Southwest buys AirTran, grows bigger, less quirky

Associated PressMay 3, 2011 

  • Southwest Airlines' acquisition of AirTran will solidify its position as the busiest carrier at Raleigh-Durham International Airport.

    Southwest flies 31 daily nonstop departures to 11 destinations from RDU, including Chicago, Las Vegas, Denver, Phoenix and Tampa, Fla. AirTran's only nonstops from RDU are to Atlanta.

    In March, Southwest handled about 82,000 passengers from RDU, well ahead of the 66,000 served by American Airlines and American Eagle. AirTran served 8,500.

— Southwest Airlines is looking more and more like the big airlines it loves to needle.

The once-quirky upstart flies to the big, busy airports it used to shun. It lets travelers cut in front of the boarding line - for a fee. Its overhauled frequent-flier program is more complicated, like others in the industry.

Now comes Southwest's boldest move, its $1 billion purchase of AirTran Airways, completed Monday. All these changes are designed to help Southwest compete better for high-fare business travelers.

Benefits of AirTran

By acquiring AirTran, Southwest increases passenger traffic by 25 percent. It gains AirTran's hub in Atlanta, a business-travel center that had been missing from Southwest's route map. It gains a toehold at Washington's Reagan National and adds gates at New York's LaGuardia, two airports favored by business travelers over nearby Southwest locations.

It will rival Delta and the combined United and Continental as the biggest airline by passenger-carrying capacity within the U.S., according to aviation data firm OAG. It already flies more than 100 million domestic passengers per year, the most of any airline, but most of them are vacationers who pay lower fares than corporate travelers.

The new frequent-flier program was designed expressly to reward customers for buying more-expensive tickets, something business travelers do when they make last-minute travel plans. It sent the message that Southwest wants business travelers, even at the expense of angering longtime leisure customers. The average fare on Southwest has risen about 12 percent a year recently, but the airline would like to push that even higher.

Southwest is no longer the undisputed king of cheap flights. New, ultra-low fare airlines have sprung up. Some midprice competitors, such as JetBlue and Virgin America, have more amenities. Fare watchers say that, at times, United, Delta, American or US Airways offer lower fares on some routes.

Nor is Southwest the lowest-cost operator anymore. Spirit Airlines, Allegiant Air and AirTran have lower costs per mile, partly because they pay employees less, but also because Southwest's maintenance costs have risen as its fleet has aged. The big network airlines such as United and Delta have spent the past decade cutting labor and other costs and boosting efficiency.

Is it still cheaper?

CEO Gary Kelly insists that Southwest is "still a low-cost airline and the low-fare leader."

But Ray Neidl, an analyst with Maxim Group, said there isn't much of a cost difference with other airlines anymore.

Southwest, Neidl says, "has grown up. They are becoming more of your classic airline, though they don't want to admit it." But he acknowledges that consumers still associate Southwest with low fares.

Southwest remains the most powerful price-setter in the industry, capable of forcing others to roll back fare increases on coach tickets. And it retains vestiges of its maverick past.

The airline doesn't charge for the first two checked bags or for changing a reservation. It doesn't assign seats or have first-class cabins or airport lounges.

How it makes money

Still, Southwest is able to make a profit even when others are losing money because it keeps boosting revenue. Thanks to a 12 percent surge in traffic - far better than at other big airlines - and higher average fares, Southwest's first-quarter revenue climbed 18 percent, compared with 11 percent at United Continental and 13 percent at Delta.

Southwest earned $5 million while its four biggest rivals lost a combined $1 billion in the quarter.

Buying AirTran allows Southwest to fill the last gaping hole in its route map: Atlanta. There, AirTran has a profitable hub despite competing with Delta. Bob Jordan, the Southwest executive who will run AirTran, thinks Atlanta can become Southwest's biggest base within a few years, surpassing Las Vegas and Chicago.

Southwest also gains a foothold at Washington's Reagan National and picks up AirTran's gates at LaGuardia.

AirTran could run as a separate airline into 2013. Southwest will eventually drop AirTran's bag fees and first-class seats.

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