Thousands of Americans have just got a firsthand look at how maximizing shareholder value screws everyone.
UPDATE: Sunday, Jan 1, 2023 · 12:13:44 AM +00:00 · xaxnar
UPDATE: Zeynep Tufekci at The NY Times has posted The Shameful Open Secret Behind Southwest’s Failure
It adds a new term to the story — technical debt — and confirms that management decisions despite employee warnings set up the rolling disaster. Read the rest of this diary to see how it all comes together.
...It’s been an open secret within Southwest for some time, and a shameful one, that the company desperately needed to modernize its scheduling systems. Software shortcomings had contributed to previous, smaller-scale meltdowns, and Southwest unions had repeatedly warned about it. Without more government regulation and oversight, and greater accountability, we may see more fiascos like this one, which most likely stranded hundreds of thousands of Southwest passengers — perhaps more than a million — over Christmas week. And not just for a single company, as the problem is widespread across many industries.
This problem — relying on older or deficient software that needs updating — is known as incurring “technical debt,” meaning there is a gap between what the software needs to be and what it is. While aging code is a common cause of technical debt in older companies — such as with airlines which started automating early — it can also be found in newer systems, because software can be written in a rapid and shoddy way, rather than in a more resilient manner that makes it more dependable and easier to fix or expand. As you might expect, the former is cheaper and quicker.
Some additional information about the CEO who kicked the can down the road and left the time bomb to his successor:
...In 2020, for instance, Southwest C.E.O. [Gary] Kelly’s compensation was a record $9.2 million, despite the fact that the company lost more than $3 billion that year because of the pandemic, and the compensation for the median employee fell by $35,000, to about $66,000. (The company said his compensation had been set in place before the pandemic.) In the years leading up to the pandemic, while the company’s aging scheduling technology groaned, the company spent $8.5 billion of its excess cash on purchasing its own stock — a common practice among airlines which helps increase the value of the stock, the main form of compensation for many executives. Then, when the pandemic hit, like other airlines, Southwest received billions from the government in grants and low-interest loans. Kelly, an accountant who became the C.E.O. of Southwest in 2004, retired earlier this year, with an estimated net worth in the tens of millions of dollars, so the crisis did indeed occur under someone else’s tenure.
emphasis added
Timing is everything. Read the rest of this diary below for the big picture.
The latest news is that Southwest Airlines is returning to normal service — although reuniting people with their luggage may take a while. There’s also the issue of compensation for passengers put through the wringer by the airline’s collapse.
[Side note: Having been stranded by weather in an airport several times, I can attest that not only are airport terminals focused on moving people through as quickly as possible, they are generally actively hostile to anyone stranded overnight. It’s not a bug — it’s a feature.]
By now it has become apparent that Southwest Airlines struggled to recover from Winter Storm Elliott not simply because of the severity of the weather, but also from years of failing to invest in its own infrastructure and repeated failure to listen to its own employees.
Aldous J. Pennyfarthing had a post that lays out what set up the airline to fail: management whose priority was increasing shareholder value above all else. They were understaffed. They had outdated software incapable of managing crew assignments and reservations unless everything was working perfectly. All of that was known but not a priority — what was, was prioritizing dividends to shareholders. Their route structure and lack of arrangements with other airlines to cover for canceled flights were a factor as well, but the root cause was in the board room, the CEO’s office — and the way capitalism currently works in the American economy.
The Southwest Airline Pilots Association website has some blistering posts: a statement about the meltdown, a statement about issuing dividends from December 8 — before the storm while employees were still dealing with old contracts, and a description of the “pride and avarice” that set up the airline to fail. From SWAPA President Casey Murray on that last:
...Pride and avarice have replaced our once vaunted culture. “Pride” in ignoring solutions that have been, and continue to be, offered to support the house of cards that our operation has become. And even though irrefutable analytics and data have been provided by SWAPA again and again, pride in their outdated processes and technology continues to drive our management. A former VP of Flight Ops once stated “SWAPA has no levers to pull here, but I can” as he dismissed solutions offered by your Union. “Avarice” as evidenced by how our management chooses to continue to reward shareholders instead of stakeholders — the very same stakeholders that the Company relies on to recover the operation during and after every meltdown.
My message from last year,
Investing in the Operation lists decades of acknowledgements by management of the exact same failures that defined this meltdown...
A more detailed account of how things went south at Southwest over the years turned up in a Facebook post from Pilot Larry Lonero that has been making the rounds; he had the following to say:
Voices From The Line: Larry Lonero
What happened to Southwest Airlines?
I’ve been a pilot for Southwest Airlines for over 35 years. I’ve given my heart and soul to Southwest Airlines during those years. And quite honestly Southwest Airlines has given its heart and soul to me and my family.
