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.
Is there a firm (or semi-firm, or stated) deadline for the unions to agree to changes before Southwest starts to furlough employees?
In the longer term, I imagine that the sooner that labor and Southwest can come to an agreement, the better for each side, but Southwest has a healthy enough balance sheet that I’m not sure that there will be much urgency until/unless things get worse. Might be interesting to see management offer to add some sweeteners / incentives if demand picks up or if the company performs better than expected, in order to do the usual “share the pain, share the gain” thing, but I don’t follow airline labor battles enough to speak much to that.
I just hope that WN’s labor issues don’t impact travel over Christmas or spring break, as some labor disputes in the industry have done in the past.
Kilroy – Well, they said they needed a deal by the end of this year, but I believe furloughs are scheduled for April? Of course, it can be moved whenever they see fit. It’s entirely within the company’s control as long as it doesn’t furlough too quickly after sending WARN notices, as law requires.
Outstanding summary of the challenges that WN faces.
Their growing costs are a product of their success, strong unions, and an aging workforce. They have offset all of these with high productivity but volume – and thus productivity – will be harder to use to offset high labor costs.
Their revenue model of high frequency travel in markets they dominate won’t work for years and allows little growth.
They also suffer from using increasingly larger aircraft so small markets are harder to develop.
WN does have enough cash to get through this crisis and will be very disruptive to other airlines; right now they are setting their sights on AA and UA.
Given that AA and UA are facing enormous market-based pressures, AA still has high costs and weak finances, and WN is trying to find a new cost/revenue balance, the airline industry will be very turbulent for the next five years.
Most founders know when it is time to exit the stage; Herb built a great airline but it becomes much harder to find leaders that can reposition a company that can no longer rely on some of the strengths that helped build the company.
Out of about 700 aircraft (ignoring MAXes), about 500 are the smaller 737-700 aircraft, and pre-Covid, at least, they probably had too few -800s for the network as it was. So while average gauge size has increased, it’s not as if they lack for smaller aircraft with which to do route development.
737-7’s might be a smaller option than their MAX but may still be too big for some of the new, existing, and future routes.
I know that WN has always been a Boeing loyalist, so this is unlikely, but I can’t help but ask… Are the economics of operating the A220 compelling enough that it might be able to allow airlines to serve thinner routes profitably when the 737-7 can’t, or is even the A220-100 too close in seating capacity to the 737-7 to make that unrealistic?
Kilroy – The A220 is a rock star, and it could open up new markets for the airline in theory. But the A220 really shines in opening longer markets, and that isn’t what Southwest does well in general. Really, this isn’t about supplementing the 737-700s with A220s. Southwest needs to start replacing them as they age, and the MAX 7 hasn’t been built to serve that need as well.
Understood, thanks for the response, Brett.
I don’t normally get overly excited about specific airplanes (though I did shed a tear when the last of the Mad Dogs were retired from US mainline service recently, and flying on a vintage Super Connie and DC-3 is on my bucket list), but I’ve heard enough good stuff about the A220 that I’m really looking forward to flying it.
really ? you wanna talk “enormous pressures”, and forgot your own employer delta just piled on so much freaking long term debt due to covid it has far exceeded the ones on UA’s books, and roughly on par with AA’s ?
seriously, if you wanna troll, go read you own quarterly financials and getting a sense of reality before parroting the same old lines you’ve used pre-COVID, plenty of which no longerapplies.
I’ve always worked for privately held companies so the analogy isn’t exact but I do agree with the Unions on the issue of fiscal transparency. In 2008-09 I saw a lot of colleagues put on the street because “work is slow” only to hear about a private round of executive bonuses. I’m not saying that’s what WN would do and I think Gary Kelly is probably an honest guy but if things really are that dire why not open the books?? AFAIK that’s what GM did to get all their Union concessions. Trust but verify. I’m not a big proponent of Unions but do believe their first goal is to keep as many people employed and in the Union as possible….even if that means some pay cuts.
Furthermore, I believe it was Delta that said they’d re-emerge on the other side of Covid as a smaller airline. I haven’t been on a business flight in almost a year now. Best guess is I’m far from alone in that regard. My 25k-50k annual travel while not road warrior status is surely missed. And right now my clients are ok with Zoom meetings. It took 3-5 years for my work travel to creep back to FF status level after the great recession. Who knows if it’ll ever come back this time. Point is, WN probably should be considering downsizing…that means staff and equipment reductions.
