After my article about Southwest last month, some of you expressed consternation about the now official Southwest Airlines (NYSE: LUV) merger with AirTran. Rightfully so! Airline mergers have a horrifying history. Whatever you do, don't panic -- this merger is different.

First, let's address the challenges:

  1. Growth. Southwest's on-time flights and baggage handling numbers have slipped a bit as the airline has grown.
  2. New planes. Southwest flies only the 737, and AirTran flies the 737 and 717. Integrating the airlines will likely mean integrating the fleets and retraining employees.
  3. Union negotiations! No matter what industry you're in, these talks can be potential hang-ups or deal breakers. See Southwest's failed takeover of Frontier Airlines in 2009.

These factors are pretty widely known, but how can an investor know if a company is up to the task of meeting these challenges and maintaining success after a merger? Let's take a look at some possible solutions, beginning with the most recent airline industry performance rankings.

Too big for its britches?
Southwest has watched some performance numbers slip. Overall, flights are a little less on-time, and baggage handling isn't as smooth as it once was. AirTran, however, is still on top of its game. Out of the nine biggest domestic airlines, AirTran is No. 1 in baggage handling and No. 3 in on-time flights.

This could represent a crossroads for Southwest. If numbers continue to slip post-merger, it will certainly look like Southwest is on the short list to join its larger peers at the bottom of the ranks. If the numbers improve, even slightly, it will be an excellent sign that Southwest is poised to remain at the nexus of the industry.

What about those new planes?
In contrast to what seems like every other airline merger, this one wasn't borne out of the necessity to pull one airline out of bankruptcy. Both Southwest and AirTran actually finished 2010 in the black, making this the sort of Traveling Wilburys of airline mergers.

That money will certainly be useful when it comes time to train pilots, flight crews, baggage handlers, and other employees to operate the new planes. This then, of course, begs the question: What exactly is the free cash flow situation at Southwest?


FCF 2010
(in billions)

Net Income Q1 2011

(in billions)




United Continental (NYSE: UAL)



Delta (NYSE: DAL)






Source: Yahoo! Finance.

A merger is a heavy lift, but as you can see from its competition, Southwest is the most fiscally fit airline in its peer group.

Can we talk?
Negotiations between Southwest's internal union and the Air Line Pilots' Association (AirTran's union) began even before the merger was finalized. There is a set schedule for the talks, so that even if things don't go according to plan, investors will know about it in a timely fashion. More information can be found on this site created by the Southwest Airlines Pilots' Association.

Foolish takeaway
Pay close attention! Now that we know what to look for, it will be easy to monitor merger progress through press releases and listening in on quarterly conference calls, particularly the Q&A. Southwest even put up a website to keep everyone as informed as possible. Take advantage