issues, we want to know what they are and we'd be happy to address them. But right now, we don't know what it's about.

Pilar Wolfsteller - FlightGlobal - Analyst

Thanks.

Operator

It appears that we have time for one last question today. And that question comes from David Slotnick with Business Insider. Please go ahead.

David Slotnick - Business Insider - Analyst

Hi, everyone. Thanks for taking the call. I was just wondering, because you were talking about the - I think you said nine full flight simulators by the end of 2020. I was wondering if you could talk a little bit about your future hiring plan once the MAX is ungrounded really over the next 10 years I know that they, simulators represent a big investment. So sort of wondering how that fits into the whole thing.

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

You want to talk about that, Mike.

Michael G. Van de Ven - Chief Operating Officer

Yeah, David. So we have - as we bring airplanes into the fleet, we hire a certain number of pilots and flight attendants for the airplanes that we bring into the fleet. And so that's - there is just a math that we go through and we do that. The other thing that influences our pilot hiring are retirements. And so we've got probably around 300 to 400, and it grows every year as we age, 300 to 400 pilots that go through retirement and then. So we're adding our pilot hiring with, to replace retirements and airplanes to come out of the fleet.

But, as Gary mentioned, we've got, if we don't have production airplanes from Boeing this year, we'll only have 45 net new airplanes this year, and we're already staffed up to 61. So we don't need a lot of additional hiring in 2019. And that should start ramping up again in 2020 as a delivery process from Boeing resumes.

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

But we do plan to grow. We plan to grow, and roughly 15 to 20 airplanes a year. And we plan to hire thousands of people every year. So even in recessionary times in our history, we've been able to grow and not shrink, obviously, we - some years we might grow less, but for the most part, 2009 maybe be an exception to that, but yeah, we definitely plan to grow and continue to hire.

David Slotnick - Business Insider - Analyst

Great. Thank you.

Operator

Ladies and gentlemen, 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, Chad. If you all have any other questions, please feel free to reach out to our communications group, (214) 792-4847 or via our online newsroom at www.swamedia.com.

Operator