AirTran Airways A+ Rewards - Airtran Pilots union could hold up full integration

Not sure if it's good or bad news but if the pilots union doesn't agree to a deal we could see our beloved business class and 717's a bit longer than originally expected.

http://www.ajc.com/business/southwest-raises-possibility-of-1198877.html

From Bloomberg...http://www.bloomberg.com/news/2011-10-11/southwest-weighs-stand-alone-airtran-option-if-pilot-vote-fails.html?cmpid=yhoo

An analyst suggests this just could be a "negotiating tactic."

Based on reading the article, i dont think this is going to turn out well for WN. Airtran is a very different airline and merging such a different airline into such a monlith like WN is expensive and difficult. Mergers are always so much fun on the front end during the hunt and the brainless "we are getting married LUV LUV LUV blah blah blah marketing crap" If I were the F9 pilots i would fight tooth and nail for protection on the front end because once you are fully integrated you have no leverage

Good for them, good for us, I hope the integration is a slow and drawn out process. I already miss my Airtran business class and it did not even end yet.

I'd like to see a no vote just to see WN mired in union issues for the first time.

If I were the F9 pilots i would fight tooth and nail for protection on the front end because once you are fully integrated you have no leverage

No kidding, that's what they are voting on now. Of course if everything was automatically integrated there wouldn't be any leverage. However, since that is not the case, they have the option to evaluate, negotiate, and vote on the proposals on the table from the company.

SWA integrates the two companies. The pilots are left to negotiate/arbitrate.

This is great news. Hopefully it'll be a long drawn out battle which drastically increases costs for the airline. Then we get to be lucky enough to have those costs passed on to us. Great news for consumers. <eyeroll>

AJC article brings up possible scenario and references prior WN handling of integration.

One integration possibility is the "slow dismantling" of AirTran. In the 1980s, Southwest acquired competitor Muse Air, changed its name to Transtar, operated it separately and eventually shut it down.

I'm really surprised this has not gotten more traction on the discussion boards. I have barely enough time to read 'em as of late, much less post much of anything. But I'll carve out a little time for some points which I take from what's been said, dovetailing them in with what we've seen (and not seen) happening in the past year.

(1) Southwest's integration plan was essentially to let the single operating certificate do most of the heavy lifting. Last winter as they pushed for approval, Kelly's words grew increasingly strong about how the integration timetable needed to be sped up. I think the banked on that happening.

(2) The push for a relatively quick single operating certificate (SOC) was their solution to many of the points of integration we've come to expect in an acqusition. Earning credit on the other airline? Code sharing? Joint marketing? FF program reward options on the other airline? Standardized policies? Why go through the effort for a short transitional period. Well, it now doesn't seem like it will be such a short transitional period, and it seems they are unprepared for plan B. The closest thing to "integration" which has happened so far is that they have swapped elite FF lists to comp elite status on the other carrier...and that didn't happen until 16 weeks after the purchase was completed. The only other real integration news is a promise of code sharing sometime in the first half of 2011.

(3) Now that hopes for a fast SOC are doubtful and there's a chance that the pilots' issues could delay integration indefinitely, they are caught flat-footed. As much as they talk up the proud excitement of finally bringing the Southwest brand to Atlanta, I think it's a clear sign that the integration is not going as planned. The only way to ensure they start getting any benefit of ATL....the crown jewel of the purchase...is to put their own metal in there. If that was plan A all along, I don't see the reason they didn't put WN metal into Atlanta this summer. I think they thought integration would be just around the corner by now. By putting WN metal into Atlanta they can at least start to claim positives of the merger in the Q1 2012 conference call, more than a full year after the deal has closed. To not even have that would be at minimum an embarassment. That they have not yet moved any LGA or DCA assets over to WN is a surprise, but more about that in the next point.

