Southwest set to buy AirTran

$1.4 billion deal adds 37 cities

AirTran Airways Chairman, President and CEO Bob Fornaro (left) smiles after being handed at scale model of a Southwest Airlines passenger jet by Southwest Airlines Chairman, President and CEO Gary C. Kelly on Tuesday at Southwest Airlines headquarters in Dallas.
AirTran Airways Chairman, President and CEO Bob Fornaro (left) smiles after being handed at scale model of a Southwest Airlines passenger jet by Southwest Airlines Chairman, President and CEO Gary C. Kelly on Tuesday at Southwest Airlines headquarters in Dallas.

— Southwest Airlines has agreed to buy AirTran in a $1.4 billion deal that will combine two of the country’s largest low-fare airlines and give Southwest access to Atlanta, the busiest hub in the nation.

The acquisition announced Monday moves Southwest, which already carries more passengers than any other American airline, into 37 new cities.

Southwest will also gain more space in New York and Boston, where it has already been expanding, and adds to its push to expand internationally. Southwest gains routes to Mexico and the Caribbean, where remaining discount airline JetBlue has a big presence.

“It’s a perfect fit,” said Ray Neidl, an analyst at Maxim Group in New York. “This fills a big hole in the southeast for Southwest, and they’re getting a very good asset while also eliminating a competitor that would have overlapped with them eventually.”

Tad Hutcheson, a spokesman for Orlando, Fla.-based AirTran, called it “a great day for AirTran Airways and Southwest Airlines.”

Southwest said the deal includes “significant opportunities to and from Atlanta, the busiest airport in the U.S. and the largest domestic market we do not serve.”

T.J. Williams, spokesman for Little Rock National Airport, Adams Field, said it’s too soon to tell what the effect of the acquisition will be. Details about fares and specific markets won’t be available until regulatory approval has been received, she said.

But she said the deal will broaden the network of travel destinations for Southwest customers in Little Rock.

Rick Seaney, chief executive of FareCompare.com said the deal will put downward pressure on prices nationwide and will make it easier for travelers to get from Little Rock to either coast on Southwest.

But he said travelers in Little Rock probably won’t see big fare decreases unless Southwest decides to compete directly with “legacy airlines,” like American and United on specific routes.

Southwest has typically not used a “hub-and-spoke” system to connect small cities to larger hubs, Seaney said. But if the demand is there, he said, connecting cities like Little Rock to New York, Boston and Atlanta might be part of the company’s long term strategy.

“Having Southwest act more like a legacy airline when it comes to that will ultimately help pricing. As long as the demand is there, Southwest will definitely turn up the heat,” he said.

Southwest, founded in 1971 by Rollin King and Herb Kelleher, has only made two previous acquisitions: Morris Air in 1993 for $134 million in stock and Muse Air in 1985 for $60.5 million in stock and cash. AirTran was founded in 1993, and was formerly called ValuJet.

The combined carrier will have 43,000 employees and will serve more than 100 airports in the U.S., Mexico and the Caribbean. AirTran said it has 138 planes, and the combined company will have 685 aircraft.

Southwest has been targeting Atlanta, where AirTran currently competes with Delta Air Lines, because it is a hub for business travelers, who tend to pay higher fares.

A Delta Air Lines spokesman voiced little concern that Southwest’s arrival in its home airport would have a significant impact on its revenue or operations.

“We compete with Southwest in almost every domestic market we serve,” said Delta spokesman Kent Landers. “We have been very successful.”

The buyout is the latest in a wave of consolidations in the airline industry. Continental Airlines and the parent of United will combine this week to topple Delta as the largest airline in the world. Delta got the title when it bought Northwest in 2008.

For fliers, it could mean higher airfares in cities where competition is already fierce, such as Boston, New York and Baltimore.

Fares probably won’t rise anytime soon, said fare expert George Hobica, because JetBlue Airways competes on many of the routes where AirTran and Southwest overlap in the East.

But travelers also should be prepared for fewer fare sales when Southwest and AirTran combine, Hobica said. Locked in a battle with Delta in Atlanta and other discounters on the East Coast, AirTran puts fares on sale nearly every week. The acquisition by Southwest will take out a competitor and make fare sales less important for the combined airline.

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Passengers in smaller cities like Moline, Ill., and Wichita, Kan., will have more options for flights and connections,which means more opportunities to avoid delays and cancellations.

Southwest said it will drop AirTran’s bag fees when the pair combine in 2012. Right now, AirTran charges $20 for the first checked bag, $25 for the second.

Some major airlines charge even more. Southwest claims it has lured passengers by refusing to charge for bags, and has built a marketing campaign around the policy.

Southwest will remain the No. 4 airline by traffic. AirTran is the nation’s 8th largest airline.

Last year, Southwest tried unsuccessfully to buy Frontier Airlines out of bankruptcy. Republic Airways Holdings won the auction for Frontier last August, buying it for about $109 million.

Southwest’s acquisition of AirTran is expected to close in the first half of next year. It requires both regulatory and shareholder approval.

Based on Southwest Airlines’ closing share price on Friday, the deal is worth $7.69 per AirTran share. That’s a 69 percent premium over its closing price of $4.55. AirTran shares jumped $2.79, or 61.3 percent, to close Monday at $7.34. Southwest rose $1.07, or 8.7 percent, to $13.35.

Southwest will pay about $670 million with available cash and will assume $2 billion in AirTran debt.

In April, AirTran Holdings Inc. Chief Executive Officer Robert Fornaro signaled his interest in making a deal, saying the airline would consider a combination with another carrier if approached and if such a deal made sense for the company and shareholders.

AirTran has about 202 departures daily out of Atlanta, which would be the third-largest operation in Southwest’s network, behind Las Vegas and Chicago Midway, according to AirTran.

If the deal is approved, Southwest will face the difficult task of merging two different labor forces and even different planes.

Southwest has alwaysflown only Boeing 737s, which helped cut maintenance and training costs because pilots and mechanics only needed to master one plane. AirTran has 52 737s but also 86 Boeing 717, a smaller plane that is no longer in production.

Information for this article was contributed by Samantha Bomkamp, David Koenig and Michelle Chapman of The Associated Press, Alison Sider of the Arkansas Democrat-Gazette, Russell Grantham of The Atlanta Journal-Constitution and Mary Schlangenstein and Mary Jane Credeur of Bloomberg News.

Front Section, Pages 1 on 09/28/2010

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