In a video to employees Monday, Southwest CEO Gary Kelly announced that the airline will need to "sacrifice more" by undergoing pay cuts in an effort to avoid layoffs and furloughs through 2021 amid the coronavirus pandemic's ongoing impact on travel demand.
The announcement comes as the airline industry has been pleading for an extension of the payroll support program allotted under the Coronavirus Aid, Relief, and Economic Security (CARES) Act which Congress passed in March following the expiration of the $25 billion bailout on Oct.1.
Kelly noted that since the act's Payroll Support Program (PSP) has expired, that Southwest "simply cannot afford to continue with the conditions required to maintain full pay and employment," Kelly said.
Applauding his employees, stating they "all have performed magnificently" and called them "our heroes" but the CEO of 12 years said, "now its time for us to do what must be done to save Southwest Airlines."
While Kelly said he remains grateful for the six months of previous payroll support, he argued that it "just didn't go far enough or long enough," with domestic air travel dropping to "1970s levels" during the pandemic, down 70% from a year ago.
"Cost and spending have been cut dramatically at Southwest, but not nearly enough to offset a 70% revenue loss," Kelly noted. "Salaries, wages and benefits are far and away our largest cost item, and 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."
He also warned that the airline's quarterly losses could be in the billions until a vaccine is available, distributed, and can "effectively kill" the virus, which may not be until late next year.
"We had hoped the federal government would again move swiftly, but they have not and that is disappointing," Kelly added. "We have lobbied hard and have tremendous support for extending the PSP, so its frustrating we have yet to see legislative action."
Effective immediately, Kelly's already reduced base salary will be zero, which will continue through the end of 2021. Meanwhile, previously announced reductions in fees for Southwest's board of directors and the base pay of the airline's senior executives, which have already been reduced by 20%, will also remain that way through the end of next year.
In addition, the remaining leadership groups' base salaries will be reduced by 10% starting January 1, 2021 until the following year. The reductions will also impact Southwest's non-contract employees in an effort to avoid their layoffs through at least the end of next year.
While Kelly has promised union employees that his goal is to avoid furloughs, he warned that the option would be used as a "last resort" if Southwest and its unions "fail reach agreement on reasonable concessions."
"We simply don't have time for long, drawn-out negotiations, and I've instructed our company's labor team to take a simple approach," Kelly said.
He added that if the PSP is extended through next March, the pay cut efforts will be discontinued or reversed.
Kelly stressed that the company is focused on driving traffic, winning back old customers, and gaining new customers, noting the company is "playing offense" by adding new cities to its schedule.
"If we furlough, we'll have to cut deep to realize adequate savings and cutting our capacity deeply works against our goal of driving more traffic," Kelly said. "We need the cost savings and the people, it's as simple as that."
Southwest's plan comes as its competitors have already begun workforce layoffs.
|LUV||SOUTHWEST AIRLINES CO.||42.45||+0.72||+1.73%|
|UAL||UNITED AIRLINES HOLDINGS INC.||43.08||+1.51||+3.63%|
|AAL||AMERICAN AIRLINES GROUP INC.||16.13||+0.63||+4.06%|
Southwest stock closed at $38.49 per share at the end of Monday's trading session and is down slightly during after-hours trading.