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A Look At The Impact Of The Latest Pilot Agreement At Southwest Airlines

Summary

The latest pilot contract at Southwest Airlines seems to be much better recieved than the previous one was and seems likely to be voted in.

The pilot contract offers many positives for Southwest such as the ability to codeshare, interline, and approval to operate the Boeing 737 MAX.

At the same time however the wage increases in the pilot contract seem very steep and will put Southwest at a cost disadvantage against both low cost and some full.

Img 1: A Southwest Airlines Aircraft

After many delays and back and fourth between management and union officials, a pilot contract for Southwest Airlines (NYSE:LUV) pilots has finally been put together. Below I outline the positives and negatives resulting from the latest contract, starting with the negatives.

Negatives

Img 2: CASK Vs Avg Trip Length 2015

The pay raise at Southwest will result in a substantial operating cost increase, and potentially make Southwest less competitive. The contract outlines a 15% immediate wage increase followed by 3% raise per annum. I argued in a previous article about Southwest that "artificially low costs" were driving some of the airline's strong operating results. Part of this was pilot wages that were below were they should have been due to continued delays in coming up with a new pilot contract. The concern going forward is that the difference in pay between Spirit and Southwest pilots will make Southwest unable to profitably compete on price against the ultra low cost airline. An inability to do so would allow Spirit to push into and steal market share from Southwest on more price sensitive routes. The chart above shows the 2015 operating costs of the major U.S airlines and can be used to get an idea of where the raise will leave Southwest.

Despite the concerns, pilot wages at Spirit are likely to change in the not too distant future as the airline also works out a new contract with its pilots, however it seems very unlikely they will come close to...


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