canyonblue
Everyone loves Southwest
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- Nov 26, 2001
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Southwest's magic formula: low costs, low fares and high pay
Fort Worth Star-Telegram
By Mitchell Schnurman
May 24, 2006 Manage in good times as if they're bad, for the bad times will surely come. It seems natural that Southwest Airlines serves peanuts and skips assigned seating. You have to cut corners to be the low-cost leader. But try to reconcile this: Southwest employees are also paid some of the highest salaries in the business, with pilots and flight attendants at the top of the scale.
An experienced pilot at Southwest, for example, earns 45 percent more than his counterpart at United and almost 18 percent more than at American Airlines.
It wasn't always that way. Three years ago, Southwest pilots were paid at least 20 percent less than pilots at legacy carriers. They usually made up the difference, and then some, from Southwest's profit sharing and stock options. Then the competition began restructuring after losing tens of billions of dollars. Companies shrank, went bankrupt and cut jobs, pay and benefits. Southwest, meanwhile, continued to grow, and workers received small, steady increases, without involuntary layoffs.
If you charted the airlines' worker pay on a line graph, the lines would have crossed about 2004, with Southwest rising to the top and most of the competition heading south.
'I'm proud of the fact that we are successful with high pay,' Gary Kelly, Southwest's chief executive officer, told reporters after last week's annual meeting. 'If results are good, we can afford to pay our employees well, and they deserve it.'
Sounds wonderful, except that Southwest is also obsessed with controlling costs.
That's been crucial to its success, and by many measures, Southwest remains the industry's low-cost operator. Only JetBlue's operating expenses were a lower percentage of available seat miles -- an industry measure of efficiency -- and that's due in part to JetBlue's longer flights. Adjusted for flight length, Southwest's cost ratio is almost half the industry average. And excluding fuel, Southwest's costs have hardly moved in the past five years.At the annual meeting, Kelly repeated the Herb Kelleher line that has become a Southwest mantra: 'Manage in good times as if they're bad, for the bad times will surely come.'
In the past, the Southwest pay model was well-suited to that warning. In lean times, the company's lower pay helped cushion results. But when profits soared, employees benefited as much as anyone, thanks to rich profit sharing and stock options.
In 2000, for instance, Southwest employees received 16 percent of their pay as a profit-sharing bonus. In 2004, in the midst of the industry slump, profit sharing totaled 5 percent of pay. That's a lot less, but it's still a meaningful bump. And the payouts didn't become a permanent labor cost, as was the case with most legacy carriers. United, Delta and others signed labor contracts near the peak of the market, locking in expenses that would be difficult and painful to undo later. For years, analysts have worried that Southwest would lose its cost advantage as its work force aged (and became more expensive), and its success emboldened unions to demand ever higher pay. Many fret about the issue today, with pilot contract talks slated for this year and other work groups not far behind.
But Southwest continues to find ways to get more efficient and productive. The latest example is its Web site, which now accounts for 70 percent of bookings and half the boarding passes that Southwest issues every day. The online success means fewer people are needed at call centers and ticket counters and more can be deployed elsewhere. 'Southwest squeezes more efficiency out of almost anything you can think of,' said Michael Roach, principal of Roach & Sbarra, an aviation consulting firm in San Francisco. 'It has the highest utilization of aircraft; it gets the most from its airport assets, from its employees, from its Internet ticketing. It even has more legroom than much of the competition.'
In mid-2002, Southwest had almost 91 employees for every airplane; today it has fewer than 70.
Its pilots fly an average of almost 65 hours per month; the industry average is 53.
Southwest planes were in the air an average of 11 hours, 25 minutes per day last year (up from 11 hours, nine minutes in 2003). The industry average is slightly under 10 hours.
Carl Kuwitzky, a Southwest pilot for 23 years and vice president of the pilots union, knocked me over with this statistic: The average Southwest plane carries 19,300 passengers a year, compared with 11,700, the industry average. If a company moves 65 percent more passengers per plane, I guess it can afford to pay top-drawer wages. Adding people and paying them well doesn't have to raise costs, as long as their productivity climbs.
Roach said the passengers-per-plane statistic isn't too meaningful because airlines have such a variety of planes -- some small, some huge. But to me, it illustrates the advantages that Southwest enjoys, courtesy of its business model.
Southwest uses only one type of aircraft, which reduces maintenance costs, training time and labor expenses. It flies primarily point to point, which leads to faster turnarounds and more time in the air. And its employees always seem to go the extra mile for customers, which translates into a lot of good will and repeat business. When pilots help clean a plane, for instance, they get back in the air faster, more trips can be completed and more passengers arrive on time. As a result, Southwest continually ranks among the leaders in customer satisfaction.
Management does its share to boost the bottom line. It bought fuel hedges years ago, locking in rates when oil prices were low. Last year, Southwest paid the equivalent of $26 a barrel for 85 percent of its fuel, saving $900 million in jet fuel costs. Those savings are more than Southwest's operating profit in 2005.
Southwest has a 401(k) plan and other savings programs, but it doesn't offer a traditional pension. That helps in managing the business, because the company pays as it goes, rather than incurring big long-term liabilities. At legacy carriers, such pensions were a huge part of pilots' pay packages. United and US Airways dropped their pensions after filing for bankruptcy. At Delta and Northwest, the pensions are in doubt because the airlines are in bankruptcy now.
American continues to fund its pension, and it closes much of the pay gap with Southwest pilots. But Kuwitzky says Southwest pilots made a conscious decision to go with a defined-contribution plan so employees could get their money every year and decide how to invest it.
They saw what happened to workers at Eastern, Braniff and other carriers in the early 1980s.
'We didn't want to tie our retirement to the airline,' Kuwitzky said.
