Southwest Airlines: No Strike Meltdown
Contributor since 2013 / 14254 Followers
Summary:
- Southwest Airlines Co.’s pilot union has called for strike authorization.
- The union recognizes the extremely weak position management has following the December winter storm fiasco.
- Southwest Airlines will get it right, but it needs to return to its roots with an employee and customer-focused approach to generate value.
Kevin Dietsch
The union of Southwest Airlines Co. (NYSE:LUV) pilots is calling for a strike authorization vote in May. The move comes at a time when Southwest Airlines is under significant pressure, and I believe that does not come as a surprise as I explain in this report.
Southwest Airlines Pilots Could Call For A Strike
One thing to keep in mind is that there is no imminent strike at Southwest Airlines happening anytime soon. What is, however, happening is a call from the pilot union of Southwest Airlines pilots for a strike authorization vote, which would allow the almost 10,000 pilots of Southwest Airlines to vote somewhere after May 1st.
According to SWAPA, the pilot union, the date of May 1st gives the union time to prepare for the strike. The union also claims this will allow customers to book elsewhere in order for their summer vacations not to be disrupted.
I think the reality is somewhat different. By making an early announcement, the union is creating the uncertainty early on which could ultimately hurt bookings and force Southwest Airlines management to reach a labor agreement as soon as possible. So, in the early announcement, I do see a way to force management to reach an agreement as soon as possible. Simultaneously, I also do think that the union is calling for a strike vote months from now, because while they do want to send the warning shot to Southwest management, they do believe an agreement can be reached before a strike vote and an eventual strike could take place. However, it would be detrimental to the union’s position in negotiations if they would simply state they expect a deal would be reached.
Union Smells Blood
The timing of the announcement of a strike vote and a possible strike is not odd, because in some way you have to enter those negotiations when you are strongest, and that is what we have seen pilot unions do recently. With high demand for air travel and pilot shortages, the value of pilots to airlines is increasing, and unions are recognizing this as a perfect opportunity to negotiate new long-term labor agreements seeking better pay supported by temporary high inflation.
So, the pilot union is deriving strength in negotiations from the strength in air travel demand and high demand for pilots. The other side of the equation is that Southwest Airlines Co. management is at its weakest point after their embarrassing dealing with winter storm Elliot, which sent the airline into meltdown mode uncovering significant system and operational shortfall at Southwest Airlines. The fact that Southwest Airlines was not able to adequately deal with these issues filled pilots with a sense of embarrassment, and the fact that it took days before the CEO addressed the issues did not make things better. It made Southwest Airlines Co. management look bad, and the union knows this. The argument that they should be earning more because they are operating in a system with significant shortfalls asking pilots to go above and beyond to deliver is easily made.
Furthermore, since a new labor agreement has not been reached for three years, the easy argument is that the current labor agreement that is in effect does not reflect the current realities, which include shortages and inflation and as a result do not value the pilots.
The Complexity Of A New Agreement
Reaching a new pilot agreement is easier said than done. American Airlines (AAL) and United Airlines (UAL) have both attempted to reach an agreement with unions for a new agreement, but have been unable to reach an agreement or even a tentative one. Delta Air Lines (DAL) has reached a tentative agreement with its pilots, but it still needs to be ratified by the pilots.
It goes to show that reaching a new labor agreement is not easy. One major reason is because pilot unions are pursuing labor agreements with permanently higher pay using what is expected to be temporary arguments to support a pay hike. These arguments are demand and inflation. While hiking pay does make sense at this time, it makes less sense over the longer term as air travel demand patterns normalize again. It would leave airlines with lower top lines, but higher carried costs.
That is why airline management is looking to reach labor agreements with pilot unions, but these negotiations are not going easily. The advantage for Southwest Airlines management is that they messed up so badly in December that its negotiation position is mediocre at best. If they do not agree with the demands from the unions, the union can easily blame bean counter mentality for it which they can directly tie to the same bean counter mentality that caused big problems at Southwest Airlines operations in December. So, unions have big leverage to get what they want.
Conclusion: Southwest Airlines Management Needs To Regain Support
All of this is about generating leverage to achieve goals, but looking at Southwest Airlines Co., one thing that I have repeatedly heard is that working at the airline is not the same as it used to be, and it seems that the airline is simply no longer following its founding DNA:
Your employees come first. And if you treat your employees right, guess what? Your customers come back, and that makes your shareholders happy. Start with employees and the rest follows from that.
—Herb Kelleher (Founder Southwest Airlines)
While I do believe that Southwest Airlines Co. will solve its issues and eventually reach a new labor agreement, it seems that at least for the time being Southwest Airlines management has made itself unloved with its customers as well as pilots as it abandoned the employee-focused approach also affecting customer relations. Southwest Airlines Co. has an opportunity to undo that mistake now and it better uses that opportunity to create value for all stakeholders.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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