Southwest expands presence with AirTran buy
On Monday September 27, 2010, 10:04 am
By John Crawley and Kyle Peterson
WASHINGTON/CHICAGO (Reuters) - Southwest Airlines (NYSE:LUV - News) will purchase AirTran Holdings (NYSE:AAI - News) for $1.04 billion in cash and stock in a deal that will allow Southwest to expand its presence in major East Coast markets.
The merger, announced early on Monday, is the first among leading low-cost airlines and the second notable deal this year after United Airlines, UAL Corp (NasdaqGS:UAUA - News) and Continental Airlines (NYSE:CAL - News), which is moving toward completion. Delta Air Lines (NYSE:DAL - News) bought Northwest Airlines in 2008.
Contraction in the U.S. market could lead to higher fares and less service over time but healthier balance sheets, according to analysts who agree that the industry is fragmented and cannot make money consistently.
"The acquisition of AirTran represents a unique opportunity to grow Southwest Airlines' presence in key markets we don't yet serve and takes a significant step toward positioning us for future growth," Southwest Chief Executive Gary Kelly said.
Kelly said the deal with Atlanta-based AirTran would allow Southwest to expand in markets such as New York LaGuardia, Boston Logan, and Baltimore/Washington. It also allows access to leisure markets in the Caribbean and Mexico.
AirTran shares jumped 67 percent to $7.60 in premarket trading on the New York Stock Exchange. Southwest was down slightly at $12.19.
The move by powerhouse Southwest puts pressure on all major rivals, who are still trying to strengthen their eastern U.S. markets to leverage more premium-paying business travel and cement an industry recovery after a severe two-year downturn.
It also raises questions about whether US Airways Group (NYSE:LCC - News) will redouble efforts to find a partner, and whether low cost JetBlue Airways (NasdaqGS:JBLU - News) will seek out some kind of deal.
"Southwest had been waiting to expand this past downturn and I think this acquisition proves that substantial organic growth is a thing of the past," said Morningstar equity analyst Basili Alukos.
The proposed merger is contingent on approval by shareholders at both companies and U.S. Department of Justice antitrust clearance. Bigger carriers in recent merger deals have pointed to the expanding low-cost sector, which would shrink by one airline, if the proposal goes through.
The United/Continental and Delta/Northwest mergers easily won regulatory approval.
Including AirTran's existing net indebtedness and capitalized aircraft operating leases, the transaction value is about $3.4 billion, the carriers said.
Southwest said excluding the impact of one-time costs, the acquisition is expected to add to its pro-forma earnings per share in the first year after the closing of the deal.
(Additional reporting by A.Ananthalakshmi in Bangalore; Editing by Maureen Bavdek)