Monday, September 27, 2010

Low-cost US airline Southwest Airlines announced Monday that it would buy its low-cost rival AirTran Airways for US$1.4 billion. The merger announcement comes just days after United Airlines sealed a merger deal with Continental Airlines.

“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 towards positioning us for future growth,” Gary Kelly, CEO of Southwest, said after the merger was announced.

The Southwest-AirTran deal, which awaits antitrust regulatory approval, will gain Southwest a larger US network. By merging with AirTran, Southwest will also be a strong competitor in Eastern United States cities such as New York City, New York, Charlotte, North Carolina, Atlanta, Georgia and Washington, D.C., cities that Southwest had previously not touched much. Southwest also will be going international for the first time, inheriting AirTran’s Mexican and Caribbean routes. The newly merged company would keep Southwest’s name and livery.

Southwest will be offering AirTran stockholders US$7.69 per share. That’s 69% more than AirTran’s Friday, September 24 closing price. However, AirTran stock shot up 62% to $7.36 on Monday, while Southwest’s stock rose more modestly to US$14.01. Delta Air Lines stock declined by 2% on Monday, as Southwest will gain an AirTran hub at Atlanta, which is also Delta’s primary hub.

The new airline would carry over 100 million passengers, creating the world’s fourth largest airline. Last year, Southwest carried 101,338,000 passengers, while AirTran carried 23,998,000 fliers. Southwest will be 25% larger after the merger is completed.

Though some people worry that airfares will go up, as people worried about during the United-Continental merger, others, including Southwest, aren’t too worried. “America needs this now. You could go from Rochester, N.Y., to somewhere on AirTran, and from Charlotte to somewhere on AirTran. But with this deal you can now go just about anywhere in the country, and to the Caribbean and Mexico, on Southwest.. . With the more than 100 destinations that Southwest will now have, all the legacy airlines will have to set their prices based on whatever Southwest does,” says Tom Parsons of BestFares.com. Parsons also said that “I think America is going to very happy that now they can fly coast-to-coast between 100 U.S. cities and make the legacy airlines be more competitive with the style of Southwest and their low fees.”

Consumer advocate Clark Howard also weigned in with a positive remark on the deal. “It’s so good for the flying public. This is an opportunity for a discounter to have the kind of heft and national reach of the full-fare airlines,” he said.

Southwest even has said that fares could go down, as the “Southwest effect”, which is supposed to stimulate competition, “has the potential to stimulate over two million new passengers and over US$200 million in consumer savings, annually” in Atlanta, according to the company. After the merger, Southwest also plans to drop AirTran’s checked baggage fees of US$20-25. Southwest currently does not charge for checked baggage.

Others aren’t as thrilled with the merger of the low-cost airlines. “This is truly a shocker, and it can only mean further consolidation. I don’t think anyone really saw this coming. 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. I can only imagine that now pressure is on for American to find a partner, and also US Airways, and that will lead to even less fare competition.” says George Hobica, of airfarewatchdog.com. Hobica also said that “The era of irrational, stupid, destructive fare sales is over. This is the new normal. JetBlue now has permission to raise prices between Baltimore and Boston. Other airlines now have permission to raise prices between Washington, D.C., and Florida.”

Though Hobica was generally pessimistic about the deal, he did state that the Southwest takeover would be a win for AirTran customers, “because Southwest has better service than AirTran and lower fees.”