Southwest Fights ‘Cost Enemy’ After AMR Bankruptcy Filing

By Mary Schlangenstein - Dec 7, 2011 4:05 AM GMT+0700

Southwest Airlines Co. (LUV), the biggest fare discounter, said it faces more pressure to trim labor and operating costs since American Airlines joined other larger rivals in using bankruptcy to pare spending.

Southwest’s cost advantage over so-called legacy carriers such as American and Delta Air Lines Inc. has fallen by half and its fares have moved closer to competitors’, Chief Executive Officer Gary Kelly told employees in a memo yesterday. As a result, Dallas-based Southwest faces a more serious threat from now-profitable peers, he said.

With American’s Nov. 29 bankruptcy filing, Southwest is the only major U.S. airline never to have sought court-supervised restructuring. Southwest has relied on higher productivity from its employees and luring more passengers with low fares to sustain its record of 38 consecutive annual profits.

“The sloth-like industry you remember competing against is now officially dead and buried,” Kelly said. “We fought them and we won. Now the enemy is our own cost creep, our own legacy- like productivity and our own inefficiencies. Fighting this cost enemy is an imperative.”

Southwest has the industry’s highest labor rates, and Kelly urged workers to take advantage of opportunities to “improve our productivity, eliminate waste and preserve our pay rates.”

American and parent AMR Corp. (AMR) filed for bankruptcy in part because they failed to negotiate new contracts with employees that would boost productivity and trim labor costs that as a percentage of revenue are the highest in the industry.

‘More Competitive World’

“Gary Kelly is right,” Jeff Kauffman, an analyst at Sterne Agee & Leach Inc. in New York, said in an interview. “The edge they used to have in the domestic marketplace is gone and it’s a more competitive world for Southwest.” He rates the airline’s shares “neutral.”

Southwest rose 0.9 percent to $8.54 at the close in New York. The shares have gained 8.5 percent since the day before AMR’s filing.

Kelly’s message was in response to questions from employees about how Fort Worth, Texas-based American’s bankruptcy would affect Southwest and wasn’t a call for concessions from workers, Chief Financial Officer Laura Wright said at a Rodman & Renshaw airlines conference today in Boston.

The CEO’s memo lays out “how important it is for us to retain our spot at the top in terms of low costs,” she said. “That was really kind of the battle cry. I wouldn’t say that there was anything in there that was asking for concessions.”

Preparing for Talks

Southwest is preparing to negotiate new labor contracts as it integrates workers from the May acquisition of AirTran Holdings Inc.

Spokesmen for unions representing Southwest’s pilots and flight attendants didn’t immediately respond to calls or e-mails seeking comment.

“Their people are oriented toward always looking for a different way, trying to get more productivity,” said Bob McAdoo, an Avondale Partners LLC analyst in Prairie Village, Kansas. “It’s a culture always looking for a way to do more with less.” He rates Southwest “market outperform.”

Southwest has never furloughed workers, although 1,400 employees took voluntary buyouts in 2009. It was the airline’s third such effort, and the first that was made companywide.

To contact the reporter on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net