It's been a disastrous few months for the airline sector. First, airlines spent several months closed down outright by government mandate. Then, they spent several months open, but very few if any actually cared as business travel was replaced by extensive videoconferencing and personal travel was replaced by lockdowns and home renovation. Yet some exciting developments have occurred in the space, and one of the latest features Southwest (NYSE:LUV), who gained one percent in pre-market trading by looking to employees to help balance the books.
Spreading the Anti-Wealth
It's no secret that airline revenues have been in free-fall for the last few months, and Southwest decided the way to address this would be to effectively farm it out. Rather than costing employees jobs, Southwest looked to the employees to ask them to do something contrary to their own survival instincts, but something that would likely—or perhaps hopefully—pay off in the long run.
Southwest decided to spread the necessary cost reductions around by calling for employees to take pay cuts, a move which would keep layoffs, furloughs and other such job-ending terms off the table through 2021. While Southwest and other airlines have been frantically petitioning the government for an extension to the stimulus acts that helped keep them aloft over the last few months, such support has been slow in coming as the terms of new stimulus are bickered over endlessly in Congress.
Gary Kelly, Southwest's CEO, took to a video to elaborately and profusely congratulate Southwest employees, calling them “heroes” who “performed magnificently” before calling on said employees to voluntarily take pay cuts to “save Southwest Airlines.” Anyone who might have had a sour taste in their mouths from that little nugget, however, would do well to remember that Kelly's own base salary, already reduced, drops to zero for the entirety of 2021. The board of directors and senior executives likewise also took cuts, losing 20% of their pay and staying that way through, again, 2021. Kelly also noted that, should the stimulus programs kick back in, pay cut efforts will likewise fall away.
Fighting Back From the Brink
Such a move is actually good news for Southwest, even though it sounds like a disaster on the hoof. It's worth noting how other airlines have responded to the market conditions, generally with the furloughs and layoffs that Southwest worked so hard to avoid.
Additionally, Kelly even noted that the company was working hard on “playing offense,” working to bring old customers back to the flights, bringing new customers in for the first time, and even adding new cities to its flight plans. This is a marked difference from strategies seen at other airlines; back in August, we heard that American Airlines (NASDAQ:AAL) was looking to lose 30 destination cities, and back in June, Delta (NYSE:DAL) planned to stop flights for 11 cities.
Such a move has already been seen in operation; Southwest recently announced it was giving high school teacher Mike Brown 40,000 rapid rewards miles in a bid to help him with a project he was undertaking at his own expense. Brown, who has been teaching remotely as many schools call for these days, was teaching classes from actual historical sites along the East Coast, like Civil War battlefields and other national monuments.
Analysts, meanwhile—based on our latest research—have rewarded such an attitude by suggesting that potential investors buy in. With 21 analysts currently covering the stock, six carry a “hold” rating, 14 carry a “buy”, and the last holdout is all the way at “strong buy”, with price targets for the last three months running between $36 and $56 dollars, suggesting substantial upside as the company currently trades at $38.75 as of this writing.
A Competitive Edge in the Making
Basically, Southwest is putting itself in an excellent position going forward. If there's any kind of recovery in the travel sector, Southwest will have first-mover advantage as its competitors scramble to restore service to cities they temporarily threw over to save money. As we get closer to a vaccine and develop therapeutic measures we may well pull it off—remember President Trump managed to apparently beat coronavirus with a three-day weekend in the hospital—and as more travelers get back in planes and in the air, the end result will give Southwest the edge first.
Undoubtedly, Southwest's move to cut the pay of “heroes” who “performed magnificently” will feel like a kick in the teeth to said “heroes” who are rewarded for their magnificent performances with less money. Since said heroes will keep their jobs, however—and are currently employed in an environment that's engaging in furloughs, layoffs, and destination cuts in large numbers—they may be willing to stick with Southwest through the hard times. That may be just what the company needs to be ready to bounce back stronger than ever once air travel comes back, and put Southwest in the market leader position.
Companies in This Article:
