South­west pi­lots to the new 737s: You’re grounded

▶ The car­rier may fly the 737 Max early—if its pi­lots don’t ground it ▶ Charges of “a high-stakes and il­le­gal game of chicken”

Bloomberg Businessweek (North America) - - Companies/Industries - �Justin Bach­man, with Mary Sch­langen­stein and Julie Johns­son Edited by James E. El­lis and Dim­i­tra Kessenides

Boe­ing says it plans to break with the in­dus­try’s tra­di­tion of late de­liv­er­ies of new planes by hav­ing its lat­est jet, the 737 Max, ready to fly in the first half of 2017, sev­eral months be­fore its planned tar­get. Yet the air­plane’s first cus­tomer, South­west Air­lines, may not ben­e­fit from the Max’s early ar­rival: Its pi­lots’ union sued in fed­eral court on May 16 to keep the car­rier from fly­ing the plane un­til the 8,300 mem­bers of the South­west Air­lines Pi­lots’ As­so­ci­a­tion (Swapa) get a new la­bor con­tract.

As the air­line sees it, the plane is cov­ered un­der an ex­ist­ing agree­ment. Other than hav­ing more fuel- ef­fi­cient en­gines, South­west con­tends, the Max is ba­si­cally the same air­craft type as the 737-800, which it al­ready flies un­der a 2010 side deal to the pi­lots’ con­tract. The union re­jects that po­si­tion. “There will be ab­so­lutely no side letters to cover the Max,” says Swapa Pres­i­dent Jon Weaks. “The Max will have to be part of the new con­tract—pe­riod.”

The car­rier and the pi­lots have been ne­go­ti­at­ing a la­bor pact for more than four years. Last Novem­ber, rank-and­file South­west pi­lots re­jected a ten­ta­tive deal that would have given them raises of about 18 per­cent. A new union

team restarted ne­go­ti­a­tions in March.

The talks have turned in­creas­ingly frac­tious since the pi­lots’ con­tract be­came amend­able in 2012 (un­der fed­eral rules, air­line con­tracts don’t ex­pire) and South­west be­gan pil­ing up record prof­its, in­clud­ing $2.2 bil­lion in 2015—dou­ble the prior year’s. South­west says it must keep ex­penses down to pre­serve its low-cost ad­van­tage over larger ri­vals. The pi­lots ar­gue that their con­tract must rec­og­nize the in­dus­try’s re­struc­tur­ing and its re­turn to strong prof­itabil­ity.

In a state­ment, South­west Chief Ex­ec­u­tive Of­fi­cer Gary Kelly called the pi­lots’ Max suit “un­nec­es­sary and pre­ma­ture” and said a con­tract deal can be reached be­fore the Max is ready. If a con­tract isn’t reached, the union must use ar­bi­tra­tion in­stead of a law­suit un­der its cur­rent ac­cord, he said.

In its court fil­ing, the union said that the air­line is try­ing to force pi­lots “to ne­go­ti­ate the Max dis­pute with an il­le­gal gun to the head of Swapa. … South­west Air­lines, in short, is presently en­gag­ing in a high- stakes and il­le­gal game of chicken.”

If the dis­pute drags on, the ar­rival of the first Max—as early as March 2017— could give the pi­lots lever­age in their bid for higher pay for pi­lots of the new air­craft. South­west or­dered 200 of them in 2011. But if the air­line doesn’t come to terms, it will face the prospect that brand-new, fuel- ef­fi­cient planes that it needs could sit idle.

Who­ever comes out on top in this bat­tle, the real win­ner will be Boe­ing, which de­rives the bulk of its prof­its from the 737, its best-sell­ing air­craft. It has 3,090 or­ders for the Max, and it’s work­ing to in­crease over­all 737 pro­duc­tion from 42 per month to 47 next year and ul­ti­mately to 57 in 2019. If South­west isn’t ready to take delivery of its planes as sched­uled, Boe­ing al­ready has other equip­ment-hun­gry car­ri­ers ea­ger to take the jets—ahead of sched­ule. The bot­tom line The early ar­rival of South­west’s 737 Max jets could give pi­lots lever­age in their bid for higher pay.

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