Southwest CEO Rallies the Troops with a Sobering Note, Focuses on Costs

Southwest chief Gary Kelly sent out a great email to the airline’s employees (or, “People”) yesterday talking about the situation with American and more broadly, about the airline industry and Southwest’s place in it. He kept calling Southwest a Maverick, but the tone cast an ominous shadow over the perils of failing to control costs. You can read the entire letter below, but first, let’s discuss.

Southwest Needs Cost Control

What’s most interesting about this? It is truly a rallying cry. It’s a somber message – the good old days are over, and it’s a more level playing field now that the big boys have gone through bankruptcy to lower costs. But it’s clearly a call for Southwest employees to come together.

Now, while our costs are still lower, our advantage has been cut in half. We currently do not have a sufficient cost advantage to stimulate the market because our fares are much closer to our New Airline competitors.

Gary is very clear that costs are king, and Southwest is having trouble in that area when compared to other airlines.

The New Airline industry is profitable. In fact, the New Delta and New United had better profit margins than Southwest in the third quarter, despite the magnificent gains we’ve made over the last four years with our Customer Experience enhancements and our revenues. On that front, we have outperformed all competitors. We have a cost challenge, and it is one that looms large.

Then he zeroed in on how labor is a part of that.

Our labor rates are now, far and away, the highest in the industry. Through bankruptcy, very large New Airlines have emerged with lower rates than us and better productivity. Next to fuel, labor is our highest expenditure. We cant have lower overall operating costs if our labor costs aren’t lower. We cant have lower labor costs if we arent more productive. The good news is that we have a lot of opportunities to improve our productivity, eliminate waste, and preserve our pay rates and benefits for the foreseeable future. Its crucial that we take advantage of those opportunities.

He sets the focus for the airline on four big changes, including one (the new reservation system) that I thought was tabled.

And, it is our People who will continue to transform Southwest with four big initiatives: AirTran, All-New Rapid Rewards, B737-800, and a new reservation system.

But ultimately, it’s going to come down to one thing . . .

Finally, please remember, all the great things our People do will be for naught without low costs. Just ask the old “Legacy” airlines.

Like I said, a very somber note, but one that seems right on the money to me. This ain’t your father’s Southwest. Now the question is . . . what can they actually do about those cost problems? That’s the hard part, because Southwest employees have lived the good life. Sure, they were always happy to trade productivity for higher pay, but how much better can you do with productivity? I’m eagerly watching to see. Read the entire letter below.


Gary C. Kelly
Chairman of the Board, President &
Chief Executive Officer
P.O. Box 36611
Dallas, Texas 75235-1611

To: All Southwest and AirTran Warriors
From: Gary Kelly
Date: December 5, 2011

RE: American Airlines More Challenges for Southwest than Opportunities

The past week has been extraordinary with the bankruptcy of American Airlines and the unexpected retirement of their Chief Executive Officer. Not surprisingly, I have had questions from our People about what this means for us. I have heard comments like, “Im sure glad Im not at American. Im glad to be at Southwest.” I can assure you, in this season of giving thanks, it is the correct perspective. In this time of enormous world-wide economic uncertainty, it is the right perspective.

Just as I wrote in an article in LUVLines after 9/11: While an airline needs to be good at many things to be successful; low costs and profitability, ultimately, mean the difference between survival or not. To be clear, American Airlines, as you knew it, will not survive. Bankruptcy, by definition, means that it will be radically reorganized, or it will be completely shut down and liquidated.

American isnt the only airline not to survive without bankruptcy. Lets look back to 1989 the year Southwest became the newest member of the old major airline club, based on annual revenues. All the majors from 1989 have gone bankrupt. Pan Am. Eastern. Braniff. Continental. America West. TWA. US Air. United. Delta. Northwest. And now, American. Every single one failed. Why? Not because of Customer Service, but
because of high costs. Great Customer Service cannot overcome high costs. That is the imperative I wrote about a decade ago: low costs.

Southwest Airlines is the only major airline from 1989 that has survived this tumultuous industry without bankruptcy. Why? Because our low costs have preserved our profits. Period.

If American Airlines emerges from the ashes of bankruptcy, and I believe they will, you can be certain their costs will be substantially lower, especially their labor and aircraft costs. If they cant achieve that, they will cease to exist (like Pan Am, Eastern, Braniff, and TWA). If they do emerge from bankruptcy, as I believe they will, they will join the New United, New Delta, and New US Airways as giant, lower-cost airlines. They are, collectively, much more formidable competition than their predecessors. The term, “Legacy Carrier,” no
longer will apply.

In the good old days, when the Legacy Carriers costs were higher, we brought our low costs and low fares to their markets, stimulated demand, and expanded dramatically. Now, while our costs are still lower, our advantage has been cut in half. We currently do not have a sufficient cost advantage to stimulate the market because our fares are much closer to our New Airline competitors. These New Airlines, reconstituted from their Legacy ashes, join younger, lower-cost airlines like JetBlue and Frontier, as well as an even newer group of ultra low-cost airlines like Allegiant and Spirit. As predicted, the industry has transformed to lower costs.

