A New Southwest/AirTran merger theory

Eagle757shark

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The Southwest "mystery" and my somewhat absurd theory.


4:05 PM Tue, May 26, 2009 | Permalink
Eric Torbenson/Reporter
First, the mild mystery: Why did Dallas' Southwest Airlines Co. stop its code-share work with Westjet up in Canada, claiming that it needed to redeploy resources in other areas?
Airline folks huddled a bit today here at the DMN about that and didn't really get closer to an explanation. Southwest has done code-shares before (ATA Airlines, before its demise) and it's not like re-inventing the wheel here: it's making computers talk with each other so you can sell seats on each other's airplanes. Maybe there were more problems in the integration than they had thought. But somehow an airline with 35,000 employees has to stop a project to re-deploy resources?
The other wildcard is Gary Kelly's mysterious comments at the Annual Meeting last week where he mentioned "revenue enhancements" that they can't talk about but are working on.
My totally un-sourced, not-to-be traded upon but not totally outlandish theory after the click:

Southwest Airlines is trying to buy Airtran Airways.
Or maybe at least thinking about it. Here's my theory: First, Gary Kelly & Co. have all but lost Wall Street, which is rather unimpressed with Southwest's rising labor costs and have lumped Southwest along with all the other airlines when in the past they treated it as a unique creature that deserved special treatment. That was when Southwest was growing quickly and charming folks; now it's shrinking and looks like a lot of other airlines in terms of its challenges. When I started writing about Southwest back in 2002, shares were touching $20. They're $7 now. Since employees are the largest shareholder group at Southwest, their morale would really improve along with the share price.
Airtran's top 15 airports are all also Southwest Airports, or are at least about to be Southwest airports once Southwest launches LaGuardia, Boston and Milwaukee service. The actual route overlap isn't nearly so great as Southwest doesn't serve Atlanta, Airtran's major hub, but I think that's increasing. More and more, Airtran and Southwest will match wits on pricing.
And I really think Southwest's pricing folks would like to price their product without having to worry how Airtran is pricing its product, as Airtran -- depending on how you're doing the math -- has equivalent or lower unit costs than Southwest on some cases and can really lower yields on routes they fly and still make money. The math behind any successful airline merger is 1+1= something less than 2 because less capacity plus more pricing power equals more profits. Buy Airtran, and Southwest can gain more pricing power in markets they already fly such as Orlando, Philly, Baltimore and especially Milwaukee, where Airtran is bulking up its fleet. And winning a huge market share in Atlanta? That'd be a very attractive addition to a network that already has lots of big cities in it and where Southwest is adding more big cities. You increase your national network, the more appeal you have to business fliers, and that's where the margin remains in the difficult airline business.
Southwest has the cash on hand to make such a bold play and recently took steps to pay off its bank credit line and raise more cash. Airtran's market cap is about $650 million. It flies Boeing planes that aren't exact matches of Southwest but are pretty close, plus it flies a fleet of 717s that might work very nicely on thin routes for Southwest (say, Love Field routes to Midland or other smaller Texas cities). I asked Gary Kelly back in 2007 about why he just doesn't buy AirTran and he said they'd probably buy somebody down the road but that the investing community doesn't make decisions for his airline. If you Google Southwest buys Airtran, that's actually all you get in terms of results - my question to Gary and his answer. Which is why it's still a pretty absurd theory - I don't see it out there in many discussions.
Airtran shares have popped up in the last few weeks from a 52-week low, but are still well below where they stood in the last peak of airline shares. Not sure how eager its board would be to getting bought out; Airtran is mighty proud of the low-cost carrier they've built and they're fierce rivals of Southwest. But they've got just under $400 million of cash on hand and storm clouds are coming in the form of potential oil spikes that, coupled with the current underwhelming demand market, could really damage a carrier of that size in a hurry. Southwest has $2 billion in the bank and the ability to securitize many of its planes for billions more - it's the only big airline out there with investment-grade ratings and it's played a very cash-conservative strategy for a long time.
Of course, there are plenty of reasons why this wouldn't be such a hot idea. Integrating airlines is, in fact, a form of delicate rocket science with potentially explosive impacts if done poorly. It's a high-wire act and often disastrous in terms of labor relations, which Southwest cares a lot about. It's hard to say how Wall Street would react to such a deal - I'd argue that any attention would be welcome. The plane fleets don't mesh perfectly (but compare that to Northwest-Delta), the price might be too high no matter what Southwest wants to pay because, as Gary Kelly said last week, "cash is going to be king" going forward.
For this armchair reporter, frankly, Southwest needs to take some big risks to once again capture Wall Street's attention and grab investors interests once again. It needs some way to differentiate itself from the pack, and not having baggage fees hasn't been that strategy so far. Your comments appreciated. It may be a terrible idea for Southwest to think about trying to swallow one of its competitors. But it's clear that Kelly & Co. want some sort of game-changer.
 

