Is SWA Untouchable?

[ivauir]

HUH?

SWA: 41% of expense costs are labor, and labor is 37% of the revenue...both growing numbers over the course of the last few years. Please rephrase, how is labor part of revenue? Are we paying to work?
CASM costs will become meaningless as more pressure is exerted as the lack of pricing power will become more evident in the next few years.
Dude - CASM meaningless? Get a grip: The airline with the lowest costs sets the prices. That is still us, will be us tomorrow and the day after. Sell that POS EMB stock and get some LUV.

 

[FDJ2]

I have to laugh every day when I see how all these airlines are attempting to 'reinvent' themselves. Never knowing where they are going....

As opposed to SWA that know's exactly what they are doing, and what is required to get there.

Don't laugh too loud. SWA is successful because of its management team and management teams come and go. You've been lucky so far to have a sharp team, that can all change.

 

[Delville]

I originally posted this back in Dec:

TexasSWA, I also doubt that you will repeat the same specific mistakes that have doomed the legacy carriers. However, I think SWA could fall prey to some of the same types of cultural and emotional problems that infested the former big boys during their period of dominance.

The changes to SWA's culture and attitude, as you transition from perennial underdog to 800 pound gorilla, could be very threatening. As SWA takes a more aggressive stance within the industry, the subtle emotional effects that will have on employees and customers could be damaging. It's easy to rally the troops to put up with low pay and more work when their survival is threatened. However, the opposite is true now at SWA, and I think the psychological motivation to keep costs low and operate efficiently will be reduced with SWA's new industry position. Additionally, humility has always been a cornerstone of SWA's culture. Customers have always picked up on that and liked it. Customers have also always known up to this point, through SWA's marketing and by the genuine case of reality, that SWA was in an underdog sort of situation. They were willing to cut SWA just a little bit of slack. That's the way people are. Now, however, times have certainly changed. It is hard to be humble when you're the dominant industry leader. Both employees and customers will eventually realize this. It'll be extremely difficult to keep your culture the same. Customers will also have a different expectation from a SWA that is king of the hill.

SWA will be able to ride on it's coattails and the goodwill it has engendered for a while, but eventually that could change unless the growth is very, very carefully managed. Employees from the old guard will still be humble and try to maintain the old SWA spirit. However, there is a real danger (I think) that they will be overwhelmed as the newer, cockier employees work their way into the SWA organization. Believe me, there are pilots being hired at SWA today who five years disparaged and ridiculed anyone who would pay for a type rating to go work at a low ball operation.

Another point to consider: SWA has incredible fuel hedges (in the mid $20's) right now that last for the next couple of years. This is VERY good for SWA and will virtually guarantee SWA's position for the next several years. However, those same fuel hedges could turn out to be a bad thing in the long run. The airlines without good fuel hedges right now are being forced by the competitive situation to become ultra-efficient. If they don't become ultra-efficient, they will die (USAir, Independence, ATA). Therefore, the airlines that do manage to make it through to a point where all of the airlines are on somewhat equal footing in terms of fuel prices will be profit-making machines. SWA may feel some pressure right now to keep costs rock-bottom low but at the end of the day that pressure cannot rival the do-or-die pressure on other airlines. I've long held the belief that people do only what they know and believe they really have to do to get by. That's the argument I'm making here. Airlines like AirTran, JetBlue, and America West know and believe they have to be efficient. SWA knows in it's heart it doesn't have to be as efficient right now. If the playing field is ever leveled, SWA could be at a disadvantage.

..............................................................................................
If those who post on this board are at all representative of SWA pilots in general, then except for a very few SWA folks (Yahtzee is a notable exception), the lack of humility that I mentioned in the above post certainly seems to be settling in.

 

[canyonblue]

Don't laugh too loud. SWA is successful because of its management team and management teams come and go. You've been lucky so far to have a sharp team, that can all change.

Southwest has been very careful to promote from inside the corporation. Tell me another Airline out there that has a president that has been with the company for 34 years and worked their way up. This will continue here, we have seen what happens when you hire some penny pincher from another Fortune 500 company. Just because they know how to save a nickle at Marriot does not mean it will work at an Airline.

