$37 Million (Budget 2025, Hank Ketchum, Brian Hickman)

Today's SWAPA number is $37 million. That's the total proposed operating expenses in the budget for 2025. SWAPA pilots will have an opportunity to vote on the budget in the upcoming fall general election. So on today's show we talk to SWAPA second vice President, Hank Ketchum, and our SWAPA Director of Finance, Brian Hickman about all things finance. 

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Transcript

Tony Mulhare:

Today's SWAPA number is 37 million. That is the total proposed operating expenses in the budget from 2025. SWAPA pilots will have an opportunity to vote on the budget in the upcoming fall general election.

Amy Robinson:

On today's show, we talk to SWAPA Second Vice President Hank Ketchum, and our SWAPA Director of Finance Brian Hickman about all things finance.

I'm Amy Robinson.

Tony Mulhare:

And I'm Tony Mulhare. Here's our interview with Hank and Brian.

Amy Robinson:

Okay, Brian and Hank, go ahead and tell us, from a very high level perspective, the financial views of SWAPA?

Hank Ketchum:

Well, the association's never been in a strong financial position than it is today. Our longterm reserve fund, after we make two more allocations in Q3 and Q4, should end the year around $36.2 million. Our SPC reserve fund that's used for SOS activities during negotiations, the target on that is two-and-a-half million, and we brought that back up above that target level. Due to some investment income, it's sitting at about $2.57 million today. Then we have a very strong net cash position of 4.7 million.

All in, with only those three items, we're sitting at $43.5 million. We're in a very strong financial position.

Amy Robinson:

I did want to take a step in here really quickly and say, you said SOS. Just for our listeners we don't know that, we've changed a few times, but that's the Strike Committee prior to.

Hank Ketchum:

It is, yes.

Amy Robinson:

Yeah. Just want to clear that up for our membership.

Tony Mulhare:

How did we get to this strong position?

Hank Ketchum:

Well, during negotiations, we of course had to increase dues to the 1.31% for the 13 months. Then coming out of negotiations, we had the ratification bonus, where we did assess dues on the ratification bonus. That was in an effort to shore up our balance sheet, because we had used funds from the longterm reserve fund. We hadn't had a raise in an extend period of time, which would have provided dues to maintain pace with inflation. Our policy manual stipulates that we'll have 12-months of reserves in our longterm reserve fund, 12-months of our operating expenses. That's either current year or the next year if we have a budget in place. We weren't able to maintain those levels, and just treaded, and in events had some small declines with some action going on in the equity markets.

Coming out of negotiations, we were behind where we needed to be to meet that policy manual target requirement. The way to shore that up was to take dues on the ratification bonus. That's what the board of directors elected to do. Coming out of 2024, we're going to be in a strong financial position, having repaired the balance sheet and brought those two reserve funds up to their target levels.

Tony Mulhare:

You're talking about the SOS fund, the Strike Committee's fund. Why is it so important to build that up over time? What kind of expenditures did we have over the negotiating cycle that we don't normally have in any given year?

Brian Hickman:

Yeah. They go out and they're doing different rallies, picket events. Trying to do outreach events to get the pilots, their families engaged. That takes a lot of money. Reserving an event space, food, that type of stuff, where getting the membership involved, getting them the education. It's really education seminar. If we don't set the money aside, it is very hard to absorb that in an operating budget.

Tony Mulhare:

We had some expenditures that we don't normally have. We started the first-ever strike centers that we had to rent space for in Baltimore. I think we even got so far as to rent space in Chicago, though we might not have built that one fully out, correct?

Brian Hickman:

That's correct. Even asset procurement of laptops to get them the technology that they need to perform the functions that the SOS, or formerly SPC, needed to do their job to engage the membership.

Amy Robinson:

I know you mentioned this. You talked about being in arrears, and having to go ahead and do the ratification bonus, take dues out of that. We didn't do that in 2016. What was the difference between 2016 and now?

Hank Ketchum:

Well, the difference now, again, was that inflationary environment that we're in. Wages really moved ahead. We, of course, during negotiations, have to still pay our staff. It requires us to go ahead and give them the raises that are on pace with what their skillset would demand in the economy. We had fallen behind because we weren't getting raises.

