Southwest Snaps Up AirTran

Following the consolidation of Delta-Northwest and United-Continental, the low-cost carriers in North America joined the acquisition trail this week, as the world's largest LCC, Southwest Airlines agreed a $3.4 billion takeover of AirTran Airways. The Hub evaluates why Southwest will benefit from this move.

Dallas headquarted, Southwest Airlines operates a fleet of over 500 B737 aircraft, operating nearly 3 million weekly seats. It has a wholly domestic network and is the largest domestic operator in the US. Its network spans over 69 destinations according to flightbase data with its largest operating bases summarised below;

Source Flightbase 21-27 September 2010

LACK OF NETWORK OVERLAP

In contrast AirTran Airways has a much smaller network, with the Southwest network 82% larger than that of Atlanta based AirTran. AirTran has its main base in Atlanta, from which it operates 30% of its network, with its other major operations at Baltimore, Orlando, Milwaukee and LaGuardia (New York).

The respective networks of AirTran and Southwest are complimentary and they compete on relatively few routes given the size of the combined network. The majority of the competition is at Baltimore where they compete on Boston, Indianapolis, Fort Lauderdale, Jacksonville, Orlando, and Milwaukee. At Orlando (MCO), the carriers compete on Baltimore, Buffalo, Columbus Ohio, Indianapolis, Chicago Midway, Philadelphia, Pittsburgh, St Louis and Milwaukee. Southwest and AirTran will be able to rationalise their networks on these routes, however the acquisition of AirTran will lead to greater opportunities for the world's largest low-cost airline.

ACCESS TO KEY DOMESTIC MARKETS

The acquisition of AirTran will give access to several key domestic markets for Southwest Airlines. Southwest has shifted its business model away from serving mainly secondary markets to focus on serving both primary and secondary airports. It has attacked US Airways in markets such as Philadelphia, Phoenix, Las Vegas and Pittsburgh and has targeted markets business markets as well as leisure markets.

Its acquisition of AirTran Airways will give it valuable slots in the world's busiest airport of Atlanta where AirTran operates 57 destinations and is the second largest carrier in terms of weekly seats operated, behind Delta Air Lines.

Southwest will also gain valuable slots at Washington DCA, giving Southwest access to the high yields on offer at DCA, where AirTran is the sixth largest operator behind US Airways, Delta, American, United and Continental. Further up the east coast, Southwest will now gain AirTran's portfolio at New York La Guardia where it operates six destinations, complementing Baltimore and Chicago Midway which are already served by Southwest.

The lack of network overlap will deliver meaningful network benefits to Southwest with little duplication and bolstered presence at major cities. It also provides Southwest with instant growth rather than organice growth in the US domestic market that can be slow.

INTERNATIONAL ACCESS

Southwest Airlines has long had its eye on the near international markets such as Mexico, The Caribbean and Canada and had taken its first steps with proposed agreements with Mexican low-cost operator Volaris and WestJet of Canada. With organic growth in the US slow and it being a mature market, the deal with AirTran allows access into markets that Southwest has been considering for a period of time.

With Southwest's reportedly antiquated technology one of the major factors for lack of implementation of these codeshare agreements, the airline moving its own metal into foreign markets had looked a distant option. However, Southwest will now have access to the AirTran international network without the complexities of beginning its own services. AirTran has a ready-made international network and reservation system able to access this market, with the experience of entering into these foreign markets.

AirTran operates to the near international markets with weekly scheduled flights to Aruba, Cancun, Montego Bay, San Juan and Nassau. In February, 2011 it will also launch service to Punta Cana from Atlanta.

Its weekly international schedule is summarised below;

Source Flightbase 21-27 September 2010

With the strength of the Southwest domestic brand, there is no doubt that the new Southwest will aim to strengthen the existing AirTran international network, with the Atlanta market most likely to service this international growth.

FLEET

Both carriers operate a fleet of Boeing aircraft, with AirTran operating the B737-700 and B717 aircraft. With Southwest Airlines operating primarily B737-700 with over 100 still on order, it had been thought that the B717 may be phased out. However, Southwest has suggested that it will use the smaller aircraft to access thinner markets that the B737 struggles to serve. AirTran currently has a two-tier product however it is likely that this will disappear for a single economy product.

The purchase of AirTran will allow Southwest to put pressure on fellow LCC's such as Spirit and JetBlue and the legacy carriers operating thinner regional markets with the B717 able to serve some of these smaller markets.

With consolidation happening at a pace in the US market, it will be interesting to see which airlines seek to consolidate further.