Merger mania seen as bypassing Southwest

David Koenig

Thursday, April 5, 2001 | 11:37 a.m.

Southwest Airlines, the largest carrier at Las Vegas's McCarran International Airport, today announced it's beefing up service between Las Vegas and Tampa,Fla., and between Las Vegas and Austin, Texas. Southwest, which offers a Saturday flight serving Tampa, said it will begin offering daily Tampa-Las Vegas flights beginning Aug. 5.

The airline, which has one daily Austin-Las Vegas flight, is also adding a second flight between the Texas city and the gambling capital. Southwest today also said it's increasing service between Albuquerque and Chicago Midway, Albuquerque and Tucson; and Chicago Midway and Long Island/ Islip.

DALLAS -- Amid the scuttlebutt of actual and potential mergers in the airline industry, one name is conspicuously absent: Southwest Airlines.

The low-cost carrier, known for its colorful chief executive and quirky commercials, has rarely pursued other airlines. Company officials say they're not interested in acquisitions.

As for being a target itself, industry watchers say other airlines would be repelled by the cost and culture shock in taking over Dallas-based Southwest, which eschews reserved seating and bypasses many of the nation's busiest airports.

"Our business model really doesn't fit with any other airline, so I don't think there's any likelihood of Southwest acquiring or being acquired by any other airline," said James Parker, who will take over as chief executive in June from company co-founder Herb Kelleher.

There's plenty of action elsewhere in the industry.

United Airlines, the largest carrier in the world, announced last year that it was buying US Airways, the No. 6 U.S. carrier, although federal regulators haven't approved the deal.

American Airlines, the No. 2 carrier, answered in January by buying Trans World Airlines out of bankruptcy. There are reports of other possible deals in the works: Delta buying Continental, Northwest buying Continental, and one of the big carriers buying America West or Alaska Airlines.

But no mention of Southwest.

"I can't see them as a target," said Ray Neidl, an analyst with ING Barings. "It would be very expensive with their stock price at such a high multiple."

Southwest's market capitalization of about $13 billion is greater than the combined values of United, American and Delta, the three largest airlines.

Even if they could afford Southwest, executives at other companies might not know how to manage its mix of low fares, short flights and lack of meals or reserved seating, say industry observers.

"It's a different breed. It would be almost impossible to run Southwest as it's been run," said Stuart Klaskin, co-founder of an aviation-consulting firm in Coral Gables, Fla.

From 1971, when it started with three planes serving Texas, to its current nationwide operation with more than 330 planes, Southwest has made only two minor acquisitions, with mixed results.

It bought Muse Air for $60 million in 1983 and flopped while trying to run it as a separate operation. Eight years later Southwest bought charter carrier Morris Air for $129 million in a deal that successfully expanded its reach into West Coast markets.

Southwest officials say they might be interested in buying pieces of other carriers if the Justice Department requires United or American to sell some assets as they split up US Airways. Such assets most likely would include gates or takeoff and landing slots, analysts said.

Southwest executives say, at least publicly, that because of their cost-cutting prowess, they can compete even if the rest of the industry consolidates.

"We can make money charging low fares, and they can't. That will be the case whether there are two major airlines or 12," said chief financial officer Gary Kelly. "Do we want to compete against two major megacarriers? Well, no. Size is an advantage."

The go-it-alone approach was displayed late last month when Kelleher announced that Parker would succeed him as chief executive and Colleen Barrett would take over his duties as president. Both are longtime Southwest executives and Kelleher confidants.

Company directors never even interviewed an outside candidate for either job, said Kelleher, who will remain chairman of the board under a new three-year contract. Analysts say investors were relieved that the question of Kelleher's successor finally had been settled and that an insider was chosen.

"If they had brought in someone from the outside, you would have seen a very negative reaction from Wall Street," said Julius Maldutis, an analyst with CIBC World Markets Corp.

Robert Milmore, an analyst with Arnhold & S. Bleichroeder, said in the current consolidation climate, promoting Parker to CEO makes sense because of his experience cutting deals with Southwest's business partners.