Southwest-AirTran: This Is a Game-Changer, As They Say

Barely six months of profitability and boom, the game has changed in the domestic airline business with Southwest's announcement today that it will buy AirTran.

I'll spare you the Wall Street equity jive. Suffice to say the deal is worth about $1.4 billion, which isn't real big money in finance these days. Hell, a good investment banker could steal that much before lunchtime today.

On the other hand, airlines are coming out of this summer on a roll, and Southwest is clearly leading the pack. Southwest, having already made things more interesting lately by deciding to enter the Newark/LaGuardia New York market with higher-capacity 737s, has now startled the industry with its plan to buy AirTran, which will give it more presence in key East Coast markets and even further strength in the New York market, adding AirTran's existing operations at LaGuardia to Southwest's recent foray there. It will put Southwest firmly into Atlanta.

A combined Southwest-AirTran will be by far the biggest domestic airline (which Southwest already is) -- and would put Southwest firmly into near-international markets in the Caribbean. It would have about 43,000 employees and serve more than 100 million customers annually from more than 100 different airports in the U.S. and near-international destinations.

Question that needs to be addressed at the Southwest press conference this morning: Will Southwest continue to avoid charging customers for checked bags once it buys AirTran, which of course does charge?

[UPDATE: Yes, no bag fees, Southwest says.]

The combined carriers' all-Boeing fleet will comprise 685 aircraft, including 401 Boeing 737-700s, 173 Boeing 737-300s, 25 Boeing 737-500s, and 86 Boeing 717s, with an average age of approximately 10 years, one of the youngest fleets in the industry.

"AirTran represents a near-perfect fit for Southwest. Including an Atlanta hub. Particularly including the 717 fleet," the airline forecaster Michael Boyd says today on his company's Web site.

Southwest Airlines also announced recently that it is evaluating the opportunity to introduce the higher-capacity (180 passengers) Boeing 737-800 into its domestic network, providing opportunities for longer-haul flying and service to high-demand, slot-controlled, or gate-restricted markets. [Read: New York]. "This acquisition supports Southwest Airlines' evaluation of the Boeing 737-800," said Southwest, whose friendly flight-crew unions have already green-lighted the idea of larger-capacity 737s.

Southwest said that its proposal to buy AirTran has been approved by both companies' boards. Closing will occur after regulatory approval, which is expected.

From the Southwest statement this morning:

"Today is an exciting day for our employees, our customers, the communities we serve, and our shareholders," said Gary C. Kelly, Chairman, President, and CEO of Southwest Airlines. "As we approach our 40th anniversary of providing exceptional customer service at everyday low fares, 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.

"This acquisition creates more jobs and career opportunities for our combined employee groups, as a whole. It allows us to better respond to the economic and competitive challenges of our industry, and fits perfectly within our strategy for our fifth decade of service. It offers customers more low-fare destinations as we extend our network and diversify into new markets, including significant opportunities to and from Atlanta, the busiest airport in the U.S. and the largest domestic market we do not serve, as well as Washington, D.C. via Ronald Reagan National Airport. The acquisition also allows us to expand our presence in key markets, like New York LaGuardia, Boston Logan, and Baltimore/Washington. It presents us the opportunity to extend our service to many smaller domestic cities that we don't serve today, and provides access to key near-international leisure markets in the Caribbean and Mexico. Finally, this accelerates our goal to boost profits and achieve our financial targets."

The acquisition will significantly expand Southwest Airlines' low-fare service to many more customers in many more domestic markets, creating hundreds of additional low-fare itineraries for the traveling public. Moreover, the expansion of low fares should generate hundreds of millions in annual savings to consumers.

Based on an economic analysis by Campbell-Hill Aviation Group, Southwest Airlines' more expansive low-fare service at Atlanta, alone, has the potential to stimulate over two million new passengers and over $200 million in consumer savings, annually. These savings would be created from the new low-fare competition that Southwest Airlines would be able to provide as a result of the acquisition, expanding the well-known "Southwest Effect'" of reducing fares and stimulating new passenger traffic wherever it flies. ...

... Until closing, Southwest Airlines and AirTran will continue to operate as independent companies. After closing, Bob Fornaro [the AirTran CEO] will continue to be involved in the integration of the two companies. Southwest Airlines plans to integrate AirTran into the Southwest Airlines Brand by transitioning the AirTran fleet to the Southwest Airlines livery, developing a consistent customer experience, and consolidating corporate functions into its Dallas headquarters. Subject to receipt of necessary approvals, Southwest Airlines' integration plans include transitioning the operations of the two carriers to a single Operating Certificate. Plans for existing AirTran facilities will be developed by integration teams and decisions will be announced at appropriate times. The carriers' frequent-flyer programs will be combined over time as well."

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