"Profitable" is one adjective seldom used to describe an airline operator these days. In the first quarter of 2011, the four biggest airlines in the United States posted a combined loss of more than $1 billion.
Southwest Airlines (NYSE: LUV ) , however, didn't seem too keen on following the general trend. Now, with its acquisition of AirTran Airways (NYSE: AAI ) , the resilient discount carrier could soar even farther above its rivals.
The deal
By purchasing AirTran for $1 billion, Southwest is gearing up for a race against high-fare giants like Delta Air Lines (NYSE: DAL ) and United Continental (NYSE: UAL ) . This deal will allow Southwest to spread its network into key underserved areas like Atlanta and Washington, D.C. While Southwest operates in 72 cities in the U.S., AirTran itself serves 69 cities in the U.S., Mexico, and the Caribbean. After accounting savings thanks to duplications and redundancies, the deal will surely generate some nice efficiencies.
The numbers
The news isn't all great, however. Southwest's net income dropped to $5 million in the first quarter this year, from $11 million in the first quarter of 2010. However, that plunge owed to the costs related to acquiring AirTran.
The airline's revenue rose to $3.1 billion, up from $2.6 billion in the first quarter of 2010. Operating expenses increased, as expected, owing to rising oil prices. As my Fool colleague Shubh Datta pointed out earlier, airlines are going through a rough patch, thanks to inflated oil prices, driving them to raise fares and cut capacity. AMR (NYSE: AMR ) reported a net loss of $436 million, while US Airways (NYSE: LCC ) lost $114 million in the first quarter of 2011. Unfortunately for airlines, there's no end to soaring fuel prices in sight, and thus no readily apparent solution to the problem.
The bottom line
Southwest, which is primarily famous for its low-cost fares and excellent customer service, is no longer the cheapest carrier in the industry. JetBlue (Nasdaq: JBLU ) and Alaska definitely offer lower fares on most of their respective routes. Still, Southwest looks all set to expand its already-proven model.
The fact that Southwest is making money at a time when the goliaths are reporting losses speaks volumes. Thanks to its synergy with AirTran, the airline will only get bigger from here. I think it's about time we make room for Southwest in our portfolios.
What do you think about the newly expanded Southwest's prospects? Share your thoughts in the comments box below.
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