Categories Earnings Call Transcripts, Industrials

Southwest Airlines Co. (LUV) Q3 2021 Earnings Call Transcript

LUV Earnings Call – Final Transcript

Southwest Airlines Co. (NYSE: LUV) Q3 2021 earnings call dated Oct. 21, 2021

Corporate Participants:

Ryan Martinez — Vice President of Investor Relations

Gary C. Kelly — Chairman of the Board & Chief Executive Officer

Robert E. Jordan — Executive Vice President and Incoming Chief Executive Officer

Tammy Romo — Executive Vice President and Chief Financial Officer

Andrew Watterson — Executive Vice President & Chief Commercial Officer

Michael G. Van de Ven — President & Chief Operating Officer

Linda Rutherford — Executive Vice President, People and Communications

Analysts:

Jamie Baker — J. P. Morgan Securities, Inc. — Analyst

Savanthi Syth — Raymond James & Associates — Analyst

Brandon Oglenski — Barclays Capital Inc. — Analyst

Duane Pfennigwerth — Evercore ISI — Analyst

Sheila Kahyaoglu — Jefferies — Analyst

Helane Becker — Cowen — Analyst

Mary Schlangenstein — Bloomberg News — Analyst

Alison Sider — Wall Street Journal — Analyst

Leslie Josephs — CNBC — Analyst

Dawn Gilbertson — USA Today — Analyst

David Koenig — Associated Press — Analyst

Presentation:

Operator

Good morning, and welcome to the Southwest Airlines Third Quarter 2021 Conference Call. My name is Rocco and I will be moderating today’s call. This call is being recorded and a replay will be available on southwest.com in the Investor Relations section. [Operator Instructions]

At this time, I’d like to turn the call over to Mr. Ryan Martinez, Vice President of Investor Relations. Please go ahead, sir.

Ryan Martinez — Vice President of Investor Relations

Thank you Rocco and thank you all for joining us today. In just a moment we will share some brief remarks and then open it up for Q&A. And on our call today we have our Chairman of the Board and CEO, Gary Kelly; Executive Vice President and incoming CEO, Bob Jordan; Executive Vice President and CFO, Tammy Romo; Executive Vice President and Chief Commercial Officer, Andrew Watterson; and President and Chief Operating Officer, Mike Van de Ven. Just a few quick notes here. So, first we’ll make forward-looking statements, which are based on our current expectations of future performance, and our actual results could differ substantially from those expectations.

And secondly, we had a few special items in our first quarter results, which we excluded from our trends for non-GAAP purposes, and we will reference our non-GAAP results in our remarks today. So please see our press release from this morning in our IR website for more information on both topics. And just a reminder that we are hosting our Investor Day in New York on December 8 so stay tuned for more details on that and we will go ahead and get started.

So Gary, over to you.

Gary C. Kelly — Chairman of the Board & Chief Executive Officer

Ryan, thank you very much and good morning everybody. Welcome to our third quarter 2021 earnings call. After five quarters of pandemic weakness we saw a dramatic recovery in terms of passengers, fairs and revenues and obviously that was very encouraging. It would have been even better, but for the Delta variant surge, which began to affect us in early August. Of course the bounce in revenues came with a lot of bumps in the operation though as our historic staffing models went short and caused us to miss our reliability plan for the quarter.

And that required immediate attention and action for future schedules, which we have taken. So I would be the first to admit that things are messy. It is also very encouraging to see the earnings potential and especially considering the business travel is far from recovered to 2019 levels and our capacity is not fully restored with 24 airplanes still sitting on the ground. It also illustrates that this virus and its effect on our business can be unpredictable and volatile.

And the burden to manage through all of this falls to our people and we’ve gone from not enough to do to too much to do in a very short period of time. And as a perspective, of course, I think we’d all take the latter scenario any day. It has been a huge challenge for our people. So I want to thank them. They are warriors. They have performed exceptionally well and especially considering the challenging circumstances. I am very proud of them and they remain and always will be my top priority.

And with that, I’d like to turn the call over to our incoming CEO, Mr. Bob Jordan, who will give us a quick overview.

Robert E. Jordan — Executive Vice President and Incoming Chief Executive Officer

Thank you, Gary, and hello everybody. It’s good to be with you again. I’ll touch on a few items before I turn it over to Tammy. The transition continues to go really well. As part of the leadership changes announced last month our full senior team now reports to me and they are the finest leaders in the industry and it’s an honor to work with them. We’re working together on long-term priorities and specific plans for ’22 and we will share those in December. But one of my highest priorities is being with our people and it’s energizing to see their heart and their dedication and witnessed the incredible job that they do every single day despite the challenging operating environment.

They are my heroes and it’s an honor to stand beside them as we emerge from the pandemic and take advantage of our opportunities. As Gary said, we had terrific momentum at the beginning of the third quarter especially leisure demand with traffic actually above 2019 levels. We were on a good trend on the corporate side as well. It was just off of a lower bottom. The resurge in COVID cases cost the quarter about $300 million, and that aside, the quarter would have been solidly profitable. As cases have come down and subsided, booking trends have recovered nicely on both the leisure and the business front and booking trends for the holidays are in line with 2019.

As you know from the release the key headwind for the fourth quarter aside from just inefficiencies as we continue to ramp up is a significant increase in jet fuel prices. I do want to touch on the issues we experienced beginning October 8. Our challenge started with a widespread ATC Ground Staff and Ground Delay Program that effectively shut down our Florida operation from that afternoon through the end of the day. Mike is going to talk more about this, but that caused a significant number of crews and aircraft to be out of position and then that took several days to recover.

As a result, we inconvenienced thousands of customers, and we further challenged our stellar employees and I just want to apologize to both our customers and our employees. We just did not live up to your expectations. Before this, we were actually seeing very positive trends in our operational performance and the key to continue improvement is getting staffed and continuing to invest in our operation, and we are absolutely laser focused on both of those. Looking forward, our immediate goals are really basic. Number one, to bulk up our staffing. We made tremendous progress that remains short of what is needed, especially when we dip in the staffing reserves.

And therefore we’ve continued to modestly trim our fourth and first quarter schedules. Second, get back to our historic operational reliability and efficiency. The ramp up of the business and the fits and starts caused by the COVID waves have made both of those very tough as has the lack of network depth. Third, restore our customer service advantage, which starts with our people and the unrivaled hospitality that they deliver and again that is tough in the current operating environment. And fourth, continue to focus on our people and our culture. Our people are our advantage and the last 20 months has been challenging them collectively and individually.

Our culture has sustained us through the pandemic, and it will power our advantage as we emerge from the pandemic. And while we have short-term issues to manage, I’ll just tell you, I am very positive about our long-term opportunities. I’d also like to talk briefly and highlight our sustainability plans. Earlier this week, we announced a set of specific 10-year plans in support of our overall goal of becoming carbon-neutral by 2050. It’s important to our people, our customers and above all our plan is that we are good stewards. As we grow over the next decade that growth is planned with no incremental carbon emissions as compared to 2019 and carbon emissions per available seat mile falling by at least 20% by 2030 as compared to 2019.

This progress occurs through a number of initiatives but namely a commitment to the more fuel efficient Boeing 730 MAX 7 and 737 MAX 8 and accelerated retirements of our older, less fuel-efficient aircraft. A commitment to 10% sustainable aviation fuel by 2030 and in the near-term a carbon offset program that partners with our customers who are passionate about this and our offset program will be the only one that provides both loyalty points and a dollar for dollar match. Above all, I’m just really proud of the work team that has done the work to pull this plan together so quickly and I’m especially proud that our plan and our commitments are specific and they are time-bound.