Of course, one major point of low costs is to drive profits. The old airline industry was famous for not achieving profits, which rendered them very weak competitors. The New Airline industry is profitable. In fact, the New Delta and New United had better profit margins than Southwest in the third quarter, despite the magnificent gains we’ve made over the last four years with our Customer Experience enhancements and our revenues. On that front, we have outperformed all competitors. We have a cost challenge, and it is one that looms large.

American Airlines lost its way. It made promises it could not keep. It tried very hard to avoid bankruptcy. As every other major airline used that tortured strategy, American became higher and higher cost relative to the New Airline industry. Just when we thought 2011 would be safe from the perils of the 2009 recession, American is posting another massive loss. The New Delta and the New United are producing strong profits. Why? You know lower costs. It puts New Delta and New United in a position to grow from here. American has shrunk dramatically this past decade. They will shrink more. That may provide Southwest some opportunities to capture more Customers and grow; however, we will have to compete with a stronger marketplace for Americans customers. You know how much harder that is because of our
diminished cost advantage.

Americans employees will make many sacrifices. It is convenient to lay the blame at the feet of Americans management. Certainly, they deserve their share of the blame. But, just as employees deserve credit when a company does well, so do they deserve some of the blame when it does not. American has outdated and inflexible work rules that render it less productive than the New Airline industry. Thats just one example of how the company lost its way, and just one example of what is imperative to change, lest they be shut down.

For us, the bottom line is simple. There may be some near-term opportunities for Southwest as American shrinks and is distracted with the human struggle of bankruptcy. American will be governed through a bankruptcy court and a creditor committee, and it will be sheer hell for them. Once they get through it though, several years from now, they will join the New Airline industry as a much more formidable competitor. We need to prepare ourselves better right now for this New Airline industry.

So, what if we dont? As stated earlier, Southwest is the only 1989 major airline that has survived without bankruptcy. Why? Because our low costs have preserved our profits.

Our labor rates are now, far and away, the highest in the industry. Through bankruptcy, very large New Airlines have emerged with lower rates than us and better productivity. Next to fuel, labor is our highest expenditure. We cant have lower overall operating costs if our labor costs aren’t lower. We cant have lower labor costs if we arent more productive. The good news is that we have a lot of opportunities to improve our productivity, eliminate waste, and preserve our pay rates and benefits for the foreseeable future. Its crucial that we take advantage of those opportunities.

The imperative I spoke about nearly a decade ago has been fulfilled by our remaining, formerly “Legacy,” competitors. The imperative is now squarely upon Southwest. I know you all understand the evidence hundreds of airlines perished since deregulation. No 1989 major airline has survived without bankruptcy except Southwest. We are the maverick. We are different. Thats how we have prevailed with a Warrior Spirit, a “Never Give In” resolve, and a burning desire to be the very best. The sloth-like industry you remember competing against is now officially dead and buried. We fought them, and we won.

Now, the enemy is our own cost creep, our own legacy-like productivity, and our own inefficiencies. Fighting this cost enemy is an imperative to remain the Maverick. We will fight, and we will remain the Maverick.

It is important to say that low costs, alone, will not win the day. Our People are most important. It is our People who produce this great low-cost airline. It is our People who serve our Customers in an outstanding way. And, it is our People who will continue to transform Southwest with four big initiatives: AirTran, All-New Rapid Rewards, B737-800, and a new reservation system.

Finally, please remember, all the great things our People do will be for naught without low costs. Just ask the old “Legacy” airlines.

I am very grateful and very thankful for all of you.

74 Responses to Southwest CEO Rallies the Troops with a Sobering Note, Focuses on Costs

  1. Brad says:

    Good luck with that one, Gary. The long time employees of Southwest are flat out resentful of GK. The changes they’ve experienced since his arrival at the top spot have been a far cry from the ‘good ole days’ of Herb (I should know – I worked at two of their largest stations). Let us not forget Southwest recently acquired a competitor, the costs of which are blatantly reflected on the balance sheet.

    Southwest has made it’s own bed with concerns to labor costs; WN ground personnel are some of the highest paid in the industry and, thanks to union smarts and thin support for station management, are kept on a very, VERY loose leash. It will be EXTREMELY difficult for GK to reduce costs on the ground, and efforts to do such will be met with stiff resistance from the TWU.

    Back in 2007 I had a long conversation with a now retired employee whom compared the then state of Southwest to her previous employer, Eastern Airlines. In 2010 I asked Gary Kelly, point blank at a meet and greet, what sort of lessons we can take from our competitors, to which surprisingly answered, “None.”

  2. Jennifer says:

    Another reason why unions are to blame for a lot of America’s problems. Those low skill workers are making more than some Americans that actually put forth the effort to get a college degree. Unions have way too much power in today’s US.

    • Jason H says:

      I don’t really want to get into a political discussion, especially since this isn’t such a site, but really? First a caveat. I lean anti-union for many reasons that I won’t bother sharing here.

      Unions created the working environment we “enjoy” today. The 40hr work week, the concept of overtime, worker safety, non-arbitraty hiring/firing, fair pay, etc. As the unions have been pushed back we see expectations like 60hr work weeks, non paid overtime, etc. Recently a US Congress-critter proposed a law to remove overtime pay from all IT workers and went so far as to define an IT worker as someone that uses a computer to complete their job.

