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Some in the industry think the time is near for Southwest Airlines to look at non-organic growth opportunities.
Jake DeanGary Kelly, chairman and chief executive of Southwest Airlines, has been asked different variations of the same question during the last few quarterly earnings calls.
The question centers around the grounding of the 737 Max made by Boeing Co. (NYSE: BA) and how long Southwest Airlines Co. (NYSE: LUV) will tolerate not growing and ceding market share to competitors.
Southwest has hundreds of 737 Max planes on order, and frustration is mounting at the Dallas-based carrier.
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"We put our future in the hands of Boeing and the Max, and we're grounded," Kelly said in a CNBC interview recently.
The grounding has breathed life into speculation that's been circulating for years — is this the time for Southwest to buy another airline?
Fleet diversification
During Southwest's latest call discussing third quarter earnings on Oct. 24, Jamie Baker, an analyst with JP Morgan, asked Kelly about his comments on CNBC earlier in the day. Kelly said the board had asked him to review the carrier's strategy of exclusively using 737s.
As Baker brought up on the call, there are a couple of ways to go about diversifying the fleet type. One is to get in line with Airbus and wait several years for orders of new narrow-body planes. Or, Southwest could buy an existing Airbus operator.
"Is it safe to assume that if the board is debating a second fleet type, as you said today, it's also debating consolidation? Or, is it somehow possible to divorce those two topics?" Baker asked. "Because in my mind, they're highly intertwined."
Like previous answers Kelly has given on the consolidation possibility, he was equivocal in his answer. Southwest has a policy not to comment on potential M&A activity.
"They are potentially intertwined, but they could also be disaggregated," Kelly responded. "I think it just depends on how one wants to think about it."
Other analysts are wondering the same thing.
Analysts at Stifel recently went as far as to downgrade Southwest from 'Buy' to 'Hold' based on the concern Southwest would pursue an acquisition in light of the 737 Max's grounding.
Airlines went through considerable consolidation after the 9/11 terrorist attacks rocked the industry.
At a pilots conference this fall, a group of analysts was asked if there's any more room for consolidation in the industry.
"My answer is 'yes,'" Baker said. "And whatever the next deal is, I expect Southwest to be at that table."
Which airline would Southwest buy?
If Southwest wanted to acquire another carrier, it might have better luck than the three legacy airlines.
Delta, United and American each went through their own megamergers this century and are all now comparably sized. Industry experts think it unlikely regulators would allow one of the Big 3 to become the dominant U.S. carrier through non-organic growth.
When those experts are asked which airline Southwest would target in an acquisition, a range of possibilities emerge.
"I think the easiest target might be Alaska," said Jim Simmons, a professor who studies aviation at Metropolitan State University of Denver.
"You could see either a Spirit or Frontier being an interesting combination," said Bob Mann, an airline industry analyst.
"While Alaska is a better network-fit for Southwest, JetBlue better solves its desire to get A320 exposure," Joe DeNardi, another industry analyst, wrote in a recent research note.
It comes down to what Southwest would prioritize in a partner with each coming with their own challenges.
Spirit's business model is heavily dependent on ancillary fee revenue from bags, while Southwest's 'Bags Fly Free' policy is a hallmark of the company.
The average fare on a Southwest flight was $151.64 in 2018, according to regulatory filings. The average ticket price on a Spirit flight last year was $58.14, according to filings, while the average non-ticket revenue per passenger averaged $55.23.
Alaska's network might have the most overlap with Southwest's since the carrier is concentrated on the West Coast and Southwest is already the largest carrier in the state of California. Plus, Alaska has a limited number of Airbus planes in its fleet if diversification was something Southwest desired.
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.
Here's what Southwest would look like combined with Alaska Air Group Inc. (NYSE: ALK), JetBlue Airways Corp. (Nasdaq: JBLU) and Spirit Airlines Inc. (Nasdaq: SAVE).
Do they want to?
Acquisitions are not foreign to Southwest. In May 2011, Southwest closed on its $3.2 billion purchase of AirTran Airways, which at the time raised revenue by more than 21 percent.
From a network perspective, the deal gave Southwest access to new markets, like Atlanta, and strengthened Southwest's presence in Baltimore. However, some think the acquisition didn't go entirely according to plan.
"I think it took longer than they expected, and it was more expensive than they expected," Mann said. "Beyond getting into Atlanta in a big way, it didn't really achieve any new market coverage."
Airline mergers are complicated and messy. It takes years to integrate key systems and standardize processes. One of the big factors Southwest would have to consider is altering its culture too much, which is known throughout the industry as being one of the strongest.
Bringing on another few thousand employees from a different company with different pay scales, different unions and different work expectations might disrupt the culture Co-founder and longtime leader Herb Kelleher worked to instill and that Kelly wants to continue.
"It's almost cult-like, and I don't mean that necessarily in a negative way," Brett Snyder, an industry expert who runs the Cranky Flier blog, said about Southwest's culture. "It's an important attribute for the airline. You'll hear Gary Kelly say that over and over again. Maybe future management would stray further away a little bit and take more risks. But, they seem to put culture toward the top of what matters when they're doing things."
Hi, isn’t Alaska buying Hawaiian?Originally Posted by docav8tor
If Southwest wanted to acquire another airline, which would it target?If Southwest wanted to acquire another airline, which would it target?
