The $3.4 billion Southwest-AirTran deal would give Southwest access to the Caribbean and more of the eastern US. It could also mean increased competition for Delta and JetBlue.
Southwest Airlines, the nation's largest no-frills air carrier, announced plans to purchase rival AirTran Monday, a move that would extend Southwest's reach into the Caribbean and significantly expand its presence in the Eastern US.
The roughly $3.4 billion Southwest-AirTran deal, if approved by regulators, will combine two of the nation's largest low-cost airlines. An open question is to what degree consolidation will mean rising fares for passengers. Ticket costs have already risen since last year, due to a strengthening economy and efforts by airlines to return to profitability.
"I don't think fares are going to go up very much," says George Hobica, founder of Airfarewatchdog.com, a website with tools for consumers to track ticket prices. "I don't see any need to panic."
Southwest, in its press release, suggested that fares could go down. The airline cited what's been called the "Southwest effect" in past cases, where the company's expansion has led to greater price competition. Specifically, Southwest said that a heightened presence in Atlanta (now an AirTran hub) "has the potential to stimulate over two million new passengers and over $200 million in consumer savings, annually."
Mr. Hobica voices skepticism that the AirTran deal will bring average US air fares lower. For one thing, Southwest's own prices aren't as low as they used to be. Also, AirTran itself is already a low-price airline.
Still, he sees new competition coming to Atlanta, where fliers who use that hub may have an increasingly attractive alternative to Delta Air Lines. Delta lost about 2 percent of its share value in stock trading Monday, while Southwest rose nearly 10 percent. Shares of AirTran Holdings surged more than 60 percent in value, because Southwest agreed to pay a significant premium to win the deal.
Although the two carriers currently overlap their service to about two dozen cities, AirTran's focus includes many Eastern cities where Southwest is not a player. Among them are Atlanta, Memphis, Miami, and Charlotte, N.C. Southwest would also gain access to Reagan Airport in Washington, D.C., and substantially expand its presence in New York, Boston, and Orlando. New destinations such as Jamaica and Aruba, meanwhile, would step up Southwest's competition with JetBlue for warm-weather vacation traffic.
The buyout, if approved by federal regualators, will eventually result in AirTran's business being rebranded under Southwest's name. Included in the buyout's overall transaction value of $3.4 billion is a $1.4 billion share purchase plus arrangements regarding AirTran’s debt and aircraft leases.
Southwest has nearly 35,000 employees and now flies 461 routes. AirTran has about 8,100 employees and flies 177 routes.
In the era since deregulation, many carriers have gone out of business or undergone mergers with larger airlines. The industry's most recent consolidation trend has included linkups of Delta with Northwest, United with Continental, and Midwest with Frontier.
Still, the threat of upstart competitors has persistently held rising fares in check. According to federal data, the average fare this year ($328 as of the first quarter) is similar to where it stood 10 years ago.
For now, many airlines have a strategy that blends fare wars with add-on fees on everything from meals to extra leg room. Southwest is one of the few carriers that allow fliers to check a bag for free. And when it does charge fees, Hobica says they're usually lower than those of rivals.
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A Southwest Airlines aircraft. Currently, the airline only serves the US market; however, if they successfully purchase AirTran Airways they will gain international routes to Mexico and the Caribbean.
An AirTran airplane. The company flew 23,998,000 passengers in 2009.
Low-cost US airline  announced Monday that it would buy its low-cost rival  for US$1.4 billion. The merger announcement comes just days after United Airlines sealed a merger deal with Continental Airlines.

"The acquisition of AirTran represents a unique opportunity to grow Southwest Airlines' presence in key markets we don't yet serve and takes a significant step towards positioning us for future growth," Gary Kelly, CEO of Southwest, said after the merger was announced.

The Southwest-AirTran deal, which awaits antitrust regulatory approval, will gain Southwest a larger US network. By merging with AirTran, Southwest will also be a strong competitor in Eastern United States cities such as New York City, New York, Charlotte, North Carolina, , Georgia and Washington, D.C., cities that Southwest had previously not touched much. Southwest also will be going international for the first time, inheriting AirTran's Mexican and Caribbean routes. The newly merged company would keep Southwest's name and livery.

Southwest will be offering AirTran stockholders US$7.69 per share. That's 69% more than AirTran's Friday, September 24 closing price. However, AirTran stock shot up 62% to $7.36 on Monday, while Southwest's stock rose more modestly to US$14.01. Delta Air Lines stock declined by 2% on Monday, as Southwest will gain an AirTran hub at Atlanta, which is also Delta's primary hub.

The new airline would carry over 100 million passengers, creating the world's fourth largest airline. Last year, Southwest carried 101,338,000 passengers, while AirTran carried 23,998,000 fliers. Southwest will be 25% larger after the merger is completed.

===Debate over airfare hikes===

Though some people worry that airfares will go up, as people worried about during the United-Continental merger, others, including Southwest, aren't too worried. "America needs this now. You could go from Rochester, N.Y., to somewhere on AirTran, and from Charlotte to somewhere on AirTran. But with this deal you can now go just about anywhere in the country, and to the Caribbean and Mexico, on Southwest.. . With the more than 100 destinations that Southwest will now have, all the legacy airlines will have to set their prices based on whatever Southwest does," says Tom Parsons of BestFares.com. Parsons also said that "I think America is going to very happy that now they can fly coast-to-coast between 100 U.S. cities and make the legacy airlines be more competitive with the style of Southwest and their low fees."  

Consumer advocate Clark Howard also weigned in with a positive remark on the deal. "It's so good for the flying public. This is an opportunity for a discounter to have the kind of heft and national reach of the full-fare airlines," he said.

Southwest even has said that fares could go down, as the "Southwest effect", which is supposed to stimulate competition, "has the potential to stimulate over two million new passengers and over US$200 million in consumer savings, annually" in Atlanta, according to the company. After the merger, Southwest also plans to drop AirTran's checked baggage fees of US$20-25. Southwest currently does not charge for checked baggage. 

Others aren't as thrilled with the merger of the low-cost airlines. "This is truly a shocker, and it can only mean further consolidation. I don't think anyone really saw this coming. More than any recent merger, it spells bad news for low fares, since both airlines were leaders in the low fare space and had frequent, almost weekly, sales. I can only imagine that now pressure is on for American to find a partner, and also US Airways, and that will lead to even less fare competition." says George Hobica,  of airfarewatchdog.com. Hobica also said that "The era of irrational, stupid, destructive fare sales is over. This is the new normal. JetBlue now has permission to raise prices between Baltimore and Boston. Other airlines now have permission to raise prices between Washington, D.C., and Florida."

Though Hobica was generally pessimistic about the deal, he did state that the Southwest takeover would be a win for AirTran customers, "because Southwest has better service than AirTran and lower fees." 

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