Southwest and AirTran: Excess Baggage?

Southwest Airlines (NYSE: LUV  ) is buying AirTran (NYSE: AAI  ) for $1.4 billion. This helps Southwest in some obvious ways, such as taking out a competitor (and leaving JetBlue (Nasdaq: JBLU  ) as its primary low-cost rival), and getting into Delta's (NYSE: DAL  ) home turf in Atlanta.

But Fool analyst Rex Moore says a question to ask for any merger is "Why now?" An analyst asked exactly that on the conference call announcing the merger. Southwest CEO Gary Kelly gave three reasons: 1) The financial health of the company, 2) there is little or no organic growth left with Southwest's route system, and 3) the right leadership team is in place.

Kelly says making this merger work depends "on whether or not we can make the networks work." The merger creates a larger low-fare airline with 74 airports that either Southwest or AirTran did not serve. This gives management the opportunity to create hundreds of new itineraries, including the possibilities of going to entirely new airports, but it will be challenging to do it efficiently.

The bottom line here: Mergers are tough to pull off. (And the "Why now?" question should also be asked of the proposed "merger of equals" between UAL (Nasdaq: UAUA  ) and Continental Airlines (NYSE: CAL  ) .) Southwest risks damaging its very valuable brand if the customer experience degrades. But this has been the best-managed airline over the past several years, and as an investor Rex gives it the benefit of the doubt.

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Fool analyst Rex Moore flies by the seat of his pants, but owns no companies mentioned here. Southwest Airlines is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletter services free for 30 days.

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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.

  • Report this Comment On September 29, 2010, at 3:30 PM, definer wrote:

    As a nearly dedicated Airtran customer over the last 10 years, I doubt I'll fly the merged airline. As a frequent business traveler, I like an assigned seat. I also like the option of upgrading to the space of business class when I can. If Southwest continues it's "cattle call" mentality with the new airline, I, along with a number of business customers, will take my business elsewhere. If the Southwest model worked for everyone then the current Airtran would have much fewer customers than it does now. Airtran has offered a good alternative that may now, sadly, go away.

  • Report this Comment On September 29, 2010, at 3:54 PM, SmallWords wrote:

    I disagree about business traveler's leaving Southwest. Business traveler's get guaranteed early boarding for a small fee and this also gets them a drink coupon. LUV is also adding onboard internet access soon. They're going after the business traveler. The fact that they have the lowest fares because of the cattle call may not be to your liking, but it's hard to argue with their inexpensive fares and on-time departure rate. I see nothing but upsides for this, once they settle the integration of seniority of pilot's and flight attendants. That's a significant but doable hurdle.

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