Kurt Heidemann:
Today's SWAPA Number is 2.07. That's the percentage of 2022 profit sharing that will be funded next month. February is a busy time for our EFA Committee every year with full year earnings across the industry coming in and Southwest Profit Sharing getting announced. But this year it's especially busy with a fallout from the Christmas meltdown, a recent TA at Delta and big pay raises across the industry.
Amy Robinson:
So on today's show we're going to talk with Erich Schnitzler, Greg Auld, and Damian Jennette from the SWAPA EFA Committee. It's been a while since we've had all three on together, but with all the news we thought you'd want to hear from each of them.
Kurt Heidemann:
I'm Kurt Heidemann.
Amy Robinson:
And I'm Amy Robinson. And here's our interview with Erich, Damian, and Greg.
Kurt Heidemann:
Guys, let's start out by talking about Southwest's fourth quarter earnings. How did we do?
Greg Auld:
Well in a nutshell, Southwest did poorly. Southwest was one of two airlines in the fourth quarter that posted a loss and that's completely attributable to the meltdown we had in the last week of December. So Southwest posted a 344 million operating loss, whereas they would've probably posted somewhere in the neighborhood of four to 500 million in operating profit.
Amy Robinson:
I do want to make it clear though, that's just for the fourth quarter, right? They were still profitable overall for the year?
Greg Auld:
Yeah, so Southwest did report a positive net income for the year over, 500 million dollars. Adjusted operating income is what we tend to look at because it shows you how well the business is running. And again, like I said, an operating loss for the fourth quarter of 344 million dollar, but on an adjusted basis for the year 1.12 billion. So the company did have a good year, it just had a very terrible end of December.
Kurt Heidemann:
And you said that another carrier also posted a loss? Who was the other carrier?
Greg Auld:
It was Hawaiian. In fact, Hawaiian has yet to post an operating profit since the pandemic. They're the only carrier of the 11 that we follow.
Erich Schnitzler:
They noted that their business to Japan, which their largest international segment has never really recovered since the pandemic. And so they are, they're nowhere near the amount of traffic they had back into 2019, 2018, 2019 years. They're also facing intense competition from us on inner island and neither airline is making any money on those. There's an intense fare war inner island with us and Hawaiian and both airlines are suffering, but it's hurting Hawaiian a lot greater than it is Southwest.
Amy Robinson:
So you mentioned Hawaiian was another one that did not post a fourth quarter profit. How did Southwest earnings in the fourth quarter compare overall though with the rest of the industry? Can you give us sort of a snapshot?
Erich Schnitzler:
Sure. The rest of the industry, particularly the big three, did pretty well. They had double digit margins and they really returned to a 2018, 2019 level of profitability. One on statistic we saw that was interesting as revenues were for the industry, were up 13%, but capacity was actually down by 5% and that just indicates the incredible strength in fares and yields out there with this constrained capacity environment that we are operating in right now. A lot of airlines are really doing well in this environment in terms of able to generate outsize revenues.
Greg Auld:
And I'll just go on to say that on one hand when you say the legacy carriers are doing well and the ULCCs are not doing as well, you might find that to might be unusual, but really this is just an echo of the great distortions we had during COVID. So it's no surprise really that the legacy carriers with a large business portfolio in large international traffic, they're seeing that rebound.
We mentioned that the GDP is larger now than it was three years ago. There's a pent up demand. In fact, airline revenues are still about 15% lower than their normal share of total GDP. So there is room for the airline industry to grow. There's actually bright skies ahead for the airline industry. The rumors of its demise are certainly premature and we're going to see these... We'll see this good news going forward.
Erich Schnitzler:
Some of the themes that we had heard from the ultra low cost carriers, they mentioned supply chain issues. Some of these airlines, for example, Spirit and Frontier having trouble sourcing aircraft from Airbus, they're one to six month delivery delays. Some in the airlines have mentioned parts delays for parts for maintenance, and as we know with the ULCC model, it is to grow to keep costs down. And so as their growth slows, their costs go up and that distorts the whole idea of the ULCC model.
Kurt Heidemann:
That brings up a question I guess is with all of these spikes in employee costs, not just pilots but across the board, does that further harm the ULCC model? Do they suffer more as pilot rates go up?
