Hyper-efficiency is bad business

Did you have a happy holiday season? Probably not if you travelled on Southwest Airlines. The budget carrier stranded thousands of passengers for the 10 days between December 21 to 31, chalking up the vast majority of flight cancellations during the busiest travel period of the year.

While severe weather and out-of-date crew scheduling software were cited as reasons for the meltdown, the problem is reflective of a much larger issue for Southwest in particular, the airline industry in general, and even the American business landscape as a whole. The “efficiency” model corporate management of the past 40 years is tapped out.

Southwest is at the sharp end of this spear. The company came to fame as one of the first airline industry disrupters in the US, offering cheap, no frills flights, and circumventing the usual hub and spoke model. Instead of flying through major airports to get to smaller cities, travellers could go directly from place to place. For years, under chief executive and co-founder Herb Kelleher, the airline was a poster child for innovation, delighting customers and workers alike.

But in 2004, when Gary Kelly took the helm, employees (who were subsequently called “cost units”) took a back seat to capital management. Kelly financialised operations with a fuel-hedging programme, and focused everyone’s attention on increasing return on invested capital. Why pour money into updating technology systems, when you could do more share buybacks instead? Wall Street rewards companies far more for downsizing people and distributing profits to investors than it does for capital expenditures that may not pay off fully for years.

Southwest wasn’t alone in handing back as much money as possible to investors rather than spending more in the business. Indeed, when airlines got a Covid-related bailout at the beginning of the pandemic, it was done with a ban on buybacks and dividend payments, as well as staff lay-offs. Both these had increased in recent decades, as airlines attempted to do ever more with less, hiring cheaper staff and pushing older workers with fatter pensions aside.

Even amid the buyback and firing ban, Southwest continued a voluntary retirement plan (which incentivised higher-paid staff to leave), and was quick to resume dividend payouts, once the federal ban on them was lifted in September. This was despite the pilot union demanding pay rises and better working conditions. Captain Casey Murray, the president of the Southwest Airlines Pilots Association, did a podcast weeks before the holiday disaster, saying: “I fear that we are one thunderstorm, one [air traffic control] event, one IT router failure away from a complete meltdown.”

The same could be said for any number of US companies that have worked over the past half century to bolster “efficiency” rather than resilience. Consider the rise and fall of Jack Welch, the former chief executive of General Electric who turned the manufacturing company into a too-big-to-fail financial institution. Or the cost-cutting that led to crises such as the Boeing 737 Max crash, Pacific Gas & Electric equipment which caused wildfires in California, and the General Motors ignition switch recall. All of which had some link to the balance sheet-focused form of management: being lean and mean, cutting all excess costs and treating human beings as metrics to be squeezed.

Certainly, this type of management brought prices down after airlines were deregulated in the late 1970s, and introduced new, low-cost competitors. But it also increased concentration (just four airlines own 80 per cent of the US business), exported repair jobs to less well-regulated countries like El Salvador, Mexico and China, and led to lower salaries and higher workloads for airline employees. This is one of the main reasons that flying these days (especially in the US) is such a drag.

The financialisation of airlines in general and Southwest in particular may have reached a peak. It’s hard to imagine efficiency going much further when seats are hardly big enough for human bodies, companies are charging for snacks and even drinks, selling more tickets than they have aircraft to service (another financial engineering tactic that often backfires) and dealing with failing technological infrastructure.

I expect that transport secretary Pete Buttigieg, who has already said he will mount “an extraordinary effort” to get consumers reimbursed for cancelled flights, will also be under more pressure to investigate things like technological capacity and price gouging in the sector. But airlines are hardly alone when it comes to pushing the efficiency model too hard. President Joe Biden had to block a railway workers strike in the US last month following complaints about no paid sick leave. There’s also been a backlash against productivity software that tracks workers’ every movement.

There’s some anecdotal evidence to show that American workers are less likely to want to come back to their jobs, post-pandemic, than Europeans are, because they crave a better work-life balance. I’ve heard this myself from several multinational chief executives. I can’t help but wonder if some of the reluctance is down to management styles that are pushing people, customers and companies to the brink.

rana.foroohar@ft.com