The Southwest Airlines pilot union sent its members a note in the aftermath of their airline’s meltdown, diagnosing the core issues and challenges at the company. It’s a mix of correct analysis and hobby horses.
Tom Nekouei, 2nd Vice President of SWAPA, mostly dumps on former CEO Gary Kelly, who retired early in 2022, and correctly flags that the company has deferred technology investment for decades. However he also goes down the rabbit hole of stock buybacks, repeating the incorrect trope that buybacks increase share price.
In doing so he tries to connect choosing to underinvest in technology as a way to increase shareholder return. Only it doesn’t do that, quite the opposite! It may mislead investors for a time into thinking that the business will run on lower costs, but the investment deficit will need to be made up, and the year-end debacle at Southwest will cost the airline hundreds of millions in lost revenue and in traveler reimbursements. That’s ultimately bad for shareholders.
Here’s the full analysis:
YOUR SWAPA LEADERSHIP
December 31, 2022
Tom Nekouei, 2nd Vice President
“You put your employees first. If you truly treat your employees that way, they will treat your customers well, your customers will come back, and that’s what makes your shareholders happy. So there’s no constituency at war with any other constituency. Ultimately, it’s shareholder value that you’re producing.”
— Herb Kelleher
“Arguably, our shareholders have suffered for a long time when it comes to getting a return and our employees have been very well taken care of.”
— Gary Kelly
How did we get here? How did we go from the most stable and profitable airline in history to the greatest meltdown in airline history? As with most organizations, the answer can be distilled down to one word: Leadership. Actually, in our case, it’s three words: Lack of leadership. While we continue to receive saccharine corporate-communications-department-written and legal-counsel-reviewed “we’re sorry” and “I love you” meaningless and generic messages from SWA corporate executives, they obscure a genuine cancer within our Company that has been an ever-growing existential threat that must be excised before it becomes terminal. And these messages obfuscate the actual corrective action that is absolutely necessary to pull out of this graveyard spiral that our Company’s so-called leaders have placed us in. That fix is actual and tangible accountability above the front-line worker level for the first time in our recent history. It is time to have a frank discussion about the root cause of the quagmire that we find ourselves in today. That root cause has a name.
Systemwide meltdowns at Southwest Airlines have been increasing in frequency and magnitude over the past 15 years. From the original Midway Meltdown (and then the second larger one 1/3/2014) to destroying our on-time-performance with the added “virtual airframes” experiment to the “router brownout” (2016) to the “Jacksonville Center debacle” (Columbus Day weekend, October 2021) to what we are experiencing today, there are two common threads that bind each of these incidents together.
First, they were all results of conscious operational, manpower, or tech infrastructure investment decisions made at the senior levels of our Company.
Second, there has never been any real accountability for the decision-makers as a result of any of these fiascos, or the numerous smaller ones in between. If the saying that “insanity is doing the same thing over and over again while expecting different results” is true, then what is it when the same people are allowed to do the same thing over and over again? Supreme insanity, perhaps?
Herb’s legacy and the culture he built from the ground up was centered on his employees and empowering them to make proactive decisions at the lowest level possible. However, the culture that Gary Kelly ushered in with his ascension to the throne was the exact opposite. Gary’s vision was to become the darling of the investment community while building an insulated and vertical hierarchical structure where all decision-making authority was slowly stripped from front line experts with the most situational awareness and moved further up the cubicle chain in Dallas far removed from line operations. During that time, he took our Company from being known for our personality and agility to becoming a classic technocrat’s dream with an explosion of stove-piped vice-presidential fiefdoms that all communicate vertically with little-to-no horizontal integration.
Rather than keeping the organization flat and lean with minimum distance between the nerve center of the organization and its executing appendages as Herb had originally designed, he added layer upon layer of bureaucratic fat, staffed by corporate automatons whose defining skills are sheltering the boss from bad news from below and never disagreeing with him. In his two decades at the helm, Gary Kelly managed to build an organization of yes-men and yes-women around him and promoted within that organization, based on agreeability rather than competence. As Pilots, we need look no further than the string of milquetoast headquarters “leadership” we have been subjected to within our own operations stovepipe in the Company. Additionally, one need only look at last week’s viral memo from the SWA VP of Ground Ops to his workers in Denver to see how far Gary Kelly allowed this Company to deviate from the culture and principles that Herb cultivated. Despite negatively impacting our Denver operation in a concrete manner and humiliating SWA on a national level, this VP remains in his position and will likely do so indicating the tacit approval for his “leadership” style by SWA executives. If nothing else, the world now knows that SWA management embraces the words of Herb’s legacy for public relations purposes only while having completely abandoned them in deeds. Image versus reality.
