SWA airlines cost divergence

[lowecur]

This is an interesting analysis by Unisys. The majority of the analysis lays out the employee costs for LUV with a warning that they may be strangling the goose. What is really interesting is employee unit costs have risen significantly with the FA's. It says their productivity has declined. I'd be interested in hearing from some LUV FA's.

Also, mentioned is the large loss expected from DAL this quarter, and the major fight brewing in PHL between UAIR and LUV. They make it sound like UAIR will be out of business shortly, but offer a disclaimer that they only have data for 1 Q since they have been out of bankruptcy. It obviously does not take into consideration of the large deployment of CRJ 700/EMB 170's in the next few years.

http://www.unisys.com/eprise/main/admin/micro/doc/Dec_03_Scorecard.pdf

 

[General Lee]

Lowecur,

A very interesting analysis. I believe the Delta loss you stated was this LAST quarter, 3rd quarter, right? Yes, it was worsened by the huge early retirement on Sept 1st. I don't think this current quarter will be as bad--since Thanksgiving was great for us, and the current holiday season is going well. We all knew that the SEP---mid NOV was going to be tough. I am glad that the economy is getting better, and hope all of us have a better year next year.

Bye Bye--General Lee

 

[SWAInflt]

What is really interesting is employee unit costs have risen significantly with the FA's. It says their productivity has declined. I'd be interested in hearing from some LUV FA's.

Well, I'm stumped. The only explanation I can come up with is that our workforce is simply aging. Meaning that as I climb the pay scale, it cost SWA more for my services now than it did when I started 6 years ago.

What parameters would one use to measure my "productivity" as a flight attendant? The only gauge that I can think of is the number of segments I work in a day. That of course is completely outside of my control. Crew Planning builds my schedule, not me. I would also imagine that the addition of more long hauls to our schedule might also play a role in productivity. Again, that is all SWA. Though we are currently in contract negotiations, the pay rates and work rules from the previous contract remain in effect. Essentially, SWA's ability to build my schedule has not changed since the current contract was ratified in 1996.

SWA can contractually schedule me up to 8 legs per day except for Fridays and Sundays. I can be scheduled for a 10.5 hour duty day as a lineholder and minimum contractual crew rest is 11 hours block to block.

Let's take a look at my last trip, an unaltered Saturday, Sunday, Monday 3 day pairing. I worked 3 legs to TPA a 6:30 duty day for a 18:55 block to block layover. Next day I worked 4 legs to ONT, a 10:15 duty day to a 13:55 layover. Finally, I worked 2 legs back to base with a duty time of 6:55.

So, contractually I could have possibly worked 8 legs on Saturday, 7 on Sunday, and 8 more on Monday. Working 10.5 hour days and minimum contractual rest I could have flown 23 landings, 31.5 hours of duty and only spent 22 hours in crew rest.

Instead, I worked 9 landings, spent 23.75 hours on duty and 33 hours in crew rest. Don't get me wrong. If I had flown the more contracually productive trip, I would have had to be carried off the aircraft feet first. However, the 3 day I flew was an average, unaltered BWI 3 day and we have some of the more productive trips among the 7 bases. A trip somewhere between the two I described would give SWA the productivity they seem to feel we are lacking and allow me to make the most of my time away from home.

Again, crew planning has all the tools to make me a "productive" flight attendant. All they have to do is use em.

 

[lowecur]

General

Not according to Unisys.

"Indeed, Delta- among others- is expecting substantial losses in the fourth quarter. Delta announced in November that, with a special charge estimated at $140M related to the premature, voluntary retirement of a number of it's senior pilots it could record 4th Q losses between $365 and $410M."

In the last 6 years Delta has lost ground to SWA. Unit costs have risen from a legacy best in 1997 of 155% of SWA unit costs to 170% in 2003. By it's own reckoning, Delta would still have the lowest unit costs amoung the legacy carriers, if its employees had made wage concessions comparable to American's employees.

The best of the legacy carriers, Continental would take approximately 20 years for it's stage length adjusted unit costs to converge with SWA.

