Southwest First Picture

With a fresh contract in the bag, and profitability secure, are Southwest shares poised to take off? Image source: Southwest Image Library.

Just the other side of the holiday weekend, two days before Independence Day, flight attendants at Southwest Airlines (NYSE:LUV) got a holiday surprise all their own -- management has agreed to give them a raise. 

As Southwest announced on July 2, the company has reached at least a "tentative agreement" with representatives of the company's flight attendants union (Transport Workers Union Local 556). While precise details have not been released, Southwest has confirmed that the agreement hashed out last week includes:

  • wage increases
  • "bonus opportunities"
  • and work-rule adjustments.

While the agreement approved by TWU Local 556 remains to be voted upon and approved by union membership, the two years of negotiations that went into its preparation argue strongly in favor of that membership wanting to get this deal done once and for all. The more so because union leaders confirm that the deal they've secured represents an improvement upon the terms of the union's existing "industry-leading Contract" and ensures "that the Southwest Airlines Flight Attendants continue to be the highest paid in the industry through 2019." (Once approved, the new agreement will run through May 2019.)

Which is great news for Southwest flight attendants, no doubt. But what does it mean for Southwest shareholders?

What it means to investors
When it comes to earning a profit, there's almost nothing more important to an airline than how much money it has to spend on compensating its employees. (There is one thing -- fuel costs. But aviation jobs website Avjobs states plainly that as a rule, "more than one-third of the revenue generated each day by the airlines goes to pay its workforce. Labor costs per employee are among the highest of any industry.")

And speaking of "highest" -- Southwest's flight attendants are paid far and away more than their peers at other airlines. Just take a look at these figures, drawn from the 10-K filings with the SEC of Southwest and its two larger U.S. peers -- American Airlines (NASDAQ:AAL) and Delta Air Lines (NYSE:DAL):

Southwest Airlines Salaries E
Wage data courtesy of Glassdoor.com.

With your average Southwest flight attendant already earning well over $60,000 a year (versus a bit less than $45,000 at American, and a bit more than $43,000 at Delta), you might not think there's much room for improvement in Southwest's labor compensation.

Indeed, according to the company's filings, Southwest devoted 33.2% of its operating costs to "salaries, wages, and benefits" last year -- a number that grew nearly 8% in comparison to 2013 compensation. That compares to American's labor costs of "approximately 25% of our operating expenses," and Delta's devotion of 24.1% of its operating expenditures to "salaries and related costs" and "profit sharing" in 2014. Once again, we see here concrete evidence that Southwest is paying as much as a third more than the competition to secure top talent in the flight-attendant sphere.

It pays to hire the very best
And that's OK. You see, according to data from S&P Capital IQ, even after paying its princely salaries, Southwest manages to outclass both American and Delta in profitability. Operating profit margins at Southwest totaled 15.3% over the past 12 months, versus 14.7% at Delta, and just 14.1% at American Airlines. Assuming Southwest didn't "give away the store" -- and Southwest Chief Operating Officer Mike Van de Ven confirms that even with concessions, the agreement "supports Southwest's low-cost structure and positions the Company to be competitive in the years to come" -- it seems likely the company will be able to retain a profitability advantage over its larger, "legacy airline" rivals.

And with the best-paid, and presumably happiest flight attendants in the U.S., it's just as likely Southwest will retain its position as one of the favorite airlines for Americans to fly.

Southwest Second Photo

Gee, somebody sure looks happy. And with a new contract securing wage gains through 2019 -- who can blame her? Image source: Southwest Image Library.

Rich Smith does not own shares of, nor is he short, any company named above. Neither does, or is, The Motley Fool. You can find Rich on Motley Fool CAPS, publicly posting his stock picks and pans under the handle TMFDitty, where he's currently ranked No. 317 out of more than 75,000 rated members.

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