Southwest Airlines’ proposed $1.4-billion acquisition of AirTran Airways reflects a fact of life for many low-cost carriers: They may be reaching the end of their ability to grow organically.
Most analysts believe the U.S. Justice Department will decide not to oppose the acquisition, given the small overlap between the carriers, although the government’s response is not always predictable and there are some things that make this merger different than those of Delta Air Lines with Northwest Airlines and United Airlines with Continental Airlines.
More challenging, perhaps, will be the merger itself—mergers are inherently tough, rarely seamless and often unsuccessful. Moreover, competitors such as Delta will defend their turf, and there also are other complicating factors, such as a second aircraft type and some differences in airline policies, services, cultures and operations that Southwest would need to sort out.
There is no question, however, that this is a deal with greater meaning. At the World Low-Cost Airlines conference here just two days after the merger deal announcement, low-cost carriers (LCC) were grappling with the implications of the Southwest-initiated agreement between the first and seventh ranked U.S. airlines in terms of domestic passengers.
With very little route overlap between Dallas-based Southwest and Orlando-based AirTran, the acquisition could increase Southwest’s network by 25% and boost its weekly departures—already more than twice those of any other LCC—to about 26,000. Southwest generated $11.2 billion in revenue for the 12 months ending June 30; AirTran generated $2.5 billion.
Nyras CEO Richard Davey, whose London-based company provides aviation consulting and financial transaction services and has helped many airlines consider merger options, says low-cost carriers are running out of room to grow organically because they are in so many markets now.
Read Full Article