Airline ETF Soars as Southwest Takes AirTran Under Its Wing

Includes: FAA, LUV
by: Eric Dutram

As the third quarter draws to a close, 2010 hasn’t exactly been the year full of M&A activity some analysts thought it would be, but a number of high profile marriages have helped to give the still fragile economy a boost. Already this year has witnessed successful bids for data storage firm 3Par (NYSE:PAR) and McAfee (MFE) with ongoing wars for Potash Corp. (POT) still hanging in the balance. In fact, at the end of August, global announced M&A takeovers have totaled $1.29 trillion, up 23% from the same time last year.

This wave of activity continued earlier today when discount air travel leader Southwest Airlines (NYSE:LUV) announced its intentions to purchase one of its chief rivals, AirTran (AAI), in a $1.4 billion deal. Based on Southwest Airlines’ closing share price on Friday, the deal is worth $7.69 per AirTran share. That’s a 69 percent premium over its closing price of $4.55. AirTran shares jumped 62 percent to $7.36, while Southwest shares rose $1.73 to $14.01 in early Monday trading. Southwest will be paying for roughly half the deal with cash and will also assume $2 billion in AirTran debt as part of the merger.

In addition to knocking out one of its chief competitors, Southwest finally gains access to the Atlanta market and Hartsfield International Airport, which is currently the busiest single airport in the world’ Hartsfield had been a dark spot in the company’s otherwise robust route map. The acquisition also allows Southwest to expand its flight offerings in a number of smaller markets across the Midwest and mid-Atlantic regions, including untapped medium sized cities such as Charlotte, Richmond, and Memphis. In total, the airline will now have access to 37 new cities across the nation, which looks to help the company increase its lead over its rivals in terms of sewing up the domestic market.

ETF Impact

This news sent shares of the Guggenheim Airline ETF (NYSEARCA:FAA) surging higher in Monday trading by close to 5% in mid-day trading, before receding a bit off of its highs. Southwest Airlines makes up a robust 15% of the fund’s total assets, and the company’s move lifted the entire industry to start the week. A 7.6% jump from fellow discount carrier JetBlue and a 3.9% surge by US Airways also helped to lift FAA.

FAA tracks the NYSE Arca Global Airline Index, which is a modified equal-dollar weighted index designed to measure the performance of highly capitalized and liquid U.S. and international passenger airline companies identified as being in the airline industry and listed on developed and emerging global market exchanges. The fund has been flying high for quite sometime now, posting a 35% gain over the past 52 weeks and adding more than 20% so far in 2010.

Disclosure: No positions at time of writing, photo is courtesy of Stuart Seeger.

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