Amy Robinson:
Today's SWAPA number is 1.31. That's the new temporary dues structure that SWAPA is proposing on the fall general election ballot. This marks the first time the Board has voted to increase dues during times of negotiations.
Kurt Heidemann:
So on today's show, we spoke with SWAPA's second VP, Tom Nekouei, and Executive Operating Committee Member, Hank Ketchum, about this year's budget, the dues increase, and what it could mean to our pilots in the upcoming election.
Amy Robinson:
I'm Amy Robinson.
Kurt Heidemann:
And I'm Kurt Heidemann. And here's our interview with Tom and Hank.
Hank, most of our listeners already know who Tom Nekouei is, as our second VP, but can you explain what your role is and what you do for the Executive Operating Committee?
Hank Ketchum:
Yeah, Kurt. I'm the Chair of the Internal Audit Committee. And the Executive Operating Committee came about as a result of my internal audit report that I released and looking at the business operations of the Association in 2020. And one of the recommendations was to form an Executive Operating Committee that really focused on looking at the business operations of the Association. It was something that was lacking and we needed an internal committee to look at the budget and spending. And that's what the Executive Operating Committee does.
It meets monthly, outside of the board meeting months. And when we get together, we're looking at the FPNA process, the financial planning analysis component, of Association spending. So we look at the budget, we look at how the committees and departments are spending their money, and then we make adjustments. As we need to, we'll involve the Board if it is beyond the EOC authority. And they'll be involved in the decisions, if they have to be, in terms of modifying the budget with resolutions. But the EOC does have the authority to make changes.
And my role with the EOC is really is the coordinating the committee activities. So Casey Murray, our President, is the Chair of the committee. But I set the agendas and also focus on the budget matters that are going to be reviewed during each meeting. And also our departments and committees bring to us their needs, and we make sure that they're addressed so that the Association is focused on using the dues dollars that our members are paying, in a very efficient manner, and there is no waste within the organization.
Amy Robinson:
Who else is on the committee? You said, Casey Murray's the Chair. You're on it. Who else is on that committee?
Hank Ketchum:
Okay. So Executive Operating Committee, it's our executive team. So it's Casey Murray, Mike Santoro, Tom Nekouei. So the VP, second VP. We also put two sitting Board members on the committee. That was important to bring the Board visibility and involvement from our elected representatives, so that they can see and have a seat at the table to understand how spending is accruing within the Association. And those are our voting members, those five individuals.
Kurt Heidemann:
And who are they? Who are the two board members?
Hank Ketchum:
Yeah, it's Matt Wright and Dennis O'Leary. And of course, those will change annually as people term out.
And then the other members of the committee are myself. We have our Executive Director, Matt Redding. We have Stella, our General Counsel. We've got Pat who is our IT Director. And then we of course, have Brian Hickman, who is our Director of Finance and Accounting. So it's really the people that have the touches on the financial components and things that would impact spending or obligations of the association.
Kurt Heidemann:
Tom, let's get to the heart of the matter on this podcast, and that is the proposed dues increase. Why are we asking for it?
Tom Nekouei:
So to follow up on what Hank was saying, the way we look at the budget, through the EOC and just the budgeting process, we do have a fiduciary responsibility to balance the budget every year. And the 800-pound gorilla in the room right now is our negotiating effort. And so that's the single biggest driver in why we're doing this.
You look at what's happening with over two years of negotiations and only three sections AIPed. And what we're doing, which we did in 2016 as well, with the SPC and outreach, and really our NC as a whole, the tier one committees that are part of that negotiating effort, it costs money to do that. And so with Hank's analytics, we looked at it surgically, actually, to see how we could continue doing this. And the truth of the matter is that at some point we have a revenue problem versus the spend problem. And we need to build that war chest to be able to, if the company continues their tactics of delaying negotiations and not really negotiating in good faith, we need to be able to fund NC. As I wrote in the RP last month, to be able to go long. And how long that's going to be, who knows? So that was the single biggest driver behind the dues increase.
Amy Robinson:
So I think our pilots would generally ask, "We didn't do this in 2016. Why do we need to do it now?"
