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.
WN seems to always do ok so all this should be interesting to see what happens.
For years WN treated it working well, having parties etc which they knew would keep them happy and agreeable to whatever the airline asked of them. Now sounds like the party is over.
Southwest airlines has a pyramid scheme enacted with their paygrade. The rampers make a salary of a teenager, not a man. They don’t support living wages and they do not value education. If their employees were highly educated they would lose control of the herd.
Well, well, well. WN will finally be forced to play on the same field the rest of the industry. Maybe their marketing will become a little more humble. Doubt it.
“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.”
This is the most important point in the whole article, and bravo to you, Cranky, for making it. It’s a pivotal, and common, “mistake” made in low margin businesses because it requires deep, long-term thinking to avoid — and to be fair, there’s not really a strong argument to be made that it should be avoided. It benefits growth, assuming you can get a handle on it once that growth slows.
By “same playing field,” are you referring bankruptcy court?
That would be a hoot!!!!!!
A little posturing on the union side. In negotiations, SWA asked for increased part time workers and scheduling flexibility, TWU said no. These items could have helped SWA serve smaller cities and grow the airline and union jobs. So, SWA is going to finally use the outsourcing of ramp jobs as already agreed to by the TWU in the current contract. Not sure where the 20% comes into play. 20% percent of a station, don’t think so. 20% of the total jobs systemwide, that makes sense when new, smaller stations are brought over from AirTran.
At some point the company will take on the flight attendants and then the
general public will really start to notice that something is going on with the
airline. Grumpy attitudes about work are bound to be noticed.
“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.)”
That contract language only applies to the ramp. All above-wing services must be handled by employees, so maybe that fact may relieve some of your surprise.
If I was the Unions, I’d point to management’s failure to upgrade WN’s computer systems as the reason for a lack of growth (internationally/code share).
And, I still want to know WN’s plans for growth after they 717 sell off.
EASY SOLUTION to costs and this labor problem, Charge for BAGS. LOL
You laugh, Frank, but I agree completely. It’s a very easy way to get money. Even if it’s $10 to be “different” from the legacies, it would make a difference. It’s also why I’ve argued Southwest should have a $25 change fee for many years. It not only raises revenue but it improves booking integrity.
As I have mentioned here before, it comes across as disingenuous that WN airs commercials touting its no baggage fee status, while its AirTran unit charges $25.
There is a big partition that separates AirTran and WN. Once it is lifted and they can book tickets through one site, the fee will go away. It’s just not that easy for any company to make this transition. As far as labor goes I think change is near. These guys have the highest wages in the industry. In this market and this economy they can’t continue to have a restrictive contract if they want the money. Historically WN has done the right thing for their people so… The biggest issue I think will be the productivity of the pilot and flight attendant groups. Their wages are high and productivity is low in comparison. One of the two will have to give.
I can’t imagine it would be that hard to just not collect money for bags on AirTran flights.
But if the AirTran reservations and pricing system are set up at prices that are profitable only with bag fees as they might be, keeping bag fees makes perfect sense. (How much did fares on AirTran only routes change since the merger?)
What’s the dollar value of booking integrity? With a change fee you have fewer cancellations and no-shows, without a change fee you have more. In either case you know what level of cancellations and no-shows to expect, and you can plan accordingly. What hurts planning is not the overall amount of cancellations and no-shows, but the fluctuations in that amount. Would a change fee reduce this variation?
Also, when my mother-in-law books the same one-way routing for Tuesday, Wednesday and Thursday, Southwest can know for sure that at least two of these will get canceled. Their planning systems should be able to make use of this information, if they’re smart enough.
There are many travelers who are both price-sensitive and require flexibility. For these, Southwest offers a unique proposition. Take that away, and they’ll fly with all different airlines.
“There are many travelers who are both price-sensitive and require flexibility. For these, Southwest offers a unique proposition. Take that away, and they?ll fly with all different airlines.”