Erich Schnitzler:
Absolutely. As you mentioned, employee costs, particularly pilot costs. I mean right now you have open contracts at Allegiant and certainly their costs will go up once they sign a deal. Frontier's contract doesn't expire until 2024, so they have some breathing room. But to be sure as these employee costs go up, that will certainly have an effect on the ULCC model.
Greg Auld:
We are seeing, particularly in the pilot side, just a commoditization of pilot costs. So the old model of regionals to ULCC to mainline or to legacy mainline Southwest, that's breaking down a little bit now with some of these smaller carriers are forced to pay industry-leading contracts to retain their pilots.
Kurt Heidemann:
Is it safe to say that the Delta benchmark is just that? That's sort of the bar that everybody's going to be aiming for?
Greg Auld:
Yeah, I think that's fair. That what the Delta, United, American sets as their benchmark for their narrow body and wide body, yeah, it does set the industry standard and you're seeing even the smaller carriers put out contracts that are closing in on those numbers.
Erich Schnitzler:
And I mean even if you look at the Alaska contract, they have a snap of as of to an average of the big four plus JetBlue. So when American and United get contracts, if that resets the bar higher even than Delta, then you'll see somebody like Alaska be able to try to capture some of those gains.
Kurt Heidemann:
Damian, I'm sure our listeners are going to ask, why wouldn't SWAPA ask for a me too clause?
Damian Jennette:
Well, Bob Jordan has said in the beginning that the rates are set by the market, right? Well, the new market now, or the me toos at least that's kind of how the position that we're looking at it. Alaska has a me too in it, Delta has a me too, further expect a United, American when they finally get deals to come out, we'll have me too clauses in that as well. Even JetBlue out of me too but it was more linked to the NEC and it was a compensation piece to me too. So it's going to happen.
Just historically, yeah, SWAPA have always just taken the position that we want to give the company a known cost through the duration of that contract. But of course the company keeps delaying contracts. They did the before on this one, they're doing it now. But the other thing that we learned was back in May of 2017, at least it was a pinnacle piece for me. Everybody had their contracts ratified, and then American came out in the outside of Section six pay increase in May of 2017 because Delta had a deal and United had a me too. So then the market really started launching past that really in May of 2017 and really put us behind on compensation. So it is, it's hard not to have it in one of our proposals.
Amy Robinson:
So we've all heard that Southwest has calculated the loss of the meltdown at about 825 million. Does that account for the payouts they're still making the passengers or is that sort of all lumped in together?
Greg Auld:
Yeah, it does account for most of it. The company does their accounting on a accrual basis, so they make us estimates and they make adjustments. So for the most of those costs will be baked into the fourth quarter. Certainly we'll see some additional problems in the first quarter. Most notably on the revenue, they called out 300 to 350 million dollars of revenue lost as wary passengers weren't booking in January and February. And of course there will be some additional costs as some of the settlements are finally taken care of in January and February. But the lions share of the meltdown costs should be in the fourth quarter.
Kurt Heidemann:
So has that had a long-term impact or future impact on, say, share price or what the analysts are forecasting for profit for this year, et cetera?
Greg Auld:
Well, first quarter was always going to be a tough quarter. First quarter is a tough quarter for all the carriers. It's by far the lightest quarter of the year. Southwest has already pre-announced they expect a loss in the first quarter. We were modeling a very small gain prior to the meltdown, but from an analyst standpoint, most of the... They essentially have moved past the meltdown as far as the costs. They now begin to worry about some other larger, more systemic factors.
Amy Robinson:
What would those be?
Greg Auld:
The analysts worry about is Southwest capacity going to be growing too big? Will they have the staffing to handle their announced capacity increases? That's a concern. If they had trouble operating with 4,000 flights in December, how well they going to operate with 4,500 to 5,000 flights come around the end of next Christmas?
Kurt Heidemann:
Is it safe to say that they're concerned with the operational side of it? Basically the meltdown has uncovered kind of what SWAPA has been talking about all along, and now other people are finally paying attention?
Erich Schnitzler:
I would say that's definitely true. From our point, the analysts have come to ask asking questions if we think that Southwest will be able to handle operating during the summer, spring break, those kind of high travel times, and is our operation capable of meeting those demands?