Tom Nekouei:
In 2016, we took money out of the reserve fund to fund our negotiating effort. And we simply can't do that now because we have, again, a revenue problem versus what we're spending on the budget side, as our numbers grow. I think by the end of next year, we're going to be at 10,800 pilots. Our services are growing. And of course, our negotiating effort with the SPC, being the single biggest driver, is growing. And so to take the money out of the reserve fund now would put us in a not so good position as far as a reserve fund is concerned. We can't just keep drawing down on the reserve fund because that is our emergency fund, basically, is what that is.
Kurt Heidemann:
And speak to the target of the reserve fund. Where is the target and where are we in relation to that today?
Tom Nekouei:
Well, at the 1% dues structure, we've been able to teeter right there on balancing, the reserve fund being where our operating expenses are.
Kurt Heidemann:
And that's the policy manual is-
Tom Nekouei:
Correct. And now with what we're doing with the SPC outreach and really the whole negotiating effort, and there's some IT cost increases, as well, that's sitting at 32
Hank Ketchum:
32.7 million.
Tom Nekouei:
32.7 million, for what we're going to spend. But the reserve fund due to market conditions, as well, everybody's been watching the market, is sitting at roughly 22 and a half million. So that delta is just a tremendous delta, that we've never had before.
Hank Ketchum:
23.6. Yeah. So it is down. We have the funding mechanism for the SPC, as well. But with SPC activity planned this year, most of the SPC reserve fund will be eroded by year end.
Tom Nekouei:
You guys remember, last year what we created was a specific SPC reserve fund. So any surplus would go into that reserve fund, to fund our negotiating effort, before they go into the actual reserve fund. So we started this last year. And through Hank's analytics, we're at a juncture now where we have an income problem and not... If negotiations keep going the way they are, and at this rate, after almost three years, we're into the third year of negotiating with only three sections AIPed, you see where that's going.
Hank Ketchum:
And one of the things I'll add, too, to the 2016 environment and Kurt, you and I were working on the NC back then. When I came into the organization, the organization really lacked infrastructure, in terms of that data-driven organization that we've turned into today, I was a financial expert back then, and we didn't have an ENFA. We have an ENFA today and that's staffed with two full-time individuals and another third person who shares duties from the NC. So back then it was really one person. We didn't even have a decent data service that gave us form 41 financial analytics that we had to use. We had to go out and develop all these things.
The SRC is much stronger today in what they're able to do. Top to bottom, the organization is completely different in our data-driven approach to negotiations. Back in 2016, it was very thin. And also, inflation was almost non-existent back then.
And thirdly, things move very quickly. So we had a failed TA, 12 months, we had a ratified agreement. If we had gone into 2017 and had prolonged negotiations, we likely would've been looking at a dues increase to continue to support the negotiating effort. But as we rolled out of '16 with the ratified agreement, coffers refilled with higher pay rates on terms of dues revenue, we are then able to build that infrastructure within the organization.
We started up the NFA, which I chaired at that time. And I started it with four individuals. And across the organization top to bottom, the analytics that were being done within the negotiating committee, the effort that you were driving with the contract rewrite, all of those components. And where we are today, we're much more focused on data. We're built to focus on data, but that comes at a cost. And associated with that is our other efforts with the SPC and outreach and then the growth of the airline.
So today we have prolonged negotiations. We have inflation, inflation's running at 15%. If you look at the date of our last raise, two years ago, and that impacts the organization. And then thirdly, we have a growing airline. So the airline's growing, those probationary pilots, we're excited to have them, but their due structure is 0.25% versus 1%. That is a 1.2 million revenue spill just as we go into '23, planned hiring of 2,160 pilots.
So we have all these factors coming into play, and that leads to the need to raise dues to 1.31%.
Tom Nekouei:
And we talked about that, to stress that one point about our numbers growing. Our numbers are growing from the bottom. Our retirements are minimal, 175 a year. If Southwest is able to do even 80% of what they're proposing to hire, we're going to have 3,000 new pilots on property, basically, between this year and next year. And that's at 0.25. So that income doesn't change. The proposed increase to 1.3 does not apply to new high pilots, so they stay at 0.25%. So where the growth is happening, that revenue still stays at 0.25, for SWAPA.
