After failing to acquire Frontier Airlines in 2009, Southwest Airlines has successfully wooed AirTran Airways to continue consolidation in the fragmented US airline industry.
Southwest's misfortune with Frontier could have been a blessing in disguise. Through the acquisition of AirTran Southwest gains key access to Washington National Airport and a significant presence at Hartsfield Jackson International in Atlanta. In the span of the 24-month integration period Southwest will grow by a whopping 25%, and estimates the AirTran acquisition could add 20% to its annual revenues of $2 billion a year.
Once the deal receives requisite regulatory approval and AirTran is integrated into Southwest's operations, the combined entity will operate 685 Boeing aircraft with an average age of 10.5 years. More notably, however, Southwest, by buying AirTran, gains "important future delivery positions", says Southwest chief executive Gary Kelly.
Kelly has moved quickly to resolve a key question regarding the combined fleet by expressing a desire to keep AirTran's 86 Boeing 717s. But Southwest plans to operate the aircraft in a single-class 117-seat configuration instead of AirTran's current two-class cabin featuring the same number of seats.
Southwest has expressed a desire to keep AirTran's 86 Boeing 717s
Noting the 717 is in line with Southwest's 122-seat Boeing 737-500s, Kelly says: "We're very comfortable we can make that [the 717] work." The smaller Boeing aircraft allows Southwest to expand into smaller US domestic cities, a strategy Southwest has been interested in executing.
The 737-800 has been under serious consideration by Southwest, and Kelly says that while the carrier is not prepared yet to commit to the -800, "we hope to make a decision on that soon".
Analysts at JP Morgan question whether introducing the complexity of the 717, which is based on the McDonnell Douglas MD-95 platform, will slow down Southwest's process of shifting to the higher density -800. But Kelly appears bullish on the aircraft stressing that "clearly without the -800 we'll simply have fewer places that we could add to our route map".
Kelly is also laying to rest any doubts that Southwest will stray from core elements of its business including open seating and no fees for checked bags. "At this point in time we are not assuming that we will be open to assigning seats, charging for bags, having dual-class service, anything along those lines," he states.
Southwest's move into Atlanta through the AirTran acquisition led to immediate questions over how competitive dynamics with Delta Air Lines would change. But JP Morgan's analysts believe Delta is "not uniquely threatened". By merging the Southwest and AirTran networks, 37 incremental city pairs emerge as unique. Of Delta's roughly $2 billion local demand base in Atlanta, roughly 10% is represented by those unique cities, which accounts for less than 1% of Delta's overall business, JP Morgan concludes.
Moreover, combining Southwest and AirTran should not pose a meaningful threat to any existing legacy carrier franchise. The JP Morgan analysts heartily disagree that this forces "American Airlines to do something". However, they question if low-cost carriers JetBlue, Spirit and Virgin America now "view their standalone prospects somewhat differently".