All's Not Well At Luv
- Thread starter CaptBud330
- Start date
It appears to me as well that WN might start to see some medium-term problems. I think they recognize this and it is the reason they are taking advantage of their fuel hedges and cash to buy marketshare in so many key markets. WN recognizes that they are going to need to generate more revenue in the future to offset their rising costs, so they are moving in now into PHL/MDW to gobble marketshare. Once they have a dominant position in those markets you'll see the fares rise.
The ATA codeshare also seems to be a way to drive to drive up revenues without adding much in the way of costs. WN saw the potential revenue streams created by adding the additional cities to the network and went after ATA.
UA tried this with the proposed US merger. They had just signed the new expensive pilots contract and needed to generate more revenue to offset their newfound costs, so they went out and tried to buy US, thinking it would provide the revenue streams necessary. WN's strategy is much more sound, but they are going to have to do more than just try to dominate markets.
The ATA codeshare also seems to be a way to drive to drive up revenues without adding much in the way of costs. WN saw the potential revenue streams created by adding the additional cities to the network and went after ATA.
UA tried this with the proposed US merger. They had just signed the new expensive pilots contract and needed to generate more revenue to offset their newfound costs, so they went out and tried to buy US, thinking it would provide the revenue streams necessary. WN's strategy is much more sound, but they are going to have to do more than just try to dominate markets.
whlinder, this is a misstatement. SWA has always been about sustainable growth, adding planes where they can be filled in a profitable manner, not just "gobbling marketshare". An example of this is SWA starting to talk about moving planes from Dallas-Love, a market it CLEARLY dominates, because they are not filling at sustainable fares.
Someone else posted that once SWA dominates a route, fares will go up. This is also short-sighted. There is no 'marketshare' to 'gobble' if fares keep people from flying.
SWA works because it is a low cost provider of services. It can afford to charge lower fares, and fill planes, because it costs SWA less to operate it's aircraft per seat mile (ASM).
There's been a remarkable shift in target here. Less than a year ago, the naysayers were saying that SWA paid it's people less, and it was on the backs of the workers that SWA was successful. Now this thread is started because SWA is seeing "cost creep" from paying it's employees too well.
Ya'll let me know when you make up your minds. In the meantime, I'm going to believe the numbers that SWAFA30 posted from the fourth quarter earnings announcement, which seemed to be ignored.
SWA does a great job but like any airline (and most companies in any industry) if it doesn't grow, costs creep up. The postponement of deliveries post 9/11, prudent though it was, did have some cost. I think LUV saw it too, and decided to grow again to help keep costs down. Spreading overhead helps make the cost per ASM go down, as does adding new employees at the starting scale...of course if you adjust for stage length, LUV's advantage is still startling, and beats Jetblue even.
Well, while salary creep could indeed pose a problem for Southwest in the long term, the author of the piece really does gloss over the effect of fuel on Southwest's margins. In 1998, fuel amounted to 9.3% of operating revenue; compare that to 15.3% in 2004. That amounts to 6 percentage points of operating margin delta. Given that operating margins in 1998 were 16.4%, 6 of the 8 points of change in operating margin can be attributed to fuel, in spite of Southwest's industry-beating hedges in 2004.
It is clear, however, that management is well aware of the cost pressures from salaries; if you listened to the analyst call last week, there were several mentions of continuing to improve employee productivity. One of the goals is to eventually get the number of employees per aircraft down to about 70. Given that the current headcount is a bit over 74 per aircraft, this would improve labor costs in the neighborhood of 5-6%. And with most employee groups at or near the top of the industry in pay (and certainly best in job security), the pressure for wage increases should (hopefully) subside.
One more thing -- the company's 2004 labor costs were affected by a handful of one-time items: closing three reservations offices, retro pay for flight attendants, and the companywide early-out offer. Excluding the effect of these items, employee costs were 36.8% of revenue, not 37.4%.
It is clear, however, that management is well aware of the cost pressures from salaries; if you listened to the analyst call last week, there were several mentions of continuing to improve employee productivity. One of the goals is to eventually get the number of employees per aircraft down to about 70. Given that the current headcount is a bit over 74 per aircraft, this would improve labor costs in the neighborhood of 5-6%. And with most employee groups at or near the top of the industry in pay (and certainly best in job security), the pressure for wage increases should (hopefully) subside.
