Southwest to buy AirTran for $1 billion
Southwest Airlines , the nation’s largest low-cost airline, plans to buy AirTran Holdings for $1.04 billion to expand into major East Coast markets as well as growth in the Caribbean.
The cash and stock deal, announced early Monday, is the first among leading low-cost airlines and represents a 69 percent premium over Friday’s closing price of AirTran stock.
The move jump-starts Southwest’s growth strategy, which was suspended in 2008 when the airline industry began slashing capacity to offset soaring fuel costs and sagging travel demand during an economic recession.
“What is an interesting opportunity to us is threefold: (AirTran hub) Atlanta, small cities and international,” Southwest Chief Executive Gary Kelly said on a conference call with analysts. “And clearly we have those as opportunities post-AirTran as compared to without AirTran.
“The profit opportunity with this transaction is simply far greater than it is without,” Kelly said.
AirTran shares jumped $2.70 on the New York Stock Exchange to $7.26. Southwest’s shares were down 81 cents at $13.09.
The deal lifted shares of big carriers broadly, whilelow-cost rivals JetBlue, Alaska Airlines and Republic Airways Holdings rose sharply.
Southwest’s shares have underperformed the broader Arca Airline Index this year, rising about 7 percent against its 24 percent jump. AirTran has done even worse, falling 13 percent in the year to date.
BLENDING OPERATIONS
The deal is the second notable airline merger announcement this year after United Airlines, UAL Corp and Continental Airlines, which is moving toward completion. Delta Air Lines bought Northwest Airlines in 2008.
The combined company would be based in Dallas, which is Southwest’s home, and have nearly 43,000 employees and fly more than 120 million passengers annually. The all-Boeing Co fleet would consist of 685 active aircraft that would include 401 Boeing 737 700s. The fleet would be one of the youngest in the industry.
AirTran is based in Orlando, Florida, and is run by CEO Bob Fornaro.
Southwest and AirTran have labor forces that are largely union represented, including the pilots and flight attendants, which have the greatest potential to disrupt airline operations.
The pilots at AirTran are represented by the Air Line Pilots Association. At Southwest, the pilots are represented by the Southwest Airlines Pilots’ Association.
Flight attendants at Southwest are members of the Transport Workers Union. AirTran flight attendants are represented by the Association of Flight Attendants.
EXPANSION PLANS
Southwest, which operates from 69 cities -- including Las Vegas, Chicago, Phoenix, Denver and Dallas -- said the two airlines have very little overlap on their routes. AirTran flies from 71 cities, mostly on the East Coast, and it also also has some routes in the Caribbean.
Kelly said the deal with Atlanta-based AirTran would allow Southwest to expand in markets such as New York LaGuardia, Boston Logan, and Baltimore/Washington. It also allows access to leisure markets in the Caribbean and Mexico.
The move by powerhouse Southwest puts pressure on all major rivals, who are still trying to strengthen their eastern U.S. markets to leverage more premium-paying business travel and cement an industry recovery after a severe two-year downturn.
It also raises questions about whether US Airways Group will redouble efforts to find a partner, and whether low cost JetBlue Airways will seek out some kind of deal.
“Southwest had been waiting to expand this past downturn and I think this acquisition proves that substantial organic growth is a thing of the past,” said Morningstar equity analyst Basili Alukos.
The proposed merger is contingent on approval by shareholders at both companies and U.S. Department of Justice antitrust clearance. Bigger carriers in recent merger deals have pointed to the expanding low-cost sector, which would shrink by one airline if the proposal goes through.
The United/Continental and Delta/Northwest mergers easily won regulatory approval.
Including AirTran’s existing net indebtedness and capitalized aircraft operating leases, the transaction value is about $3.4 billion, the carriers said.
