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Southwest Pilots Reject Tentative Agreement

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Southwest Pilots Reject Tentative Agreement

Southwest Pilots Reject Tentative Agreement
November 05
14:13 2015

MIAMI —As was widely expected, Southwest Airlines’ pilots union rejected the proposed tentative agreement for a new pilot contract today, with roughly 62% of the 95.1% of members who participated voting against.

The contract rejection is merely the latest salvo in the increasingly contentious contract talks between Southwest management and its pilots, which have dragged out over the past three years and required the U.S. National Mediation Board (NMB) to step in for arbitration in 2014.

The latest contract offer itself, even by the admission of many Southwest pilots, was reasonable with regards to pay, work rules and other contract-specific issues. But whatever its objective merits, the vote on this contract was actually treated as a referendum on the leadership of CEO Gary Kelly.

There are several reasons for why this cote was treated in such a manner. According to Southwest’s employees, over the past several years, CEO Gary Kelly and Southwest’s management team has consistently misled the Southwest team over the actual purposes and outcomes of the strategic decisions being made.

One particular theme is the company’s plans for growth, which pilots and employees are of course very interested. Some of the shifts and concessions made by pilots, such as enabling the AirTran merger and allowing code sharing as a matter of scope, were apparently sold to employees as enabling growth.

But in terms of frequency growth, the figures have fallen fall short of what the employees expected – more ASMs were produced with more seats per airplanes, but the employees don’t have more flying to bid on. Beyond growth, there is a general sense amongst Southwest employees that management is unable to strategize for and execute on critical operational matters, as evidenced by Southwest’s woeful on time performance figures and their assessment of management’s proposed remedies.

Just to exacerbate matters, despite all of these issues, the contract offered to them was competitive with the industry but didn’t blow competitors (i.e. American/Delta) out of the water. All of this added up to yet another no vote.

Some of the Breakdown is Externally Driven


So there are definitely concrete decisions and communication choices made by Southwest’s current management team which have hampered the relationship. At the same time, a large part of it is actually driven by the evolution of the broader US airline industry around Southwest.

Two factors in particular stand out. First – that Southwest employees’ relative position versus the industry has weakened. Second, that Southwest’s relative financial outperformance of the industry has reversed.

A good way to conceptualize this is to think about the broader arc of the employee situation at most US airlines post-deregulation. Ignoring the various companies that went out of business, for employees at US airlines, large swatches of the period between 1985 and 2010 were defined by various indignities, such as two tier pay scales, shrinking at the legacies, scope givebacks that fed into the rise of regionals, bankruptcy, pension and benefit cutbacks with acrimonious relations with management and their bosses every step of the way.

There were some exceptions to this rule (“Keep Delta my Delta” could be argued though that could be contextually characterized as verging on Stockholm syndrome), but by and large things weren’t great.

Then there was Southwest, who had a fun corporate culture that valued its employees and grew like weed for decades – growth that enabled it to offer best in industry work rules and pay (adjusted for aircraft size) while keeping costs low and productivity high. It was a wholly unique experience in the airline industry that, outside of a couple of temporary outliers (JetBlue under Neelman in the early years comes to mind), no other airline could match.

There’s a well known school of thought in psychology which posits that human beings care a lot about relative inequality versus the people that they define as their peers. This effect works in both directions – i.e. people like feeling superior/being better compensated than their peers as much as they dislike feeling inferior/being compensated worse. And for the first 40 years of deregulation, Southwest’s employees had the best situation amongst their peers.

Now? Southwest still pays well and still has a strong corporate culture, but its peers have caught up. Delta and Alaska in particular are nipping at Southwest’s heels with regards to strength of employee relations, while American and United have largely caught up in terms of compensation (the culture still lags to varying degrees in both places).

And so naturally to an employee group that is used to getting deals that are heads and above the market, when management offers new contracts and communicates on the basis of a reasonable improvement the prior baseline for Southwest in a vacuum, because of what’s going on around the Southwest employees, it’s going to make whatever management offers/says feel worse, even if it isn’t.

Southwest employees aren’t getting the best deal amongst their peers anymore, and at least some of the frustration with management is actually latent frustration about that fact and has nothing to do with management.

From Financial Darling to Middle of the Pack


Moreover, while Southwest’s compensation has come back to pack, that is matched by the fact that Southwest no longer outperforms its US airline peers in terms of finances, let alone stock performance. The following is a list of Q3 operating and net profit margins for the 10 major US airlines.

Airline – Operating Margin / Net Margin

  • Alaska – 28.5% / 18.3%
  • Allegiant – 25.7% / 14.8%
  • American – 18.7% / 17.6%
  • Delta – 19.9% / 12.5%
  • Hawaiian – 24.5% / 12.4%
  • JetBlue – 20.8% / 11.7%
  • Southwest – 23.0% / 11.7%
  • Spirit – 27.3% / 16.9%
  • United – 18.4% / 16.5%
  • Virgin America – 18.0% / 17.8%

Out of 10 major US airlines, Southwest is fifth in operating margin and tied for dead last in net margin. Back when Southwest was the only profitable US airline, there wasn’t as much of a laser focus on operating margins, bringing down every cost, etc. Southwest’s unique status as the best stock in a bad industry meant that it didn’t have to make the oft-derided “bean-counter” type decisions, to put short-run financial outcomes over its people and its operations.

But in today’s airline industry, when the other carriers are able to leverage cost advantages (Spirit, Allegiant) or network advantages (the legacies) to out-earn Southwest, the airline is now forced to sit down and make some of those tough decisions like not automatically granting pilots a raise or asking for code sharing.

And Wall Street also has driven much of the misalignment between management’s stated growth plans and what they’ve actually put into practice. After all, earlier this year, Southwest was practically browbeaten into pulling back from its “overly aggressive” (8%, not even Spirit-esque figures in the 20s) capacity growth plans by Wall Street backlash.

On some level, I do believe that management generally has wanted to grow more over the past five years, but shareholders and Wall Street, through their relentless focus on headline PRASM and ASM growth figures, has constricted their ability to do so.

None of this is meant to excuse Southwest’s management team from whatever genuine missteps that they have made over the last few years.

But it is meant to shine the light on the fact that much of what has poisoned the relationship between management and the rank-and-file was driven by external factors beyond management’s control, and was not entirely their fault.

 

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About Author

Vinay Bhaskara

Vinay Bhaskara

Senior Business Analyst, Big Airline Enthusiast, Avid Airport Connoisseur, Frequent Flyer, Globetrotter. I Miss Northwest Airlines Every Day. vinay@airwaysmag.com @TheABVinay

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