Tony Mulhare:

Since that time, ALPA has announced dues refunds to its members. They did that back in April. Is that something we're in a position to do? And why or why not?

Hank Ketchum:

No. Our pilots pay the lowest due structure in the airline industry. An ALPA pilot pays 1.85%. A pilot at American Airlines or at APA, they have 1% due structure like we do during peace time. But six months prior to entering negotiations, or Section 6 negotiations, their dues go up to 1.5%. They did that in the summer of 2018. Then when they finally had the ratified agreement in 2023, that was a five-year period at 1.5%. We did 1.31 for 13 months. An ALPA pilot's always, always at that higher of the 1.85.

Tony Mulhare:

They're paying more for much, much longer than what we paid, so their surplus, also with their much larger pilot population across all of ALPA, results in a very different picture or surplus than we were able to generate here at SWAPA.

Hank Ketchum:

Very different picture because all the major ALPA carriers obviously saw significant raises. That would be, of course, United and Delta. They were able to refill those coffers. But they always were at the higher level, and then you get to 30%-plus. They had substantial assets where they were able to do that.

APA's another good example. Brian, I think when you and I looked at it, their net assets eclipsed $100 million at one point. That'd be the reason why APA, of course, was in a strong position to go ahead and have a dues holiday.

Amy Robinson:

Let's go ahead and pivot a little bit, and let's talk about the 2025 budget that the pilots are going to be seeing this upcoming election cycle. Let's talk about big picture. What are the changes from 2024? Are there any really big ticket items in this year's budget that we want to talk about?

Hank Ketchum:

The major change is going to be in the facility. As we move forward and look to the future, and preparing SWAPA for the future in our rebuilding efforts, the number one item that we need to address is the facility. We've been in our current facility for 20 years. Purchased it back in 2003, moved in in 2004. At that time, acquired the building for $1.5 million, put $700,000 into it, $2.2 million. Moved into the building.

Since then, we've allocated another 400,000 that's on the books. That brings you up to 2.6 million. We haven't really done much more than that 400,000. That was some minor bathroom remodeling and for expanding an IT area, and some other minor things that were done. From a repair and maintenance standpoint, we were basically just reactive in what we were trying to do because of budgetary constraints. Under that 1% due structure, not a lot of excess capital. Not we're at a point where the building just needs to be remodeled.

Tony Mulhare:

Why is 2025 the right time? Why move from an ownership position to this new property we're going to lease?

Hank Ketchum:

Okay. 2025 is a very opportune time because where we are in the negotiating cycle. Everything we do as a pilot union is always driven by that cycle, because when we get into negotiations, we're very busy. The staff is busy, the committees are busy. It's when the organization is the most stressed.

Right now, we're in peace time. In 2025, it is a very logical time to make that move. We also have some excess cash on the balance sheet as a result of soft money from the CBA, in terms of some of the financial modeling that we did when we forecast our dues. We didn't have data on how to capture that. We're actually seeing additional dues coming in as a result of that. It's allowed us to build a slight excess cash position, which we can then use to fund a move.

It's important to get that done in 2025, making a move. We've already been doing a facility study for four months. If the membership goes ahead and approves the budget, it's a six to seven month process after that. That'll take us to mid-2025. As we get into 2026, that's when we're doing our bench building. Then we, of course, have the early opener in mid-'27. '25 is a very logical year.

Amy Robinson:

I know that there's resources for people to take a look at, but you are part of this very extensive research for the facility. There were several different options that were proposed. Can you guys speak a little bit to that? Because I think that's important for our membership to hear.

Hank Ketchum:

Yeah. We have a facilities focus group that we formed. 14 people were involved in that project, from legal, to finance, to IT. Went out and sourced a commercial real estate broker. We did a study on the entire Dallas metroplex, and what areas made the most sense. We looked at where our employees lived. We looked at what areas were offering the best amenities at the lowest rental rates. We also looked at a purchase option, like what we have today, and how the numbers would work for that. Having a space to drive some rental income from some tenants, a very similar model to what we have here. Then we looked at what would it cost to remediate, swap it, just bring it up to where we need to be, and to be able to continue to live here and muddle along like we have. Then we also looked at a full remodel and what those costs were.

