Southwest Buys AirTran, Grows Even Bigger

May 3, 2011
Southwest's $1 billion purchase of AirTran Airways,completed Monday.


Southwest Airlines is looking more and more like the big airlines it loves to needle.

The once-quirky upstart flies to the big, busy airports it used to shun. It lets travelers cut in front of the boarding line - for a fee. Its overhauled frequent-flier program is more complicated, like others in the industry.

Now comes Southwest's boldest move, its $1 billion purchase of AirTran Airways, completed Monday. All these changes are designed to help Southwest compete better for high-fare business travelers.

By acquiring AirTran, Southwest increases passenger traffic by 25 percent. It gains AirTran's hub in Atlanta, a business-travel center that had been missing from Southwest's route map. It gains a toehold at Washington's Reagan National and adds gates at New York's LaGuardia, two airports favored by business travelers over nearby Southwest locations.

It will rival Delta and the combined United and Continental as the biggest airline by passenger-carrying capacity within the U.S., according to aviation data firm OAG. It already flies more than 100 million domestic passengers per year, the most of any airline, but most of them are vacationers who pay lower fares than corporate travelers.

The new frequent-flier program was designed expressly to reward customers for buying more-expensive tickets, something business travelers do when they make last-minute travel plans. It sent the message that Southwest wants business travelers, even at the expense of angering longtime leisure customers. The average fare on Southwest has risen about 12 percent a year recently, but the airline would like to push that even higher.

Southwest is no longer the undisputed king of cheap flights. A new breed of ultra-low fare airlines have sprung up. Some mid-price competitors, such as JetBlue and Virgin America, have more amenities. Fare watchers say that, at times, United, Delta, American or US Airways offer lower fares on some routes.

Nor is Southwest the lowest-cost operator anymore. Spirit Airlines, Allegiant Air - and AirTran - have lower costs per mile, partly because they pay employees less, but also because Southwest's maintenance costs have risen as its fleet has aged. The big network airlines such as United and Delta have spent the past decade cutting labor and other costs and boosting efficiency.

CEO Gary Kelly insists that Southwest is "still a low-cost airline and the low-fare leader."

But Ray Neidl, an analyst with Maxim Group, said there isn't much of a cost difference with other airlines anymore.

Southwest, Neidl says, "has grown up. They are becoming more of your classic airline, though they don't want to admit it." But he acknowledges that consumers still associate Southwest with low fares.

Southwest remains the most powerful price-setter in the industry, capable of forcing others to roll back fare increases on coach tickets. And it retains vestiges of its maverick past.

The airline doesn't charge for the first two checked bags or for changing a reservation. It doesn't assign seats or have first-class cabins or airport lounges.

Still, Southwest is able to make a profit even when others are losing money because it keeps boosting revenue. Thanks to a 12 percent surge in traffic - far better than at other big airlines - and higher average fares, Southwest' first-quarter revenue climbed 18 percent, compared with 11 percent at United Continental and 13 percent at Delta.

Southwest earned $5 million while its four biggest rivals lost a combined $1 billion in the quarter.

The gap between revenue and costs is wider at Southwest than at low-cost rivals including Spirit and Allegiant, even with their lower wages. Southwest also tops JetBlue and AirTran in the revenue-versus-cost measure, according to a recent study by management-consulting firm Oliver Wyman.

Southwest grew rapidly in the 1980s and `90s by adding new cities, mostly secondary airports that were less crowded, letting Southwest turn its planes around after just a few minutes at the gate.

But business travelers prefer close-in airports. In New York, they would rather fly out of LaGuardia than Islip, Long Island. Washington Reagan is more convenient to them than Baltimore-Washington International. So Southwest decided to go where the business fliers were - New York, Boston, San Francisco, Denver and Philadelphia. The airline has paid the price - its on-time performance has slipped, but that seems to be a sacrifice Kelly is willing to make.

Buying AirTran allows Southwest to fill the last gaping hole in its route map: Atlanta. There, AirTran has a profitable hub despite competing with Delta. Bob Jordan, the Southwest executive who will run AirTran, thinks Atlanta can become Southwest's biggest base within a few years, surpassing Las Vegas and Chicago. Southwest also gains a foothold at Washington's Reagan National and picks up AirTran's gates at LaGuardia.

AirTran could run as a separate airline into 2013. Southwest will eventually drop AirTran's bag fees and first-class seats. AirTran CEO Robert Fornaro says that's the right thing to do. "Southwest's brand is bigger; it's better known. They've got a product that works."

Antitrust regulators saw no reason to block the AirTran deal. Some consumer advocates say it's not likely to send prices higher.

"As long as you have a strong Southwest and smaller independent airlines like JetBlue and Alaska, I don't see any monopolistic pricing in the domestic market," said Ed Perkins, an author of travel books and former travel editor for Consumer Reports.

The average trip on Southwest is shorter than on many other airlines, so it competes against the cost of driving as well. For the last week in May, Southwest recently had fares as low as $49 each way from Dallas to Houston. With gas at $4 a gallon, a traveler making the same trip in a car that gets 20 mpg would spend $48 on fuel.

Southwest also gets AirTran's routes to the Caribbean and Mexico. Southwest only recently began selling travel to Mexico on planes operated by a partner, Mexico's Volaris.

Darryl Jenkins, an aviation consultant, says buying AirTran gives Southwest enough growth opportunities to last five or 10 years. By that time, he says, the domestic leader might be ready to consider flights to Europe and other international destinations. That would make it - again - even more like the big, legacy airlines.

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