(4) As integration takes longer and longer, Southwest seems less positive about AirTran's financials, network, and business plan. Of course in the lead up to approval everything was roses and sunshine, and that's to be expected...combining two strong and successful carriers, no plans to drop anybody, etc. More recently there have been some cities announced to get the ax, and negative comments about some of AirTran's lower-frequency markets by Southwest suggest more is on the way. Then recently we hear of Southwest's plan to "unwind" the Atlanta hub because AirTran carries far too much low-yield connecting traffic, reducing service there to levels better suited to the local demand. Now we hear that, essentially, Southwest has not standardized fees with AirTran because FL relies quite heavily on baggage fees as a revenue source. As a matter of fact only weeks ago they increased the second bag fee...something which seems to have passed under the radar. Why would they do this? I suspect that they are trying to keep AirTran chugging along as best they can so it is not an excessive drag on their earnings. Stripping them of some LGA and DCA slots would hurt their network significantly, and dropping bag fees would kill their profit margin. So for the time being the best financial decision is for AirTran to keep trying to be the most profitable AirTran it can, even if the long-term prospects are doubtful in the WN world.


Based on all this:

(1) I think that if the pilot issues are resolved quickly, and the SOC is not far behind, Southwest will make more radical changes to the AirTran network than we might have expected at one point. I don't think they have left AirTran alone now because they think it is an important asset to maintain and ultimately fold into their network intact. Instead I think signs increasingly point to them leaving AirTran alone because minor fine-tuning won't help them work in the Southwest model anyway and would hurt near-term results. Major surgery will come, but until that point the patient might as well continue normal activity.

(2) If the pilot issues are not resolved quickly and the airlines are kept separate for an indefinite period, they are in a real quandry. The severe actions are just as needed, but with the airilnes being separate it's difficult for them to do so. As soon as they start tinkering with what makes AirTran sustainable...dropping fees, pulling them out of GDS like Expedia, moving hub spokes over to WN...the center of AirTran profits collapses. They are not tinkering with AirTran at this point precisely because they can't without killing financials. If they roll FL into WN they can make relatively swift moves to bring the FL system into the WN way of doing things. But if there's a partition, that same surgery is ultimately necessary. But instead of swift and decisive surgery with the support of the WN asset network, they must conduct that same surgery in a partitioned FL essentially with one hand tied behind their back. The longer they postpone it, the longer they let AirTran wilt, becoming an increasing drag on the WN bottom line with nowhere near the promised financial benefit. If they are stuck in this situation, my bet is that they will do the surgery but it will be a lot uglier than it would have to be. Recent negative comments about integrating the 717 further suggest a more radical solution might be at hand if worse comes to worse.

I do agree that there's an element of negotiations ploy in this threat. But if the pilots' issues do indefinitely stall the SOC, I don't see Southwest with any good options.

Knope2001,

Here are some of my thoughts:

1. Pilots' issues will NOT substantially delay the functional integration of the two airlines, period.

2. Prior to merger close, Southwest managers had to work off their assumptions of AirTran's performance, as there was a lot of sensitive pricing, cost, and operational data that the airlines could not legally share with each other prior to merger close. It takes months to pore through actual AirTran data, compare it to Southwest data, make sophisticated assumptions about how numbers and processes will differ in the context of a combined network, and then begin to implement changes based on the findings. Southwest-AirTran is no further behind in the current point of merger integration than Delta-NWA or United Continental - the only real difference is that the legacy carriers had alliance agreements in place that predated the merger, allowing some FF reciprocity prior to the comprehensive operational integration.

3. Radical change to the AirTran network at Atlanta was inevitable ever since DL's emergence from BK in 2006, and is thus long overdue. As Southwest's manager aptly noted, AirTran did a poor job of attracting the lucrative O&D business traveler and tried too hard to chase after connecting traffic that Delta can and does carry at a better financial proposition relative to AirTran.

4. I will be VERY interested to see if Southwest gives up the few tools it can take/adapt from AirTran to compete effectively against enlarged and retooled legacy competitors on account of its legendary corporate arrogance.

Knope2001,
Prior to merger close, Southwest managers had to work off their assumptions of AirTran's performance, as there was a lot of sensitive pricing, cost, and operational data that the airlines could not legally share with each other prior to merger close.

I thought that in most situations, the purchasing company gets complete due diligence of the purchasee's books. You think this did not happen in this case?

Buyer's remorse.

Who knows...AirTran's MKE hub is still chugging along and they've maintained most of the routes from here. Could be in place for at least another year if not more.

Buyer's remorse.

Who knows...AirTran's MKE hub is still chugging along and they've maintained most of the routes from here. Could be in place for at least another year if not more.

Wishful thinking.

