How Will The New Labor Contract Affect Southwest?
Southwest Airlines has been one of the most successful airlines in the U.S., pleasing customers by providing pocket-friendly fares and commendable hospitality. It has also managed to keep its investors satisfied with its share repurchase programs and other initiatives.
One of the unique selling points behind Southwest’s popularity has been the low costs it offers. Over the period between 2013-2015, Southwest’s operating expenses fell 2.5% annually. Most of this fall is attributable to the decrease in fuel costs due to the declining crude oil prices. However, the Dallas-based carrier couldn’t contain its expenses on wages and salaries, which were up over 12.5% annually, over the same period.
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In a recent development, Southwest reached a new agreement with its pilots, after four years of tussle. The agreement will raise the pilots’ pay by 15% with effect from late 2016, and then by 3% a year for the next four years (2020). Another point to note here is that the contract will be back dated to when the discussion regarding the agreement began (2013), providing an overall increment of close to 30% to its 8,500 odd pilots.
It is expected that the deal with the pilots will be followed by similar deals with flight attendants and mechanics, exacerbating Southwest’s operating expenses significantly. We expect the airline’s labor costs to be comparable to that of the legacy carriers, and be among one of the highest in the market post the agreement. This, in turn, could pressure the carrier’s margins, which have already been under the pump due to the recovery in crude oil prices.
Historically, Southwest mostly focused on price-sensitive leisure travelers, entrepreneurs, and small and mid-size business people trying to keep their travel expenses to a minimum. However, given the company’s skyrocketing expenses, the low-cost carrier will now have to change its focus on wooing customers on a basis other than its cost advantage, which is expected to decline sharply.
1 Industry excludes Southwest
On the positive side, the contract will allow limited partnerships with other airlines for codesharing and interlining on certain international routes. This will help Southwest put its international passengers on other airlines when they’re connecting to foreign destinations the carrier doesn’t serve. Secondly, the contract gives the carrier permission to fly the new Boeing 737 MAX, which is far more fuel and cost efficient than the older aircraft models. These two factors together, may help offset some of the increase in costs that Southwest is expected to see going forward.
Have more questions about Southwest Airlines (NYSE:LUV)? See the links below:
- Why Trefis Revised Southwest’s Price Estimate From $46 To $38 Per Share
- Southwest Drops Post 2Q’16 Results As The Airline Restricts Its Capacity Growth For 2017-2018
- Southwest Q2’16 Earnings Preview: Capacity Growth To Partially Offset The Impact Of Declining PRASM
- How Will Different Capacity And Fuel Cost Forecasts Impact Southwest’s 2016 EBITDA?
- Rapid Capacity Additions And Lower Fuel Expense Drive Southwest’s 1Q’16 Earnings
- What Will Be The Impact On Southwest’s EBITDA, If Crude Oil Prices Rebound To $100 Per Barrel by 2018?
- Will Southwest’s International Operations Contribute A Significant Portion Of Its Revenue By 2020?
- What Will Be Southwest’s Value In 2020?
- What Factors Caused A Sharp Jump In Southwest’s 2015 Operating Margin?
- How Has Southwest’s Revenue And EBITDA Composition Changed Over The Last Five Years?
- Southwest Airlines: The Year 2015 In Review
- What Is Southwest’s Outlook For 2016?
- What Is Southwest’s Fundamental Value Based On 2016 Estimated Numbers?
- What Is Southwest’s Revenue And EBITDA Composition?
- How Has Southwest’s Revenue And EBITDA Grown Over The Last Five Years?
Notes:
1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Southwest Airlines
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