Southwest - Air Tran Merger

[East New York]

 

By David Grossman, special for USA TODAY

 

By now you've probably read all about Southwest Airlines' acquisition of rival AirTran. Perhaps you've heard this consolidation of two large low-cost carriers (LCCs) will eliminate one brand (AirTran) and result in higher airfares. Or maybe you've heard just the opposite, that airfares will fall as network or legacy airlines face formidable competition from a larger and more powerful Southwest Airlines.

 

There is little doubt the merger will affect air travel, but the underlying rationale behind the transaction may have far greater implications for the industry beyond the combination of two airlines. While most attention has been focused on Southwest's expansion plans, it may be more important to examine the paradox of why one profitable airline wants to exit the business while another is pursuing a growth opportunity.

 

For over a decade, LCCs have enjoyed rapid growth and prosperity driven by travelers searching for low airfares. At the same time a faltering tangle of network/legacy airlines became so cash-strapped that many liquidated, consolidated, reorganized or simply shrunk to cut costs and remove capacity from the market. With network airlines in dire economic straits, their product has suffered as they cut costs and corners and charge passengers for many services formerly included in the price of an air ticket. As a result, many loyal network airline customers defected to low-cost brands.

 

This helped LCCs rapidly gain market share and expand, but now the business may be changing in a way that no longer favors LCCs. This may account for AirTran's decision to sell out now.

 

LCCs will likely face more difficult times ahead, as the cost advantage they've enjoyed in the past couple of decades is gradually eroding. At one time, the cost differential between network airlines and LCCs was as much as eight cents per mile. Though LCCs still hold a slight edge, that cost differential has been reduced to just one or two cents.

 

Southwest and AirTran are often called "discount" airlines, implying that their prices are lower than their network airline competitors. This was true for many years, but not anymore. For many city pairs, fliers will find that network airlines match or even undercut LCCs much of the time.

 

LCCs now comprise 25% of air travel worldwide, and that is projected to reach 40% within the next two decades. When LCCs began, they generally avoided competing with each other, but now they are increasingly fighting for fliers on the same routes (see my 2009 column " Low-cost airlines face new competition each other.")

 

Recent airline consolidation, like Delta-Northwest and Continental-United, as well as the expansion of alliances, have also created behemoth competitors for LCCs.

 

Finally, the coup de grace for LCCs may well be the price of oil. While all airlines are affected by oil prices, LCCs often feel the greatest impact because they compete primarily on price and don't have long-haul premium traffic to help defray the increased expense. In 2007, before the oil price spike, AirTran's net profit was $53 million. In 2008, the airline lost $274 million. For a company with just over $300 million in cash, a large swing in net income becomes a major risk to survival.

 

With oil prices already exceeding $80 per barrel, many experts project prices to climb higher still as the economy recovers and energy demands from densely populated developing countries like India and China place additional strains on current refining capacity. Perhaps it is the memory of that recent oil price spike or fear of another that has convinced AirTran's management to bail out now.

 

If AirTran believes its best days are behind and LCCs are increasingly vulnerable, why aren't more LCCs jumping ship? And why is Southwest acquiring another one? The future may be worrisome for LCCs, but at this point each one has its own strategy for coping with an increasingly challenging environment.

 

Virgin America is buffered by its alliance with the other Virgin brand airlines around the world. Additionally, Virgin America operates its own hubs, however small, and offers a premium first class product. jetBlue sells a premium coach product offering more room in flight, plus the airline is partially owned by Lufthansa and shares passengers with American Airlines at its JFK hub. An increasing number of LCCs across the globe have already joined an airline alliance, and it is possible U.S. LCCs may go that same route in the future.

 

While Southwest continues to be an independent entity and is probably least likely to join an airline alliance, the original LCC looks more like a network airline every day. Southwest now flies considerably fewer point-to-point routes than just a few years ago, and most of the airline's expansion is aimed at their hubs in Denver, Baltimore, Houston Hobby, Chicago Midway and other cities. Once the transaction is complete, Southwest will likely expand AirTran's existing hubs in Atlanta and Milwaukee.

 

With network airline cuts in food service and other amenities, there is little difference between domestic travel on Southwest and other network airlines. Southwest and most other LCCs are actively pursuing business travelers. Like the network airlines, Southwest is installing in-flight Internet access across its fleet. Southwest may not have airport lounges, but they have installed special seating in the gate areas with electrical power and USB ports.

 

Southwest may not have a first class cabin or pre-assigned seating, but they now offer a two-tiered frequent flier program, and the airline expedites priority boarding for elite level travelers and those who pay full fare. Those who board early are able to snag the best seats and are guaranteed adequate overhead storage space. Southwest also offers free in-flight drinks for these travelers.

 

Although no U.S.-based LCCs are currently flying long-haul transoceanic flights yet, most added cities the Caribbean or Latin America to their route maps and now Southwest will benefit from AirTran's growth in those regions.

 

If it's true that AirTran's management believes their business as a standalone airline is at risk, and other LCCs concur, this will likely not be the last merger or major action taken by an LCC. It could even spell the end of LCCs as we know them if more consolidate, join alliances or morph into something better resembling traditional network airlines. That may not bode well for those who have enjoyed an extended spell of low airfares, but in the immediate term, AirTran passengers are sure to rejoice over the elimination of baggage fees and a few extra inches of seat pitch, courtesy of Southwest Airlines.

