Southwest develops cost cutting strategy amidst quarterly loss

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Published: March 29, 2012

Facing its first quarterly loss in three years, Southwest Airlines is developing a new cost reduction strategy aimed at recapturing its historical advantage over a set of rivals that have reduced costs under bankruptcy protection over the last decade.

“We’re coming up with the tools right now,” Bob Montgomery, vice president of airport affairs, told the Phoenix International Aviation Symposium today.

The details of the strategy have not yet been revealed outside the company. “We haven’t made those things public yet,” Montgomery says.

But it is clear a key element of the strategy if focused on compensating somehow for Southwest’s rising labour costs in comparison to legacy carriers. Montgomery noted how Southwest’s culture was based on having the lowest cost structure, especially on labour rates.

“Due to all the bankruptcies of all the other carriers, we got what we call the ‘Aunt Jemima’ treatment,” Montgomery explains, invoking a US brand name for pancake syrup. “You’ve been flipped. It’s a constant thing we’re talking to our unions about. It’s antithetical to our culture to have the highest cost. We don’t want to disrupt that culture. [But] we’re going to have to grapple with the cost.”

Southwest warned earlier this month that it would post a first quarter loss. The carrier’s management blamed the loss on a sharp spike in jet fuel prices during the first two months of the year.

“The real story is fuel. Our fuel bill was $ 250 million more than the first quarter of last year,” Montgomery says. “Last year we made $ 20 million in the first quarter. It’s kind of hard to sustain your profitability when fuel cost are up by $ 250 million. We have had some gains in revenue, but it has not been sufficient to stave off the fuel costs.”

Montgomery’s remarks show that Southwest has acted upon a warning issued to employees in December by chief executive Gary Kelly.

“The sloth-like industry you remember competing against is now officially dead and buried,” Kelly wrote. “Now, the enemy is our own cost creep, our own legacy-like productivity, and our own inefficiencies. Fighting this cost enemy is an imperative to remain the Maverick. We will fight, and we will remain the Maverick.”

Southwest is currently negotiating contracts with three labour groups – appearance technicians, dispatchers, and ramp, operations and provisioning and freight agents. Three more contracts with pilots, mechanics and customer support and service representative and agents become amendable later this year.

“No doubt our labour cost structure will be a central theme throughout the year,” the carrier tells Flightglobal.

However, Montgomery’s references to specific tools applies to broader issues than labour costs, the airline says.

“Battling costs is an everyday occurrence in the airline industry, whether it’s airport costs, fuel, labour, vendor contracts, etc.,” Southwest says.

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