Southwest to fly higher with AirTran

On 27 September 2010, Southwest Airlines announced plans to acquire AirTran Holdings. The US$1.4 billion transaction will give Southwest access to key airports in the US such as Atlanta and mark its debut in the international air transportation scene with flights to the Caribbean and Mexico.

Additionally, the acquisition is expected to create net annual synergies of around US$400 million by 2013. In the short term, however, integration costs are expected to be between US$300 million and US$500 million.

In terms of business strategy, the company will maintain the no bag and no change fees, one-class cabins, no assigned seating and friendly customer service strategy established by Southwest.

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Low growth spurs acquisition

In 2009, Southwest Airlines continued to be the largest low-cost carrier operating in the US and ranked eighth in the global air transportation industry with value sales of US$9.7 billion.

The negative effects of the economic downturn forced Southwest to halt its growth in capacity as demand for air tickets plummeted and the opportunities for growth were limited. The crowded market lead to Southwest competing with other low cost carriers and entered congested airports, such as La Guardia in New York City, to capture growth.

It also targeted business travellers by introducing products aimed at that market, including the “Business Select” fare. The acquisition is likely to kick start growth again for the company.

Access to key airports and new routes

With the acquisition of AirTran, Southwest gains access to the busiest airport in the US in Atlanta. It also expands its access to key business markets: Ronald Reagan National Airport in Washington DC, La Guardia Airport in New York and Logan Airport in Boston. This will increase Southwest’s appeal to business travellers and opens the door for larger corporate contracts.

Furthermore, Southwest will continue to AirTran’s international flying and will likely utilize the company’s planes and expertise to expand the international network. This will increase its appeal to leisure travellers. It remains unclear if this will impact Southwest’s codeshare agreement with Volaris.

Potential risks of the merger

In any merger there are great synergies involved, but also risks. The main risk of the merger is labour integration. 80% of Southwest’s labour is unionized while only 50% at AirTran are. It is likely that AirTran’s workers will be given wage increases to match the higher wages of their Southwest counterparts. While this will put pressure on margins, the elimination of a competitor along the East Coast routes may help Southwest with pricing power although JetBlue will remain a strong competitor.

There are also risks with technology. Southwest is looking to upgrade its reservation system, which can be a risky and expensive process. Challenges may be faced as it tries to build a new system that tries to combine two airline’s technologies.

Let the battle continue

It is expected that the acquisition will be successful, especially if labour integration goes smoothly. It has access to important airports for lucrative business travellers and gains international routes that appeal to leisure travellers. With its ability to feed traffic, these forays into new territory will be rewarded handsomely.

Its improved network also makes it a stronger competitor to legacy carriers, who have also been consolidating, and to low cost carriers, who have been making money on short haul international trips. Southwest will also benefit from the elimination of its competitor on the East Coast, which may give it more pricing power. If it decides to raise prices on routes, especially to Florida, it’s likely that competitors will follow.