Next week I’ll debate Stifel analyst Joe DeNardi at the Airline Information 10th Mega Event Worldwide in a main session before the conference breaks into loyalty, ancillary merchandising, and co-brand tracks. We’ll debate whether frequent flyer programs should be spun off into separate businesses.
Next Week’s Debate
Joe is the airline analyst most associated with the idea that frequent flyer programs are driving the profitability of airlines and that the market is undervaluing these assets.
My position is that frequent flyer programs are good businesses, just not as good as Joe argues, and that the airlines are worse businesses so overall the market values the combined entities fairly. I suggest that frequent flyer programs are most valuable and effective working in concert with their associated airlines (actually, more so even than they do today – I think they need to be factored more into network planning) and that splitting them off will entail real costs and loss in value.
But First, Will Southwest Airlines Buy JetBlue?
This week, instead of prepping for our debate, Joe is out with a research note arguing that Southwest Airlines should acquire JetBlue to get access to more aircraft, since their own growth is stalled due to the 737 MAX grounding.
He appeared on CNBC pitching the likelihood of such a deal:
Southwest Has Taken a Careful Approach to Acquiring Other Carriers
Historically Southwest has acquired only much smaller carriers. They acquired Muse Air after founding President Lamar Muse and his son founded a competing venture in Southwest’s backyard. The acquisition put a competitor (dubbed “Revenge Air”) out of business.
Southwest acquired Morris Air in the 1980s (co-founded by JetBlue founder Dave Neeleman as it happens), certain assets of American Trans Air out of bankruptcy, and then AirTran in 2011 after losing a bid for Frontier.
Southwest Might Buy Other Jets Instead
A JetBlue acquisition would double down on its ‘congested airports in the Northeast and flying to the Caribbean’ strategy from the AirTran deal. Joe’s argument is that they’d acquire planes.
There are cheaper ways to do that. If they want Airbus narrowbodies, American Airlines President Robert Isom reports that used A319s are cheap. They might acquire delivery positions from IndiGo or GoAir out of India. Of course they wouldn’t have already-trained pilots or a maintenance program for those.
In April though they kicked the tires on the Airbus A220.
Swiss International Air Lines, Copyright: prestonia / 123RF Stock Photo
I suggested they might look at Embraer E2 jets as a replacement for Boeing 737 MAX 7s.
Southwest Airlines has been exclusively a Boeing 737 airline since its founding. The 737 MAX crisis, combined with potential for a plane smaller than the MAX 7, could change that.
Any Deal Would Have to Happen Soon
Unquestionably if Southwest wanted to make this sort of deal they’d want to do it before the end of the Trump administration and before Elizabeth Warren appointees take over at the Departments of Transportation and Justice. The carriers do have significant overlap in South Florida (Fort Lauderdale in particular). DeNardi also suggests Alaska as another Southwest marriage partner, though Alaska and JetBlue seem like they could be better matched at this point (especially now that Alaska operates Airbus aircraft).
The Real Question is How Does Southwest Grow?
The underlying issue isn’t “will Southwest Airlines try to buy another airline” it’s “how does Southwest Airlines grow without the Boeing 737 MAX in service and continued production?” And if Southwest isn’t in a position to grow its business, it can’t command the historically high price-earnings multiple it’s enjoyed relative to peers in the U.S. airline industry.
Mergers are costly. They rarely generate the promised benefits. They involve combining IT systems, fleets, unionized work forces, and company cultures. They’re fraught with risk. Southwest Airlines needs the MAX to be flying again soon, and likely to act on a plan to diversify its fleet (with the attenuated costs and complexity that brings) — potentially with Embraer E2 jets.
I think we have all seen that AA-US merger pushed the pendulum from “not enough consolidation” across the median to “too much consolidation.” I’d be surprised if even this administration would let that transaction through, but surely an administration with any of the current Democratic candidates would shoot this down in a second. Southwest is the largest domestic passenger carrier according to DOT; removing JetBlue’s admittedly small but surely important pricing and service pressure on not only WN but AA, DL, and UA in favor of making the largest domestic carrier even larger is a poor play for the consumer — and I say this as a general ally of the free market.
