Will Southwest’s Latest Contrarian Stance Pay Off?

Southwest Airlines is a low-cost airline that gives plenty of value to its employees, its customers, and its shareholders. Famous for their founder Herb Kelleher’s contrarian stances, they bucked the trend of the many struggles that other airlines suffered, even before COVID-19.  In its almost 50 years of operations, Southwest Airlines has not had a single layoff or pay cut for any employee, while maintaining its profitability.[1]

Airlines all over the world got caught in the turbulence of the pandemic. In the US, airlines received federal funding in March from the CARES act, provided they protected employees from lay-offs until September. In July, both American and United announced at least 30,000 layoffs from October 1, if federal funding was not extended. In July, Southwest committed to no layoffs until the end of 2020.

October 1 happened; no federal funding was extended to any airline. Southwest stuck to its contrarian stance: Employees come first (customers are second.)

CEO, Gary Kelly shared a plan to keep jobs until the end of 2021, which includes:

  1. Effective immediately until the end of 2021, his salary is reduced to $0.

  2. The board’s cash fees and senior executive base salaries will continue to be reduced by 20 percent until 2021.

  3. All employees in other leadership roles will have a 10% pay cut from Jan 1 until the end of 2021, with a snap back guarantee on Jan 1, 2022.

  4. And for the employees in unions, he will approach union leaders about concessions to avoid lay-offs.

  5. And if funding is made available for payroll support, all these pay cuts would be reversed.

How can Southwest Airlines afford to be that generous when they’re making only 40% of their usual revenue today?

Their founder’s credo of “Manage in The Good Times to Protect the Company in The Bad Times” meant they were actually tight in budgeting and deplored debt despite their flamboyant marketing. This helped them save cash for at least 2 years of bad times.

Their latest contrarian stance is not in standing by Herb’s vision of keeping Southwest job-secure for their people, but in their solution to keep this true.

Economists have long advised that layoffs are better than pay cuts during a recession since pay reduction creates a worse situation of unemployment and decline[2] because a pay-cut would impact morale and productivity.  COVID-19 has challenged this model. By seeking pay cuts, Southwest is saving jobs and providing hope that they will all still be flying as a new normal develops every day. It’s safe to say we’re all hoping their latest contrarian stance will pay off.

Got a view about this? Let’s have a chat.

[1] Source: CNBC, Southwest CEO shares the secret to why they’ve never had to layoff a single employee, or cut pay, December 2016

[2] Source: Federal Reserve Bank of San Fransisco, Downward Nominal Wage Rigidities Bend the Phillips Curve, January 2014

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