Southwest, AirTran in $1.4 billion merger

By Derek Kravitz and Jia Lynn Yang
Washington Post Staff Writers
Tuesday, September 28, 2010

Southwest Airlines has agreed to buy AirTran in a $1.4 billion deal that would bring the nation's largest low-cost carrier to Reagan National Airport for the first time and extend its already large presence at BWI.

The merger announced Monday could position Southwest to become the Washington area's dominant airline, with a combined 31.5 percent of the region's air travel and opportunities to expand.

The deal's impact on passengers, at least in the short term: possibly lower fares, as Southwest tries to compete against the newly merged United and Continental as well as Delta and Northwest. But the deal could also mean fewer and more crowded flights at Baltimore-Washington International Marshall Airport, where the combination of Southwest and AirTran would control roughly 65 percent of business.

"Up to now, no one carrier has been able to dominate our market," said Leo J. Schefer, president of the Washington Airports Task Force, a nonprofit aviation trade group. "This merger could change that."

The acquisition signals Southwest's growing ambition to expand into the nation's busiest markets. The merger would result in more Southwest flights in and out of New York's La Guardia Aiport and Boston's Logan Airport. The airline would also finally enter Atlanta, which has the country's biggest airport and is the most significant market not yet served by the Dallas-based company.

Regulators including the Justice Department and Federal Aviation Administration still have to green-light the merger, but Ray Neidl, an analyst at Maxim Group, said the deal shouldn't have any trouble because the two carriers don't have much overlap.

Both companies' boards and shareholders have to approve the deal, as well. The offer prices AirTran at $7.69 a share, 69 percent more than its closing price on Sept. 24, according to a statement from Southwest.

"The AirTran stockholders are getting a bargain, and Southwest is getting a solid asset they can build upon," Neidl said. The companies said they hope to complete the transaction within nine months.

Southwest's acquisition of AirTran would give the carrier a position for the first time at National Airport, where AirTran has a roughly 4 percent stake in passenger travel. Those flights are mostly trips to Atlanta's Hartfield-Jackson International Airport, Milwaukee and Orlando.

Analysts said Southwest could use that stake as a toehold for expanding its presence at National, where the airline has been angling for takeoff and landing slots for several years. Robert W. Mann, a former airline industry executive, said a merger could allow the carrier to expand to second-option airports in larger markets, such as Chicago-Midway and Love Field in Dallas.

At BWI, AirTran and Southwest handled a combined 14.3 million passengers last year, airport officials said. With such a large share, Southwest could reduce the number of routes in and out of the airport, said Rick Seaney, the Dallas-based co-founder of "And what do you get with less routes? Fuller flights," Seaney said.

Still, there is a relatively small number of overlapping routes at Baltimore and there are only 18 overlaps nationwide, Mann said. "Any type of changes at Baltimore would be relatively minor compared to the benefit for the Washington region as a whole," he said.

In its statement, Southwest bragged about the "Southwest effect," in which the carrier drives prices lower in the markets it enters.

For instance, before Southwest's arrival in Minneapolis in 2009, three carriers offered round-trip Chicago-to-Minneapolis flights for about $400. Southwest undercut its competitors, offering $150 tickets, before the "price point" stabilized at about $200.

"They're known for being especially aggressive when they first enter big cities," Seaney said. "That means lower fares for customers."

Southwest is already Washington's largest domestic carrier, with more than 10.9 million passengers at BWI and Dulles. After its October 2008 merger with Northwest, Delta moved into second place, with 6.1 million passengers at all three airports. United fell to third, with a little more than 6 million domestic travelers; US Airways was fourth with 5.2 million passengers; and American Airlines was fifth with almost 3.7 million passengers at the three airports.

At Dulles International Airport, Southwest and AirTran together handled nearly 977,000 passengers last year. That figure outpaces rival American and could allow Southwest to compete directly with JetBlue, which holds the No. 2 spot at the aiport behind United, which has one of its hubs there.

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