Southwest Airlines Co. Chief Executive Officer Gary Kelly, taking on his biggest acquisition ever, is dismantling the carrier’s keep-it-simple strategy in a bid to reignite growth.
The nation’s largest low-fare carrier’s decision to buy AirTran Holdings Inc. for $1.4 billion will mark its first foray into a second jet type and its first boost in seating capacity since the end of 2008.
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Southwest will also face off with bigger Delta Air Lines Inc. at its primary hub of Atlanta, the world’s busiest airport and the only major American city Southwest doesn’t serve. The Dallas-based carrier will start flying at Washington’s Reagan National, add its first international flights and mesh 8,000 employees into its work force.
“They ran out of places where they could keep it simple,” David Swierenga, president of consultant AeroEcon in Round Rock, Texas. “They’ve become such a widespread, far-flung airline and served just about every city that met that simple requirement. They figured it was time to go beyond that.”
With the cash-and-stock purchase, Kelly gives up some of the last vestiges of Southwest’s historic low-cost strategy, including flying just one fleet type, Boeing 737s, to hold down maintenance and training costs, making short hops between cities at high frequencies and owning most of its jets.
The deal will add 138 planes, ending Southwest’s self-imposed capacity ceiling that began at the end of 2008 and became the longest dormant period in 20 years. The combined company is to have 685 aircraft, including 86 Boeing 717s from AirTran. Southwest’s 737s can carry at least 122 passengers, while AirTran’s 717s have 117 seats.
“Growth is in Southwest’s DNA, and the growth pause of the last several years has not been a naturally comfortable place for the company,” said Douglas Runte, managing director at Piper Jaffray in New York. “The addition of AirTran will allow them to satisfy their briefly dormant, but always present, inclination for growth.”
AirTran flies to Cancun, Mexico, and the Caribbean, giving Southwest the “perfect opportunity” to add internationl flights for the first time, Kelly said Monday at a news conference at Southwest’s headquarters.
Southwest’s offer values Orlando, Fla.-based AirTran at $7.69 a share, including its convertible notes.
That’s 69 percent more than the carrier’s closing price on Sept. 24.
The merger must be approved by AirTran shareholders and the Justice Department.
The federal clearance is “not a slam dunk,” said Vaughn Cordle, a managing partner with AirlineForecasts in Clifton, Va.
The Justice Department will analyze direct service on a route-by-route basis to determine whether the merger leaves too few competitors in any individual market, said Steve Martin, a senior vice president at InterVistas Consulting in Washington.
The deal allows Southwest to eliminate AirTran, the second- biggest discounter, as a competitor and increase pressure on rivals JetBlue Airways Corp., Frontier and Virgin America Inc.
“It’s certainly going to change the competitive dynamics of the low-cost sector,” said Paul Mifsud, a Washington consultant and former airline executive.
“They are going to become an extremely big competitive force in the domestic industry.”
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