The acquisition in May 2011 of AirTran Airways puts Southwest Airlines (LUV) back on a path of revenue and, hopefully, profit growth. Using a simple discount fare structure, Southwest Airlines has managed to stay mostly profitable while the major airline companies have lost billions over the last decade.
The addition of AirTran provides Southwest access to the major market airports of Atlanta and Ronald Reagan in Washington, D.C. plus additional access in Boston and New York City. AirTran also serves destinations in the Caribbean and Mexico, new territory for Southwest. The purchase of AirTran will cost Southwest approximately $1 billion.
The two airlines will continue to function separately for at least a year after the acquisition. Once the integration starts, Southwest CEO Gary Kelly predicts $400 million in "synergy savings" by 2013.
The acquisition’s biggest effect is to expand business-traveler sales for Southwest. The airline has been known as a low cost choice for personal travel and the goal is to go after a higher percentage of the more-profitable business travelers.
Fuel cost risk
On the negative side, higher fuel prices are having a serious effect on the bottom line. First quarter net income dropped to 1 cent per share compared to 17 cents earned in the fourth quarter on similar revenue.
Fuel costs for Southwest are predicted to increase by $1.3 billion for the full year 2011. If fuel prices remain high, the airline will be forced to increase fares, possibly affecting the number of travelers who chose to fly.
Although she has downgraded the airline industry as a whole, Dahlman Rose analyst Helane Becker increased her rating on Southwest Airlines to a buy from a hold after the AirTran purchase was announced. Her target price for LUV is $15. Recent trades were around $12.32.
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