Cranky on the Web: Should Southwest Buy Another Airline?

Nov 9, 2019

More Reading on This Topic: Cranky on the Web, Southwest

If Southwest wanted to acquire another airline, which would it target? – Dallas Business Journal
A research note suggesting that Southwest might consider buying another airline to get new airplanes since the 737 MAX remains grounded has spread like wildfire. I have trouble seeing it. If there’s one thing Southwest does poorly, it’s change. And when it does change, it goes very slowly. An acquisition wouldn’t bring Southwest new airplanes for many months at the earliest. By then, the MAX should be flying again. So simply as a MAX solution, this isn’t a great plan. That doesn’t mean there can’t be other reasons, however.

Brett

19 responses to “Cranky on the Web: Should Southwest Buy Another Airline?”

Tim Dunn

Nov 9, 2019 at 6:03 am

It should be clear that Wall Street analysts have more to gain financially than by showing common sense when they suggest mergers like this – and they have done it over and over.

First, WN IS a megacarrier already. It carries similar amounts of passengers as the big 3. The only reason it doesn’t have comparable amounts of revenue is because its routes are not as long and don’t include higher yielding premium cabins.

Second, what is consistently left out of discussions like this is that WN has a higher CASM than every other potential merger candidate. There are major portions of the route systems of every potential merger partner for WN that don’t work with WN costs. Regulators can easily see that acquiring another carrier would result in WN cutting service or fares going up. How analysts can’t see that is beyond me.

Third, WN has a poor track record of competing against legacy carriers and AS and B6 are both large competitors to DL. WN has pulled out of EWR, is less than half the size AirTran was in Atlanta (in terms of flights) and has cut more capacity in DL hubs than in any other market group during the MAX grounding. WN has been growing in other places so to argue that the MAX is the reason for WN’s pulldowns in legacy carrier strength markets is patently devoid of facts. WN’s single class product does not compete well wiht the more complex but higher revenue legacy carrier model.

Fourth, it is highly unlikely that WN would acquire any airline to get A320s and it is unlikely that WN will ever fly the A320. If WN gets another aircraft, it will be a smaller aircraft such as the A220 or E2 family of jets. The A320 family largely duplicates the 737 and does nothing more than diversify WN’s current aircraft size – at huge operational costs; the MAX grounding is a once in a lifetime event for which it makes no sense to seek redundancy, esp. since Boeing will pay for at least part of the grounding cost. WN needs a 110-140 seat new generation aircraft in order to get industry leading CASM in a smaller aircraft size than the MAX7. Despite WN’s orders for the version, WN and BA both know the MAX7 is too large and not light enough to be competitive w/ newer, smaller aircraft. The MAX7s unit costs are higher than the MAX8 which further begs the question of why WN would order an aircraft that increases its costs relative to its existing fleet. WN needs a cost competitive smaller aircraft to be able to serve smaller routes than they can serve w/ the 737 series.
Fifth, AS and B6 have a huge amount of local loyalty in their home markets and that will be lost in a merger. Don’t underestimate the power of local politics in scuttling a deal. And, of course, there is no evidence that AS or B6 want to sell out – and they are both improving their performance which makes it less likely they could justify a sale to their boards.

There are a host of reasons why WN won’t merge but the argument of doing it based on fleet is the most uninformed possible. Glad you threw some cold water on the notion of a WN merger driven by fleet. WN is well run and they are looking at a 2nd aircraft type; they won’t engage in a merger to fix a short term problem which Boeing is going to pay for anyway.

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1. Oliver
  
  Nov 9, 2019 at 8:40 am
  
  I agree, it makes no sense to me to even think about a merger as an answer to the MAX grounding. Thiis blurb from the article is very weird:
  
  “JetBlue would bring over dozens of Airbus aircraft, but Southwest wouldn’t be able to realize fleet diversification benefits overnight. Such a merger would likely go through months of scrutinization by regulators while Southwest continues to be hamstrung by the lack of 737 Max planes in its fleet throughout the rest of 2019 and into 2020.“
  
  Gee, yeah… calendar says it’s Nov 9, so clearly nothing WN is going to do, whether pursuing a merger or buying alternative aircraft, is going to fix the lack of planes problem “throughout the rest of 2019 and into 2020”.
  
  So what *is* WN’s long term solution to more growth? Copy B6 and go trans Atlantic? While also introducing the complexity of premium seating?
  
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Jin King

Nov 9, 2019 at 10:29 am

Hi CF, If they can find the right deal I think it makes a lot of strategic sense for WN to acquire an A-320 airline. No, it would not be a MAX solution but I think that situation has awakened management to the risk associated with dedicating their whole fleet not to just one manufacturer but one aircraft type. There would be some cost to operating a second aircraft type but they could both have a fleet size that gets most of the benefits of commonality.

