Low-Cost Leader Southwest Calls for Concessions or Furloughs
Gary Kelly, CEO of Southwest Airlines addressed employees last night. Calling on the employees to “save each other’s jobs,” “save Southwest Airlines,” and rise up as a group in their “finest hour.”
Expressing his gratefulness for the help provided in the CARES Act and PSP, Gary shared the disappointment he now feels for federal leadership’s inability to extend protections; “we had hoped the federal government would again move swiftly, but they have not, and that is disappointing. We’ve lobbied hard and have tremendous support for extending the PSP, so it’s frustrating we have yet to see legislative action.”
With the expiration of CARES Act funding this past week Mr. Kelly stated, “the fact is, it just didn’t go far enough or long enough. The pandemic has devastated travel and tourism. Domestic air travel is at 1970’s levels, down seventy percent from a year ago.”
Setting the stage for concessionary talks the CEO goes on to state that effective immediately he will cut his “already-reduced base salary” to zero through the end of 2021, board members and senior executive salaries will continue to be cut by 20% as well.
Emotionally calling upon the warrior spirit and family dynamic of Southwest, Gary’s memo expresses the need for shared sacrifice in the face of a massive revenue drop and low passenger traffic levels. Placing job security above compensation, the memo repeatedly identifies salaries, wages, and benefits as the largest expenditure and a need to trim costs.
Mr. Kelly isn’t retracting his previous promise of no involuntary pay reductions in 2020, however, January 2021 things change swiftly unless the government extends PSP; “Effective January 1, we will reduce all remaining Leadership groups’ base salaries by ten percent.” The memo makes it clear, Southwest will be making temporary changes to compensation for non-contract employees as well.
Addressing the unionized groups of Southwest, including pilots and flight attendants, Gary states he still has the goal of no furloughs, repeating this statement multiple times in the message. Mr. Kelly doesn't rule out the possibility of deep employee cuts, “If we furlough, we’ll have to cut deep to realize adequate savings. And, cutting our capacity deeply works against our goal of driving more traffic.”
According to management, in order to “save every job” concessions are needed by January 1, 2021; “we simply don’t have time for long, drawn-out, complex negotiations,” later adding “it’s just a law of nature: we’re going to have bad times, and going to have to sacrifice in the really bad times. And, it’s really bad.”
Thank you to our trusted resources for sharing this memo with us last night.
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“Breeze Airways is a new airline that will launch in the US in the coming months, and it’s founded by the same person behind JetBlue. Breeze Airways plans to launch scheduled passenger flights in March 2021.”
“The airline is currently in Phase 3 of the certification process with the Federal Aviation Administration.”
The airline started pilot training, September 21, 2020
Breeze Airways will launch operations with Embraer 190s & 195s in March 2021 and will take delivery of its first Airbus A220-300 in August 2021
“Breeze Airways plans to operate point-to-point flights between markets that the airline considers to be underserved. This would include mid-size city pairs with no current nonstop flights, and it would also include flying into & out of secondary airports in regions.”
“Breeze will fly nonstop service between places currently without meaningful or affordable service.”
Technology will be a big focus; described the business as “a technology company that happens to fly planes”
Flight Radar 24 examines tracking data, observing recovery trends in China leading to predictions to how the US market could recover.
“International traffic is still very suppressed, and despite an easing of restrictions on the 17 September, with some foreign nationals allowed entry, international traffic is just a fifth of what it was at the start of the year.”
“Following the steep decline in traffic to just 20% of previous levels, the first phase of the recovery saw a sharp up-tick in domestic flights back to 40% as essential connectivity was re-established. However, international traffic remained suppressed and ongoing travel restrictions greatly limited demand, resulting in no recovery beyond this level.”
“The domestic traffic recovered at a steady pace of ~10% per month, with the LCCs recovering astonishingly quickly – by May, Spring (the largest Chinese LCC) was already flying over 100% of flights on a Year-on-Year (YoY) comparison.”
The recovery is being led by ULCC ‘Spring’ Airlines with “LCC flights both decreasing less than full-service carriers (FSC) and recovering faster. The LCC recovery is led by Spring airlines, which the end of August was flying more than 150% compared to last year”.
Domestic Full-Service carriers have also recovered to 100% but international flights continue to be down 80%.
“Analyses suggest that at least part of the rapid recovery in China is due to extreme ticket discounts, with flights sold at just 10%-20% of their usual prices. With their lower cost base and the example set by Chinese traffic, it seems highly likely that LCCs in Europe and the US will seize higher market shares than before the pandemic.”
“Entering 2020, Alaska Airlines had 71 Airbus jets in its fleet, compared to 166 Boeing 737s. Furthermore, all of its firm orders for mainline aircraft are for the 737 MAX, although Alaska also has 30 cancelable orders for the A320neo.”
“All but 10 of Alaska's Airbus planes are leased, and about two-thirds of those leases are scheduled to expire between 2021 and 2023.”
“Earlier this year, the carrier disclosed that it had permanently parked 12 Airbus jets, including all 10 of its A319s.”
“Alaska said that it had decided to go ahead with borrowing up to $1.9 billion from the federal government under a secured loan program included in the CARES Act. Buried near the end of the filing was a statement that "management has authorized a plan to retire 10 owned Airbus A320 aircraft earlier than previously scheduled," leading to an impairment charge between $115 million and $125 million.”
“Just to replace its Airbus planes on a one-for-one basis, Alaska would need dozens of 737 MAX jets beyond what it already has on order. Including replacements for the oldest Boeing 737s in its fleet today and aircraft to support growth plans toward the middle of the decade, Alaska Airlines could easily order 100 or more 737 MAX jets for delivery over the next five to seven years.”
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