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Southwest Airlines Buys AirTran to Spread Low Airfares, Not to Boost the Industry

Typically buyout news can be very bullish for the industry and competitors of the firm bought. Potentially less focused competition or even a higher premium for stand alone operators can be very positive. In the case of the airlines, that usually isn't the case. As soon as one airline leaves, another usually is born to take their place. Despite being a long term losing industry, airlines seem to never lack for new entrants.

Today's news that Southwest Airlines (LUV) is willing to buyout AirTran (AAI) for a roughly 69% premium is huge for shareholders of both companies and especially AAI. This deal allows LUV to more effective compete in the NorthEast not to mention to enter markets such as Atlanta. Does that make JetBlue (JBLU) or American Airlines (AMR) an attractive acquisition now that one competitor is gone? Hmm, more and stronger competition from LUV doesn't seem ideal. The headline of their press release says it all "Southwest Airlines to Acquire AirTran; Spreading Low Fares Farther". That doesn't make me want to run out and buy JBLU or AMR! The combined companies will be much more of a force on pressuring fares down.

Terms of the Deal:
At Southwest Airlines' closing stock price of $12.28 on September 24, 2010, the transaction values AirTran common stock at $7.69 per share, or approximately $1.4 billion in the aggregate, including AirTran's outstanding convertible notes.  This represents a premium of 69 percent over the September 24, 2010 closing price of AirTran stock.  Under the agreement, each share of AirTran common stock will be exchanged for $3.75 in cash and 0.321 shares of Southwest Airlines' common stock, subject to certain adjustments, based on Southwest Airlines' share price prior to closing.  Including the existing AirTran net indebtedness and capitalized aircraft operating leases, the transaction value is approximately $3.4 billion.

Comments from LUV CEO:
"Today is an exciting day for our Employees, our Customers, the communities we serve, and our Shareholders," said Gary C. Kelly, Chairman, President, and CEO of Southwest Airlines. "As we approach our 40th Anniversary of providing exceptional Customer Service at everyday low fares, 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.

New or Expanded Hubs for LUV:
It offers Customers more low-fare destinations as we extend our network and diversify into new markets, including significant opportunities to and from Atlanta, the busiest airport in the U.S. and the largest domestic market we do not serve, as well as Washington, D.C. via Ronald Reagan National Airport.  The acquisition also allows us to expand our presence in key markets, like New York LaGuardia, Boston Logan, and Baltimore/Washington.  It presents us the opportunity to extend our service to many smaller domestic cities that we don't serve today, and provides access to key near-international leisure markets in the Caribbean and Mexico.

Note the focus on lower fares to more customers in more cities. AMR and JBLU have been warned! Don't get caught buying these shares on the 'HOPE' trade.


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