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Southwest To Buy AirTran To Reignite Growth

By Jay Boehmer / September 27, 2010 / Contact Reporter
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Southwest Airlines on Monday announced plans to acquire AirTran Holdings through a stock and cash transaction valued at $1.4 billion. Approved by both carriers' boards on Sunday, the deal awaits stockholder and regulatory approval, pushing closing of the deal "months down the road," according to an estimate from Southwest chairman, president and CEO Gary Kelly.

The combined carrier would have 43,000 employees, 685 active aircraft and operate from more than 100 airports, mostly in the United States, though AirTran also serves some near-international routes. Kelly said the AirTran brand would be retired and folded into Southwest. The carriers eventually would operate under a single Federal Aviation Administration operating certificate and corporate functions would be consolidated, with headquarters remaining in Dallas.

Kelly said he had contemplated such a deal for years, though the closest he and AirTran CEO Bob Fornaro had come to conversations was a codeshare plan discussed several years ago. "This idea with AirTran has occurred to us many times, over many years, and it just wasn't right until now," Kelly said on Monday. "We're well prepared, we have the right team, we're at the right place, we have the right recourses, the right momentum, we have clarity on where we want to go, and, while the deal has been many months in the making, I think it's safe to say that preparation for this deal has been many years in the making."

For nearly four decades, Southwest had been in perpetual state of growth, but cut annual capacity for the first time in its history in 2009, as it found few organic growth opportunities in an era of declining demand. The carrier last year attempted to take over Frontier Airlines as a means to maintain its growth model, though that ultimately failed amid a prevailing bid from Republic Airways Holdings.

Roughly a year later, Southwest is pursuing another shot at sustained growth. Citing a "struggling economy" and stagnant domestic air travel demand, Kelly on Monday said, "Our own growth prospects in the near term are quite modest." However, Kelly said AirTran gives Southwest "significant growth opportunities," something the carrier hasn't had in a couple of years as it has all but given up on major capacity additions.

"AirTran provides us a unique opportunity, and that is to strategically expand our network by 25 percent and to do that profitably," Kelly said on Monday, noting that the carriers are not expecting capacity reductions once integration commences.

Noting "minimal" overlap with AirTran, claiming only 19 such nonstop routes, Kelly said Southwest is poised to grow in some key markets. "The big, gaping hole in our route system is Atlanta," he said, noting AirTran's home base is "the largest domestic market we do not serve."

The deal also allows Southwest to grow in markets where it recently entered but built only a modest footprint, including New York's LaGuardia and Boston Logan, while also giving it entry into Washington National Airport.

Meanwhile, adding AirTran operations would give Southwest its first international markets, as it would pick up some Caribbean and Mexican destinations. "We have made the decision that we would like to have near-international service at Southwest Airlines," Kelly said. "We think that would be a natural evolution from the domestic route system that we developed, but our priority is still to follow through with our domestic expansion, and again, the AirTran acquisition is a very significant step in that direction." Kelly added, "Several years from now, we think we'll be ready for near-international expansion."

Kelly said he was confident of a positive review from the U.S. Department of Justice, though the timing of that review and closing schedule remains to be determined. "It's anybody's guess how long that will take," he said. "I'm assuming it will take months. I don't know if that's two months or whether that's 12 months, but until we get that we cannot close." Upon closing, he said to expect at most an additional 24 months to integrate and gain a single operating certificate.

Of the other pending approvals, Fornaro said, "I think the shareholders will support it wholeheartedly." Under the terms, each share of AirTran stock would be exchanged for $3.75 in cash and 0.321 shares of Southwest common stock—a deal that Fornaro said stockholders would embrace. Taking into account AirTran's debt, to be assumed by Southwest, and the value of its capitalized aircraft operating leases brings the deal's total value to about $3.4 billion.

Kelly noted that until the transaction closes, each company would operate independently, with their own policies and procedures. "It's like being engaged to be married. We're not married yet," he said. "Until we get married, we're going to continue to operate as totally independent companies."

Still, Kelly acknowledged there is quite a bit to reconcile between the carriers. "There are clearly differences," he said. Among those is AirTran's view of itself as a hub-and-spoke carrier with a hybrid legacy/low-cost-carrier model, different labor structures, divergent approaches to ancillary fees—particularly bag fees, which AirTran has embraced and Southwest has shunned—and varied fleet makeup, though Kelly said the carriers would be combining a "compatible all-Boeing" fleet. The carriers expect $400 million in annual synergies in the coming years.

Despite all the possible changes, Kelly said Southwest would continue to be Southwest.

"At this point, we haven't made any decisions about changes to the Southwest brand," Kelly said. "We have open seating; we have no plans to change that. We don't charge for bag; we have no plans for changing that. We have single-class service; we have no plans to change that. In fairness to our integration team and certainly in deference to a great company here in AirTran, we'll want to look at and understand their business and their processes and learn from them."

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