That’s a good point, Ron. But, to Cranky’s point — a $25 exchange fee is still well-below the cost of the legacies (Delta now charges $150) that it could still provide a worthwhile alternative for this subset of customers.
Scott, even a small fee completely changes the dynamics of the game. My mother-in-law won’t book tickets on three alternative dates if she knows for sure that she’ll lose $50 when canceling the two she doesn’t use. She will no longer have all this credit on Southwest’s books, locking her in further. If she only has one ticket booked, she’ll stick to the plans she had made. And since changing flights now becomes a rare event, the dollar amount of the change fee becomes less important, and she’ll go with whatever carrier offers her the best price and schedule.
Ron – It’s true that variability is the real killer, but Southwest has never been a master at overbooking anyway. I wouldn’t put much faith in Southwest’s ability to use technology to really understand the consumer. Technology is certainly the weak point for the airline. But even if it does nothing to variability, it still will raise a whole boatload of money and $25 seems entirely fair.
How IRONIC, bags fly free and Customers of size get harassed: http://www.realestateradiousa.com/videos/southwest-airlines-has-huge-i-mean-big-fat-social-media-problem-video/
Just flew AirTran for the 1st time last Wed (FLL-ATL-LAX). Bags were $20/each. I upgraded
my short segment to Business for $69 and bags flew free the entire way. I agree with last poster – charge for bags ($20 is less than most) and changes ($25-$50, and still less than most) and $$ issues solved for a while. Right?
People have been forecasting SW Airlines demise now for the last 40 years. Instead it has grown from a small Texas airline to the biggest in the country, and still is number one in value in virtually all of the ratings. I don’t see an end to that in the near future. Cost pressures? Yes! Ask American Airlines about cost pressures! They still give out million dollar golden parachutes when Rome is burning.
You’re engaging in a “strawman” argument. No one here is predicting WN’s downfall. What Cranky does appear to be predicting is they are no longer immune to the pressures a mature airline faces. WN’s history of success, while interesting and notable, has no bearing on their ability to maintain that success without constant growth to finance it. This is the transition they face in many segments of their business, with labor being the most immediate.
HAHA!!!! I love it! Welcome to the real world Southwest!! Your lucky youre still making that kind of money! And soon you’ll be contarcted out. Your time is coming. Its the sign of the times. I work for Regional Elite we work DL and DL Conx flights and recently got the contract to work US Airways flights. We have over 100 stations and are continuing to grow! Your “Career Wage” jobs are over. So suck it up, its just a matter of time.
Amen to that. Southwest (aka Southworst) are still criminally getting away with stealing customers from legacy airlines that had been there longer…most of them before Southwest (Southworst) was even born!
CD, do you bash Southwest on every forum you subscribe? This is the same rhetoric you pen on everything. Geez, get over it. You didnt get hired at SWA so now your on crusade to chase every Southwest windmill. I hope your taking an Aspirin a day because you really need to alleviate stress complications.
to re… who r u to think ur taking our jobs??? just keep working ur contract jobs while the bigs boys r still here and not going anywhere any time soon……
The unions at WN can’t play nice with the FL folks (TWU basically wanted to staple FL to the bottom), and as mentioned above, the IAM customer service contract does not allow for outsourcing.
There are also scope protections that do not allow current AirTran employees to work WN flights (but they can do the other way around – which is very inefficient because the Southwest contract does not allow for specialty training – when WN took over ramp handling for FL at places like PHX, LAS, LAX, they had to train the entirety of the WN workforce just for one or two flights a day that only a small portion will touch).
Where this ridiculousness continues, as WN was awarded one slot into DCA and will open up there, they must do so parallel to the FL operation. The WN ramp will be contracted for the one daily flight, but for upstairs, they have to bring in their own WN CSAs, and guess what, even with one flight a day, they aren’t allowed to have more than like 15% be part time, so you’re going to have a full complement of full time agents for a station that’s open maybe 3 hours a day.
