Bloomberg News

Southwest Fights ‘Cost Enemy’ as AMR Bankruptcy Raises Pressure

December 16, 2011

Dec. 6 (Bloomberg) -- Southwest Airlines Co., 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. 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.

Southwest was unchanged at $8.47 at 12:40 p.m. in New York. The shares gained 7.6 percent through yesterday from the day before AMR’s filing.

Not Seeking Concessions

Kelly’s message was in response to questions from employees about how Fort Worth, Texas-bases 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.”

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

--Editors: John Lear, Niamh Ring

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


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