      Unions do not have the power they used to have. Their ranks are thinning and their clout, while still strong, is continually pushed back. However, as that happens people forced into conditions that are an antithesis of what they consider a safe and fair work environment will find ways to associate.

      As I said, I lean slightly anti-union.. or more specifically slightly anti-US-union. Consider the pay, vacation, retirement, and other perks that a worker in Europe gets. Germany is an exporting powerhouse with a 95%+ union workforce. No, I’m sorry. Unions are not “to blame for a lot of America’s problems.” In fact they should be part of the solution.

      Okay. I’m off my soapbox for now. Back to your regularly scheduled airline/airplane dorkiness.

    • Jesse W says:

      I am a pilot for a major airline. I am a union member. I am not a low skill worker. I have over 8000 hours of flight time acquired over 21 years . I have flown in combat and been an Air Force instructor pilot. We negotiate with the company to achieve a contract that both parties agree on. The company is a willing participant in those negotiations. We have little leverage to get a great or even good deal since the individual union members have more to lose than the company executives they are negotiating with. I took a 50% pay cut in 2003 in order to keep my airline out of Chapter 7 bankruptcy and preserve my job. My CEO and many of the executives received a pay raise. Remember they are the ones that made the business decisions that put us into bankruptcy in the first place. A large part of the blame for Americas economic problems should be placed squarely on the shoulders of the people who make the poor business decisions. Not the workers who carry out the business plan.
      Contrary to popular belief, the planes do not fly themselves. How much is a good pilot worth? Would you really trust your life to the lowest bidder?

      • FRANK says:

        <<<>>>

        Thank you, Jesse. Everyone on this board seems to think LABOR is the problem here. Like we havent taken it in the shorts enough already. Like I said, I have co-workers who are applying for and GETTING food stamps. that’s ridiculous. And, that shows how LOW management has taken those “business plans”.

  3. I hope all airline employees read this. It’s a sobering statement on where the entire industry is, not only Southwest.

    • FRANK says:

      Ok, I read it. :::yawn::: Apparently, you’re forgetting that I already took major paycuts and benefits cuts almost a decade ago. Havent seen any real pay raise in that time as well. Pensions are gone, turned over to the PBGC. Now, what was he saying, Labor costs are high? Yeah, compared to other airlines that went into bankruptcy and used the bankruptcy courts to rip apart OUR contracts, sending our pay back 10 to 15 years!!!!

      and, I hope all passengers read this. Airline employees are tired of subsidizing your cheap *&^ airline ticket at the expense of our pay and benefits!

      • Jason H says:

        Unfortunately more and more airline employees are viewing all customers as paying the cheap tickets. So, those of us that are paying high dollar fares are treated with enough contempt that we walk away from those airlines. Don’t just blame the customer either. Management has just as much to answer for as well as the inflexibility of some groups of airline workers. There is plenty of blame to go around, but the employees seem to be focused on blaming fare paying customers. Not a very good long term plan for a business.

        • FRANK says:

          ..if you’re paying HIGH dollar fares, then you’re probably buying those last minute fares, most business travelers use. While excessive in price, the seats are held til the day of departure at the risk of going empty if last minute travelers dont purchase them.
          The article is about HIGH labor costs. I disagree. No one’s making a fortune here, not even the pilots anymore. Some resort to sleeping in an airport crew lounge because they cant afford hotels before they start their trips and yes, they choose to commute to work. Check out how often an airline will open and or close a base. Moving is not an option for some workers.
          Jason, it’s the mentality of the passenger as well. I dont have contempt for their business, but I hear constantly from them that they expect a cheap fare. I had a passenger complain to me on a transcon, that he paid over FOUR hundred dollars. I laughed and said, it costs over 900 dollars to DRIVE.

          • Jason H says:

            I agree that there are plenty of terrible passengers. I’ve had them complain to me about how they paid $600 for their flight when I paid 3 or 4 times that because I booked 24-48 hours out. It is the Wal-Mart effect in the air. People want cheap, not inexpensive. One of the things my parents taught me early was the difference in those two terms.

            I have no issue paying much more for my ticket, personal or business. What I do have an issue with is being treated with contempt by crews and ground staff just because I’m there. Even when I am as pleasant as can be it doesn’t change their attitude and that is sad.

          • Mark says:

            FRANK -

            I can totally understand that rude and clueless passengers get under your skin. Retail service industries suck; sooner or later, you’re bound to meet someone who ruins your day.

            I get from your many comments that you (labor) don’t want to be blamed as the cause of the profit problem. That’s fine; what’s your solution? Where’s the fix? If the airline’s not making enough profit, it’s either because your costs are too high or your prices are too low. What changes would YOU make?

            As I passenger, I’m tired of being blamed for your pricing problems. Like everyone else, my business and my family have a budget. If I can afford to fly somewhere, I will. If I can’t, I won’t. *I* don’t set the prices. *I* don’t have any idea how much you guys need to make to break even. If you don’t want me buying cheap tickets on your airline, just raise the fares and I’ll stay away. It’s simple. If it costs you more to transport me than I paid for the ticket, that’s your mistake and you should correct it. If you want to raise your fares 100% or more and offer pillows, blankets, fine dining and a dress code, go for it. I wish you the best. But enough with the attitude – YOU offered ME that ticket at that price.

