Southwest Airlines (LUV) has announced that it's going to buy AirTran (AAI). And, unlike the United/Continental merger, this is no merger of equals. It is a Southwest takeover through and through. That means that passengers will continue to see open seating, no bag fees, no change fees, and a single class of service -- only they'll soon have more routes to chose from. The Southwest you know (and love?) won't be changing its much-celebrated ways, but it now will find new opportunities that will only improve things for the customer.
Here's why this is a shrewd play:
- Business Destination Strategy Goes on Steroids
For the last few years, Southwest has changed its focus from alternate airports to big city business destinations. We've seen the airline go into Philly, Boston, Newark, New York/LaGuardia and more. Now that strategy is getting a booster shot.
Buying AirTran brings Southwest into the world's largest airport, Atlanta-Hartsfield. Atlanta has long been the biggest blank spot on the Southwest route map. Though Southwest has been content with simply establishing a beachhead in other business markets, AirTran's Atlanta hub will now become one of the most important strongholds in the Southwest system. I'm sure the Delta folks are popping some Tums this morning.
- International, Now Southwest has been talking about going international for a long time, but it's never been able to get to that point for a variety of reasons. Now it jumps right in. AirTran serves several Caribbean spots, and now Southwest will as well. Having this capability built-in means that additional international expansion becomes much easier to accomplish, eventually giving passengers more choice for more destinations.
- Technology That Works If I had to pick Southwest's Achilles Heel, it would be the airline's ancient, inflexible information technology. With international service, codesharing, and a variety of other things along the way, the airline's IT systems have always been the biggest roadblock. This problem has stretched for years and years. But as Southwest CEO Gary Kelly said on the media call today, "We've made a decision to replace our reservation technology." Finally. This will take the shackles off the airline.
- Moving Beyond the Boeing 737
Except for a couple of 727s in the early days, Southwest has been loyal to the 737 for its entire life. That's great for simplicity but it also means that the airline hasn't taken advantage of what a smaller fleet can bring. Now Southwest has a smaller fleet.
Southwest puts 137 seats on most of its 737 fleet today (except for a small number with 122 seats). AirTran has eighty-six 717s which seat 117 in dual class service. Southwest expects to keep a similar capacity, and that means it will now have about 100 airplanes that seat 20 fewer people and can be put in different, smaller markets. It just expands opportunity.
- Killing Competition
Southwest and AirTran will continue beating the drum that there is very little route network overlap between the two, but that's only part of the story. In some cities, two in particular, this will allow Southwest to rapidly consolidate its position and make things look much better.
The more obvious one of these is Milwaukee, where Southwest, AirTran, and Frontier have been in a three-way war for quite some time. It's an unsustainable war, but now with two competitors it makes a lot more sense. I imagine Frontier is actually quite happy about this as well.
The other is Baltimore. In Baltimore, Southwest is the largest airline with 54 percent of passengers while AirTran is number two with 16 percent. There is significant overlap there and this will only help Southwest to strengthen the operation.
- Consistency for the Customer
When all of this is said and done, the Southwest customer should be quite pleased. Why? Because nothing is changing for the worse. Southwest has said it intends to keep its policies of no bag fees, no change fees, no assigned seats, and a single class of service. This will be a big change for AirTran customers, but it should be positive for them. AirTran is not exactly known as a leader in customer service, but of course, Southwest is.
In the end, this will open up new opportunities for Southwest customers. Atlanta and the Southeast are now Southwest territory as are the Caribbean and I assume we'll see Mexico and Canada enter as well. Southwest will be able to serve smaller cities with its new fleet of smaller airplanes, and the airline will now have a functional IT system to make things easier for passengers.
Bottom line: It's a big move from Southwest, and it's a good one that gives the airline a lot of additional strength.