To wrap up, while we’ve made considerable progress from a year ago and are pleased with the recent improvement in travel demand trends it is clear that 2022 will be another transition year in the pandemic recovery. The restoration of the network is a top priority in ’22 and ’23, but it will take time and it will be largely dependent on the pace of recovery of business travel and our ability to staff. Even with the anticipated cost headwinds in 22 related to significant inflation and productivity shortfalls, our primary goals next year are to deliver increased operational reliability, generate solid profits, and margins and restore and grow the route network, while reducing our carbon emissions intensity. And I look forward to sharing a lot more about all this and our ’22 plans at our Investor Day on December 8.

And with that, I will turn it over Tammy.

Tammy Romo — Executive Vice President and Chief Financial Officer

Thank you, Bob, and hello everyone. I’ll provide a quick overview of our overall financial results and some color on our outlook. On a GAAP basis, we generated a $446 million profit in third quarter, our $0.73 per diluted share, and this was driven by the $763 million of PSP proceeds that offset a sizable portion of salary, wages and benefits expenses. Excluding this temporary PSP benefit and other smaller special items, our net loss was $135 million, a $0.23 loss per diluted share. Our third quarter results are clearly not where we need them to be and we are disappointed by the step back in revenue trends as a result of the Delta variant.

Even so, we are pleased our bottom line came in above expectations and improved sequentially from second quarter. And we currently have $16.2 billion of cash and short-term investments on our balance sheet. This is well in excess of our outstanding debt. And it is relatively in line with where we were at the time of July earnings before the impact of the Delta variant began. Overall, travel demand has proven to be more resilient today and the overall impact of this variant has been much less than what we previously experienced since the pandemic began.

Before I get into the specifics, I want to offer my thanks and appreciation to our employees. Their warrior spirits have been in full effect since the pandemic began and I commend them for continuing to work together to combat this pandemic. I am also pleased for them that we were able to accrue additional profit sharing in third quarter as a result of our GAAP profits. Third quarter available seat miles and non-fuel unit costs were within our guidance ranges. And I am pleased with our overall cost control throughout the quarter. Operating revenues were better than guidance, and that was primarily due to improving revenue and booking trends in the second half of September soon after our last investor update as COVID-19 cases began to decline.

And fuel cost per gallon was slightly better than guidance. We provided a lot of color for you in our press release regarding revenue and cost trends as well as fleet plans. So I will just add a few additional thoughts. We had four points of notable cost pressure in the third quarter and these four points were primarily due to premium pay as well as other ramp up costs. In terms of premium pay going forward we currently anticipate that we will need less in the fourth quarter as we have reduced our flight schedules to provide more staffing cushion. The reduction in premium pay provides a roughly 2 point unit cost tailwind from third to fourth quarter. Our two largest ongoing inflationary cost categories are salary, wages and benefits and airport cost.

These two categories alone are driving 3 points to 4 points of unit cost inflation in fourth quarter on a year-over two-year basis. First on salary, wages and benefits, which represents roughly 3 points of the unit cost pressure, we have higher than normal wage rate inflation, including the recent increase in the minimum hourly wage. It is a tight labor market, which is also putting pressure on wages. In addition, we should have nearly everyone back from extended leave by year-end and we are hiring across all work groups to support the current operation.

Second, on airport cost; by year-end, we will have 18 new airports in our network. So our overall properties footprint has increased and we are experiencing rate pressure across the board. The rate increases we are anticipating continue to be much higher than inflation, especially in this environment. Our fourth quarter trips are expected to be down 13% compared with fourth quarter 2019, which under-utilizes our space and exacerbates the inflation we’re currently seeing. I expect better operating leverage from our airport facilities in the future as we are able to add depth and frequency back to our network over the next few years.

Also in fourth quarter, we have 4 points to 5 points of notable cost pressure above and beyond general inflation. These cost pressures are attributable to hiring our vaccination incentive pay program and lower productivity than historical norms. We expect cost pressures from lower productivity to persist in the near term and subside as we are able to restore the majority of the network. Even with these inflationary pressures, our fourth quarter bottom line outlook is trending better than third quarter except for higher fuel prices. Fuel prices even after factoring in higher hedging gains are $0.26 higher in fourth quarter than in third quarter, which is roughly $120 million more in fuel expense sequentially.

That said, our strong fuel hedge is currently expected to provide $0.18 of hedging gains here in fourth quarter and underlying revenue trends have picked up, which is encouraging even though we are expecting a loss for the fourth quarter in this high fuel price environment. Our flight schedules are currently published through April 24. We have reduced our fourth quarter capacity to down 8% on a year-over-year basis and we currently expect our first quarter 2022 capacity to be down 6% compared with first quarter 2019.

We currently have 72 firm orders and 42 options next year and we will continue to evaluate option exercises as decision points arise. Regardless of our capacity plans next year, we continue to believe that taking the additional 2022 options will yield a positive net present value on aircraft replacement if we don’t deploy them in the network. As far as other commentary on 2022, we will share more about our fleet and capacity plans and our financial outlook at Investor Day. And I’m looking forward to seeing you all there.

So with that, I will turn it over to Andrew.

Andrew Watterson — Executive Vice President & Chief Commercial Officer

Thank you, Tammy. I’ll provide some additional color on our revenue trends and outlook and point you to our earnings release for more detail. To sum up our third quarter revenue performance, it was disappointing to take a step back on the revenue recovery trends we experienced from March through July. The impact of the Delta variant began impacting revenues around the beginning of August. We saw slowing and inconsistent passenger traffic and bookings along with an increase in trip cancellations through about mid-September. In terms of overall revenue loss, September bore the brunt of the impact and we saw that across all geographies and for both leisure and business travel.

As with prior waves, when we have a step down in demand especially with the slide we saw in business demand in September, yields are tough to manage. However, we had better success in terms of maintaining load factors in the low 80% range for the third quarter. And the silver lining is that the overall impact from the Delta variant estimated to be $300 million in Q3, another $100 million in Q4 was less severe than what we experienced from prior COVID waves. As you may recall, operating revenue stalled it down to the mid-negative 60% range from September through February. So travel demand is much more resilient today than this time last year.

While there is a lingering impact to fourth quarter operating revenues from the Delta variant, revenue trends have improved substantially since mid-September. Trip cancellations have decreased and stabilized and we’ve seen an increase in bookings across all geographies for both leisure and business. Operating revenues are currently expected to improve sequentially throughout the fourth quarter. The booking curve has normalized and bookings thus far for the holidays in November-December are healthy and supported by improving leisure demand. In fact, our overall booking curve is currently trending in line with 2019 levels for the holidays, which is encouraging.

In terms of business travel trends, our managed business revenues were down the lower 60% range in both July and August year-over two-year but took a step back in September to down 73%. However, this trend is reversed as we are experiencing steady improvements in business bookings thus far in October. Based on current trends, we expect managed business revenues to continue improving modestly in November and December and end at down roughly 60% by year-end. This estimate is less optimistic than what we previously shared prior to the impact from the Delta variant as many corporations push back their campus openings until after the New Year.

But we remain cautiously optimistic about overall business travel improvement throughout year end and we believe there is some pent-up business demand and there is a chance that we see a pickup in a faster clip as we get into early 2022. We are now live on all three of our planned GDS platforms Amadeus, Travelport and Sabre. We have now removed the friction from business as working with Southwest and we have a full array of distribution channels that they can choose from. Early indications from our GDS launch as we are gaining incremental volume for the GDS channel and seen a great response for Southwest fares through the GDS.