      • If everyone (passengers and employees alike) are always focused on getting the best possible deal for themselves the airlines will suffer…

        Haven’t we hit a reasonable equilibrium?

        • It would be nice if we could hit a “reasonable equilibrium.” It would help everyone.

        • FRANK says:

          Nicholas,
          ………everyone should REALIZE the most airline “employees” found that equilibrium, in most cases, it was FORCED upon them in bankruptcy court.

          • You know Frank, if you’re working in a job that you don’t like and/or don’t think you get paid enough for please change. All of the major airline bankruptcies except AA’s were before the 2008 crash, when unemployment was low and there were lots of jobs..

            Don’t forget that one of the big benefits that airline employees get (free flights) is something that the rest of us don’t, and we pay a good amount of money for…

          • Trent880 says:

            It was “FORCED” on them in spite of having often decades or more advance warning. Every labor group, and some management, has taken a short view–maximize employee return today, rather than manage toward a stable equilibrium that is less suceptible to economic chocks. The APA had at least a decade to find a manageable solution but their starting point was a 50% raise and scorched earth. Well the solution is now going to be imposed on them during bankruptcy. Labor unions always have a choice–manage to the economic environment, or have the economy manage you.

          • Trent, you bring up a very important point. Southwest has probably had some of the best union-managment relations, period. When talking with people not in the know about airlines they think Southwest is non-union, and they’re amazed when I tell them it is heavily unionized..

            Southwest’s management and labor get that this is a partnership that benefits both of them, and I hope they’re not about to throw it away..

          • Trent880 says:

            Nicholas,

            Great labor relations are easy when everything is rosy. When things start getting tough (they are) is when those great labor relations get put to the test. This is going to be FASCINATING to watch.

          • FRANK says:

            Written by Nicholas Barnard on December 6, 2011. You know Frank, if you’re working in a job that you don’t like and/or don’t think you get paid enough for please change.Don’t forget that one of the big benefits that airline employees get (free flights) is something that the rest of us don’t, and we pay a good amount of money for…
            —————————————————————-

            again with the change jobs CRAP. I didnt put in 32 YEARS to just walk away from my job, my seniority, my benefits etc..etc. NO WHERE IN MY POSTS have to said, I dont like my job. NO WHERE IN MY POSTS did I say, I hate passengers. Newsflash, we’re talking labor costs here. I have co-workers who are QUALIFYING FOR FOOD STAMPS. My pension was terminated, I didnt sign up for that many years ago. It’s always the employees to blame, you make too much. You’re not educated. I find that laughable, heck, if AMERICAN AIRLINES was losing money for so many years, then why was MANAGEMENT rewarding themselves with MULTI-MILLIONS in bonuses???? They certainly HAD control over that, now didnt they?
            @ Mark. I get that. Airfares dont always support the airline’s costs. Competition dictates fares. Fares go too high, and people simply stay home. You are simply purchasing an airfare an airline has offered. But, they can CONTINUE to offer that fare, based on labor costs/fuel costs, etc…etc.
            Big benefit is flying for free? LMAOOOOOO. I havent used mine in years!

          • Frank, welcome to 2006 where the era of a single job for life died 10 years ago. I’ve had to deal with seasonal work, companies that transform to the point that I do hate my job, and a manager breathing down my neck. This is the economy we live in. It ain’t fair, and I’d support you if you were staring occupy-737, but most folks have had their real earnings stagnate or fall. Airline employees are no different.

            P.S. Why don’t you use your free flight priveldges?

      • CF says:

        FRANK – It must get pretty exhausting always being so bitter about your situation The reality is that thanks to deregulation, you have two options – work for less or leave the industry.

        Travelers want cheap tickets, and that’s what drives the race to the bottom. I’ve heard plenty of airline employees complain that their employers are charging too little for seats and should raise fares. This worked before deregulation, but not anymore.

        When an airline raises fares too high, it opens an opportunity for low cost airlines to come in and steal all their passengers because passengers want cheap fares. That’s how Southwest survived in the beginning, and it’s how Allegiant and Spirit are running a run at things today.

        The legacy carriers started learning that once the industry was deregulated, they needed lower costs and lower fares to survive, because they’d be out of business otherwise. So if they went and gave huge raises back to 1990s levels, they’d be out of business pretty quickly.

        So as others have said, if you’re so unhappy, find another job in another industry. You’re not going to see wages return to their previous levels. I’m not suggesting that this makes me happy – it’s simply the reality of the situation.

        • FRANK says:

          FRANK – It must get pretty exhausting always being so bitter about your situation The reality is that thanks to deregulation, you have two options – work for less or leave the industry.
          ——————————————————————–

          Dude, you couldnt be farther from the truth. What I say on the internet and my work ethic are two different issues. NOT Bitter, I’ve adapted to the circumstances quite well. In fact, I’ll be retiring EARLY. but, thanks for the education that I didnt need. I’ve lived it and for the most part, enjoyed the aviation industry. the reality of the situation is that THIS industry is heavily UNIONIZED for a reason. It’s labor disputes are a symptom of that race to the bottom.

    • @FRANK, With all due respect, have you looked at other industries? Airline employees are well paid relative to most others on an average basis (I know everyone doesn’t make the “average” wage), so you’ll have to pardon my lack of sympathy for your “poverty” wages (I personally know pilots who make six figures – and I fully acknowledge they’re worth it).