Evan HoopferSome in the industry think the time is near for Southwest Airlines to look at non-organic growth opportunities.Jake DeanGary Kelly, chairman and chief executive of Southwest Airlines, has been asked different variations of the same question during the last few quarterly earnings calls.
The question centers around the grounding of the 737 Max made by Boeing Co. (NYSE: BA) and how long Southwest Airlines Co. (NYSE: LUV) will tolerate not growing and ceding market share to competitors.
Southwest has hundreds of 737 Max planes on order, and frustration is mounting at the Dallas-based carrier.
FREE FOR PREMIUM MEMBERS
Live Webinar Future of Cities with Richard Florida
Use code MEMBERFOC24 to reveal your free ticket
SAVE MY SPOT
"We put our future in the hands of Boeing and the Max, and we're grounded," Kelly said in a CNBC interview recently.
The grounding has breathed life into speculation that's been circulating for years — is this the time for Southwest to buy another airline?
Fleet diversification
During Southwest's latest call discussing third quarter earnings on Oct. 24, Jamie Baker, an analyst with JP Morgan, asked Kelly about his comments on CNBC earlier in the day. Kelly said the board had asked him to review the carrier's strategy of exclusively using 737s.
As Baker brought up on the call, there are a couple of ways to go about diversifying the fleet type. One is to get in line with Airbus and wait several years for orders of new narrow-body planes. Or, Southwest could buy an existing Airbus operator.
"Is it safe to assume that if the board is debating a second fleet type, as you said today, it's also debating consolidation? Or, is it somehow possible to divorce those two topics?" Baker asked. "Because in my mind, they're highly intertwined."
Like previous answers Kelly has given on the consolidation possibility, he was equivocal in his answer. Southwest has a policy not to comment on potential M&A activity.
"They are potentially intertwined, but they could also be disaggregated," Kelly responded. "I think it just depends on how one wants to think about it."
Other analysts are wondering the same thing.
Analysts at Stifel recently went as far as to downgrade Southwest from 'Buy' to 'Hold' based on the concern Southwest would pursue an acquisition in light of the 737 Max's grounding.
Airlines went through considerable consolidation after the 9/11 terrorist attacks rocked the industry.
At a pilots conference this fall, a group of analysts was asked if there's any more room for consolidation in the industry.
"My answer is 'yes,'" Baker said. "And whatever the next deal is, I expect Southwest to be at that table."
Which airline would Southwest buy?
If Southwest wanted to acquire another carrier, it might have better luck than the three legacy airlines.
Delta, United and American each went through their own megamergers this century and are all now comparably sized. Industry experts think it unlikely regulators would allow one of the Big 3 to become the dominant U.S. carrier through non-organic growth.
When those experts are asked which airline Southwest would target in an acquisition, a range of possibilities emerge.
"I think the easiest target might be Alaska," said Jim Simmons, a professor who studies aviation at Metropolitan State University of Denver.
"You could see either a Spirit or Frontier being an interesting combination," said Bob Mann, an airline industry analyst.
"While Alaska is a better network-fit for Southwest, JetBlue better solves its desire to get A320 exposure," Joe DeNardi, another industry analyst, wrote in a recent research note.
It comes down to what Southwest would prioritize in a partner with each coming with their own challenges.
Spirit's business model is heavily dependent on ancillary fee revenue from bags, while Southwest's 'Bags Fly Free' policy is a hallmark of the company.
The average fare on a Southwest flight was $151.64 in 2018, according to regulatory filings. The average ticket price on a Spirit flight last year was $58.14, according to filings, while the average non-ticket revenue per passenger averaged $55.23.
Alaska's network might have the most overlap with Southwest's since the carrier is concentrated on the West Coast and Southwest is already the largest carrier in the state of California. Plus, Alaska has a limited number of Airbus planes in its fleet if diversification was something Southwest desired.
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.
Here's what Southwest would look like combined with Alaska Air Group Inc. (NYSE: ALK), JetBlue Airways Corp. (Nasdaq: JBLU) and Spirit Airlines Inc. (Nasdaq: SAVE).
Do they want to?
Acquisitions are not foreign to Southwest. In May 2011, Southwest closed on its $3.2 billion purchase of AirTran Airways, which at the time raised revenue by more than 21 percent.
From a network perspective, the deal gave Southwest access to new markets, like Atlanta, and strengthened Southwest's presence in Baltimore. However, some think the acquisition didn't go entirely according to plan.
"I think it took longer than they expected, and it was more expensive than they expected," Mann said. "Beyond getting into Atlanta in a big way, it didn't really achieve any new market coverage."
Airline mergers are complicated and messy. It takes years to integrate key systems and standardize processes. One of the big factors Southwest would have to consider is altering its culture too much, which is known throughout the industry as being one of the strongest.
Bringing on another few thousand employees from a different company with different pay scales, different unions and different work expectations might disrupt the culture Co-founder and longtime leader Herb Kelleher worked to instill and that Kelly wants to continue.
"It's almost cult-like, and I don't mean that necessarily in a negative way," Brett Snyder, an industry expert who runs the Cranky Flier blog, said about Southwest's culture. "It's an important attribute for the airline. You'll hear Gary Kelly say that over and over again. Maybe future management would stray further away a little bit and take more risks. But, they seem to put culture toward the top of what matters when they're doing things."
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