It was a very extensive study, a lot of financial modeling went into it. We landed on a decision to go ahead and move the facility to Las Colinas, which is in between Dallas Love Field and DFW, to a leased office space there in Williams Square.

Amy Robinson:

Tell the membership a little bit more about why is it advantageous for us to lease space versus buying space?

Brian Hickman:

Yeah, absolutely. Our core business is not to be a landlord, not to own necessarily our own office space. Our core business is to serve the pilots. With a leased office space, we can go in, it's turnkey, and we can focus on serving the pilots. There's a lot of, again, additional benefits from being in an area that has other services that can actually service SWAPA, versus our current building that has no services, no amenities.

Tony Mulhare:

I think an important thing to point out here is that if we aren't the owners of the space, if there's a problem with the space that needs repairs or something happens, we then turn to the building owner and go, "Please fix this space." That allows our executive team and our staff to do their primary job, which is to focus on our core missions here at SWAPA.

Hank Ketchum:

Yeah, absolutely. As the building has aged, there's a lot of environmental conditions we've had to deal with. There's an increase transient population in the area. We've always had budget constraints as well. You look at us at our 1% due structure, as I mentioned, priorities are always to fund negotiations, and to keep the dues as low as we can. We were able to keep it at 1% through that whole time the last cycle, except for the 1.31 for the 13-months. Always a focus on really delivering low costs to our pilots.

But one of the things in being reactive instead of proactive with building repairs and maintenance, the building's just at a point, after 20 years, where it really just needs a full remodel if we were to stay here. The reality is it's not the best neighborhood. Putting that money into the facility, we're just not going to get the return on it. And then the time distraction for executive officers and executive leadership on the staff side, to commit to that. Just better, again, as Brian mentioned, we want to focus on our core mission of serving pilots, not maintain a building and taking care of tenants.

Amy Robinson:

In terms of commercial real estate, apparently that's been a big driving factor for us. Why is that better now than it would have been in prior years?

Hank Ketchum:

Well, right now is a very attractive time in the commercial real estate market. Coming out of the pandemic, there's a lot of supply in terms of office space. And people returning to work, and companies utilizing office space, versus work-from-home. What we found in the Dallas area as we did our research, Las Colinas had an attractive value proposition. We were able to go there and drive a pretty significant tenant improvement allowance. And then also, we'll be looking at signing a 10-year lease, and that provides 10 free months of base rent is what they call it. All in all, at Williams Square, we're looking at $2.6 million in incentives for SWAPA.

The other factor is growth. In looking at a lease option, why it's so attractive to us, not only is it the attention that it diverts for executive leadership, but it's also the ability to expand. Williams Square is a large office facility. It has three different towers. It gives us flexibility, if SWAPA needs to grow in the future, to be able to expand into some of that additional office space.

Amy Robinson:

A couple of just basic questions, in terms of where are we getting the money from? And two, where's the money from the sale of the current building going?

Hank Ketchum:

First, I'll start with how do we approach the budget. We want to be conservative. In this budget, we don't recognize the sale of 1450. Our move is not being supported in the budgetary analytics that are being presented to the membership. It doesn't count on a sale to make the budget work.

As a result of that, we have a $1.3 million deficit in the budget. That's being funded, if you'll remember, I talked about the $4.7 million in net cash. We need about a million-and-a-half in operating cash just to make sure we have enough in the timing of cash payments. That leaves a pretty substantial surplus, in terms of $3.2 million of additional funding that we can allocate to other areas.

What we did is we established a capital reserve fund. This capital reserve fund was something Brian and I have talked about for a few years, wanting to form. It's really a savings account for things like building needs. When you need to do refurbishments, remodeling, there's also other capital projects like ERP systems for Brian's accounting systems that are capitalized that we can also use as a source of funds as well. The budget, even though it's a deficit budget at 1.3 million, the board has authorized to go ahead and establish a capital reserve fund and fund it with a million-and-a-half dollars of that excess cash I just spoke about.