      The airline industry is mature. It’s financially under performed throughout its history. It ultimately has to get its costs in order and become economically sustainable. I’m sorry; but that’s life in the real world. I hope things change; that carriers will become profitable in the long run and increase pay for the front line workers (not pay bonuses to executives while cutting pay for everyone else, one of the dumbest [if not THE dumbest] things that AMR management ever did).

      No one is forcing you to work for an airline. Indentured servitude (i.e. slavery) was outlawed by the Thirteenth Amendment. If you really think you’re being underpaid, get a job in another industry that pays better.

      Most peoples’ pay has gone down relative to inflation. SO … You’re not alone. Join the club.

      • FRANK says:

        Really? that if you dont like it, find another job mantra? Lame.

        well, one could say the same about passengers. it’s transportation from point A to point B. NOT the FOUR SEASONS HOTEL. No, we dont have blankets, get over it. YOU wanted cheap, you got it. No one is forcing you to fly, there’s always greyhound or the freeway.

  4. Don says:

    WN is a great airline. But I heard that they were the higest paid. And now with the Airtran merge their costs are gonna go higher. Cost creep is a scary thing; especially now that their fuel hedge is over. Now they face a growing pay scale for a growing workforce all while downsizing in certain markets.

    HEY GARY…..KEEP THE WN BRAND SAFE, DON’T START CHARGING FOR THE TWO CHECKED BAGS!

    • CF says:

      I don’t understand why you think costs would go higher. AirTran’s costs are lower, so at worst, it should just raise that operation’s costs up to current Southwest levels.

  5. Jon says:

    I smell bag fees.

  6. Dan says:

    WN ain’t the darling anymore, that’s for sure.

    • FRANK says:

      and, he’s NOT sounding like HERB either. More like all the other CEO’s of airlines. BLAME IT ON THE EMPLOYEES if all else fails.

      • Ryan says:

        To be fair, Herb left at the perfect time. Before he himself had to make these kind of statements. What would Herb do differently right now? Without double digit kind of growth, their costs were going to start catching up with them eventually.

      • He isn’t “blaming it on the employees.” He is explaining the factors that are major challenges for Southwest to be profitable in this new industry environment.

  7. Jason H says:

    I would like to think that as WN begins to look more and more like the other major carriers it will start acting a little less like a spoiled brat. They don’t want to interline with anyone in the US. They want to try to go solo as much as possible. Yet at some point they need to realize that they can benefit from the major carrier’s long-haul international reach just as the major carriers can benefit from WN’s domestic reach.

  8. Ogsams says:

    Your crazy GK every other work group got significant pay increase but when its our time you start with this crap. I’m rejecting any BS contract you send our way. Nobody works harder then we do dealing with the extreme heat and extreme cold constantly being madotory stayed after shifts and on our days off. So yes your going pay like you dud every other work group.

  9. There is a saying ‘what goes around, comes around’, so one day WN could be facing the same thing AA is now facing and they too might have to sell themselves off or head to bankruptcy. They are no more the darling little engine that could.

    The bigger you get, the harder you fall.

  10. Ryan says:

    Something will have to give. WN already has the highest productivity in terms of Pax/FTE and Dep/FTE. I’m excluding airlines like Allegiant or Spirit. Airlines that outsource heavily on the ground operations. That naturally inflates their productivity metrics. But WN does everything with their own employees and the kinds of productivity they get out of it is still amazing to me. I just don’t see how you can squeeze much more out of them in a single day.

    • CF says:

      I’m with you on this one, Ryan. I will be very curious to see how they work toward increasing productivity at this point. If they keep all their own employees, then I think it’s going to be very hard. If they start thinking about outsourcing some stuff, then that’s going to go down just as bad or worse with employees than a pay cut. This could get ugly, quickly. I don’t envy Gary having to fix this situation.

    • One question regarding Pax/FTE, Does a passenger who flies CMH->MDW->MCI (I’m just making that up.) on the same plane without getting off count as two passengers? Because that has the potential to really skew that number..

      • Ryan says:

        Good observation. Southwest reports 2 numbers. One is passengers carried and another is passenger enplanements. The enplanement number is higher. In your scenario, yes you should count each “segment” a passenger flies as an enplanement no matter if they get off the plane in MDW or not. But I believe they show the passengers carried stat to show you how many people they carried on distinct itineraries. So in the third quarter they had about 28m passengers and 35m enplanements. So about 7m people took one or multiple stop flights but didn’t change planes. I know technically a person who doesn’t get off might skew the number for the ground operations people, but what about the flight attendants and the pilots? They still serviced that passenger on the CMH-MDW and on MDW-MCI leg. Or what about the revenue management folks who priced the ticket on each of those legs? They still put in the work to make those two flights go. And you could argue that even though the rampers didn’t unload that person’s bag, they still brought the plane in and pushed it back out. So while the stat isn’t perfect in cases like that where the passenger doesn’t change planes, it still makes some sense when you think about it in a few different ways.