@Gary: “Unquestionably if Southwest wanted to make this sort of deal they’d want to do it before the end of the Trump administration and before Elizabeth Warren appointees take over at the Departments of Transportation and Justice.” Is this a prediction or your preference? Just curious.
Southwest would be crazy to take on jetBlue’s impossible challenge of recovering from delays caused by routing half their flights through JFK.
@Jon As someone usually in favor of the government erring on the side of providing additional protections to consumers, the one pushback I’d offer to your assessment is that at present, outside of FLL, B6 and WN do not have a lot of overlap. WN is very much a bit player in B6’s biggest markets (JFK/greater NYC and BOS), so I’d see such a merger as taking one competitor in that market and trading it for another. Funny how certain situations make you reconsider your generally-held beliefs!
But overall, I very much agree with your point that we’ve essentially reached the point of oligopoly in the airline industry and that further consolidation would not advance competitive goals. Nor really do I think either of these hypothetical mergers make a ton of sense for WN.
@Other Just Saying – not my preference. She appears most likely to win the Democratic nomination at this point, and the Democratic nominee is largely favored to win the general election. See for instance the betting markets.
Maybe I am missing something here, but if the primary reason for an acquisition is to get planes due to the 737 Max grounding (as opposed to route synergy, etc) , then it seems like this would be an ill-advised move. Even if they could get a deal started now, it would take many months to consummate it, and far longer to have any sort of integration, so what would be the point. The timeline on something like that has to be far, far longer than it will take to get the 737 Max back flying again in a meaningful way.
Most acquisitions now would be buying high since stock prices for most airlines are rather lofty. Unless you trade off of the value of your own stock or find an airline in distress.
@Gary. Interesting. I had a personal friend who is a big gambler hit me up for a bet against Trump. He wanted to do $500, I reduced it to a more friendly $50. I am guessing he will lose well over $10,000 if Trump wins.
RE: My last comment. Not clear. In other words, I bet for Trump, my gambler friend bet against Trump.
@Other Just Saying – Here’s a simple conversion of Betfair betting odds to percentages https://electionbettingodds.com/
There are basically only two things that would benefit WN in purchasing B6:
1. Increased foothold in northeast (particularly NYC, BOS & DCA)
2. Additional planes
The biggest problem is that the fleets are no NO WAY compatible. B6 has free tv & satellite internet, as well as seat selection. They also have Mint planes. WN has shown no interest in these things. B6 is planning expansion to Europe–WN has barely shown interest in central america/caribbean. No way WN even tries this…and if they did, ZERO chance this ultimately happens. Airline consolidation has ruined the US aviation industry (they’re about as popular tv providers) and there are literally no small guys left (RIP Virgin America). Meanwhile there are a lot of people who love WN & some who love B6 and they’d fight to keep them separate.
An Alaska merger with jetBlue would be so much better. Just as it would have made more sense for Virgin in the first place. It would merge the strong East Coast routes of jetBlue with the strong West Coast routes of Alaska and create a true 5th domestic competitor for the domestic big 4.
Are used 737-7/8 NG’s that hard/expensive right now?
@Gary. I checked out the election betting site you referred to. I am not sure this says that Warren can start measuring the drapes in the White House.
–According to the site, 24.2% are betting that Trump gets forced out of the race early, presumably due to impeachment or something like that.
–If that happens, then Warren would be facing a more traditional candidate like Haley or Pence. No way to know how that campaign would play out.
–Also, if Trump was 100% sure of winning the Republican Primary, instead of 77.2% per betting, I suspect the betting that he would win the Presidential election would be around 50%.
