Good News/Bad News: Southwest Airlines Acquires AirTran

I love Southwest for its prices, its lack of a change fee, its employees, its on-time record, its lack of luggage fees, its checkin system, its boarding system, and its planes, in about that order. But I may be losing out on some of the price benefit.

The boards of directors of Southwest and AirTran have agreed that Southwest will acquire all of Airtran's outstanding common stock for $1.4 billion, subject to approval by AirTran shareholders and regulatory clearance (more on that below). The deal gives them $7.69 per share in cash and stock, well above Airtran's Friday closing price of $4.55 per share.  Southwest will also acquire AirTran liabilities like corporate debt and aircraft leases, making the whole deal worth $3.4 billion.

Southwest says this will be a boon to travelers. It is true that it will put Southwest on small destinations like Wichita, Portland, ME and Knoxville and for the first time Southwest will have international destinations (in the Caribbean). It also gives Southwest AirTran's Atlanta hub, and Atlanta is a strategic business travel route. For the people who fly those routes, it's a plus.

But AirTran and Southwest also used to fly to a lot of the same destinations, and this move will eliminate competition between the two most important discount airlines. Southwest says otherwise:

Southwest executives say there is minimal overlap in service between the two carriers, but the deal will have to receive approval from U.S. anti-trust officials. 

(Emphasis supplied.) Oh, really? Let's compare the two carriers' route maps. Southwest:

 

AirTran:

In terms of destinations, there is a very large amount of overlap.  In terms of routes, Southwest is technically correct.  AirTran's routes (if you go to their page and mouse over the cities) go through Atlanta, while Southwest often flies nonstop. But a route with a stop is still an alternative to a route without one.

For example, I use Southwest to fly (nonstop) from Philly to Ft. Lauderdale, San Diego, San Francisco, and Seattle. Those were all places I could get to on AirTran, too, albeit with a layover in Atlanta, and that competition kept Southwest's prices in line. The next largest carrier flying out of Philadelphia is USAirways, which is not a discount carrier and, in any case, routinely gives a bad flying experience. I anticipate flying out of Philly is going to get more expensive for me.

There are two other airports that are viable alternatives for Philly: Baltimore and Newark. This writer from the Baltimore Sun says that the deal would give Southwest a "stranglehold" on Baltimore/Washington International Thorgood Marshall Airport; he estimates that Southwest would handle 70% of the passengers at BWI. He anticipates that the government will alter the deal on antitrust grounds, which I think probably means a portion of AirTran's routes being auctioned to other carriers. I doubt this would give Southwest anywhere near as high as percentage of the Philadelphia airport's business.

On the other hand, Southwest's arrival in Newark means that fares on some routes there will drop by 20-30%, the Star-Ledger says.

Comments

[Gib]

Having "Air Greyhound" here in Atlanta will be interesting - I know people who actually drive to Birmingham to fly Southwest. It seems to me that Southwest does a better job of pulling down prices than AirTran does - I guess we'll find out if that's true when there isn't an AirTran around.