Then into the future, hopefully in 2025, we sell the building, we can then basically replenish the money that we took out of there for the move, the $1.3 million deficit. Because it's going to cost us 2.8 million, in terms of cap ex and op ex funding to do this move.

Tony Mulhare:

Brian, if we're getting out of the ownership business, why is that capital reserve fund important moving forward?

Brian Hickman:

As Hank mentioned, if we expand in the future, whether that's with services or technology that we offer our constituents, that is something that it could be outside of our normal scope of operations that we need to save and pay. Hank mentioned my ERP system conversion. They did that conversion maybe 10-plus years ago.

Tony Mulhare:

What's an ERP?

Brian Hickman:

Enterprise resource planning. That's our accounting, and financial, and budget system. That's the stuff that you would want to save for that's outside of what we're doing and presenting in this budget. Where five years from now, 10 years from now, at the end of a lease or during a lease, if we need to expand, money needs to be set aside strategically to pay for additional expansion, additional furniture, so on and so forth.

Tony Mulhare:

Even if we lease, at some point in the future, we're going to have to refurbish the space that we live and work in, correct?

Hank Ketchum:

That is correct. At the end of a lease term, like a 10-year lease term, that again is a negotiation. You would go into that with a landlord, if you had to do a refresh of the facility, you would obviously try to negotiate another tenant improvement allowance to allow you to do that. But this capital reserve fund would be a great source of additional funding, and just a responsible way of doing business.

Amy Robinson:

Hank, you talked earlier about dropping the due structure from 1.31, which we carried for about 13 months I think you said, but we dropped it back down to 1%. But our pilots did get a raise, so why are we not carrying a surplus based on that raise?

Hank Ketchum:

Well, this year we are, of course, because we have dues on the ratification bonus. Then we'll also have the increased dues revenue coming in from the soft money side. We also have higher implementation costs going into this year. Our committees are very busy. Our negotiating committee, contract administration, our scheduling analytics committee, all very busy. The pilot group received the big raise, but that translates directly to our committee costs because of trip loss. Our trip loss pays are based off pay rates that are paid to our pilots. Even though our pilots get a big raise, revenues go up, we also see a corresponding increase in committee costs because the majority of our committee costs are driven by trip loss, which are derived from those pilot pay rates.

On the department side, we also see a pretty healthy rate of spend because the airline's been growing. As the airline grows, we have to add staff. That's what we've been doing. We're going to be going to 51 employees, full-time staff, to service the needs of our pilots on the 2025 budget.

Amy Robinson:

You did talk about trip pulls and things. I know a lot of times, our membership asks questions about the cost of a trip pull, or whatever. But I do want to do a little plug.

On the website, on the SWAPA website, every month, we publish the trip pull for the month, and what committees have spent how much money, and et cetera. That's a big testament to our financial transparency, in allowing our membership to see all of that at any given time.

Hank Ketchum:

Absolutely. Brian and his team do a great job of producing our monthly financial report that's also posted on the SWAPA website. If you want the detail by committee, by department, by line item and account from our general ledger, it's all in there. It's typically over 100 pages. Brian does a great job of doing a writeup in the beginning of that, that's three to four pages, detailing all the activity.

Brian Hickman:

It's also something that the board put into policy manual that is required for transparency to the membership.

Tony Mulhare:

Hank, previously you mentioned the reserve fund being replenished. What is the SWAPA reserve fund? What do we use it for? Why is important to have it filled to a certain amount?

Hank Ketchum:

Well, we have three reserve funds. We have the longterm reserve fund, we have the SPC reserve fund, and now we have this newly formed capital reserve fund.

The main one is the longterm reserve fund. The reason we have a longterm reserve fund, it's like your rainy day fund. Just like you'd have a savings account at home, we need to have a savings account to run our business. It's there in the event of a merger acquisition, if we ever have a strike, a severe economic downturn. If we ever were entered into litigation, maybe we were sued, we'd have to have the ability to fund the lawsuit. There are numerous reasons for why we have a longterm reserve fund. Every well-run business has a reserve fund.

Tony Mulhare:

This is a deficit budget for this year. But are we looking at continued deficits moving forward? Or do we have a better financial outlook for years 2026 and beyond?