–Finally, according to betting Trump has a 41.5% chance of winning. Even taking this betting as predictive, he still has a significant chance of being re-elected. In other words, if you roll two dice, what is the chance the combined number is 5 or less. 5/12=42%. I grew up playing Yahtzee (5 dice), roll two dice and all sorts of weird things happen.
Give me an “O”
Give me an “L”
Give me an “I”
Give me a “G”
Give me another “O”
Give me a “P”
Give me another “O”
Give me another “P”
And give me a “Y”
What have we got?
Yep, an airline industry “Oligopoly”!
Yay! So excited to see I’m no longer the lone wolf who sees that and is saying something about it!
So. Excited. 🙂
Oh, and it makes for much shorter reader posts, too! 😉 hehehe
Oopsie! I got so caught up with delirium and excitement, I put a “P” where the “L” should’ve been in the above.
Silly me!
Oh, well – there’s no edit or delete function, so the error remains as is.
But, for the record that’s
OLI-GOP-OLY.
Gee, see, you can’t even spell “Oligopoly” without “GOP”!
Who knew?!?! 😉
Amazing how that worked out, right?!?!
If they adopt the MAX I for one would avoid Southwest completeky
” before Elizabeth Warren appointees take over..”
— this is not happening.
Oopsie! I got so caught up with delirium and excitement writing the above post, that I missed the typo where my fingers hit the “P” on my “virtual keyboard” instead of the “L” for the word “Oligopoly”.
Oh, well, since there’s no edit or delete function, I guess that typo must remain as it is.
But, for the record, that’s:
OLI-GOP-OLY in the above!
And how funny is it that one cannot spell the “O-word” without “GOP”?!?!
Shocker! 😉
Who knew!?!?
Isn’t it amazing how things have a way of working out!
Cheers!
I can see it now – Southwest buys Jet Blue and the first thing they do is rip out all the Mint seats. Don’t laugh or dismiss it – they did just that when they bought AirTran. Granted AirTran “business” wasn’t of the quality of Mint but it was sure better than coach. Also, Southwest would do away with seat assignments. They have a model and will impose it on any airline they purchase.
Frankly, the biggest issue I see is their desire to remain totally a 737 airline. Buying Jet Blue would mean integrating other planes into their system and that, along with the cost and potential disruption due to changes to the Jet Blue product, are reasons I can’t see Southwest seriously considering this.
Merging for the purpose of obtaining non-737’s will take a tremendous effort for Southwest as they will need to develop/implement advanced crew scheduling software (currently all pilots & FA’s can be on any flight) alongwith new training programs for flight crews and maintenance workers.
With the AirTran purchase, they just sold all the 717s off and really just kept the routes and gates. Much simpler than a Jet Blue acquisition
Wow this would be almost as bad as Alaska buying Virgin. The VX brand was beloved and thus immediately destroyed by AS, which gutted its routes so the planes could be used elsewhere.
Similarly there are many fans of JetBlue – not just Mint but also the reasonably priced E+ section, plus the self-serve snacks and soft drinks. OF course I am not as prescient as Gary but I don’t see this coming to pass as the planes are not compatible and the East Coast hubs would be unable to turnaround flights fast enough to suit WN’s operations.
“… the Democratic nominee is largely favored to win the general election”. ROTFLMAO. TDS much Gary?
@Jose – as you’ll see, I’m basing that on betting markets but you can look at polling too. I think it’s pretty supportable “largely favored to win.” To be sure, after the 2016 election, I’m open to the possibility that the candidate favored to win will lose but that’s not where I’d place a bet. And as I noted, I have absolutely zero brief for Elizabeth Warren.
Instead I’m making a point here about electoral risk for a deal like this. It would be wise to get a deal in that would be evaluated by the Trump administration and not by the possibility of some other future administration. Warren selected as perhaps the scariest to business for anti-trust.