With the above changes instituted by Gary Kelly came the proliferation of single-points-of-failure within our Company’s individual stovepipes, and at the top of that operational stovepipe as Chief Operations Officer, Gary Kelly installed another accountant and friend, Mike Van de Ven. And just like that, we were suddenly an operational flying and customer service company with the top three positions occupied by three holders of bachelor’s degrees in accounting from the University of Texas. A recipe for operational ignorance and collective groupthink. A monetization of the once vaunted Southwest culture and instead turning it into a headquarters-centric cult. A good old boys and girls network indeed. While this would temporarily bode well for our shareholders for the last decade, it slowly eroded our Company from within to set the stage for our current and complete meltdown.
While altering the personnel culture around Southwest Airlines headquarters, Gary Kelly also instituted an obsessive focus on cost-control to increase shareholder return, turning Herb’s founding philosophy on its head. He introduced the much-ridiculed term Return On Invested Capital, or ROIC, to Southwest Airlines.
Herb Kelleher once said that his greatest mistake was not embracing and investing in technology. This was a prescient warning to his successor, but it was one that his successor chose to essentially ignore for 20 years in his obsessive quest to maximize ROIC. Twenty years when the importance of technological infrastructure was going from “nice-to-have” to “must-have.” A fantastic accountant, Gary Kelly’s lack of strategic vision beyond a singular focus on increasing revenue at all costs has come to result in the grievous injury our Company is suffering through today.
During Gary Kelly’s tenure as CEO, Southwest Airlines has returned approximately $12 billion to shareholders while increasing his own total annual compensation by more than 700%. Much of that money was spent executing billions of dollars in share buybacks. Share buybacks that were once illegal, that provide no benefit for the Company itself while artificially inflating share prices (thus inflating stock-based executive compensation) and sent the clear message that the Company has excess cash on hand but that the CEO thinks there is no better place for investment of capital within his Company. All while there were clear and constant signals that there were aspects of our operations that were in desperate need of significant investment and upgrade. And all while subject matter experts, including our analysts at SWAPA, pleaded with management to make the investments into our tech infrastructure before we suffered an existential meltdown.
Even as recently as early November, SWAPA President Casey Murray said, “I fear that we are one thunderstorm, one ATC event, one router brownout from a complete meltdown. Whether that’s Thanksgiving, or Christmas, or New Year, that’s the precarious situation we are in.”
SWAPA has been beating this drum to management for nearly a decade pleading with them to spend the necessary capital to prevent the ultimate consequence someday. As CEO, Gary Kelly made a conscious decision to make the less than necessary investments in tech upgrades in favor of maximizing shareholder return because, well, “our tech’s been working ok for 20 years.” While Gary’s financial acumen cannot be debated, his poor operational leadership and judgment have been demonstrated repeatedly with each meltdown and finally laid bare with the current situation we find ourselves in. A situation only exacerbated by the fact that he chose to surround himself with people who dare not disagree with him. However, while remaining the current Chairman of the Southwest Board of Directors, Gary did manage to hand over CEO reins to Bob Jordan this year before the ultimate consequence of Gary’s lack of investment in his own Company manifested itself. Meanwhile, Gary basks in the glow of a shelf full of awards from the business, finance, and investment world while they all completely ignore the internal damage he did to our Company in pursuit of those accolades. The airline darling of Wall Street who Gordon Gekko’d his own company from within through greed, ambition, and neglect for the operation itself.
The Vote of No Confidence in Gary Kelly and Mike Van de Ven that your SWAPA Board of Directors took in 2016 after what was, at the time, the worst meltdown in our Company’s history has never been rescinded. We took that vote then because it was evident that neglect for tech infrastructure investment in favor of maximizing stock price was becoming an existential threat to our careers and our Company’s longevity. We took that vote as a symbolic message to Gary Kelly in an attempt to wake him up to the fact that, while he may be the darling of Wall Street, his employees knew that he was risking the future of the Company we love through his lack of focused investment to fortify our operation. But instead, Gary Kelly continued his aggressive growth of the network in the pursuit of ever-increasing revenue without the commensurate investment in tech infrastructure necessary to support that explosive growth. A classic symptom of the “but that’s how we’ve always done it and it has always worked” sickness within our corporate leadership while ignoring the reality that “it has always worked” because the network was much smaller.