Hank Ketchum:

Yes, we do. The only reason this is a deficit budget is because of the $2.8 million of expenditures. Some of that's cap ex, and some of it's op ex. They're one-time expenses related to the move. Once we're there, and one of the things Brian and I looked at because we're always looking at everything on what we call a proforma basis. What would it have looked like in 2025, if we had already been at Williams Square, we didn't have to pay operating expenses for 1450 at SWAPA, the building was already sold. What does it look like with a full load, a full year of rent at Williams Square, where would we have landed on the budget? According to our analytics, we would have had a $1.7 million surplus.

We do look at that. Of course, we can never guess what happens to the airline, which really drives our revenue into the future. But that looks very positive for '26 and beyond.

Tony Mulhare:

Okay. Let's talk specifics now. Digging into the committee budgets for 2025, some have gone up, some have gone down, and some are about the same as 2024. Which committees will see a large increase in 2025 and why?

Hank Ketchum:

Well, I'll go through the increases, and then the decreases.

On the increase side, the board of directors is going up. That's a result of a full year of having Nashville in the budget, because the base opened on May 1st. Then the other item is we've seen a lot of, a significant increase in what we call 21Es, which are disciplinary related investigations, that type of thing. That drives extra costs because, of course your board members are out there representing you if you ever need representation with a company.

Other area, contract administration. With the new CBA, we're seeing a lot of demand being put on our contract administration committee. That's driving higher costs there. Both in the committee and the department.

Tony Mulhare:

They have a big role in 21Es as well, correct?

Hank Ketchum:

Absolutely. They're as tied into that as the board of directors is. It's a team, between legal, contract admin, and our board of directors.

Then we have higher IT costs. We had an AI specialist we added last year. Then our current Chairman Will Young, he's getting pretty close to retirement. He's looking to build a bench, so we allocated some TFPs to allow him to do that, so he can start transferring his skillsets as he looks towards retirement.

Then we have our schedule analytics committee. Again, that has a big tie into implementation. They also work with contract administration as well, that we're one of the counterparts of the company, delivering just a phenomenal product for our pilots.

The areas we saw savings were in our elections. Last year, we had the TA ratification, but we had a special election for my position. We had a lot of other special elections for representative positions. We should see those costs go down. Executive costs will go down as well. Then we also have the policy manual requirements that fall off. We'll have a new president elect and a new president next year. The policy manual says, for this year, we had to account for two months of the president elect to be paid alongside of the president. Well, we won't have that in '25. Same for my position, it's one month. There's basically three months of trip loss that drop off there.

Then with both outreach and SOS, we took those budgets down. We're not in that wartime footprint. The outreach budget, of course, has a big tie in to hiring. We really don't see much of any hiring at all, other than a couple of 2T5 classes coming through in 2025. Then the SOS activity, of course, has been taken down.

Those are the main areas in the committee leadership budgets, which are only up 1.8%. That's sub-inflationary, so we've done a very good job of controlling costs there.

Tony Mulhare:

Hank, I thought we were in peace time here. Why is the negotiating committee still fully staffed? Aren't the negotiations concluded? Inform the listeners as to why it's so important to keep that committee fully funded, even though we're technically in between negotiations.

Hank Ketchum:

Well, that committee is heavily involved in implementation. They have the GIC, where they meet with the company every other week. There's a lot of activity that goes on in between those meetings. They're heavily involved with implementation.

As we get down the road, they're going to have to start looking at building a bench. They're going to be the ones that are going to need to be there to train the next team ask they look to hand off the baton to a new group, as get closer and closer to mid-year 2027. Of course, you don't send a new team in there the day before negotiations start. That's the reason for the NC budget.

Amy Robinson:

Also, I know there were several committees that SWA was going to start paying for some of those committee budgets. What are the details of that? How did that offset any of our costs?

Brian Hickman:

Yeah. We have certain committees, like safety. There's a few subcommittees under there. There's SAC that also has a full-time position paid for. It's a calculation that we have to do at the end of each month, for union billing to reimburse Southwest for the trip loss that the pilots are pulling. They agreed to it in the CBA. We get a credit from them at the end of each month, as we're paying that invoice for trip loss.

