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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.
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.
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