And now, Gary Kelly’s chickens have come home to roost. In true Southwest fashion, our executives continue to apologize and “accept responsibility” out of one side of their mouths while making banal excuses that deflect from the true cause out of the other side. “Unprecedented storm,” “employee no-shows,” “decreased pick-up rates,” “point-to-point network,” and the list goes on. While many of us thought that perhaps this event would be the final straw that snaps the Southwest Board of Directors out of their fiduciary slumber and wake them up to the fact that they have allowed Gary Kelly to be an unchecked one man show to the eventual detriment of the Company itself, it is clear that Southwest management is circling the wagons as they have always done in the past. No acknowledgment of the magnitude of the mistakes they have made. No attempt to hold the responsible decision-makers accountable. No indication that there will be a course correction in the future. No understanding of the fact that the people who drove the bus into the ditch in the first place must be first removed from the bus before it can be removed from the ditch and repaired.
Gary Kelly still reigns supreme on the board of this Company despite having overseen the decisions and setting the conditions that made this most recent fiasco possible. I, for one, am tired of seeing my Company’s good name, and in some cases our fellow employees’ reputations, dragged through the mud in national media. I’m tired of the abuse they are receiving on the line from rightfully frustrated travelers whose travel plans and worlds were turned upside down during the most important family and travel time of the year. I am fearful for the future of our Company as the long knives come out from government regulators, lawmakers, the flying public, media, and lawyers and get pointed directly at the heart of our future careers. This meltdown was easily avoidable. It was predictable and it was predicted.
This is not a Southwest Airlines problem. This is not an employees of Southwest Airlines problem. This is not an unprecedented weather problem. This is a Gary Kelly problem. First to step forward over the years to take credit and accept all his CEO of the Year awards, Gary Kelly is nowhere to be found to step forward and take responsibility for this crisis that has his DNA all over the scene of the crime. He and his complicit Board of Directors are in hiding likely planning their public relations strategy to “survive” this and keep their lucrative income streams intact. The cold hard truth in this scenario is simply that the highest layer of management in this Company will not have their families’ lives upended by the turmoil their decisions have caused. They will be able to walk away with millions of dollars over the years and further cash in their stocks and options to not impact their standards of living even one iota. Gary Kelly will still enjoy living in his newly constructed retirement mansion in the toniest of Dallas neighborhoods while waxing philosophical in financial media interviews about what it takes to be a successful CEO. But the burden of Gary’s and his fellow senior executives’ and board members’ folly will be borne by the front-line employees without millions of dollars in compensation packages to their names. The ones whose futures and family fortunes literally depend on the success of our Company.
I do not begrudge the vast sums of money our executives earned for working their way up the corporate ranks. I am a capitalist, and I love American upward mobility. I do, however, begrudge earning vast personal wealth while running our Company’s operations and culture into the ground. But that’s not how “shareholder capitalism” works. All that matters is share price, and Gary Kelly knows share price! Gary Kelly was charged with protecting the precious legacy that was passed to him by Herb Kelleher. Herb had already done the heavy lifting; all Gary had to do was not drop it. But instead, Gary Kelly’s only enduring legacy is that he destroyed Herb Kelleher’s. Rest in peace, Herb.
Respectfully and with a heavy heart,
Captain Tom Nekouei, SWAPA 2nd Vice President
I think it’s important to note that the Gary Kelly quote about shareholders suffering – an 8 year old quote from a former CEO of the airline – is very much taken out of context. At the time Kelly reiterated his commitment to continue taking care of the airline’s employees. He sought work rule changes from its unions along with higher wages, so that the airline could remain profitable.
The sociology of pilots, and pilot unions, is fascinating because here the second vice president of the Southwest Airlines Pilot Association declares “I am a capitalist, and I love American upward mobility.” You’d never hear that from Sara Nelson.
Pilot unions work to limit entry into their profession, to give them greater leverage in work rule and salary negotiations. But they don’t have the same narrative of desperate class warfare that other airlines do. Indeed, like law enforcement unions they tend to skew more Republican.