Hank Ketchum:
Yeah. And SWAPA has to grow to meet the needs of this larger pilot group. And we're growing over 2,000 pilots in '23 and probably well over a thousand for the years after, if you look at the order book for the airline. And we can't look five minutes in front of us, we have to look three to five years out, to make sure that we're properly staffed and that we're growing to meet the needs of a growing pilot group.
Amy Robinson:
So how did we get to the 1.31? It's kind of a weird number.
Hank Ketchum:
Yeah, it is a weird number. And one of the things that we wanted to do is we talked about it within the EOC, was to make sure that we didn't overcharge our members, if you will. If you look at the dues structure at other airlines, as they go into the negotiations, you have APA steps up to 1.5%, six months ahead. You have all the ALPA carriers that are at 1.9, all the time. And then you have UPS goes from 1.5 to 2.25%.
So even at 1.31%, we are far below the dues level of any of our peers within the airline industry. The 1.31 was the number that we needed to be at in order to balance the budget, in accordance with the policy manual. As Tom mentioned, we had the higher expenses really being driven by three main areas with the SPC outreach and then our additional IT spending. That's 69% of the increase that we're looking at going to this next year or 4 million dollars of that increase is being driven by just those three areas.
Amy Robinson:
So when you say it balances the budget for 2023, is that going to be an issue since it just balances it? Is that going to be an issue if there's more money needed?
Hank Ketchum:
If there's more money needed, we have different levers we can pull. And the reserve fund is there just to meet those needs. And that's why we really didn't want to plan to utilize the reserve fund. It's really there for unplanned expenses. So if there's a surprise during the year, we need access to additional funding, we do have the reserve fund and we can pull that lever.
Kurt Heidemann:
So just to put it in a little more simple terms, I think with when we were working with 1% dues, we would collect the money, we'd have a calculation of how much the revenues were, and then we'd look to see what we could spend. But we're kind of reversing that now. We are seeing what we need to spend, and then we're figuring out how much money we have to collect to cover those things. That's how we came up with the 1.1.
Tom Nekouei:
Yeah.
Kurt Heidemann:
[inaudible 00:14:11]
Tom Nekouei:
And we've never... This is the first time, in the history of SWAPA, that we've done that. And Hank has done a great job doing that with his pro forma, where we actually look ahead.
And also, I talked about this, I think it was last year on the budget podcast, that we're treating our budget as a live document. Instead of having one that's ratified in November, and then we just don't look at it. We treat it as a live document. Meaning, if there is line items that we end up not using, or we don't use all of it, name it, whether it's staffing, supplies, whatever the case is, through the EOC now and the Board, we're able to take that, whatever the underspent is, and apply it somewhere else. And really, really surgically look at the budget on a monthly basis, really.
But then what you were talking about, Kurt, is that look ahead and that's exactly where we had those meetings and the EOC meetings and looking at Hank's pro forma. We knew that it was unsustainable to continue on that path of the spending that we want to do for our negotiating effort and IT infrastructure and everything else, but it was now going to be fiduciary responsible to just continue spending the money without having the revenue.
Kurt Heidemann:
Let's talk a little bit about the mechanics of the dues increase. The pilots are going to vote on the budget and if they vote for the budget, then they're voting for the dues increase.
Hank Ketchum:
Correct.
Kurt Heidemann:
Can they vote for the budget and not for the dues increase? Is there a way to split that or they do not have that choice?
Hank Ketchum:
No.
Tom Nekouei:
No. We structured it through... Everybody was involved in structuring this, because it's the first time we've ever done that. And the way we've written it is that once you vote for the budget, you will automatically vote for the dues increase.
Amy Robinson:
You said it's the first time we've done that. But we actually talked about this in the past. Is that not correct?
Tom Nekouei:
We talked about it, actually, very recently in the past because the previous administration actually the previous second vice president had a podcast that he recorded in 2019 to bump the dues up to 1.1, and the trigger for that was negotiations. At the time, we knew that we were going into kind of a prolonged negotiation cycle, which seems to be standard operating procedures for Labor Relations over the company. And they had talked about it, they recorded podcast, but then COVID hit, and everything was put on hold. So this issue, even not doing the pro forma, was a known issue back in 2019. And we knew we were going to have this issue.
