In a deal that turns up the heat on its bigger rivals, Southwest Airlines Co. (NYSE: LUV) yesterday (Monday) announced plans to buy discount carrier AirTran Holdings Inc. (NYSE: AAI) for $1.4 billion.
By nabbing AirTran, Southwest is making a move that supports its long-term growth strategy and targets large network carriers with a large East Coast presence such as Delta Airlines Inc. (NYSE: DAL) and US Airways Group Inc. (NYSE: LCC).
"This absolutely changes things," said Gary Kelly, Southwest's chairman and chief executive officer on a call with analysts.
The deal will allow Southwest to expand into airports serving major hubs like Atlanta, Washington D.C., Boston, Baltimore and New York City, he added.
The move puts Southwest in head-to-head competition with Delta in Delta's home base of Atlanta. The buyout, funded mostly with debt, will also give Southwest a bigger slice of the market in cities like Boston and New York, where it has been expanding.
Eventually, the low-cost carrier will expand into international markets, with flights to Mexico, the Caribbean, Canada and possibly South America, Kelly told CNNMoney.com.
"It will be several years before you see Southwest airplanes in international markets, but it's going to happen," he said.
Kelly says expansion into European and Asian markets is "down the road," because his airline does not currently have planes with enough range to make those flights.
AirTran shareholders will receive $3.75 in cash and 0.321 Southwest share for each share of AirTran under the proposed deal, valuing the stock at $7.69 a share, a 69% premium to Friday's closing price.
Southwest will pay about $670 million in cash and will assume $2 billion in AirTran debt. Including AirTran's debt and capitalized aircraft-operating leases, the transaction is valued at about $3.4 billion. AirTran holders will own about 7% of the combined company after the deal closes.
Southwest expects the acquisition to be accretive to earnings net of charges after three years, with one-time acquisition-related costs of $300 million to $500 million. The company sees cost savings of more than $400 million by 2013, The Wall Street Journal reported.
Southwest and AirTran said the new airline would operate from more than 100 different airports and serve more than 100 million customers.
Southwest, based in Dallas, carries more passengers than any other airline in the United States. Besides its base in Atlanta, AirTran has hubs in Milwaukee and Orlando.
The deal has been approved by the board of directors of each airline, and is now contingent upon the approval of regulators and AirTran stockholders. The acquisition is expected to close in the first half of next year. The airlines expect to fully integrate their operations in 2012.
Southwest spokeswoman Brandy King said that once the merger goes through, all the airplanes would fly under the Southwest logo and adopt the Southwest policy on fees, providing some relief to AirTran passengers.
AirTran currently charges $20 for a passenger's first checked bag, and $25 for the second. Major carriers like UAL Corp.'s (Nasdaq: UAUA) United Airlines and AMR Corp's (NYSE: AMR) American Airlines charge $25 for the first bag and $35 for the second. Southwest claims it has stolen passengers from those airlines by refusing to charge for bags, and has even fashioned a marketing campaign focused on the policy.
The announcement continues the airline industry's trend towards consolidation. Continental Airlines Inc. (NYSE: CAL) and United will become the world's largest airline when they formally combine at the end of this week, knocking Delta from the perch. Delta has held that spot since it acquired Northwest Airlines two years ago.
Southwest previously failed in an attempt to buy Frontier Airlines out of bankruptcy. Republic Airways Holdings Inc. (Nasdaq: RJET) won the auction for Frontier last August, buying the Denver-based carrier for almost $108.8 million.
AirTran Chief Executive Officer Roberto Fornaro first signaled his interest in making a deal in April, saying the airline would consider a combination with another carrier if approached and if a deal made sense for the company and shareholders.
But when asked by The Associated Press who might be a potential suitor for AirTran, Fornaro said, "I'm not sure that we're necessarily a natural fit to be gobbled up by somebody else."
News & Related Story Links:
- Wall Street Journal:
Southwest Airlines To Buy Discount Rival AirTran
Southwest to acquire AirTran
- Associated Press:
Southwest to buy AirTran for $1.4 billion
- Money Morning:
United, Continental Merge Into World's Largest Airline
- Money Morning:
Global Airline Industry Rebounds, Will See Profit in 2010 From Recovering Economy