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Posted: October 11, 2010

Southwest sure can keep a secret!

It kept the AirTran deal in the vault

Robert Polk

The Southwest buyout of AirTran is a huge game-changer in the travel industry, and boy was it ever a well-kept secret! Airline executives at two other carriers and industry experts we spoke with said they were not surprised about the deal, but they had no idea it was in the works.

So, after scrambling to collect my thoughts, and getting input from lots of other smart travel professionals, here is what we know so far and what we think it means for the airline industry.
Southwest will pay $7.69 per share for AirTran, or approximately $1.4 billion. This is a premium of 69 percent over AirTran's Sept. 24 close. Wall Street will like this deal because the large carriers are growing through consolidation and not by adding flights. Additional flights could lower airfares, which could lead to losses for the industry which could then lead to lower stock prices.

The agreement has been approved by both boards of directors, but the two carriers will operate as independent carriers until the deal is closed. If the government allows the deal to be completed, the combined carriers will have almost 43,000 employees, will fly more than 120 million customers from 100 different airports, and have total sales of approximately $13.7 billion.

The combined carriers will have an all Boeing fleet with 401 737-700s, 173 737-300s, 25 737-500s and 86 717s. The average age of the fleet will be ten years, making it one of the youngest in the industry. The 717s that AirTran currently flies will allow Southwest to serve smaller markets, something they could not do with their larger 737s. Cities that have been praying for Southwest to show up in their towns could have their prayers answered with this deal.

AirTran flies to Cancun and several Caribbean destinations. This will be new for Southwest and something they have said they wanted for a very long time.

Though we may see new competition into Cancun and the Caribbean, we do not think this deal will have much direct impact on Denver. But, there will be great impact east of the Mississippi River. AirTran is headquartered in Orlando, but its largest hub by far is Atlanta. Delta happens to operate the largest hub in the world in Atlanta. Atlanta will become a battle ground like we have not seen since 1864.

We have seen first-hand how United, Frontier and Southwest have tried to divide and conquer Denver. The winner has been anyone in the Rocky Mountain Region that likes to travel by air. This new battle for Atlanta will be similar to the battle for Denver, but on a much larger stage. The winner will be anyone in the Atlanta area and anyone else in cities that have a Southwest/AirTran presence.

The airline industry, with the exception of Southwest and a couple of other carriers, are drunk on ancillary fees for checked luggage, priority boarding, blankets, pillows, and anything else you can think of. With Southwest coming to Atlanta and not charging many of these fees, will this change Delta's thoughts on ancillary fees? This could affect the entire industry and its thoughts on fees. (USA Today recently reported that U.S. carriers collected $2.1 billion in ancillary fees in the second quarter of 2010.)

AirTran offers Gogo in-flight Internet on every flight, assigned seating, Business Class seating and complimentary XM Satellite Radio. Southwest does not currently offer any of these services. It will be interesting to see what the combined carriers will offer.

If this goes through, more mergers are an almost certainty. I have always been very clear about my thoughts on buying airline stocks, but if I had money I could afford to lose I would buy some JetBlue stock, which was incidentally up 7 percent on Monday. I think American will be running to JetBlue now that Southwest, United and Continental are all on the move. (Please remember this free stock advice is worth every penny you have paid for it.)

If American and JetBlue get together, this will leave USAir as the last unmarried legacy carrier. Could a shotgun wedding happen between Alaska Air and USAir?

This game-changing merger sure does open up a lot of questions. I am excited to see how it plays out, and I'll keep you posted.
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Robert Polk is CEO of Polk Majestic Travel Group, Denver's largest independent travel agency. He welcomes your comments and questions at Robert@polkmajestic.com.

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