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Southwest Airlines’ Mechanics Approve New Labor Contract

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May. 22 2019, Published 10:40 a.m. ET

Bitter tussle ends

After six long years of bitter tussle, Southwest Airlines (LUV) finally made peace with its mechanics. On May 21, the company announced that its mechanics and related employees have voted in favor of ratifying a tentative labor contract. Before this, Southwest Airlines had reached a tentative agreement with the AMFA (Aircraft Mechanics Fraternal Association), a union for its mechanics, on March 16 for a new labor contract.

Southwest Airlines had been in labor contract talks with its employees since 2012. Pilots and the attendants’ unions have new contracts, but the mechanics’ union didn’t accept the deal until mid-March.

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The AMFA rejected Southwest Airlines’ five-year contract offer in September last year. Since then, the dispute between the airline and union intensified. In February, Southwest Airlines blamed its mechanics for forcing unnecessary grounding of its jets by flagging minor maintenance issues. The company filed a lawsuit against the AMFA on this matter. The AMFA responded with a counter defamation case against the airline.

Finally, during the first week of March, the Federal Aviation Administration had to intervene in the matter, which warned both parties against putting flights’ safety at risk.

New contract

Southwest Airlines is paying a hefty price to make peace with its mechanics. According to the agreement, the company will increase mechanics’ base wages by 20%, effective April 1, 2019. The hike will be much higher than the 14.8% raise it was giving in September, while the AMFA was demanding 16.7%. The company will provide a 3% annual hike beginning in August 2019 and going through August 2023.

The company has also agreed to pay a ratification bonus of $160 million, which is 76% higher than the September contract. According to the September contract, the company had proposed a ratification bonus of $91 million. According to the new deal, each Southwest Airlines mechanic will get ~$66,000 as a ratification bonus.

To gain exposure to Southwest Airlines, investors can consider the US Global Jets ETF (JETS), which has allocated 11.9% of its funds to the stock. The ETF has also invested 11.7%, 11.7%, and 13.5% of its holdings in American Airlines (AAL), United Airlines (UAL), and Delta Air Lines (DAL), respectively.

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