So Southwest Is Mortal After All

[Lear70]

I predict they will raise prices.

One of the few management teams that employs actual good business sense in their daily operations is certain to understand that the BULK of their retained profit margin MUST come from increased prices.

To take it from labor would jeopardize the good will they've worked SO HARD over the years to create and retain. They may ask for some increased productivity and ask to exchange a small percentage of pay for stock or profit sharing but it would go against the business model they've had since day one to come asking for large pay cuts.

 

[BeCareful!]

There's a fresh new batch of airline "talent" hitting the job market. It's many former USAir guys and gals. Perhaps SWA can hire them to help hammer out some "competitive" labor agreements!

 

[pilotyip]

kelbill no intent to slam. You forget to add the raising fuel prices that will also reduce the percentage of payroll costs, plus pilots are not leaving SWA like they did up until 2001 and pilots are creeping up the pay scale. But that alone does not tell the whole story on the health of a company. Your answer made sense, but a change in a ratio like that compared to ROI and profit margin can send a message. My concern was you can only pull so much milk out of a cow, then it goes dry. Employees at other airlines have pulled too much milk out of their cows with raising expectations that can not be meet.

 

[kelbill]

Pilotyip,

We pilots are in the midst of some productivity discussions (actually a vote coming up) and the fact that we have more senior pilots and more vacation will increase our expenses no doubt. Your fuel costs example of artificially reducing payroll costs is accurate. So when/if fuel prices go down does that make our inevitable payroll percentage rise a red flag to Wall Street? It will go up as well at all the airlines, to include those in BK. Very few pilots left SWA pre2001, let along post2001. And retirements here are just now starting to kick in big time, so I don't see a big problem with payroll in the near future. SWA doesn't sit on its laurels, and we are doing what we can to stay competitive and profitable. Wall Street is smart enough to know that we can only control so much with BK, Wright, and heinous fuel costs (even with hedging). We are on track to make more money this year than last (ROI, Net Margin, total $ all going up) so I don't worry about the cow going dry. I don't hold my breath that someone will liquidate either.

 

[AA717driver]

4. When the industry cycle turns around, watch out.

The problem is that we have been in an economic growth mode for the past few years. The airline industry cycle hasn't turned around. You will probably have to wait out the next downturn before the industry gets any better.

That said, SWA is MUCH better suited to weathering a storm than the other airlines. That is due primarily to its cooperative spirit between labor and management.

Hey, Arpey, there is no PDP at SWA! Wonder why...? TC

 

[SirFlyALot]

Payroll has jumped up as a percentage, no doubt. But taking that one stat and making hay with it is misleading at best.

1. We pilots have gotten some nice raises recently.
2. Revenue growth and profits have tanked since 9/11. Even with little or no raises, payroll's percentage of expenses would have increased.
3. We and the company are now becoming leaner and meaner, meaning when revenues pick up, which they are slowly but surely doing, payroll percentage will drop a lot.
4. I forget the exact number, but with buy outs and internal transfers, our employee per plane ratio has plummeted. When the industry cycle turns around, watch out.
5. And finally, are we to assume that our increase payroll percentage is a slam on SWA, but the drop in payroll percentages elsewhere due to 40% paycuts is a positive?

SWA has been able to maintain its profitability over the last several years due in large part to an absolute cost advantage over other airlines. The cost advantage consisted mostly of 1) the fuel hedges, and 2) inefficiencies at other airlines. SWA was able to charge less than other carriers and people, as we all know, generally go for the lowest price offered. Now, however, the fuel hedges are going to begin to go away and other airlines have dramatically improved their efficiency. SWA's cost advantage is eroding. SWA has become leaner and meaner but most other airlines are becoming leaner and meaner more quickly than them simply because there was much more "fat" to shed.

At the same time, the strength of competing low cost carriers is increasing thanks to the prowess of JetBlue and AirTran. As these two carriers in particular continue to grow, they are going to become even more efficient due to economies of size, and SWA will feel increasing pressure from them. On a percentage basis, they are both growing more quickly than SWA. The latest stats I saw at a stage length of something like 700 miles showed AirTran with lower non-fuel costs than SWA and JetBlue with very slightly higher non-fuel costs.

 

[JohnDoe]

quote:
"The problem is that we have been in an economic growth mode for the past few years. The airline industry cycle hasn't turned around. You will probably have to wait out the next downturn before the industry gets any better."