  11. Southwest appears to be at a crossroads. It is no longer the scrappy little airline with a simple concept. CEO Kelly is correct. With higher fuel costs and labor costs, it is no longer as competitive. Employees need to wake up to the statistics. In addition to industry high salaries for union employees, the other elephant in the room is the astronomic costs of employee absenteeism, especially among union employees. A majority are hardworking and conscientious but there is a subculture of union employees who believe they are entitled to take maximum FMLA and OJI, for example, even if they are not sick or injured. Southwest has the highest absenteeism rates in the industry, above the industry average, which means they have to carry almost 3,000 extra employees to cover the absences. Again, most union employees do not take advantage of the system but there are sufficient numbers to cost the company multi-millions of dollars. CEO Kelly is doing his best to increase productivity through more enhanced technology, the employees who do show up for work and don’t “game” the system, are the most productive in the industry, but those who do “work the system” are dragging the company down and don’t seem to care.

    • CF says:

      Wait, what? They have 3,000 extra employees just to cover for absences? That seems suspicious to me. Please cite your sources for this one.

    • FRANK says:

      A WN flight attendant told me they have a higher rate of OJI’s among their workgroup. It’s those short haul, tray-using beverage flights. They’re pressured to get up, serve them, even when turbulence may be an issue. Other airlines simply dont serve those short time flights.

  12. Don says:

    I think the answer is really quite simple with very harsh hard reality involved. If you can’t get more from your employees while keeping the pay level you will be doomed. That is just the way the world works nowadays unfortunately. When the cost creep starts to exceed the profits or turns very little profit; then furloughs, service cuts, higher fares, and/or bankruptcy are imminent. That is the raw reality of any profit making business. And lambasting about customers isn’t fair to the customers. Every single paying customer that walks on board the airplane did not set the fare. And looking for a great bargain is what most people do these days; including flight attendants (reading some of the comments here seems like they are flight attendants).

  13. James Craven says:

    Having worked for Eastern Airlines in the 70s & 80s and competing against SouthWest during their start-up period, I never thought I would read that WN’s labor costs are the highest in the industry (Alfred Kahn must be laughing from the grave), just goes to show you that, “the first will be last and the last will be first”, once again… JSC

  14. Anthony says:

    During college I had the dumb-founded luck to intern at Southwest Airlines (still can’t believe I pulled that off), and while I was only there for about 4 months I was able to see what an outstanding company they are. It was amazing to me the level of commitment that Southwest employees have to their company and to their professions in general. It seemed like everyone I met while I was there genuinely enjoyed what they did and were very proud to be a part of Southwest (rightly so, in my humble opinion). The company has weathered difficult situations in the past, and I think they will be able to find ways to stay competitive against these newly restructured legacy carriers. They have always been very conservative in their business decisions, and starting work on this issue now before it becomes too late is wise. I certainly agree with Mr. Kelly’s assessment of the situation. While it’s easy to become complacent and reminisce about the good ol’ days, businesses must constantly adapt to the marketplace and continually find new ways to stay competitive. Southwest’s labor relations seem to be much more cordial that at any legacy carrier, so hopefully this will lead to agreements forged out of understanding and fact rather than by threat and force. Also, when times are tough and airline management asks employees to sacrifice, they must also realize the impact of their actions and perhaps pledge to take no pay increases as long as employees do not get them, or something to that effect. It will be essential for Southwest to maintain its high level of employee morale in order to stay competitive (their employee morale is probably their greatest strength). Again, it’s probably a good move to notify employees of the situation and get the ball rolling on this as soon as possible. This is just my opinion, but if I worked at Southwest full time I would be extremely grateful just to work there again and would probably be willing to work on some new agreements in order to keep the company as successful as it has been in the past. Best of luck to Southwest and their people.

  15. Are the typos yours or GKs?

    Someone needs to learn how to use apostrophes, among other things.

    • CF says:

      I actually didn’t know what to do with those. The letter was sent to me from a third party in a format that had no apostrophes in it. I didn’t see the real letter in its native format (though I did ask WN to make sure it was real), so I just pasted as I received it. I think the only change I made was to put quotes around things that were supposed to be quoted. (They were shown as periods in the doc I received.) My assumption is that the grammar was probably sound, but I don’t know for sure.

  16. ancdude says:

    Before we moved to Alaska, I used Southwest almost exclusively out of SEA. But I switched to AS in the early 2000s for three reasons: Comparing ticket prices, I found ASto be consistently competitive; Alaska’s flight schedules were usually more favorable; we could fly point-to-point without having to stop every couple of hours and change planes; last, but not least, we had assigned seats – no cattle car. In addition, I’ve never cared much for WN’s smug, cutesy BS and phony “caring.” I flew them because they were cheaper. When that advantage ceased, I began flying a real airline that didn’t really care, but got me where I was going, with minimal BS. Now I fly Alaska because I live in Alaska, but they have grown into a very good airline – great route structure, pleasant environment and competitive prices, once you get outside of the state.

  17. Kyle says:

    FRANK, I couldn’t agree with you more! It’s easy for the public to blame unions, however they are very unique at airlines, especially since the are a 24/7, 365, mostly worldwide operations. Many airline employees are “self-managed” and rarely work with a supervisor or manager watching over them unlike most other industries. I for one speak or see my direct manager once every 6 months, of that.

