As the end of 2020 approaches, Southwest finds itself in a very unfamiliar situation. The airline has long thrived during economic downturns, and it always finds ways to take advantage of the misfortune of other airlines. It’s trying to do that now, but for the first time, it’s also asking for broad wage cuts from its unions, and they aren’t having it. How Southwest navigates this will determine just how the airline looks on the other side of the pandemic.
It’s no secret that COVID-19 has caused all airlines to lose incredible amounts of money. Southwest is, for once, no exception. In the third quarter of 2020, Southwest lost $1.2 billion. It burned roughly $16 million per day, or about 25% of its daily 2019 revenue. The government’s support through the end of September kept things afloat, but hopes of additional support have faded as no further relief in any way has come out of Washington despite constant talk that it might be coming. Southwest has a very strong balance sheet with plenty of liquidity, but it says it can’t keep going like this, and it needs to cut costs until something changes.
The airline wants to avoid furloughs since it has never done that in its long history, so CEO Gary Kelly took to the airwaves on October 5 to explain what management believes needs to happen.
In the video, Gary said he reduced his own salary to zero through 2021. The Board of Directors and senior execs saw earnings cut by 20 percent. Starting January 1, all leadership groups saw salaries cut 10 percent through 2021. Now, management wants the same deal to apply to everyone in the company. The problem, however, is that Southwest is one of the most unionized airlines around, so it can’t just cut wages. It needs to negotiate, and if the groups don’t agree, furloughs are coming.
The video message was one of shared sacrifice, and it’s one that might resonate with people at any other airline where things usually end up much, much worse. But this is Southwest where givebacks are unheard of, and the reaction from the labor groups was swift and brutal.
The pilots put out a memo taking the company to task for a variety of failings. The general thrust of the letter was that Southwest has a strong balance sheet so it should use that to pay its employees fully. If it really needs cuts, it has to share all the data that led to that assumption or the pilots won’t even think about going along.
The flight attendants had a similar message about data, but they also claimed that they had all kinds of ideas to help the company save money without wage cuts or furloughs. They say the company hasn’t listened. Meanwhile, a union survey says 80 percent of respondents aren’t interested in taking a pay cut to prevent furloughs. The beating of the drum has been relentless…
The mechanics aren’t happy either. They say the company is negotiating, but they sure don’t like what they’re hearing. Meanwhile, the day where furloughs may actually occur draws nearer. The law requires that airlines put out WARN notices far in advance to alert the rank and file to the possibility of layoffs. Thousands of those have been sent, and even though it doesn’t mean furloughs will happen, the letters fan the flames anyway.
While this situation goes down the wire, Southwest is still trying to run its business the way it always does during a downturn: opportunistically.
So far this year, Southwest has either announced or launched service at 10 new domestic airports. TEN NEW AIRPORTS. If this were Allegiant, you wouldn’t bat an eye. But Southwest doesn’t go into new airports often, especially domestic ones.
Some of the airports on that list involves heavy competition; places like Chicago/O’Hare, Houston/Intercontinental, and Miami. Others involve entering smaller leisure markets with a different network model that may or may not work, like Montrose, Palm Springs, Sarasota, Savannah, and Steamboat Springs. Then there’s Colorado Springs which is just a mid-size opportunity that Southwest thinks will be able to perform. Oh, and don’t forget Jackson, Mississippi. Southwest actually left Jackson several years ago due to poor performance. Lastly, it’s not a new market, but Southwest scooped up JetBlue’s slots in Long Beach when that airline left, more than doubling Southwest’s size there.
The one thing that all of these have in common is that their near-term success is far from guaranteed. In fact, it’s likely that money will be lost on most if not all of these in the beginning. In the long run, of course, the hope is for profits, and that’s why Southwest is doing this. But spending money now for payback later? This is where labor takes issue.
Most recently, there have been rumors that Southwest is talking to Boeing about picking up some 737 MAX aircraft that Boeing hasn’t been able to sell, so-called “white tails.” The price for these airplanes would undoubtedly be ridiculously cheap, but even a cheap 737 costs millions. Those millions along with whatever may be lost in new airports is all money that labor thinks should be used to keep them paid in full until the crisis is over.
It’s easy to understand why this real and rumored growth could be a great opportunity for the airline, but it’s also easy to see why the unions would feel the way they do. I’d say the chances that Southwest will opt not to grow into new markets are slim to none. That will help create more jobs and more stability in the longer term future. The opportunity is just too great, and it might not be there once the crisis is over.
Maybe the rumors this time will come true, and the feds will actually give more relief. If so, then the bullet will have been dodged for now. Southwest will keep paying its employees in full, and it won’t have to worry about the optics of continued growth. But nobody can rely on the government to save the day here. Even if it does happen, it may not last long enough.
As the end of the year approaches, Southwest has to decide if it really will furlough people. That means the unions need to decide whether to come to an agreement or take their chances. It’s getting rather heated in Texas, and how Southwest navigates the next few months will have a real impact on the airline’s culture and its future.