Southwest Airlines Company (LUV)

Southwest Airlines managers (NYSE: LUV) spent only $0.03 on mergers and acquisitions for every $1.00 of shareholder value they created. By comparison Delta Air Lines Inc. (DAL) spent $2.35 for every $1.00 of value they created. In Louisiana, there's a name for this kind of strategy. It's called jumping over a dollar to get to a nickel.

Does Herb Kelleher know something about creating shareholder value that other CEOs don’t know? Perhaps he understands that in the domestic airline market earnings don’t necessarily increase with market share. Or in economics speak, changes in earnings with respect to a changes in market share may be very inelastic.

Herb Kelleher understands – as no other sitting airline CEOs seems to – this fundamental principle about competition: given

• A capital intensive industry,
• With few meaningful scale efficiencies,
• Delivering a highly perishable product,
• Within a partly regulated infrastructure,
• Operated by talented professionals,
• In a very price sensitive market, with
• Free entry and court protected exit,
• Shareholder value can best be created organically. How? By maximizing the satisfaction of employees, passengers, suppliers, partners, and shareholders. Here is the corollary to that fundamental principle:

In airlines, building market share through mergers short circuits the creation of satisfied stakeholders.

Southwest hedges more fuel than any other airline, with 70% of its 2008 fuel needs hedged at $51 per barrel. In contrast, the industry average is about 30% of fuel needs hedged at about $100 per barrel. By maintaining low fuel costs, Southwest minimizes its operating expenses- for example, Southwest estimates that it saved over $686 million in fuel expenses in 2007 because of its hedges.

Southwest Airlines managers (NYSE: LUV) spent only $0.03 on mergers and acquisitions for every $1.00 of shareholder value they created. By comparison Delta Air Lines Inc. (DAL) spent $2.35 for every $1.00 of value they created. And Northwest Airlines (NWA) spent $1.61 on M&A for every value dollar they created. In Louisiana, there's a name for this kind of strategy. It's called jumping over a dollar to get to a nickel.

Southwest Airlines Co. (LUV) and Canada-based WestJet Airlines Ltd. on 8th July 2008(Tuesday) announced a marketing alliance that is planned to go into effect in 2009. “This gives WestJet exactly what they need in terms of growing their trans-border flights,” Chris Murray, an analyst at CIBC World Markets Inc. in Toronto, told Bloomberg News. “The deal would make sense for Southwest to build its service into Canada, too.”