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Sep272010

« Southwest Puts Its Money to Work – Announces Intention to Buy AirTran »

In March of this year, I wrote a blog titled:   Dear Southwest: Grab Your Bag of Fiction; It’s On.  This widely-read piece was about Southwest’s role in the proposed US Airways – Delta slot swap transaction. “If Southwest wants to gain entry to the few remaining slot controlled airports,” I wrote at the time, “Then it should make the incumbents an offer – one that provides the slot holder a return on that carrier’s prior investment.”

Well today, Southwest announced an investment – a $1.4 billion investment – in purchasing AirTran Airways, lock, stock and landing slots.  And that is what I was pining for in that post.  That is, I believe Southwest should pay, not get something for free or at some rock bottom price for assets the incumbents paid dearly for over the years. With AirTran come slots at New York’s LaGuardia and Washington’s Reagan National Airports.  Along with slots, Southwest gains meaningful entry into the one remaining legacy carrier hub where it offers no service – Atlanta.  It also gains entry into Charlotte, a US Airways hub.

Should Delta at Atlanta and US Airways at Charlotte be concerned with this transaction?  No, and there are a number of reasons why not.  First and foremost, the network carriers already compete with the low cost sector for nearly 85 percent of their domestic revenues.  Whereas AirTran serves 37 markets that Southwest does not serve, some of them smaller, there will be some new competition for passengers in those markets.  But for the most part, those cities already enjoy the low fares delivered via AirTran’s initial entry.  A second consideration is that while Delta and US Airways depend on local traffic at Atlanta and Charlotte, each are major connecting complexes and are not solely reliant on originating passengers.

If you ask me, the losers in this announcement are not the network carriers but rather Frontier and Spirit.  jetBlue will survive just fine.  But Frontier is now confined to one [maybe two] traffic base for all intents and purposes.  And that makes them vulnerable.  As for Spirit, which just announced its intentions to launch a $300 million Initial Public Offering, it is one thing to have a highly fragmented market competing inside their network.  It is a totally different animal to have Southwest and AirTran focused on carrying traffic to the Caribbean. The investment thesis necessary to market the IPO just got tougher.

Southwest Needs A New Reference

In its press release Southwest said: “Based on an economic analysis by Campbell-Hill Aviation Group, LLP*, Southwest Airlines’ more expansive low-fare service at Atlanta, alone, has the potential to stimulate over two million new passengers and over $200 million in consumer savings, annually. These savings would be created from the new low-fare competition that Southwest Airlines would be able to provide as a result of the acquisition, expanding the well-known “Southwest Effect’” of reducing fares and stimulating new passenger traffic wherever it flies.”

So where is the “Southwest Effect” in Akron-Canton?  AirTran serves the market and Southwest serves Cleveland up the road.  There should be significant stimulation in that market area? And in Dayton and Columbus, OH?  Perhaps Southwest is looking far back to a 1993 study.  Ding: the “Southwest Effect” as we knew it is dead.  The truth is today’s stimulation is largely diversion from another market or another carrier.  Fares may still be reduced in certain AirTran markets where the network carriers rely mostly on regional jets, but some markets will more than likely just recapture certain traffic from an airport in the catchment area that offered better fares to a unique geography.

Labor Issues

Some have questioned whether the acquisition will lead to labor troubles down the road. But one thing is for sure: If I was an AirTran employee the first words out of my mouth upon hearing the news would be:  “Ding, cha-ching!”  Like employees at United who are looking forward to enjoying the feel of a new culture, one can be sure that the AirTran employees feel much the same.  For them it is an opportunity to join one of the most admired and beloved companies, not just in the airline industry, but in the entire country

There will need to be union representation elections as a result of the merger as pilots and flight attendants are represented by different unions at each airline.  But it’s hard to imagine any vote going the way of the AirTran unions.  The main difficulty then becomes seniority list integration.  Southwest CEO Gary Kelly told investors that “equitable and fair” will rule the integration process.  That sounds like the words in the Allegheny-Mohawk Labor Protective Provisions and should be music to the ears of AirTran employees.  The question is whether each union will have it’s own definition of what is equitable and fair.  That was the case in Southwest’s most recent acquisition attempt, when the Southwest Airlines Pilots’ Association could not find a formula to integrate Frontier Airlines pilots – and the deal failed.