  18. Trent880 says:

    Now serving crow on all WN flights. Book now! The next five years are going to be harder for WN than the first 40. WN’s main, arguably only, advantage over the other carriers was cost, and that advantage has slowly been whittled away over the years, especially when it had hedging benefits to distract their focus. In WN’s world, and anyone that competes with them it’s all about network/schedule, cost, cost, cost. WN doesn’t have the strongest network/schedule by a longshot, and now its cost advantage is even debatable.

  19. Patrick says:

    Southwest, as I recall began in 1971 with Herb..and a napkin..San Antonio-Houston-Dallas. 3 aircraft. He managed to drag down the pay and working conditions of EVERY airline to grow his own. In those days, you had airline passengers, train passengers, bus passengers, and automobiles. Now somehow, everyone feels entitled to fly. Thankyou Southwest…They want big seats, nice meals, great service,,and pay less than bus-fare for it.
    Southwest in my opinion began the cheap fare ops that changed flying. Watch the TV show “PAN AM” Passengers actually were well dressed and mannered back then. The middle seat was open. Passengers were well mannered, educated and civilized. Now we have bus people wearing shorts and T-shirts. There is an old saying…what goes around comes around..or vice-versa…Sorry Herb and Gary…now you reap what you have sowed. Did you actually expect to defeat the carriers that made aviation what it is today. Would it not be interesting if United/Continental, Northwest/Delta, American, and USAir beat the crap out of you. Remember…you started it !!!

    • CF says:

      Southwest did not invent low fares. In fact, Southwest got some of its inspiration from what PSA was doing in California. The only reason either of them could do it is because they were flying intrastate so weren’t subject to the federal regulations.

      Southwest and PSA did exactly what they should have done – catered to the people who wanted to fly but simply couldn’t afford to do it. Deregulation enabled them to expand and thrive. (Well, ok, so PSA didn’t thrive for long.)

      I’ll take the system we have today over what was there 50 years ago every time. That’s because I wouldn’t be able to afford the $2,000 cost to fly across the country that was charged back then (adjusted for inflation).

  20. Sanjeev M says:

    Ok so outside of labor, Southwest has done a couple things to reduce costs aside from revenue increases such as Early Bird Check in.

    1. 737-800′s will reduce CASM and increase capacity into key airports.
    2. GK was floating the idea of adding another row of seats on the planes. Maybe with slimline seats or something (a la LH Neu Europe Kabin)
    3. Merger synergies from the AirTran merger (about $500 million?)

    This industry has cut so much cost already that I don’t see any major structural changes/cuts that can be made. Southwest could go to just one bag free, but this would harm them more than anything and not save much. Maybe WN could get a real reservation system that would allow them to get proper international feed from other carriers.

    Policy wise, we need to relax visa restrictions so that the USA gets tourists (those with money).

    On an interesting side-note, Megabus last month launched a hub in ATL with routes all over the Southeast.

  21. Oliver says:

    @FRANK – what’s your solution?

  22. Bill says:

    Frank I’m on your side. There is something horribly wrong with our culture that lionizes the CEO class while demonizing unions. News flash for all here that have used this thread to bash unions. UNIONS MADE THE MIDDLE CLASS !! If not for unions we wouldn’t have the Fair Labor Standards Act that created the 40 hour work week and put and end to child labor in this country.
    Brett this blog is very useful and informative however you never fail to pass up a chance to bash unions.
    Unions: The people that brought you THE WEEKEND.

  23. Flyinryan says:

    One thing WN has been doing has been raising fares and most likely not the one with the pricing power in markets. I’ll use DTW-Chicago as an example. Just a few years ago the average price was like $90 one way. In the 2nd quarter of this year, the average fare was $160.70 one way. Southwest had the lowest average fare at $154…Maybe that’s why we have seen the likes of Spirit jump in the DTW-ORD market…they noticed fares went up…soon Southwest will actually be a target and they won’t be targeting others.

  24. JT74 says:

    Just a quick note…

    Southwest’s walk-up fare from DTW-MDW tomorrow is $168. (Web fares as low as low as $67 are still available for tomorrow, too.)

    The walk-up one way fare in 1979 on most major carriers was about $56.00 (according to an old OAG). Midway Airlines offered a walk-up fare of $42.

    $56.00 in 1979 is about $181 today. $42 would be today’s $136.

    Southwest’s fares may have increased in the past few years, but taking inflation into account, their fares (at least on that route) today are still less than or about the same as they would have been in 30 years ago in 1979.

  25. I find this letter very interesting, but not surprising. I’ve been sounding the alarm for years that WN’s labor costs were eroding its competitive advantage — indeed, its reason to exist. Kelly’s a smart guy and obviously understands this. One sentence is particularly noteworthy: “We currently do not have a sufficient cost advantage to stimulate the market because our fares are much closer to our New Airline competitors.”

    With WN forced to charge about the same as the Legacies, what’s WN’s advantage? I don’t honestly see one.

    Kelly is obviously preparing his troops for wage “restrictions” — probably not reductions, at least at this point. But, time and again, airline employees have failed to understand why sacrifices need to be made to keep their airlines successful. Instead, they have preferred to remain ignorant and stubborn, and have driven their employers into Chap. 11 (AMR the latest example). I’m skeptical that the mentality among WN employees will be materially different.

