Southwest pilots trade wage increases for stock


NEW YORK -- Employees of many airlines in recent years have exchanged pay and privilege for company stock. The idea was to stanch the carriers' heavy losses and let them compete with low-cost competitors, most notably Southwest Airlines Co.

Southwest is about to turn the tactic back on its rivals. The airline's pilots union agreed yesterday to freeze members' wages for five years in return for options to buy Southwest shares and a possible share of future profits.

If the pilots vote for the agreement, as expected, Southwest's competitors may be right back where they started.

The pilots' negotiators agreed to a 10-year contract, remarkable enough in itself. They agreed to keep pilots' pay where it is for five years and then take 3 percent pay increases in three of the remaining five years.

For its part, Southwest will offer the pilots stock options for about 1.4 million shares in each year of the contract. Southwest now has about 143 million shares outstanding. The airline also said the pilots would be "eligible for additional compensation" based on Southwest's profitability, but it gave no details on that.

The agreement stunned the industry and puts even greater pressure on big carriers to reduce their labor costs to compete with Southwest and other low-cost airlines.

Southwest pilots' salaries already are about 10 percent less than those of pilots at other big airlines, though they also get paid in stock, Merrill Lynch & Co. analyst Candace Browning said.

The proposed contract "makes it clear to competitors that Southwest will remain the low-cost leader," Ms. Browning wrote in a report yesterday. "The contract was also remarkable in that it was negotiated quickly with no public rancor on either side," the analyst said.

By contrast, talks between USAir Group Inc., which seeks to reduce its annual labor costs by $500 million, and its pilots resumed this week with the help of a mediator. Last month, AMR Corp.'s American Airlines and its flight attendants finally told an arbitration panel to work out a new contract, something they couldn't accomplish in two years.

Southwest Air's 10-year contract proposal isn't just rubbing it in. New competition from airlines with labor concessions is stealing passenger traffic from the Dallas-based carrier.

United Airlines began a cut-fare shuttle service in California last month. Southwest responded by adding 15 daily flights to its California schedules. Later, it increased the number of its daily flights from Los Angeles to Las Vegas from 14 to 19 and cut its one-way fare on the route to as little as $31.

Southwest's load factor, the percentage of seats filled on its flights, declined in each of the past three months. In October, the load factor fell to 65 percent from 68 percent in the same month last year.

Chairman Herb Kelleher said November's load factor probably would fall too, and analysts say the pattern will continue until Southwest enters new markets next year.

Southwest's profits have held up despite increasing competition. They rose 20 percent, to $58.6 million, or 40 cents a share, in the third quarter and totaled $159 million, or $1.08 a share, in the first nine months.

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