Many of you have asked what caused this epic meltdown. Unfortunately, the frontline employees have been watching this meltdown coming like a slow motion train wreck for sometime. And we’ve been begging our leadership to make much needed changes in order to avoid it. What happened yesterday started two decades ago.
Herb Kelleher was the brilliant CEO of SWA until 2004. He was a very operationally oriented leader. Herb spent lots of time on the front line. He always had his pulse on the day to day operation and the people who ran it. That philosophy flowed down through the ranks of leadership to the front line managers. We were a tight operation from top to bottom. We had tools, leadership and employee buy in. Everything that was needed to run a first class operation. When Herb retired in 2004 Gary Kelly became the new CEO.
Gary was an accountant by education and his style leading Southwest Airlines became more focused on finances and less on operations. He did not spend much time on the front lines. He didn’t engage front line employees much. When the CEO doesn’t get out in the trenches then neither do the lower levels of leadership.
Gary named another accountant to be Chief Operating Officer (the person responsible for day to day operations). The new COO had little or no operational background. This trickled down through the lower levels of leadership, as well.
They all disengaged the operation, disengaged the employees and focused more on Return on Investment, stock buybacks and Wall Street. This approach worked for Gary’s first 8 years because we were still riding the strong wave that Herb had built.
But as time went on the operation began to deteriorate. There was little investment in upgrading technology (after all, how do you measure the return on investing in infrastructure?) or the tools we needed to operate efficiently and consistently. As the frontline employees began to see the deterioration in our operation we began to warn our leadership. We educated them, we informed them and we made suggestions to them. But to no avail. The focus was on finances not operations. As we saw more and more deterioration in our operation our asks turned to pleas. Our pleas turned to dire warnings. But they went unheeded. After all, the stock price was up so what could be wrong?
We were a motivated, willing and proud employee group wanting to serve our customers and uphold the tradition of our beloved airline, the airline we built and the airline that the traveling public grew to cheer for and luv. But we were watching in frustration and disbelief as our once amazing airline was becoming a house of cards.
A half dozen small scale meltdowns occurred during the mid to late 2010’s. With each mini meltdown Leadership continued to ignore the pleas and warnings of the employees in the trenches. We were still operating with 1990’s technology. We didn’t have the tools we needed on the line to operate the sophisticated and large airline we had become. We could see that the wheels were about ready to fall off the bus. But no one in leadership would heed our pleas.
When COVID happened SWA scaled back considerably (as did all of the airlines) for about two years. This helped conceal the serious problems in technology, infrastructure and staffing that were occurring and being ignored. But as we ramped back up the lack of attention to the operation was waiting to show its ugly head.
Gary Kelly retired as CEO in early 2022. Bob Jordan was named CEO. He was a more operationally oriented leader. He replaced our Chief Operating Officer with a very smart man and they announced their priority would be to upgrade our airline’s technology and provide the frontline employees the operational tools we needed to care for our customers and employees. Finally, someone acknowledged the elephant in the room.
But two decades of neglect takes several years to overcome. And, unfortunately to our horror, our house of cards came tumbling down this week as a routine winter storm broke our 1990’s operating system.
The frontline employees were ready and on station. We were properly staffed. We were at the airports. Hell, we were ON the airplanes. But our antiquated software systems failed coupled with a decades old system of having to manage 20,000 frontline employees by phone calls. No automation had been developed to run this sophisticated machine.
We had a routine winter storm across the Midwest last Thursday. A larger than normal number flights were cancelled as a result. But what should have been one minor inconvenient day of travel turned into this nightmare. After all, American, United, Delta and the other airlines operated with only minor flight disruptions.
The two decades of neglect by SWA leadership caused the airline to lose track of all its crews. ALL of us. We were there. With our customers. At the jet. Ready to go. But there was no way to assign us. To confirm us. To release us to fly the flight. And we watched as our customers got stranded without their luggage missing their Christmas holiday.
I believe that our new CEO Bob Jordan inherited a MESS. This meltdown was not his failure but the failure of those before him. I believe he has the right priorities. But it will take time to right this ship. A few years at a minimum. Old leaders need to be replaced. Operationally oriented managers need to be brought in. I hope and pray Bob can execute on his promises to fix our once proud airline. Time will tell.
It’s been a punch in the gut for us frontline employees. We care for the traveling public. We have spent our entire careers serving you. Safely. Efficiently. With luv and pride. We are horrified. We are sorry. We are sorry for the chaos, inconvenience and frustration our airline caused you. We are angry. We are embarrassed. We are sad. Like you, the traveling public, we have been let down by our own leaders.
Herb once said the the biggest threat to Southwest Airlines will come from within. Not from other airlines. What a visionary he was. I miss Herb now more than ever.
This NPR report covers what the results of corporate neglect have produced — and what business management theories have led to, all through the business world.