The integration process has evolved over the years since the Allegheny-Mohawk Labor Protective Provisions were enacted. Over that time, there have been more failures than successes in adopting fairness and equity. But it is incumbent for Southwest labor and management leadership to ensure that career expectations are met for all employees. Simply put, this concept means that the relative seniority in a combined list is not significantly different for any respective employee than it would be in their respective entity today.

Concluding Thoughts

Southwest will celebrate its 40th birthday next year. It is a mature and maturing carrier operating in a mature domestic environment where it is no longer THE innovator. What I find most interesting in Southwest’s potential bid for AirTran is that the carrier is being forced to act just like the network legacy carriers in seeking a consolidation scenario that would lead to an improved revenue line systemwide.

Let’s give credit where credit is due.  Southwest put its money where its route system was weakest and made a very smart acquisition -- one that recognizes that two carriers will accomplish more together than either carrier could on its own.  The two carriers offer a combined network with minimal overlap that ensures that new revenue synergies will be generated.  With the deal there also will be new international opportunities derived for Southwest’s loyal passenger base.  Multiple fleet types are not an issue as the smaller airframe will allow Southwest to serve some smaller communities.

But I can’t wait to hear the arguments Southwest uses in Washington to gain regulatory approval, particularly as it will be hard pressed to make the argument that acquiring AirTran would further lower airfares in the US domestic marketplace.  After all, Southwest is not the only airline offering low fares, no matter what its boosters in Washington may think.

To make its case, the little ol’ Texas carrier that flies only to secondary markets will probably use the very same arguments to gain approval as did Delta/Northwest and United/Continental used.  Interesting indeed.   

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    Southwest Puts Its Money to Work – Announces Intention to Buy AirTran - Aviation Articles and Commentary - Swelblog / Swelbar on Airlines
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Reader Comments (12)

I'm struggling to see how Frontier is a loser in this. Since the acquisition, Frontier has been confined to two - maybe three - traffic bases. I don't know what changes with this.

If nothing else it resolves an untenable situation at Milwaukee, may very slightly ease the situation at Kansas City and - who knows? - may even take some tiny pressure off DEN, after all these years.

But maybe I'm missing your point.

09.28.2010 | Unregistered Commenterdavywavy

Here's a nice picture view of just how much Southwest is not an upstart airline anymore: http://www.coolinfographics.com/blog/2010/9/28/converging-flight-paths-airline-merger-infographic.html

Incidentally, I agree with the previous commenter, I think the company that's going to be affected by this more than Frontier is Virgin.

09.28.2010 | Unregistered CommenterGreg

Do you really believe that the number 1 pilot at AirTran with a hire date of Sept 1993 should be placed right under the SWA number 1 pilot with a hire date of Sept 1974?
If the the answer is yes then this acquisition will be as harmonious as the AmWest/UsAir pilot senoirity integration.
A very concerned SWA Captain

09.28.2010 | Unregistered CommenterMike

How about DOH? How many SWA pilots were hired after 1993? Airtran cant be upset about being given DOH, and a good chunk of the SWA pilots will be senior to them even with the DOH. Win-win?

On the previous Virgin comment, how will VX be affected? They focus on transcon routes, and I dont see SWA/Airtran operating nearly as many coast to coast nonstop routes as VX.

09.28.2010 | Unregistered CommenterBW

"Relative Seniority" is hardly equitable when the companies involved have such different career expectations. For a supposed expert, the author does not seem to grasp even the most rudimentary aspects of pilot integration. Relative seniority for Airtran employees is as extreme a position as stapling them to the bottom. Neither is position is reasonable and will result in endless labor strife, something no one needs. I hope the groups are smarter and more subtle than Mr Swelbar

09.28.2010 | Unregistered CommenterTWA Pilot

How do you think integration should work when Southwest has pilots that were previously
at Airtran as a captain and are now at Southwest? Airtran is and has been a place to get experience and try to move up to a better flying job. There are many pilots there who have interviewed or applied at Southwest only to be turned down. For those who were chosen to be hired as a Southwest pilot it would be a failure of our legal system and an injustice to have pilots they passed up on the heirarchy of careers to even be equall to them, much less ahead of on seniority at Southwest Airlines. A senior Airtran Captains annual income
is about equall to a 5 or 6 year Southwest first officer. Fair and Equitable is hard to define but earnings and benefits should be rule over any seniority list issues. There employee are getting a winfall just coming on our property and there should be no loss for our employees.