  26. BeachDude says:

    I can’t wait for them to start charging for peanuts or restricting the bag of peanuts to one bag per paying passenger and extra bags will be sold like drinks.

    Been flying SWA since I was in college back in the 80′s and was quick to sign-up for the old Company Club. Sad to see a good model turned rotten with the initial change to rapid rewards and then the flight credits turn to points a la the legacy carriers. What about SWA reneging on the drink coupons that will never expire only to have them all expire in August.

    RIP SWA as you have become that which you worked so hard to be so unlike :-(

  27. Don says:

    I remember when the employees worked free to keep WN afloat. But now, I’m not so sure. They have become much bigger and acquired Airtran. So, that alone will be hard.

  28. nsx at FlyerTalk says:

    With WN forced to charge about the same as the Legacies, what’s WN’s advantage?

    WN’s differentiator is honest fares without sucker-punch fees. The ability to re-use canceled advance purchase fares at full value is unique, building long-term loyalty at minimal loss in revenue.

    Customers detest surprise fees, yet fees provide little pricing advantage (other than reduced federal tax) if the customer is fully informed about the fee at the time of purchase. As customers become informed, mostly through unpleasant experiences at the ticket counter, they will keep moving market share to Southwest.

    • “As customers become informed, mostly through unpleasant experiences at the ticket counter, they will keep moving market share to Southwest.”

      How long have we had fees for bags and other items? By my recollection this started four years ago. As far as I see customers aren’t flocking to Southwest over this too much.

      Customers are smart and know off the top of their head that bags will be $20 or $30 an factor this into their buying decisions.

  29. Jan says:

    The economy will suffer in the long run when employee’s take pay cuts while upper management continues to take huge “bonuses”.

    • DavidZ says:

      Even if upper management decides to take pay cuts also, there’s always the risk of one or so being pirated by a company willing to pay more. If that upper management employee bites then leaves, then WN or whoever airline scrambles to fill in that empty yet arguably needed position ASAP, what then?

      Just asking, that’s all. Cause and effect.

  30. yo says:

    So, when is the media going to get over their Southwest worship and start reporting this? I’ve been saying for the last few years that Southwest faces some tough times, but, the public is so used to the endless baloney about Southwest being unbeatable.

    Of course the big airlines have reorganized, decades of union entitlements and workrules made them all slugs, but when they needed to compete they couldn’t. Its a good thing that SW is getting their asses handed to them by USAirways in PHL and PIT. Humility makes for better strategy.

  31. David says:

    Don’t you all own stock? Go to the board meetings. Educate/investigate enrichment at the top as much as you can. And TALK about it. Re-regulation isn’t going to happen (as I’d like!) The unbelievable ongoing seasonal price wars place our industry product of travel in continual retrograde. Combine that with unprecedented greed at the top and……….there’s not enough “income” to pay for the “outgo”………..it is beyond time to slap fingers on the cookie jar.

  32. Pingback: Frontier Charts Its Course as an Ultra Low Cost Carrier - >> The Cranky Flier

  33. Carl says:

    All of you need to take stock in what you are saying and stop ignoring the obvious. It doesn?t matter one whit whether you like the man or not, Mr. Kelly is right. If your costs are too high, you go out of business. Period. Is that what you want?

    Do you remember Eastern Air Lines? The mantra of the unions was “bring Frank Borman to his knees”. They succeeded. They brought Eastern to its knees and it really worked out well for them, didn’t it? Is that what you want?

    It is really short sighted (read stupid) to blame passengers for flying where the fares are the lowest. You can?t ignore the fact that customers go where the prices are the best. You do it when you buy groceries for your children or gasoline for your car. Passengers do it when they buy tickets. Airlines do it when they shop for fuel. Every time you shop for a lower price you put a squeeze on the companies that provide whatever it is that you want to buy.

    I’ll give you even odds that a large contingent of people will continue to ignore the economic facts of life and declare me a shill for management. Like the ostrich with its head in the sand they think the bugaboo isn?t there. Rest assured it is there and blowing on a bent bugle isn?t going to change anything.

    If you are the ostrich here?s a suggestion. Do a little side study on economics and show Mr. Kelly how you can stay in business when your costs are higher than your revenue.

    You need to wake up and put this discussion on the level it belongs: Southwest will die if you don’t control costs. Period. That’s what Mr. Kelly’s letter said and Herb Kelleher couldn’t do differently today.

  34. Pingback: Southwest’s Looming Labor Fight - >> The Cranky Flier

  35. stuman the crewman says:

    I worked for TWAin 1987 in NY the Sabena in 1989, this industry use to require one of three things , work experience , a college degree or second language…all that changed with deregulation and its been a race to the bottom line ever since … the customers get treated like cattle, the shareholders lose money, the employees get less compensation relative to cost of living. The only people making out are senior management, the bankers and lawyers from the turmoil. My main point is that Unions do help the middle class by having a negotiated contract which apparently does’nt mean much during bankruptcy. This is happening in every industry including local and state government contracts. Look at Scranton PA recently cutting salaries to min wage. I would recommend that unions negotiate work rules as long as it does not effect safety but protect the existing contract , with future promises to pay more into pensions and health care across the board based on income not just seniority .. the real savings come from the top so create an incentive for early retirement creating demand for new labor.

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