Which brings me to – why the heck would you buy a MAX right now? For one, it’s probably not needed due to demand. Highly doubt they have old frames due for D checks that they can’t swap out with already owned aircraft without affecting operations. Even if the sale is super cheap the optics are terrible when you’re sending out WARN notices. Just take the frames you already bought, which is a lot! Finally, I know a lot of people claim the MAX has been so thoroughly tested it’s the safest plane in the air now but I for one don’t want to be the first one to test that theory. Would rather give it a couple years or several thousands of flights before I take that risk. God forbid, if another one does crash, being branded the airline of the MAX would be worse than their current situation.
“Furthermore, I believe it was Delta that said they’d re-emerge on the other side of Covid as a smaller airline.”
Correct. Delta has repeatedly stated that they plan to emerge from this crisis smaller, and are planning accordingly.
Not to get down in the weeds of any airline other than WN since it is the focus of this discussion but UA also said it would be smaller. No one knows how long any carrier will be smaller but Cranky’s weekly network reports show that every US airline is indeed smaller and there is no date when things will return to normal.
The larger scale issue is that WN knows it is easier to grow revenue than to cut costs – and that is largely true in the airline industry and esp. with heavy unionization. AA and WN both took a strategy of putting a lot of capacity into the market fairly early but the demand is just not there right now. DL and UA focused on cost cutting and 3rd quarter financials show that DL cut HR related costs the most of the big 4 followed by UA; AA and WN did not get costs out near as well and the reason why WN is turning to labor is that labor is not near as variable as other costs. It is precisely because other competitors are probably getting labor costs out better than WN that they are having to turn to labor. Also remember that early retirements – of which Delta led the industry – amount to long-term cost cuts as long as they positions are not rehired.
WN is focusing heavily on growing its revenue base – but some of those measures like banking its schedule more to increase connections – erode labor efficiency (as passengers are handled on more flights in order to earn the revenue). It is not certain that WN will succeed at its new cities but they are likely to take a piece of AA and UA’s revenues (since that is where WN is adding service) at the airports which WN is entering. Given the low demand environment, any revenue WN takes from other carriers is revenue which slows AA and UA’s return.
As for WN’s fleet, the challenge right now and for the foreseeable future is that demand – including higher revenue business travelers which WN carried – will be reduced. Nearly every other legacy and low cost carrier has smaller aircraft which are easier to fill. The shift to larger aircraft and the lack of smaller aircraft all worked fine in a strong demand environment but it might be a long time before that environment returns.
WN has plenty of cash to avoid a near-term financial crisis but their medium and long-term cost-competitiveness is at stake not just with more nimble legacy carriers (including AS) but also with ultra-low cost carriers.
As for hedging, remember that WN gained a huge advantage in the mid-2000s because it continued hedging when others no longer could. Without getting into macroeconomics, there is nothing stopping the same conditions from happening again – which included a weak dollar. WN has long kept fuel hedging because it is an insurance policy against huge cost increases; you don’t see the value of insurance until you need it.
it is precisely because I read financial statements as well as competitive capacity reports (including what CF produces) that I know that DL’s financial and competitive situation is significantly different than others. I won’t belabor the point but DL’s cash burn as a percentage of costs is the lowest of the big 4 – including better than WN. In addition, DL has debt on its books that is related to its airport terminal projects which other carriers do not.
and then DL and WN both have billions more in unencumbered assets than AA and UA.
Yes, it appears that WN is targeting UA the most, particularly in DEN. Toss in IAH and ORD, and it’s a bit more concerning. AA is also in their sights in ORD, MIA, and, to a lesser extent, PSP. But your analysis is incomplete. You have neglected your friends in ATL. As much as you may want the readers to overlook it, SRQ, SAV, and JAN are direct assaults on Delta. Delta will lose share in all 3 of those markets to Southwest. And the beauty is that WN isn’t even flying to ATL from any of them. Instead, they will run their traffic over BNA, where you don’t have to schlep forever or take a train to a connecting flight.
