Another Southwest Airlines Co. Merger Makes No Sense

Many Southwest Airlines flight attendants think that Southwest is on the verge of putting together a new merger. That doesn't seem very likely, though.

Less than a year ago, Southwest Airlines essentially completed its merger with rival low-cost carrier AirTran Airways, retiring the AirTran brand for good on December 28.

Apparently, many of Southwest's flight attendants think that the airline is now on the prowl for another merger partner. Alaska Air,  Hawaiian Airlines, and JetBlue top the list of speculation (via - Chicago Business Journal).

However, it is highly unlikely that Southwest Airlines is thinking about any merger. None of these companies would be a very suitable merger partner, and attempting to merge would create a huge distraction just as Southwest is starting to ramp up its organic growth again.

Flight attendants are suspicious

A few months ago, Southwest Airlines reached a tentative agreement with the Transport Workers Union on a new flight attendant contract. The tentative agreement would have kept Southwest's flight attendants at the top of the industry in pay and benefits, according to the company.

However, the flight attendants clearly weren't impressed. A solid 89% of the flight attendants participated in the ratification vote, and 87% of them voted against the tentative agreement.

For whatever reason, many flight attendants have come to the conclusion that Southwest is particularly keen to get a contract ratified because it is shopping around for a new merger partner and wants to get its own house in order beforehand.

Why a merger doesn't make sense

Historically, one of Southwest's main tools for keeping costs down has been operating a single fleet type: the Boeing 737. The AirTran merger brought a second type of plane -- the 717 -- into Southwest's fleet. However, after initially planning to operate the 717 and 737 fleets side by side, in 2012 Southwest Airlines decided that it made more sense to go back to the single fleet type strategy.

This all-737 strategy is a big barrier to any further merger attempts at Southwest. Hawaiian Airlines flies a mixed fleet including 717s, two different types of wide-bodies, and also contracts out for regional flights on ATR turboprops. JetBlue also has a mixed fleet, which consists of A320s and E190s.

Given that Southwest's management just put in a lot of time, money, and effort to manage a transition back to an all-737 fleet, the idea that it will blow up this work by buying JetBlue or Hawaiian Airlines is far-fetched, to say the least.

Alaska Airlines does operate an all-737 fleet in its mainline operations. That makes it the most logical merger partner of the three for Southwest Airlines. Still, it's hardly a match made in heaven.

First of all, Alaska has a fairly extensive regional operation, with turboprop flights operated by its own regional subsidiary (Horizon Air) and regional jet flights that are contracted out. This adds a ton of complexity that Southwest's management is not accustomed to.

Second, Alaska's route network is heavily concentrated in Seattle, where it caters to a lot of business travelers. This requires amenities like first class seats and airport lounges that don't exist at Southwest.

Third, Alaska Air would be an extremely pricey acquisition. Southwest paid $1.4 billion for AirTran. Alaska could cost close to 10 times that amount, given that its market cap is already $9.7 billion and a merger premium would be necessary. It makes more sense for Southwest to focus on organic growth rather than paying that much for an acquisition.

Consolidation is slowing down

Merger mania in the airline industry may not be over, but it is definitely slowing down. If we do see more deals ahead, they probably will come primarily from smaller carriers bulking up.

Even for Southwest Airlines -- the smallest of the top four U.S. airlines -- attempting to buy a competitor the size of JetBlue or Alaska (both of which had more than $5 billion of revenue last year) would almost certainly invite antitrust scrutiny. That's a strong incentive to stand pat, beyond the business issues that make a merger with Hawaiian Airlines, JetBlue, or Alaska Air suspect.

This Southwest Airlines merger talk simply seems to be a case of the rumor mill run amok. The real reason why Southwest CEO Gary Kelly is so eager to reach new labor contracts probably has a lot more to do with a desire to keep operations smooth in a period when Southwest Airlines is earning record profits.

(The Motley Fool)