As expected, we are also seeing some channel shift from our Direct Connect channel to GDS which is perfectly okay, and sets us up for broader fuel the corporations to the channel of their choice. Turning to our new markets, they continue to develop well and overall performed in line with expectations in the third quarter. Hawaii markets were impacted more severely as travel warnings were issued against travel to the islands.

However, all of these growth markets have shown improvement recently in line with the broad-based improvement we are seeing across the rest of the network. And lastly, our Rapid Rewards program continues to progress in third quarter with other revenues up 10% on a year-over 2-year basis. We remain convinced about the growth opportunities of Rapid Rewards and our program portfolio, which we recently expanded in terms of credit card offerings.

And with that, I will turn it over to Mike.

Michael G. Van de Ven — President & Chief Operating Officer

Hi. Well thanks, Andrew, and hello everyone on the call. We had a challenging quarter operationally. It’s clear that our industry ecosystem is still fragile. We’re facing headwinds with hotel services including food and transportation, airport services like wheelchairs and concessions, match for requirements for customers and our people and still have a very challenging supply chain and hiring environment and all of those things are impacting travel experience for our customers and for our employees. Our third quarter operational results reflect that environment and we have a number of employees making significant sacrifices to help us navigate through it.

And I am extremely grateful to them for their support to engage in a very difficult arena. And you know they’re just special warriors. We finished the quarter with a 71.7% on-time performance. And while that was sixth in the industry, those delays were generally less than 45 minutes and our on-time performance at 60 minutes was 90.4%, which was fourth in the industry. We did have our best third quarter of bag handling performance in our history with of course the exception of last year when our bag volumes were slightly less than half of this year. And we continue to lead the industry with the lowest customer complaint ratio to the DOT.

So while I’m not satisfied with our overall results and we can and we will do better, our people worked very, very hard to take care of our customers. As we move forward, we are focused on a couple of targeted actions. First, we know that our on-time performance has been impacted all summer by a combination of high load factors and especially going into and out of our largest cities and the reduction in frequencies from our typical network. In fact, our largest cities experienced full airplanes coming in and out nearly every day and they had much more extensive connecting activities including bag volumes than what we had seen pre-COVID.

And those activities took more time to complete than we had scheduled for our turns and given the heavy load factors we tended to hold the flights for connections given the reduction in frequencies and our inability to re-accommodate the customers. And that of course put pressure on our on-time performance and that averaged roughly 66% from July through mid-August. So as the customer volumes declined mid-August through September and those activities lessened our on-time performance improved to 80% and that was a welcome improvement, but again it was below our historical performance in that period.

So in the near-term, we have focused hiring efforts to increased staffing at the airports to give us more resources to handle those activities when our load factors increase over the holiday periods. And we’re also better using our staffing tools to more accurately match our scheduled shift with those activities. So I expect both of those additional resources and more focused staffing execution will boost our on-time performance going forward. And then for future schedules we are looking at scheduling opportunities to move ground times around the places where it’s most needed to keep our flight lines on time as long as this connection activity is expected.

And a second — in a separate but still related issue from on-time performance is balancing our schedule with our crew resources. All of our employees should expect to be able to bid their shift, they show up to work and it’d be the same as what they bid and then they get to go home as planned. And I have mentioned before that those staffing plans were based on various models that have assumptions for things like vacation and sick leave, open time or shift pick up rate and the time it takes to fill open positions. And while we had adjusted those assumptions going into the summer to provide more staffing cushion, they just weren’t enough to match the reality of the environment that we were operating through.

And that was particularly impactful to our flight crews. Our sick trends were much higher than expected and our open-time pickup rates were also impacted. And those were more pronounced on weekends and we were routinely exhausting our reserves to cover those impacted flights. And that’s what causes the crew re-routes and the unplanned overtime and the unscheduled overnight and all of that impacts our people. So it’s a spiral that we just have to break. And to do that we’ve adjusted our fourth quarter flight schedules downward as previously announced.

And we have a new higher flight attendants along with pilots returning from extended leaves that are coming back online in the fourth quarter. And those actions will boost our crew reserves to 20% for our pilots and around 26% for our flight attendants. We’ll also expect our sick trends, which include COVID impacts to begin to decline as this Delta variant begins to wane. So in summary, we continue to add staffing. We’ve made schedule adjustments to both improve our on-time performance and add more staffing cushion to navigate through our current environment.

As our environment and our staffing and scheduling balance begin to stabilize we’ll be in a good position to begin restoring our network frequencies during 2022. So in closing, we’ve had our share of operational headwinds this year. I know the environment is full of stressors and distractions and I just want to express my continued thanks to all of those employees that have made significant sacrifices to take care of our customers and to support their cohort. I know they have tremendous pride in our company and the company is tremendously proud of them.

And with that Ryan, I’ll turn it back to you.

Ryan Martinez — Vice President of Investor Relations

Thank you, Mike. I believe we have analysts queued up. And just a reminder to please keep your questions to one and a follow-up if needed. So Rocco, please go ahead and begin our analyst Q&A.

Questions and Answers:

Operator

Yes, sir. [Operator Instructions] Today’s first question comes from Jamie Baker, J. P. Morgan. Please go ahead.

Jamie Baker — J. P. Morgan Securities, Inc. — Analyst

Hey. Good afternoon, everybody. So, Gary, notwithstanding the PSP related prohibition, could you opine in the milestones you hope to achieve before dividends and buybacks re-emerge as part of the Southwest story?

Gary C. Kelly — Chairman of the Board & Chief Executive Officer

Oh, well, I think Jamie, it’s pretty much a stock answer. Obviously, the — we’ll want to make sure that the earnings supports that. We’ll want to make sure that the balance sheet supports that. And then we’ll want to balance that against our capital plans. So I think the litmus test that we’ve used for decades we would continue to use. In the old days when we were so high growth we had a fairly modest dividend and used share repurchases sparingly because we were investing in the company and in growth. I think everybody in this room is very hopeful that that’s what we’ve got in front of us. I think we are — I pushed a little too hard there in the third quarter with capacity, but the encouraging thing is, demand is there. We’ve got a line of sight to airplanes.

Things what I mentioned in the second quarter. We’ve got airport capacity and right now our constraint is just making sure that we have the people, resources to balance all that. So that’s going to be a priority repairing the balance sheet, at least to a degree, Tammy is [Indecipherable] here is certainly an objective for us. And you’ve got two levers, one is paying down debt. The other one is generating earnings. So both of those work in tandem. But it will — I think — our long history of returning or having returns to shareholders it has not changed. It will just have to obviously feather in with this very different environment that we’re finding ourselves in and an interesting growth opportunity over the next five years. So Bob, I don’t know or Tammy if there’s anything you’d like to add?

Tammy Romo — Executive Vice President and Chief Financial Officer

No, I think you’ve covered it all Gary.

Jamie Baker — J. P. Morgan Securities, Inc. — Analyst

Yeah, okay, that’s very helpful. And then a follow-up on that. And this one is going to show my age and hopefully not because anybody there to laugh, but I’m thinking back to the infamous 10-Minute Turn. What prevents that today? I mean, obviously aircraft size is an issue, demographics have changed. I’m guessing people check more bags. I don’t know if there’s anything in the labor contract that prohibits flight attendant contribution that sort of thing, longer stage means more fuel to pump. I’m just wondering what else has happened that prevents you from having a 10-Minute Turn? And obviously, I’m not suggesting you ever get back there. But I’ve got to imagine you can do better than what you currently are. So what are some of the other constraints that I haven’t thought through?