Paul Krugman weighed in with an opinion piece arguing that we shouldn’t ascribe all of what happened at Southwest to corporate greed — although he does admit that’s a big factor.
Bill Saporito asks if this was the debacle we needed — to recognize that the effects of deregulation of the airline industry need to be addressed:
...Airline deregulation began in 1978, and over the decades, passengers have made a trade-off. They got lower fares and greater access to more airlines, including JetBlue and Southwest. Then came ultra-low-cost carriers such as Spirit, Allegiant and, most recently, Breeze, founded by Mr. Neeleman. Democratizing travel via competitive pricing has been great for nearly everyone.
The trade-off is that everything else about flying gradually deteriorated: comfort, seating, punctuality, baggage handling, amenities and customer service. Just when we think these trade-offs can’t get any grimmer, they do. Frontier, for instance, recently got rid of its telephone agents. Got a problem? Need to rebook because of weather? Chat with its friendly bot. Other technology, spurred by the pandemic, has allowed carriers to push more of the work on us passengers, from ticketing to checking bags.
The argument for deregulation is essentially that the market knows best, government hurts the economy by placing regulatory burdens on business, and consumers benefit from lower prices — but the quote above shows how the trade-offs work in practice.
This opinion piece by Elizabeth Spiers lays out how miserable flying can be even when things work as they are supposed to.
...Some airlines are worse than others, but these are industrywide afflictions and are dictated by airline executives who know families like mine have little choice but to pay through the nose and suck it up. Real pain is borne by fliers and staff members, especially desk workers and airline attendants, who are expected to be wait staff, safety monitors, therapists and often law enforcement.
Incidents of assault and harassment of airline attendants went up during the pandemic, when airline personnel had to enforce masking mandates and the worst people you know decided to try air travel, seemingly for the first time. No one really gets paid enough to do that, much less deal with abusive fliers who often take it out on frontline airline personnel because when people call the airline, they get 20 minutes of automated prompts and recordings and cannot get a human on the phone, sometimes for hours. I am generally fine with high-stress situations, but I have cried more on the phone with airline customer service reps than I have during multiple viewings of “Terms of Endearment,” and I feel very strongly that the ratio should run the other way.
[If there’s one bright spot in all this, a lot of people are suddenly interested in restoring passenger rail in America. We need better choices than either flying, driving, or being crammed into a bus. But that’s a whole ‘nother diary.]
This tagline has not aged well for Southwest. So much for freedom.
It’s Not Just Southwest where this is a problem
One of the most damaging theories to be embraced by the business world was the belief that corporations have only one responsibility: to increase shareholder value. This is part and parcel of the Friedman Doctrine which holds that the only social responsibility of a business is to its shareholders — and shareholders are the only ones who should decide if a company should include anything or anyone else in that agenda.
To put it another way, it means a business has no responsibility to its employees, its customers, the long-term health of the company, the communities in which it operates, or the country in which it is based — other than avoiding actions which would hurt shareholder value. In practice this amounts to extracting as much money out of businesses as can be managed in the short term.
Friedman’s contention that it’s up to shareholders to make a business pursue a broader agenda than just piling up profit is idiotic. People don’t become shareholders to make the world a better place (aside from activists seeking corporate reform.) They are there to make money. Period. And, they want management who will make money for them. When stock is held by investment firms, hedge funds, etc. that idea breaks down even further — after all, as corporations in their own right according to that theory, their only obligation is to increase shareholder value for their own investors, and so on and so on. Where does the buck stop?
An opinion piece in the L.A. Times by Michael Hiltzik looking at the Southwest debacle puts it this way:
...For decades, Big Business has been squandering its resources on handouts to shareholders instead of spending on workers and infrastructure. There’s not enough give in the system, so when crisis comes, it doesn’t bend, but breaks.
What drives this tendency is economics. Business managements have become hostages to cost-cutting, squeezing expenses out of their systems in every way possible, trusting to luck that what works under normal conditions will continue to work when the outside world goes haywire. They’re betting their companies on a bad strategy.
Sully Sullenberger of Miracle on the Hudson fame noted how far airlines have taken this. IIRC, when both engines on his airliner flamed out after swallowing a flock of geese, he and his copilot were trying to fly the airplane while looking up emergency engine restart procedures. In a cost-cutting measure, the airline had saved money on the manuals by no longer including tabbed pages to make it easier to find something in a hurry…
This is taking cost-cutting to the micro level. It also takes place at the macro levels. Again from Hiltzik:
There are numerous manifestations of this cheeseparing habit. One is just-in-time production, which spread like wildfire from Toyota, where it originated in the 1980s, to the rest of the automobile industry and eventually to the manufacturing sector generally.
The idea was to slash waste by coordinating inventories of parts, the supply of workers and the time for production so that everything was in place when needed and not a minute before or after.
Read the whole thing from Hiltzik.