 

[ultrarunner]

It is only a matter of time until SWA starts losing money. They got very lucky this quarter (or smart). If they hadn't hedged their fuel they would have lost money. As fuel prices incease so does the cost to hedge. JB made money this quarter without the large volume of fuel hedges. That should scare the pants of a SWA pilot. It is increadible for a start up to make money with so many costs associated with startup (buying gates, uniforms, computers, stationary, busses, tugs, paperclips....hell everything for that matter except their planes).

SWA bought their fuel when prices were low and got lucky when they went up. The question is will the prices fall again so they can re-hedge. If prices don't come down significantly in the next 10 months SWA will be as stuck as anyone else in the business. No one is going to sign a long term contract for $30 a barrell fuel if the current price is 45 and moving up.

I am betting that fuel prices are going to increase, and that SWA will have 10 months of modest profit, and then will start losing money.

Uhhhh...DUDE...have you seen their long-term hedge numbers?? DUDE?

Oh, OK, here they are for you:

"We also continue to mitigate record-high jet fuel prices with our hedging program, which resulted in a reduction in fuel and oil expense of $174 million during fourth quarter 2004.

We are 85 percent hedged in first quarter 2005 with prices capped at $26 per barrel

We are 85 percent hedged for the remainder of 2005 with prices capped at $26 per barrel

65 percent in 2006 at $32 per barrel

Over 45 percent in 2007 at $31 per barrel

30 percent in 2008 at $33 per barrel

Over 25 percent in 2009 at $35 per barrel.


All in all, this appears to be very agressive hedging.

 

[SWAdude]

I originally posted this back in Dec:

TexasSWA, I also doubt that you will repeat the same specific mistakes that have doomed the legacy carriers. However, I think SWA could fall prey to some of the same types of cultural and emotional problems that infested the former big boys during their period of dominance.

The changes to SWA's culture and attitude, as you transition from perennial underdog to 800 pound gorilla, could be very threatening. As SWA takes a more aggressive stance within the industry, the subtle emotional effects that will have on employees and customers could be damaging. It's easy to rally the troops to put up with low pay and more work when their survival is threatened. However, the opposite is true now at SWA, and I think the psychological motivation to keep costs low and operate efficiently will be reduced with SWA's new industry position. Additionally, humility has always been a cornerstone of SWA's culture. Customers have always picked up on that and liked it. Customers have also always known up to this point, through SWA's marketing and by the genuine case of reality, that SWA was in an underdog sort of situation. They were willing to cut SWA just a little bit of slack. That's the way people are. Now, however, times have certainly changed. It is hard to be humble when you're the dominant industry leader. Both employees and customers will eventually realize this. It'll be extremely difficult to keep your culture the same. Customers will also have a different expectation from a SWA that is king of the hill.

SWA will be able to ride on it's coattails and the goodwill it has engendered for a while, but eventually that could change unless the growth is very, very carefully managed. Employees from the old guard will still be humble and try to maintain the old SWA spirit. However, there is a real danger (I think) that they will be overwhelmed as the newer, cockier employees work their way into the SWA organization. Believe me, there are pilots being hired at SWA today who five years disparaged and ridiculed anyone who would pay for a type rating to go work at a low ball operation.

Another point to consider: SWA has incredible fuel hedges (in the mid $20's) right now that last for the next couple of years. This is VERY good for SWA and will virtually guarantee SWA's position for the next several years. However, those same fuel hedges could turn out to be a bad thing in the long run. The airlines without good fuel hedges right now are being forced by the competitive situation to become ultra-efficient. If they don't become ultra-efficient, they will die (USAir, Independence, ATA). Therefore, the airlines that do manage to make it through to a point where all of the airlines are on somewhat equal footing in terms of fuel prices will be profit-making machines. SWA may feel some pressure right now to keep costs rock-bottom low but at the end of the day that pressure cannot rival the do-or-die pressure on other airlines. I've long held the belief that people do only what they know and believe they really have to do to get by. That's the argument I'm making here. Airlines like AirTran, JetBlue, and America West know and believe they have to be efficient. SWA knows in it's heart it doesn't have to be as efficient right now. If the playing field is ever leveled, SWA could be at a disadvantage.

..............................................................................................
If those who post on this board are at all representative of SWA pilots in general, then except for a very few SWA folks (Yahtzee is a notable exception), the lack of humility that I mentioned in the above post certainly seems to be settling in.

