By Alexander Moschina
Airline Mergers Take Off
Rising fuel prices and a flooded market, plus the fact that airlines simply can’t fill seats, have made single carriers very vulnerable. To stay alive, airlines are teaming up.
In 2009 Republic Airways (Nasdaq: RJET) picked up Frontier. The acquisition resulted in a 50% boost for the share price over the months that followed. Continental and United recently completed a long-anticipated merger. The two emerged as United-Continental (NYSE:CAL) on October 4.
And there are more on the way, which should lead to cheaper fares for consumers. And if more people fly as a result, that means more cash is being spread across fewer companies, which is great news for investors.
Southwest Airlines (NYSE: LUV) – the largest carrier of domestic passengers in the United States – has just tapped into a virtual cash machine…
Hartsfield-Jackson International Airport in Atlanta.
The major American hub is one of the busiest airports in the world, serving around 88 million passengers per year and 970,235 flights. It’s the home base for Delta Airlines (NYSE: DAL) and AirTran Airways (NYSE: AAI). But despite its position at the top of the U.S. airline charts, Southwest doesn’t even get a sniff in Atlanta. It’s been “noticeably absent” from Atlanta for years, according to Dahlman Rose & Co. analyst, Helane Becker.
However, it’s about to snag a space there. And with it, a huge slice of the market…
AirTran Opens Up the Revenue Floodgates for Southwest
On September 27, Southwest announced that it will buy AirTran for $1.4 billion. The acquisition finally gives Southwest that coveted spot in Atlanta, as well as residence in 36 new airports. “Just by acquiring [AirTran] it allows us to expand our network 25%,” said Southwest spokesman, Paul Flanigan.
That’s potentially 25% more routes… 25% more destinations… and most importantly 25% more customers. Practically overnight. Not only that, it gives Southwest access to new international routes in Mexico and the Caribbean – a first in the company’s 40-year history.
Tom Parsons, CEO of BestFares.com, referred to the deal as “a coup for both airlines and a win for John Q. Public.” But what about investors?
An “Extremely Big Competitive Force”
According to former airline executive, Paul Mifsud, the elimination of low-cost rival AirTran as a competitor is a definite game-changer. “[Southwest and AirTran] are going to become an extremely big competitive force in the domestic industry,” he said.
There’s a precedent for this, too.
In 2008, when Delta began to absorb Northwest (NWA), there were obviously initial growing pains. By the middle of that year, Delta shares were languishing around $4. But today, the share price is around $12, having hit a 52-week high of $14.94 in April.
Breaking it down further, Southwest and AirTran generated combined revenue of $13.7 billion in the 12 months ending June 30. And Southwest projects more than $2 billion in additional revenue this year, thanks to the acquisition, as its low fares appear in new airports like Atlanta. And that will allow Southwest to strengthen its position in major East Coast business hubs.
In fact, once their operations are combined, Southwest and AirTran will do business from more than 100 airports. To compare, competitor JetBlue (Nasdaq: JBLU) has gates in just over 60.
That immediate network growth means Southwest will realize a faster-than-normal return on its investment – and so could investors.
In addition, the company is already building up its international bid by planning to offer flights to Europe as early as 2015. There will be more airline mergers over the coming quarters, but it’s doubtful that any will present such a strong value to shareholders.
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