Southwest Airlines CEO explains pay cuts: ‘We are in intensive care’
Southwest Airlines never had laid off, furloughed or asked workers to take pay cuts in its 50 years of flying — until a global pandemic forced its hand.
CEO Gary Kelly told employees Monday he needs them to take a 10 percent pay cut to avoid furloughs in 2021, reflecting the prolonged negative outlook for the travel industry staggered by COVID-19.
He said in an interview Tuesday with CNBC that the move would save “real money” — $500 million a year.
At Dallas-based Southwest, 17,000 employees already have volunteered for temporary leave while other airlines have furloughed workers. Nonunion employees, who make up about 17 percent of Southwest’s 60,000 workers, will see their pay cut 10 percent beginning Jan. 1.
Labor leaders at Southwest have been skeptical of the plan, contending the airline has an overstaffing problem and not a compensation problem.
Kelly spoke with the Dallas Morning News about the proposal. His comments have been edited for brevity and clarity.
Why has it come to this point?
The Payroll Support Program has been very helpful for the past six months, and basically maintained our cash position. Absent that, we would have lost a solid $3 billion. Over the next six months, since the pandemic is still raging, that’s the kind of exposure we’re looking at.
My logic, and it’s really straightforward, is our government did what it needed to do in the spring with the CARES Act to avoid an all- out depression. This pandemic is something that no company can be totally prepared for. The only mistake that was made is it just didn’t go long enough.
We remain hopeful that Congress and the administration will come to an agreement. If so, we can avoid these pay cuts.
I think Southwest, among the top six carriers, is unique. We don’t need layoffs, we don’t need furloughs. Our employees have done a great job with the voluntary separation program and extended time off that they have volunteered for. They’ve significantly reduced our costs already and put us in a position where we can seek some rather modest concessions with our unions and implement some rather modest pay cuts with our noncontract employees.
Do you think 10 percent pay cuts will be enough to get through and what do you base that on?
Ten percent won’t restore our profitability. Our largest cost item is salaries, wages and benefits. It’s very difficult to reduce our costs further without doing something with salaries, wages and benefits.
This won’t be the only thing on the revenue side. I’m very excited about opportunities to addmore cities to our routemap at minimal incremental costs. That will open up new pools of revenue to us in terms of new customers and that will bring value.
For this to work, how quickly do you need for your business to recover next year?
If you extrapolate the current cash burn rate, we have well over two years’ worth of cash on hand.…
Everybody knows that travel and tourism is in a depression. Our business is still off 70 percent. We’ve got to get a vaccine. We’ve got to get the vaccine distributed. We need to reach herd immunity before people will begin to travel in numbers similar to what we were seeing before the pandemic. We’ve just got to make sure that we do everything we can to minimize our cash burn and maximize our cash balance during this time period.
Back in April, labor groups were upset Southwest would even consider asking for contract concessions. Do you think employees are more willing to accept this now?
We’re formally reaching out to our unions to seek concessions. We’re notifying our noncontract employees that we’ll have a pay reduction of 10 percent, effective Jan. 1. None of that has happened before.
We want to make this simple. We want to make it quick. We want to get the cost reductions in effect across the board on Jan. 1. That’s our goal.
Do you think employees are willing to make a sacrifice now?
Our employees are very devoted. This is all about saving jobs. …
In the meantime, we have to make sure we have plenty of cash. We need to make sure that we minimize our expenses, that we serve our customers aswell as we possibly can, and do everything that we can to win more customers.
If you look at the U.S. travel market right now, the traffic is back to 1970s levels. We have significantly more infrastructure and supply in place than we do demand right now and that’s the fundamental challenge. Until we work ourselves out of that, I would say this is the right way to describe us: ‘We are in intensive care.’ Andwe’ll do everything we can to keep our patients alive.
Will more employees need to take temporary leave this winter?
That’s just something we’ll have to decide based on future demand. …
That’s just something we’ll have to leave open and we’ll have to make that decision when the time comes.