Defensive Strategy

The Southwest AirTran Acquisition: What Are They Thinking?

28 Sep 2010  

You might presume from the title of this post that I’m opposed to Southwest’s acquisition of AirTran. But that isn’t actually the case. I’m just confused. Why would Southwest do this? I don’t follow the logic.

I can easily identify reasons why this deal isn’t a good one for Southwest.

  • Southwest has a very distinctive and unique culture. Merging with AirTran will put this at significant risk.
  • Southwest has long benefitted from having just one type of plane, the 737. With the AirTran acquisition, Southwest will start flying the 717. This is a big shift.
  • AirTran’s main base is Atlanta, a huge Delta hub. Southwest has long avoided the hub model, especially at major airports like Atlanta. Again, this is a major strategy change.

Overall it feels like Southwest is becoming more like the other big domestic airlines. And why would Southwest want to do this? Financially, most domestic airlines have been a disaster over the past 10 years. Southwest, with its very unique model and culture, was the one shining star.

I have a much harder time identifying reasons why the deal makes sense. Perhaps this is a defensive move; Southwest might be nervous about AirTran, so the acquisition is primarily to eliminate a threat. This could be the case, but I find it unconvincing.

So if I owned any Southwest stock (I don’t) I would sell it.

Or am I missing something?

14 Responses

  1. It’s an amazing piece of writing for all the web people; they will take benefit from it I am sure.

  2. Tim Calkins says:

    A lot of good discussion!

    There is something to the argument that AirTran will give Southwest access to space constrained Atlanta and international routes. In the long term Southwest will need to add international service to continue to grow. This acquisition is certainly a first step in that direction.

    The big question now: can Southwest remain a different and special carrier as it grows?

  3. Matt says:

    I usually agree with you Professor Calkins, but I have to say that this transaction makes sense to me and actually does follow Southwest’s strategy. First and foremost, it lays the foundation for future growth at the company, which might otherwise start to become difficult. The deal gives SW immediate access to the largest US market that it doesn’t currently serve, an established (though small) international route network in Latin America, and a smaller aircraft that can be deployed profitably to smaller markets that would otherwise be inaccessible to SW. In fairness, SW does currently operate two aircraft types: classic 737 (300/500 series) and next generation 737 (700 series). JetBlue has also shown that a smaller aircraft can provide growth opportunities both for employees and revenue. SW does also have a history of competing with legacy carriers at hubs dating back to BWI when it was a USAir hub and more recently Philadelphia, MSP, Dulles, Denver, SLC and others. Finally, the culture argument doesn’t seem as strong as it once was given the recent strain in labor relations (as evidenced by the difficulties in 737-800 series negotiations among others). I don’t mean to suggest that the merger won’t be challenging, but it does seem to make sense to me.

  4. Shahzeb says:

    AirTran would provide Southwest entry into Atlanta, which is gate constrained. Additionally , Southwest would get growth opportunities in Milwaukee, Baltimore, Orlando and the Caribbean.

    One potential road block would be the pilot integration. Last year when Southwest attempted to acquire Frontier Airlines, Southwest pilots rejected the deal based on seniority. They insisted Frontier pilots come in at the back of the plane. They may take a similar position with AirTran pilots.

  5. Richard Cancellare says:

    Making a move towards international service looks like a winner. These destinations are still fairly short haul distances and should support the flight frequency Southwest normally targets. It will also add a new dimension / product offering to the Rapid Rewards program by providing a more extensive set of vacation destinations.

    • Mike Dienhart (EMP78) says:

      So, what do you think the playbook is to make this successful for SWA? What would you do in their shoes over the next 6 – 12 months to add value as quickly as possible? What pitfalls are you paying the most attention to?

  6. Matthew Brock says:

    The AirTran acquisition offers Southwest a relatively easy way to begin international service: also a big strategic step. (AirTran serves a half-dozen destinations around the Caribbean; Southwest service is U.S.-only.)

  7. Benjamin Thompson says:

    Centexrevestors nailed it. This is all about slots, specifically, Atlanta, New York, and Boston. Southwest doesn’t want them for a hub – they need them for basic service. They’ll keep the same model but are slowly closing the holes in their route map. I like it a lot.

  8. Purely a real estate play. $5 says that within 3-5 years all of the non-737s will be gone (rightly so) and the AirTran pilots will transition or leave. Of course they will stay and love the SWA way of life.

    To me this is a solid way to buy gates and routes, and might even be at a discount when you compare the cost of developing those routes.

    Delta, American, United are all big and bloated and ripe for the picking.


  9. Scott Shrum (MBA '04) says:

    I had the same question when I heard about this deal. I know that AirTran is a well regarded airline, but I don’t see why Southwest needed this deal.

    The one thing I thought of, aside from access to Hartsfield, was maybe to acquire AirTran’s management team? The only reason I raise that idea is because Southwest has done that before — e.g., its acquisition of Morris Air back in 1994, to bring in David Neeleman (who later started JetBlue) and his team.

    Seems like an awful lot to go through just to get their hands on a few great managers, though…

  10. aziz says:

    I think Southwest is seeing this as the next step after their successful switch to the industry standard rez stack to facilitate codeshares (2007) and integration of ATA assets (2008). SWA has the IT capability to handle legacy carrier practices today, while ATA introduced Southwest to “hub’ operations.

    Delta had essentially locked SWA out of the Southeast by preventing the acquisition of gates at Hartsfield. With the flexibility of a standard rez system, and confidence they can handle hub-style airports acquiring, Airtran probably seemed irresistible.

    I expect that the real loser in this acquisition will be Delta, a truly terrible excuse of a company.

  11. Mike Dienhart (EMP78) says:

    Great post. I had the exact same reaction when I first heard about this. The acquisition seems very inconsistent with their previous strategy, and I can’t find aspects of consonance in this deal. Southwest had historically expanded very deliberately, in a controlled fashion, from positions of strength. They add adjacent markets, in Tier 2 or 3 cities, where there is a sufficiently strong community of interest (in consideration of their existing markets) to support demand very quickly.

    The business literature on Southwest lays the credit for their success on a simple and streamlined culture and operational model. By all accounts, the culture at AirTran isn’t consistent with Southwest’s. Sure, their strategies (low cost operator) are similar, but how will they execute that strategy as a combined company?

    This seems rash, and I can’t identify the upside. I had concluded that they were acting to remove a competitive threat from the marketplace, but I’m not satisfied by that expectation. Will be interesting to see how this develops.

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