In Sept. 2010, Southwest Airlines (NYSE:LUV) announced that it would acquire AirTran Airways in a $3.4 billion transaction that would solidify Southwest's position as the leading U.S. low-cost carrier. At the time, Southwest was expected to fully integrate AirTran operations by the end of last year, but the process of merging operations has been very slow. Southwest still operates hundreds of daily flights under the AirTran brand with a separate reservations system and different policies. Even worse, it has been impossible to connect from Southwest to AirTran flights with a single ticket. This has prevented Southwest from achieving any revenue synergies.
A spark of hope
However, the outlook is finally improving for Southwest, which last week announced that it is ready to begin connecting passengers across the two networks through a codeshare arrangement. It began testing this process in a few cities last month, and as of next Monday, it will roll out to another 34 cities.
This move could have a big impact on Southwest's profitability beginning this spring. By taking advantage of the combined route network, it will be able to offer more flight choices and open up new destinations for many of its customers. For example, Southwest's reservations system is famously unable to accommodate international itineraries (the company is working to fix this). On the other hand, AirTran flies to a number of leisure destinations in Mexico and the Caribbean, but has fewer domestic flights. By linking the two networks, Southwest will be able to offer a variety of one-stop itineraries to Mexico and the Caribbean that were not previously available.
Southwest shareholders should be very happy because of these revenue benefits. However, Southwest is not out of the woods yet. The company still needs to integrate the Southwest and AirTran technology systems. Last year, United Continental (NASDAQ:UAL) learned how difficult that process can be. Even though United had performed several dry runs, the reservation system change still led to a raft of problems that alienated customers.
Southwest may be able to learn from that example. However, it faces an additional challenge because the incompatibility of Southwest's main reservation system with international itineraries will force the company to use an all-new platform. (Generally, the most efficient solution to integration problems is to use the larger carrier's systems.) Investors, therefore, should understand that while Southwest is making progress, there are still substantial risks to investing in the company today.