Southwest Airlines Targets Pay Cuts in Bid to Avert Layoffs

(Bloomberg) -- Southwest Airlines Co. will seek to cut employee compensation in a last-ditch effort to avoid the first involuntary layoffs in the company's 49-year history.

The company wants to have givebacks in place by Jan. 1, Chief Executive Officer Gary Kelly told employees in a video message Monday, warning that “we all need to sacrifice more.” Kelly won't receive a salary through the end of 2021. And 20% pay cuts for senior executives will continue next year as the company contends with a travel collapse caused by the coronavirus pandemic.

“We would have to wipe out a large swath of salaries, wages, and benefits to match the low traffic levels, to have any hope of just breaking even,” Kelly said. “Absent substantial improvements in our business, our quarterly losses could be in the billions until vaccines are available, distributed, and effectively kill the pandemic -- and at best that is looking like late next year.”

Kelly delivered the warning as House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin continue to negotiate a broad economic relief plan that would include $25 billion in payroll support for passenger carriers -- a six-month extension of an earlier aid package that expired Sept. 30. Southwest would abandon efforts to cut pay if the government provides additional help, Kelly said, adding that he has “not given up hope” for the extra aid.

Union Warning

U.S. carriers have furloughed about 38,000 since Oct. 1, including major layoffs at American Airlines Group Inc. and United Airlines Holdings Inc. Those cuts followed the departure of 150,000 who left airlines voluntarily or accepted leave.

Southwest's pilots union said it recognized “the seriousness of the situation we are in” and said it would meet with management.

“However, agreeing to discussions is very different than agreeing to concessions,” the union said in a statement, warning that there were limits to how much the company could cut costs “on the backs of labor.”

Employee costs often jockey with fuel as the largest expense for airlines, and Southwest has warned since April that plummeting demand might force it to seek labor concessions or end its streak of avoiding layoffs and pay cuts. About 17,000 employees already have left the Dallas-based carrier temporarily or permanently through voluntary programs.

10% Cut

“This is the singe largest and best cost-reduction idea that we have,” Kelly said in an interview. “The thing that's exciting here is we have a path to avoid any layoffs, any furloughs.”

Company leadership groups will take a 10% pay cut next year and it would be a “logical conclusion” to assume that Southwest will seek a similar reduction for employees, Kelly said.

Southwest has received nearly $3.4 billion in federal payroll support. The company had $14.5 billion in cash and short-term investments at the end of June. It burned $17 million a day in the third quarter, Kelly said.

Domestic travel demand remains about 70% below a year earlier as the pandemic and related quarantine restrictions gut demand. A moderate uptick that began in August continued through September, and Kelly said he hoped improvements would continue each month through year-end. But it will be “far from closing the gap,” he said.

“It pains me that through no fault of any of you, we have to take these next steps,” Kelly told employees. “it's just a law of nature: We're going to have bad times, and going to have to sacrifice in the really bad times. It is really bad.”

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