Another good call for the employees and a good call for Southwest.
Fort Worth Star-Telegram
By Mitchell Schnurman
May 24, 2006 Manage in good times as if they're bad, for the bad times will surely come. It seems natural that Southwest Airlines serves peanuts and skips assigned seating. You have to cut corners to be the low-cost leader. But try to reconcile this: Southwest employees are also paid some of the highest salaries in the business, with pilots and flight attendants at the top of the scale.
An experienced pilot at Southwest, for example, earns 45 percent more than his counterpart at United and almost 18 percent more than at American Airlines.
It wasn't always that way. Three years ago, Southwest pilots were paid at least 20 percent less than pilots at legacy carriers. They usually made up the difference, and then some, from Southwest's profit sharing and stock options. Then the competition began restructuring after losing tens of billions of dollars. Companies shrank, went bankrupt and cut jobs, pay and benefits. Southwest, meanwhile, continued to grow, and workers received small, steady increases, without involuntary layoffs.
If you charted the airlines' worker pay on a line graph, the lines would have crossed about 2004, with Southwest rising to the top and most of the competition heading south.
'I'm proud of the fact that we are successful with high pay,' Gary Kelly, Southwest's chief executive officer, told reporters after last week's annual meeting. 'If results are good, we can afford to pay our employees well, and they deserve it.'
Sounds wonderful, except that Southwest is also obsessed with controlling costs.
That's been crucial to its success, and by many measures, Southwest remains the industry's low-cost operator. Only JetBlue's operating expenses were a lower percentage of available seat miles -- an industry measure of efficiency -- and that's due in part to JetBlue's longer flights. Adjusted for flight length, Southwest's cost ratio is almost half the industry average. And excluding fuel, Southwest's costs have hardly moved in the past five years.At the annual meeting, Kelly repeated the Herb Kelleher line that has become a Southwest mantra: 'Manage in good times as if they're bad, for the bad times will surely come.'
In the past, the Southwest pay model was well-suited to that warning. In lean times, the company's lower pay helped cushion results. But when profits soared, employees benefited as much as anyone, thanks to rich profit sharing and stock options.
In 2000, for instance, Southwest employees received 16 percent of their pay as a profit-sharing bonus. In 2004, in the midst of the industry slump, profit sharing totaled 5 percent of pay. That's a lot less, but it's still a meaningful bump. And the payouts didn't become a permanent labor cost, as was the case with most legacy carriers. United, Delta and others signed labor contracts near the peak of the market, locking in expenses that would be difficult and painful to undo later. For years, analysts have worried that Southwest would lose its cost advantage as its work force aged (and became more expensive), and its success emboldened unions to demand ever higher pay. Many fret about the issue today, with pilot contract talks slated for this year and other work groups not far behind.
But Southwest continues to find ways to get more efficient and productive. The latest example is its Web site, which now accounts for 70 percent of bookings and half the boarding passes that Southwest issues every day. The online success means fewer people are needed at call centers and ticket counters and more can be deployed elsewhere. 'Southwest squeezes more efficiency out of almost anything you can think of,' said Michael Roach, principal of Roach & Sbarra, an aviation consulting firm in San Francisco. 'It has the highest utilization of aircraft; it gets the most from its airport assets, from its employees, from its Internet ticketing. It even has more legroom than much of the competition.'
In mid-2002, Southwest had almost 91 employees for every airplane; today it has fewer than 70.
Its pilots fly an average of almost 65 hours per month; the industry average is 53.
Southwest planes were in the air an average of 11 hours, 25 minutes per day last year (up from 11 hours, nine minutes in 2003). The industry average is slightly under 10 hours.
Carl Kuwitzky, a Southwest pilot for 23 years and vice president of the pilots union, knocked me over with this statistic: The average Southwest plane carries 19,300 passengers a year, compared with 11,700, the industry average. If a company moves 65 percent more passengers per plane, I guess it can afford to pay top-drawer wages. Adding people and paying them well doesn't have to raise costs, as long as their productivity climbs.
Roach said the passengers-per-plane statistic isn't too meaningful because airlines have such a variety of planes -- some small, some huge. But to me, it illustrates the advantages that Southwest enjoys, courtesy of its business model.
Southwest uses only one type of aircraft, which reduces maintenance costs, training time and labor expenses. It flies primarily point to point, which leads to faster turnarounds and more time in the air. And its employees always seem to go the extra mile for customers, which translates into a lot of good will and repeat business. When pilots help clean a plane, for instance, they get back in the air faster, more trips can be completed and more passengers arrive on time. As a result, Southwest continually ranks among the leaders in customer satisfaction.
Management does its share to boost the bottom line. It bought fuel hedges years ago, locking in rates when oil prices were low. Last year, Southwest paid the equivalent of $26 a barrel for 85 percent of its fuel, saving $900 million in jet fuel costs. Those savings are more than Southwest's operating profit in 2005.
Southwest has a 401(k) plan and other savings programs, but it doesn't offer a traditional pension. That helps in managing the business, because the company pays as it goes, rather than incurring big long-term liabilities. At legacy carriers, such pensions were a huge part of pilots' pay packages. United and US Airways dropped their pensions after filing for bankruptcy. At Delta and Northwest, the pensions are in doubt because the airlines are in bankruptcy now.
American continues to fund its pension, and it closes much of the pay gap with Southwest pilots. But Kuwitzky says Southwest pilots made a conscious decision to go with a defined-contribution plan so employees could get their money every year and decide how to invest it.
They saw what happened to workers at Eastern, Braniff and other carriers in the early 1980s.
'We didn't want to tie our retirement to the airline,' Kuwitzky said.
Another good call for the employees and a good call for Southwest.
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