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The Long Haul

As airlines struggle to survive, the role of finance in decision-making takes off.

Picking Their Battles

For a time last December, it seemed that Southwest Airlines Co. and America West Airlines Inc. were ready to spar over some spoils of the U.S. airline industry fare war.

At an auction of assets by the bankrupt discount carrier ATA, Southwest proposed paying $177 million to secure six ATA gates to bolster Southwest’s Chicago Midway Airport operation, and for a 27.5 percent nonvoting preferred equity ownership in ATA. America West’s idea was grander: a possible offer for the entire ATA operation, a move that would have given America West over-water rights to allow it to begin offering service to Hawaii. Just before the bids were due, though, America West pulled out, leaving Southwest the winner.

While America West’s withdrawal might have seemed a surrender to Southwest, keen financial thinking governed the decisions at both airlines. In his final analysis, America West CFO Derek Kerr calculated that global demand for ATA’s Boeing fleet had suddenly increased — in part because the Chinese were buying up 737s — driving their used-aircraft value high enough that the net present value of the whole offer fell short of the target. As for the over-water service: “We were already targeting Hawaii in 2006,” says Kerr, and the ATA deal would have only “accelerated things.” In an environment in which a third of the nation’s airliners are being operated by carriers in bankruptcy, “there are going to be a lot of other opportunities.”

For others besides America West, Southwest remains the mightiest rival, as well as an object of envy for its low cost, cozy employee relationships, marketing skills, and tough voice in the industry.

“I don’t think any airline can be successful if the focus is only on cost,” says Southwest CEO Gary Kelly. “The airline industry is enormously challenging from a financial perspective, with airlines having to undertake every effort available to mitigate risks.” Southwest has managed to thrive — with 31 consecutive annual profits — because “we found a way to weave our way through those risks.”

But low cost is still the key to profits. Where once Southwest was about the only discounter in town, “lower-cost airlines are now 25 percent of the industry,” says Kelly. “The writing is on the wall. The legacy carriers are going to have to get their costs down, or else they’re going to just disappear.” —R.H.


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