GuppyWN

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The line starts right behind the 9/08 newhire class. (thought I'd jump right in and piss everybody off from the get go.)

Gup
 

Dude

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If we acquire/merge, I want my $7500.00 bucks back that I paid for the type. That or everyone else buys in. I paid for mine.

One thing is for sure.......this would be an equal-opportunity screwing. Mergers are only successful if everyone feels like they got screwed and mgmt. regrets it.

Duuuuude:erm:
 

Lear70

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The line starts right behind the 9/08 newhire class. (thought I'd jump right in and piss everybody off from the get go.)

Gup
You succeeded... ;)

p.s. I think DOH is highly overrated. I think AAI will buy SWA and staple all of you to the bottom of the list. Gear up, b*tch. :D
 

Fubijaakr

Seniority is Forever
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Enough
He's got the right idea, but the wrong carrier.
 

Cobra17

¿quién es tu papi?
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You succeeded... ;)

p.s. I think DOH is highly overrated. I think AAI will buy SWA and staple all of you to the bottom of the list. Gear up, b*tch. :D
Ever look at the balance sheets? This is Monopoly, not WSOP.
 

Kharma Police

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The line starts right behind the 9/08 newhire class. (thought I'd jump right in and piss everybody off from the get go.)

Gup
Tell it to the arbitrator. Who knows, he might have a sense of humor.
 

c9skytrain

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We can't merge. AAI has ground based wifi. LUV has satellite based wifi. At least I think that's what those Yakima rack luggage rack looking blue things on the top of the purple airplanes are. Either that or for extra bags.
 

Eagle757shark

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The line starts right behind the 9/08 newhire class. (thought I'd jump right in and piss everybody off from the get go.)

Gup
Because it's all about you.....no wonder this industry is so screwed up! Explain to everyone on this board with some intelligence why you are entitled to putting all AirTran pilots behind 9/08 nehires. How absurd!
 

gearup5

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It won't work. We taxi to slow, and refuse to call ready to go a half mile from the end of runway;)
 

GuppyWN

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Because it's all about you.....no wonder this industry is so screwed up! Explain to everyone on this board with some intelligence why you are entitled to putting all AirTran pilots behind 9/08 nehires. How absurd!
I was jerking your chain bro..... sort of! :cool: Not gonna lie to you, if I had my choice you'd get stapled but A/M and B/M will be the reality.

It's all good,
Gup
 

PanPan

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If we acquire/merge, I want my $7500.00 bucks back that I paid for the type. That or everyone else buys in. I paid for mine.
...
Duuuuude:erm:
I'll "buy in" as long as I get back pay for the last four years of flying it at SW rates!!!

Saweeeet
 

Kharma Police

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Because it's all about you.....no wonder this industry is so screwed up! Explain to everyone on this board with some intelligence why you are entitled to putting all AirTran pilots behind 9/08 nehires. How absurd!
Don't get riled up over something that will probably never happen. If it does, all the chest thumping, Hee-Haw watching, Kool-Aid drinking SWAPholes can try and give the arbitrator a pool table or plasma TV, but it's not going to change his decision for a fair and equitable merger with our profitable airline.
 

fiel12

That's Ridiculous!
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Nothing would kill the LUV culture quicker than a merger with S/I. I'd like to think GK knows that.
 

1031Guy

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He's got the right idea, but the wrong carrier.

Sun Country:
- In BK...no significant tangible assets
- Same terminal in MSP
- Same aircraft type
- Established Mexico,caribbean, and military ops

Just my .02
 

labbats

Zulu who?
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With any possible integration with SWA, I only hope the arbitrator is less biased than ATC.
 
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