The obituary of Southwest Airlines has been written many times, by many pundits, prophesied and predicted. Next year is their Golden Anniversary, 50 years in business. Let’s see if they celebrate it with their first furlough in Company history. My prediction is that if slot restrictions are removed at LGA and/or JFK, they will celebrate in an entirely different fashion.
DL doesn’t have more than 45% market share in any of SAV, SRQ, or JAN; it does have more than 50% market share in all of its 4 major interior US hubs.
Further, the smallest of the the three hubs you highlight (from a revenue perspective) which WN is adding (IAH) is 10X larger than the largest of those 3 non-hub cities.
So, no, the size of competitive capacity increases in DL’s largest markets is nowhere near on the scale of what other carriers -most notably WN – are adding in other carrier strength markets.
btw, AA is the 2nd largest carrier in all 3 of the cities you note.
WN’s revenue growth strategies – in contrast to its cost-cutting efforts – are focused in AA and UA strength markets. In contrast, WN’s market share in every one of DL’s hubs is less than what it was 5 years ago and DL’s capacity share is as high or higher in every one of its top markets in the current covid environment.
Those are not my opinions but backed by data.
I haven’t read too many obituaries for WN that I think are credible but that doesn’t mean that WN faces major strategic challenges of labor costs and labor-management relations is very high on the list.
regarding the single fleet cost advantage that WN has, a single fleet also limits WN’s revenue generation ability. If costs were the sole factor, then WN wouldn’t consider a second fleet type. AA, DL, HA and UA all fly widebodies because they couldn’t access significant portions of revenue that they access.
And WN’s single 737 fleet leaves revenue above and below the size of the 737 that WN cannot access.
The reality is that every airline adding new service to Florida (including UA) is a direct assault on Delta. Florida is getting saturated with service that bypasses Atlanta.
Florida is a divided market. Delta is the largest legacy north of Miami by revenue but WN is by passenger share according to DOT data. American is actually the largest legacy in Florida as a whole because of Miami.
Delta and Southwest’s growth in Miami is precisely why AA’s position in Florida as a whole but esp. to Latin America is a strategic challenge for AA. Both DL and WN have the strength in the rest of Florida so that growing in MIA is fairly easy to do. Unlike WN, DL has been the second largest domestic airline to MIA for years; Latam has been and is the largest international airline at MIA.
Using current schedules data, DL has displaced WN as the 3rd largest carrier at FLL and, in S. Florida (MIA, FLL and PBI), DL has moved up from #5 to #3, behind AA and NK and displacing B6 and WN. B6′ presence in S. Florida is heavily tied to the locked-down NE while WN realizes that it cannot compete effectively with B6 and NK at FLL and will likely be much smaller. Add in that the cruise industry will be very slow to return (a large traffic driver in S. Florida) and carriers that disproportionately carried alot of cruise traffic (heavily LCCs) will be most hurt.
Nationwide, DL has the financial strength to stay relevant in markets that matter long-term to it and to increase its presence, in part by using its seat blocking strategy to maintain flights using large aircraft which are not fully sold but keeps large aircraft moving. The chances are high that DL will drop the seat-blocking strategy in the spring which will immediately make them much larger in all of these markets; nobody is continuously selling anywhere near their full capacity right now anyway.
Also nationwide, DL and WN are “the hunters” in terms of opportunities to advance their market positions during and very likely after covid. Unlike WN, DL is adding very few new routes and is increasing its market position by retaining a higher level of capacity than its competitors in key strategic markets.
Good stats. Of course this is about much more than south Florida – which is pretty much built out. This is about all the other airports in the growing parts of Florida (Gulf Coast) that are increasingly getting service bypassing Atlanta.
I agree WN is a hunter, but DL is clearly in the hunted category with an AA+AS assault on the west coast (esp SEA, SJC, LAX), an AA+JB assault at BOS and NYC, UA returning to JFK, plus the previously mentioned capacity dump from all airlines into Florida. They may or may not successfully fend off these challenges, but there’s no doubt they’re being attacked (as are AA and UA).
I’ll put in a plug for the Cranky Network Weekly report.
This week, there is a feature showing capacity for both the LA Basin and NYC regions over a 10 year period.
While there has to be a little caution about future capacity projections because carriers keep pulling down capacity much later than normal, historic capacity is obviously accurate.