From history and mentioned in the article -

One integration possibility is the "slow dismantling" of AirTran. In the 1980s, Southwest acquired competitor Muse Air, changed its name to Transtar, operated it separately and eventually shut it down.

I thought that in most situations, the purchasing company gets complete due diligence of the purchasee's books. You think this did not happen in this case?

Not until the government gave full approval - until then they were required to operate as seperate companies.

Plus, is in the off chance that the government didn't give the go ahead then Southwest would know all of AirTran's dirty secrets.

The requirement to operate separately, and a thorough sharing of information through due diligence, has been managed by hundreds of competing companies in many industries. If Southwest didn't know the details of AirTran's revenue stream they did poor due diligence.

One integration possibility is the "slow dismantling" of AirTran. In the 1980s, Southwest acquired competitor Muse Air, changed its name to Transtar, operated it separately and eventually shut it down.

"Unwinding" and "dismantling" sound about the same.

FL's 30-33 gates at ATL are a huge asset. They could keep AirTran as a subsidiary, expand the overseas routes and use Harstfield as a feeder from WN's system. And probably jettison FL's unprofitable domestic routes in the process.

FL is profitable. WN is profitable.

Now we are discussing the option of combining two profitable carriers to form one unprofitable carrier.

This would make a great business school case study.

What am I missing?

Not until the government gave full approval - until then they were required to operate as seperate companies.

Plus, is in the off chance that the government didn't give the go ahead then Southwest would know all of AirTran's dirty secrets.

Really? I continue to believe that in most purchase situations, the purchasing company makes an offer subject to due diligence of looking at all of the books of the company they are purchasing.

You believe that did not happen here?

AirTran was relatively open that, in their due dilligence on Midwest in preparation for the hostile takeover, they discovered YX was highly reliant upon profits from a few key markets -- most notable MKE-LGA -- to make the whole operation profitable. They got to see enough to know this.

I'm sure that Southwest didn't have unlimited access to every last bit of proprietary detail of AirTran's financial operation. But some of the negative factors they've recently chosen to bring up publicly...AirTran's soft yields, larger proprotion of connecting traffic, and reliance upon fee income to keep in the black...are all readily available in public data. And not something Southwest should be surprised by. That they are chosing now to cite these issues is interesting. Is it that they are priming us for big changes in the network? Is it that they are ramping up the rhetoric to pressure pilots? Is it that things are worse than anticipated? The notion that they are having a hard time weaning AirTran off of fee income is especially odd...not sure how they thought they'd do that.

I thought that in most situations, the purchasing company gets complete due diligence of the purchasee's books. You think this did not happen in this case?

Oh, there was due diligence done, no question about that. But in the airline business, due diligence is typically a bit more nuanced than in most other industries. While carriers undergoing a proposed merger process will often get access to each other's historical and current data, information pertaining to future activity will typically be off-limits, at least until shareholder approval is received and often until DOT approval itself is obtained.

FL is profitable. WN is profitable.

Now we are discussing the option of combining two profitable carriers to form one unprofitable carrier.

This would make a great business school case study.

What am I missing?

From the Soutwest perspective, mergers cost money, resources, energy, and focus. If Southwest is careful and disciplined, they can avoid getting distracted -- but the risk is there. At very least, however, the acquisition creates expense which affects the bottom line. Southwest is profitable -- generall quite solidly so -- and merger expenses won't pull them into the red.

AirTran, however is a different matter.
--Their profits have been inconsistant, with some rather good quarters, some decidedly lackluster quarters, and some quarters well in the red, including Q1 of this year.
--Revenue from other fees -- primarily bag fees, change fees, seat assignment fees, and business class upgrades -- are clearly essential to keeping AirTran out of the red in the profitable quarters. Southwest has been clear that the merged airline will do busienss Southwest's way...which includes free bags, free seating, no busienss class and no change fees. That would seem to more than kill their profits right there.
--Network-wise, AirTran is in a holding pattern. Uncharacteristically few adds or drops since WN took over. New aircraft being sent to WN instead of FL. WN taking over frequencies on routes like BWI-BOS, ATL-MDW and MKE-LAS reduce FL hub connectivity.
--Brand-wise, AirTran is a lame duck. None of the benefits of Southwest are there to attract passengers. And AirTran's benefits such as business class, are on borrowed time in spite of AirTran still advertising them.