One more thing -- the company's 2004 labor costs were affected by a handful of one-time items: closing three reservations offices, retro pay for flight attendants, and the companywide early-out offer. Excluding the effect of these items, employee costs were 36.8% of revenue, not 37.4%.
markkus757
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- Jul 26, 2004
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Seniority is going to be just as important to the future as the fuel hedges. Look at the airlines who have furloughed people. They got rid of the people who cost the least amount against payroll. Early retirements will be a must. The good thing about Southwest is that they have engineered the employee's positions so well, that taking people off the street to plug into to open holes is the easiest at Southwest compared to the other airlines. While I do see fares increasing over time, it will only start when capacity is reduced. Either by airlines going out of business, or by them conceding markets and shrinking. Either way, people are going to lose jobs. Sorry.
markkus757 - you make the assumption that when one airline concedes or fails or shrinks, that another airline does not simply replace that capacity with its own growth. Historically, in this industry, we have seen major players (i.e. what we would now call legacy carriers) grow unprofitably in the name of market share, particularly when another fails. (AA/DL/Braniff at DFW, US/EA/Midway at PHL, WN/TZ/Midway at MDW, WN/AA at BNA, DL/EA/ValuJet/AirTran at ATL, etc.) I am not sure if this trend can continue... But now we have a whole cadre of LCC's with large fleet orders, who will probably replace the "lost" capacity at a lower cost... The trick is whether or not the LCC's can do it at a cost lower than revenue. The legacies too, to the extend DAL tries to replace a failed US Airways (should that occur).
markkus757
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- Jul 26, 2004
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No one is in a position to replace another airline if they liquidate. Now, that might not be the case if someone just decides to not fly certain routes. As far as the LCCs go, they have less wiggle room and less assets to mortgage and less cash sitting around. With the majors, they are already mortgaged to the hilt. There is no more credit worthy assets to dangle in front of anyone. This has probably been a long-time coming, but it is now coming to a climax. Someone is going to lose and lose big-time.
I thought the article was pretty stupid. For one thing, comparing percentages is meaningless with no context.
For example, if airline ABC used to spend 40% of its operating expense on labor, and then made some changes and dropped that to 25%, is that automatically a good thing? It certainly isn't if it turns out that ABC doubled their non-labor expenses by blowing money on velvet seats, personal satellite TVs with 150 channels and offering three course meals (OK, revenue would rise, but this is just to demonstrate how one can twist numbers).
That is, in one sense, rising labor cost as a % of the total is actually good if it is the result of flat labor costs and non-labor costs being cut, assuming the customer experience isn't affected by non-labor cost cuts, and thus doesn't affect revenue.
The author harped on labor costs while hardly mentioning the fact that operating costs are down, which is amazing considering Southwest's expansion into the Northeast, where you would expect costs to rise.
The author also failed to mention the fact that more people are driving shorter distances now, IMHO in large part due to 9/11. Had Southwest been entirely short-haul in 2002-2004 like they were around 1980, they would definitely be losing money.
I'm sorry, but dealing with the TSA idiots is simply not worth it for a 30 minute flight. Next summer, for the first time, I will be taking my family on vacation in the car (around 600 miles to Ohio) rather than on an airplane.
It used to be that I would always fly from one city to another unless they were so close that there was no air service (e.g., SAT to AUS). Now I will drive 300 to 700 miles from my house depending on the destination (I won't drive to PHL but I will drive to TPA). My car doesn't give me lip and doesn't threaten to ground me if I don't bend over.
For example, if airline ABC used to spend 40% of its operating expense on labor, and then made some changes and dropped that to 25%, is that automatically a good thing? It certainly isn't if it turns out that ABC doubled their non-labor expenses by blowing money on velvet seats, personal satellite TVs with 150 channels and offering three course meals (OK, revenue would rise, but this is just to demonstrate how one can twist numbers).
That is, in one sense, rising labor cost as a % of the total is actually good if it is the result of flat labor costs and non-labor costs being cut, assuming the customer experience isn't affected by non-labor cost cuts, and thus doesn't affect revenue.
The author harped on labor costs while hardly mentioning the fact that operating costs are down, which is amazing considering Southwest's expansion into the Northeast, where you would expect costs to rise.
The author also failed to mention the fact that more people are driving shorter distances now, IMHO in large part due to 9/11. Had Southwest been entirely short-haul in 2002-2004 like they were around 1980, they would definitely be losing money.
I'm sorry, but dealing with the TSA idiots is simply not worth it for a 30 minute flight. Next summer, for the first time, I will be taking my family on vacation in the car (around 600 miles to Ohio) rather than on an airplane.
It used to be that I would always fly from one city to another unless they were so close that there was no air service (e.g., SAT to AUS). Now I will drive 300 to 700 miles from my house depending on the destination (I won't drive to PHL but I will drive to TPA). My car doesn't give me lip and doesn't threaten to ground me if I don't bend over.
markkus757
Veteran
- Jul 26, 2004
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Mweiss - everyone but Southwest does not have a pile of cash sitting around. You can pretty much exclude them from my whole analysis because they are the exception to it. No kidding someone can replace anyone else over the longer time periods. If either US or UA go under, a limited response can be expected until more hiring of employees and more acquisitions of planes. Sorry to not explain it more...............