Please God no. JetBlue points are actually useful
@Gary: Trump is ahead at the bookies.
https://www.thelines.com/odds/election/
Much as it pains me to say this, if the Democrats go looney left like they did with George McGovern against Tricky Dick Nixon in 1972, then unless Putin’s Useful Idiot / Putin’s Puppet / Putin’s Poodle (etc.) has lost enough Senators’ votes at any potential Impeachment trial to resign as Tricky (“I am NOT a crook”) Dick did instead of facing conviction and removal by his current toadies, then I agree, NOT likely a leftie like Warren wins – with our long national nightmare then set to continue for however long it takes into the imbecile’s 2nd term until he’s finally no longer needed by the GOP, and they decide his lunacy and bombast does more harm than good for 2022 mid-terms, and it’s better to replace him with the more conventional, less caustic, Pence.
Sorry, progressives and leftie utopians – but if you really think Western red states and the southern “Bible Belt” will ever support a leftie like Warren, or Bernie Sanders, then you’re still NOT understanding that credibly alleged pedophile Roy Moore barely lost to Doug Jones in the special election to fill the seat vacated by Alabama’s longtime Senator, Jeff Sessions, when he decided to go full-on masochist subjecting himself to the pain and repeated public humiliation as the Dotard’s Attorney General – and that Roy Moore is planning another run towards becoming Alabama’s US Senator instead of say, laying low knowing that he got away with “dating” an underage teen/and has a ‘taste’ for “barely legal” teens – or going to jail for Statutory Rape.
Of course, in my fantasy world where unicorns roam freely and there are rainbows aplenty adorning every flagpole around the world, Elizabeth Warren would get my vote (she’s exceptionally bright, and that alone is reason enough when compared to the pea-brained, man-child dolt with tiny hands now occupying 1600 Pennsylvania Ave), but the reality is there are more people who identify with (alleged) pedophile creep, and all around dirty old man, Roy Moore than Elizabeth Warren in places like Alabama, Wyoming – or even Florida once one gets beyond the “Gold Coast” or portions of Orlando and Jacksonville.
Just look at how things turned out in 2000 and again in 2016, if anyone doubts which way Florida will go if the D’s go looney left (as they
so often like to do 🙁 )
Sorry, but so NOT going to fall for the idiot’s “NOT electable” or that we, as a country, “will come to our senses” and will pick anyone but the racist, gaslighting, gasbag.
In fact, as my partner will confirm, as early as May, 2016, I began saying things would turn out the way they did.
It’s pretty to think our fellow Americans would aspire to greatness instead of preferring a narcissistic buffoon to lead our (NOT right now, anyway) great nation.
But as someone who grew up in a Republican predominant family, and understands the “Republican brain” (yeah, I know an oxymoron nowadays…) and “worldview” the chances of Warren defeating you-know-who may seem reasonable until the votes are counted on election night and instead of moving on to the 46th president with a sense of optimism and pride in being an American again, we find ourselves stuck with the same old slug for however long it is until his party (and/or Putin) no longer needs their useful idiot, and casts him aside.
Of course, nothing would give me greater pleasure than to be completely wrong.
But, if the D’s really want to WIN they’d be wise to stop planning on building castles in the sky, and make sure their nominee can actually WIN enough votes in enough places to overcome the plague of the Stone Age “Electoral College” that heavily favors the GOP and its looney tunes (Fake) “President” that has managed to accomplish the miracle of actually making Tricky Dick look like a half decent President by comparison.
Please Democrats, please!
Don’t blow it this time by going looney left.
The risk of disaster is waaayyy too great.
With the consequences too dire to even fathom. 🙁
@Gary. I think you are making two leaps here. (1) Warren: (a) Despite Warren’s rhetoric, I am guessing she will not be as radical or hostile to big business as she sounds. In fact, some of her earlier writings sounded almost Republican by today’s standard. She has evolved to the left, but i she becomes the Democrat nominee, I am guessing she will evolve (as fast as she can) back to the center. (b) I have noticed little difference between the Trump, Obama, Bush, and Clinton administrations toward’s industry concentration. In fact, Clinton repealed Glass Steagall act which created the current system of megabanks doing lending, investment banking, and so forth. (2) Has Trump actually weighed in on airline mergers. Unpredictability is one of the main criticisms of Trump. You are kind of making the assumption that he would support such a merger, when nobody actually knows what he or his administration would do.