Southwest has let its own labor contracts get out of control. When a ramp or CS agent is injured, they don’t have to take a drug test (most airlines mandate this for an OJI) and they are allowed something like 8 weeks of salary continuance. So what is the incentive to come back? Reading a Southwest employee newsletter, apparently last year Southwest had enough OJIs to equal to almost 17% of it’s entire company-wide workforce.
Oh, and one of the reasons Southwest doesn’t charge all these fees at the airport is because its prehistoric reservations system makes cash collection and end-of-day reconciliation so onerous. Each agent has to reconcile their payments with every single individual work station they may have used that day…. it doesn’t track transactions by employee across the system, just for that individual computer set. Also, part of the reason there are not redeyes is because still each station has to manually take down the local computer system each night and bring it back up.
Somebody made the comment that Southwest now has to play on a more level playing field. Southwest is playing on anything BUT a level field. Every major airline in this country has filed for bankruptcy due to their mismanagement. That has allowed them to cut costs on the backs of it’s employees and creditors. Just think of the money Southwest would make if they didn’t have to pay their bills.
James…the other airlines had to file for bankruptcy because, they were becoming benefits program providing companies first..airlines second. The unions took too much for too long and they killed the companies. All the other airlines did what they had to do, it was logical…as for the back of their employees…well they caused the problem with the union contracts. Plenty of folk out there who want to work for an airline…
Reading through this there are interesting parallels to AA’s story. They grew for a long time on the backs of their employees with B Scale, lower wages until the labor groups aged and the airline didn’t have any expansion space.
I really wonder if we’ll be looking at WN in ten or fifteen years bemoaning their mismanagement. Given that management is starting to work on these things, I doubt it, but you never know…
Cranky.. Southwest didn’t “merge”, they PURCHASED AirTran. And they did not do so with the intention nor the need to fly to their smaller markets.. they did so in order to grow quickly and more cheaply in the largest airport.. ATL. And to break into the international market. And the raises you cite offered by Mr. Parker to their FA work group was for mere pennies nor was Mr.Parker an effective leader. Herb Kelleher and Gary Kelly are. Herb built an airline based on the golden rule, he treats his family (labor) right and they in turn treat the customers right. It’s a philosophy of doing business that is foreign to most but clearly works. There is no denying that the Southwest business model works. That doesn’t mean that their model isn’t flexible to change in accordance with market demands. You will soon see massive growth out of Atlanta with Southwest along with their international destinations and larger planes. Southwest and it’s culture aren’t going away. Thank God.
The ONLY reason why Southwest bought AirTran Airways was to 1) fly into ATL 2) fly into CLT 3) fly into DCA (already flown out of LGA) and 4) expecting to pay HIGH COST (and I use that term extremely loosely) of flying international!
FFG – And that’s exactly what I said. Southwest “acquired” AirTran but it still requires merging the operations. This is all about ATL and eliminating a competitor. If Southwest bought AirTran to get into international markets, then Southwest is a lot dumber than I thought. Southwest can start any of those markets on its own. It doesn’t need to buy anyone to do that.
There is no denying that the Southwest model worked in the past, but things have changed a lot in the last decade and it’s not working nearly as well as it used to. Changes are necessary and I think there are going to be a lot more fights on the horizon.
I am a flight attendant for SWA and trust me…we aren’t going anywhere but up. Our culture is alive and well and is only flourishing!! This airline is a survivor and we are getting ready to grow again….just stand back and watch us!!
KJen – This is exactly part of the problem. Are you expecting to continue to get raises beyond Cost of Living Raises, and maybe not even those? If so then you’ll likely be in for a shock, because SWA has looming revenue issues, and since labor is their second biggest cost, there isn’t much else management can do…
I have been trying to tell my Southwest adoring friends this for years, but everyone believes the PR and no one seems to understand the dilemma they are in. They are getting beaten by US and DL in lots of places. Southwest just announced they are pulling out of PHX-BOS, which is a pretty high yield city pair..they can’t compete with US and B6. As usual, the media will still continue to report about Southwest as if it were 1992 and they were the airline to beat. Sure will be a big surprise when bad stuff has to happen.