Gary C. Kelly — Chairman of the Board & Chief Executive Officer

Well, I’ll give you a historic answer and then Mike — Mike is going to make you and I both look old here but Mike, his team and technology just rolled out some technology this week. In fact, it will help address what you’re describing. But the 10-Minute Turn, Jamie, my first flight on Southwest was in 1972 and there were two other passengers on the flight. It does not take long to turn an airplane in 10 minutes when there’s three customers. I asked Lamar Muse when I first became CEO about who was the genius that designed the open seating concept?

And he very colorfully told me that you don’t need to assign seats when the airplanes are empty. So the passengers are the gating factor with the turn, it’s rarely the bags. With the more connecting bags you have obviously, that calculus can change. But I will tell you one other funny old story. These all pre-date me although I was a customer in the 1970s and experienced this. We actually would push the airplane before everybody was in their seat much less buckle them with a seat belt. So all kind of clean stories now, but I think you’re probably more interested in what can we can do realistically. So Mike, you want to talk about those targets you have?

Michael G. Van de Ven — President & Chief Operating Officer

Yeah, so all of those things are true that Gary was mentioning. But I think we do focus on the turn and we break it down into different components and you start just with a different components, we offload and then clean and the loading back up. And there are several things that make the turn longer today than they were back in the days when you remember the 10-Minute Turn. And so one of the big items right now is the ADA and wheelchairs and making sure that we have a wheelchair accommodations for people. That probably adds three or four or five minutes just trying to get people loaded on the airplane and a lot of times, they are magically healed getting on — from the flight than they don’t need them getting off. But when they do need them getting off, it’s actually adds several minutes again. So I think just the wheelchair process is probably adding five to 10 minutes of that in a turn.

The second thing that you have is just more people are bringing bags on the airplane and we’ve got the sky, the new overhead bins on the new airplanes trying to get all those things stored. That takes a little bit longer than normal. And those are really the two primary things. The third thing is back when I first started at Southwest Airlines, we are op agents for at the door of the airplane. And so any coordination they had to do with the cockpit was right there at the door of the airplane. Today, depending on — you probably walk down some of the jet bridges, they’re long walks and our op agents sometime had to make that trip two or three times. And that’s one of the things what Gary was talking about, we just rolled out some technology that will allow us to have a mobile platform and get our ops agents back closer to the door of the airplane. So that will help also.

Jamie Baker — J. P. Morgan Securities, Inc. — Analyst

Okay, very interesting and enlightening. Thank you for letting me ask that question. Take care everybody.

Operator

And our next question today comes from Savi Syth with Raymond James. Please go ahead.

Savanthi Syth — Raymond James & Associates — Analyst

Hey, good afternoon, everyone. Just, I know in the past you’ve talked about just given the number of new airports you’ve added that you can increase your breadth basically and not your depth and that most of the capacity growth going forward will be to kind of build back that depth. And I think Tammy, your comments of those getting back to that to bring back productivity. I was just kind of curious in that — at what level of capacity would you get back to a level where you can kind of drive better productivity across the network and maybe better recoverability?

Tammy Romo — Executive Vice President and Chief Financial Officer

Andrew, I’ll start off and then let you chime in with any thoughts you have. So, yeah, just to give you an idea of at least how we’ve deployed our aircraft here currently. As we’ve talked about, we added the 18 new cities and of course we’ve added Hawaii. So when you look at all of those together, we have about 92 airplanes deployed in either new cities are in Hawaii service, so which means that’s 92 aircraft less that we have in our network kind of pre-pandemic, if you will.

So we need to go back and backfill that number of aircraft to at least get us back to kind of where we were pre-pandemic. And then as we look ahead to 2022, we were making some adjustments to our capacity here in the near term as we’ve taken you through, so we’ll want to add that capacity as quickly as we can. But obviously, demand is going to be a pacing factor and of course, our staffing levels as we’ve covered with you. So those are just a couple of high-level thoughts. But Andrew anything — any more details you’d like to add to that, or thoughts?

Andrew Watterson — Executive Vice President & Chief Commercial Officer

So and to build on that, if you kind of look at the aircraft numbers that Tammy is talking about it implies it’s going to take us over a year to fully restore our network. So this is a longer-term play. And we talk about restoration overall like that, but that’s a subset of that — a very large subset, which is a depth we talk about. And so the depth markets are primarily a business oriented market, so we expect to with the pace of business travel return bring in those depth markets over next year.

Those same depth markets are the ones that also facilitate recovery, the day-to-day recovery that the Mike was talking about and our March through summer schedules as we anticipate seen a step change and that level of density and depth in our network. We won’t be fully restored again for over a year but the part which really appeals the business travelers and helps [Indecipherable] recovery, we expect to see substantial progress from March through the end of summer.

Savanthi Syth — Raymond James & Associates — Analyst

That’s super helpful. Thank you. And if I might quickly to follow-up on some of the GDS comments, I was just wondering if you could talk a little bit more about what you’re seeing in terms of the channel shift that you mentioned and how that lines up versus expectations?

Andrew Watterson — Executive Vice President & Chief Commercial Officer

We’re seeing incremental benefit clearly from GDS. It happened just — that went live with Sabre, a third of the three, just before the Delta variant. So, given the kind of turmoil of the Delta variant, it’s really hard to have conclusive with the trends. We can see clearly though it is incremental. The shift we had planned for from our direct channels to these indirect channels, how to give you a bit of context, one of our largest corporations actually use all three. So they’re using Southwest SWABIZ, they’re using a Direct Connect and now they’re using GDS.

And they use them for different populations and travel purposes. So the amount that is going through each of those three channels really depends on the population of who is traveling at that company right now. So it’s hard to make a definitive statement about what the overall shift will be, more kind of done and dusted here as business travel finishes out its ramp-up. But right now we see it’s clearly incremental and we certainly planned in our business case for a substantial one shift.

Savanthi Syth — Raymond James & Associates — Analyst

Makes sense. All right, thank you.

Operator

And our next question today comes from Brandon Oglenski with Barclays. Please go ahead.

Brandon Oglenski — Barclays Capital Inc. — Analyst

Hey, good afternoon everyone and thanks for taking my question. So I don’t know if this is for Bob or Tammy. But how do we think about ongoing costs here? And I guess in regards to recovering the network, getting back into some of those shorter haul frequencies like you guys talked about but just longer term, I think, Tammy, you were talking about projects back in like 2018-2019 on the technology side that you guys needed to invest in. So, are we back to an environment where maybe benchmarking to prior cost structure is not the right way to think about it or can we get back to those unit costs?

Tammy Romo — Executive Vice President and Chief Financial Officer

I can start, Bob, and then you can chime in with any thoughts you have. But, yeah, just kind of picking up from where we are here in the third quarter, our CASM ex was up about 3.5% and that was on a year-over-year two basis. And so, clearly we’ve got some ramp up cost pressures here currently. And as I said earlier, that was about 4 points and that related to premium pay and ramp-up costs. So, if you adjust for that impact our third quarter CASM ex would have been slightly below third quarter 2019 on capacity that’s down about 2%. So we’ve taken some cost-cutting measures here that we’ve implemented during the pandemic, and that’s namely the voluntary retirement program and our extended leave program.

And while those had substantial savings this year. The benefit is certainly temporary as all those employees will be back here by year-end. And of course, as you know, we’ve shared that we’re hiring a substantial number of employees that we’ve got a goal to hire 5,000 new employees by year-end to replace many of those who left. So point being is the cost reductions that we had during the pandemic, those will come back as capacity comes back. So that puts us at a much different point in the ramp up than most of our competitors who still have capacity down much more. So we’ve talked about our 18 new cities and Hawaii investment.

