September 28, 2010 in Business

Acquiring AirTran expands Southwest’s base

Deal would let airline compete for business travelers
Associated Press
 
Associated Press photo

Acquiring AirTran will let Southwest Airlines enter Atlanta and expand quickly in New York and Boston.
(Full-size photo)

DALLAS – Leisure travelers turned Southwest Airlines Co. into a profit-making machine, but Monday’s acquisition of AirTran shows how much Southwest is counting on business travelers to propel its growth in the future.

The deal will let Southwest enter Atlanta and expand quickly in New York and Boston, all markets that are important to business travelers.

Southwest’s biggest acquisition ever, the $1.42 billion deal offers the low-fare king a chance to expand significantly at a time when the U.S. air travel market is barely growing. For other airlines, especially Delta Air Lines Inc. in Atlanta, it creates an even bigger low-cost rival with more power to set prices on hundreds of routes.

AirTran has carved out a profitable business competing with Delta in Atlanta. Southwest has stayed out of the fight, making Atlanta the biggest U.S. city that it doesn’t serve. That causes Southwest to lose potential customers elsewhere.

“We’re trying to get more customers in Chicago and more business customers in particular,” Southwest CEO Gary Kelly said in an interview, “and if we don’t serve their destination needs, we won’t get them. Atlanta becomes a gaping hole in our route system.”

Airlines covet business travelers because they travel frequently and often pay more to purchase their seats at the last minute.

Southwest has long been considered a vacationer’s airline, but recently it has pursued business travelers with offers like Business Select fares that cost more but promise priority boarding, extra frequent-flier credit and a free drink. And the Dallas-based airline is pitching lower fares to budget-conscious corporate travel departments.

Monday’s deal doesn’t completely ignore leisure travelers. Southwest would pick up AirTran’s service to Mexico and the Caribbean. And Southwest said it intends to drop AirTran’s checked-bag fees – $20 for the first bag, $25 for the second one.

Investors like the deal. Southwest shares rose 8.7 percent. AirTran shares jumped 61.3 percent to $7.34. The deal values the shares at $7.69.

By buying AirTran, Southwest would grow overnight by 25 percent, something that otherwise would have taken several years of rapid expansion.

Analysts say regulators aren’t likely to oppose the deal. The two airlines overlap in only a few markets including Baltimore, Milwaukee and Orlando, Fla. And regulators might even like the notion of a stronger competitor in Atlanta against Delta, the world’s biggest airline.

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