Southwest Airlines has agreed to buy AirTran in a $1.42 billion deal that will combine two of the nation’s biggest discount carriers.
The two airlines primarily overlap in the Baltimore and Orlando markets. Passengers traveling to and from those cities could face higher ticket prices because less competition traditionally means higher airfares.
The acquisition moves Southwest into 37 new cities. The largest of those is Atlanta, where Delta Air Lines is based. Atlanta’s Hartsfield-Jackson International airport is the nation’s busiest, and a primary hub for business travelers, a group that Southwest has increasingly been targeting because they tend to pay higher fares.
The acquisition also gives Southwest a bigger slice of the market in cities like Boston and New York, major East Coast cities, where it has been expanding. The deal is also a boost to Southwest’s plans to expand internationally. The Dallas carrier gains routes to Mexico and the Caribbean, where fellow discount airline JetBlue Airways has a big presence.
There is one change passengers will surely welcome: Southwest said it won’t keep AirTran’s bag fees when they fully combine in 2012. AirTran currently charges $20 for a passenger’s first checked bag, and $25 for the second. Major carriers like United and American charge $25 for the first bag and $35 for the second. Southwest claims it has lured passengers from those airlines by refusing to charge for bags, and has built a marketing campaign around the policy.
Southwest, based in Dallas, carries more passengers than any other airline in the U.S. AirTran is the nation’s 8th largest carrier. Besides its base in Atlanta, AirTran has hubs in Milwaukee and Orlando. Southwest will remain the No. 4 airline by traffic.
This latest deal continues the airline industry’s move to consolidate. Continental Airlines and United Airlines parent UAL Corp. will formally combine at the end of this week and become the world’s largest, toppling Delta. Delta claimed that spot when it acquired Northwest Airlines two years ago.
Southwest tried unsuccessfully last year to buy Frontier Airlines out of bankruptcy. Republic Airways Holdings won the auction for Frontier last August, buying the Denver-based carrier for almost $108.8 million.
Southwest’s acquisition of AirTran is expected to close in the first half of next year. It requires both regulatory and shareholder approval. The airlines expect to fully blend their operations in 2012.
Based on Southwest Airlines’ closing share price on Friday, the deal is worth $7.69 per AirTran share. That’s a 69 percent premium over its closing price of $4.55. In premarket trading, AirTran shares jumped 61 percent to $7.31, while Southwest shares rose 12 cents to $12.40.
Southwest will pay about $670 million with available cash. Southwest will assume $2 billion in AirTran debt.
Southwest and AirTran said the new airline will operate from more than 100 different airports and serve more than 100 million customers.
In April, AirTran Holdings Inc. CEO Robert Fornaro signaled his interest in making a deal, saying the airline would consider a combination with another carrier if approached and if such 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.”
AirTran would be Southwest’s largest acquisition by a wide margin. The company, which began with a handful of planes hopping among three Texas cities in the early 1970s, bought Morris Air and Muse Air in the mid-1980s. Two years ago, Southwest bought assets of ATA Airlines out of bankruptcy, which gave Southwest an opening to serve New York with ATA’s takeoff and landing slots at LaGuardia Airport.