There are so many points that are off the mark in this post I really don't have the patience to address each of them. The one I will is the one about our efficiency. When I was at AA and contemplating trying to get on at SWA I read an article that interviewed Herb and he said " We operate the airline everyday like we are in a recession." And I can honestly say they do. Even in the best of times this airline is aggressively trying to drive down costs. Right now as we speak there is a hiring freeze with the exception of flight crews and mechanics due to the increase of the fleet.

As for the culture and size relation. I've heard that at the beginning of my tenure here 11 years ago. Believe me...the spirit is just as strong now as it was 11 years ago.

 

[ultrarunner]

To contine... the world is in turmoil. I would be bet that before we exit our current war, well, we never really exit unless we loose..that we'll will be at war in Korea and in Iran. Maybe both at the same time. This will keep oil prices high.

I think SWA's hedge numbers will stand up over the next several years. If only there would be a significant liquidation, or two, so that capacity would be reduced and prices would rise....

We can only hope.

 

[FDJ2]

Southwest has been very careful to promote from inside the corporation. Tell me another Airline out there that has a president that has been with the company for 34 years and worked their way up. This will continue here, we have seen what happens when you hire some penny pincher from another Fortune 500 company. Just because they know how to save a nickle at Marriot does not mean it will work at an Airline.

You could have said the same thing about DAL not too long ago.

 

[lowecur]

SWA: 41% of expense costs are labor, and labor is 39% of the revenue...both growing numbers over the course of the last few years. CASM costs will become meaningless as more pressure is exerted as the lack of pricing power will become more evident in the next few years.

Please rephrase, how is labor part of revenue? Are we paying to work? It's known as the Net Multiplier. As the percentage grows it means the company is getting less bang for it's buck. In 2002 it was 9.5% lower. Dude - CASM meaningless? Get a grip: The airline with the lowest costs sets the prices. Wrong, just ask your friends at ATA about a CASM only business model. If you subtract the fuel hedge, your CASM is not 7.70, it's well over 8.00. Fuel Hedging has cost the company lots of money in 2004 in order to hedge into 2007. The cash position has gone down to $1.3B from projection of $1.5B. $146M in debt is due this year, plus $605M in 2006. Gary is betting fuel prices will remain high. Let's hope he's right. That is still us, will be us tomorrow and the day after. Sell that POS EMB stock and get some LUV. I've got a 130% return on my investment in the last 2 years. How's LUV doing?

Yes, LUV will be here tomorrow. I just question the chemistry of the relationship if the company hits a wall. I hope I'm wrong.

 

[Snoopy58]

There's a difference between "things that need close attention" and "things that are going to clobber you."

Keeping the leadership team great is vitally important, and deserves close attention and thoughtful planning. Thankfully, SWA has a pretty deep bench in that regard, and the issue is getting (so far) the attention it deserves.

Likewise, the transition from "3-jet in TX underdog" to "800lb gorilla" is fraught with risks, but such risks can be addressed. And, on the whole, are being addressed rather successfully, so far.

Is there reason for caution? You bet! Is success certain? No way. (That's sort of like life... nothing is certain except death & taxes.) Is SWA untouchable? Nope! Nevertheless, Southwest continues (thus far) to deal well with the challenges at hand: adding fuel-saving winglets and looking to other fuel-efficiencies and cost-efficiencies as aggressively as possible; making smart tactical & strategic decisions (MDW gates, Wright Ammendment fight, IAH, etc).

Doesn't mean that SWA is invulnerable to a bad decision or other bad break, but just as success isn't certain, neither is failure. And, given all the factors, there are strong reasons to bet in SWA's favor right now!

 

[Bake]

[/color]Yes, LUV will be here tomorrow.

This scares me, you haven't been correct on one thing in the last year. I sure hope you are on this one. You remind me of stock brokers!! What ever they say buy, I sell and vice versa -- so far it works pretty darn good.

 

[satpak77]

Southwest has been very careful to promote from inside the corporation.

In the book, "Good to Great", a zillion times over worldwide bestseller, they indeed identified "greatness" with corporate American when they promoted from within, not from external (note: this is not a guarantee for success, but overwhelmingly those that promoted from within had better performance than the others that did not).

