Labor Dispute Troubles Southwest (revised)

The trade union dispute has again sparked integration problems forSouthwest Airlines([url=http://www.zacks.com/stock/quote/luv]LUV[/url]). The carrier has been trying to integrate operations with subsidiary AirTran Airways, but even after a year it continues to see setbacks with its labor contracts.

Though flight attendants at AirTran had voted over 90% in favor of a deal, the mechanics union has kept it from going through. The contract came into existence in December last year and was duly approved by the executive boards of the Transport Workers Union 556, representing the union of Southwest Airlines Flight Attendants and the Association of Flight Attendants Council 57, representing the union of the Flight Attendants of AirTran Airways.

Subsequent to the acquisition of AirTran, the company was keen on establishing a joint contract for all flight attendants. A single contract would be highly beneficial not only in terms of preventing union disputes, employee strikes and other labor disruptions, but also in terms of cost synergies related to labor disputes and compensation issues.

The AirTran merger is expected to be accretive to Southwest’s earnings when realized fully. The transaction is expected to generate net synergies of more than $400 million by 2013 upon full integration.

Last year, Southwest generated $80 million in annual synergies. The company expects to produce half of the net synergies ($200 million) this year, with two-thirds realized from revenue and one-third from cost savings.

With union issues flaring up, we foresee a delay in receiving even a single operating certificate for the combined entity, which was slated to be operational in the first quarter of this year.

Southwest is currently seeking help from the union officials of both the carriers to pursue the matter with the director of the Aircraft Mechanics Fraternal Association to reach a single agreement.

Apart from the union issues, Southwest also remains stifled by sky rocketing fuel costs. Fuel price volatility continues to be one of the significant challenges. Though high currently, fuel prices remain well below the 2008 level of over $140 per barrel that had ravaged the airlines industry.

The company's ability to pass along the increased fuel costs to its customers is limited by the competitive nature of the airline industry. Southwest Airlines faces competition from other low-cost carriers likeJetBlue Airways([url=http://www.zacks.com/stock/quote/jblu]JBLU[/url]) as well as from major airlines like Delta Air Lines([url=http://www.zacks.com/stock/quote/dal]DAL[/url]) andUnited Continental Holdings([url=http://www.zacks.com/stock/quote/ual]UAL[/url]) that cut fares in order to attract customers. Thus, even a small change in fuel prices can significantly affect profitability.

We expect crude oil and jet fuel prices to remain largely stable this year, but forecasting this key variable with any level of accuracy has always been challenging. All the more when the company has already announced a suspension in its expansion plans owing to escalating operating costs.

(We have revised this article to correct an error: The unionized flight attendants of AirTran were originally reported to have rejected the tentative agreement. We regret the error, and the original article -- published earlier today -- should not be relied upon.)