Kurt Heidemann:
And what have you told them?
Erich Schnitzler:
We've told them that we know that Southwest is continuing with their network restoration. We think that it will, they should be able to meet the demand, but there's always that chance with weather or ATC or something unforeseen, a black swan type event that could cause our operation to crater once again.
Amy Robinson:
So in Casey Murray's blast, the last one that he put out, he mentioned that after the meltdown management gave themselves about 8 million dollars in bonuses. Can you comment on that?
Greg Auld:
Sure. In February, the company every February announces essentially the VS and proxy statements of what has been awarded. Now this is primarily for past performance. This meltdown will impact future stock awards, but it's not a good look to see almost 9 million dollars of stock awards awarded to the executives just a matter of weeks after the company posts nearly billion dollar loss.
Amy Robinson:
So shifting gears a little bit, when we're talking about the executive compensation for Southwest, that kind of leads us into the discussion of profit sharing. What is this year's profit sharing number and when is it paid? Damian, you want to answer that?
Damian Jennette:
Yeah, this year it was 2.07%, 2.06789% to be exact, but it's off of 126 million was the accrual. It's going to be paid on March 15th, which is an off cycle payment. Obviously everybody gets paid on the fifth or the 20th. Because it's an off cycle payment that you'll have supplemental taxes taken out of it, so 22% federal, whatever your supplemental is for your state tax. And then you'll have the FICA also taken out of that as well. But you can see the before tax number on the SWAPA, we have rebooted the profit sharing estimator on the SWAPA website.
Kurt Heidemann:
We get this question every year, Damian explain the supplemental tax rate versus a pilot's individual tax rate versus withholding.
Damian Jennette:
Normally when you have your taxes, the federal income tax piece of it's going to look at what you filed for your W-4 and then it takes it out according to how much it is supposed to be for that year, long-winded answer to that. Basically just in the supplemental piece, it just takes out 22%, just whatever that number is. So it makes it a lot easier on the withholding side of it. So then it'll be readjusted at the end when you thaw your taxes, that's when you'll either owe money on it or maybe you'll get some back. But that's where that adjustment comes into play.
Amy Robinson:
The other question we get every time is why can't everyone get their own choice of cash or a qualified contribution? Can you explain that again too?
Damian Jennette:
Always a great question. So our 401k plan at SWAPA is a CODA plan, cash or deferred arrangement. And so that's where you get your choice of you putting your actual contribution in. And the difference in with our profit sharing plan is you don't get a single election and it can only be done at the pilot level, the whole pilot level. So that's why we have to do that voting each year and we just let the pilots make that decision.
Kurt Heidemann:
And with the 2% profit sharing this year, how does that compare to historic rates?
Damian Jennette:
I mean it's lower. 2014 was 9, 2015, 15, so it's definitely lower at 2%. Even 2021 was 4%. We would've actually been at about 4.2 basically what the same percentage was for last year would almost be the same percentage this year if we hadn't had the colossal meltdown of Q4.
Kurt Heidemann:
And so what does the low profit sharing for this year mean for our negotiations?
Damian Jennette:
Well, NEC and all lots of contribution, that's year guaranteed retirement piece. The profit sharing has always been variable. Well, 2020 and Q4 of this past year proved that pilots want to make sure that they get their guaranteed retirement and that's a way to do this through a higher NEC.
Amy Robinson:
Do we have a good example of what the difference is, what a pilot would've earned had we gotten the profit sharing that it was expected without the flight [inaudible 00:14:51] around Christmas time versus what it ended up being?
Damian Jennette:
Yeah, because we said before was 2.07 for this past year and we estimated about 4.2, 4.19 really. So in reality, it's basically half, right? So the average Captain was about 7,400 ish and about say, let's say 7,000, and the average First Officer was about $4,000. So that's what they're losing in profit sharing just because of basically IT failures.
Kurt Heidemann:
Has the company indicated any change to their hiring plan or I don't want to call it growth but restoration plan for 2023 based on the earnings and the fallout from the meltdown?
