The trade union dispute has again sparked integration problems
for
Southwest Airlines
(
LUV
). The carrier has been trying to integrate operations with
subsidiary AirTran Airways, but even after a year it continues to
see setbacks related to labor contracts.
The unionized flight attendants of AirTran have rejected the
tentative agreement on merging seniority rankings of mechanics. The
contract came into existence in December last year and was duly
approved by the executive boards of the Transport Workers Union
556, representing the union of Southwest Airlines Flight Attendants
and the Association of Flight Attendants Council 57, representing
the union of the Flight Attendants of AirTran Airways.
Subsequent to the acquisition of AirTran, the company was keen
on establishing a joint contract for all flight attendants. A
single contract would be highly beneficial not only in terms of
preventing union disputes, employee strikes and other labor
disruptions, but also in terms of cost synergies related to labor
disputes and compensation issues.
The AirTran merger is expected to be accretive to Southwest's
earnings when realized fully. The transaction is expected to
generate net synergies of more than $400 million by 2013 upon full
integration. Last year, Southwest generated $80 million in annual
synergies. The company expects to produce half of the net synergies
($200 million) this year, with two-thirds realized from revenue and
one-third from cost savings. However, with workers raising
questions related to long-term rules on seniority and expansion
plans of the merged operation, substantial benefits from the
acquisition appear to be a far cry for Southwest.
With union issues flaring up, we foresee a delay in receiving
even a single operating certificate for the combined entity, which
was slated to be operational in the first quarter of this year.
Southwest is currently seeking help from the union officials of
both the carriers to pursue the matter with the director of the
Aircraft Mechanics Fraternal Association to reach a single
agreement.
Apart from the union issues, Southwest also remains stifled by
sky rocketing fuel costs. Fuel price volatility continues to be one
of the significant challenges. Though high currently, fuel prices
remain well below the 2008 level of over $140 per barrel that had
ravaged the airlines industry.
The company's ability to pass along the increased fuel costs to
its customers is limited by the competitive nature of the airline
industry. Southwest Airlines faces competition from other low-cost
carriers like
JetBlue Airways
(
JBLU
) as well as from major airlines like
Delta Air Lines
(
DAL
) and
United Continental Holdings
(
UAL
) that cut fares in order to attract customers. Thus, even a
small change in fuel prices can significantly affect profitability.
We expect crude oil and jet fuel prices to remain largely stable
this year, but forecasting this key variable with any level of
accuracy has always been challenging. All the more when the company
has already announced a suspension in its expansion plans owing to
escalating operating costs.
We maintain our long-term Neutral rating on the stock supported
by a Zacks #3 Rank (Hold)
DELTA AIR LINES (
DAL
): Free Stock Analysis Report
JETBLUE AIRWAYS (
JBLU
): Free Stock Analysis Report
SOUTHWEST AIR (
LUV
): Free Stock Analysis Report
UNITED CONT HLD (
UAL
): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment
Research