Southwest Buys AirTran for $1.37 Billion

Southwest Airlines announced that it will buy fellow discounter AirTrain Airways for $1.37 billion in cash and stock. From the Wall St. Journal:

The definitive agreement marks the first combination between major U.S. low-cost carriers and marks only the second large acquisition by Southwest, the country’s largest carrier of domestic passengers.

Acquiring AirTran would provide access to the Caribbean and Mexico and provide a tougher challenge for network carriers, notably those such as Delta Air Lines Inc. (DAL) and US Airways Group Inc. (LCC) with a large East Coast presence.

Southwest Chairman and Chief Executive Gary C. Kelly said the move gives the company “significant opportunities” in Atlanta–the largest U.S. market the company currently doesn’t serve–and expands its presence in other major airports including New York LaGuardia, Boston and Baltimore/Washington, as well as gaining entry to many smaller domestic cities.

The New York Times adds:

The proposed merger between two discount airlines steps up the pace of consolidation in the industry, following the deal announced this spring between United Airlines and Continental Airlines. Airline executives have said that there need to be fewer seats available in order for airlines to raise fares and be profitable.

Southwest had little choice in the merger, according to BusinessWeek’s Justin Bachman:

The world’s two biggest airlines, United and Delta, now have their merger approved. They are aimed squarely at reclaiming the profitability and passengers that Southwest (and other discounters) so deftly stole over the past 20 years. They are not the same competitors Southwest faced when it was a scrappy newcomer with far cheaper expenses. The big guys are now bigger, leaner, and more dominant on many routes. The playing field is not what it was just a year ago.

The successful niche Southwest carved as a medium-sized player won’t work once the domestic industry becomes the massive trio of United, Delta, American and a bunch of other guys. From the perspective of competing, everyone else could just be road kill.

I wonder whether all this consolidation in the US, along with the fewer-seat strategy, isn’t creating a new space for a foreign competitor like Jet Airways to enter the domestic market. If US regulation allows foreign entry, that could create a real problem for over-consolidated domestic carriers. That hasn’t happened yet, of course, so passengers just have to deal with run-of-the-mill over-consolidation, and the inevitable price hikes that come with it.

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