Yesterday I sang the praises of Southwest's (LUV) plan to acquire AirTran (AAI). But wait: it's not all sugar and spice in Dallas. While I still like this acquisition, there are some big negatives that come along with this deal as well. Let's take a look.
- Culture Clash
This cannot be underestimated. Southwest talked up the culture combination this way:
We are kindred Warrior Spirits bringing together two similar, Employee-centric organizations that have won numerous awards for Customer Service.That sounds good in theory, but I don't believe it. Southwest has spent nearly 40 years building a culture with little outside influence. Sure, there have been small acquisitions over the years, but those are easy to assimilate. This is a big merger and it won't be so easy.
Southwest has a very unique culture. Just go for a spin around the headquarters building filled with framed pictures and you'll pick upon the quirkiness right away. It's a good quirkiness, but it's not something you'll find at another airline. Even if AirTran had stellar customer service (something I haven't experienced), it still won't be easy to bring the workgroups together and get the AirTran folks to fully buy-in to the Southwest way of doing things.
And then there's the issue of pay.
- Cost Creep
Southwest's employees are generally the highest paid in the US industry. AirTran? Not so much. For example, a 10 year captain flying the 737 at AirTran makes $144 an hour. That same pilot at Southwest makes $201 an hour. And it's not just pilots. It's a general trend.
There's no doubt that the AirTran employees will instantly be brought up to Southwest pay levels once the integration is done. That will certainly help employees get into the culture-adopting spirit, but it also hurts costs. In fact, using data from the second quarter, we see that AirTran had roughly a 5-10 percent non-fuel unit cost advantage over Southwest (adjusted for average flight length). That's a substantial difference. With Southwest's costs, some of AirTran's marginal flying isn't profitable, so something has to change, and it will . . .
- Sayonara, Small Markets
Much of AirTran's strategy involves sniffing out desperate airports that want to pay for the privilege of having the airline come on in. Wichita is famous for its subsidies to AirTran, for example. There are also a couple of markets that were funded with the most recent Small Community Air Service Development grants from the feds (Tunica and Huntsville). When the subsidy dries up, AirTran walks away, though the Wichita subsidy does seem to be a bottomless pot of honey.
I have little doubt that many of these smaller cities (though not Wichita, probably) are going to lose service. It just doesn't make sense for Southwest to continue to serve them considering both the airline's higher cost structure and its strategy of trying to build-up markets and stay with them. (Southwest very rarely leaves a market.) But there is a benefit here. Southwest will instead be able to use the power of its network to build up frequency in existing AirTran markets and develop new routes between big Southwest markets and AirTran markets.
So it's not all bad, but it's going to be different unless Southwest takes more from AirTran than I expect. And it's going to have to move away from some of what has made AirTran successful in the first place.
- Distractions Lastly, there's the distraction problem. Anytime an airline is going through a merger, it has to take its eye off the ball, so to speak. You can expect to see more of a focus on integrating AirTran and that means less of a focus on tending to Southwest's existing routes. This could be good for other airlines, and in fact, there are some that I think will benefit greatly from this merger.