There’s a lot of coverage of airline profit sharing in recent weeks – positive stories about Delta and Southwest, less positive about American. But what I haven’t seen reported, but that JonNYC tweets, is that Southwest’s profit sharing may not be as generous or popular with employees as widely believed.
Profit Sharing Is Big News At Airlines
With airlines continuing to deliver profits in the U.S., profit sharing has been a big topic of conversation for employees. Delta, which is delivering the most profit, shares 10% of what they generate with employees. They pay out $1.6 billion this year, the sixth consecutive year they’re paying out $1 billion or more.
American Airlines pays less because they make lower profits, devote less of those profits to profit sharing (5% vs. 10% at Delta), and have more employees to spread it across. Their new mechanics contract, likely to be mirrored by pilots and flight attendants who are negotiating now, pays out 10% of the first $2.5 billion in profit and 20% thereafter.
Southwest’s Profit Sharing Is Being Misreported
Southwest is devoting $667 million to profit sharing, approximately 12.2% of employee pay, or an extra six weeks of earnings. This will be distributed on March 13th.
However employees only get 2.2% of pay in cash. The first 10% goes into a retirement plan. (Some see all of it go into retirement plans based on their union contract.)
JonNYC tweeted last year’s Southwest Airlines employee FAQ about profit sharing:
is this how airline/employee profit-sharing generally works?? pic.twitter.com/UViq1REcs4
— JonNYC (@xJonNYC) February 10, 2020
Southwest Airlines sets how much money goes into a retirement account out of profit sharing. The employee has no choice. By doing this they are able to have a retirement account separate from (and separate from the limits of) the employee 401(K) plan.
When employees see news stories about how much profit sharing they can expect, they often think it’s cash they can access and spend right away. However Southwest tells me that their profit sharing “is not a bonus plan.”
ProfitSharing is one of our two qualified, defined contribution (retirement) plans at Southwest Airlines (the other being our 401(k) plan). The Board of Directors initially established the ProfitSharing Plan as a way to share profits with Employees in acknowledgment for their collective effort and contribution toward Southwest’s success. Our Employees’ hard work has resulted in profitability each year since 1973, and the Board has recognized this annual accomplishment by cumulatively rewarding Employees with more than $5.8 billion in ProfitSharing over the past four-and-a-half decades as a way to contribute to our Employee’s retirement security.
How This Is Being Misreported
The name of the retirement account where Southwest Airlines profit sharing distributions go is the ProfitSharing Plan. Some news outlets correctly report that the payout is being split, but not in a way that readers will understand (and the outlets themselves may not understand it since it’s largely just a rewrite of the airline press release). For instance,
Southwest Airlines said on March 13, 2020, most Employees will receive 10% of eligible compensation as a contribution to the ProfitSharing Plan, and the remainder—approximately 2.2 percent—in cash.
Southwest itself says “This $667 million profitsharing award is equivalent to $1.8 million a day and is more than six weeks’ pay for every eligible Employee.” That makes it seem like employees are getting an extra six weeks of pay (right away). Indeed, here’s one report describing employees getting “extra pay — six weeks-worth to be exact.” When CNN covered it they flagged the six weeks of pay in the headline and only that some employees would get a retirement contribution.
[E]ligible employees will soon receive 12.2% of their annual salary, which is the equivalent of roughly an additional six weeks of pay. Other employees will get the contribution added to their retirement accounts.
Should We Care?
Southwest puts nearly all of the money into retirement. This lets them keep the funds separate from the employee 401(K). It helps employees save more for retirement. But employees don’t have a choice. Since some employees would prefer access to the funds right away, the profit sharing program doesn’t generate as much benefit for those employees as it otherwise would.
In the case of the airline’s unionized workers, they can certainly bargain over elements of compensation including profit sharing. If enough workers care about this they can make it an issue in contract negotiations.
Ultimately for everyone that’s not an employee it’s merely a curiosity, an item that’s frequently misreported in the media although the airline’s press release on it is technically accurate (most people rewrite press releases without bothering to understand the details).