Southwest Airlines Buys AirTran For $1.4 Billion
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NEW YORK — Southwest's decision to buy AirTran will mean more routes and fewer delays and cancellations in small cities but higher fares in the Northeast and perhaps the end of the super-low sale fare.
Southwest Airlines, which has built a loyal following with its tongue-in-cheek ads and refusal to charge for checked bags, said Monday it planned to buy AirTran for $1.4 billion.
The deal will move Southwest into 37 new cities, expand its presence in cities like New York and Boston and move it into Atlanta, the busiest airport in the nation.
Combining the AirTran and Southwest routes means more connecting options for people flying through places like Moline, Ill., and Wichita, Kan., which should result in fewer delays and cancellations because there will be more options for rerouting passengers.
In bigger cities like the Northeast hubs, however, fares will probably eventually go up. They may not rise right away because many of those cities are still served by a third discounter, JetBlue Airways, said fare expert George Hobica.
The acquisition may also spell the end of the deep-discount sales currently offered by AirTran and Southwest because there will be less competition. Right now, for example, AirTran is offering a $54 one-way fare between Baltimore and Boston.
"The era of irrational, stupid, destructive fare sales is over," Hobica said. "This is the new normal. JetBlue now has permission to raise prices between Baltimore and Boston. Other airlines now have permission to raise prices between Washington, D.C., and Florida."
In welcome news for weary travelers, Southwest said it will drop AirTran's bag fees when the pair combine in 2012. Right now, AirTran charges $20 for the first checked bag, $25 for the second.
Some major airlines charge even more. Southwest claims it has lured passengers by refusing to charge for bags, and it has built a marketing campaign around the policy, with baggage handlers shouting declarations of love to suitcases on the tarmac.
The combined airline probably won't be large enough to pressure big competitors like United and American to give up the hundreds of millions of dollars a year they make from baggage fees, airline analyst Jay Sorensen said.
While Southwest will be about 25 percent larger when the deal is complete, it will remain the fourth-largest by traffic. The upcoming combination of United and Continental will be No. 1, followed by Delta and the parent of American.
Southwest will move into Atlanta, the only major business hub it doesn't already serve. Business travelers are key to airlines because they tend to pay higher fares. In an interview with The Associated Press, Southwest CEO Gary Kelly said Atlanta was a "gaping hole in our route system."
Southwest also gains routes to Mexico and the Caribbean, where JetBlue has a big presence.
The buyout is the latest in a wave of consolidation in the airline industry. Continental and United will topple Delta as the largest airline in the world when they combine this week. Delta got the title when it bought Northwest in 2008. In the past 10 years, 10 major airlines have paired off, leaving five fewer.
The deal will leave only four major airlines without suitors: American, US Airways, JetBlue and Alaska Airlines. Several experts suggest the unexpected Southwest deal will pressure American to tie up with US Airways, or possibly JetBlue.
AirTran was founded in 1992 as ValuJet Airlines. It was renamed after the 1996 crash of ValuJet Flight 592 into the Florida Everglades, which killed all 110 people on board. It would be Southwest's largest acquisition by far.
Southwest founder Herb Kelleher, a cigarette-smoking, Wild Turkey-drinking Texas lawyer, revolutionized the airline industry in the 1970s by offering low fares to leisure travelers out of secondary airports. Early on, the airline drew customers by passing out booze and putting flight attendants in hot pants.
The company, which began with a handful of planes hopping among three Texas cities, bought Morris Air and Muse Air in the mid-1980s. Two years ago, it bought assets of ATA Airlines out of bankruptcy and began limited service to and from New York's LaGuardia Airport.
Last year, Southwest tried unsuccessfully to buy Frontier Airlines out of bankruptcy. Republic Airways Holdings won the auction instead and bought it for $109 million.
Southwest's acquisition of AirTran is expected to close in the first half of next year. It requires both regulatory and shareholder approval.
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. AirTran shares jumped 62 percent to $7.36, while Southwest shares rose $1.73 to $14.01.
Southwest will pay about $670 million with available cash and 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.
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AP Airlines Writer David Koenig in Dallas and Business Writer Michelle Chapman in New York contributed to this report.
(This version CORRECTS spelling of analyst's name to 'Jay Sorensen') AP Video. This story is part of AP's general news and financial services.)
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SAMANTHA BOMKAMP 09/28/10 12:30 AM ET Associated Press