It’s about the guaranteed money.
For Southwest, that makes all the difference — in corporate culture, productivity and a business model that let it become one of the great innovators and disrupters.
Herb Kelleher had a folksy way of keeping Southwest on track: “We manage in good times so that we’ll do well in bad times,” the former CEO often said.
One way that played out was in labor contracts. They were usually heavier on variable pay, including profit-sharing, and lighter on work rules. There was an emphasis on fast turns at airports and more hours in the air, and that produced sky-high productivity and a rare business double-play: Southwest could be both a low-cost leader and a generous employer.
Southwest workers often are the highest-paid in the industry, but only when productivity and profit merit it. In 2014, Southwest pilots had the highest average salary in the business: almost $198,000, according to the MIT Airline Data Project.
But here’s something more impressive: “We’ve never had a layoff. We’ve never had a furlough. We’ve never had a pay cut. We’ve never cut benefits.”
That was Gary Kelly, Southwest CEO, speaking at a conference in December. And he was drawing a contrast between Southwest and the legacy airlines that were unable to withstand recessions, terrorism and other global events.
In the five years after 9/11, U.S. airlines eliminated 134,000 full-time jobs and steadily slashed pay and dropped pensions. Many carriers eventually went bankrupt. In 2000, seven airlines paid their pilots more than Southwest. By 2005, none did.
An analyst asked Kelly about his disappointment that pilots and flight attendants had soundly rejected tentative agreements last year. How would he get them to understand that Southwest’s low-fare brand is so crucial?
“We just have to make sure that we are rewarding our people in a way that also allows their company to remain strong,” Kelly said.
Southwest has never been stronger. It earned over $4 billion in operating profit last year, 85 percent more than 2014. Its market cap, near $23 billion, has tripled in three years.
Its annual profit streak now spans over four decades, and with fuel prices low and planes carrying record loads, money is pouring in.
Pilots, who’ve been negotiating a contract since 2012, want their share.
“We’re roughly 20 percent more productive, and we want to be rewarded for it,” said Jon Weaks, president of the Southwest Airlines Pilots’ Association and a company pilot since 1990. “We want to keep the company agile and competitive. But we’re not gonna work more and make the same” as other pilots.
Last fall, Southwest agreed to industry-leading pay on the pilots’ hourly rate, passing American’s 2015 contract figure by a nickel an hour, Weaks said.
(Since then, United has raised the bar further.) Southwest also agreed to lift the company match on retirement from 9.3 percent to 10 percent.
The tentative agreement reached last fall would have boosted pilot pay by 17.6 percent over the life of the contract, through 2019, the union said. Yet members rejected it almost 2-to-1 and then replaced the union leadership and negotiators.
There was disagreement over the value of back pay. But the retirement match is the big hang-up. At American and United, 16 percent of pay is put into retirement and pilots don’t have to contribute anything.
At Southwest, the match would have gone to 10 percent, and it’s contingent on pilots contributing a like amount.
Then Southwest kicks in a profit-sharing payment, a variable amount added to retirement. Historically, that’s been a healthy bump for Southwest employees.
In 2014, the profit share was 9.5 percent of pay, added to the company match. But in 2009, during the recession, Southwest profit-sharing was just 1.3 percent.
That spread provides a lot of flexibility for Southwest. If a much higher match were guaranteed, it would be that much tougher to cope with a fuel price spike or a contracting economy.
Southwest already faces a balancing act. In June, for the first time, its labor costs became the highest among U.S. carriers, said consultant Oliver Wyman. In two years, Southwest labor costs increased 16.4 percent, much more than any large rival, according to the firm’s report, Airline Economic Analysis.
Yet Southwest continues to have lower total costs. In June, it had an edge over Delta, American, United and JetBlue despite spending a higher amount on labor.
How does Southwest manage to have the highest labor expense and still lead many on total costs? Credit employee productivity and structural advantages, such as using a single plane type and secondary airports.
Kelleher used to say that preparing for bad times was prudent, because at least two crises would strike the industry every decade. So far, Southwest has been able to work through recessions and 9/11 without betraying employees. But if it locks in higher costs, what happens when the cycle turns?
The union chief said not to worry.
Demand for travel seems insatiable and airlines, post-consolidation, are disciplined about expansion, he said. And Southwest will keep finding ways to get more efficient, from adding modern planes to a new reservations system.
“This is not your father’s legacy carrier,” Weaks said.
If fixed costs get high enough, it’ll look like one.
(Mitchell Schnurman - The Dallas Morning News)