Plotting the Next Airline Deal
September 27, 2010, 3:11 pm — Updated: 3:11 pm

Consolidation among the legacy carriers has been a constant drumbeat in the airline industry the past few years. Might the discount airlines be next?

Southwest Airlines’ announcement Monday that it has reached a deal to acquire another discount carrier, AirTran Airways, for $1.4 billion certainly seems to raise that question. The deal comes less than two weeks after shareholders approved the merger between United Airlines and Continental Airlines, which will create the world’s biggest airline.

“Well, my question to you is, who’s left?” Ray Neidl, an analyst at Maxim Group LLC, told DealBook. “There’s JetBlue. That’s the big question: What are they going to do?”

Shares of JetBlue Airways, which operates 650 daily flights to Southwest’s 3,200, rose nearly 7 percent to $6.35 by Monday afternoon.

But analysts said while that the Southwest deal may eliminate some seats, a far larger consequence would be if it motivates JetBlue to make an acquisition of its own in order to fuel its own expansion.

“This certainly increases the pressure,” said Henry Harteveldt, an analyst at Forrester Research.

A particularly bold target for JetBlue, Mr. Harteveldt said, would be US Airways, whose acquisition would allow JetBlue to transform itself into a truly national airline in one fell swoop. So would a deal with American Airlines, which Helane Becker, an analyst at Dahlman Rose & Company (which advised Southwest in the AirTran deal), suggested as a possibility.

But whether JetBlue would want to enter into such a complex, sweeping deal is unknown. A more culturally compatible takeover target, Mr. Harteveldt suggested, could be Frontier Airlines, which Republic Airways acquired at a bankruptcy-court auction last year after beating out Southwest.

Seth Kaplan, the managing partner at the trade publication Airline Weekly, also mentioned JetBlue and Frontier as a possible match.

“Those are two airlines with pretty similar products – one with a lot of strength in the East and to the Caribbean, one with more strength out West,” Mr. Kaplan said. “That’s the kind of thing that you could imagine.”

But with many legacy carriers already paired off, that is what analysts were largely left to do on Monday: imagining combinations of smaller airlines that could fit together. Mr. Neidl, for example, suggested that Alaska Airlines might be an attractive target for American Airlines or Delta Air Lines. And there is always the question of what will happen to US Airways, which has been mentioned as a possible merger partner for American Airlines.

For Southwest — which rose to prominence by offering travelers a friendlier, value-oriented alternative to the legacy carriers, many of which no longer exist — the deal with AirTran allows the kind of expansion that the airline otherwise would have struggled to realize.

“It sets the stage beautifully for us so that we can resume our growth again with the necessary profits in place,” Gary Kelly, Southwest’s chief executive, said in a conference call on Monday.
AirTran serves 37 airports to which Southwest currently does not fly, most notably Atlanta, the world’s busiest airport. “That’s the big opportunity here,” Mr. Kelly said, adding that AirTran also adds to Southwest’s destinations many smaller cities and some international locales, which will jumpstart Southwest’s eventual effort to expand outside of the United States.

It also would give Southwest more heft in an industry dominated by the few remaining post-consolidation giants. The combined airline would fly to more than 100 airports and serve more than 100 million customers annually.

“Together, we are stronger,” Bob Fornaro, the chief executive of AirTran, said at a news conference Monday, adding that in joining forces, the two airlines “can accomplish more than either of us can accomplish alone.”

Mr. Fornaro was speaking specifically of AirTran and Southwest. But there are surely many other airline executives who could probably say the same thing about their own hypothetical merger.

And so the drumbeat of consolidation continues on.
“With every deal that’s done,” Ms. Becker said, “it shows that it makes a whole lot of sense.”
– Thomas Kaplan