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.
