Monday, November 2, 2009

The Southwest and St Joe escape clauses

Southwest was playing "hard to get" in this negotiation and had the strong hand, so I assume the $14M and $12M will protect SW down to their lowest forecasts, which should include peeling off 2/3 of Delta's PFN traffic and stimulating some more from surrounding markets. How much more goes to SW depends on Delta's fare response. If Delta does not defend VPS and allows SW to take half of that, SW could break even earlier than 3 years.

The "opt outs" should be set to protect both companies - JOE can opt out if SW just wants to bleed JOE in a hopeless deal, and SW can opt out even if JOE is willing to go deeper in losses than SW expects to grow out of in 3 years.

The wild card in this is not the competiton between markets and airlines, it is the economy that might not support any high volume traffic plan. Southwest is not breaking even nationally on its airline sales and must keep beating the fuel market with hedges until the economy is better. Delta is outright losing money although we have to assume they are profitable in monopoly markets. JOE is also unprofitable and borrowing to finance this deal. If the economy turns strong within 2 years, JOE and SW and the TDC's have helped each other through a rough patch; if not, give-away's cannot entice enough people to travel and buy premium or optional real estate.

The crucial assumption for the players is that transportation cost and insufficient advertising, rather than fundamental economics, is preventing growth and prosperity. There is no obvious "plan B" other than returning to the long term challenges of industry and education in a global and urban-centric economy.

in reference to: The News Herald (view on Google Sidewiki)

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