Labor Dispute Troubles Southwest (revised) - Analyst Blog

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The trade union dispute has again sparked at 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 with its labor contracts.

Though the mechanics at AirTran had voted over 90% in favor of a deal, the mechanics union at Southwest has voted it down. The contract came into existence in December last year and was duly approved by the executive boards of AMFA, which represents Southwest's mechanics, and the Teamsters Union, which represents the mechanics at AirTran.

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.

According to sources, Southwest Airlines is expected to receive its Single Operating certificate from the FAA within or around the first quarter of 2012, as previously announced.

Apart from the union issues, Southwest also remains stifled by skyrocketing 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 have revised this article to correct errors regarding flight attendants' agreement to terms. We regret these errors, and the original article -- published yesterday, February 28, 2012 -- should not be relied upon.)


 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: DAL , JBLU , LUV , UAL

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