@OJS,
I so want to agree with your comments immediately above.
But, just not sure Warren can overcome the onslaught of bald faced lies & the “yuuuggge” poopstorm that the slug in Chief (and his party’s well oiled, and often very effective tried and true propaganda machine) featuring the infamous three “G’s” of “God”, “Guns” & “Gays” along with “White Male Resentment” that “special rights” are being created for immigrants, people of color, women, and of course the LGBTQIA community – or basically everyone else but white males.
It worked well in 2016.
And there’s no indication that the GOP is moving away from that “Southern Strategy on Steroids” anytime soon – because thus far, it’s worked for the gaslighting gasbag and the GOP.
JMHO!
I don’t see this happening. Southwest would be better off recalling 737 classics from the desert in the near term. However, Alaska merging with jetBlue is just a matter of time.
@Howard Miller
I bet you’re really fun at parties……
“Unquestionably if Southwest wanted to make this sort of deal they’d want to do it before the end of the Trump administration and before Elizabeth Warren appointees take over at the Departments of Transportation and Justice.”
I have seen-um your smokem signal, I chief warren (who totally did not lie about my race my whole life to get ahead, stealing positions from actual minorities) have great confidence in my ability to stand up against Chief Orange Paleface.
You have seenum my experience when handling that paleface Tulsi Gabbard.
@L3 – that’s a bit misleading. Trump more than any single candidate right now has the best odds of being President, because every other candidate still has to get through a primary. So Trump has better odds of winning than Elizabeth Warren still. But Trump’s odds are less than 50% [meaning betting markets suggest he’s likely to lose to whomever wins the Democratic primary].
Put another way if you sum up the chances of each Democrat to win it far outstrips trump.
Trump’s betting market odds of winning on Betfair are around 41% right now.
Feel like a couple X-factors not addressed here.
1) will the MAX will return with the same pilot requirements, ie no separate type rating or significant extra training , and eventually settle into the fleet & with public acceptance;
2) the cracks being found on NG wing box are quite significant. Would it be wise moving forward to diversify WN fleet risks
3) If the answer is yes – then In that case – if you have to add a new plane type – that opens a whole new discussion. One way to capture growth might be to upgauge – Southwest does have some routes and traffic where they could probably justify widebodies running shuttle routes the way it is done in Asia, for example. Plus adding widebodies would open other routes, and obviously free up current aircraft.
Of course this would this be a stretch? Yes. It would be a historic reinvention of their business plan, but this is an unprecedented, potentially quite challenging time in their history, and I’ll bet they are considering all kinds of solutions. I think there’s an argument that it would be easier to add used 767 frames (or talk Boeing into a deal on keeping that production line open & building some cheep new ones, the way United was rumored to be considering) than going through a major merger.
I think Steve might have the smartest move here. Snag some aged 757’s and 767’s and put them on the heaviest routes and then reallocate the 737’s to new markets where the demand will be lower. They could even shift the widebodies to the new Hawaii routes and expand further east with the extra distance provided. Yes it is a big shift on planes, but at least staying in the Boeing family should ease some of the learning curve.
@Gary: True it’s a conditional probability but there is a trend in these things. In April 2016 Trump was at 3:1, but won. I got those odds, knowing that Clinton was unelectable. If the Democrats do choose a Venezuelan (whether it is Bernie Maduro or Elizabeth Maduro) they will speak to such a small base that it will be a Trump landslide.
@Gary. My point is, you are being simplistic with Betfair numbers.
According to Betfair numbers, the probabilities are as follows:
23.1% (100% -76.1% of winning) chance of not winning the Republican Primary (withdrawing or being impeached) + 41.5% chance of being re-elected + 35.4% (100%-23.1%-41.5%) of winning the Republican primary but losing to a democrat.
