Labor Issues Thwart Southwest's Efforts to Buy Frontier

The unthinkable has happened. Republic actually won the bid to buy Frontier out of bankruptcy from right under Southwest's nose. Why is it so unthinkable? Well Southwest could have won if they wanted to, and they said they really wanted to. So I just didn't see a reason to doubt it. But the only thing that could have ruined their plans did. Labor issues. But that doesn't mean it's labor's fault.

If you look at the headlines, you'll see that Republic's $108.75 million bid carried the day. Frontier will now be owned by Republic after bankruptcy wraps up this fall. But Southwest's bid was $170 million, so how did Republic get away with such a steal? Two reasons.

1. Republic's bid may have been $108.75 million but they made a key move to agree to waive their claims on $150 million of unsecured debt. That means the money that makes it down to the unsecured creditors can be spread out across a smaller pool. Unsecured creditors other than Republic should now receive just shy of 20 cents on the dollar, up from Southwest's 12 cent bid.
2. Labor couldn't come to an agreement in time, and Southwest refused to move forward without labor on both sides agreeing how things would move forward.

The pilots were the big sticklers, from what I understand. Over on Southwest's side, they were more than happy to welcome the Frontier pilots into their fold . . . as long as every single one of them was stapled to the bottom of the seniority list. Frontier has been around for 15 years, so assuming some originals are still around, the most senior 15 year Frontier captain would end up with seniority less than the first officer Southwest hired off the street last week.

We've seen this before. TWA's crews were stapled to the bottom of American's seniority lists and now most of them are gone thanks to furloughs that started at the bottom, as they always do. Southwest also offered that Frontier pilots could stay at their Denver base for a mere 3 years before seniority rules kicked in and Southwest pilots could take over. They also would bring all Frontier pilots up to the Southwest first officer pay level which would have been a substantial raise for most.

So while there was some good in here, it's no surprise that Frontier pilots wouldn't accept it simply because of the seniority issue. But that's why it's a negotiation. You start with what you really want and then you start compromising.

In letters written by Southwest Airlines' Pilots' Association (SWAPA) President Carl Kuwitzky and by the mergers & acquisitions committee, it's claimed that Frontier pilots wanted the ability to stay in Denver forever and they wanted pay and health benefits for furloughed Frontier pilots. They also wanted an integrated seniority list as opposed to the stapling method.

I'm sure that most of these issues could have been resolved quickly were they able to agree on seniority. That is always the sticking point because it is the lifeblood of every pilot. It determines what airplane you fly, in which seat (left or right) you fly, what schedule you can hold, when you get a vacation, etc. And I just can't imagine that it's something that can be resolved in a few hours.

SWAPA's president seems to attack Frontier pilots by implying that the Frontier pilots didn't put as much time and effort into the process as they could have. I asked Frontier Airline Pilots Association (FAPA) President John Stemmler for his reaction, and he simply responded that "we were absolutely engaged." He went on to say that "we met with them just as soon as we knew what we were talking about." That refers to the fact that there wasn't much time to digest the bid and then begin negotiations after reviewing it. Stemmler's tone was certainly different from the Southwest letter, and he had nothing but praise for the Southwest pilots.

So why are we hearing different sides of the same story? Union politics, I'm sure. Southwest probably had more to lose, so it's not a surprise that they would want to come out with a stronger statement saying that it wasn't their fault. This purchase was a steal for Southwest. Just the balance sheet swing from the elimination of a competitor in Denver would have paid for the purchase in a few years. But Southwest then would have had a currently-profitable airline that offered flights to Mexico and regional destinations. Southwest could have studied the operations up close and could have taken what it found worked and left what didn't. I have to think that much of this could have worked for the airline.

And it could have resulted in the return of growth opportunities for an airline that has slowed itself down for the first time in its history. SWAPA certainly doesn't want to look like the guys that screwed the whole thing up, so they'll just try to shift the blame if they can.

But what about the flip side? Should Frontier pilots have just rolled over and taken the stapling at the bottom of the list? Probably not. The captains would end up being first officers for a long time, and they'd have to transition to fly Boeings, but they would also have gotten a good raise. Now, Frontier pilots keep their jobs, but we've already seen Republic chief Bryan Bedford suggest that some Frontier A319s will end up flying for Midwest in Milwaukee. Who knows what that means? Will it involve Frontier pilots? That remains to be seen in the short term.

In the long run, these pilots should all end up on the same seniority list. That means a three way seniority list merger between Frontier pilots, Midwest pilots (if any are still left), and the Republic subsidiary pilots. FAPA President Stemmler said that he expects them to begin discussing an integrated pilot group with Republic once the dust settles.

So should labor have tried harder to reach a middle ground? I guess we can look back in 5 years and find out, but my bet is that it would have been better for both groups in the long run. Then again, we don't know what Republic has up its sleeve, so this might work out best for the Frontier pilots.

The bottom line is that I just can't imagine them making such an important decision in the few hours they had. Trying to get a merger agreement with labor groups in just a few hours is absurd. Southwest CEO Gary Kelly really laid it on the line for his labor groups, and they clearly appreciated it (time to work on that new contract while you have the labor-loving halo, Gary), but it must have been tough to watch the opportunity slip away. Had they started this process earlier, we might have seen a different result.