It was made quite clear by Bob Montgomery, Vice President of Properties for Southwest Airlines, that if it weren’t for St. Joe, Southwest Airlines wouldn’t be coming to Panama City. The discussions between St. Joe and Southwest Airlines began over a decade ago. One of the things that was explained to me a short while ago was that Southwest Airlines can go where ever they want to go; they just pick an airport, and the airport accommodates. I was told that Southwest coming to Panama City made absolutely no sense from a business perspective and the prospect encompassed more risk than a company like Southwest would be willing to take. But, what if the risk was mitigated by a third party? That was their ticket into our market.
Read on for all the facts.
Rumors were flying around over the summer that St. Joe offered to give Southwest $10 million. A comment was made here on pcbdaily.com that $10 million was peanuts for a company like Southwest. And while I don’t necessarily disagree, a little subsidy money never hurts, even if it isn’t lining the pockets of SWA.
Of course, it should be noted at this time that the agreement for Southwest Airlines to come to Panama City is more complex than St. Joe offering a little incentive. The entire arrangement is only grounded by St. Joe’s offering, but it actually consists of several moving parts and pieces (more on that another time).
So, what did it take to woo the coveted Southwest Airlines to our beaches? The commitment from St. Joe involved money to the tune of $26 million over the course of 2 years. Specifically, St. Joe agreed to pay Southwest Airlines up to $14 million the first year of operations and up to $12 million the second year. Conversely, if Southwest operated at a profit, they’ve agreed to share that profit with St. Joe.
What does all this mean? Well, to put it simply, Southwest Airlines has a fixed cost (well, it varies a little based on fuel costs) to operate its jets. Given their experience, they’ve estimated approximately how much it would cost for them to bring service to the Northwest Florida Panama City International Airport. Therefore, Southwest agreed that if St. Joe will pay up to $14 million in the first year and up to $12 million in the second year to ensure no loss in revenue, it would make sense for them to service and build a market for our area.
By now, I’m sure you read the opinion piece I wrote refuting Carlton Proctor’s Pensacola News Journal article discussing his disagreement with Southwest “[ignoring] its long-standing and highly successful business plan,” citing that they were “bought” by St. Joe. Bought sounds like such a nasty term, used in this context; it insinuates a negative connotation in that mitigating risk is a bad thing.
The reality is risk-mitigation is a good thing, just ask any insurance professional. If one can stand to turn a profit with little or no risk, what’s wrong with that? Isn’t that the capitalistic American Way? Southwest is a publicly traded company and has a duty to please its share-holders. An opportunity to expand market share, increase customer reach, grow the company and in turn increasing revenue all while mitigating risk sounds great to me if I was a shareholder!
But, I digress, on to the details.
St. Joe has agreed to pay Southwest quarterly payments if Southwest operates at a loss for the first 2 years of a 3 year agreement. At the end of the agreement, either party can terminate if certain criterion are met. If St. Joe has had to pay in excess of the agreed amounts they can back out. If Southwest Airlines “actual annual revenues attributable to the air service at the new airport are less than certain minimum annual amounts established in the agreement,” they can back out. Furthermore, it also “provides that Southwest’s profits from the air service during the term of the agreement will be shared with St. Joe up to the maximum amount of St. Joe’s prior break even payments”
The idea here is to have a fair and equitable agreement that is mutually beneficial for both companies with the ultimate benefactor being Bay County and the Northwest Florida Regional Area. Sure St. Joe stands to make a profit with all of their land surrounding the airport, but shall we go back into the publicly traded company Capitalistic American Way discussion again?
It makes sense when two companies plan to increase market share and generate more revenue that if they can work together to decrease risk, that they do in fact do that. For both companies, it is about managing risk. St. Joe decreases their risk in holding all that land with the opportunity at future development by partnering with Southwest to bring more people into the market; and Southwest decreases their risk by accepting payments from St. Joe so that their cost to enter a market is little to nothing with an opportunity to grow substantial profits in the future.
Who wins with this? We all do.