Will Southwest Lose Some of the LUV?
By WSJ Staff
Journal reporter Mike Esterl writes:Those famously cheerful smiles aboard Southwest Airlines could become a little more strained in the coming months.

The giant discount carrier has long had a feel-good vibe on board and at the check-in counter, partly because the company has never had layoffs in its 38-year history. Or any bankruptcy filings, which have caused other airlines to slash employee wages and benefits.

Southwest struck pay-hike deals with unions in recent weeks with a minimum of fuss. Contrast that with American Airlines, currently mired in protracted and poisoned negotiations with most of its workers.

But Southwest management is finding it tougher to be generous now that it has posted three straight quarterly net losses. On Thursday the airline said it plans to reduce staffing and will offer voluntary buy-outs, available to almost all of its 35,500 employees. It’s the third such offer in the past five years; a bit more than 1,600 took buyouts in 2004 and 2007.

CEO Gary Kelly, known for dressing up in funny outfits to keep spirits up at Southwest’s Love Field headquarters, says management hasn’t set a firm number for workers it must shed. Offer terms have not been made public and will reach employees in early May. But it’s quite possible a lot of them won’t be willing to walk in the midst of a prolonged recession.

That could force some tough decisions. Southwest management has long held that treating employees well means they’ll treat customers well and business will do well as a result, making shareholders happy.

Mr. Kelly says layoffs remain a last resort, but he also acknowledged in a conference call Thursday that all options are on the table during a dramatic downturn in travel.

Mr. Kelly said he could envision a scenario of forced layoffs if the company has to cut its fleet size by around 10%. Southwest isn’t there yet. But it has put fleet expansion plans on indefinite hold. That’s in contrast to previous industry downturns, when Southwest used the opportunity to aggressively gain market share. He also said if conditions continue to deteriorate, he could at some point ask workers for pay concessions.

Southwest’s overall cost structure remains low, thanks in part to the simplicity of its business model. But its labor costs — adjusted for capacity — were second only to American among 13 big carriers last September, according to the federal Bureau of Transportation. In the first quarter of this year, its workforce grew 2.1% and its labor costs rose 4.5% over the same period in 2008, even as capacity shrank 4.1% and revenue fell 6.8%.

Those kinds of numbers don’t usually put smiles on the face of shareholders or employees.