AirTran has been purchased by Southwest Airlines for $1.42 billion in a deal that merges two of the largest discount airlines in the United States. Southwest’s acquisition of AirTran enables the airline to expand to key eastern hubs and sets it up to compete with major international carriers. The deal caught travel experts off guard. There is a lot less competition in the discount flying market meaning there is an expected increase in fees after the Southwest/AirTran combination, most are stating. Competition within the market will be easier for the big company. Smaller corporations will have to merge to compete with Southwest. However, a definite good for former AirTran passengers could be Southwest’s policy of no baggage fees, which the airline said it will maintain across the board.
The east coast benefiting from Southwest Airlines
Airlines are consolidating more often which is why it is not that surprising that Southwest Airlines bought AirTran for $1.42 billion. Delta and Northwest merged in 2008. October 1 is when Continental and United Air carriers will merge. This means they could be the largest airline in the world. USA Today reports the deal gives Southwest a major presence in primary travel hubs for instance New York’s La Guardia and Washington, D.C.’s Reagan National. Access was given to Southwest in Atlanta which is a world’s busiest passenger airport. This is where Southwest and Delta will start to battle.
AirTran investment gets Southwest bump
Southwest Airlines is based in Dallas. Remarkably, more passengers ride with Southwest within the United States of America than any other airline. Within the U.S., AirTran has been rated as the eighth largest carrier of passengers. The Associated Press reports that depending on Southwest’s closing share price on Friday, Southwest’s acquisition is worth $7.69 per AirTran share–a 69 percent premium over AirTran’s closing price of $4.55. Southwest has plans to pay with cash. It has in available cash $670 million. $2 billion in AirTran debt is going straight to Southwest. Assuming regulatory and shareholder approval, the deal is expected to close within the first half of 2011. By 2012, all AirTran planes will bear Southwest colors.
Is it good or bad that airlines combine?
The merging of Southwest and AirTran might be bad. This might mean low air fares could disappear. The competition between businesses is what keeps prices low, states the Consumerist. The competition being gone will leave Southwest and other businesses with less pressure. Without the pressure, prices are sure to go up. George Hobica of Airfarewatchdog told The Consumerist the Southwest AirTran merger will also lead to more airline consolidation, further reducing competition and consumer choice. Hobica said the outcome will depend on whether Southwest will use the expansion to either improve its ability to profit from low fares, or simply raise prices. Also, Southwest might just make it harder for other companies to get business leading them to lower their prices overall.
Further reading
USA Today
usatoday.com/money/industries/travel/2010-09-27-southwest-airtran-merger_N.htm
Associated Press
google.com/hostednews/ap/article/ALeqM5hFjJQqYUno_x04Nx3mAvf9Na1EwwD9IGC59G0
The Consumerist
consumerist.com/2010/09/what-does-southwest-buying-air-tran-mean-for-consumers.html
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