The largest U.S. low-cost carrier, Southwest Airlines (LUV) finally completed its $1.4 billion merger of AirTran Holdings Inc, following all regulatory clearances.
The merger represents a unique opportunity for Southwest Airlines to expand its presence in key markets. The combination of the two low-cost carriers represents the third major U.S. airline merger in the last three years. Delta Air Lines Inc. (DAL) acquired Northwest in 2008 and United Airlines acquired Continental Airlines in 2010, resulting in a new entity United Continental Holdings (UAL).
Southwest gained a valuable market presence in Atlanta, the busiest airport in the U.S., post merger. The acquisition will widen Southwest’s network by 25% and provides its first international destination in the Caribbean and Mexico. The company will expand its presence in key U.S. markets such as New York LaGuardia, Boston Logan, Milwaukee and Baltimore/Washington as well as extend its services to many smaller domestic cities.
Southwest is expected to resume growth in seating capacity for the first time since three years that should add about $3 billion in annual revenue. Post-merger, each AirTran shareholder will receive $3.75 in cash and 0.321 share of the Southwest common stock.
The transaction will be accretive to Southwest’s earnings per share in the initial year and will keep on increasing when realized fully. The transaction is expected to generate net synergies of more than $400 million by 2013. However, this will also result in $500 million in one-time charges.
AirTran will continue to operate under its own brand name until the operations of the two companies are fully integrated, which is expected in 2013.
The merged Southwest now poses major challenges to carriers, especially American Airlines, a wholly owned subsidiary of AMR Corporation (AMR) and US Airways (LCC). Southwest is the fourth largest U.S. carrier by traffic, after United Continental Holdings, Delta Air Lines and AMR Corp.
We are currently maintaining our long-term Neutral recommendation on the stock with the Zacks # 3 (Hold) Rank.
AMR CORP (AMR): Free Stock Analysis Report
DELTA AIR LINES (DAL): Free Stock Analysis Report
US AIRWAYS GRP (LCC): Free Stock Analysis Report
SOUTHWEST AIR (LUV): Free Stock Analysis Report
UNITED CONT HLD (UAL): Free Stock Analysis Report
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