Seeking Alpha

Vaughn Cordle's  Instablog

Vaughn Cordle, CFA serves as an airline analyst and consultant to various institutional investors, investment banks, and money managment firms in the U.S. and around the world. He analyzes industry trends using the core competencies of strategy, finance, and airline economics. Mr. Cordle has... More
My business:
AirlineForecasts, LCC
My blog:
airlineforecasts.com
  • Southwest's missed opportunity: Frontier goes to Republic 0 comments
    Aug 14, 2009 05:56 PM | about stocks: RJET, LUV

    August 14, 2009 / Vaughn Cordle, CFA

    Southwest CEO Kelly washed his hands of the seniority issue by allowing the pilots union (SWAPA) to decide how the Frontier pilots (FAPA) are integrated.  Naturally, SWAPA decided to protect the junior pilots, which resulted in Republic winning the bid for Frontier.
    The junior SWAPA pilots may have been protected, but that security came at a very high price. The opportunity cost for Southwest shareholders is likely in the $1.3 - $1.5 billion ($1.6 - $2 per share) range based on our recent valuation of the acquisition.

    In this case, Southwest’s shareholders have been trumped by a powerful pilot’s union. Even the Southwest employees – especially the pilots – are hurt by this as the largest shareholder, and they now must accept lower growth prospects.
     
    This missed opportunity results forces Southwest to continue offering below-cost fares in the Denver market and a share price that falls back to a pre-Frontier bid value.
     
    Without an acquisition, Southwest has no choice but to compete on price and depend on a war of attrition for its growth.  United benefits in the longer term because a Republic-owned Frontier will be a much weaker competitor, with both a higher cost structure and lower sustainable growth.  However, having three big competitors in Denver instead of two will certainly result in lower average fares, and Frontier will likely be the loser in such a war of attrition.
     
    Southwest's current share price of $9.24 is too high given any reasonable estimate of 2010's earnings, which now appear to be in the .35 per share range.  It is likely that the share price will fall towards ~ $7 now that the Frontier acquisition has failed, which represents a 25% hit.
     
    SWAPA is a political entity, and its primary objective is to the protect the interests of its members. The pilots recently rejected a new contract with the company, which suggests that SWAPA's negotiating leverage, as it pertained to the Frontier bid, was enhanced significantly.


     

    Stocks: RJET, LUV
Back To Vaughn Cordle's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Full index of posts »
Latest Followers
Posts by Ticker
AAI, AF, AMR, BA, CAL, DAL, HA, JBLU, LCC, LUV, RJET, RYAAY, UAUA, WJAVF.PK
Posts by Themes
AirFrance/ KLM, airline demand , Airline Industry Revenue Falls 20% in 1Q09, airline joint ventures , airline security, British AIr, Open Skies, Pacific Airlines , Pacific Airlines Anti trust, terrorist threat, WestJet versus Air Canada
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.