Southwest's AirTran Deal Is Right On Point

Monday, September 27, 2010

The trouble with the aviating business sector is that anybody with a big enough chequebook, appetite for losses, and ego can open an airline business. So integration is always good, right?

Not for everybody. Purchasing AirTran Holdings ought certainly profit Southwest Airlines. Say only three-quarters of the advised annual synergies of $400 million are attained. Taxed & put at a multiple of 10 times, that would still be worth $1.4 billion, as is as AirTran's price tag.

It is the rest of the industry that should be concerned. Delta airways, for instance, suddenly confronts a rowdy new rival in its hometown of Atlanta. Southwest proclaims synergies on drawing in more passengers now that it can fly paths through the Atlanta hub and the smaller cities that AirTran serves.

Having filled a large hole in its meshing, Southwest ought take more market share as price-conscious passengers migrate toward it. It is also now dipping its toe in the international market.

The deal reflects the dominant position Southwest already has in domestic low-cost flight. Last year, it transported 55% of all U.S. low-cost carrier passengers, according to Goodbody Stockbrokers. Across the Atlantic, upstart Ryanair Holdings similarly faces a slowdown in its historically high growth rates as it reaches a saturation point in key European markets. That is a big reason why Ryanair now wants to branch out from its strategy of focusing on secondary airports to targeting primary hubs.

The larger airlines rely on attracting as many passengers as possible through their hubs to defray the high fixed costs that these carry. As more passengers are lured away to low-cost carriers serving an ever larger point-to-point network, so unit costs creep higher for the big boys, even as ticket prices come under pressure.


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