Southwest Airlines' failed attempt to buy a major rival in the Denver market has sparked debate among experts over whether the carrier's labor relations will impede its efforts to seize market share.
The low-cost carrier lost its bid to buy Denver-based Frontier Airlines Holdings Inc in a bankruptcy court auction last week, a development that surprised experts who expected a Southwest win.
Disagreements over seniority between Southwest and Frontier pilots played a major role in unraveling the deal. Southwest's bid required that the pilots' unions reach an accord.
The impasse allowed Republic Airways Holdings Inc to snag Frontier. Now some experts question whether Southwest's deference to its Southwest Airlines Pilots' Association, which represents more than 5,900 pilots, could harm its growth.
Clearly the pilots played a significant role in this deal going down, said William Swelbar, an airline researcher at the Massachusetts Institute of Technology and director of Hawaiian Holdings Inc.
Southwest was the heavy favorite to win the bankruptcy court auction for Frontier. Shares of Dallas-based Southwest rallied 20 percent in the two weeks after it announced its interest in the carrier on July 30.
Buying Frontier would have helped Southwest take out the No. 2 player in Denver and put pressure on UAL Corp's United, the dominant airline in that market.
Shares have lost their steam since Republic's win, reflecting worries about stiff competition in Denver, one of Southwest's busiest airports in terms of daily departures.
Next Generation analyst Daniel McKenzie now forecasts Southwest may have to cut rates to top competitors in Denver, potentially costing the company tens -- if not hundreds -- of millions of dollars.
The pilots' unwillingness to be more flexible with respect to seniority integration with Frontier pilots now leaves Southwest's balance sheet in a more challenging position, McKenzie said.
A SIGN OF STRENGTH
Southwest has long been the envy of the airline business with its investment grade credit rating, solid balance sheet and large fan base.
But experts say the 38-year-old company has to redouble efforts to raise its profile and maintain its dominance.
Competition in Denver has been particularly tight. Frontier is a well-loved brand in the area and thanks to its bankruptcy its costs have been lowered.
Airline consultant Michael Boyd said Southwest may amp up its Denver operations by offering more connecting flights.
They had an opportunity to take out a competitor and that opportunity went away, Boyd said. So they're back where they started.
Industry-watchers say Southwest has other options in the United States that can boost long-term prospects.
There still are markets that they can make some headway in and really bring the pricing down, said Craig Hodges, president of Hodges Capital Management, which owns Southwest stock.
The provision mandating an agreement between the two unions was a unique feature of the Frontier deal, but labor remains a consideration when the company does a deal, a company spokesman said. Southwest's pilots commended the company after Republic won the bidding war for taking the employees' side.
Many other carriers would have said 'let the unions fight it out,' Boyd said. Southwest has a more holistic view toward their employees. It underscores how well-managed Southwest is.
(Reporting by Deepa Seetharaman, editing by Matthew Lewis)