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Reinforcing its opportunistic approach to growth, Southwest Airlines agreed to acquire AirTran Airways parent AirTran Holdings. The $1.4 billion deal already has been approved by both companies' boards, and now is subject to regulatory approval and other closing conditions, including a review by AirTran's shareholders. AirTran would become a wholly owned Southwest subsidiary, with AirTran's branding and many policies and product attributes falling by the wayside. Southwest CEO Gary Kelly described the AirTran deal as the "most ambitious" acquisition attempted in the company's history.
After failing in 2009 to grow through acquisition when then-bankrupt Frontier Airlines went instead to Republic Airways, Southwest plans to add a larger presence in such metropolitan areas as Baltimore/Washington, Boston, Chicago and New York as well as a profitable and growing airline franchise with a hub in Atlanta--the busiest U.S. airport and the largest domestic market Southwest currently does not serve.
"The opportunity to grow our market segments is greater with business customers," Kelly said today during a conference call. "Part of the strategy is a recognition that if we are trying to win business customers in Chicago, you have to get them to Minneapolis, you have to get them to New York, you have to fly them to Boston. That is where they want to go. The gaping hole--one of the top markets always that business customers are looking for--is Atlanta."
Kelly added that "the interesting opportunity for us is threefold," including Atlanta, many smaller cities served now by AirTran but not Southwest, and AirTran's existing "near-international leisure markets in the Caribbean and Mexico."
Though overall network overlap is minimal--"only 19 overlapping roundtrip flights," according to Kelly--it is most apparent in Baltimore and Orlando. In those two markets, Southwest likely would neither shrink nor grow much, Kelly said.
One caveat in combining the networks, Kelly explained, is Dallas/Ft. Worth. Under terms of the Wright Amendment, Southwest is prohibited from serving the airport, and therefore would discontinue AirTran's service there.
"We also anticipate providing low-fare service to many markets that neither of us serve today," added Southwest CFO Laura Wright.
"I have been asked many times over the years about this idea" to merge with AirTran, Kelly said. "We are financially ready and healthy. We are at a point where we are not growing our route system organically. It's a revenue story. The costs are more or less going to be a wash. All hinges on whether or not we can make the networks work. We see some very strong opportunities to generate some very strong revenues now."
In a research note issued today, UBS analysts wrote, "We view Southwest as a more formidable and aggressive competitor to Delta Air Lines in Atlanta, so this deal is not good news for Delta. Also, Southwest was planning for no significant capacity growth in 2011 and 2012 and has indicated that this merger likely presents growth opportunities, not good news for the industry."
Southwest and AirTran executives indicated that an integration team already has been established. The transition would see AirTran's brand and livery gradually retired, its corporate functions brought to Southwest's Dallas headquarters and, eventually, a combination of the carrier's operating certificates.
Kelly also laid out plans for "a consistent customer experience," including a combined frequent flyer program. Noting existing AirTran policies and products that differ from Southwest's, he said, "We are not assuming that we will be open to assigning seats, charging for bags, having dual-class service or anything along those lines." Kelly added that "we reserve the right to change our minds."
In terms of fleet make-up, AirTran brings Boeing 737s--currently Southwest's sole fleet type--and Boeing 717s, which Kelly said could be used to serve smaller markets.
The airlines' combined revenues for the 12 months through June 2010 were $13.7 billion. Together, they have 43,000 employees serving 100 million annual customers from more than 100 U.S. and "near-international" destinations.
Now the two airlines must undergo a lengthy process to obtain regulatory and other necessary approvals. The duration of the U.S. Department of Justice review is "anybody's guess. I am assuming it will take months," Kelly said. He noted that the limited overlap between the two carriers means Southwest does not expect regulators to demand scaled-back operations in any markets.
Southwest executive vice president of strategy and planning Bob Jordan acknowledged that AirTran can listen to any competing offers, but under terms of the agreement with Southwest, it cannot solicit any.
Assuming DOJ does not move to block the deal and AirTran shareholders approve the deal, Kelly said that "it would take no more than an additional 24 months to have done our integration work" once the transaction closes.
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