Unlike any other large airline in the US, Southwest has had an incredible streak of good labor relations. Despite being highly unionized, the airline has had labor peace for most of its 40+ years. How has the airline done this? Well, it has long put a high priority on supporting its people and that has meant a no layoff policy, ever-increasing wages, and no outsourcing. In return, Southwest’s employees are very productive and famously-friendly.
This has worked for the airline ever since it began, but now the airline finds itself in a different situation. As CEO Gary Kelly noted in an excellent letter to the troops back in December, Southwest’s wages are the highest in the industry. With growth almost non-existent and profits being squeezed, it’s just a matter of time before a labor fight turns ugly. Right now, it’s the ramp workers who are making a lot of noise.
It’s no surprise that today’s Southwest is not exactly the same as the one from days of yore. The airline is in a very different place now. While Southwest was once the scrappy upstart, clawing its way to the top, it is now the largest passenger carrier in the domestic US market. It isn’t the lowest cost operator and it’s not nearly the low price leader it used to be.
A Brief History
Up until the last decade, Southwest relied on rapid growth to fuel its business. It never had to worry about layoffs. When times were tough for the other airlines, Southwest thrived by introducing low fares into more and more markets. It mercilessly stole traffic from the big guys. That growth also kept labor costs low. Even though wages kept climbing, the constant influx of new blood to fuel the expansion meant that there were a lot of people working for entry level wages.
Things should have started to change in the last decade. Legacy airlines going through bankruptcy one after another brought their cost structures closer to that of Southwest. At the same time, fuel cost increases meant that demand would be slowing. Southwest should have been transforming to face that challenge. It didn’t.
Southwest was was able to rely on its fuel hedges as a crutch. While many people suggested that this fuel hedge was brilliant, all it did was prevent Southwest from adjusting to the new reality of high fuel prices. Once the hedges ran out, Southwest had to make big changes.
Merging to Find Growth
Since that time, Southwest has been a different airline. It has slowed to almost no growth after realizing that there were few big opportunities left for the airline in the US, especially considering the rapid rise in fuel costs that it faced when the hedges ran out. So what did it do? It turned to a merger, acquiring AirTran to grow its business.
When Southwest first announced it would take over AirTran, I got excited at the prospect of Southwest figuring out a way to serve smaller cities but that hasn’t happened. We’ve seen Southwest ditch the smallest airplanes, cut the small cities AirTran served, and really back away completely from this idea of serving smaller towns. The merger now seems to be mostly about Atlanta and eliminating a competitor.
So here we are with an airline that has seen internal growth stagnate and profits start to lag. What can Southwest do to combat this?
Labor the Untouchable
The one untouchable has always been labor. Back in 2004, the first CEO after Herb Kelleher, Jim Parker, tried to take a stand in labor negotiations with the flight attendants. The flight attendants weren’t happy with the raises being offered (and yes, they were offered raises). In the end, Herb stepped back in, gave the flight attendants more, and Jim resigned soon after.
While there have always been minor spats over the years, the big dust-ups like that have been very rare. Is it time for a labor confrontation to come to a head once again?
It wouldn’t be a surprise, especially considering that letter that Gary Kelly wrote last year. Labor has enjoyed a great ride with Southwest, but will it be ready to face the challenges that Southwest is facing today?
Last week’s rumblings were from the airline’s ramp workers protesting at Chicago’s Midway Airport. The rampers have decided to take their negotiations public by announcing that Southwest has asked for the right to outsource 20 percent of their jobs. That’s certainly one way to reduce labor costs, but as you can imagine, when I spoke with Charles Cerf, President of TWU Local 555, he and the rest of the rampers were not very happy with this plan.
Southwest, for its part, says there is no effort to outsource jobs at Midway, but of course, that doesn’t mean it wouldn’t change its mind if it could get the right to do it in contract negotiations. I assume it has to have at least some interest or it wouldn’t bother asking for it. Then again, it already has the right in some cases and it doesn’t use that.
Something I didn’t realize is that Southwest’s current contract with its rampers allows the airline to outsource jobs in new cities with fewer than 12 daily flights. Yet when it opened Panama City in Florida and Greenville/Spartanburg and Charleston in South Carolina, it kept jobs in-house. (That provision makes it even more surprising that Southwest has walked away from AirTran’s smaller cities.)
You would think that any level of outsourcing would take away from the Southwest culture, but Southwest has to find a way to contain its costs. I can see how the airline might come to the conclusion that it would rather outsource some jobs to lower costs instead of putting downward pressure on compensation for its own employees.
Maybe this is Southwest just trying to position itself in negotiations. It could give up the outsourcing ask in exchange for something else. I really don’t know. Since this is part of a labor negotiation, Southwest won’t comment (and really, it shouldn’t). But it wouldn’t surprise me in the least to see Southwest trying to do things differently.
Southwest has a cost problem on its hands, and it has a tall task ahead to try and figure out a way to tackle it. Inevitably, this means there are bound to be more serious clashes with labor than we’ve seen in the past.