Southwest alone is profitable
Southwest alone, plus merger costs, is still in the black

AirTran, as things stand right now, is probably modestly profitable
AirTran, if left to stagnate as-is, probably beomes more and more marginal
AirTran, with fee income removed, takes a sharp turn south into red ink

It seems Southwest has kept AirTran status quo to get the best financials out of them for the time being. But status quo won't last forever, and there will be a real challenge to re-form the assets coming from AirTran (including markets) into something that works in the Southwest business model.

I wouldn't assume due diligence overcame executive decision-makers’ empire-building, hubris, fear, and tendency to copy other firms.

And the knowledge stockholders will go along...even when it is not a value-creating strategy.

I personally feel that WN's "bundled" business model is the one that is outdated. But, offering things like free bags are PR tricks to lure passengers. It works for WN, but I prefer an a la carte product to have lower fares and not subsidize others who check bags.

If FL stays out of the black by charging separately for things like checked bags, no wonder WN wants to slow down the integration process. It's a ways for Southwest to, indirectly, collect some bag fee revenue without having to own up to it.

Moving forward, it sounds like WN is in quite a pickle with the integration process. I'll get out my popcorn and enjoy the show as they dismantle a unique LCC.

I'd like to see a no vote just to see WN mired in union issues for the first time.

Actually this would not be their first time to have to deal with "union issues". It certainly can be argued that Parker's (CEO pre GK) ousting was due almost totally to how he dealt with union negotiations. Even if you don't want to count Parker's firing, Southwest actually had a strike by mechanics in its early years (although it was settled quickly).

Let's see what items that generated revenue for FL that WN will be doing away with:

- business class upgrades
- business class full fares
- seat selection fee
- exit row seat selection fee
- phone reservation booking fee
- checked baggage fee
- reservation change fee
- reservations made through online travel agencies

Anything else?

That's a lot of money that Southwest has to find through increased share or yield...

Let's see what items that generated revenue for FL that WN will be doing away with:

- business class upgrades
- business class full fares
- seat selection fee
- exit row seat selection fee
- phone reservation booking fee
- checked baggage fee
- reservation change fee
- reservations made through online travel agencies

Anything else?

That's a lot of money that Southwest has to find through increased share or yield...

Gogo inflight internet (I assume FL gets a cut of this, but I'm not sure).

For what it's worth, here's a list of the fees:

http://www.airtran.com/policies/ancillary_fees.aspx

Thanks to all here for such an enlightening and fascinating discussion.

From Bloomberg...http://www.bloomberg.com/news/2011-10-11/southwest-weighs-stand-alone-airtran-option-if-pilot-vote-fails.html?cmpid=yhoo

An analyst suggests this just could be a "negotiating tactic."

Dumb idea if there ever was one. Being acquired by WN means they get the benefit of the best paying contract in the industry, on the same equipment, at an airline with no overwater flying, redeyes, or international trips to armpit destinations. Additionally, WN offers flexible work rules in exchange for productivity opportunities to pad one's paycheck. Chances are the AirTran pilots won't even have to worry about fencing off the ATL base, as it is likely that few Southwest pilots live in the ATL area.

What's the problem here?

Let's see what items that generated revenue for FL that WN will be doing away with:

- business class upgrades
- business class full fares
- seat selection fee
- exit row seat selection fee
- phone reservation booking fee
- checked baggage fee
- reservation change fee
- reservations made through online travel agencies

Anything else?

That's a lot of money that Southwest has to find through increased share or yield...

From what I understand, SWA's "Business Select" is similar to a seat selection fee without a reserved seat.

From the originally quoted AJC article
..."difficulty weaning" AirTran from $200 million a year in revenue from baggage fees

I didn't realize that AirTran received such a big portion of the their revenue from bag fees. Where does WN makes up the difference, at least in terms of percentage? Sales volume?

From the originally quoted AJC article


I didn't realize that AirTran received such a big portion of the their revenue from bag fees. Where does WN makes up the difference, at least in terms of percentage? Sales volume?

Fuel hedging, higher fares (that are the equivalent of their competitors fares + bag fee), EBCI fees, elimination of smaller markets...