Southwest Airlines Plays Defense with Frontier Bid

by: Loren Steffy

Southwest Airlines (NYSE:LUV), which for 30 years led the charge to change the airline industry, is now playing defense. With its bid to buy the bankrupt Frontier, Southwest is fighting to preserve the status quo, rather than fighting to change it.

The Frontier offer has a lot of people scratching their heads. Southwest has done three mergers or merger-like deals in the past, and none have gone terribly well. The first was Muse Air, which was done simply to eliminate its only competitors at Dallas' Love Field. After that transaction, co-founder Herb Kelleher once swore he'd never do another.

The second was Morris Air, which allowed Southwest to expand throughout the west. In that sense it was success, but it was plagued by internal integration issues that frustrated the airline for years.

The third was ATA, which never involved combining the two carriers, but was basically a way for Southwest to grab gates at Chicago's Midway Airport and prevent AirTran (AAI) from getting them.

But why, in a falling revenue environment, would Southwest want to buy a bankrupt rival? It's not about growth, and its not about sticking it to United (UAUA) in Denver. It's about playing defense.

As Bill Swelbar explains, Southwest now operates at a cost disadvantage to what he calls Midscale carriers - Air Tran, JetBlue (NASDAQ:JBLU), Frontier. If Republic Airways (RJET), the rival bidder in the bankruptcy, succeeds in buying Frontier and keeping its operations in Denver, it poses a long-term threat to Southwest's profitability in that market, and possibly others.

After it bought Morris, Southwest left the Denver market because it was too expensive. It returned later when its need for growth superseded the cost concerns, but some analysts believe Southwest has been losing money in Denver since it returned.

If that's true, then it can't afford to allow Frontier to continue flying as a competitor. It seems the airline that helped redefine the industry runs the risk of getting beat at its own game by a new crop of upstarts.

Disclosure: no positions