Southwest merger with AirTran combines biggest BWI rivals
By By Lorraine Mirabella, Andrea K. Walker and Hanah Cho and The Baltimore Sun
Sep 27, 2010 at 10:14 PM
Southwest Airlines' $1.4 billion bid for AirTran Holdings would combine the two largest carriers at Baltimore-Washington International Thurgood Marshall Airport, cementing Southwest's dominance at BWI but possibly ushering in higher passenger fares amid decreased competition.
Southwest, the nation's largest low-cost airline, announced its plans early Monday. The combined company would be based in Dallas, Southwest's home, employ about 43,000 people and fly more than 120 million passengers annually. At BWI, Southwest would secure a market share of about 70 percent.
Officials with both carriers said it is too early to determine whether a merger would lead to job cuts at BWI, where AirTran employs 245 and Southwest 2,600. But analysts said they expect little change in the overall work force of the newly created airline.
The merger would bring together two rival low-fare carriers that have helped BWI grow into a major regional hub, and, some industry analysts said, the combined company would maintain current routes there. The airport has weathered the recession better than others largely because of competition among low-cost carriers; it was one of only two major U.S. airports to see an increase in passengers in 2009.
Some analysts said the deal could raise antitrust concerns, and travel experts said they expect fares to increase as a result of the merger. George Hobica, founder of Airfarewatchdog, an online travel site that specializes in flight deals, said local travelers could see increase on fares for overlapping destinations including Boston, Indianapolis and several Florida destinations.
"A lot of these short hops don't make a lot of money. I would say that those routes will go up in price," he said.
The deal would jump-start Southwest's growth strategy, which had been hampered by soaring fuel costs and sagging travel demand. It also would allow the airline to expand to major hubs such as Reagan National Airport in Washington and offer access to leisure markets in the Caribbean and Mexico. Both companies contend the merger would be good for customers, employees and investors.
The new airline also is likely to adopt many Southwest policies that are popular with consumers, including not charging for bags. Executives said the airline does not expect to have business class or to move to assigned seating.
The cash and stock deal has been approved by the board of directors of each airline, and is now contingent upon antitrust clearance from the U.S. Department of Justice and the approval of AirTran stockholders. Both airlines have labor forces that are largely represented by unions; the Transport Workers Union, for one, said members support the acquisition.
The integration of the two carriers under the Southwest brand is expected to be completed sometime in 2012.
Southwest and AirTran have the largest number of overlap in flights at BWI and in Orlando, officials said, adding that no decisions regarding routes would be made until the deal is formally approved. At BWI, the two airlines now have a total of 223 daily departures — 170 for Southwest and 53 for AirTran.
Southwest spokesman Paul Flaningan said "it's probably much too premature to speculate" on whether the airline would pull back on the number of flights. He also said he doesn't believe a presence in Washington would siphon off some customers who may now be making the road trip to BWI.
One analyst said he doesn't expect changes in the routes at BWI.
"I think they're both making money there," said Robert McAdoo, a senior airline analyst with Avondale Partners LLC. "It is a big market for both of them. I think any changes that they make would be very modest because it is a good market for both of them."
The merger is a good move for Southwest, analysts said.
"Strategically, it make a lot of sense," said Matt Collins, an industry analyst with Edward Jones & Co. "Southwest is very strong in the western United States. AirTran gives them areas such as Atlanta as well as international routes."
But Collins said that the merger would give Southwest the largest market share of any airline at an airport in any major city across the country — an issue that could raise antitrust concerns.
"That would put them at 70 percent which would be larger than any airline at any major city airport that I know about," Collins said. "You don't see that kind of market share that often."
"Potentially that is a risk to consumers there that you could lose some competition and fares could trickle higher in the next couple of years," Collins added.
He also said he expects little change to the workforces at both airlines, though merging the union contracts could be difficult. AirTran employees should get raises as employees of Southwest, but seniority issues could come into play, he added.