In addition, the "great" leaders (VP's, CEOs, etc) were the ones that came from the "action", whether it be a sales job, operations type job, or something similar. People rarely rose the ranks from admin type job into CEO.

I am not ex-military, but I would think that this is also applies there too.

later

 

[skykid]

To contine... the world is in turmoil. I would be bet that before we exit our current war, well, we never really exit unless we loose..that we'll will be at war in Korea and in Iran. Maybe both at the same time. This will keep oil prices high.

You are getting a little bit out carried away. If we go to war with Korea and Iran, the airlines with big planes are going to get them "borrowed" by our government, and there isn't going to be anybody flying domestic. I'd stick to your "if only" hope for others demise.

 

[FR8mastr]

I think SWA's hedge numbers will stand up over the next several years. If only there would be a significant liquidation, or two, so that capacity would be reduced and prices would rise....

We can only hope.

Yea lets put a couple hundred thousand people out of work so I can fly across the country for 50 bucs. that will be great!!

Thanks buddy, right back at ya!

 

[SWA tech]

Yes, LUV will be here tomorrow. I just question the chemistry of the relationship if the company hits a wall. I hope I'm wrong.

We have hit walls and worked around them. SWA people make it happen it's
called team work.

 

[Dizel8]

Rez O. Lewshun says:"SWA works with thier unions.... Jetblue is adamently against them".

That is not the case, certainly I have never heard neither David nor Dave say it, however, Neeleman have said, that if jblu gets a union, he hasn't done a good job of keeping the employees happy.

As for SWA, if they continue to execute their plan well, and all indications are such, they will continue to prosper.

 

[FlyBoeingJets]

HUH?

SWA: 41% of expense costs are labor, and labor is 37% of the revenue...both growing numbers over the course of the last few years. Please rephrase, how is labor part of revenue? Are we paying to work?
CASM costs will become meaningless as more pressure is exerted as the lack of pricing power will become more evident in the next few years.
Dude - CASM meaningless? Get a grip: The airline with the lowest costs sets the prices. That is still us, will be us tomorrow and the day after. Sell that POS EMB stock and get some LUV.

Ivauir,

Lowecur is just quoting another way to look at labor cost as a percentage of something. A statistical tool.


You can compare labor costs to total expenses or total revenue. But you can't use these tools in a vacuum.

If SWA's labor costs are a large percentage of total costs, so what. If SWA's TOTAL costs are still lower than someone elses SWA has the advantage. It is then a strength that SWA has very, very low non-labor costs.

Labor costs being a high percentage of total revenue is a different story. For SWA, and other airlines, it means that revenue is declining or not growing like it should. Every company should be worried about their revenue stream. Good revenue can mask an inefficient company's high costs while poor revenue demands a brutally efficient cost structure. Again, this statistic must be weighed against total costs. As long as SWA has lower total costs than other airlines and total costs lower than total revenue, all is reasonably o.k.

But passenger airline revenue needs to improve at some point for the longterm health of even SWA, IMHO. Otherwise changes will occur like concessionary labor contracts.

 

[FlyBoeingJets]

On the flip side, I am very positive about SWA. Low debt is an awesome advantage that will continue to be huge in the years ahead. Costs have to be that much lower at a debt laden carrier to compete against SWA, JetBlue and Airtran.

For this reason I do not see mergers between low debt and high debt airlines. High debt carriers will either find a way to start paying off debt or stay in Ch 11 (or "GE Capital") protection.

 

[Rez O. Lewshun]

Rez O. Lewshun says:"SWA works with thier unions.... Jetblue is adamently against them".

That is not the case, certainly I have never heard neither David nor Dave say it, however, Neeleman have said, that if jblu gets a union, he hasn't done a good job of keeping the employees happy.

As for SWA, if they continue to execute their plan well, and all indications are such, they will continue to prosper.

I've listened to a DN webcast type presentation (2 years ago?) at a business college where he stated that unions were beneficial in the industrial revolution in terms of work rules, child labor, etc but there wasn't really a place for unions in todays business world. I took that to mean certianly not in his business world.

At the risk of running this thread into a 'union at jB' discussion, the fact is you can't have the DA represent both the gov't and the defendant at the same trial.