 

 

[metsfan]

Not to mention a few slots at newark opening up soon.

 

- A

[East New York]

I think this was a very smart move. SWA is now better positioned to compete with the big boys. Especially Atlanta, where Delta has a stronghold. They also will only have 1 new aircraft type to integrate into the fleet. But I have a feeling they will get rid of the rare 717's as soon as they get a chance. I really don't even see them making it long enough to even be repainted in SW colors. I just hope they retain the 2-class seating arrangement that Air Tran has. Since 2001 we have lost several airlines to mergers, including Continental, Northwest, and TWA. Names I thought would be around forever!

[553 Bridgeton]

SWA is taking over. They have a major hub in Philadelphia. 2/3 of the flights outta philly is SWA. I heard something that by next year or so SWA will have 3/4 of the flights out of philly. There not a bad airline at all. I like them.

[East New York]

The thing I love, is everytime an airline merges, the value of my model airplanes go up. I think I have like 14 planes from airlines that no longer exist.

[metsfan]

The 717's might not get a repaint, but i think they will get a few more years of use.

 

- A

[East New York]

The 717's might not get a repaint, but i think they will get a few more years of use.

 

- A

 

Yeah, that's what I think too. I've always wanted to fly on one too. I've been on several DC-9, and MD-80 series aircraft, so I guess I'm not missing too much.

[metsfan]

You know, i've seen tons of those at newark recently, you can tell them apart from the ERJ from a distance because of their big goofy horizontal stabilizers.

 

- A

[Master'KJ]

Very beneficial.. Southwest needs more terminals any darn way. Im sure we'll see a rise in their stock soon.

[Pablo M 201]

Another merger eh. Soon there'll be five mega airlines worldwide.

[East New York]

It's going to be like the '60's and '70's again. This is a superpower scenario I could see:

 

Europe: Air France-KLM, British-Iberia, Lufthansa-Everything else

USA: American, Continental, Delta, Southwest

Asia/Pacific: Cathay, Delta(lol), Korean, Qantas

Mid-east: Emirates, Eithad

Canada: Air Canada

 

That's all I can think of off tops.

[7LineFan]

It's going to be like the '60's and '70's again. This is a superpower scenario I could see:

 

Europe: Air France-KLM, British-Iberia, Lufthansa-Everything else

USA: American, Continental, Delta, Southwest

Asia/Pacific: Cathay, Delta(lol), Korean, Qantas

Mid-east: Emirates, Eithad

Canada: Air Canada

 

That's all I can think of off tops.

 

Not willing to call it United?

[Pablo M 201]

Not willing to call it United?

Hell, I wouldn't either.

 

With that same Continental look, that United name means nothing. And Continental people are running the show? It will always be Conti to me.

[metsfan]

The continental/united merger is basically taking the best of both systems and combining them. Continental ceding slots at EWR won't mean much since united as a stand-alone all ready has tons of slots there, basically it's just cutting some fat and that happens to allow SWA to gain some slots, all of which will be utilized via terminal A, since terminal B and C have the customs stuff going on, no need to waste that resource on domestic flights.

 

As far as other airlines & mergers, remember there's still Areoflot in russia. I think they have one of the more interesting fleets out there, with a mix of different manufacturers not really seen here in the states. I mean some of the smaller charter carriers have different things like beechcraft and stuff, but they have like 7 different manufacturers!

 

- A

[East New York]

Not willing to call it United?

 

I have flown on Continental, and I am definitely not a fan of the merger. I just can't bring myself to say United right now. I call US Airways, America West, because that's what it is in my eyes. But I never really cared for either one of them! That was one of the worst mergers in aviation history!

 

Hell, I wouldn't either.

 

With that same Continental look, that United name means nothing. And Continental people are running the show? It will always be Conti to me.

 

I will miss Continental. I was so looking forward to seeing a 787 in CO colors. Bet then again, I was also looking forward to seeing a 787 in NWA colors. But hey, I can settle for Delta.

[Pablo M 201]

The continental/united merger is basically taking the best of both systems and combining them. Continental ceding slots at EWR won't mean much since united as a stand-alone all ready has tons of slots there, basically it's just cutting some fat and that happens to allow SWA to gain some slots, all of which will be utilized via terminal A, since terminal B and C have the customs stuff going on, no need to waste that resource on domestic flights.

 

As far as other airlines & mergers, remember there's still Areoflot in russia. I think they have one of the more interesting fleets out there, with a mix of different manufacturers not really seen here in the states. I mean some of the smaller charter carriers have different things like beechcraft and stuff, but they have like 7 different manufacturers!

 

- A

United was a broken, long lost puppy who has been looking for someone to rescue them for the past 10 years and Continental finally fell for it.

 

As reputable as an airline United is, they've been in trouble and looked for a scape goat.

 

But Continental is just taking them in and will turn the situation better, even though both United and Continental both posted major profits in the last quarter. Maybe United should've waited a little longer to see if they can turn things around themselves.

[7LineFan]

As far as other airlines & mergers, remember there's still Areoflot in russia. I think they have one of the more interesting fleets out there, with a mix of different manufacturers not really seen here in the states.

 

Well obviously, since they have Russian-built planes, Airbuses, and Boeings.