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1. CF
  
  Nov 9, 2019 at 12:19 pm
  
  Jin – I think the A220 is more likely, especially if they go with the -500. But why but an airline when you can just order the airplane? I guarantee you Airbus will find delivery slots whenever Southwest wants them.
  
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  1. Jeff
    
    Nov 10, 2019 at 5:30 am
    
    I agree it makes more sense… but Southwest’s Pilot Contract allows their pilots to hold them hostage to a new plane type rate. It isn’t like other US contracts where every plane type up to the a380 is spelled out. If Southwest shows interest in it, their pilots could hold up the ability to take on a new plane type until its written in contract. I’d think there’s some kind of merger scenario that would prevent this, but I could easily be wrong.
    
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  2. Jin King
    
    Nov 10, 2019 at 11:54 am
    
    Both good points
    
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Alex

Nov 9, 2019 at 10:34 am

I think the premise is wrong. Southwest has no interest in operating anything that’s not a 737, and they’re willing to leave the lower-volume destinations to the legacy network carriers. The MAX won’t be grounded forever, and in all likelihood it will be back in the air before any acquisition could be fully integrated.

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1. Justin Decodence
  
  Nov 9, 2019 at 11:28 am
  
  WN has just about ran out of high volume city pairs.
  
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2. enplaned
  
  Nov 9, 2019 at 2:25 pm
  
  The premise is not wrong – Southwest is known to be considering a second type, and it is right that they should consider it. A year ago, if anyone had told you that the 737MAX would be grounded for a better part of a year and Boeing’s reputation would be in tatters, everyone would have thought you were crazy.
  
  But this has, in fact, happened. Those who are relying on 737MAXes for lift and for growth are dead in the water currently, and those who have A320s, or have both types, have a degree of flexibility.
  
  Ryanair now has a subsidiary that flies A320s (Lauda). That was in the works prior to the MAX issues, but Ryanair must be doubly pleased that they made the decision to split their favors.
  
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  1. Sunny leveson-jones
    
    Nov 9, 2019 at 6:52 pm
    
    The problem for WN is that the max is most likely the last generation of 737, the reality is that its showing its age and with each modification its getting harder and harder and more and more tied together with ducttape and zip ties. So if your at WN or FR, whats your next step, and I’m really not sure what the best option is, get into the a320 family like FR, or wait for boeings next solution because the reality is 737 operators are going to have mixed fleets at some point.
    
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Jimmyjohn

Nov 9, 2019 at 5:35 pm

The premise that diversifying from the 737 would save them is faulty in my opinion. If they were able to go 50-50 with 737 and A320, losing either fleet would put the company out of business in short order.

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1. Noah
  
  Nov 11, 2019 at 7:39 am
  
  exactly. Once you reach enough scale in either fleet to reach real cost parity you reach a size where any grounding is impactful. And there is always a tradeoff of captive pricing to Boeing and favorable terms and design influence. So there is no easy answer.
  
  Now, should WN diversify? The model they have works, but is arguably approaching its limits — fewer new cities can support high cost structure and 150+ passengers per departure. And most public companies need growth. Additionally, there isn’t a good 1:1 replacement for the 737 after the MAX which seems likely to be challenged within 10 years, and airplanes at both the higher end (a321) and lower end (a220/E2) are starting to get CASM advantages while being able to right size capacity to a market. So the WN cost structure likely won’t save it the way quick turns, hedged fuel, and commonality worked over the past few decades.
  
  Should WN acquire someone? Acquisitions are tough — they take a lot of time and focus, hurt culture, and generally require paying a premium. So it makes sense when you get big cost synergies or revenue premiums. I don’t see anyone who has something WN wants that they couldn’t take the same premium money and pour into competition. They can buy or lease planes anytime they want and few airports are slot restricted. The best argument is the gaps in the New York market, but paying a premium for Jetblue likely wouldn’t lead to new customers beyond what each carrier has, would be challenging on culture for both work groups, and doesn’t help Southwest with new growth areas (i.e. Europe). So I just don’t see big benefit there. Same with Alaska — sure you get the state of Alaska, but will Southwest actually do better than Alaska there? Probably not…so paying a premium to lose focus and marginal loss of competition just doesn’t seem better than trying to get creative in fighting for markets or attempting to create a uniquely Southwest international service to deeper Latin America, Canada, or Western Europe.
  
