The State of the Airline Industry: As Seen by the CEO of Southwest

 

Gary Kelly, the CEO of Southwest Airlines, put out an extraordinarily candid letter to employees this week. In it he succinctly summarizes the state of the airline industry, and of Southwest in particular. You can read the letter, in its entirety, here. Here are some key parts to look for...

"If American Airlines emerges from the ashes of bankruptcy, and I believe they will, you can be certain their costs will be substantially lower, especially their labor and aircraft costs. If they can't achieve that, they will cease to exist (like Pan Am, Eastern, Braniff, and TWA). If they do emerge from bankruptcy, as I believe they will, they will join the New United, New Delta, and New US Airways as giant, lower-cost airlines. They are, collectively, much more formidable competition than their predecessors. The term, “Legacy Carrier,” no longer will apply."

Here's the takeaway: contrary to what a lot of people think, the "legacy" airlines have been doing a good job of competing with Southwest. When American emerges from bankruptcy, it will be an even stronger competitor.

"Our labor rates are now, far and away, the highest in the industry. Through bankruptcy, very large New Airlines have emerged with lower rates than us and better productivity. Next to fuel, labor is our highest expenditure. We can't have lower overall operating costs if our labor costs aren’t lower. We can't have lower labor costs if we aren't more productive. The good news is that we have a lot of opportunities to improve our productivity, eliminate waste, and preserve our pay rates and benefits for the foreseeable future. Its crucial that we take advantage of those opportunities."

The takeaway: Southwest needs to get its house in order.

 

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