There are many things that influence how an airline prices its flights. Hard costs like pilots, ground crew and flight attendants are part of that equation.
Across virtually the entire industry, those expenses have increased as all of the major pilot and flight attendant unions have negotiated significantly higher salaries and other benefits for their members. These agreements make it more expensive for airlines to operate their planes.
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That's less of a concern for traditional airlines like American, Delta and United Airlines, which offer first and business class seating. Those passengers are already paying exponentially higher fares and have historically been a resilient audience in the face of price volatility.
Southwest Airlines (LUV) , however, does not have the same protection against rising costs. The company has built its business on being a reasonably priced and mostly all-inclusive airline. It doesn't sell first-class or business-class seats, so it can't pass along price increases to customers accustomed to paying higher prices.
That means the airline has to accept lower margins or raise prices in the face of higher costs. You could also add flights to increase your ability to increase profits even if you make less money from each passenger.
In reality, however, Southwest has a problem that won't be good news for its passengers.
Image source: Kevin Dietsch/Getty Images
Southwest reaches labor agreements
After a contentious battle with the airline, the Southwest Airlines Pilots Association (SWAPA) approved a new agreement with the airline that will give them an immediate 29% raise. This will be followed by 4% increases in each of the next three years of the contract, while the fifth year will come with a 3.25% increase.
Pilots also received enhanced benefits, including enhanced retirement, disability coverage, and enhanced maternity and paternity leave.
“This has been a long time coming and only through the unity of our group of pilots were we able to achieve the benefits of this contract. This new collective bargaining agreement will provide our pilots with the safety and protection they have needed for a long time,” Union El President Captain Casey Murray shared in a statement.
Southwest has also reached new, more expensive agreements with several other unions, including the one representing its flight attendants, although that agreement was rejected by the union and negotiations continue.
Southwest CEO Bob Jordan spoke about the labor situation during his airline's presentation. fourth quarter results call.
“We have successfully achieved ratification to provide competitive market compensation packages for our people. This is a great achievement, and I would like to thank all those who have tirelessly supported those negotiations,” he said before flight attendants voted on Please do not accept their treatment.
Southwest will not increase capacity
Higher labor costs mean higher ticket prices unless the airline can find other ways to save money. That seems unlikely given that fuel costs remain somewhat high and inflation remains a factor.
Southwest will also not be able to increase its flight capacity in 2024, according to Jordan.
“We also made rapid adjustments to capacity for 2023 and 2024 and implemented significant network adjustments in response to changing demand patterns. These changes reduced our planned year-over-year capacity growth for 2024 to approximately 6%, all of which is carryover from network restoration in 2023. Therefore, there will be no additional net new capacity in 2024 as we work to mature our route network,” he shared.
Southwest has been limited both by Boeing (licensed in letters) the slow delivery of ordered aircraft and a series of pilot retirements during the pandemic.
With its various costs increased, Southwest will see its cost per available seat mile (CASM-X) increase by 6% to 7%. About 4 to 5 points of that amount will come from increased labor, while 1% to 2% will come from increased maintenance costs, according to Chief Financial Officer Tammy Romo.
“While we are accruing market wages, the recently ratified pilot contract contributes the majority of the CASM-X job increase this year due to an increase in wages, changes in work rules and improved benefits,” he said.
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