Southwest Airlines, the nation’s largest no-frills air carrier, announced plans to purchase rival AirTran Monday, a move that would extend Southwest’s reach into the Caribbean and significantly expand its presence in the eastern United States.
The roughly $3.4 billion Southwest-AirTran deal, if approved by regulators, will combine two of the nation’s largest low-cost airlines. An open question is to what degree consolidation will mean rising fares for passengers. Ticket costs have already risen since last year, due to a strengthening economy and efforts by airlines to return to profitability.
“I don’t think fares are going to go up very much,” says George Hobica, founder of Airfarewatchdog.com, a website with tools for consumers to track ticket prices. “I don’t see any need to panic.”
Southwest, in its press release, suggested that fares could go down. The airline cited what’s been called the “Southwest effect” in past cases, where the company’s expansion has led to greater price competition. Specifically, Southwest said that a heightened presence in Atlanta (now an AirTran hub) “has the potential to stimulate over two million new passengers and over $200 million in consumer savings, annually.”
Hobica voices skepticism that the AirTran deal will bring average U.S. air fares lower. For one thing, Southwest’s own prices aren’t as low as they used to be. Also, AirTran itself is already a low-price airline.
Still, he sees new competition coming to Atlanta, where fliers who use that hub may have an increasingly attractive alternative to Delta Air Lines. Delta lost about 2 percent of its share value in stock trading Monday, while Southwest rose nearly 10 percent. Shares of AirTran Holdings surged more than 60 percent in value, because Southwest agreed to pay a significant premium to win the deal.
Although the two carriers currently overlap their service to about two dozen cities, AirTran’s focus includes many Eastern cities where Southwest is not a player. Among them are Atlanta, Memphis, Miami, and Charlotte, N.C. Southwest would also gain access to Reagan Airport in Washington, D.C., and substantially expand its presence in New York, Boston, and Orlando. New destinations such as Jamaica and Aruba, meanwhile, would step up Southwest’s competition with JetBlue for warm-weather vacation traffic.
The buyout, if approved by federal regulators, will eventually result in AirTran’s business being rebranded under Southwest’s name. Included in the buyout’s overall transaction value of $3.4 billion is a $1.4 billion share purchase plus arrangements regarding AirTran’s debt and aircraft leases.
Southwest has nearly 35,000 employees and now flies 461 routes. AirTran has about 8,100 employees and flies 177 routes.
In the era since deregulation, many carriers have gone out of business or undergone mergers with larger airlines. The industry’s most recent consolidation trend has included linkups of Delta with Northwest, United with Continental, and Midwest with Frontier.
Still, the threat of upstart competitors has persistently held rising fares in check. According to federal data, the average fare this year ($328 as of the first quarter) is similar to where it stood 10 years ago.
For now, many airlines have a strategy that blends fare wars with add-on fees on everything from meals to extra leg room. Southwest is one of the few carriers that allow fliers to check a bag for free. And when it does charge fees, Hobica says they’re usually lower than those of rivals.