Removing the 23.1% chance of not winning the Republican Primary: It is simple math to determine Trump’s chances of winning against the Democrat field if he is running. 41.5% chance of winning/(41.5% chance of winning + 35.4% chance of losing) = 54.0% chance of winning against the Democrat field.
@L3 – as I say, I was wrong in 2016. My working model was:
* Trump would underperform Mitt Romney with women and minorities
* You don’t become President by underperforming Mitt Romney
He squeaked out a really interesting and very narrow victory. He lost the popular vote by millions, because there are a tremendous number of people in California (and New York). The states that were expected to go Democrat that he won he generally won by fairly narrow margins because Hillary Clinton was a terrible candidate along almost every conceivable dimension.
I agree that Elizabeth Warren is perhaps the least-electable choice. She could genuinely lose to Trump in a year that Democrats really should win.
My point though is that an airline looking to merge and pass through anti-trust scrutiny is going to want to make that play quickly, rather than risking an Elizabeth Warren (or similar) Justice Department and DOT that’ll be less friendly towards the prospect than what they face today. I believe my point stands.
@Gary: “My point though is that an airline looking to merge and pass through anti-trust scrutiny is going to want to make that play quickly, rather than risking an Elizabeth Warren (or similar) Justice Department and DOT that’ll be less friendly towards the prospect than what they face today. I believe my point stands.”
Agreed. It will be “big is bad”. Simple-minded, wrong, but some voters will buy it.
@Gary. “He lost the popular vote by millions, because there are a tremendous number of people in California…”.
Trivial. I looked at the numbers some time ago. Hillary won the popular vote by 2.9MM. Just 5 counties in California (using 2/10/17 NYT numbers) accounted for 3.0MM for Hillary over Trump:
Los Angeles County 1.7MM
Bay Area (Alameda County, 0.4MM, Santa Clara County, 0.4MM, San Francisco County, 0.3MM, Contra Costa County, .02MM) = 1.3MM
More Trivia: Some 25 out of 58 counties in California actually went for Trump over Hillary.
@Howard Miller.
— At least you are not blind to the fact that Trump might win again.
–I was disappointed you did not comment on De Blasio in a previous posting. You are really knowledgeable about New York City.
–Wish you would dial it back with snark about Trump and his voters. After all, I am sure many proud deplorables read this blog.
–There is no indication that Trump is anti-gay. He is a New Yorker and had been in the entertainment business for years. In fact, his administration has been pushing other countries hard to decriminalize homosexuality. Other administrations were too diplomatic to push this topic. Sometime having a rude Queens guy on your side is good.
Since Southwest stock is an overvalued currency (Wall Street thinks its business model is better than it actually is) there is some value in them buying other airlines. But JetBlue would present a dilemma since their business model is a bit different from Southwest’s, and their stock is also overvalued. Would Southwest be more successful at JFK and BOS than JetBlue is? Personally, I doubt it –I think JetBlue’s model is better suited to those markets. Since JetBlue is only mildly successful as a business venture, I don’t see how Southwest could make it more profitable. In any event, I think it’s fanciful to think Southwest would buy JetBlue “for their aircraft.” That’s pretty much nuts. I think they’d think of buying them if they wanted to expand at JFK and BOS. That’s where the value would be (if there is any).
“the Democratic nominee is largely favored to win the general election. See for instance the betting markets.”
Yeah, that worked so great in 2016. Hahahahaha
Two words: Sun Country.
Small company with 30 738’s – some even ETOPS! – already configured for single-class economy. Buying them is a rounding error given WN’s revenue.
I agree that AS will eventually merge with B6.
Southwest isn’t buying any other airline. They don’t have to. The 737 Max will be back in the air, no later than next summer. Look Southwest’s business model and company culture do not blend well with other airlines. It won’t happen.