CNW shows that DL’s capacity share of both the LA Basin and NYC regions right now is at historic highs and they also show that other carriers, esp. AA, is at historic lows.
Just because other carriers are adding service in major DL markets doesn’t mean the share is coming from DL; in the case of NYC, S. Cal and S. FL, DL is maintaining or growing its capacity share while other carriers are jockeying for position around other carriers, predominantly AA.
Of course, there is no assurance how capacity will play out once demand really starts to return – perhaps by the 2nd quarter of 2021. Every carrier will add new markets. It is doubtful that DL is flying routes – in some cases becoming the only legacy carrier in some markets in which it previously competed with AA – to not add new routes or increase frequencies in these key markets.
DL established NYC, LA and S. Florida as key markets before covid. They are maintaining their presence because they see those markets as long-term growth markets- and strengthen DL’s position in key coastal markets where AA or UA has historically been stronger.
I am sure other carriers will add their own capacity – but let’s keep in mind that AA and UA are facing large-scale growth of new capacity in top markets. Remember that we will have WN flying ORD and MDW to DAL and DEN; those are huge markets for AA and UA which they absolutely have to defend, limiting their ability to focus on other markets.
As for NYC, B6 and UA are messing w/ each other and w/ AA far more than with DL. UA is counting on taking a piece out of AA at JFK and is also trying to offset B6′ growth at EWR. DL is still the largest carrier from NYC based on flights and seats (including blocked seats), a position DL has had for several years. If DL decides to grow EWR to offset, UA’s addition of JFK, the game changes even more in DL’s favor.
AA and B6 are two separate airlines. They don’t and can’t ever jointly plan capacity and so far do not have permission to exchange slots. They are marketing partners, won’t share revenue, and even if B6 takes over every route which AA has dropped, B6 doesn’t have the aircraft to defend other markets or to fully replace AA’s capacity – even before considering that B6 is now trying to fight a battle with DL and UA at JFK and EWR as well as hoping for a stronger position at LGA. Same principle applies to AA/AS on the west coast.
B6 and DL have the same relative capacity positions at BOS as they had pre-covid, even without DL flying much of its longhaul international capacity.
I understand the loyalty people have to specific airlines but actual data shows that DL and WN are the hunters in the industry in terms of growth now and very likely post-covid; DL is doing it by continuing the same strategies it had pre-covid while WN is adding new capacity entirely in AA and UA strength markets or divided markets. In some markets such as S. Florida as a whole, DL’s capacity position has improved relative to WN. Capacity additions by other carriers are coming at the expense of carriers besides DL.
Tim> “DL is still the largest carrier from NYC based on flights and seats (including blocked seats), a position DL has had for several years.”
If DL is #1 at NYC, why does the Port Authority in the stats below say they’re #2 with more than a million fewer passengers than UA in the 12 months thru Sept? (and going back thru the stat archives, they were closer pre-covid but UA was still #1 – see Jan or Dec) And JB+AA is larger than either UA or DL – an attractive proposition for a frequent flier in east NYC.
IN hub markets such as NYC, the share of local passengers is what matters and not passenger boardings.
DL connects a lower percentage of capacity through NYC, mostly because LGA is point to point. The strength of a local market is defined by passengers that start or end their journey in a city and not by all of those that are making connections. That is just as true in ATL, DFW, DEN etc as it is in NYC.
AA and B6 are separate companies. period. You can’t combine both as if it is one company. The revenue is not split between them. AA and B6 will buy seats on each other. There will be some passengers that will choose to fly B6 where AA drops out of a market – as is happening in both NYC and LAX to large degrees – but the global carriers offer a different level of service that some passengers want so B6 is not going to necessarily get what AA doesn’t fly. AS and B6 already fly a number of markets that AA is dropping; it is not a given that AS or B6 will get a higher percentage of passengers than other competitors in the market just because AA chooses to drop out of markets.
You need only look at AS, B6 and WN average fares even in markets where they compete with AA, DL and UA to see that the legacy carriers do get a more valuable passenger.
And while there is huge uncertainty about how much business travel will be back, it will not all disappear and not all airlines will regain it at the same percentage. All airlines are going to compete for whatever passenger is flying – which is illustrated by how WN is shifting its network around.