It's helped out substantially. Safety budget used to be one-and-a-half million. It's been significantly reduced down to maybe a half-a-million going forward. Some committees are not paid for in full, so there's still costs absorbed. But we do also get part-time pilot credits as well, that have helped out tremendously with the workload that we're seeing in safety and scheduling analytics.

Tony Mulhare:

We've talked a lot about cost. But the other side of that discussion is value. What additional value add is SWAPA bringing to the table that the membership should see?

Hank Ketchum:

Well, it's really across the organization. We're a pilot services organization, it's what we do. We take care of our pilots and their families. Our pilot services group, like SERT, special services lift, or HIMs, pilot benefits. I'll tell you, our pilot benefits team has been working extremely hard during implementation. A pretty big change, in terms of the insurance product that's provided now through the company, with the loss of license. Then the big shift with MetLife, in what we did with both STD and LTD, and those programs. Then VEBA, and transitioning that. There's a lot of work that goes on, and a lot of phone calls that are taken and answered.

You look in the back, in the scheduling analytics committee. The growth we've seen there in head count, it's because they have so much work to do with all those great scheduling work roles that were negotiated in the CBA. We have to backfill, and then make sure that we're providing the team that can actually go out and assist with the implementation.

Contract administration, we already talked about the negotiating committee. EFA is busy all the time. EIM, Wall Street interactions. They helped me with a facilities project. Those guys are going all the time.

Across the board, our tier one committees are doing a great job providing tremendous value, along with our pilots services groups which provide great support to our pilots and their families.

Amy Robinson:

I think even our departments. Brian, could you speak to that to some extent?

Brian Hickman:

Yeah, absolutely. Hank mentioned some of the big ticket items in the budget. We've talked about facilities, we've talked about contract admin. When you look at the department budgets and you see where we've grown or actually contracted, the departments are up almost 18% year-over-year. There's $2.8 million of one-time costs. You extract that, and it's nominal inflationary growth.

But what we've done, from a strategic management side, we've tried to get people in the right department for the pilot services that were mentioned. Pilot benefits is growing again because of those contracts. Retirement 401K, their first in class in the industry for the retirement saving plan for the pilots and the staff. There's just certain areas where strategic planning, we're focusing on the right stuff. We're growing in the right area to serve the pilots and the membership.

Tony Mulhare:

If I want to know more about the budget, and I want to see more about the facilities, where do I go to find that?

Hank Ketchum:

You can go to swapa.org. We have the budget book, a comprehensive book, that Brian and I, along with the entire accounting and finance team put together. A very extensive document, it goes through the budgets in great detail. Also, there's a link to this facilities project. Our pilots can go and see the amount of analytics that went that project, the amount of lift, the amount of work in determining what would be the best facility and provide us the best value proposition for our pilots and our staff.

Brian Hickman:

A special shout-out to the communications department. They've been side-by-side. It's an excellent product that we're putting out.

Tony Mulhare:

The board of directors has had an opportunity to vote on this and they've approved this budget. But do I, as an aligned pilot, get an opportunity to voice my opinion on this budget?

Hank Ketchum:

You do. The budget's up for vote. During the fall election cycle, every pilot has the opportunity to go and cast their vote on the budget.

Amy Robinson:

To put a bow on this podcast as a whole, what is it about this budget that you are proud of? What do you think is imperative here?

Hank Ketchum:

We have a funding proposition here that will take great care of our pilots and their families, provide all the services and needs that they demand at a very efficient due structure of 1%. It also allows us to prepare the association for the future. And as we look to undertake our facilities move and get us in place so we're ready to go, and start preparing for the next negotiating cycle.

Tony Mulhare:

We'd like to thank Hank and Brian for taking the time to walk us through this budget discussion. The proposed budget can be viewed in detail at swapa.org. As always, we'd love to hear from you and what feedback you have for us on this podcast or any of our products. Drop us a line at comm@swapa.org and let us know how we did.

Amy Robinson:

Finally, today's bonus number is 22. As in the 22nd of October. That's the date the fall general election closes. Please make sure to cast a vote for the proposed budget by that date.