Southwest Airlines Co. Slashes First-Quarter Guidance

Last October, Southwest Airlines (NYSE: LUV) announced that it would start selling tickets for flights to Hawaii during 2018. This came after years of rumors that the U.S. airline giant would expand to this popular tourist market, potentially bringing lower fares.

However, the Aircraft Mechanics Fraternal Association -- the union representing Southwest's mechanics -- has threatened legal action to halt the carrier's plans to fly to Hawaii. Southwest Airlines wants to use outside contractors to do necessary maintenance work in Hawaii. The union claims that this would violate its contract, although the company disagrees.

The main barrier to Southwest's Hawaii flights

Flying from the West Coast to Hawaii involves traveling more than 2,000 miles over the Pacific Ocean, with no diversion airports in between. The FAA has strict "ETOPS" rules for operating routes that involve flying more than an hour from the nearest diversion airport. These include special certifications for the airline as a whole and the specific airplanes operating those routes.

Southwest Airlines needs FAA approval to start flying to Hawaii. Image source: Southwest Airlines.

Maintenance procedures are particularly important for airlines operating ETOPS routes. Given the importance of avoiding aircraft problems in the middle of the ocean, the FAA has special rules beyond what is normally required for commercial airlines.

The ETOPS certification process is currently the primary sticking point preventing Southwest Airlines from beginning flights to Hawaii. Depending on how quickly it can complete the approval process, Southwest may be able to launch its first flights to Hawaii in late 2018 or it may have to wait until 2019.

Why maintenance is a challenge for Hawaii flights

For Southwest Airlines, flying to Hawaii introduces some complications from a maintenance perspective. Most flights from the West Coast to Hawaii leave in the morning and arrive in the early afternoon, in time for hotel check-in. Return flights typically leave in the afternoon and arrive back on the West Coast in the late evening.

Southwest hasn't released any flight schedules for Hawaii, but it isn't likely to deviate from this general pattern. One of the main alternatives would be an evening departure from the West Coast and a red-eye return flight. However, Southwest has never operated red-eyes -- although it could change that policy.

As a result, it's entirely possible that there would never be Southwest Airlines planes on the ground in Hawaii outside of the hours of noon to 4 p.m. HST (roughly speaking). That would make it extremely inefficient to hire local staff to carry out ETOPS maintenance inspections in Hawaii, as there would only be a few hours of work each day.

The solution gets caught up in bargaining

Rather than hiring local maintenance staff in Hawaii, Southwest Airlines wants to use outside contractors to perform ETOPS checks on its aircraft there. On the West Coast, it would use its own staff.

This plan doesn't sound unreasonable on its face. However, Southwest's mechanics are still working under a contract that became amendable more than five years ago. (Airline labor contracts never formally expire.) The mechanics are seeking raises and job protections, and they aren't inclined to do any favors for management until a new contract is implemented.

Ideally, Southwest Airlines and the mechanics would sign a new contract during 2018 that would directly address the issue of outsourcing maintenance in Hawaii. However, if they don't reach an agreement, the courts may have to decide whether Southwest's plan violates the existing contract. That would raise a risk of the carrier having to postpone its Hawaii service.

Not much reason to worry -- yet

Despite all of the tough talk from the mechanics union, management and the union aren't very far from one another on most contract issues. The differences in the two sides' pay proposals are extremely small in comparison to Southwest Airlines' annual earnings. Instead, the main issue of contention appears to be the "scope" section that determines what work must be performed by Southwest's in-house maintenance staff.

Reaching an agreement on this issue won't be easy, but there's still time to make a deal. It should be possible for Southwest Airlines to trade some combination of job protections and pay raises for the flexibility to outsource maintenance at far-flung airports where it would be prohibitively expensive to rely on full-time staff.

Given Southwest's history of relatively peaceful labor relations, investors shouldn't worry too much about this contract dispute derailing the carrier's Hawaii plans.

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