Just before Labor Day weekend, Southwest’s pilots announced that they had come to an agreement with management on a new contract. Though a full tentative agreement isn’t out yet, early indications are that management almost entirely caved here. After 4 years of negotiating, the big question is now… why would Southwest just give up on nearly everything it fought for? And how is it going to back itself out of the uncomfortable place it will now find itself?
This deal is great for the pilots, based on what’s been released so far. To put it in perspective, let’s just look at a couple of comparisons to the tentative agreement agreed upon last year that was resoundingly rejected (more than 70 percent voted no).
In that old agreement, the pilots were going to get a cumulative raise of 17.6 percent over 4 years. There was also a small ratification bonus in lieu of any retro pay. This new agreement provides a 15 percent increase right off the bat, and then 3 percent a year over the four-year life of the deal. There’s another 3 percent bump as the contract becomes amendable. Oh, and this one has full retro pay as well. But wait, there’s more. There will be changes to the retirement plans that will “align them with the industry standard practices.” If you were wondering, that’s an upgrade.
Yep, this is a big win for the pilots. In fact, it’s not all that far off the pilots’ negotiating platform from way back in 2012. They wanted an 18 percent bump with 3 to 3.5 percent increases per year. We don’t know what this means for work rules yet, but it’s pretty hard to imagine this being anything but a very rich contract for them.
This also gives Southwest pilots, as the union says, “a compensation package that is market rate compared to pilots at Delta, United, and American.” Low cost carrier, huh? Yes, I get that there are differences in productivity, but still, this is a big-time contract. And it’s not just the pilots. As is often the case, the mechanics facility maintenace and flight attendants each announced agreements shortly after the pilot deal was made public. Presumably the mechanics will be coming soon. We haven’t seen any details on those, but I’m going to assume that these will be rich as well.
So after 4 long years of butting heads and eroding the trust that had been built up between management and the pilots since Southwest’s early days, management has given in. It’s as if CEO Gary Kelly ripped a page from the Jim Goodwin playbook. Goodwin, as you may remember, was the United CEO who fought the United pilots all through the horrendous summer of 2000 when those pilots slowed the airline down and created long-lasting damage to the business. Only after the summer did Goodwin decide to give in. This, for the record, is not a playbook I’d want to use.
Southwest made a lame effort to act like the deadlock was all Randy Babbit’s fault. Randy was brought in to get contracts done, but just before this was announced, he “retired”. That let’s the remaining management team, led by CEO Gary Kelly, march in and act like saviors. Nobody is buying it. This is a damaged relationship.
And since the damage is done, why would Southwest do this now? My first guess was the entry into service of the 737MAX next year. Management says that the MAX isn’t a new type so pilots would be able to fly it under the existing contract. The pilots disagree and say they needed a new agreement or they wouldn’t fly it. Who is right? Maybe Southwest didn’t like its chances, or maybe it just didn’t want to find out. I’m sure there could be other reasons, but this seems most likely on the surface.
This still has to be turned into a tentative agreement and voted on, but I can’t imagine the pilot deal not passing. Same for the mechanics and flight attendants if their contracts are similarly rich. That means Southwest finds itself with a big problem.
These contracts are going to push costs up a fair bit. Helane Becker with Cowen and Company estimates that the 15 percent raise alone would cost more than $250 million a year. Jamie Baker at JP Morgan expects additional total costs to be in the $500 million range annually for pilots. Once you add in the mechanics and flight attendants, he has additional costs pegged around $700 million a year. That’s a more than 10 percent increase in labor costs, and the airline is going to have to pay for it.
Southwest has raised fares a ton in the last decade, and it might not have leverage to do much more than it has. Where should Southwest be looking? Ancillary revenue, of course. Bag fees, change fees, extra legroom seating, etc. You name it. Once the new Amadeus system is in place for reservations next year, Southwest CAN do all of these things. But the airline has spent so much time convincing people it won’t, it has now backed itself into a corner.
Labor is happy with the new deal but still bitter at management. That’s an issue for management to try to resolve. And once this passes, management has to figure out a revenue strategy to help offset those higher costs. Gary and his team are going to be very busy trying to dig their way out of a hole they’ve dug for themselves.
Updated to reflect that it was the facility maintenance folks that came to an agreement, not the aircraft mechanics. That’s still outstanding.
