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Southwest's Loss Of Frontier Airlines

Southwest's Kelly: "Even Tiger Woods doesn't win every tournament"

Aug 21, 2009

Low-fare giant Southwest Airlines Co. suffered a surprise setback last week when it lost a bankruptcy-court auction for Frontier Airlines Holdings Inc. to much-smaller rival Republic Airways Holdings Inc.

Gary Kelly, Southwest's chairman and chief executive, said his airline may take another run at an acquisition. But the Dallas-based carrier isn't ditching its conservative playbook, and any future bid would carry conditions -- even if they cost Southwest the deal, as was the case with Frontier.

"Even Tiger Woods doesn't win every tournament," Mr. Kelly, who has been Southwest's CEO since 2004, said of the loss of Frontier in an interview.

The protracted recession has reversed Southwest's decades-long track record of fast growth and fat profits. Some investors are nervous about Southwest's expansion prospects and a growing number of analysts predict the airline this year could post an annual loss for the first time in 37 years and the second time since its founding in 1971. Helane Becker, a stock analyst at Jesup & Lamont, cut Southwest to a "sell" recommendation Wednesday, citing the company's "slow growth strategy" following Southwest's failed bid of a bit more than $170 million for Denver-based discounter Frontier.

Mr. Kelly declined to forecast if Southwest will make money in 2009 after losses in three of the last four quarters. "I think there's a chance we can grow revenues in 2010 if we assume things don't get worse in the economy," he said.

But he said winning Frontier -- which would have more than doubled Southwest's presence in the Denver market and secured routes to Mexico and Costa Rica -- wasn't worth jeopardizing management-employee relations.

Southwest refused to drop a contingency clause requiring pilots to first sign off on the takeover to avoid labor conflicts, which resulted in Indianapolis-based Republic -- a company with about 1/30th of Southwest's market capitalization -- being awarded Frontier.

The largest U.S. airline measured by the number of passengers flown, Southwest has mostly avoided acquisitions. It has kept costs lower than other big airlines through a simple operating system that includes point-to-point, domestic-only flights and no meals aboard its all-Boeing 737 fleet. Frontier represented a marked departure as it flies Airbus planes and operates a hub-and-spoke flight system.

For future deals, the 54-year-old CEO said Southwest likely would limit any potential acquisition to an airline going through a bankruptcy restructuring and wants to stick with an all-737 fleet. Large airlines approaching Southwest's size and regional carriers aren't on its radar screen.

"There's definitely a limit to how much risk we take on," said Mr. Kelly, adding that Frontier, whose fleet is one-tenth that of Southwest's, would have been "the right size."

Meanwhile, Southwest has long been aggressive on another front: fare sales. On Tuesday, it began offering one-way domestic flights as low as $59 between Sept. 9 and Jan. 7, an unusually long sale window.

It also has weathered the recession better than large competitors who fly international routes and target premium-class customers -- two areas that have been hit particularly hard in recent months and which Southwest has avoided.

Industry trackers said Southwest could generate hundreds of millions of dollars in new revenue -- and easily stay in the black -- by charging customers for checking in their first and second pieces of luggage, a policy most competitors have adopted.

"It's difficult to justify leaving that money on the table in this revenue environment," said Hunter Keay, an airline analyst at Stifel Nicolaus in Baltimore. Mr. Keay estimated Southwest will finish $70 million in the red in 2009.

But Mr. Kelly also is moving cautiously on that front as management studies implementing the fees. He believes one reason his airline has lost fewer passengers than many rivals is because it hasn't instituted the fees, earning consumer loyalty. He added that the company won't introduce such fees this year.

Mr. Kelly said Southwest also is "seriously considering" flying some of its own 737-700s to Canada, Mexico and the Caribbean. But that wouldn't happen before 2011 "at the earliest," he added. Code-sharing deals with Canada's WestJet Airlines Ltd. and Mexico's Volaris are slated to start next year.

He estimated there are still about a dozen new U.S. cities the airline can target in addition to expanding market share across its 67-airport network.

Mr. Kelly notes Southwest has launched flights to three new cities this year - including Boston last Sunday - without adding to its fleet through optimized scheduling.

It will begin flights to Milwaukee in November.

Southwest's Kelly: "Even Tiger Woods doesn't win every tournament"
Southwest Airlines Chief Executive Gary Kelly / Image via


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