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).
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)
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.