Kurt Heidemann:
So this dues increase for 2023, what happens at the end of 2023? Or if we get a deal?
Tom Nekouei:
So if we have a deal and I'll just throw it out there, and it's an example, so don't take my word for it, but let's say second quarter of 2023-
Kurt Heidemann:
Okay. Folks, Tom Nekouei just said, "We're getting a deal, second quarter 2023"
Tom Nekouei:
Right. Exactly. Two pay periods following ratification, that dues structure goes automatically, goes back to 1%, that's if we have a deal next year. If we don't have a deal next year, we'll go through the same budgeting process, doing the analytics that Hank does, by September of next year and do this all over again, depending on what we need in terms of the dues that are going to balance the budget and fund our negotiating effort.
Kurt Heidemann:
So it could be more for the SPC, could be less, could be more outreach, less, depends on what happens.
Tom Nekouei:
That's correct.
Amy Robinson:
And it currently is set to expire December 31st of 2023, correct?
Tom Nekouei:
Yeah, it's a 2023 budget, the fiscal budget. So it expires December 31st, 2023.
Hank Ketchum:
These are one-year authorizations. So it'll be revisited annually during each budget season.
Tom Nekouei:
And so what Hank was talking about earlier about the other airlines is they have it in their constitution, at least APA does and UPS, that they automatically go to that dues structure once section six negotiations start. So we have not approached that yet.
Kurt Heidemann:
Just a question. If the budget gets voted down, then what happens?
Tom Nekouei:
By our policy, we revert back to this year's budget.
Kurt Heidemann:
Hank, what are the main increases in costs for next year that are driving this higher budget?
Hank Ketchum:
Really three main areas, kurt.
First one being SPC. That's something that I always... The term I like to use is it turns on and off like a light switch. So here during negotiations each year, as negotiations continue, our pressure is stepped up, it gets more expensive. Planned spend for '23 is 2.8 million dollars. That's up 1.3 million from the adopted budget in the '22 budget.
Outreach we step up our efforts there, as well, communicating with our pilots, which is critical, and their families. That's going to over half a million dollars, because we have to fund the committee, their events contacting and having that contact with our new hires and captain upgrades. We're hiring over 2,000 pilots. So there's a lot of events, a lot of touches there. And then we also have the committee chair upgrading during the year. And we're seeing that across all our committees, as you look at inflation across the committees, a lot of upgrades occurring, which drives added cost, with the committee members that are doing a lot of hard work for the Association.
And then thirdly would be the IT infrastructure. It's important that we continue to focus on building that out. We have a long-term vision and our current ITO services contract, we use a firm that's expiring this year and that will be renewing for another three to five-year agreement. And our projected cost, based on the RFP process, we're looking at a big increase there as a result of the continuing needs, meeting the needs of the organization, and also inflation that we're seeing for that type of talent that's out in the economy.
Amy Robinson:
So one of the questions that I have is around the same, I'm actually going to pick on you a little bit, Hank. But when we're talking to the membership about a dues increase, what have we done of the last two years to be better stewards of our members' money? And I can speak to your spreadsheets as one of those things. So if you would explain some of those things, that would be good.
Hank Ketchum:
Yeah, that's a great question. So when we formed the EOC and we revamped the budgeting process with a new accounting finance team, Brian Hickman leads that as Director of Finance. Brian and I, and under Tom's leadership, we focused on revamping the process and making it a lot more granular, a lot more detailed. You can probably speak to that when we're focusing on the spending, that's going on with it in the organization.
So from the committees, that's really my area. I work with our committees very closely. With all the chairs, we analyze all the spending requests, that's vetted through our FPNA and a process through the EOC. And we actually cut 5.1% of the budget requests that were sent to the EOC. It was over $800,000. We cut that out. And so that EOC process is really critical to making sure that our dues dollars are being spent very efficiently.