Southwest has been exploring an international expansion but didn't have the technology or proper aircraft, according to analysts. The combined company will have an all- Boeing fleet of 685 active aircraft, including Southwest's 737s and AirTrans's 717s.
Southwest's chief executive, Gary Kelly, said in a conference call that he would keep AirTran's international service and learn from it. "So that when we fully integrate them, the target would be for us to be ready to move that international service into Southwest Airlines several years down the road," he said.
BWI Chief Executive Paul Wiedefeld said the Southwest-AirTran merger is good news for the airport, especially Southwest absorbing international routes that airport officials have tried to cultivate. He said it's too early to speculate about the merger's impact on fares, and that it doesn't necessarily mean higher prices. Like other analysts who don't expect antitrust concerns, he said competition must be viewed from a regional perspective.
"We have to recognize that we're in a competitive region," he said. "We have Philadelphia, Dulles, Reagan, Harrisburg. It's not like we're in the middle of nowhere. We have competition, inside the terminal and outside the terminal."
Several Southwest and AirTran customers said Monday that they were optimistic about the merger and what it means for consumers.
Parmatma Khalsa, 35, who lives in western Massachusetts, said he flies Southwest several times a year out of Bradley International Airport in Hartford, Conn., and was glad that a merger could increase the number of destinations that the airline offers.
"I've been hoping for years that Southwest would add more destinations," said Khalsa, who was flying Southwest with his wife and young son on Monday.
Derek Lucas, 36, a project manager from Gaithersburg, said he was concerned about charges for checked luggage. He said he doesn't like AirTran's policy of charging $20 for the first checked bag and $25 for the second bag.
"I end up jamming everything into a carry-on," said Lucas, who was flying AirTran to Atlanta. "That's probably the biggest inconvenience."
The Southwest-AirTran deal is just the latest in an industry that has been consolidating. Stockholders approved a merger of United and Continental this month, and that deal is expected to close by the end of the year. The combined company will fly under the United name and Continental logo. It will become the country's largest airline, surpassing Delta Air Lines, which became the biggest when it merged with Northwest Airlines in 2008.
But the Southwest-AirTran deal is the first among leading low-cost airlines.
Southwest said Monday the deal values Orlando-based AirTran at $7.69 per share, a 69 percent premium over its closing price of $4.55 Friday. Southwest's rose surged $1.07, or 8.7 percent, to $13.35, while AirTran's stock surged $2.79, or 61 percent, to $7.34. Southwest said the total deal, including AirTran's debt and aircraft operating leases, is valued at about $3.4 billion.
Both Southwest and AirTran have found success with low-fare strategies.
Southwest, which began flying between Dallas, Houston and San Antonio in 1971, has kept operating costs down thanks to quick turnarounds, efficient use of crews and no frills. It expanded in the 1980s to California and Chicago and then to the East Coast.
AirTran's predecessor airline, ValuJet airlines, was founded in 1992 by airline industry veterans, including pilots, mechanics and flight attendants from the defunct Eastern Air Lines, to fill a void at the Atlanta airport after Eastern Airlines went out of business. In 1997, ValuJet Inc. acquired the holding company for AirTran Airways Inc. of Orlando and the AirTran name survived.
The move by Southwest puts pressure on all major rivals, who are still trying to strengthen their eastern U.S. markets to leverage more premium-paying business travel and solidify an industry recovery after a severe two-year downturn. It also raises questions about whether US Airways Group will redouble efforts to find a partner, and whether low cost JetBlue Airways will seek out some kind of deal.
"Southwest had been waiting to expand this past downturn and I think this acquisition proves that substantial organic growth is a thing of the past," said Morningstar equity analyst Basili Alukos.
Baltimore Sun staff writers Gus G. Sentementes, Michelle Deal-Zimmerman and wire services contributed to this story
At a Glance:
•-Revenue for year ending June 30: $11.2 billion
•Operating income for year ending June 30: $843 million
•Daily flights: More than 3,200
•Employees: nearly 35,000
•Revenue for year ending June 30: $2.5 billion
•Operating income for year ending June 30: $128 million