Southwest threatens the big boys

December 01, 1993|By Stephen D. Solomon

THE afternoon before Thanksgiving, the chairman of Southwest Airlines, Herbert Kelleher, joined his baggage handlers at Love Field in Dallas loading suitcases onto planes. All over the country, Southwest's office workers tagged baggage and collected tickets.

Meanwhile, flight attendants cleaned up the cabins so they could seat a new flock of passengers.

From 1990 to 1992, when the other airlines were losing more than $10 billion, Southwest was the nation's only profitable carrier. Its success is forcing radical change on its competitors. Over the next few years, employees at the major carriers will either match the everyone-pitches-in efficiency of Southwest or face vast layoffs.

The strikers at American Airlines proved that they can snarl the air traffic system, but in the long run they cannot win.

Labor costs, of course, are not the sole reason for the industry's travail. In 1983, American began a $20 billion campaign to expand its system. Soon many other airlines followed its lead.

The strategy was straightforward enough: more planes, more flights, more routes, more hub airports -- in short, the raw power that comes with size -- would produce big profits. The strategy did deliver a big share of the market to a handful of carriers. But it produced not a penny of profits.

Southwest, by contrast, never joined the race to grow quickly, instead honing its strategy of no-frills flying on short routes.

Understanding that there are few things more fundamental than controlling costs, Mr. Kelleher built a company in which employees realize that their compensation and job security depend on productivity.

Unlike employees at most other big airlines, Southwest's people (almost all union members) are paid only for the time they fly. And as 12 percent owners, they share in the profits.

Consider the advantage this has produced for Southwest. Pilots for American earn an average of $104,600 a year for flying mid-size aircraft; they actually fly about 48 hours a month. Southwest's pilots earn about the same, but they fly about 80 hours a month.

In large part because of higher productivity, Southwest's operating costs are 20 percent below American's and 37 percent below USAir's. You don't need an MBA from Harvard to understand the long-term consequences. When it enters a new market, as it did in Baltimore in September, Southwest cuts existing fares by half or more, a level at which it makes money but its competitors cannot.

When Southwest and Reno Air, a new carrier, expanded in the California market earlier this year, American shut down much of its own operations because it could not compete profitably, and United began to explore spinning off a new airline that would fly short routes using lower-cost labor. Either contraction or spinoff means the same thing for employees at the high-cost carriers -- a major loss of jobs.

To avoid this result, employees will have no choice but to become more productive. That does not necessarily mean lower wages; after all, Southwest's pay is among the highest in the industry. But employees will have to work longer hours and drop work rules that raise operating costs.

There does not seem much justification, for example, for the flight attendants' insistence that American place one more attendant on board than its competitors. The attendants want to protect jobs, of course, but the costs of such featherbedding imperil the job security of everyone.

Pay and work rules are all bargaining chips, and perhaps the high-cost carriers will save themselves by gaining concessions they need in return for some level of employee ownership.

Northwest avoided bankruptcy last summer by just such a route, and United Airlines continues to talk with its employees about a buyout offer.

Employee owners have nothing to gain from a strike; they'd be striking against themselves. But even the American Airlines attendants who are flush with victory may have lost more than they gained.

American lost nearly a billion dollars from 1990 to 1992; this strike cost it needed revenue, and further concessions to employees will cost it more still.

A free market rewards the most efficient producers. However devoutly they may wish it weren't so, airline employees are not likely to repeal that particular economic law any time soon.

Stephen D. Solomon is an associate professor of journalism at New York University and a former writer for Fortune and Inc. magazines.

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