September 17, 2012
Credit: Credit: Southwest Airlinees
Paul Seidenman and David J. Spanovich San Francisco
Two years after it announced an intention to acquire AirTran Airways, Southwest Airlines remains on track to integrate the smaller carrier into its system by 2015. Dallas-headquartered Southwest closed on the AirTran purchase in May 2011 and was granted a single operating certificate for the two airlines in March.
“Unlike recent large legacy mergers, Southwest/AirTran is not a merger of similarly sized airlines. In this case, a much larger airline has acquired a much smaller airline,” says Duane Pfennigwerth, director for airline equity research at Evercore Partners in New York. Orlando, Fla.-based AirTran, he points out, was roughly 25% of Southwest's size when it was acquired. “What we have observed is AirTran effectively being absorbed into the Southwest mother-ship. AirTran's aircraft, brand and operating model are slowly being converted to Southwest's,” he says.
Pfennigwerth says that while investors have yet to see the payback from the acquisition, Southwest's approach has less execution risk to the existing Southwest customer side of the equation. “In a merger of equals, both airlines' labor, operations and customers must experience some change, which they typically do not like. In this case, Southwest's existing customers have been relatively insulated from merger-related integration pains.”
According to Southwest data, the airline boarded approximately 100 million passengers in 2011, while AirTran's passenger count was about 20 million. That same year, Southwest served 73 cites versus AirTran's 25.
The merger has had the advantage of “combining two companies that were a good cultural, cost and productivity fit,” says Bob Jordan, Southwest's executive vice president and chief commercial officer—and AirTran's president. In addition, it gives Southwest access to AirTran's Hartsfield-Jackson Atlanta International Airport hub, a location that had been on Southwest's radar for years.
“Atlanta was a glaring hole in our system, which we needed in order to grow,” Jordan notes. “Since it is a relatively constrained airport, it would have been difficult to get in there on our own.”
Jordan also points out that AirTran's profitable routes to Bermuda, Mexico and five Caribbean destinations brought added value. “Since Southwest had no cross-border routes, we are learning a lot from AirTran as we become an international carrier.”