Unisys also states: "Finally, and related to the foregoing, because a lot of the cost reductions are temporary. Delta, an airline that is only now engaged in serious negotiations with its pilots- a step that required a change in CEO - has been offered a 9% rollback in pilot wages (to the level that prevailed quite recently before two successive 4.5% increases) and the sacrifice of an additional 4.5% increase already scheduled. According to one analyst, "mid-2004 pay rates would still be roughly 37% higher than at American and United. At the end of the proposed contract in 2008, rates would snap-back to current levels. In this scenerio, pilot wages would be 45% higher than at American and United, a fact likely to stir the ambitions of pilots at those carriers.

And this brings us to an important conclusions: the salvation of the legacy carriers does not lie in external events. Rather it lies within the grasp of each airline that is willing to seize control of its own destiny and make the hard choices - based on realistic analysis of the world as it is, not as one would like it to be- necessary for success in a world that owes no one a living."

Pretty tough language General. You think maybe this analysis could be management biased, or are they looking at the total package?

 

[lowecur]

SWAInflt

Per Unisys:

"Does SWA, then, have nothing to worry about?

On the contrary, Southwest has everything to worry about in its creeping unit cost inflation. It is in real danger of allowing prosperity to destroy all that it has achieved. In our view Southwest should be particularly concerned about the increasing proportion of its costs that go to labor. Whereas labor accounted for less than 38%of Southwest's total operating costs in 1997, today labor is consuming almost 45% of the pie.

Most important, pilots accounted for 10.9% of Southwest's total costs in 1997; today that figure is 13.6%, a share increase of 25%. And this is worse than it sounds since the inherent productivity of a Southwest pilot's work hour has increased over the same period. Longer average hops have increased average aircraft speed by 6.5% and the continuous addition of larger aircraft to the fleet/retirement of smaller aircraft have increased average aircraft capacity by nearly 2%. In other words, for the same time worked the average Southwest pilot is producing 8.6% more ASMS; the company unit costs for pilots should be declining relative to other costs.

Here's the bottom line: if we take out the fluctuations in fuel prices, Southwest's costs, not adjusted for stage length, increased from 6.15 cents/ASM to 6.47 cents, 5% over the the six year period of 97 to 03.. If we omit as well the increase in unit costs related to the employees, Southwest's unit cost over the period actually declined by 7% , from 6.15 cents to 5.77 cent, 7%.

Southwest's unit cost related to employees, on the other hand, increased by 26% over the six years. The largest percentage increase was garnered by the flight attendants, 42%. The pilots were second with 32%. All other employees on average, experienced a unit cost increase of about 19%.

As we have noted before, some of Southwest's union leadership, particularly some of its pilots, appear to have gotten the peculiar notion that they would like to follow the path of company destruction blazed by their bretheren at the legacy carriers who, starting with United in the summer of 2000, "won" industry leading contracts in a succession of "can you top this?" negotiations. If I were a SWA pilot, I would hope to be spared such a victory. "

Disclaimer: The above is all from Unisys, and in no way implies that I'm suggesting you order E-class aircraft. However, you can "look for the order." Right, Snoop?

 

[FlyBoeingJets]

I agree with you Hostage.

Management's longterm thinking usually involves making labor weaker. If management isn't working on labor all they're doing is golfing. After all, how else can they pay themselves hefty bonuses and bankruptcy protected, offshore retirement plans.

America's workers are feeding on themselves. Everyone expects cheaper autos, DVD players and airline tickets. Americans in other industries hope we get our salaries cut until it hurts.

That said, the the greed of the top guys on the seniority list is a scary thing. Yeah they deserve good contracts during good times. They helped build the companies. But when times get tough they want to "wait for the turnaround". Slogans like "United plus 1%" turn into "lets give back 9%, but I want that 4% raise". What?! How 'bout some flexibility to maintain profitability until a turnaround? Wouldn't that make the most sense? In the pilots defense some managements have been asking for 6 year concessionary contracts. Thats real BS. I wish I knew what to make of this power struggle. In the end management (read the rich class in America) doesn't like to share power and concentrate their efforts on consolidating more.

Everyone, individually, wants to cash in. Pilots and management. The old guys only want to see the company survive until they retire. New guys want the company to last.

You want success study the past and look to the future. Don't count on the present to last very long

 

[General Lee]

lowecur,

That same loss was this last quarter---I guess it was the fourth quarter---because we only had ONE huge retirement. (Hence the extra $140 mil payment) That is over with and doubtful that we will have a mass exodus like that again, unless our upcoming paycut is very large. (doubtful---but it will probably equal about 19.5% total--which is large.....)

As far as Delta giving up ground to Southwest---you have to remember that the two airlines are not really alike. We have two large hubs with three small ones on the side--and a major hub and spoke system. Southwest's style is more point to point--and that does give them a productivity advantage--one that a hub system cannot give. They are adding new airplanes (while we are bringing some back from the desert), and they seem to be targeting other airlines currently---PHL (USAir, Airtran, AmWest), and I highly doubt that they will invade ATL or CVG anytime soon. Also, with the economy getting better, we will add back needed capacity and do very well this Spring and Summer on our INTL routes---something that SW has not tried---yet.

Bye Bye--General Lee

 

[enigma]

Re: SWAInflt

Per Unisys:

"Does SWA, then, have nothing to worry about?

Most important, pilots accounted for 10.9% of Southwest's total costs in 1997; today that figure is 13.6%, a share increase of 25%. And this is worse than it sounds since the inherent productivity of a Southwest pilot's work hour has increased over the same period. Longer average hops have increased average aircraft speed by 6.5% and the continuous addition of larger aircraft to the fleet/retirement of smaller aircraft have increased average aircraft capacity by nearly 2%. In other words, for the same time worked the average Southwest pilot is producing 8.6% more ASMS; the company unit costs for pilots should be declining relative to other costs.

This paragraph is a good explaination of the efficiency one gains with larger aircraft.

Here's the bottom line: if we take out the fluctuations in fuel prices, Southwest's costs, not adjusted for stage length, increased from 6.15 cents/ASM to 6.47 cents, 5% over the the six year period of 97 to 03.. If we omit as well the increase in unit costs related to the employees, Southwest's unit cost over the period actually declined by 7% , from 6.15 cents to 5.77 cent, 7%.

Southwest's unit cost related to employees, on the other hand, increased by 26% over the six years. The largest percentage increase was garnered by the flight attendants, 42%. The pilots were second with 32%. All other employees on average, experienced a unit cost increase of about 19%.

Figures lie, and liars figure. These figures indicate that SWA's costs increased 5% over the six year period. I can accept that, but then the author decides to do a little puffery by writing this, "Southwest's unit cost related to employees, on the other hand, increased by 26% over the six years." That's typical anti-labor rhetoric friends. First he tells the truth (5%) then tells another truth, but tells it in a different scale so as to mislead and misdirect.

As we have noted before, some of Southwest's union leadership, particularly some of its pilots, appear to have gotten the peculiar notion that they would like to follow the path of company destruction blazed by their bretheren at the legacy carriers who, starting with United in the summer of 2000, "won" industry leading contracts in a succession of "can you top this?" negotiations. If I were a SWA pilot, I would hope to be spared such a victory. "

Disclaimer: The above is all from Unisys, and in no way implies that I'm suggesting you order E-class aircraft. However, you can "look for the order." Right, Snoop?

Look for the order?????

The above analysis just proved that larger aircraft are more efficient. The Unisys analyst showed that the larger aircraft had decreased unit costs, and you're still hoping to stir up the smaller aircraft pot. You can't have it both ways.
Hopefully, SWA's new leadership will not fall victim to the same misleading rhetoric that you have.

regards,
enigma

 

[lowecur]

enigma

"This paragraph is a good explanation of the efficiency one gains with larger aircraft"

Maybe WN should dump all their 737's and go to 747's.

 

[canyonblue]

Re: Re: SWA airlines cost divergence

So, contractually I could have possibly worked 8 legs on Saturday, 7 on Sunday, and 8 more on Monday. Working 10.5 hour days and minimum contractual rest I could have flown 23 landings, 31.5 hours of duty and only spent 22 hours in crew rest.

A pretty average day at alot of Regional Airlines, except the duty day was always closer to 14 hours. Just remember that next time you get a jumpseating pilot from a Regional carrier. Treat them well in the back as they deserve it. By far the hardest working pilots and flight attendants in the air.

 

[lowecur]

enigma

"Figures lie, and liars figure."

I think this paragraph is a great explanation of the superb job WN's management has done. They've done their part by keeping the airline's unit costs lower than what they were in 97, but the employees payroll costs have shown that they intend to keep margins tight and make sure most of the savings goes into their pockets. This is a great "thank you" to a management team that is running out of ideas to keep this "ship" profitable. It's amazing to me that airline employees fail to learn from the past. They would rather get as much as they can while they're there, and let the people that follow behind them worry about the future. The 4th Q for WN will be maginally profitable, and next year's poor profit numbers will begin to reflect the continued difficulties management is facing.

I look for WN stock to be single digits by Summer 2004.

 

[lowecur]

general

True about the comparison with WN.

I don't look for them to cross paths with DL anytime soon, but FL has been in your back pocket for a number of years. With their expansion to 737'NGs, this will only further exasperate an already difficult situation in ATL. The Song project will need further expansion, and the addition to Song of an E-Class a/c is mandatory.

Don't look for the economy to bail DL out in the next few years. Their future will be squarely hinged on a renegotiated contract in line with AMR at best.

 

[FlyBoeingJets]

We've got a couple of quotes I think will fall by the wayside in 2004. If I'm wrong you can say "I told you so" next year in December


Lowcur -- "SWA stock in the single digits in 2004"

Very clear prediction and we will see. I predict SWA dominance for at least couple of years. Lowcur may be correct long term (5 years out) but not short term


General -- "That same loss was this last quarter---I guess it was the fourth quarter---because we only had ONE huge retirement. That is over with and doubtful that we will have a mass exodus like that again"

I disagree with the General on this one and see more retirements in '04 that will drag down earnings. They will be hard to predict because those thinking about it will not share their plans.

 

[SWAInflt]

Re: Re: Re: SWA airlines cost divergence

A pretty average day at alot of Regional Airlines, except the duty day was always closer to 14 hours. Just remember that next time you get a jumpseating pilot from a Regional carrier. Treat them well in the back as they deserve it. By far the hardest working pilots and flight attendants in the air.

I treat all my passengers well. That's my job.

 

[FDJ2]

General -- "That same loss was this last quarter---I guess it was the fourth quarter---because we only had ONE huge retirement. That is over with and doubtful that we will have a mass exodus like that again"

I disagree with the General on this one and see more retirements in '04 that will drag down earnings. They will be hard to predict because those thinking about it will not share their plans.

PMFJI, but there were 779 retirements at DAL in 2003, 474 early, 135 normal and 170 over 60 (ropes) retirements. That will be a hard number to duplicate next year. Looking forward, DAL scheduled retirements are:

2004: 115
2005: 158
2006: 176
2007: 237
2008: 284

There are also 180 pilots on the property who are over 60.

If half of all the pilots at DAL scheduled for retirement in 2005-2008 were to retire early, plus half of the ropes in 2004, DAL would have 633 retirements in 2004, far short of the 779 in 2003.

IMO, the number one reason for the spike in early retirements in 2003 was the historically low GATT rate, which greatly increased lump sum retirement pay outs. It is precisely because of these early retirements that scheduled retirements have significantly decreased over the next few years. Most anyone who was in a position to retire early has pretty much already done it, and scheduled retirements have plummetted.

 

[FDJ2]

dont the early retirements subtract from the scheduled or is that already figured in to this list

The early retirements have already been figured into to the shecduled retirements for the next few years.

For example the scheduled retirements back in Oct. 2002 looked like this:

2004: 250
2005: 221
2006: 221
2007: 287
2008: 323

Today those numbers look like this:

2004: 115
2005: 158
2006: 176
2007: 237
2008: 284

And so on. IOW, the large number of early retirements in 2003 has reduced the number of scheduled retirements for the next few years. There are only so many pilots in the retirement window and the exodus of 474 early retirements inevitably will lead to fewer retirements down the road.