7-8 years ago or so, I used to be a Southwest disciple, going out of my way to use their product. Over the last five years, I probably have flown three or so flights on WN. All one-way (usually in conjunction with Amtrak for the return trip), all <300 miles. The vast majority of my travel is personal, with a little work thrown in (I am able to choose my own flights for work, unless the cost spread is ungodly). I am not for sure what has tipped the scales; the increase in fares to equal to the other majors at best, frustration with the boarding policy, lame FF program, limited route map, lack of international routes, etc. Probably a little of all the above.
With this said, I think the absolute worst aspect of flying WN are some obnoxious employees who feel that their airline is the "Master of the Universe" of air travel and all other competitors are inferior products that are unworthy of comparison, no questions asked. This is not to indict all WN employees, because I have met some amazing workers. However, many WN employees are unprofessional, obnoxious, and fake-acting individuals whose joke repertoire primarily consists of the same tired jokes putting down their competitors they have used forever, it seems. The boorish behavior of many employees is nearly equaled by the hordes of travelers who lap up the WN load of bull and take it as gospel truth, not even bothering to see if they would find cheaper fares/more convenient itineraries with other carriers.
CF… oh honey.. you just sound stupid. Buying AirTran gave Southwest gates in the busiest airport in the country and routes and planes. Cheaper and more quickly that the way YOU think would’ve been better. Guess that’s why you aren’t being wooed for CEO of an airlines, though. You make it sound like eliminating competition is bad for business. You’re so funny.
Do you work for Southwest, FFG? I ask, because that’s the same kind of condescending arrogance that AirTran folks tell me is oozing from Southwest these days.
Oh where to start . . . Let’s go backwards.
Yes, Southwest bought airplanes, but it has already turned around and gotten rid of 65% of those to Delta. It would have no problem getting 47 new 737s if that’s what it wanted.
Routes? No. Southwest purchased a few slots in Washington and New York but everything else could have been developed internally without AirTran. Maybe there are a couple of international routes that it couldn’t have flown because of a cap on the number of carriers, but I’m not even sure about that.
So, Southwest got a bunch of gates in Atlanta, but can it use them for good? AirTran competed with Delta by offering a similar service for less thanks to lower costs. Southwest is getting rid of assigned seating, business class, etc and going strictly with the Southwest model. That didn’t work in Philly against US Airways, where Southwest ran away quickly. I’m not convinced it will work in Atlanta either.
Yes, it eliminated competition, but who said there was something wrong with that? I’m just not sure the price was worth it. You can’t judge an acquisition in the middle of it, but we’ll see a few years down the line if this was worthwhile or not. It’s far from a sure thing as you make it seem.
Exactly. Southwest can’t compete in the big airports, and if they go head to head with US in PHL or DL in ATL, they lose. AirTran purchase was a waste of money, it wasn’t like buying a dozen planes from Morris Air…
The problem isn’t that Southwest employees wages are too high, it’s that all the other airline employees in the industry are making artificially lower wages because they all went through bankruptcy. In time these artificially low wages will be more in line with Southwest and the playing field will be level again.
Well CF got to my comment before I did… When I read Matt’s comment in email I thought: “hedging just delays the inevitable (see Southwest).”
Err, I was going to comment that Southwest didn’t have to deal with the belt tightening that everyone else did since they had a hedging strategy to keep the business profitable on paper… Now they’ve gotta pay the piper…
matt – You assume that Southwest employees will be happy to just sit there while other airline wages creep up. That won’t happen. Instead, they’ll want to keep getting raises as well. I don’t foresee the gap closing.
Twu will bite sw in the ass.. They giving all these fa raises left and right and its going to come a time when sw is going to say enough is enough.. sw is trying hard to be different by not charging bag fees but soon your going to see those commercial were all a waste of money…