Southwest and AirTran: Excess Baggage?
By Fool TV September 29, 2010
Southwest Airlines (NYSE: LUV) is buying AirTran (NYSE: AAI) for $1.4 billion. This helps Southwest in some obvious ways, such as taking out a competitor (and leaving JetBlue (Nasdaq: JBLU) as its primary low-cost rival), and getting into Delta's (NYSE: DAL) home turf in Atlanta.
But Fool analyst Rex Moore says a question to ask for any merger is "Why now?" An analyst asked exactly that on the conference call announcing the merger. Southwest CEO Gary Kelly gave three reasons: 1) The financial health of the company, 2) there is little or no organic growth left with Southwest's route system, and 3) the right leadership team is in place.
Kelly says making this merger work depends "on whether or not we can make the networks work." The merger creates a larger low-fare airline with 74 airports that either Southwest or AirTran did not serve. This gives management the opportunity to create hundreds of new itineraries, including the possibilities of going to entirely new airports, but it will be challenging to do it efficiently.
The bottom line here: Mergers are tough to pull off. (And the "Why now?" question should also be asked of the proposed "merger of equals" between UAL (Nasdaq: UAUA) and Continental Airlines (NYSE: CAL).) Southwest risks damaging its very valuable brand if the customer experience degrades. But this has been the best-managed airline over the past several years, and as an investor Rex gives it the benefit of the doubt.