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Southwest in $1.4-billion deal to buy AirTran

The acquisition would broaden Southwest's reach east and into international destinations including Mexico and the Caribbean. Some fear the combination would boost fares.

September 27, 2010|Hugo Martín and Ronald D. White, Los Angeles Times

Southwest Airlines, the nation's biggest low-fare carrier, moved to gobble AirTran Airways in a $1.4-billion deal that positions it to take on more established giants in overseas and East Coast markets.

The deal holds the prospect of expanding Southwest's popular model of no-frills discount flights around the globe. If approved by regulators, Southwest would begin serving 38 new cities, including destinations in Mexico and the Caribbean.

"We have the desire to prepare for international expansion one of these days," Southwest Chairman and Chief Executive Gary Kelly told Wall Street analysts in a conference call Monday. "This acquisition fits in beautifully with the strategy we've laid out for what will be the next decade."

Together, the two discount airlines carried 125 million passengers last year and flew 685 jets. Delta Air Lines, currently the nation's largest carrier, served 109 million passengers with a fleet of 740 jets.

Southwest would see its biggest immediate gains in stretching farther east, including into Atlanta — home of the nation's busiest airport. The acquisition would also give the airline greater access to key East Coast markets in Boston, New York, Baltimore and Washington.

That would be welcome news for Shani Carty, 32, of Los Angeles, who flies at least twice monthly for her job inspecting facilities for environmental compliance.

"Southwest is not in a lot of the airports I use, so I'm hoping for more cheap flight options," she said.

The Southwest-AirTran combination would be the third blockbuster airline deal in the last two years. Delta Air Lines Inc. bought Northwest Airlines in 2008, and United Airlines' parent, UAL Corp., is acquiring Continental Airlines Inc. in a deal expected to close Friday.

Wall Street gave its approval, lifting shares of Southwest Airlines Co. nearly 9% and pushing AirTran Holdings Inc.'s stock price up 61%.

Some analysts warn that the elimination of AirTran as a competitor could spur Southwest to raise ticket prices.

"More than any recent merger, it spells bad news for low fares, since both airlines were leaders in the low-fare space and had frequent, almost weekly, sales," said George Hobica, founder of the travel website Airfarewatchdog.com.

But others point out that the two airlines have relatively little overlap, with Dallas-based Southwest still stronger in the Western states, and Orlando, Fla.-based AirTran being a bigger player on the East Coast.

"Although it is true Southwest will gain some additional pricing power as a result of the acquisition, I expect the impact on prices to be marginal at best," said Brett Gordon, a marketing professor at Columbia Business School. "This is more about cost synergies and improving Southwest's airport access and network — all of which should benefit consumers."

Bryan Saltzburg, general manager of new initiatives for travel website TripAdvisor, said it was too soon to say what the effect would be.

"The devil will be in the details on how it impacts travelers and airfares," Saltzburg said, adding that "robust competition among low-cost carriers and legacy airlines has been essential to keeping airfares in check in recent years."

Founded in 1971, Southwest has accomplished a rare feat for an airline: It actually seems to be popular with its customers. That may be partly because of its egalitarian ethos — no first-class seats or elegant in-flight meals, but peanuts and soft drinks are free.

Passengers say they prize the airline's low fares — and the fact that no fees are charged for the first two pieces of luggage, a rare exception in the airline business.

Its flight attendants are also known for their whimsical repartee with passengers, a reputation that does not extend to AirTran.

"With AirTran you are paying for cheap fares, and that's what you get," said Bradley Lowell, 37, who was at Los Angeles International Airport on Monday waiting to board a Southwest flight for Chicago.

But it's the low fares, first and foremost, that have made Southwest a hit with fliers such as David Romo, who flew the airline from Tucson to visit family in Los Angeles.

"They have the cheapest fares," he said. "I have gotten tickets for less than $50 one way, and I don't have to pay for my bags. That makes a big difference to me."

Despite some concerns from passenger watchdog groups, Southwest Chairman Kelly said, the airline has no intention of straying from its low-cost roots. He also promised to retain its "Bags fly free" policy.

The two airlines would be fully integrated within two years, Kelly said. More than 80% of the employees of Southwest are in unions, while about half the employees at AirTran are unionized, but Kelly did not see that as a stumbling block.

"Both companies have dedicated people with kindred warrior spirits," he said.

Southwest agreed to buy AirTran for a combination of cash and stock. AirTran shareholders would get $3.75 in cash and 0.321 shares of Southwest stock for each AirTran share.

With Southwest's closing price of $13.35 — a gain of $1.07 — the stock portion of the deal was worth $4.28 a share, which combined with the cash portion valued AirTran at $8.03 a share.

AirTran soared $2.79 to $7.34 a share.

hugo.martin@latimes.com

ron.white@latimes.com

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