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.
"If you want to fly on a low-cost carrier, your options in terms of places you can reach on that carrier will have increased even though the number of low-cost carriers will have decreased by one," Kasper says.
"America needs this now," says Tom Parsons of BestFares.com. "With this deal you can now go just about anywhere in the country, and to the Caribbean and Mexico, on Southwest. ... All the legacy airlines will have to set their prices based on whatever Southwest does."
Other carriers may also have to worry about the new mega-carrier in their midst. American, once the biggest airline in the U.S., fell behind in size and global reach when Delta acquired Northwest Airlines two years ago, and now may be further challenged by the United-Continental merger and the proposed combination of Southwest and AirTran, some analysts say.
"This puts more pressure on AMR (American's parent company), which will find it even more difficult to merge its way to prosperity because the remaining potential merger partners offer far less attractive financial and strategic benefits," says Vicki Bryan, an analyst at Gimme Credit, an independent research service on corporate bonds. "AMR has been scrambling to reinvent its business model, and following the United/Continental and Southwest/AirTran mergers it could be potentially without dominance in any lucrative market."
Other carriers that may be threatened by the wave of consolidation include US Airways, which merged with America West in 2005; Alaska; and JetBlue.
Terms of Monday's deal call for AirTran stockholders to get a combination of Southwest common stock and cash valued at $7.25 to $7.75 per share, depending on the price of Southwest stock prior to the merger. At least $3.75 will be cash, the companies say.
Airline-industry insiders long have considered a Southwest-AirTran merger to be inevitable because the combination of their two networks, which overlap on only 19 routes, could have significant appeal to travelers.
Travelers see upside
Some travelers were pleased with the prospect of a broader route system that gives them more appealing destinations when they redeem their loyalty program points, as well as the chance that Southwest's entry into new markets could drive down ticket prices at other airlines as well.
New Southwest flights to cities now served by AirTran "can help restrain" other airlines from setting high airfares and fees, says Dave Simonson, the president of a computer consulting company in Antioch, Tenn., who's flown more than 40 Southwest flights since the beginning of last year.
But others worried that the best aspects of each airline -- be it Southwest's customer service or AirTran's assigned seating -- could be lost in the merger.
"The Southwest culture is unbelievable, and its employees have the highest passion I've ever seen in the industry," says Don Schmincke, a Baltimore-based author and speaker. "Can they convert AirTran employees?"
DaWane Wanek of Sugar Land, Texas, says he stopped flying AirTran and other airlines connecting through Atlanta because of flight delays and missed connections. Atlanta's Hartsfield-Jackson airport has one of the worst records of all airports for on-time flight arrivals and departures, according to Transportation Department statistics for the first seven months this year.
"I am concerned that Southwest can handle bringing the beast -- Atlanta -- into the network," says Wanek, a sales director in the computer hardware industry.
But some perks are set to remain. Southwest, which prides itself on not charging for the first two checked bags, unlike most of its peers, will maintain that policy at the merged airline, eliminating AirTran's bag fees.
AirTran's planes will also become a single class, like Southwest, and be painted in Southwest's colors.
AirTran was founded in 1992 as ValuJet Airlines.
The company nearly failed following the 1996 crash of ValuJet Flight 592 into the Florida Everglades, which killed all 110 people on board. In 1997 it merged with the much smaller parent company of Orlando-based AirTran. The damaged ValuJet name was jettisoned, and the company quickly acquired younger aircraft to replace the small fleet of nearly 30-year-old McDonnell Douglas DC-9s it had flown since its launch.
The merger with Southwest must be approved by U.S. regulators and AirTran's shareholders. Southwest expects the government approval of the deal sometime in the first half of next year.
After that, Kelly said, it should take no more than 24 months for the two carriers' operations to be fully merged.
Contributing: Barbara Hansen, Gary Stoller