So we’ve allocated capacity here and that has come from pulling down our short and medium haul flying. So many of our cost here are back online and I just want to point out again we’re staffing back up. And our network is very different from what it was pre-pandemic. And so that’s kind of where we are today. And then we’ve also experienced several years of wage rate inflation from where we were in 2019. And as I covered earlier, we’ve got inflation in airports and pretty much across the board. So when you add to that the lower productivity we’re experiencing from some of the behavior changes that we talked about in this really tough operating environment, point being the environment is just different here.

So kind of getting to your question, as we move forward, the main thing we want to focus on here is regaining our historical productivity edge and clearly the biggest thing is gain operating leverage through restoring the majority of our pre-pandemic network. And so I know that was kind of a long-winded answer there, but there are just a lot of moving parts here. So we’re going to be focused on improving our productivity as we move forward, but I think the biggest question mark I have right now is just, what is going to be the extent of the inflationary pressures that we’re feeling?

Robert E. Jordan — Executive Vice President and Incoming Chief Executive Officer

Yeah Brandon, and I’ll give you the 50,000 foot view, maybe the way I’m thinking about it is we’ve got, I mean nothing is normal right now. There’s just all kinds of fits and starts in the business and different behaviors. And so you’ve got extra cost and inefficiency that comes through the network moving around. We’ve had schedules, we cut them back. You had inefficiencies that have come through just hiring. We’re staffing. It takes a while to get people through training. We’re still behind. It takes a while for those folks to become productive. So you’ve got cost inefficiencies there. We had changes in behavior.

I think those are largely COVID driven. So we have obviously direct COVID people, they’re literally pulled off — can’t work because of a COVID contact. We have excess sick leave as compared to normal. We have more folks on leaves as compared to normal that’s likely due to connected to bringing folks back from those extended leaves earlier than they had planned. So there’s all kinds of stuff that is in there and it’s hard to tease apart exactly what the value is a V. So I’m what Tammy. Job one is to stabilize all of that and then work to get ourselves back to pre-pandemic levels of productivity and efficiency. And then from then work on cost past that but job one is to get back to the — to ring all this out and get back to the productivity that we had prior to COVID.

Gary C. Kelly — Chairman of the Board & Chief Executive Officer

And if I could just pile on, I would — if you think about airplanes, airports and people, I think we’ve got a line of sight on airplanes and that’s pretty much in our control. Airports, I think, are close to that. And absolutely, I agree with Bob and Tammy, the goal will be to get back to the people productivity that we had pre pandemic, and that we’re just going to have to work our way through that. But that will absolutely be the goal.

Savanthi Syth — Raymond James & Associates — Analyst

I mean, is it incremental hiring that you guys need to get — going forward, to get back to that productivity levels?

Gary C. Kelly — Chairman of the Board & Chief Executive Officer

I think it’s yes and no. So right now, the way to think about it is it takes more people per departure than before. It’s — the analogy would be like the United States participation rate. Our participation rate actually producing flights is less today than historically. I mean, Bob ticked through it, it’s excess sick, more people on leave, etc. As we get the pandemic behind us, I, for one, think that that will revert back to the mean and will trend and achieve prior productivity rates. The plus on what you’re asking in terms of hiring is we’ve got 24 airplanes sitting on the ground doing nothing. We’ve got airplanes that we want to add to the fleet next year. So absolutely, hiring will address that, and that will be a productivity contributor on the airport and the airplane side.

Brandon Oglenski — Barclays Capital Inc. — Analyst

Thank you.

Operator

And our next question today comes from Duane Pfennigwerth with Evercore ISI. Please go ahead.

Duane Pfennigwerth — Evercore ISI — Analyst

Thanks for the time. So I’m curious if you could share kind of what you’ve learned from a network perspective that strained the operation. Every carrier has been sort of contorting their network to this demand environment. I think you lengthened stage length. In past media, you talked about how much of your capacity touches Florida. What are the lessons learned? And if we kind of dig through your future plans, what are the types of markets you’ve moved away from in an effort to improve the operation?

Michael G. Van de Ven — President & Chief Operating Officer

I think the first thing is we moved, in the summer, we cut our forward schedules based on what we’re seeing with staffing that Tom — I mean, that Gary and Bob referenced. And we just took more people per trip, and so we immediately lowered trips from October through the end of the year. So just the level of capacity versus staffing was the initial issue. The second is the day-to-day recovery is more difficult when you have fewer options for re-accommodation, whether that’s re-accommodating the customer, the crew or even the airplane to get it where that needs to be that night. And so bringing back that density, we’ve identified as the number one thing that will help our day-to-day operations recover more easily when there are things that are exogenous shocks from weather or something else that allows us to recover. And so getting that back is going to be what we’re going to be using our aircraft for over at least the next year and kind of in our network that was preexisting in 2019 will come to look a lot like what we have at the end of next summer, at the end of next year. That core part that operated very well and produced good results will start to look a whole lot similar. It takes a while to get there but that’s what we’ll be using the aircraft for versus, say, growth of breadth options, which we used during the pandemic.

Gary C. Kelly — Chairman of the Board & Chief Executive Officer

And Duane and Andrew, you chime in on this. But I don’t think that it’s so much a stage length, long haul versus short haul as it is more of a tilt towards leisure markets. So that sort of lends itself to thinner frequencies, maybe longer distances. Obviously, Hawaii has a huge impact on averages here because we beefed up that service. But a lot of our traditional business markets are the high-frequency short haul and we’ve thinned those out.

So I think it’s more the — Andrew, the leisure business that we’ve adjusted now and we want to go back to restoring, which will be more short-haul, more business-oriented, which beefs up the backbone and helps with recoverability. So I don’t know if there’s a learning that we’ve had. I think actually, things are playing out the way we thought. But we’re all anxious now that demand has recovered. I mean, that’s an encouraging thing here, is now we’re in a position where we can sort of pursue our strategy. It’s playing out like we hoped. And we want to keep the new markets we added. We just want to get back to restoring the traditional Southwest networks, which we think is going to drive a really nice profit. They’ll develop very rapidly.

Andrew Watterson — Executive Vice President & Chief Commercial Officer

That’s correct. That restoration should be very low risk. And the leisure portion is absolutely correct. In fact, if you dig into the issue Mike talked about with connections, it wasn’t so much the nominal connections of connecting customers, which are actually flat, slightly down. It’s connecting bags. And connecting bags were up because we have more leisure customers, and leisure customers check bags at a higher rate than business customers. And so as we get back to a better business leisure mix, we should see the proportion of bags and connecting bags coming down on the network, which will also be a tailwind operationally.

Robert E. Jordan — Executive Vice President and Incoming Chief Executive Officer

Yes. Duane, I actually think the learning wasn’t on the network side. I mean, our network folks and our operational analytics folks are on top of all this stuff. They understand what we’re doing, and then obviously, they understand what we have done to ourselves if we back off frequencies and depth. Obviously, it’s going to be tougher to recover our customers and move our crews around. So we knew all that. I think the two learnings are — again, we’ve talked about this a lot. We depended on some hiring to get staffed to support that network and it was just tough to get there. So by the time we were ready to fly, for example, the summer, we just weren’t staffed to the point that we thought we would be.

And the second learning really was how important the margin is, whether it’s crews or around operations but I think especially crews. And as we had lower-margin things like reserves and all that, the operation is just — it deteriorates faster as you eat up that margin that you’ve got, especially on the crew side.

So to me, really the learning is on just how important it is, Mike’s talked about this, to have that margin in the crew network, especially as you operate. And again, in a thinner network with lower frequencies, as you have to use a part of that margin to move crews around and those kinds of things, it’s just not there. So to me, the learnings were really more there, the importance of staffing than they were on the network design.

