South­west moves to buy ri­val AirTran

The $1.4-bil­lion deal would broaden the low-fare leader’s reach east and into in­ter­na­tional mar­kets.

Los Angeles Times - - Front Page - Hugo Martín and Ron­ald D. White

South­west Air­lines, the nation’s biggest low-fare car­rier, has agreed to buy 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 nofrills 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.

South­west,

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.

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 first­class seats or el­e­gant in­flight 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 in­dus­try.

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 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 South­west’s em­ploy­ees 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.

Joe RaedleGetty

SER­VICE: Hector Sanchez helps South­west fliers check in at an air­port in Fort Laud­erdale, Fla.

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