Can This Airline Survive?

For the first time in recent memory, two airlines that don't need a merger are merging. Southwest Airlines (NYSE: LUV  ) this morning announced a deal to acquire AirTran (NYSE: AAI  ) for $1.4 billion. AirTran shares soared more than 60% on the news.

Thus, Fool, you are a witness to history. Someone (finally!) has made money on an airline stock. Congratulations, AirTran investors.

Surely, some of you will take profits. I can't blame you. But before you sell everything, let's at least consider whether this deal has a chance to create long-term value:

Metric

AirTran

Southwest

Revenue

$2.5015 billion

$11.176 billion

Net income

$27.9 million

$222 million

Return on capital

3%

4.8%

Revenue per seat mile (RASM)

$0.1119

$0.1244

Cost per seat mile (CASM)

$0.1010

$0.1101

Total debt

$1.1061 billion

$3.447 billion

Debt as a percentage of capital

69.6%

38.3%

Sources: Capital IQ, a division of Standard & Poor's, and company filings.

Good numbers for both airlines, to be sure. But the similarities don't end there:

Metric

AirTran

Southwest

Employees

8,083

34,636

Fleet

Boeing 737-700: 52

Boeing 717-200: 86

Boeing 737-700: 345

Boeing 737-500: 25

Boeing 737-300: 173

Nonstop routes

177

461

Cities served

69

69

Source: Southwest and AirTran data.

There's a lot to like in both tables. AirTran and Southwest have fewer fleet mismatches than do UAL's (Nasdaq: UAUA  ) United and Continental Airlines (NYSE: CAL  ) , which are merging per an agreement announced in May.

Equally important is that both carriers are handling their sizable debt loads. They also make money. For as thin as the spreads between revenue and cost per seat mile appear to be in the table above, remember that these are comprehensive numbers that include both passenger and other revenue, as well as special items and fuel costs.

On that basis and more, I like the combination. AirTran's Atlanta hub and international routes should prove appealing to Southwest passengers and help boost the carrier's somewhat modest 79.3% second-quarter load factor. JetBlue (Nasdaq: JBLU  ) and Allegiant Travel (Nasdaq: ALGT  ) are two among many carriers flying planes at 85% or more of available capacity.

Now it's your turn to weigh in. Will Southwest and AirTran fly higher together? Please vote in the poll below, and then leave a comment to explain your thinking. You can also add Southwest to your Foolish watchlist by clicking here.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Southwest Airlines is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. The Motley Fool owns shares of Allegiant Travel and is also on Twitter as @TheMotleyFool. The Fool's disclosure policy can't believe how long the line is at security. Sheesh.


Read/Post Comments (0) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 1313640, ~/Articles/ArticleHandler.aspx, 7/24/2014 3:10:00 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement