Southwest keeps employees happy
By Mitchell Schnurman
Star-Telegram Staff Writer
Low costs are a way of life at Southwest Airlines, but here's a
little secret: Many of its pilots are among the best-paid in the
business.
That would seem to be a pricey contradiction, except that the key is
variable pay, not guaranteed salaries.
Southwest pilots earn about 20 percent less each month than their
colleagues at mainline carriers, but many Southwest pilots eventually
lap the competition because of stock options, profit sharing and
performance bonuses.
Those variable elements have made millionaires out of some Southwest
pilots without ratcheting up the company's expenses.
Not surprisingly, stock options have been eagerly adopted by most of
the airline's other workers.
At Southwest, it's a virtuous circle, holding down labor costs,
boosting productivity and rewarding the people responsible for the
company's success. That, in turn, drives more growth, more job
opportunities and a stronger stock price.
Executives at other airlines marvel at the trust between Southwest
managers and employees. But Jim Parker, Southwest's chief executive,
says it's just a matter of everyone realizing that what goes around
comes around.
How they work together now, how they treat one another, how they
succeed or fail -- those experiences dictate the attitudes going
forward.
"It's a round world," says Parker, a key negotiator on some of the
company's breakthrough contracts.
Other airlines, including United, have tried to emulate the Southwest
approach. But none can match Southwest's stellar performance on the
bottom line and on Wall Street.
When losses mount and the stock price tumbles, workers can rebel. At
other airlines, they demanded raises in "hard pay" -- compensation
they can count on -- without worrying about the impact on expenses.
Now the big airlines are in deep trouble, not only because of the
slow economy and the 9-11 attacks, but also because their labor costs
are so high.
Southwest has maintained its cost advantage and profits despite the
worst financial decline in aviation history. And Southwest hasn't
laid off any workers, a colossal achievement that scores big in labor
talks.
"Job security has never been more important," said Greg Crum, a
Southwest pilot and vice president of flight operations, who pointed
out that about 8,000 pilots industrywide are on furlough.
The Southwest plan has attracted some criticism. Pilots who join the
company after a contract takes effect get a new strike price on their
options. That can reduce their total returns and create some
resentment in the cockpit.
But here's the most telling referendum on the deal: Southwest pilots
overwhelmingly approved the latest contract, even though it wasn't
due to expire for two years and didn't come close to closing the gap
with Delta's "hard pay."
Half of the pilot union's leadership balked at the proposal. But
Southwest pilots approved it by a ratio more than 2-to-1 in August,
extending it to 2006.
Delta pilots, the highest-paid in the business, earn 22 percent to 24
percent more than Southwest pilots with the same experience on the
same Boeing 737s, according to Air Inc., an Atlanta company that
provides career information to pilots.
"They agreed to take less pay," Air Inc.'s Kit Darby said about
Southwest. "But you have to look at the whole package. They get a lot
of stock options and profit sharing."
In 1994, Southwest pilots agreed to a groundbreaking, 10-year
contract that locked in pay rates for five years in exchange for
hefty stock options. Senior pilots, for example, received options for
10,000 shares.
Since then, Southwest's stock has split four times and its price has
soared, even after accounting for the latest downturn in the
industry. The initial stakes for those senior pilots now total 50,625
shares, with a base price, adjusted for splits, of $3.95 a share.
Last January, when Southwest was trading at more than $23, those
stakes were worth just under $1 million. At Friday's price of $14.35,
the paper value is $525,000 for each of the pilots.
The contract extension signed in August appears to be another savvy
deal. It gives pilots an average of about 9,500 shares each, with a
strike price of $12.84.
By Thanksgiving, Southwest's stock was trading above $16, and pilots
were up $34,580, at least on paper. By year-end, much of the gain had
been given back, but the airline industry is cyclical.
That underlines the tricky nature of stock options. Their actual
value hinges on when workers get them and at what price, and when
they sell them, again at what price.
The upside potential is great, but the process requires careful
tending.
Southwest's pay has other valuable elements. Its profit-sharing plan
has been huge because the company has made money for 29 consecutive
years and is easily the most profitable airline. Southwest has
typically contributed 10 percent to 15 percent of each worker's pay
into a profit-sharing account, and employees decide how to invest the
funds.
For pilots, some of whom earn more than $155,000 a year, the profit-
sharing numbers can add up quickly. But Southwest does not have a
traditional pension plan, which has been a staple at the mainline
carriers and a major income source for retirees.
One pilot said that Southwest's profit sharing is approximately the
equivalent of a traditional pension. Maybe by some measures. But the
current crisis in the airline industry has put traditional pensions
under pressure while employees at Southwest have cash in their
accounts.
Southwest also has a 401(k) plan that matches the pilots'
contribution, dollar for dollar for 7.3 percent of pay -- more than
double the average match.
"We emphasize the value of the entire package," Parker said.
Surely that's one reason that ramp workers recently agreed to a
contract extension, even though it freezes pay for two years. Their
deal includes stock options, which have become a staple with nearly
all worker groups at Southwest.
Darby calls the Southwest approach "self-adjusting." If there are no
profits, there's no profit sharing, and the stock options aren't a
hard cost.
"The problem is that you have to sell employees on doing it," Darby
said. "They start out wanting cash."
Southwest makes it work because employees have faith in management:
not just to boost stock values but to treat workers well and to keep
its business model humming.
The company uses only one kind of plane, which cuts maintenance costs
and turnaround time. It also lets Southwest pilots spend more hours
in the air without wasting energy jockeying for higher-paying slots
on larger jets.
At most other airlines, pilots move ahead by being promoted to bigger
planes. But that career ladder also drives up training costs and
makes it harder to match pilots with planes.
Southwest says it pays competitive rates for all its employees. By
adding stock options to the mix, it keeps pay from skyrocketing and
motivates workers to push harder.
That keeps the company growing, which creates more jobs. Southwest
pilots have typically advanced to the captain's seat in less than six
years, about half the time of pilots at many other airlines -- and
that promotion adds the biggest boost to pay.
"At the end of the day, Southwest pilots aren't losing out," Darby
said. "They've taken a risk, and it's paid off."
It's paid off for the company, too. And its customers.
_____________
What's important for everyone to realize not every pilot is or will be a millionaire by working here. The level of expansion & splits in stock can't be guaranteed for future folks. I'll post later the stock options that have been negotiated for new hires. Gotta go,
By Mitchell Schnurman
Star-Telegram Staff Writer
Low costs are a way of life at Southwest Airlines, but here's a
little secret: Many of its pilots are among the best-paid in the
business.
That would seem to be a pricey contradiction, except that the key is
variable pay, not guaranteed salaries.
Southwest pilots earn about 20 percent less each month than their
colleagues at mainline carriers, but many Southwest pilots eventually
lap the competition because of stock options, profit sharing and
performance bonuses.
Those variable elements have made millionaires out of some Southwest
pilots without ratcheting up the company's expenses.
Not surprisingly, stock options have been eagerly adopted by most of
the airline's other workers.
At Southwest, it's a virtuous circle, holding down labor costs,
boosting productivity and rewarding the people responsible for the
company's success. That, in turn, drives more growth, more job
opportunities and a stronger stock price.
Executives at other airlines marvel at the trust between Southwest
managers and employees. But Jim Parker, Southwest's chief executive,
says it's just a matter of everyone realizing that what goes around
comes around.
How they work together now, how they treat one another, how they
succeed or fail -- those experiences dictate the attitudes going
forward.
"It's a round world," says Parker, a key negotiator on some of the
company's breakthrough contracts.
Other airlines, including United, have tried to emulate the Southwest
approach. But none can match Southwest's stellar performance on the
bottom line and on Wall Street.
When losses mount and the stock price tumbles, workers can rebel. At
other airlines, they demanded raises in "hard pay" -- compensation
they can count on -- without worrying about the impact on expenses.
Now the big airlines are in deep trouble, not only because of the
slow economy and the 9-11 attacks, but also because their labor costs
are so high.
Southwest has maintained its cost advantage and profits despite the
worst financial decline in aviation history. And Southwest hasn't
laid off any workers, a colossal achievement that scores big in labor
talks.
"Job security has never been more important," said Greg Crum, a
Southwest pilot and vice president of flight operations, who pointed
out that about 8,000 pilots industrywide are on furlough.
The Southwest plan has attracted some criticism. Pilots who join the
company after a contract takes effect get a new strike price on their
options. That can reduce their total returns and create some
resentment in the cockpit.