 

[Maynard]

I look for WN stock to be single digits

Hey lowcur or what ever your name is, keep looking for SWA stock to drop, we luv that. But how can you see the price of the stock with that pitch fork in your face? You sound like an expert...NOT! Glad you are having fun on this forum...That's what counts...By the way, are you in the airline business? Come clean...

 

[lowecur]

maynard

I'm just a semi-retired insurance exec, that luvs disussing the airline business. Although I've been drawn and quartered by some SWA FO's, these discussions are nothing more than interesting speculation and fun.

Incidently, the pitch fork is from Caddy-Shack (gunga, galungala).

 

[enigma]

Re: enigma

"Figures lie, and liars figure."

lowecur, For a semi-retired executive, you don't show much reading comprehension skill. My liars comment was addressed to the analyst who wrote the article.

I think this paragraph is a great explanation of the superb job WN's management has done. They've done their part by keeping the airline's unit costs lower than what they were in 97, but the employees payroll costs have shown that they intend to keep margins tight and make sure most of the savings goes into their pockets.

Some of my sentences don't make sense either, so I'll cut you some slack on this one. I certainly agree that WN's management has done a masterful job of maintaining low costs.

This is a great "thank you" to a management team that is running out of ideas to keep this "ship" profitable.

I'm having to assume that the previous sentence said that labor is thanking management by putting the savings in labors pocket. If that is what you meant, I can only say that SWA pilots have long been the most productive pilots (excepting the regional/commuter boys) and their current pay rates reflect the value that management puts on the services of a very important asset, the pilots. Remember, the pilot group at SWA has always had a good relationship with management and also remember that labor agreements are just that agreements. Management types such as yourself seem to conveniently forget that you are 50% responsible for ever labor contract.

at airline employees fail to learn from the past. They would rather get as much as they can while they're there, and let the people that follow behind them worry about the future. The 4th Q for WN will be maginally profitable, and next year's poor profit numbers will begin to reflect the continued difficulties management is facing.

I look for WN stock to be single digits by Summer 2004.

You might have a point about airline employees failing to learn from the past. However, SWAPA has a history of being very compliant when Herb comes with hat in hand. I suspect that the compliant posture will continue for the foreseeable future.

I don't pick stocks because I know very little about the market. But, I will venture a guess that SWA stock will remain about where it is now.

regards,
enigma

 

[lowecur]

Re: Re: enigma

lowecur, For a semi-retired executive, you don't show much reading comprehension skill. My liars comment was addressed to the analyst who wrote the article.

Ouch!

Some of my sentences don't make sense either, so I'll cut you some slack on this one. I certainly agree that WN's management has done a masterful job of maintaining low costs.

Touche'

I'm having to assume that the previous sentence said that labor is thanking management by putting the savings in labors pocket. If that is what you meant, I can only say that SWA pilots have long been the most productive pilots (excepting the regional/commuter boys) and their current pay rates reflect the value that management puts on the services of a very important asset, the pilots. Remember, the pilot group at SWA has always had a good relationship with management and also remember that labor agreements are just that agreements. Management types such as yourself seem to conveniently forget that you are 50% responsible for ever labor contract.

Although they call it collective bargaining, it really is controlled by the pilots. They hold all the cards, unless the airline is faced with chapt 11. What amazes me is the fact that over the years the BOD for most airlines has made dumb decisions when it comes to the hiring of an airline management team. They hire people who are in for themselves and this does nothing but alienate the unions. BOD's have to do a better job of structuring the hiring of a management team, and they need to structure their contracts base on incentives and penalties for profit. The employees for their part need to oversee this process and make sure the BOD aren't rewarding poor management. Now none of this is the case with SWA. My concern with them is will SWAPA offer to help the company if the long term good of the company is threatened in the next few years? I'm skeptical, and I hope I'm wrong.

You might have a point about airline employees failing to learn from the past. However, SWAPA has a history of being very compliant when Herb comes with hat in hand. I suspect that the compliant posture will continue for the foreseeable future.

I hope you are right. SWA needs to increase their margins to pay for the continued long term health of the company, and this will only happen if SWAPA accepts this fact.