You Are Now Free To Snap Up Your Competitors?

In a recent question-and-answer session with the Dallas Morning News, Southwest Airlines CEO Gary Kelly said the trendsetting low-cost carrier is interested in consolidation... but he made it quite clear it will be Southwest writing the big check if and when that happens.

"At some point, I think we'll probably acquire somebody," Kelly (above) said. "There's bound to be a scenario that we would say, 'That scenario out of these 10, yep, that one would work for us.' We'd want to be prepared for that opportunity that presents itself."

Kelly pointed to Southwest's 2004 investment in then-bankrupt ATA Airlines as an example of the airline's interest in snatching up weaker competitors. Southwest also acquired Muse Air in 1986, and Morris Air in 1993 -- deals that showed Southwest both advantages and pitfalls of taking over another airline.

In the short term, Kelly said, Southwest is interested in doing the best it can, in an industry whose current state he classified as "very tenuous," and not prepared for a looming slowdown in the US economy.

"I think the business cycle this decade has been very difficult for our industry. You know, finally in 2006 and 2007, you were seeing some profit reports by various airlines," Kelly said. "Two emerged from bankruptcy in 2007. [But] It looks like those profits may be short-lived.

"It'll be an interesting 2008," he added.

Kelly added Southwest is in a better position than most of its legacy and low-cost competitors. As ANN reported, Southwest managed to hedge 70 percent of its fuel for 2008 at about $50 per barrel -- far below prices that earlier this year came close to twice that. While that's not as good as the 90 percent supply hedged for 2007, Kelly added, it still leaves Southwest in a better position to ride out spikes in oil prices than its rivals -- as long as prices stay high.

"The balance sheet is in great shape," Kelly said. "You know, our leverage is well below 50 percent. We're under 40 percent total debt -- that's including all of our aircraft leases."

Rather than focusing on acquiring another carrier -- yet -- Kelly said Southwest is working to keep the airline's unique brand identity intact, even as it moves to increase profitability by appealing to business travelers, over its bread-and-butter customer base.

"I don't want to be like other airlines," Kelly said. "We want to be Southwest. But we're a business, so we also have to be profitable and prosperous in the way that we offer this. So I think that is the trick .. We want to be low fares. We want to have great personal customer service. We are not going in a direction like some of our European counterparts who, they don't capitalize "C" in customer, I assure you.

"But, you know, we also have to find ways to beat our competitors and win customers," he added. "In some ways, that may give the appearance like we're acting like other airlines, but if you put everything we do today together as a whole, we still, I think, are very different."

In response to a question regarding a theoretical suggestion from a hedge fund manager, telling Southwest to acquire a competitor like AirTran, Kelly took a swipe at recent reports of a merger between Delta and United -- a scenario that, apparently, existed only in the minds of officials at investor Pardus Capital Management.

"We can't let investors guide the company. That's not to say that investors aren't smart and don't have good ideas, because they do. They just have different motives. We've got to stay true to who we are as a company and build for the long term...

"At some point, I think we'll probably acquire somebody," Kelly restated. "That's just a reflection of my view that the industry is weak and that there'll be players up for sale, probably in a fire-sale mode, and we'll want to at least be thoughtful about that. We'll still have all the considerations -- the fleet, the labor contracts, the seniority issues, the cost implications of it, the cultural aspects of trying to bring two work groups together and on and on and on. We would be concerned about that and always have been."

FMI: www.southwest.com