Southwest Traffic Gains & Pilot Agreement Support $10.60 Value
Last week was uneventful for Southwest Airlines (NYSE:LUV) as the stock ended the week on a slightly dull note along with peers Delta Air Lines (NYSE:DAL) and United Continental (NYSE:UAL). However, some good news came yesterday as the carrier reported higher year-over-year October traffic and made progress in its integration with AirTran after it secured an agreement for the pilot’s seniority integration.
Southwest saw its October traffic rise 3.5% y-o-y on the back of 4% higher capacity for the combined entity of Southwest Airlines and AirTran. Lower occupancy rates however partly eroded traffic gains (See Southwest Airlines Reports October Traffic, Press Release, Nov 7).
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In another key development this week, Southwest reached a key integration milestone with the approval of a seniority integration agreement by the Southwest Airlines Pilots’ Association (SWAPA), the union representing Southwest Airlines Pilots, and the Air Line Pilots Association (ALPA), the union representing the pilots of AirTran Airways. Airline acquisitions require the task of merging the seniority lists of work groups, which determines the order in which the pilots are placed and the impact of an employee’s earnings, city base and days worked.
Southwest had previously warned the pilots of subsidiary AirTran that it would consider keeping AirTran as a separate airline if the pilots of both airlines fail to agree on the plan to combine seniority lists. With the agreement now in place, Southwest is rapidly moving towards full integration with AirTran. Southwest expects the integration to bring meaningful revenue synergy opportunities in the areas of schedule optimization, revenue management, combining of frequent flyer programs, distribution and cargo.
We have Trefis price estimate of $10.60 for Southwest, implying a premium of ~25% over the current market price.
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