Wednesday, August 31, 2016

Southwest Pilots' Huge New Deal Will Force Maverick Airline To Operate Conventionally

Southwest Airlines Pilots’ Association members picket outside their airline’s annual shareholders meeting in Chicago earlier this year. Stuck in four years of fruitless contract talks, SWAPA sued Southwest in April trying to prevent it from acquiring the 200-seat Boeing 737-MAX, a new plane central to the airline’s need to increase revenue to cover rising costs. The union asserts that its contract with the carrier does not allow Southwest to introduce that new aircraft without negotiating new pay rates for flying a plane that is 20 percent bigger than the airline’s largest plane today.
(Daniel Acker/Bloomberg) 

Southwest Airlines is all grown up now (and that’s not a compliment).

Oh sure, it still doesn’t offer first class seating, or even assigned seats. There still are no meals served – and likely never will be. And a bit of Southwest’s old playful corporate style still leaks out into public view when flight attendants clown around during the otherwise boring pre-flight safety spiel, or when one of its sly TV commercials gets loaded up with inside jokes, cool cultural touchpoints and subtle put downs of its competitors.

But make no mistake, Southwest reached full maturity on Monday. After four years of frustrating and unusual-for-it ugly labor negotiations, it gave in to labor’s demands and agreed to boost its pilots pay by nearly 30 percent over seven years (back-dated to 2013). Assuming the deal is approved by the Southwest Airlines Pilot Association’s board and ratified by the company’s 8,000-puse pilots Southwest will never be the same (and it’s hard to imagine this deal failing because it’s so much more rich than the deal the rank-and-file rejected last year that would have given them only 17 percent more money).

What’s more, the new pilots’ deal now is certain to be followed by similarly expensive new deals with its mechanics and flight attendants. As a result of those the much higher costs the long-time king of the low cost carriers will be irrevocably changed in three ways:

Southwest’s labor costs will be very close to being the highest in the U.S. airline industry. That turns the carrier’s original low cost operating formula on its ear

Southwest will have to operate more in big air travel markets and compete more aggressively than ever for travelers willing to pay above average fare prices. That’s quite different from Southwest’s historical marketing approach, which has been mostly aimed at price-sensitive leisure travelers and at entrepreneurs and small and mid-size business people trying to keep their travel expenses to a minimum

Southwest will be compelled to abandon its strict go-it-alone operating model and to begin cooperating with foreign and even certain U.S. airlines in order to generate the additional revenue it’ll need to cover its skyrocketing labor costs.

In other words, Southwest is on course to become just another big U.S. airline. It’s historical distinctives – low fares, extreme operating efficiency, high esprit de corps and an irreverent and funny style – will, over time, fade and become secondary, or even tertiary marketing items instead of the main selling points.

Under the tentative new contract between SWAPA and Southwest, the carrier’s average pilot’s pay will soar from an already eye-popping $230,000 a year to almost $300,000 a year by 2020. The most senior pilots and those who aggressively seek additional flying opportunities in order to maximize their earnings can bring in much more than that. In light of the big new pay hike it’s hard to see how the carrier can avoid granting its other unionized workers similarly gracious contracts. And in short order little ol’ low cost Southwest will be vying with high cost Delta for the title of “highest paying airline.”

To cover those much higher costs, Southwest will have to begin pursuing “big” dollar travelers like never before. The Dallas-based carrier built its business model around selling tickets on short haul flights to grandmas and college back packers, and to penny-pinching day-tripping business people who did not have the huge travel budgets to fund their business trips. Yet it quietly has been the case for 15 or 20 years that Southwest is much more focused on big city travelers in places like Chicago, Los Angeles, and Dallas than on those in smaller cities like Corpus Christi and Albuquerque that it featured in its early years.

But in the years ahead Southwest will have to become much more focused on milking every dollar possible out of big city markets. It no longer will be able to maintain the pretense of still being a low fare carrier. It may not be a high fare carrier because of its lack of first class seating, but it’s already possible to find lower priced seats on competing carriers than on Southwest. And in the future it will become easier to do so.

That’s why the airline has signed up to buy up to 300 new Boeing 737 MAX 8-200s – which at 200 seats will be the biggest version ever of the 7237 that Southwest ever has flown (and it only flies 737s). It not only will need to carry passengers willing to pay more, it will need to carry more of them. It’s also why Southwest also now is expanding beyond the domestic market and into Mexico, Canada and the Caribbean. As bank robber Willy Sutton famously said when asked why he robbed banks, “that’s where the money is.”

And don’t be totally surprised if the carrier begins charging its passengers at least some fees. If so, it wouldn’t be the first time that the carrier has abandoned a major advertising theme because of economic realities. In the 1980s and 1990s Southwest’s entire advertising effort was built around its unequaled operating efficiency. It even had a huge trophy, called the Triple Crown, created so that it could awarded it to itself for leading the industry in all three of the major customer satisfaction statistical categories – fewest mishandled bags, fewest passenger complaints, and best on-time arrival performance. 

But as it grew and began expanding into bigger markets with more congested airports, its smooth operations grew considerably rougher. Today Southwest is a middle of the pack performer in all of those categories. The rising pressure to seek Big Dollar passengers and to carry more travelers per flight will only complicate and slow down its operations even further. You likely will never hear a Southwest executive say the words “Triple Crown” again.

Not only must Southwest now become more like conventional competitors, American, United and Delta in its pricing, operations, marketing and route selection, it also will be forced to abandon its maverick, we-do-it-our-way approach. With only the smallest of exceptions here or there, Southwest has operated for 45 years as a stand-alone product. It doesn’t cooperate with other carriers to hand off passengers who want to fly part way on Southwest and part way on another carrier.

With only a couple of insignificant exceptions, it never has cooperated with foreign carriers to sell connecting flights to foreign destinations or foreign travelers connecting flights to interior U.S. destinations. But upon ratification of its new pilots agreement Southwest will get for the first time the right to begin cooperating with foreign carriers to do just that. It also will get the right to jointly market service with certain other airlines – mainly smaller “regional” airlines, to exchange passengers on lower demand routes to small cities.

The new pilots’ agreement does put some limits on Southwest’s ability to engage in so-called “code sharing” agreements with other airlines. Once passenger traffic on such routes reaches certain levels Southwest would be required either to take over that flying itself or to curtail the service. But such limits will have little real world impact. Now that SWAPA is prepared to allow the code sharing camel’s nose in under the tent, there’ll be no stopping that big animal from eventually getting all the way inside.

The additional revenue and business opportunities such deals represent will be too sweet for either Southwest or its pilots to give up. Thus, if it makes sense for Southwest to takeover that additional flying itself it will, and its pilots will be happy. And if doesn’t make sense for Southwest to take over that flying – like, say, on a Los Angeles-China route, it will be in both sides best interest to loosen the restrictions and allow for even more code sharing.

It is difficult to forecast a day when Southwest would join one of the three big international airline alliances – oneworld anchored by American, Star anchored by United and SkyTeam anchored by Delta. That may well never happen. Still, Southwest is all grown up now. It’s not the pesky little upstart with low costs and a cheeky attitude anymore. It’s a 720-plane behemoth, with relatively high costs and it will have to behave like the other behemoth carriers. It will have to take ever bigger steps away from its maverick, low-cost, low-fare origins in order to generate the bigger revenues it will need to cover its higher costs.
The upside of that is that Southwest today is fully capable of going toe-to-toe with the Big Three conventional airlines. Indeed, because of its higher costs these days, it must do so. But increasingly it will have to do so on the Big Three’s terms.

(Dan Reed - Forbes)

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