Southwest and short-term capitalism

Not Zeynep’s typical wheelhouse, but good stuff here on the Southwest Airlines fiasco last week and how its related to too-common, short-term thinking that is too often and too easily rewarded in American capitalism:

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.

It’s a bit like constructing a building. If you had the option of not adhering to strict earthquake or fire codes — i.e., if there was little or no regulation or oversight — it would almost inevitably be cheaper and quicker to skip such niceties. The building might look and feel the same to its inhabitants — as long as there was no earthquake or fire. But if there were an earthquake or fire, the “debt” would be paid by the endangered inhabitants of the building.

Which brings us back to Southwest. Throughout the past year, the flight attendants’ union picketed in front of various airports as part of their contract negotiations. One protest sign they carried? A placard declaring, “Another Victim of SWA’s Outdated Technology,” with a graphic showing a stuck software progress bar. A few months ago, in September, they put the same sign lamenting the company’s outdated technology on the side of a truck and drove it in circles around Love Field (Southwest’s core airport) in Dallas as well as the nearby Southwest headquarters. In March, in its open letter to the company, the union even placed updating the creaking scheduling technology above its demands for increased pay…

So why didn’t Southwest simply update its software and systems?

Well, if you are a corporate executive whose compensation is tied to stock prices and earnings statements released every three months, there are strong incentives to address any immediate problem by essentially adding a bit of duct tape and wire to what you already have, rather than spending a large amount of money — updating software is costly and difficult — to address the root problem. Then you can cross your fingers and hope that whatever catastrophe may be in the making, it erupts under someone else’s future tenure. Such bets often pay off since, increasingly, the plight of a company’s customers and employees is divorced from the immediate fortunes of its current top executives.

In 2020, for instance, Southwest C.E.O. 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…

Ultimately, the problem is that we haven’t built a regulatory environment where companies have incentives to address technical debt, rather than passing the burden on to customers, employees or the next management.

What would proper incentives look like? It would differ by industry. For airlines, it might mean holding them responsible for the problems their miserly approach causes to the flying public. To start with, they could be forced to compensate passengers for delays or cancellations that go beyond reasonable expectations because of weather or events outside their control. (Europe has such a rule, though the implementation has hit a lot of snags.)

Companies can also be substantively fined for major failures like this one. But if the fines are too small, companies will just see them as a cost of doing business and carry on.

For example, after the 2017 Equifax breach, which exposed sensitive information from 143 million Americans because the company failed to institute a routine security update to its software, it agreed to pay a penalty of at least $575 million to the Federal Trade Commission. That may sound like a lot, but it was just a few dollars per affected customer, and a mere 15 percent of the company’s revenue in 2018, the year after the hack. I’m sure Equifax would have much preferred not to have been fined, but it was still a cost they could endure — especially those lucky enough to inhabit the executive suites. The Equifax C.E.O., Richard Smith, did resign. But despite the failure and the fine, he also collected $18 million in pension money on his way out the door.

This is why we can’t just keep turning the operation of more and more of our infrastructure and our lives to antiquated software and self-interested executives. Technical debt is real debt. It will eventually be paid by someone. And unless we take steps to hold companies and executives accountable for preventable — and foreseeable — failures, it will be we the public that keep paying.

To be fair, one can’t just blame this on “capitalism” as the other airlines clearly have a better handle on things.  But, we currently have an economic system and regulatory regime where it is too easy for really bad stuff like this to happen and for ordinary American to pay the price.  I’m not quite sure what the exact solution to technical debt and short-sighted execs getting rewarded, but I do feel confident that we can do a lot better with the right policy changes.