AA’s historic position in many markets is less significant than what they are doing right now. AA has retreated to its strongest hubs right now. They aren’t even operating all of their hubs on a daily basis right now or thru the winter. There will be competitors that move into those markets that AA is not flying.
No other airline has walked away from as much of their pre-covid network even temporarily, than AA.
When you consider how large AA is, there is an enormous amount of revenue they have carried in the past but are not competing for in their strategy right now which is focused largely on DFW and CLT. Every airline is competing for that revenue but DL is still the most direct competitor to AA.
We don’t know how it is all going to shake out but it is very unlikely that every airline is going to restore all of the capacity they aren’t flying now plus grow when it is a given that some airlines are going to continue growing into new markets as some, mostly B6 and WN, are doing now.
History shows that over 40 years of deregulation, the growth of low cost carriers including WN but also including DL has been at the expense of AA and UA. Based on what is happening right now, that is likely to continue if not accelerate post-covid.
WN will be larger relative to its peers coming out of this and so likely will be DL. Some of the low cost and ultra low cost carriers will likely also grow.
I lied. It turns out WN will fly JAN-ATL once a day. To level the playing field in ATL, WN needs more gates.
Saw – Southwest will fly Jackson – Atlanta 3x daily. Same for Jackson – Houston, and there’s 1x daily to Baltimore.
I know it’s 3 times a day. I just didn’t want Mr. Dunn to have another one of his melt-downs on here. ??
WN has no shortage of gates.
You also forgot to mention that they are no longer flying ATL to the west coast. There has never been a number 2 airline from ATL since the jet age began that hasn’t flown ATL to LAX.
WN is flying about 60 flights/day from ATL, down 40% from a year ago pre-covid. They are not short gates.
Do you realize that DL is actually scheduling more flights from BNA to LAX than WN for Dec, Jan and Feb?
I use data which is why you and others can’t come up with a logical rebuttal.
Tim – You may be working with data, but it’s either not right or you’re manipulating it to fit your narrative.
Southwest returns to Atlanta – Oakland/San Diego in March again. So is it true that it is “no longer flying ATL to the west coast”? It is truish, in a narrow way. But it won’t be true for long.
Southwest has exhausted it’s business model that made it so successful. They can only get so far with their 737’s. I can’t help but think what a smaller and/or larger sized aircraft would do for them. Regardless. It’s time for them to adapt. Let’s see how successful they will be at doing so.
Cranky, I know that AA, DL and UA stopped hedging fuel a while back. But Southwest hedged 59% of its 2020 fuel consumption at $88.2 per barrel. The current market is $46.64 per barrel. To what degree does this add to Southwest’s future financial health?
Angry Bob – It’s certainly a giant waste of money, but ultimately Southwest can handle that. I think hedging is silly, personally, but you win some, you lose some.
As another commenter mentions, Southwest has pushed their 737-only fleet to – pardon the pun – the max. Having some A220s or even a handful of A330s would give them so much flexibility and also scale in some of these markets. I think the labor issues also highlight what so many of us feel – Southwest likes to pretend that it’s a different airline but, at the end of the day, the culture isn’t that much different than DL or the others. It just seems different because WN has been smart enough to create a more customer-friendly airline with free bags, etc. I live in Chicago and have the luxury to choose from huge operations of 3 of the 4 large legacy carriers. Even though I live closer to MDW, I almost always choose ORD. Southwest flight attendants are either annoyingly hokie or battle axes just like UA and AA. I’ll happily fly UA knowing that I can accumulate miles that are actually worth redeeming. I struggle to find a free flight to Tampa aspiration. Austrian or Swiss business class to Europe is aspirational. I wish WN the best but I think we’ll soon see some changes to their model as they are rapidly running out of growth opportunities.
The real problem WN is having is the transition to a legacy carrier, complete with overhead, labor costs and bureaucracies. This is the inevitable outcome when a company transitions from start-up, with its entrepreneurial and seat-of-the-pants management style, to full-blown market participant who takes on UA and AA at ORD and UA at IAH.