Peter

TWA Pilot

Thank you for your wisdom. What is relative? What is fair and equitable? My hope is that lessons were learned from the Frontier deal and we are not talking about stapling the AirTran pilots to the bottom of the list.

Relative can mean many things. If you think that I am advocating anything other than fair and equitable - taking into account the many variables that play a part in the process - then you are sorely mistaken.

09.28.2010 | Unregistered Commenterswelbar

Swelbar, you have no clue and know nothing about which you talk. Your definition of "fair and equitable" is laughable at best. For your information, if you compare my career here at SWA vs. a pilot, my same age, at Air Tran and total up our earnings over our time there is a HUGE discrepancy! With everything being equal, I will end up about $ 2 Million dollars ahead at age 65, than my counterpart at Air Tran. Tell me how an Air Tran pilot , who automatically is given a 40 to 60 percent pay raise, not including benefits and retirements, is not already receiving a HUGE windfall just by virtue of being hired at Southwest? If the Air Tran pilots are NOT stapled, they are the ones getting the windfall, not us! . What do I get out of the deal - nothing! I will welcome our new brothers and sisters with open arms, and I'm sure most of them will be excellent new Southwest employees, but to give them such a huge, unfair advantage right off the bat with relative seniority while we get ZERO, is absolutely ludicrous! A seniority integration list using "relative seniority" could account for a difference in 20+ years between a Southwest and Air Tran pilot. Tell me again how that is "fair and equitable"? I guess if you come from the school of Socialist wealth distribution like you advocate then it is "fair and equitable". Please stop with your Socialist agenda here, it is NOT welcome!

Mr. Swelbar, please do your research before you go on spewing your slanted, half-assed "facts" next tme here on this blog!

09.29.2010 | Unregistered CommenterSWA pilot

Mr. Swelbar,

The US airline industry has been characterized as having low barriers to entry. Do you see this merger as perhaps closing the door on that phase of de-regulation?

IMHO, this merger creates what is essentially a national low cost carrier (I'm aware that LUV does have some cost issues). We also have several other low cost airlines (that might merge). What need would a new low cost carrier fill? I would really like to hear your opinion on this issue.

As a retired airline pilot (not from either of these companies), I can assure you that it is impossible to merge two pilot senority lists without creating a very large number of disgruntled pilots. The postings here already demonstrate the difficulties involved.

I do not think a 'date of hire' merge would be fair to the LUV pilots. I think a "fair and equitable" solution would put all of the LUV pilots hired prior to the creation of AAI at the top of the list. Then there would be a bias towards the LUV Captains as AAI Captains are mixed into the list. Next, some of the LUV first officers would be placed above some of the AAI Captains and there would be a bias towards the LUV First Officers as the AAI First Officers are mixed in. Finally, there should be a fence that disolves slowly to provide some position protection for a period of time with rules to reduce displacement of B-717 pilots to reduce training costs.

Just my $.02...

09.29.2010 | Unregistered CommenterBob M.

It's a waste of time to even try and figure out what is "fair". Both sides will present an opener and it will go from there. If no one is happy, then it will be "fair"

As of today, the most junior captain at AirTran is a DEC 2004 hire. Before oil took off, upgrade time was three years. Aircraft deliveries have slowed, but they are still coming.

The current pay rates at AirTran are from contract 2001. We've been in negotiations since 2005. Just to bring us up to industry standard would involve a large increase in pay. Currently 10.5% B-Fund.

So who can really say what career expectations are?

09.29.2010 | Unregistered CommenterTony

One thing that could help to facilitate the merger of the seniority lists would be if Southwest decided to lease the 20 B-717 that Boeing took back from Mexicana's Click.

That would provide some growth so that the seniority list merger would not be a zero-sum game.

It would probably also provide some low cost aircraft since it would be more difficult for Boeing to place them somewhere esle.

09.29.2010 | Unregistered CommenterBob M.

I honestly wish that SWA would go acquire someone else. Go buy JetBlue or Reliant. Had your management announced the purchase of, let's say Delta, you pilots would be crying a river; all over integration. SWA has a 25 year history of manhandling smaller companies in mergers/ buyouts. HOW about SWA take on AMR or USAir in a merger. SWA hasn't hired a pilot in over 2 years, and AirTran has hired practically more pilots than the entire rest of the industry combined--so we are doing something right. I will be very surprised if the SWA culture is nothing more than a fairy tale, If you are saying get in line under us and be happy, you ARE nuts.

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