Southwest CEO: AirTran Deal 'Imperative' To Counter Fuel Spike

[maxblast72]

Interesting that you chose 2009 as that was the year Kelly had to pay the piper for the fuel hedges.

Interesting you chose the year 2008 as that was the year Fornaro wrote the $100 million check to unwind Airtran's bad hedges. Both Airtran and Southwest (and just about every airline) got caught with bad hedges as oil dropped from around $150 during the summer of 2008 to the low $30s by early 2009. Airtran unwound their position in Sept/Oct 2008 while Southwest absorbed most of the bad hedge costs during 2009 (as evidenced by their small $99 million profit in 2009).

Kelly could pay his fine for reneging on the deal and wait around for oil to spike even higher and then maybe get AAI at around $1.80-$2.00 a share. Or, has something changed so drastically in AAI's business model that they are not in danger of this happening again?

I am not a lawyer, but my guess is the Merger Agreement Fornaro and the lawyers drafted up for Kelly to sign back in September doesn't allow Kelly to back out of the deal for too many reasons (I believe lack of DOJ or AAI shareholder approval are the only conditions where SWA could). However, the testimony of your CEO just 9 days ago suggests he isn't looking to back out of the deal anytime soon.

 

[roughneck]

However, the testimony of your CEO just 9 days ago suggests he isn't looking to back out of the deal anytime soon.

He will certainly follow through with the acquisition. He wants the gates in Atlanta. Combining the operations is another thing. If oil continues up he may sell off AirTran and keep what he wants. Gates, slots, etc.

And yes, the AirTran contract allows that.

 

[Roomwithaview]

Maxblast

I didn't choose 2008 that was dictated by the price of oil. 2011 could be shaping up to be a similar setup.

Kelly said he wanted to buy Frontier. He didn't do that.

He said he was going to codeshare with Westjet. That didn't happen

He said he was going to use the old 300's for night freight. That hasn't happened.

I could go on and on about the things Kelly and flight ops have said we're going to do. I'll believe it when it happens.

My point, once again is better made by your CEO in his 2008 financial statement where he tries to explain to shareholders the reason for the losses and the uncertainty for the future. Bad hedging was never mentioned. You can read it for yourself, I got it off your website. I tried to cut and paste it but it's adobe and for some reason it didn't allow me to do so. Here's the gist of it.

Risk factors and competition. The ability of your competition to have more cash on hand, better credit, better credit ratings and the ability to beat you head to head on ticket prices. It's a pretty stark commentary.

Once again. Who needs who? We are much better positioned to weather any financial storm vis a vis Airtran. I will not argue that Kelly's comments were directed at Shareholders and the DOJ to make sure the deal goes through. However, I also know Kelly well enough to realize that he will not hesitate for a moment to pull out of a deal if it no longer is as financially lucrative as it once was. He reneged against us on codeshare and he will have no problem in backing out to get something at a better price later on down the road.

You ought to know how airline CEO's work by now.

 

[ivauir]

Roughneck,

I disagree. Gary could back out of the deal for a multitude of reasons.

Before anyone gets excited, I don't think he will, but Maxblast's assertion is incorrect: Gary can back out for any reason. There would be a penalty, but not enough to make GK blink.

Again, I'm NOT contending that this is the path. I don't think it is. Gary is going to follow through because (and as long as) the deal makes sense.

 

[jonjuan]

And, one more point to be made. The Hedges are on oil futures, not on fuel that goes into the planes. Not sure if you were alluding to something different but this is a great misconception that no one seems to get right, even the geniuses on CNBC or FOX business.

Not exactly. That's a misconception that it's solely on oil. It's actually a combination of heating oil. crude and yes, jet fuel. Heck, they might even have a small hedge based on the price of cotton which is at a 150-year high.
BTW, the geniuses on CNBC tend to know just a little of what they're talking about.

 

[Roomwithaview]

Jj

BTW, the geniuses on CNBC tend to know just a little of what they're talking about.

You get my point. Sorry but CNBC did have it wrong for a long time.

BTW, the geniuses on CNBC tend to know just a little of what they're talking about.

Correct. Just a little. Hope you didn't follow their advice on Lehman or Bear Stearns!

 

[Max Powers]

Not exactly. That's a misconception that it's solely on oil. It's actually a combination of heating oil. crude and yes, jet fuel. Heck, they might even have a small hedge based on the price of cotton which is at a 150-year high.
BTW, the geniuses on CNBC tend to know just a little of what they're talking about.

Correct...Don't even get me started on the FOXbusiness boys and hot girls. They have the same qualifications as a Piper Jafery mutual funds sales boy.

 

[waveflyer]

Hedges aren't primary.
They are put in place as well as they can so that we know how to price our advance ticket sales.
When an airline isn't hedged in ratio with their advanced bookings- and oil climbs- you just guaranteed a loss on those tickets. We got lucky making a profit on them in the past and unlucky with some losses. But in each case we knew how to price the tickets.

(btw- I don't believe there is such a thing as jet fuel futures- could be wrong)

 

[roughneck]

Roughneck,

I disagree. Gary could back out of the deal for a multitude of reasons.

Before anyone gets excited, I don't think he will, but Maxblast's assertion is incorrect: Gary can back out for any reason. There would be a penalty, but not enough to make GK blink.

Again, I'm NOT contending that this is the path. I don't think it is. Gary is going to follow through because (and as long as) the deal makes sense.

You are right. He CAN back out and WILL if it no longer makes sense to buy AirTran. Contrary to the belief of some on this forum, the break up fee doesn't apply to SWA it only applies to AirTran.

 

[maxblast72]

You are right. He CAN back out and WILL if it no longer makes sense to buy AirTran. Contrary to the belief of some on this forum, the break up fee doesn't apply to SWA it only applies to AirTran.

Here is a link to Airtran SEC filings:

http://investor.airtran.com/phoenix.zhtml?c=64267&p=irol-secSplash

On 2/9/2011, Airtran filed a DEFM14A (Filing Group Merger & Aquisitions).

Looking at the Termination of Merger Agreement section (located on page 85-86) and in Appendix A, Article III, Section 3.1 (located on page A-9), it appears that Southwest can back out of the merger if the AAI shareholders vote no, DOJ says no, AAI Board of Directors doesn't live up to their part of the deal, or Fornaro misrepresented Airtran in any way. It seems to say the deal can't fall through due to changes in economic conditions or changes in fuel price levels.

Can you point out the section that says Kelly can pull out of the deal if he doesn't like the deal anymore? You are correct that the breakup fee of $39 million only applies to Airtran.