Southwest Seeks Mediation - Analyst Blog

Low-cost carrier Southwest Airlines Co. (LUV) has decided to seek assistance from the National Mediation Board. This will be through a mediation process defined by the Railway Labor Act.

The request follows Southwest's failed attempts to strike a deal with Transport Workers Union's (TWU) local 550, which represents 185 Southwest dispatchers. The company has been in negotiations with TWU local 550 since December 2009.

Southwest Airlines is highly unionized like its peer United Continental Holdings Inc. (UAL). Approximately 82.0% of Southwest's employees were represented for collective bargaining by labor unions, making it particularly exposed in the event of labor-related job actions.

We believe the deal with employees could be crucial for Southwest as it may negatively impact its operations and hurt profitability. If collective bargaining agreements are not made properly, they may lead to strikes, work stoppages, wage hikes, bonus or high labor costs, affecting the company's competitive position.

In the rising fuel cost environment, the failure to the deal may pose a serious threat to the company. Higher fuel costs could also adversely affect the ongoing recovery of the airline industry.

But we believe Southwest Airlines is well positioned for growth owing to its cost leadership position, strong balance sheet, low cost, flexibility, network optimization, and increasing revenue initiatives such as new frequent flyer program and the introduction of the Boeing 737-800 fleet into its network. Southwest Airlines' acquisition of AirTran Holdings (AAI), scheduled this year, should also augur well.

We are currently maintaining our long-term Neutral recommendation on Southwest. However, for the short term (1-3 months), the company retains a Sell rating with Rank #4.