Gary C. Kelly — Chairman of the Board & Chief Executive Officer

Yes, I’ll just tie along at the very end here, Duane, but the biggest learning that I’ve had is, and I talked about it earlier, is this industry ecosystem. And it’s dependent on having people at work. And it doesn’t matter where it is, it could be hotels, it could be van drivers. It could be people at the — working at the airports. But the people — if you have enough people, you can have an up-tempo business. And that’s what our business — our whole industry’s business wasn’t as fast as tempo as everybody had planned it to be. And that’s where I think everybody got into issues with their on-time performance and their staffing and their crews. And so everything that everybody else said, I totally agree with. But to me, people in the industry that slow the tempo down, we want to be an up-tempo operation. And to get that, we need more people and we need more frequencies.

Duane Pfennigwerth — Evercore ISI — Analyst

That’s super helpful. And maybe just to segue on that last point. On labor availability, your ability to hire ground airport staff or whatever it is you need to support that operation, I assume as you raise rates, that creates demand and more people show up. But I guess, normalizing for that, are you seeing any relief on that front? Are you seeing more people apply for open positions? Are you seeing any clouds parting on that front? Thank you.

Robert E. Jordan — Executive Vice President and Incoming Chief Executive Officer

Yes, I think on the hiring front, just look across the whole United States or the world, hiring is just more difficult because the labor pool is smaller with folks that have not come back into the labor pool. So that’s just where we all started. Southwest is a terrific company, a terrific employer, terrific benefits, and so we do not struggle to get applicants. The applicant rates are a little below normal, which is to be expected given the number of open jobs. But no, we’ve not struggled to get applicants.

I think the issues have probably been a couple of things. One, we spent 18 months or a little bit less hiring no one, I mean, basically, no one. In fact, we kind of dismantled the hiring machine and folks that work there and put them into other parts of the business. So once you decide to hire, which for us was probably April, you’d have to — you have to decide and then you have to rebuild the team that actually works on all that. So by the time we really got to moving, it’s July or August of this year before you could really have new folks back into serving — to working and serving the airline.

You also have to rebuild your training. But I think overall, again, it’s a tough hiring environment but we are not struggling to get people. It is more competitive than ever. And it’s especially competitive in our more entry-level jobs, for example, ramp — on the ramp in airports and it’s more competitive in certain parts of the country, like in Denver, for example. But no, we’re not struggling to find people. We just need — we need a lot and it’s a competitive market, and it takes a while to get them from the hiring — from the point of hiring to the point of actually being at work.

We are using all kinds of new techniques we had not used in the past, instant interviews, instant offers, contingent offers where somebody goes into training ahead of their — the required things like drug testing and background checking, those kinds of things. So no, I think I’m optimistic we just have a lot to do, trying to hire over 5,000 this fall and 8,000 next year.

Gary C. Kelly — Chairman of the Board & Chief Executive Officer

I do think, in fairness to your question, there’s one thing that I learned here that I would like to share. And that is — for everybody on the phone, I don’t know what your lives have been like over the past 20 months but I bet they’ve been impacted dramatically. And many of you may be working remotely. So because you’ve done that, your habits have changed. And we can all speculate on what things are different for you now. Our people are the same way and especially the people that went on leave. And at our peak, Bob, didn’t we have 15,000 people that went out on leave?

Robert E. Jordan — Executive Vice President and Incoming Chief Executive Officer

Yes.

Gary C. Kelly — Chairman of the Board & Chief Executive Officer

So an assumption that I made was that we were going to call them and say, “Okay, it’s time to come back.” They’re going to show up, everything will be just like it was, and it’s just not. And so I do think — I personally underestimated that coming into this year. And I’ll just repeat what I said earlier. For a long time, we had nothing to do. And then all of a sudden, wham, we had to pick up the pace, like Mike was describing and it’s just been messy. So I think all that will smooth out, both with our existing employees that we’re trying to get back in and settle back and new hires as well. But it’s not going to be here in the fourth quarter. It’s going to take a while.

Robert E. Jordan — Executive Vice President and Incoming Chief Executive Officer

And one last question and I’ll be done is I’ve gotten a lot, which is the requirement to have new hires vaccinated. Is that hurting you? Is it limiting your applicant pool? And the short answer is no. We had, I think, 50,000 people in the hiring or applicant process whenever we decided to shift and require that our new hires be vaccinated. And we’ve seen less than 2% drop out of the process because of that. In other words, the 98-plus percent are either already vaccinated or are going to get vaccinated in order to be able to come to work for Southwest Airlines, which number one, tells you it’s not an impediment; and number two, it tells you people want to work for Southwest Airlines, which is terrific.

Duane Pfennigwerth — Evercore ISI — Analyst

Thank you very much.

Operator

And our next question today comes from Sheila Kahyaoglu with Jefferies. Please go ahead.

Sheila Kahyaoglu — Jefferies — Analyst

Good afternoon, guys. Thank you so much. Tammy, you talked about some of the inflationary pressures when it comes to labor and the team talked about that extensively. So I want to switch gears maybe talking about higher fuel prices and how you guys are thinking about that as it affects your route expansion.

Tammy Romo — Executive Vice President and Chief Financial Officer

Yes. So yes, that — as you know, fuel cost has historically been a third of our cost structure, so it’s certainly an input as we think about the pace of our expansion here. So it just kind of goes into — in the mix with all the other costs. But the good news is we have a really great hedge in place to at least help blunt the market prices that we’re seeing here. And our — the fair market value of our hedge book is over $900 million a year, so we’ve got a lot of really great protection in place should we continue to see fuel prices at these levels are higher.

That said, we’re still going to see some inflation in our fuel cost at higher fuel levels. So that will just obviously be taken into consideration along with all the rest of our cost structure as we plan our future capacity plans.

Sheila Kahyaoglu — Jefferies — Analyst

Great. Thank you so much.

Operator

And we have time for one more question today, and we’ll take our last question from Helane Becker at Cowen. Please go ahead.

Helane Becker — Cowen — Analyst

Thanks very much, operator. Hi, everybody. Thanks for the time. So two questions. One, Gary, is this your last earnings call or are you going to be back for next year? And for — I guess you’ll be back for Investor Day but that’s one of my questions. [Speech Overlap]

Gary C. Kelly — Chairman of the Board & Chief Executive Officer

Yes, I’ll be there for Investor Day and my transition date is February 1, so I’m going to come back and haunt you one more time, possibly in January.

Helane Becker — Cowen — Analyst

Okay. All right. Well, that’s fair enough. I’ll see you. I guess we’ll see you in December. And then my other question is really with respect to technology. You guys spent a lot of money on technology over the last few years kind of ramping up, getting ready for more business travel and getting ready for more GDS exposure. Now I’m wondering like what’s next? What’s next on that front? And if you could just talk a little bit about that.

Robert E. Jordan — Executive Vice President and Incoming Chief Executive Officer

Helane, every company, I think, at this point is — some part of them, they’re a technology company. It’s central to everything that we do, obviously, central to everything that we do at Southwest Airlines, because we’re so dependent. I would tell you, we have all kinds of priorities and some of those are — like we have every year and ongoing, they are revenue initiatives that we’ll be sharing with you in December and most of those require technology. But I would — and Mike can comment on this, to me, the — if I had a headline, it’s our investment in operational tools.

Our people are terrific. We have good tools. But at our size and scale and complexity, I think there is a need to continue to invest heavily in the operation and particularly heavily in the operational tools that we provide to our employees. They’re terrific but they could use tools that better help manage their day, manage the complexity. And so to me, if I had to rank order, the number one objective is our continued investment in our — what Mike and I are just calling modernizing our operational tools. Mike, do you want to add on to that?

