Southwest Airlines said Monday that it will buy smaller rival AirTran for $1.4 billion, creating the most expansive network of any low-cost carrier in the U.S. and giving the feisty airline a chance to grab business travelers in the nation's busiest markets.
If the merger is approved by regulators, Southwest, which already carries more domestic fliers than any other U.S. airline, will for the first time go head to head with Delta on its home turf at Atlanta's Hartsfield-Jackson International, the busiest passenger airport in the world. It will gain access to Reagan Washington National Airport and capture increased share at Boston Logan and New York LaGuardia.
The deal would give Southwest its first flights outside the continental United States by continuing AirTran's service to Mexico and the Caribbean.
The merger continues an industrywide trend of consolidation, which has seen United Airlines and Continental announcing their intention to join operations Friday, potentially creating the largest carrier in the world, and Delta and Northwest joining forces in 2008.
But the latest deal would unite two airlines that have prospered by keeping a tight rein on costs and marketing low domestic fares, while offering little or no international service. Southwest is about five times larger than AirTran -- with $11 billion in 2009 revenue to AirTran's $2.3 billion and 3,200 daily departures to AirTran's 686.
"The acquisition of AirTran represents a unique opportunity to grow Southwest Airlines' presence in key markets we don't yet serve and takes a significant step toward positioning us for future growth," Southwest CEO Gary Kelly said.
AirTran CEO Bob Fornaro stressed in a conference call with reporters on Monday that AirTran had "done a lot with not much" in terms of financial resources, but that it was becoming less clear that AirTran had the ability to grow and remain competitive in an industry where the size of a carrier's route network is increasingly important.
"Southwest has, relative to AirTran, vast resources," Fornaro said. It became clear that "we could do more with Southwest resources" than AirTran could do on its own.
Southwest and AirTran said the combined airline would fly more than 100 million passengers a year out of more than 100 airports in the U.S., Caribbean and Mexico. And by creating a truly nationwide low-cost carrier, the merger will make Southwest a tougher competitor in the lucrative domestic business-travel market.
"Southwest is making a conscious effort to be the first truly national low-cost carrier, to have a domestic route network that is as comprehensive as the legacy network carriers," says Daniel Kasper, head of the transportation practice for economic and financial consulting firm LECG.
Invading bigger markets
Southwest, which initially concentrated on midsize towns and secondary airports, has in the last two decades gotten steadily more aggressive in taking on conventional airlines in large markets. AirTran is its largest acquisition but not its first: Southwest bought Muse Air and Morris Air in the 1980s and defunct discounter ATA's assets in 2008.
The deal to purchase AirTran will give Southwest a footprint in virtually every large and midsize U.S. city.
In addition to gains at major portals such as LaGuardia and Reagan National, Southwest would pick up AirTran's service at Charlotte and Memphis and its large operation in Atlanta.
Among the other 38 airports that AirTran serves but Southwest currently does not: Miami, Des Moines, Wichita and outside the U.S. in Cancun, Mexico; San Juan, Puerto Rico; and Aruba.
A merger will open up more choices to budget-conscious leisure travelers as well as business fliers, experts say, and could take the so-called Southwest effect that compels other carriers to match the carrier's low fares to every corner of the country.
AirTran's COO says the airline's formula puts it in an elite club of moneymakers, no matter its ranking.
Airlines added to the Dept. of Transportation list of major carriers must have $1 billion or more in annual revenue.
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Southwest's $1 billion purchase of AirTran Airways,completed Monday.