Southwest Airlines Co. (LUV), one of the leading discounted airlines in the U.S., has reached a tentative agreement with the Aircraft Mechanics Fraternal Association that represents 260 appearance technicians.

Appreance technicians are responsible for the cleanliness and maintenance of an aircraft. Though details of the new agreement were not specified, the company assured that the agreement includes compensation benefits and changes in work rules. The new tentative agreement is subject to workers’ approval through vote and will expire in February 2015.

Recently, Southwest completed its $1.4 billion merger with AirTran Holdings. The combination of these two low-cost carriers represents the third major U.S. airline merger in the last three years and a unique opportunity for Southwest Airlines to expand its presence in key markets. Southwest gained a valuable market presence in Atlanta, the busiest airport in the U.S., post-merger.

The acquisition will widen Southwest’s network by 25% and provide its first international destination in the Caribbean and Mexico. The company will expand its presence in key U.S. markets such as New York LaGuardia, Boston Logan, Milwaukee and Baltimore/Washington as well as extend its services to many smaller domestic cities.

However, we believe, union disputes, employee strikes or slowdowns, and other labor-related disruptions owing to the integration of Southwest and AirTran workforces may delay expected merger synergies, increase labor costs or labor disputes, and concurrently hurt the profitability of the company. Southwest Airlines currently has approximately 35000 employees and remains highly unionized like its peer United Continental Holdings Inc. (UAL).

We are currently maintaining our Neutral rating for the long term, supported by a short-term (1-3 months) Zacks #3 Rank (Hold).

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