Finally, somebody with some sense to see this isn't a "normal" downturn in our industry.

This is a good point that a lot of people seem to be ignoring when they talk about how this is only a cycle of good/bad times for the airlines. Our economy has supposedly been in "recovery" for a couple of years now, yet the airlines are continuing to head toward the bottom (three chap 11's in the last month alone). By the time they finally reach it, it will be time for the next decline in the overall economy.

Has there ever been a time in the "downturn" where 4 of the largest airlines have been in chap 11 at once? Not to mention including the bankruptcies of numerous other carriers. Even "regionals" are joining the party.

 

[Immelman]

I would hope that certain posters in this (http://forums.flightinfo.com/showthread.php?t=47976&highlight=hedging) thread would take a step back and see how hedging really works... option contracts for fuel are like anything else... you can't get the cheap stuff forever if the price of the commodity goes up.

I hope SWA responds to this with reasonable fare increases.. sure, it may hamper their growth, but it would be a good thing for the entire industry don't you think? Maybe reasonable fare increases will better the odds that my seat-mate on my next SWA flight has recently bathed and has decent breath

 

[kelbill]

More banter,

"SWA has been able to maintain its profitability over the last several years due in large part to an absolute cost advantage over other airlines. The cost advantage consisted mostly of 1) the fuel hedges, and 2) inefficiencies at other airlines. SWA was able to charge less than other carriers and people, as we all know, generally go for the lowest price offered. Now, however, the fuel hedges are going to begin to go away and other airlines have dramatically improved their efficiency. SWA's cost advantage is eroding. SWA has become leaner and meaner but most other airlines are becoming leaner and meaner more quickly than them simply because there was much more "fat" to shed."

Sounds good on paper, but I'm not buying. Our cost advantage, ex-fuel, is great regardless of the hedging. We've always had a cost advantage, the fuel situation just worsened the situation for the other guys. Fuel hedges are going away, but they aren't gone, and we are ready for it. Failing to pay one's retirement bills (for most of the majors), bankruptcy, and the like are not signs of leaner or meaner, but rather just leaner. And I'm sure the other folks are not even pondering asking for their pay cuts back should times improve. What will that do to the fat situation? We don't compare ourselves to the others, we just try to be as efficient as we can, and let the profits follow.

"At the same time, the strength of competing low cost carriers is increasing thanks to the prowess of JetBlue and AirTran. As these two carriers in particular continue to grow, they are going to become even more efficient due to economies of size, and SWA will feel increasing pressure from them. On a percentage basis, they are both growing more quickly than SWA. The latest stats I saw at a stage length of something like 700 miles showed AirTran with lower non-fuel costs than SWA and JetBlue with very slightly higher non-fuel costs."

I treat those two as our major competition. That being said, you can't have it both ways. As these guys mature, as we already have (4500+ pilots, 420+ planes) they will be the ones running up on increased vacation (reduced productivity), increased payroll (no 12 year captain pay at JBLU yet, but its coming), and increased MX costs. And of course, the dreaded U word will rear up at JBLU no doubt. U as in union. Our pay rates are now at or near top, whereas they have a way to go, and it would be blind to assume they won't be growing salaries at a quicker rate than us to catchup. I see them getting less competitive cost wise in the future. And JBLU debt rating is junk class I believe, so we are being a little dishonest in our comparisons. I'm not slamming JBLU or AAI, I'm just responding to the comparison.

 

[FlyBoeingJets]

Pilotyip,

We are on track to make more money this year than last (ROI, Net Margin, total $ all going up) so I don't worry about the cow going dry. I don't hold my breath that someone will liquidate either.

As long as CASM is competitive the percentage being labor is just nice to know information. It is a weakness only if it can be exploited by a competitor. Traditionally, once you let the high wage genie out of the bottle you can't put it back in. That is what can bite SWA in the future with Wallstreet. This year, of course, will be good. But what about after that?

Those not in BK will benefit from the reduction in capacity due to lease renegotiations at NWA and Delta. USAir will get rid of 50 planes too. Fares will go up and mask any CASM issues from lack of hedges and higher than average wages. But this holiday period will not last long.

When the others in the top 6 get their act together SWA will have competitors with lower non-fuel costs than they've had in two decades (leases, work rules, and pay).