Southwest: Organic growth the strategy

NEW YORK Thu Feb 25, 2010 9:20am EST

Southwest Airlines planes prepare for departure from Oakland International Airport in Oakland, California in this May 29, 2006, file image. REUTERS/John Gress

Southwest Airlines planes prepare for departure from Oakland International Airport in Oakland, California in this May 29, 2006, file image.

Credit: Reuters/John Gress

NEW YORK (Reuters) - Southwest Airlines Co (LUV.N) said it was open to acquisitions but added that this strategy would come secondary to growing the airline organically, the airline's chief financial officer said.

"No question, if the right opportunity presented itself with all the right facts, we would certainly be interested," CFO Laura Wright said on Wednesday by phone during the Reuters Travel and Leisure Summit in New York.

But Wright quickly added that Southwest, the second-largest airline by market value, has only made acquisitions three times in its nearly 40-year history.

"From where we sit, we don't see consolidation as something that's necessary for us," Wright said.

Last year, the carrier bid on Frontier Airlines, which was then in bankruptcy. The move surprised analysts at the time because Frontier flew other types of aircraft. Southwest flies only Boeing 737s.

Frontier was eventually bought by Republic Airways Holdings Inc (RJET.O) after Southwest and Frontier pilots could not agree on a labor contract.

"They had a very good product, a very good culture and a good customer following," Wright said. "We thought it was a marriage that under the right circumstances could have been good."

CAPACITY DISCIPLINE TO BOOST YIELDS

The U.S. industry has lost some $11 billion in 2009 alone, according to the International Air Transport Association. But Wright and other airline executives have said in recent months that travel demand has strengthened.

In an effort to prop up prices, U.S. airlines have cut back on the number of flights and used smaller planes in the past year.

"It remains to be seen if there was enough downsizing," said AMR Corp's AMR.N American Airlines Chief Financial Officer Tom Horton. "Capacity is probably in the range of where it ought to be."

Continued "capacity discipline" as well as economic recovery could pave the way for U.S. airlines to improve the profitability, or yields, on each flight, Wright said.

Earlier this week, the chief financial officers of US Airways LCC.N and UAL Corp's UAUA.O United Airlines told Reuters that the industry could return to profit by consolidation.

The president of the Air Line Pilots Association union said Wednesday the regional airline industry could shrink. There could be 25 percent fewer regional operators in upcoming years, said Capt.

While Wright said the regional airline industry was on the cusp of change, she said it was unclear if the carriers, or their assets, would make attractive targets for Southwest.

One stumbling block could be infrastructure, she said. For example, gates for a regional jet may not accommodate larger aircraft.

"Certainly consolidation can make a lot of sense under the right scenarios, but it is a difficult thing to accomplish in our industry for a lot of reasons," Wright said.

(Reporting by Deepa Seetharaman; Additional reporting by Jui Chakravorty, Karen Jacobs and Kyle Peterson; Editing by Carol Bishopric and Phil Berlowitz)

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