Add outsourcing — spinning off a division into a outside company and forcing them to compete on price. It can be used to break union contracts; the ‘new’ company may not be unionized at all and pays workers less. It also means a company has that much less control over its supply chain, its quality control, and its internal knowledge base.
Add offshoring — moving a company’s production to where labor is cheaper and regulations are lax, to cut costs. Again, problems with loss of internal knowledge, more supply chain vulnerabilities, less control over quality, meeting customer needs, etc.
Innovation? R&D? Fuhgeddaboudit. Why invest in basic research or continuing product refinement when stuff is selling okay at acceptable profit margins? There’s a new technology? It’s a lot easier to buy up a company to get it or shut it down than trying to match it or surpass it in house. More money can go to shareholders if those expenses are cut.
Competition on things like better products, better pricing, better customer service? Again, fuhgeddaboudit. With mergers, when there’s only a handful of companies in any given sector of the economy, it makes it a lot easier to manage workers, customers, and government regulation to maximize shareholder value over all — because size matters in that regard. (Remember too big to fail?)
Let's not forget downsizing/rightsizing. Ever greater productivity — making ever fewer people do more and more — has drawbacks. One is the idea that employees are primarily an expense to be trimmed, and are easily replaced.
In practice workers represent an investment in training, acquired skills and special abilities. They embody in-house expertise that can’t be replaced by somebody just off the street.
The airlines laid off a lot of people when the pandemic tanked air travel. Demand is recovering — but the workforce isn’t. Who wants to work for a company that is going to lay you off just so they can pay out shareholder dividends?
It’s also about resilience. When things go pear-shaped, it helps if there are enough people available to deal with emergencies big and small, whether it’s a weather event, a natural disaster, a pandemic that has people out sick -= anything that gets outside the boundaries of the ‘normal’ everything is fine tuned to support. (Kauffman’s Rule 19. Sloppy systems are often better.)
Railroads are a similar case in point. They are headed for a debacle because of Precision Scheduled Railroading — just another way of implementing the Friedman Doctrine. They’ve cut their workforces to the breaking point while posting record profits. The new agreement imposed on rail workers that ignored critical worker demands includes bonus payments to make up for 3 years without a contract. How many workers are going to take those checks and head for the door once they cash them? We’ll soon see.
Ultimately the issue comes down to companies being run by people whose only concern is having good numbers for shareholders every quarter — even if the bill will come due eventually. The short term is the only thing that matters, not the long term.
Thom Hartmann has a diary laying out how one particular scam works — share buybacks. This is when a company buys up its own stocks to raise the price of the remaining shares. In effect, they are artificially creating instant ‘wealth’. It used to be illegal.
The numbers from the airlines alone are staggering. That’s billions of dollars that didn’t go to keep employees on the payroll, that didn't go into improving systems and the customer experience, that didn't go into upgrading aircraft and facilities. What it did do was make top executives and shareholders richer.
Going further is vulture capitalism — investors who come into a struggling company supposedly looking to turn it around, but who more often than not strip mine that assets the company has, do moves to temporarily boost the stock price, then get out leaving the wreckage behind.
So, what to do?
When management is filled by people whose only skill is playing games with money, they really need to listen to people who actually make the company operate, who have to deal with the public, who have to take responsibility for products and actions — people who want a company to do well so they can keep getting paid and can't count on a golden parachute if it tanks.
Workers in other words.
It’s called codetermination, and if Southwest had had it instead of management by accountants running the airline, things might be very different today. Elizabeth Warren has a plan to turn corporate governance around, effectively junking the Friedman doctrine.
Warren wants to eliminate the huge financial incentives that entice CEOs to flush cash out to shareholders rather than reinvest in businesses. She wants to curb corporations’ political activities. And for the biggest corporations, she’s proposing a dramatic step that would ensure workers and not just shareholders get a voice on big strategic decisions.
Warren hopes this will spur a return to greater corporate responsibility, and bring back some other aspects of the more egalitarian era of American capitalism post-World War II — more business investment, more meaningful career ladders for workers, more financial stability, and higher pay.
As much as Warren’s proposal is about ending inequality, it’s also about saving capitalism.
Regulation is essential, including anti-trust regulation. When private corporations operate in the public space, when their operations depend on public institutions and public infrastructure, when private gain comes at the expense of the public good, this is when government regulation is essential.
What happened at Southwest is a horrible example — but it’s not a unique event as has been pointed out. Counting on market forces and enlightened self-interest can only go so far. The idea that there’s no need to worry about anti-trust action unless a merger will raise prices is another theory that needs to be dumped.
This video is a brutal satire of the corporate mindset that puts cutting costs to generate ever higher profits above all else — until it inevitably gets taken too far. The ‘magic’ referred to is what every corporation wants people to think about them.
What happens to the man being fired for screwing up at the end… is too true to be funny.
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