And then Brian, on the department side, is doing the same thing. He sends his budget shells out. He receives them back, they're vetted through the EOC process. And we analyze, literally, every line item and make sure that it's necessary. We try to eliminate overlap. And then we try to focus on what are the strategic initiatives and goals of the organization? Are we achieving those goals with the planned spending? And are there any areas where we can save?
Amy Robinson:
And I can speak to that. As one example, so vendors specifically, when we were looking at printing or anything else, I'd do three opportunities, three different bids, to see what is the cheapest option. Not always just the cheapest, but what is the best option and what is the most cost-effective option for us? So those are things that we're doing internally, on a regular basis, for those types of savings to the membership.
Kurt Heidemann:
Tom, we're speaking specifically about this round of negotiations and increases in dues for this section six. Is there a plan going forward? Are we going to potentially do this indefinitely or is SWAPA going to consider a dues increase, not this cycle, but for the next contract? Or is that too far out in the future?
Tom Nekouei:
We've talked about that. And that's something that the Board of Director needs to decide in the room. Right now, as it stands, today for '23, '24, we don't have that plan to make it a permanent change. And I think what we're doing, as we're different than all other unions and all their airlines, I think this fits our business model to where Hank, and whoever replaces Hank or myself down the road, does the analytics and we do a very surgical budget and we only do it when prolonged negotiations are taking place. And we customize that number to what we actually need, versus a fixed number where I think APAs run into that problem right now, where they have too much money. So this fits our model right now, but that's up to the Board down the road to the side
Amy Robinson:
For members who really want to dig into the budget or look at everything very specifically, where would they go to do that?
Tom Nekouei:
The entire document will be on the website and in the RP with all the analytics and the numbers and very detailed committee and departmental budgets.
Kurt Heidemann:
To be honest, guys, I think that this proposed dues increase might not be popular with all of our pilots. So what would you say to those individuals who might vote no?
Hank Ketchum:
Well, Kurt, ours due structure at 1.31% will still be the lowest in the industry. And we are a data-driven organization. We've grown our capabilities immensely, and that comes at a cost. And that cost should deliver a contract that rewards our pilots with an industry-leading agreement.
And if you look back at 2016, we delivered 2.4 billion dollars of increased value to our pilots. That year they paid 16,800,000 in dues. That was over a 14,000% return on their investment.
So we are very diligent in how we approach our spending. We cut unnecessary spending. We have done that in this budget. We're delivering a product that is superior to any of our peers in the industry. And their dues dollars will be very well spent.
Kurt Heidemann:
Tom, what would you like to add?
Tom Nekouei:
I, 100% agree with that. And the fact that in the last two years, we've renegotiated everything in this building, from supplies to the insurance rates to electricity bills. So we are very, very diligent on approaching the budget. Again, I say it again, very surgically over the last two years. And I said that in my campaign letter a couple years ago, that my vision was to run SWAPA more like a business than a union, and that's exactly where we are today and we're going to continue doing that. So fiduciarily, we're very responsible and very much aware of the duties that we have.
Now I want to make this perfectly clear. We are here because of one variable only, and of course we talked about within our budget, but it is that's increasing our cost, but that one variable is Labor Relations and Southwest Airlines. Where I say it again, in our third year of negotiating now, and we have three sections AIPed. You see where that's going. And we cannot continue doing this by taking money out of the reserve fund. As Hank alluded to in 2016, from a failed TA to a TA2, it took us less than a year, in 2016. We can absorb that cost. This has been two years and there's no end in sight. So I just want to make this perfectly clear that if it wasn't for the negotiating tactics over Labor Relations, we wouldn't be here.
Kurt Heidemann:
Our thanks to Tom and Hank for being on the show. The proposed dues increase is a difficult topic, but one we have to address.
Amy Robinson:
And as usual, we'd like your feedback. If you have any podcast ideas or topics that we haven't covered, please drop us a line at [email protected].
Kurt Heidemann:
Finally, today's bonus number is 14,228%. That's the return on investment our pilots received on their dues from TA1 to TA2, back in 2016. While the cost to fund our negotiations may be high, the cost to not to fund them is even higher.