June 14, 2007

Southwest looks to acquisitions

Southwest Airlines said on Wednesday that it was examining potential acquisitions and alliances with multiple carriers, a signal that industry consolidation could emerge among the fast-growing low-cost segment.

Gary Kelly, chief executive, said the largest US domestic airline had the funding to support acquisitions, despite a slowdown in revenue growth across the industry which is challenging its expansion plans and profit forecasts.

His comments followed a recent signal by Delta Air Lines, which emerged from bankruptcy protection in April, of interest in a future combination with JetBlue, the second-largest low-cost carrier. Analysts at Goldman Sachs reported the interest after a management meeting, though Delta declined to comment on any speculation.

The US low-cost segment is seen as ripe for consolidation after Delta’s successful rebuff of a hostile bid from US Airways this year raised concerns that any deals among the large network carriers could be blocked on antitrust grounds.

While low-cost carriers such as Southwest and JetBlue continue to expand faster than network rivals, the overlap in their route systems is less likely to attract opposition from regulators.

Mr Kelly declined to be drawn on any potential targets, though analysts have in the past linked the company with Denver-based Frontier and Spirit, a Florida-based carrier which focuses on routes to the Caribbean. He noted Southwest had made acquisitions in the 1980s and 1990s – Texas-based Muse Air and Morris Air, a Utah-based airline run by JetBlue founder Dave Neeleman. “Who knows, maybe we’ll do one this decade,” he said.

Southwest’s business model formed the template for the rapid emergence of low-cost carriers around the world such as Ryanair, Easyjet and AirAsia. However, the airline is evolving its strategy to provide the flexibility for code shares and other alliances, as well as international flights. Southwest had previously eschewed such moves to protect its cost structure.

By Doug Cameron in Chicago
Copyright The Financial Times Limited 2007

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