Southwest CEO: ‘The ship is taking on water’

Southwest CEO Gary Kelly told employees Friday that “the ship is taking on water,” referring to the airline’s financial struggles amid the coronavirus pandemic.

The Dallas-based airline lost $1.16 billion in the third quarter, and Kelly said earlier this month that employees would need to take a 10 percent pay cut to avoid layoffs and furloughs in 2021. The pay rate reduction is worth over half a billion dollars, Kelly said. The CEO said he has “scoured” every area of the business except salaries, wages, and benefits for savings and “can no longer afford to leave that stone unturned.”

If Congress extends the payroll support program, salaries, wages, and benefits — the airline’s largest expense — will be taken care of through 2021, Kelly said, and pay cuts will be discontinued or reversed.

Airlines are seeking $25 billion for employee pay for the next six months after payroll support from the CARES Act expired Sept. 30. Tens of thousands of U.S. airline employees have been furloughed this month, with more expected in the weeks ahead, aviation unions and airline industry groups wrote in a letter to congressional leadership asking for the support. Southwest has not furloughed employees.

“I don’t want a furlough,” Kelly said. “It’s painful for everyone. And a 10 percent pay cut is painful, too. I know that. But the reality is, we’re in a real pickle. And we have to ask for everyone to step up and do their part to help.”

Salaries, wages, and benefits make up more than half of the company’s operating cost, he said, and operating costs are 80 percent higher than revenues right now. Southwest is 20 percent overstaffed, which is costing the airline a billion dollars a year, Kelly said.

“I need you all to understand we’re in a dangerous situation,” Kelly said. “The ship is taking on water, and we cannot ignore the problem.”

As for ways of generating revenue, he’s been asked about restarting alcohol sales, Kelly said. There are health and safety concerns with that decision, he said, because customers may have to take down their masks more often during flights. And, though every little bit helps, alcohol sales represent “relatively small dollars,” he said.

Some have suggested the airline begin charging for bags, Kelly said.

“We have no plans to charge for bags,” Kelly said. “We have extensive data and analysis that shows, with our brand, we would lose more passengers and more revenue than we would gain from charging bags.”

But Southwest will stop blocking middle seats Dec. 1, Kelly said.

“To date, demand has been so weak that blocking the middle seat hasn’t hurt us,” Kelly said. “But beginning this month and into the holiday season, we can see lost revenue, and the value of selling the middle seats is significant and will provide additional key revenue for us. And, most importantly, now science supports selling all seats from a safety and a health perspective and that has been widely reported.”