Bloomberg News

Southwest Considers Stand-Alone AirTran If Pilot Vote Fails

October 11, 2011

(Updates with analyst’s comment in fourth paragraph.)

Oct. 11 (Bloomberg) -- Southwest Airlines Co. told pilots it would keep operating newly acquired AirTran Holdings Inc. as a stand-alone carrier if union members don’t agree to combine seniority lists.

Southwest briefed pilots on a “Plan B” for “separate and unintegrated” operations after that union declined to hold a membership election on a seniority proposal, according to an AirTran union summary obtained by Bloomberg News. Pilots at both airlines are now voting until Nov. 7 on a new agreement.

Keeping AirTran flying on its own would run counter to the goal of folding the discount carrier into Southwest, the biggest low-fare airline. Dallas-based Southwest paid $1 billion in cash and stock in May to buy AirTran, winning access to fly into Atlanta, home of the world’s busiest airport.

“I’m sure that’s not what management planned when they acquired AirTran,” said Hunter Keay, a Wolfe Trahan & Co. analyst in New York who recommends holding Southwest. “It probably is to some degree a negotiating tactic.”

Pilots’ approval of one seniority list would give Southwest a timeline to blend workforces and fleets, and set union members’ rankings for pay, schedules and the types of jets they fly. For AirTran pilots, ratification will mean “certainty of integration,” Southwest said in a Sept. 22 letter to union members.

Staying Flexible

Southwest has met with pilots to explain “what that vote is and what it does,” Beth Harbin, an airline spokeswoman, said in an interview today. “Absent approval, we have to think about, ‘Where is the flexibility?’”

Harbin declined to discuss the AirTran union summary or what options Southwest would consider if pilots don’t accept the new seniority agreement.

“I’m certainly not going to go into any detail about what that flexibility is,” Harbin said. “Our focus is going to be on getting the deal with the pilots done quickly because that really does set a good momentum for the rest of the integration.”

Jim Morris, a spokesman for the Air Line Pilots Association at AirTran, declined to comment, as did Jacob North, a spokesman for the Southwest Airlines Pilots’ Association. AirTran has about 1,700 pilots, while Southwest has more than 6,000.

Southwest rose 2.3 percent to $8.15 today in New York trading. The stock has fallen 37 percent this year for the third-worst decline among 10 carriers in the Bloomberg U.S. Airlines Index.

Pilot Balloting

The seniority agreement now being voted on by pilots was crafted after AirTran’s union decided against sending the original version to rank-and-file members. Under the new plan, current Southwest pilots’ seniority rights would be protected, and AirTran pilots would get pay raises.

“The company believes this proposal strongly merits your support,” Southwest said in the Sept. 22 letter.

If the ratification vote falls short, Southwest executives have developed “Plan B” as a contingency, according to the AirTran union summary. Details of that strategy were completed on Sept. 20, the summary said.

“Plan B calls for AAI and SWA to remain separate and unintegrated,” according to the summary, using abbreviations for AirTran and Southwest.

Savings, Revenue

A stand-alone AirTran would provide the same savings and revenue benefits because it would keep collecting $200 million a year in fees for checked bags, and AirTran’s Boeing Co. 717s wouldn’t be blended into Southwest’s fleet, the summary said. Southwest flies only Boeing 737s.

“It’s certainly a valid strategy,” Keay, the Wolfe Trahan analyst, said in an interview.

Southwest has said it expects that full integration of the airlines would take about two years after receiving regulatory approval to operate as a single carrier in 2012’s first quarter. Pilots’ failure to agree on an integration plan can scuttle mergers or keep airlines from operating as a single carrier after a tie-up.

Southwest’s 2009 bid for Frontier Airlines Holdings Inc. faltered when the carriers’ pilots couldn’t agree on seniority. US Airways Group Inc. pilots are still feuding over seniority after the carrier’s creation in the 2005 merger of its namesake predecessor and America West Holdings Corp., forcing management to follow separate work agreements with two unions.

--Editors: Ed Dufner, Kevin Miller

To contact the reporters on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net; Mary Jane Credeur in Atlanta at mcredeur@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net


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