Greg Auld:
No, the company actually has made no changes from what they've announced. We've all seen the numbers. 2,160 pilots planned for 2023, eleven hundred and forty I believe upgrades. They haven't come off of those numbers that at all. But what's interesting is we're watching the amount of hiring come on board. They're falling short of those targets right now. That doesn't even count the pilots that are leaving as we've seen, you've seen in other communications, what is it, 85 over the last 15 months and 16 I believe already this year?
But even the entering numbers are still not on target. So I think there's a fair bit of concern that they're not going to meet those 2160 by the end of the year. They've had a couple of numbers. They've said net of 1700 accounting for retirements and some attrition, but even there, I think they're going to fall short. And so that does call into question their network restoration plans. They have said the network needs to be restored, so it's more operable, more recoverable. We couldn't agree more, but it does require the staffing to do that. So if they're having trouble meeting those numbers here in mid-February, we're not sure how they're going to meet them to the rest of the year. A small data set to be sure, but certainly worth watching.
Erich Schnitzler:
Yeah, we plan to be at over 4,000 departures by the fall and we have some big expansion coming in Long Beach and we're restoring some of our long hauls that just announced the resumption of Oakland, Baltimore. So there's certainly some questions later in the year. If we continue on the current track with pilot hiring, are we going to be able to meet these schedule commitments?
Amy Robinson:
We had heard also that the hiring was down. Is that the case for other carriers as well, or is it sort of indicative of just a Southwest problem?
Erich Schnitzler:
I mean, to be sure hiring is robust to the start of this year. You look at, for example, Delta's already hired a class of 240 in the month of January. American had just shy of 200, so there's quite a bit of hiring going on.
Amy Robinson:
By comparison, what is Southwest's hiring for January? You just said Delta was 240, was their class for January was their totals?
Erich Schnitzler:
Yes, 240 and 196 for American.
Amy Robinson:
And how about Southwest?
Greg Auld:
Southwest? I'll go back and look. 172, I believe in January, and 207 through the most recent class in February 7th that are still on this seniority list. So 207 compared to probably in the neighborhood of 270 is what we should have to be on plan. So that's like I said, a small data slice as we look at the first few weeks of the year, but it does suggest we might have trouble meeting those 2160 end strength by the end of the year.
Erich Schnitzler:
I mean, the industry as a whole, we're looking at just shy of 14,000 pilots to be hired in 2023, and you look back at 2022, we had right around that same number, 13,000 or so new hires in 2022. So really incredible growth and there's no doubt that we have to compete with a lot of other carriers for pilots right now.
Greg Auld:
Yeah, just a way to look at this is just the enormous amount of pilot hiring that the industry has done. One of the projects AFA has taken on in the last few months is just to look at the state of pilot hiring, and if you think about 21, 22 and going into 23, the industry will probably have hired north of 30,000 pilots, which is really a decades or more of hiring. It's a phenomenal number. The industry is racing to catch up. It's racing to catch up for the pilots that had lost during the pandemic and really trying to account for the growth going forward. The economy now is 20% bigger than it was in 2019. These airlines are competitive. They're trying to staff and they're trying to get back on step, and so we're seeing a huge amounts of hiring throughout the 2020s.
Erich Schnitzler:
I read an interesting statistic. Delta reported that they had lost 5,500 pilots since 2015 to retirements, regular retirements, early retirements, people leaving, just incredible the amount of turnover in the last five to six years.
Greg Auld:
The other factor in hiring is you're seeing a lot of pilots being hired twice in a year. So there is an incredible amount of churn in the industry as pilots come on with one carrier and then move to another. Just as one anecdote, I saw a statistic for Spirit hired 69 pilots in January of this year, but lost 62 for a net of seven. So one of the aspects for this enormous amount of hiring is the churn that's going on in the industry as pilots are working, are seeing better contracts, better opportunities, and moving themselves into more advantageous positions.
Erich Schnitzler:
Allegiant reported 17% pilot attrition in 2022, and they've just upped that in their latest conference call. They reported they're expecting 25% pilot attrition in 2023.
Amy Robinson:
And Southwest has lost as of this podcast, 85 pilots since December of 2021. My question is, what does that cost airlines in terms of cash outlay with these pilots leaving from one airline to go to another?