But here's the most telling referendum on the deal: Southwest pilots
overwhelmingly approved the latest contract, even though it wasn't
due to expire for two years and didn't come close to closing the gap
with Delta's "hard pay."
Half of the pilot union's leadership balked at the proposal. But
Southwest pilots approved it by a ratio more than 2-to-1 in August,
extending it to 2006.
Delta pilots, the highest-paid in the business, earn 22 percent to 24
percent more than Southwest pilots with the same experience on the
same Boeing 737s, according to Air Inc., an Atlanta company that
provides career information to pilots.
"They agreed to take less pay," Air Inc.'s Kit Darby said about
Southwest. "But you have to look at the whole package. They get a lot
of stock options and profit sharing."
In 1994, Southwest pilots agreed to a groundbreaking, 10-year
contract that locked in pay rates for five years in exchange for
hefty stock options. Senior pilots, for example, received options for
10,000 shares.
Since then, Southwest's stock has split four times and its price has
soared, even after accounting for the latest downturn in the
industry. The initial stakes for those senior pilots now total 50,625
shares, with a base price, adjusted for splits, of $3.95 a share.
Last January, when Southwest was trading at more than $23, those
stakes were worth just under $1 million. At Friday's price of $14.35,
the paper value is $525,000 for each of the pilots.
The contract extension signed in August appears to be another savvy
deal. It gives pilots an average of about 9,500 shares each, with a
strike price of $12.84.
By Thanksgiving, Southwest's stock was trading above $16, and pilots
were up $34,580, at least on paper. By year-end, much of the gain had
been given back, but the airline industry is cyclical.
That underlines the tricky nature of stock options. Their actual
value hinges on when workers get them and at what price, and when
they sell them, again at what price.
The upside potential is great, but the process requires careful
tending.
Southwest's pay has other valuable elements. Its profit-sharing plan
has been huge because the company has made money for 29 consecutive
years and is easily the most profitable airline. Southwest has
typically contributed 10 percent to 15 percent of each worker's pay
into a profit-sharing account, and employees decide how to invest the
funds.
For pilots, some of whom earn more than $155,000 a year, the profit-
sharing numbers can add up quickly. But Southwest does not have a
traditional pension plan, which has been a staple at the mainline
carriers and a major income source for retirees.
One pilot said that Southwest's profit sharing is approximately the
equivalent of a traditional pension. Maybe by some measures. But the
current crisis in the airline industry has put traditional pensions
under pressure while employees at Southwest have cash in their
accounts.
Southwest also has a 401(k) plan that matches the pilots'
contribution, dollar for dollar for 7.3 percent of pay -- more than
double the average match.
"We emphasize the value of the entire package," Parker said.
Surely that's one reason that ramp workers recently agreed to a
contract extension, even though it freezes pay for two years. Their
deal includes stock options, which have become a staple with nearly
all worker groups at Southwest.
Darby calls the Southwest approach "self-adjusting." If there are no
profits, there's no profit sharing, and the stock options aren't a
hard cost.
"The problem is that you have to sell employees on doing it," Darby
said. "They start out wanting cash."
Southwest makes it work because employees have faith in management:
not just to boost stock values but to treat workers well and to keep
its business model humming.
The company uses only one kind of plane, which cuts maintenance costs
and turnaround time. It also lets Southwest pilots spend more hours
in the air without wasting energy jockeying for higher-paying slots
on larger jets.
At most other airlines, pilots move ahead by being promoted to bigger
planes. But that career ladder also drives up training costs and
makes it harder to match pilots with planes.
Southwest says it pays competitive rates for all its employees. By
adding stock options to the mix, it keeps pay from skyrocketing and
motivates workers to push harder.
That keeps the company growing, which creates more jobs. Southwest
pilots have typically advanced to the captain's seat in less than six
years, about half the time of pilots at many other airlines -- and
that promotion adds the biggest boost to pay.
"At the end of the day, Southwest pilots aren't losing out," Darby
said. "They've taken a risk, and it's paid off."
It's paid off for the company, too. And its customers.
_____________
What's important for everyone to realize not every pilot is or will be a millionaire by working here. The level of expansion & splits in stock can't be guaranteed for future folks. I'll post later the stock options that have been negotiated for new hires. Gotta go,
