11.11.2008 « Airline Labor Relations’ Eyes on Southwest »
Southwest and Its Cost Conundrum. I wake up in Honolulu this morning to CNBC discussing the auto industry and the fact that General Motors’ market capitalization is roughly the equivalent to what it was in 1943. Talk of a pre-packaged bankruptcy filing is spewing. But can that really fix anything? Wouldn’t it be interesting to have the US Government become the Debtor-In-Possession (DIP) financing provider in this bankruptcy case? If the US Government becomes the DIP lender, I wonder just how different their approach would be versus the airline industry's filings for bankruptcy and having to shed legacy costs and make the difficult decisions to downsize? This assumes that the USG would want a globally-competitive industry of course.
While on an airplane for eleven hours yesterday, Southwest announced its intent to codeshare with Volaris, and expand its foray into international markets to and from Mexico. Volaris and Mexico are perfectly logical choices for Southwest to keep operations as simple as possible (read costs down) as it puts its toe into international service. When combined with WestJet, Southwest is well on its way to creating a true North American airline entity that will compete with a United-Continental-Air Canada combination that is currently seeking anti-trust immunity.
Change was fine in a presidential campaign, but when an industry absolutely and positively needs to change, labor is the first to remind us that the old way is the only, and best, way. Keen observers are pointing to the outcry from the Southwest pilots over this most recent announcement. AirlineBiz, AirlineBiz and PlaneBuzz are each reporting on the story as are many others. PlaneBuzz and the comment sections underneath each story in the Dallas Morning News’ blog are being filled with comments different than those read from Southwest employees in the past.
Last October I wrote a blog entitled All Eyes on Texas where I took my own look at the upcoming labor negotiations for each of the Big 3 Texas carriers. My analysis concluded that the hardest negotiations would come at Southwest. Why?: because no carrier needs to change more to adapt to tomorrow’s difficult airline world. In the piece I wrote that Gary Kelly has, by far, the most difficult CEO job in the US industry. His internal communication of needed change is a dramatic departure from: we will grow; here is a sizeable raise if you continue to be productive; be happy. His external communication of needed change is a dramatic departure from the 30-year refrain that operational simplicity and continued growth will be the key drivers to maintain their enviable cost position.
Being a US-centric airline does not even work for Southwest anymore. The company has actively been investing in the necessary IT tools it needs to expand its revenue flows to points across international borders. Southwest on paper has an enviable cost position. But don’t let it be lost that they also have a cost conundrum. Low non-labor costs driven by a model of high productivity have cross-subsidized what are now high labor costs relative to the US industry.
Take growth away, non-labor costs will increase and will further highlight the labor cost situation the company faces. Like any well-managed company, exploring ways to augment revenue, as growth slows, serves all of its stakeholders best. The consequences have played out many, many times in the past. They have taken a no-fee stance and it will be virtually impossible for them to turn back. Also, US Low Cost Carriers have not had great success in selling on the other side of the US border so having a Canadian and a Mexican partner will address that weakness.
To this observer, seeking new revenue sources ahead of a challenging negotiations period, where the cost of labor poses a new challenge, seems to be a most logical path to pursue. When I take a look at ASMs produced per dollar of labor compensation it only highlights Southwest’s need for new revenue sources. Hopefully this fact will be appreciated, and debated, before knee-jerk reactions overwhelm the logic of the move. Southwest just ain’t the competitive animal it has been for the past 30+ years. The airline really does need to change and this path is “doing the right thing” by all involved.
Reader Comments (4)
A well timed article. The wagon wheels seem to be already separating from the wagon. As an internal, I know the communication of this reality was never effectively accomplished by our leadership. Corporate communication here is surprisingly non-existent. The unions are angry and we have all three of our major contract talks open right now. The comments I'm hearing are unprecedented and I'm afraid this is not the Southwest that I knew years ago.
Check out the company blog at www.blogsouthwest.com, and take a look at the Mexico codeshare thread. Not good : (
I've left one comment quite some time ago about the end of the airline industry as we know it, and enjoy, but do not always agree with what you have to say.
That being said I would like to ask a simple question of you and any of the other "experts" who talk many of the "legacy industries" to death.
My question is this:
Is there any work group in the United States that you actually think DESERVES or has WORKED for a decent "living" "middle class" wage? And what do you think an actual living middle class wage is?
It seems like you have advocated the gutting of all labor contracts country and industry wide.
We are the people who teach your kids, clean your houses, serve your food, put the fire out in your house, patrol your streets, and wipe your butt.
Is everyone in your dream world supposed to get by on $8.00 an hour with $2/gallon gas and 100% increases in prices for everything else? Or do we all have to move to a 3rd world country to make our tanking retirement make us live on more than dog food for dinners with no health care?
Please let us know who you think is deserving of being able earn a decent wage and to do more than just get by, or has the dream of opportunity for everyone been outsourced to Mexico or somewhere else?
a worker bee
Anon
Thanks for the note and am glad that you do not agree with everything I say.
With few exceptions, this industry has been rough on the work force. But at some point, the question should be asked why is this the case and what attributes fundamentally stand in the way of success for all stakeholders.
I advocate the rethinking of seniority and ask whether it serves workers best or is there another model that can provide the same protections yet still reward the most productive.
Further I advocate a rethink of how airline workers are paid. There is a labor market for all classes and crafts of employees that constitutes a fair base wage. But I also advocate that all employees should share in the upside when times are good and stand still during downturns. This would alleviate much of the distrust that inevitably develops when concession bargaining takes place. There needs to be some portion of every workers pay that is at risk. It will be more for management than a pilot or a flight attendant or a reservations agent.
Advocating a change at the bargaining table for the airline industry to rethink how it works and how it pays would seem to be worth the try. Just ask one of the 400,000 steel workers that have lost their jobs or the countless number of auto workers who finally made the right deal - but probably too late for some.
Thanks for writing.
There isn’t to many cities left for WN assimilate. “Resistance is futile.” MSP works well into their route structure as a spoke (for now). About all that is left is the hub fortresses at ATL & CLT to complete and complement the operation.
I always thought it made sense for WN to use HOU as their jumping off point down to Mexico with ACA and/or CUN being first on the fun meter scale or for business traffic using MEX and/or GDL as kickoff. I could see including their LAX or PHX hub in the matrix on opening day down to Mexico too. Doing this would siphon off their Frequent Flyer awards, fit well into their routes, add traffic, etc.
Some place I read, “there is zero overlap between Southwest routes and Volaris.” When I read this I thought of the Rio Grande River as being the line in the sand. WN operates nothing beyond the river but now with Volaris a new wrinkle has developed in the overall operation at WN. From what I read at the SWA blog –
http://www.blogsouthwest.com/blog/viva-mexico
Volaris will come into the United States and pick up WN passengers yet WN will not cross the river.
I guess it works well into the Swellbar big picture of outsourcing jobs and US airline workers making what their contemporaries in third world countries make but I never thought I would see this come from WN. To see WN pass over the opportunity to venture down into Mexico to cherry pick some city pairs at the expense of their own employees, now I have seen it all. Gary Kelly keeps talking about growing the airline to reduce the over all cost of operations but takes a pass on Mexico operations for his own people. Hummmmm
You can read a number of comments on the link above from some of the WN employees they are not pleased in Camelot. It seems Camelot has developed a bad case of termites.