It was reported last Friday that Republic Airways had “won” the right to buy Frontier Airlines despite a lower bid than Southwest Airlines submitted. Both companies have valid strategic reasons to buy Frontier, and Southwest’s larger size allowed them to bid more … and yet they still lost. Why?
Culture trumps strategic opportunity at Southwest. They learned a long time ago that people are key to strategic execution and without the support of their people, the merger and resultant execution would look a lot like, well, American and TWA, USAir and America West, etc.
What was the key culture issue? Pilot intetration. Southwest made it clear their bid was contingent on prior agreement between the two pilot’s unions on how the pilots would integrate seniority (a key issue in airline employee benefits, shifts, layoffs, etc.). As you might expect, the Southwest pilots proposed Frontier pilots go to the bottom of the seniority list as they were new to Southwest, would be getting a raise and the opportunity to work for a more stable airline. The Frontier pilots suggested (not surprisingly) they be integrated into the list based on their time with Frontier compared to Southwest pilot’s time with Southwest.
The two unions could not come to a resolution so Republic wins, the Frontier shareholders and creditors come out a bit worse off, Southwest misses a strategic opportunity, but does not have to try to force an employee integration that has misfired with most other airline mergers. Republic, on the other hand, grows and time will tell if this is a good opportunity for them or not.