Michael G. Van de Ven — President & Chief Operating Officer

Yes, Helane, I think Bob covered it mostly. But when you think about modernizing the operation, we just — we rolled out a significant enhancement to our maintenance systems this year, and we’ve got one last piece to get our MAX aircraft and our 800 rolled into that here in November. So that’s a big enhancement, a big modernization, if you will, in our maintenance systems. And our maintenance systems that it was replacing is close to 30 years old. So I think that you could categorize the different kinds of opportunities we have in those areas. We’ve got things that we want to do in flight planning. We’ve got things we want to do in our crewing systems. We have things that we want to do as we’re coordinating and executing our turns on the ground. And then we have investments we want to make in our decision support and optimization of technology. So we’ve got a good array of things that we want to go do, and we can talk more about those in a little bit more detail in our Investor Day.

Helane Becker — Cowen — Analyst

That’s very helpful. Thanks, everybody.

Gary C. Kelly — Chairman of the Board & Chief Executive Officer

Thank you, Helane.

Ryan Martinez — Vice President of Investor Relations

Okay. Well, that puts us at time here for the analyst portion of our call today. I appreciate everyone joining us.

Operator

Ladies and gentlemen, we will now begin our media portion of today’s call. I’d like to first introduce Ms. Linda Rutherford, Executive Vice President, People and Communications.

Linda Rutherford — Executive Vice President, People and Communications

Thank you, Rocco, and welcome to everyone, members of the media, to our call today. We can go ahead and get started with the Q&A portion, Rocco, if you will just give them some instructions on how to queue up for a question.

Operator

[Operator Instructions] And our first question today comes from Mary Schlangenstein with Bloomberg News. Please go ahead.

Mary Schlangenstein — Bloomberg News — Analyst

Thank you. Gary, earlier today in an interview, you were talking about how you don’t really support forcing employees to get vaccinations as a corporate employer, and you said you were doing the bare minimum to comply with the federal mandate. And my question is whether there’s not some concern within Southwest that by saying things like that and proceeding in that way, that you’re going to lose travelers to people who prefer an airline that can say 99.7% of their people have been vaccinated against coronavirus?

Gary C. Kelly — Chairman of the Board & Chief Executive Officer

Well, Mary, I think it’s two different things. We have an executive order that’s mandating the vaccines and we’re doing everything that we can to comply with that. Number one, we’re encouraging everybody to get vaccinated. And if they can’t do that, then their option is to seek an accommodation. So I don’t see them as inconsistent. It just simply — I, for one, am empathetic with those who don’t want to be vaccinated. And it’s not — I don’t see that it is our role to enforce a mandate coming from us. This is the U.S. government’s, President in the United States, and I respect that and we’re doing everything that we can in good faith to implement it. So I don’t believe that we’re going to be in any different spot than any other airline in terms of our health and safety.

Mary Schlangenstein — Bloomberg News — Analyst

And would it not help consumers, though, if you were to disclose the percentage of your employees who are already vaccinated?

Gary C. Kelly — Chairman of the Board & Chief Executive Officer

Well, we will, I mean, at the right point. The deadline to comply with the federal — the executive order is November 24. And right now, we’ve got — a majority of our employees have reported. Of those who have reported, a super majority of them have been vaccinated. But we still have a large percentage who have not reported. And it would just be pure speculation on our part how many of those are already vaccinated. We just haven’t heard from them yet for whatever reason. So just be patient with us when we get to November 24, we will obviously be sharing that information.

Mary Schlangenstein — Bloomberg News — Analyst

Thank you very much.

Operator

And our next question today comes from Alison Sider with Wall Street Journal. Please go ahead.

Alison Sider — Wall Street Journal — Analyst

Hi. Thanks so much. You’ve talked a lot over the last couple of months about taking some of the depth out of your network and adding all the breadth with the new cities. And I guess just curious, in retrospect, given all the complications that it has caused if you still think that that was the right strategy. If you could go back in time, do you still think it made sense really that that’s going to pay off in the long run or have those complications in the last couple of months, maybe question it at all?

Gary C. Kelly — Chairman of the Board & Chief Executive Officer

Well, I disagree with the assertion that it’s created complications. Our primary challenge is we just don’t have enough people resources to match up with the effort required to operate flights and serve our customers. When we do get into a situation where we’re trying to manage irregular operations, we’ve got a great strategy with backbone, with depth, and that’s clearly on our work plan for 2022. But Alison, there’s just — there’s no way to manage through a pandemic other than when the demand is cut by 98%, it would be foolish to fly the same schedule. So that schedule has served us well. It’s something that we’re very enthused about going forward. Now we very quickly and happily shifted to a need to go back and restore some depth in the network and that will be very, very welcome. But in any event, the kinds of challenges that we’ve had this summer, we’d have them whether we had the old schedule or whether we have this schedule. The root cause is we just need more people resources, period.

Robert E. Jordan — Executive Vice President and Incoming Chief Executive Officer

And I think the data proves it out. If you look at our performance from August and then look to September and beyond, when we reduced the amount of flying, our on-time performance substantially increased end of September all the way up to just before October 8. You added the fact that there’s one runway in Dallas, which is a big — hurting us more than we expected. Our performance during that period of time with reduced activity but still this broad network was satisfactory. Now we want more depth because it helps our business customers, it helps recovery, all things being equal, but it’s a tailwind we’re seeking, not necessarily a root cause.

Gary C. Kelly — Chairman of the Board & Chief Executive Officer

Yes. And it’s not as if we have dismantled the network that was built over 50 years. That’s also incorrect. It’s a pretty big change from where we were but certainly, the bones are still there.

Alison Sider — Wall Street Journal — Analyst

Great. Thank you.

Gary C. Kelly — Chairman of the Board & Chief Executive Officer

Thank you.

Operator

And our next question today comes from Leslie Josephs at CNBC. Please go ahead.

Leslie Josephs — CNBC — Analyst

Hi. Good morning, everyone or good afternoon, everyone. What was the reason for pulling back on that plan to do unpaid leave for the people that have exemptions that haven’t yet been approved or were still being reviewed? And then my second question just, is there any concern about your network next year, particularly in the summer with international coming back and your competitors are really ramping up other destinations? So just curious how you’re thinking about competition from other places to go.

Gary C. Kelly — Chairman of the Board & Chief Executive Officer

I’ll let you guys take the latter. I’ll talk about the vaccines. And if you don’t mind, I’m just going to give you two minutes on what our objectives are here. Number one, we are — and this somewhat ties in with Mary’s question. We want this pandemic to end. So we certainly want to do everything that we can to encourage people to get vaccinated. I, for one, believe that that is the path and that’s the path that we’re promoting.

We have tried to encourage people to get vaccinated and further with incentives as opposed to using a more punitive approach as an example by charging employees if they’re unvaccinated. So we’re not doing the latter. We’re doing the former, which is to try to encourage. So I think that’s important as a background here.

Second, our objective is to take care of our people in every way that we can in terms of their safety, in terms of their health, in terms of their job security. I think everyone should get vaccinated. However, I respect other views and especially when you consider how much information there is out there and pretty much any view you want to find support for, you can, and that has to obviously be confusing for people. So I don’t feel that it’s up to me to force people to get vaccinated. So I think that’s important in answering your question that you know that those are two of our objectives.