Greg Auld:
Well, I think you're asking about training costs. That's probably the easiest thing to measure, and for us to take a pilot from the interview to actually being him or her being productive on the line is somewhere between 70 and $75,000 for their pay, their benefits, the check airmen, the training center, the instructors. If you lose a hundred pilots, that's $7 million of cost.
Amy Robinson:
As far as what we've seen, the attrition for Southwest is pretty historical as well, correct?
Greg Auld:
Yeah, I looked at just the attrition we've had over the last three or four years. It's about 7% of the pilots that we've brought on have left, and these are junior pilots that leave. This is not accounting normal retirements and those kind of things, but 7% of the pilots that we've brought on have moved on to somewhere else.
Amy Robinson:
Historically, that's an anomaly, correct?
Greg Auld:
I think by any measure, that's an anomaly.
Kurt Heidemann:
Correct. Damian, I'll ask you this question. Recently, the company lowered the minimums for hiring. Has that been addressed in the negotiating room?
Damian Jennette:
Yeah, we did address that, and Carl very much pushed back on that and made sure to say over and over that the drop in the minimum turbine time down to 500 is a preferred action. They have a preference for 500 turbine, but obviously the easiest way is just to get a new contract to start really at getting to attracting that quality candidate here, but instead they're going to shift the standard to just go to a preferred of 500 turbine.
Amy Robinson:
So we've talked a little bit about hiring at Southwest Airlines. How are we doing in terms of comparison of hiring against the big four? We're looking at Southwest, Delta, United, American?
Erich Schnitzler:
Well, I think when a pilot looks at these carriers, a pretty basic 30,000 foot view is they're looking at upgrade time and obviously pay and number of pilots they're going to hire. And the hard thing is when we compare ourselves to the other three, you're looking at things like a Delta with a less than one year upgrade in an narrow body, but now less than a one year upgrade in wide body and United, less than one year upgrade in a narrow body, and the same with wide body. So it's very difficult. Obviously our upgrade is running around seven and a half years. We can't offer a wide body, of course. And then you look at the hiring numbers and those three carriers, American, Delta, United, are all hiring in the same numbers as we are. So it's incredible competition that we're up against here.
Kurt Heidemann:
What do you say to the people that say, well, it's less than a one year upgrade because it's LaGuardia, it's the big three in New York, or there's a reason why it's going so junior? What do you say to that?
Erich Schnitzler:
I would say they're absolutely right. There's no question you go to Delta to a wide body, say for example on the 767, in New York, you probably will be on reserve for four or five years. At least based on the numbers that we're seeing today. On the other hand, you are still a Captain on a wide body in New York, and that has to appeal to somebody. So people are doing it, and there's no doubt, certainly the same thing applies at United. I mean, it's no surprise that these upgrades are coming in, some people would say expensive, maybe less desirable basis because of the cost or the ability to commute there, such as Newark or JFK and LaGuardia type, the New York base for Delta.
But at the end of the day, those were awarded to pilots, so people are doing them. So I would say that that kind of choice that is available at some of these other carriers is something that we have to compete against. The idea that they have choice to fly a narrow body, to fly a wide body. There are 15 and 20 year first officers in on the A330, the A350 at Delta, and they have great schedules and they choose not to upgrade. But for other folks, that less than a year upgrade is quite desirable.
Greg Auld:
And I think that argument misses the mark because what we're really talking about in the presentation we gave in the negotiating room just last week was this is what a new candidate looks at. They look at very 30,000 foot numbers. How many hires, where are my upgrades? What's my max pay? Particularly to the younger one. This is why we are at a great disadvantage to the younger pilot when they look at Southwest without an upgrade, without a wide body upgrade right now with a contract that is still a long ways away from being finalized. Our concern is the churn that we're beginning to see and that we don't see at the larger three airlines is we're beginning to see something looking more like what the ULCCs are seeing right now. Lots of hiring, lots of departures as they move on to greener pastures.
Erich Schnitzler:
And we don't want to become that, quite frankly. We don't want to be that airline that's known as a stepping stone. We should be, and we deserve to be a career airline. Somebody comes here and they stay here for a career.
