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.