The days of being able to use a cost structure to annoy the hell out of people are over. So are the days when Herb thinks it is a good idea to start flying to BNA because, in part, his daughter attends Vanderbilt. The business culture that committed the airline to ultra-quick turns that was able to eliminate an airplane is largely gone. While the culture probably is still different at WN than United, they look more and more alike as the years go by.
When you look at the cost structure of these airlines, don’t forget that one of the big cost advantages that WN has is because it has only one type of aircraft. So, you don’t have pilots ‘upgrading’ to larger aircraft or moving to the left seat on a smaller aircraft to become a captain. All of that causes (non-productive) costs as most readers know only too well. Then allied to that the increased costs and complexity in aircraft maintenance, route planning, and you start to see costs really climb.
Basic labor costs are comparable across the organized groups, but WN still has the edge because of its ability to perform quicker turns with its aircraft.
While this may all be an over simplification it does outline the situation. What to watch is what the other ULCC’s with only one or two aircraft types do – F9, G4 and MXY – especially!
Could this lead SWA down the road to bankruptcy at some point? The current situation doesn’t sound good for them.
Paul – I highly doubt it. Southwest has an incredibly strong balance sheet and is well-positioned to take advantage when demand returns. If there is bankruptcy in the future, it is a long, long way away. And it won’t be just because of labor trouble.
Most SWA problems with labor boil down to trust or lack there of. They don’t trust Kelly. He says the right things, but his actions don’t match. Yes, he cut his salary but in 2019 that was only 8.2% of his compensation. SWA wasted billions on stock buybacks and dividends while dragging labor negotiations on for years during their most profitable time. 7+ years for the mechanics and continues to sue them afterwards. Failure to utilize government loans because it hurts stock buybacks and exec compensation. Hiring Union traitors as negotiators. Hiring of Ford and Harrison. Continual contract violations by SWA and systematic pay errors always in the company’s favor. Most employees are willing to invest in the company, but not a forced donation.
I seem to recall a while back when Southwest management got desperate in their negotiations with SWAPA over pay raises and the SWAPA folks picketed at Love Field. Southwest’s management decided to expose the pay scales (which were quite excessive) to the public to let them decide if it was fair or not. I wonder if Southwest does the same here and throws out all the salary bands to the public to say “hey, they guys are getting paid 3x more than your average schmuck and this is why ticket prices will go up in the future. You can blame the dirty unions!” Southwest tries to look like a wholesome company on the outside, but inside it’s pretty contentious betwen unions and management as well as the “lifers” and those with outside experience trying to right the ship. Herb’s policy for the longest time was to throw money at the unions in the hope that they would shut up and move on. Sounds like the unions got a little too used to that policy and it’s not causing more problems than any one there needs at the moment. Hopefully there is a good solution out there, but growing out of your problems doesn’t look to be the right path forward.
Steve-O – Pay scales are public anyway. You can find them all at airlinepilotcentral.com https://www.airlinepilotcentral.com/airlines/major-national-lcc/southwest_airlines
Southwest pilot pay scales are still lower than domestic industry standards for similar sized airlines. WN is also insisting on adding a force majeure clause to any deal, they just call it something else so they can deny it. That’s the poison pill WN unions are refusing to swallow.
My (former) airline went through this just like everyone else. My work group’s labor leadership negotiated multiple options to reduce staffing and avoid nearly any involuntary furloughs. A multitude of voluntary leave-length options were offered that included partial benefits and they got plenty of takers…about 1/3 of the seniority list. Not all crew are enjoying flying during Covid and many took the opportunity to take a break and protect their own and their families health. Myself, I took an ‘early out’ option and retired after 35 years with my airline. The package included severance pay, health insurance and FF miles to use when the world opens up again. Many of us that were close to retirement opted to leave early and allow the next generation to take over. I would hope that WN labor leaders are willing to discuss options to mitigate involuntary furloughs before it’s too late. They’re the only ones that know if this is going on in the background or not.
Furloughs aren’t a great look for the company, but at this rate it would be nothing out of the ordinary for the airline industry. It’s also less efficient to keep the more expensive employees, but with Southwest’s balance sheet they can afford it. The majority of union employees won’t be affected by furloughs (at least initially), so they’ll be unlikely to give anything up voluntary. Unfortunately the heads will roll and a lot of people will be out of work, but the company will have achieved their cost savings and the unions can still tout that they haven’t given concessions.