Kurt Heidemann:
You mentioned the OAL upgrade times, and I know that ours has come down from eight, nine years down to seven and a half. The company is saying that those upgrade times will continue to fall. How low can they actually get, do you think in the next couple of years?
Greg Auld:
They're not going to decrease any much more than that. Don't forget, we began hiring in earnest in 2017, 18, 19, and really even in the first couple of months of 2020. And so even at the 1100 upgrades this year, and let's just use several hundred upgrades over the next two or three years as you conjure... Do the math down the seniority list, use standard assumptions of how many will bypass and that those that bypass, then they'll finally upgrade. It still looks to be for the next several years around a seven year upgrade.
Kurt Heidemann:
So no five year upgrades anytime soon again?
Greg Auld:
I don't see five year upgrades coming.
Erich Schnitzler:
Just by the function of a single fleet. We just simply don't have the training cycles that these other airlines have. And the movement, I mean, United reported over a hundred unfilled Captain positions. There's just, with the amount of training cycles and different bases, different equipment, it's kind of an apples and orange, apples and oranges comparison when you look at us compared to just the big three and their different fleets.
Greg Auld:
Yeah, I mean, the way you get quick upgrades is either very rapid growth, which we saw in the eighties and nineties, or you get multiple fleets and you convince senior pilots to be in the right seat of a bigger airplane. That's it. That's it. That's how you get short upgrades.
Kurt Heidemann:
So you also mentioned that we had briefed the company in the room, this briefing that you're talking about now. What are some of the other things that you hit on during that briefing as far as that big snapshot view?
Erich Schnitzler:
We talked to them at about the landscape of the other airlines and the status of their negotiations. We talked to them about how United, American rejected their contracts and how the pay increases were far below at the time what has now been approved by some of these other carriers. I mean, for example, Hawaiian just approved their contract just the other day, 65% approval, and they're getting a 16% snap up and roughly 33% over four years. And they can point to industry leading cargo rates for their new A330 cargo operation that they're going to be doing.
You know, you have Spirit and JetBlue did follow on contracts two 18 month, two year follow ons on the way to their merger or proposed merger. Spirit had a 34% increase over two years. JetBlue a 27% increase. So we tried to show the company what the landscape is and what has gotten approved versus what was rejected, which seems like a long time ago. But back last fall, fall of 2022, American rejected a 19% increase over two years. United rejected a 15% increase over 18 months. And that's just in this environment now, that's just not going to cut it.
Amy Robinson:
So you were talking about other carriers contracts. When does Delta's voting close on their current TA they have out?
Greg Auld:
Our information is that it closes on the 1st of March. They've already put out a ProCon piece to their membership, and I believe voting is started. Certainly by this time this podcast is released, it will be in progress.
Erich Schnitzler:
And really when you look at the industry, you have, of course, obviously we're in negotiations, you have American and United negotiations, you have Allegiant in negotiations. Other than that, most of the other carriers that we follow, have wrapped up their contracts. Sun Country and Frontier don't come up for a couple of years and everybody else has approved contracts over the last six months. So really it's us three and Allegiant, to my knowledge, that are still out there in the negotiation phase.
Greg Auld:
Where we wound up with that conversation in the room was setting the market and for the intangibles, making the intangible tangible. While our contract has to have industry leading rates because it lacks the wide body path, it lacks some of the other things that the others can offer. We have to... Our contract is going to ask for some of the intangibles, whether that's parking or meals or uniforms, or certainly better scheduling, or certainties for commuting, certainties for the jump seat. Those are the kind of things that we have to give.
Amy Robinson:
Thank you to Erich, Damian, Greg, for taking the time to talk with us today. With all of the turmoil of the last month and on top of negotiations and earnings, we know this has been a very busy time for all of them.
Kurt Heidemann:
And as always, we want to hear from you. So if you have any ideas for us at all, please drop us a line at [email protected].
Amy Robinson:
Finally, today's bonus number is $49 million. That's the amount of profit sharing accrual the Company had to remove to account for the 800 million loss in the fourth quarter. As Damian stated, profit sharing is never guaranteed and that's why we need to secure a contract that provides a guarantee in the form of a higher NEC to protect not only the future of our pilots today, but to attract potential candidates from an ever shrinking pool.