This is not to say that labor/managment is the difference between right and wrong, it's just that management can't objectivly apply the interest of labor. (even at LUV) AND vice versa. That is why unions (thank god) don't run companies.

The E190 rates at jB are and indication of what I am talking about....

SWA understands all of this and uses its unions as partners and a player on the same team, for the same goal. And just like any team there are disagrements between the players, but in the end all the players want the same thing...to win.

A managment/union team that understands this, will do well....

Thoughts?

 

[CSY Mon]

I still believe that once UAL discharges their pensions, they will merge with AMR

Ha-ha, that's a good one.
Been smoking crack Mr. Cure...?

Nuff said

 

[lowecur]

Ha-ha, that's a good one.
Been smoking crack Mr. Cure...?

Nuff said

Smok'ns better n sniffing one's own crack, you double jointed pin-head!

 

[Dizel8]

"The E190 rates at jB are and indication of what I am talking about"

I think that is a disingenious argument. The pilots at SWA has only recently been amongst the highest paid, for years they were "languishing" on the lower end of the spectrum. Yet, ask any furloughed pilot and I would imagine he or she would much prefer the steady income at SWA to the on again, off again life. As for the SWA bunch, they seem pretty content as a whole.

Secondly, even during the best of times, there were plenty of bitching going on at the big legacies, so apparently, the money did not cure all ills.

Could the pay at jetblue be better, of course it could, it could be like the halcyon days in the late 90's early 2000's, but with the invariable fluctuations of the economy, we have been shown, that it was not working. Not so much because of pay, but because the pay vs productivity was not working.

When the legacies was able to dictate prices to the last minute traveller, all was well, but as for now, those days are gone and we have to face reality, it is currently a consumer driven market. A market in which SWA thrives and prospers.

I am fascinated by the argument, as previously seen, that jblu will have a second class citizen on the 190. If anything the pay is pretty darn logical and based on seats, unlike what you see at some other carriers. If I recall correctly, the NWA pay on the 74, if based on the DC-9 and seats, should be $450. It isn't, yet I do not hear about the second class citizens at NWA. Nor do I hear an outcry, because AWA has a single payscale.

Obviously, jblu management are not dummies, they are well aware of the markets they wish to serve and what profits, if any, they will be able to make. Is it better to underpromise and overdeliver or should they set a payscale that would be unsustainable?

As for the union argument, unless I see compelling reason to differ, I will take Neeleman at his word, that if he does right by his employees there will not be a need for representation. Now having said that, there are other reasons for a union, which does not have to do with pay, but simply about prioritizing what the pilots want and speaking with unified voice, not of threats but of desire and reasons. That would be similar to what is at SWA.

To bring it back to the topic at hand. SWA, as long as they continue to execute the gameplan so exceedingly well, they will continue to prosper.

 

[Rez O. Lewshun]

Dizel8,

Good reply...

It's not that the B747 rates should be at $450, its the Dc-9 rates should be less.

The heavies subsidize the FK100 pilot rates at AMR for example, not the other way...

So...does that mean the E190 rates are about right? In the traditional Legacy world, maybe not. But in the jB world...maybe so...

Thoughts?

 

[FlyBoeingJets]

Dizel8,

It's not that the B747 rates should be at $450, its the Dc-9 rates should be less.

The heavies subsidize the FK100 pilot rates at AMR for example, not the other way...

So...does that mean the E190 rates are about right? In the traditional Legacy world, maybe not.

Thoughts?

The above may not be right or wrong, just a point of view. The pay rates on smaller, and larger, aircraft affects how management uses them in the fleet mix. To improve profit will management expand the 100-150 aircraft fleet or the 180-240 aircraft fleet??

It could be the smaller fleet feeds the bigger, international fleet and they both grow at the same time. This is also why the scope clause issue is hot.

The small hairs on my neck stand up when I hear "the traditional way things have been are...." There is nothing traditional about this industry lately. I don't think it will ever get back to it either.

 

[superrav]

i think its a insult to the hard working individuals in the industry to sell tickets for 99 dollars across the country. Yes, business is business...your flying in a multi million dollar airplane, it just shouldnt be this cheap.....my opinions of course..

 

[Dave Siegel]

Just because they know how to save a nickle at Marriot does not mean it will work at an Airline.

Great analogy, Canyon!