DALLAS (USA Today) -- Southwest Airlines said Monday that it will buy smaller rival AirTran Airways for nearly $1.4 billion, in a merger of low-cost carriers whose impact will be felt from fares to the number of flights available to millions of passengers.
The merger continues a trend of airlline consolidation, which has seen Continental and United Airlines announcing their intention to join operations Oct. 1, making it the largest airline in the world, and Delta and Northwest merging in 2008.
Feisty Southwest already carries more domestic fliers than any airline in the U.S.
"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," Southwest CEO Gary Kelly said.
AirTran CEO Bob Fornaro stressed in a conference call with reporters Monday that AirTran had "done a lot with not much" in terms of financial resources, but it was becoming more uncertain that AirTran had the ability to grow and remain competitive in an industry where the size of a carrier's route network is increasingly important
By creating a truly nationwide, low-cost airline, the merger will make Southwest a tougher competitor in the lucrative domestic business travel market. Kelly expects more corportate fliers to take advantage of an expanded city network. And some fare watchers predict passengers will benefit from a broader reach for the carrier's low-cost strategy.
"America needs this now," says Tom Parsons of BestFares.com. "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."
The deal stunned some travel experts, who worried that the union of Southwest and AirTran would force up fares now that two of the three largest low-cost carriers are uniting rather competing. And other airlines will likely be forced to consolidate to survive, further reducing alternatives for fliers.
"This is truly a shocker, and it can only mean further consolidation," says George Hobica, founder ofairfarewatchdog.com. "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."
The cash and stock deal will allow Southwest to move into or plant a larger stake in primary travel hubs such as New York's La Guardia and Reagan National airport near Washington, D.C. It will also give Southwest entree into Atlanta, busiest passenger airport in the world, paving the way for the low-cost carrier to go head to head with Delta on that airline's home turf. AirTran, headquartered in Orlando but with its base of operations in Atlanta, had been Delta's only significant low-fare competitor there.
Southwest's acquisition of AirTran also would bring Southwest's informal, low-cost, low-fare service to Charlotte, another hub it has never served, and like Reagan National, a stronghold for US Airways.
Terms of the deal call for AirTran stockholders to get a combination of Southwest common stock and cash valued at $7.25 to $7.75 per share, depending on the price of Southwest stock prior to the merger. At least $3.75 will be cash, the companies say.
Southwest and AirTran said the combined airline would fly more than 100 million passengers out of more than 100 airports in the U.S., Caribbean and Mexico. In 2009, Southwest carried 101,338 passengers to AirTran's 23,998, the comanies say.
Southwest prides itself on not charging for the first two checked bags, and the merged airline will adopt that policy, eliminating AirTran's $20 charge for the first piece of luggage and $25 for the second.AirTran's planes will also become a single class, like Southwest, and be painted in Southwest's livery.
Southwest expects government approval of the deal sometime in the first half next year. After that, Kelly said it should take no more than 24 months for the carriers' operations to be fully merged.