The trade union dispute has again sparked integration problems
). The carrier has been trying to integrate operations with
subsidiary AirTran Airways, but even after a year it continues to
see setbacks with its labor contracts.
Though flight attendants at AirTran had voted over 90% in favor of
a deal, the mechanics union has kept it from going through. 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
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
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
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
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
) as well as from major airlines like
Delta Air Lines
United Continental Holdings
) 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.
SOUTHWEST AIR (
(We have revised this article to correct an error: The
unionized flight attendants of AirTran were originally reported to
have rejected the tentative agreement. We regret the error, and the
original article -- published earlier today -- should not be relied
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