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Southwest Reached an Agreement with Its Mechanics

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Reached agreement with the union

After a bitter dispute for six years, Southwest Airlines (LUV) is finally going to make peace with its mechanics. The company and the AMFA (Aircraft Mechanics Fraternal Association), a union for its mechanics, reached a tentative agreement on March 16 for a new labor contract. The new contract signifies a massive pay hike for mechanics. However, the contract still has to get final approval from ~2,400 mechanics.

The two parties reached an agreement a week after the Federal Aviation Administration warned Southwest and the union on March 8 that the fight is putting the airline’s safety at risk. The dispute between Southwest and the mechanics intensified over the past month.

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In February, Southwest blamed the mechanics for forcing the unnecessary grounding of its jets by flagging minor maintenance issues. Southwest even filed a lawsuit against the AMFA for deliberately slowing down its normal operations to put pressure on the company to agree with the terms. In response, the AMFA filed a defamation countersuit on Southwest and its COO Mike Van de Ven.

Southwest has been in labor contract talks with its employees since 2012. The flight attendants and pilots’ unions have new contracts, but the mechanics’ union didn’t accept the contract until last weekend. In September, the mechanics’ union rejected Southwest’s five-year contract offer.

Expensive deal

Looking at the terms of the agreement, Southwest seems to be paying a hefty price to make peace with its mechanics. According to the new contract, the company will increase mechanics’ base wages by 20% starting on April 1. The increase is much higher than an immediate raise of 14.8% in the September contract and the AMFA’s demand of 16.7%. The company will pay hike of 3% every year on August 1 through 2023.

Southwest will pay a ratification bonus of $160 million, which is ~76% higher than the September contract. In September, the ratification bonus was promised at $91 million. Each Southwest mechanic will receive ~$66,000 as a ratification bonus.

Southwest’s new contract will likely face questions from investors and analysts. The company is paying such a huge payout. Should Southwest have accepted mechanics’ demands in September? The company could have saved money and its reputation.

To gain exposure to Southwest, investors could consider the US Global Jets ETF (JETS), which has allocated 11.7% of its funds to the stock. JETS has also invested 12.5%, 11.8%, and 11.7% of its holdings in Delta Air Lines (DAL), United Airlines (UAL), and American Airlines (AAL), respectively.

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