Southwest Airlines' (NYSE:LUV) attempts to restore labor peace hit another stumbling block this week. On Wednesday afternoon, the Southwest Airlines Pilots' Association (SWAPA) announced that pilots had rejected a tentative contract agreement. More than 95% of the union's members voted in the election, and nearly 62% of those voting rejected the proposed contract.
The rejection of this tentative agreement represents another blow to Southwest's track record of cordial labor relations. As a company that prides itself on friendly customer service, getting employee engagement back on track is extremely important for Southwest Airlines' long-term success.
Contract rejection is no shocker
The proposed contract would have given Southwest's pilots a big raise: more than 17% in total, according to The Wall Street Journal. However, recent history has shown that pay raises alone don't guarantee the ratification of an airline labor contract.
Most notably, Delta Air Lines pilots turned down a tentative agreement this summer. That contract would have put them significantly ahead of their peers in total compensation thanks to base pay increases totaling more than 20% through 2018. But the pilots balked at what would have been a significant reduction in their profit-sharing payouts. Similarly, 87% of Southwest's flight attendants voted in July to reject a tentative contract that would have raised their pay.
In this case, pilots may have objected to changes (requested by the company) governing things like who could fly which planes and partnerships with other airlines. SWAPA President Paul Jackson stated, "Despite increased compensation and some work rule improvements, there were new company allowances in this agreement that our pilots did not find palatable when compared to the potential gains."
The rejection of this contract shouldn't have come as a big surprise given the lukewarm reception it had gotten from union leaders. In September, they agreed to let the membership vote on the tentative agreement without actually endorsing it.
Furthermore, in May, the union activated a "Strike Preparedness Committee." While federal regulations governing airline labor relations make it nearly impossible to strike, this move sent a clear message that Southwest's pilots were not happy with the company.
Time to get this fixed
The current Southwest Airlines pilot contract became amendable more than three years ago. (Airline labor contracts never formally expire.) That's a long time to let discontent brew among the membership ranks.
This isn't the only outdated contract still in force at Southwest Airlines, either. Several other major work groups, including flight attendants, ramp workers, and mechanics have had open contracts for at least two years.
In a press release announcing the failed ratification vote, Southwest stated that mediated discussions facilitated by the National Mediation Board would probably resume next spring. That means another several months without progress toward a new contract.
There appear to be two main reasons for Southwest Airlines' deteriorating labor relations. First, it's facing much tougher competition than ever before. The legacy carriers have significantly reduced their cost structures through the bankruptcy process, while ultra-low cost carriers have rock-bottom unit costs that even Southwest can't match. Second, despite this competition, Southwest is enjoying record profits.
The result is that Southwest Airlines' management has become extremely vigilant about keeping costs in line just as employees are looking for big contract improvements.
It's a tricky task to navigate these competing concerns. However, having (visibly) happy employees is a key part of Southwest's brand identity. If Southwest needs to sacrifice some profit to keep them happy, it should probably do so. The damage to its profitability will be a lot greater if customers become disenchanted with the Southwest Airlines brand.
Adam Levine-Weinberg is long January 2017 $40 calls on Delta Air Lines, The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.