Global Airport News

Global Airport News

Southwest Airlines closed its purchase of AirTran Holdings for about USD$1 billion on Monday, positioning itself to challenge bigger carriers in key US East Coast markets while eliminating a major low-cost rival.

The cash-and-stock deal bolsters Southwest's size by roughly one-quarter and creates for the traditional US low-fare leader more muscle as airlines battle higher fuel costs.

The new Southwest's market cap. is USD$9.8 billion, and the acquisition is expected to produce annual benefits exceeding USD$400 million by 2013, with one-time costs of about USD$500 million expected.

The carrier said it expected the purchase to add to per-share profit in the first year after the close, excluding impact of one-time costs.

Southwest, which started flying in 1971, had put its growth plans on hold as recession battered the industry in recent years. By acquiring AirTran, it will be able to expand in key US markets such as New York, Washington, DC, and Atlanta, a city it did not previously serve and home of the world's busiest airport.

The acquisition "provides great opportunities for Southwest to add capacity into some of the more higher-yield markets on the East Coast," said Robert Herbst, an independent research analyst and founder of AirlineFinancials. "It will help the bottom and the top line."

INTERNATIONAL STOPS

With AirTran, Southwest will now offer flights to international leisure destinations such as the Caribbean and Mexico, and chief executive Gary Kelly added in a statement that the carrier plans to add service to many smaller US cities.

The combination of the two low-cost carriers represents the third major US airline merger in recent years, following Delta Air Lines' 2008 acquisition of Northwest and last year's merger of United parent UAL and Continental Airlines into United Continental, the world's biggest air carrier.

AirTran was bought in 1997 by ValuJet, which dropped the ValuJet name after a 1996 crash in the Florida Everglades took more than 100 lives.

The deal values AirTran common stock at about USD$7.57 a share, based on the average Southwest closing price of USD$11.90 in days leading up to the close date, Southwest said.

Nima Samadi, airline industry analyst at industry research firm IBISWorld, said the new Southwest will have a sound financial footing as rising oil prices threaten many airlines. The combined carrier has revenue of USD$14.7 billion, and unrestricted cash and short-term investments of USD$5 billion as of March 31.

Bob Jordan, Southwest executive vice president of strategy and planning, will serve as AirTran president while former AirTran chief executive Bob Fornaro moves to a consulting role. AirTran will continue to operate under that name for some time during the integration process, expected to be completed around 2013.