As a practical matter, we’ve got important trips with — for our customers coming up in this quarter, in other words, the holidays. The last thing I want is our people distracted with something like this vaccine mandate. The last thing I want is for people to fear that they won’t be able to work or have a job. And so we simply put that to rest. And it ties in — so that objective, I’m sure you would readily recognize. But fourthly, which ties into that, we are a government contractor. We have been for decades. It is important to us in a variety of ways. And number one, we serve the military with charters; and number two, we’re part of the Civil Reserve Air Fleet which, as an example, just helped with Afghan refugees. So those are important to us. In addition to that, they’re our largest customer. We carry the mail, we carry a number of government employees as passengers under this contract.

So we’re going to do everything that we can to maintain that contract. And we didn’t ask for the mandate but we got it. So — and the order is from the White House. So all of the agencies that we actually contract with, they’re getting direction which is very general from the White House. And as that direction evolves, we evolve with it. And I think what — again, just to tie in Mary’s question, all I was trying to communicate to everyone is that we are not on a campaign here to force everybody to get vaccinated. What we are trying to do is whatever we need to do to comply with the executive order, so we can maintain our government contractor status. And if that means that we can do that and not force people off the job in December, that’s why we — this is an evolving process, working with the government in terms of what they expect. And very clearly, we want our employees to know that nobody is going to lose their job on December 9, if we’re not perfectly in compliance.

So it is a work in progress, and we’re going to continue working in good faith to meet the requirements of the executive order. But I’ve already said and I’m sure you’ve heard that we’re not going to fire anybody who doesn’t get vaccinated. How we work through the people that don’t get vaccinated or don’t seek an accommodation, we’re going to have to figure out and we’re working with the government on that. But we are not going to fire anybody. It makes no sense that we would not respect that and find some way to work with our people on that. And that’s what we’re determined to do is get the right balance between taking care of our people and maintaining our government contractor status.

Operator

Okay. Thank you. Our next question today comes from Dawn Gilbertson of USA Today. Please go ahead.

Dawn Gilbertson — USA Today — Analyst

Hi. Good morning. Unbelievably, it’s still morning here. I think this is for Gary or Bob. On the vaccine mandate from the consumer perspective, United’s CEO made some pretty strong comments yesterday warning about potential holiday travel chaos at other airlines that are still going through this vaccine mandate issue going so far as to say, buyer beware. Could this — any follow-up from this trip you up over the holidays? And if not, why not? And one of the examples offsite that he gave was say there is a testing regimen put in place. He said that potentially, you guys could have a lot of last-minute — he didn’t say you specifically. Airlines could have a lot of last-minute cancellations as people tested positive and so forth. So I just would like to get your thoughts on that. And secondly, I would also like to know who is deciding? Is it Southwest? People who gets these exemptions and how rigorous a process is it? Because it seems like you guys are encouraging people to apply for these. Thank you.

Gary C. Kelly — Chairman of the Board & Chief Executive Officer

Yes, we’re not going to disrupt travel and the White House has been clear that they do not want travel disrupted ever, much less during the holidays and that they understand that there is a process that we work through with people who have not complied either by being vaccinated or being accommodated. So they have made that clear. We are very well aligned with the White House direction on all of that. So again — and Dawn, I would just say, my duty is to take care of Southwest Airlines. My duty is to take care of our people and our customers, and we are not going to let this disrupt any of our customers’ travel especially during the busy holiday season.

With respect to accommodations, this is something that is long-standing within the company. It is a function that we have in Linda’s department, and Linda, you’re welcome to speak to this. But we have a team of experts who know what the rules are and know how to apply them in terms of medical or religious accommodations. I believe it’s Title VII for religious and the ADA for medical. So it’s not anything new and they’re expert at it.

What we are trying to do right now is to see what accommodation requests we get, so that we can ensure that we’re consistent in terms of who we accept and who we deny. Obviously, we’re trying to work with our people here and take good care of them. In terms of encouragement, we are encouraging people to get vaccinated, period. There’s nothing new with that. I’ve been doing that since the vaccine came out, and nothing has changed there. The only thing that’s changed is we’ve got this executive order that mandates the vaccine, and we are working through that in a good faith way and with our best efforts.

Linda, anything you want to add?

Dawn Gilbertson — USA Today — Analyst

One quick follow-up on that?

Gary C. Kelly — Chairman of the Board & Chief Executive Officer

Sure.

Dawn Gilbertson — USA Today — Analyst

Are you guys seeking an extension on this deadline from the government?

Gary C. Kelly — Chairman of the Board & Chief Executive Officer

We’re using our best efforts to make the deadline. We have not asked for an extension. We’re seeing great progress from our employees, and we’ll see what happens. We’ll see where we get to on November 24, which is the key date, in other words, to make the December 8 deadline because of the two-week vaccination time period. Anything you want to add on the accommodation process, Linda?

Linda Rutherford — Executive Vice President, People and Communications

No. I think you handled it well. It’s just our all-out efforts around education and awareness is to get employees in one of two buckets, and that is to be vaccinated or to seek an accommodation if that is what they need.

Gary C. Kelly — Chairman of the Board & Chief Executive Officer

And as I think everyone on the call knows, it’s a political issue, it’s a polarizing issue and there are very strong feelings among some on both sides of this question. So my job is to take care of Southwest, to take care of all of our people, whether they’re on one side or the other, and we’re going to do our darndest to accomplish that.

Dawn Gilbertson — USA Today — Analyst

Thanks.

Operator

And ladies and gentlemen, our next question comes from David Koenig with the Associated Press. Please go ahead.

David Koenig — Associated Press — Analyst

Good afternoon, and I apologize, my questions have been mostly asked and answered. But just to clarify a couple of things, Gary. Do you have an assurance from the administration that they will let contractors such as yourself accept testing instead of vaccination as an accommodation for some of your employees? And my other question is, or maybe not a question, but I’ve raised this earlier with the folks at American. United and Delta gave numbers and percentages on the number of people vaccinated early on and then just updated them. And I’m wondering why you can’t do that as well.

Gary C. Kelly — Chairman of the Board & Chief Executive Officer

David, I can’t — I just can’t pass up the opportunity to say that I agree with your thought that executives ought to have at least two alcoholic drinks before these conference calls. However, I will say that no one in this room has done that. So I believe in the Herb Kelleher way, but we’re not subscribing to it, at least not yet.

Now I’ve talked enough and I forgot your questions, but — on the percentages, I’m not prepared to share percentages because I don’t believe they would be helpful or realistic. We’ve got a November 24 deadline that we’re working hard towards. The majority of our employees have responded to the call for either an accommodation or a vaccination, and the super majority of those who have reported so far are vaccinated. But I don’t know whether that percentage would be meaningful or relevant to — because there’s a large percentage that we have not heard from yet, and I have no idea what they will do or how vaccinated they are. And just remind me what your first question was.

David Koenig — Associated Press — Analyst

I was wondering, any assurance from the administration?

Gary C. Kelly — Chairman of the Board & Chief Executive Officer

No, we have, of course, not. You’ve got the executive order and so do we, and you either get a medical accommodation or a religious accommodation. Now whether there’s a testing requirement for those who are accommodated, there’s no guidance in the order on that. We are aware, obviously, of the proposed OSHA regulation which has not come out and which does provide for testing. So the two are not reconciled for us at this point. We are working on all fronts, but yes, we know what you know on that front.

David Koenig — Associated Press — Analyst

Okay.

Operator

Ladies and gentlemen, this concludes our question-and-answer session. I’d like to turn the conference back over to Ms. Rutherford for any closing remarks.

Linda Rutherford — Executive Vice President, People and Communications

Thank you, Rocco. Of course, any members of the media who have follow-up, please contact our communications group. They’re standing by at (214) 792-4847. You can always visit www.swamedia.com. Thank you all for joining us.

Operator

[Operator Closing Remarks]

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