  So WN doesn’t need an acquisition or a new type today, but over the next 5-10 years, they likely recognize that what got them here won’t get them there and they need an evolution of the business model. I don’t know what the right move is, and there is time to wait and see, but a responsible board will evaluate all options with an open mind.
  
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DesertGhost

Nov 9, 2019 at 7:52 pm

It’s interesting to see how what was once touted as one of Southwest’s greatest assets, its fleet commonality, has all-of-a-sudden become a liability. I read that Southwest’s board has given its management the go-ahead to look at other aircraft. If the 737 can’t adequately satisfy Southwest’s needs going forward, then why not look at alternatives? That’s common sense.

Wall Street makes a lot of money on M&A activity. Analysts are paid to give their opinions about companies, so why not try to drum up some M&A business while they’re at it? Southwest is doing just fine, even though it’s not Delta, the only perfect airline in the world. Southwest didn’t become a major airline because it had a “poor track record of competing against legacy carriers.” It only drove nearly all of them into bankruptcy. I’m guessing Southwest pulled out of Newark because it wanted to allocate its resources where it felt they could do better. That’s what smart companies do. Southwest competes very effectively in California, Texas, Las Vegas, Phoenix, Chicago, Baltimore and Denver, among many other places.

Southwest doesn’t need another type of aircraft. It also doesn’t need a merger partner. But if its board and management feel the airline’s long term profitability would be enhanced by either or both of those options, it would be foolish not to explore them.

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dan

Nov 10, 2019 at 5:37 am

I disagree…WN has done well with mergers… air tran…morris air…muse air …ata…and almost frontier. It has mostly helped the industry, by reducing competition therefore increasing fares…(just like delta helped the industry by buying a refinery-stabilizing jet fuel cost). SO IF WN buys alaska airlines…they will gain 166 737’s quickly…the 10 x319’s are orphan jets and would be grounded immediately and the 8 a321neo’s would be sold at a profit in a matter of hours. this would leave 53 a320’s that they would operate for a couple years temporarily until the max returns

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1. Mike
  
  Nov 10, 2019 at 10:53 am
  
  No – Alaska is fine. No more consolidation. WN is large enough and their fares aren’t really that low. Maybe they should have thought about diversifying their fleet a while back. Any further merger activity would be very bad for the public.
  
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Eric C

Nov 10, 2019 at 9:00 am

Southwest should probably be more concerned with a merger of NK and F9, whose order books are so large that combined they would be not much smaller than WN is now. An AS/B6 merger would be a powerful competitor in the next rung up the price/frills ladder.

But Southwest has a great opportunity with a new small plane. Southwest has a unique network, in that nearly everywhere they fly in the US is at least a mini-hub. There are not many spokes. A smaller plane would allow more destinations from each city, and more cities, giving them more point-to-point than anyone. Could they do the top 20 destinations from each of the top 50 markets? Maybe. Avoiding connections in megahubs is something they could do and others couldn’t.

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Mike

Nov 10, 2019 at 10:49 am

No more mergers. WN destroyed AirTran and severely affected the smaller cities – DAY for example. FL ran a great 717 operation, low fares, relatively on-time, easy upgrades to business class. WN came and had no intention of keeping it, and all of the sudden, it was unprofitable for them to maintain service. At one point, DAY-MCO was one of the top three markets for FL in load factor. A good mix of Business and Leisure traveler. WN came in waiving the flags and touting their “low fares” and oh my gosh, left. This is only one example of how one city that screwed over.

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Alex

Nov 10, 2019 at 11:55 am

If the goal is to add a small mainline jet to the fleet, then WN could certainly order some E195-E2s for delivery within a reasonable timeline. If they want to get some in service earlier, they could lease some of the 195/190s that AerCap and/or AirCastle ordered.

Alternatively, they could buy out Moxy and their order for 60 A220-300s. However, it would probably be better to give Moxy a year or two to actually try running service. If Moxy fails, then WN could buy their fleet and outstanding orders, but if they succeed then WN might be able to buy a few somewhat developed “focus cities” to add to their route map.

Integrating a whole company with a different culture, different service standards, different labor contracts, etc. doesn’t make sense if the only goal is to expand your fleet. Just buy the planes! At the right price, someone will sell them to you, and it will be a lot cheaper than what you’d spend buying a whole operating company.

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shoeguy

Nov 10, 2019 at 6:41 pm

WN merging with B6 would give WN a strong footprint in specific markets, notably the East Coast and NY, Boston, and NE to Florida markets and a more defined transcontinental network, but I just don’t see this happening. I actually think long term, B6 will be acquired, by American Airlines, which will do it to take out a competitor in markets where it cannot otherwise grow.

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