Is Southwest Airlines Still the Little Guy?

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JONATHAN COHN SEPTEMBER 28, 2010

Is Southwest Airlines Still the Little Guy?

The big news in business yesterday was yet another step towards consolidation in the airline industry, as Southwest announced a plan to acquire AirTran for $1.4 billion.

If you're a remotely frequent flier, you may be wondering what this means for flight availability, fares, and the beloved Southwest brand. If you're a student of public policy, or an official involved with crafting it, you may be wondering what this means for competition within the airline industry and, more broadly, for the economy.

Well, I really can't answer your questions. I have zero expertise on the airline industry. But a source close to Citizen Cohn does. She recommended a blog called Swelblog, written by an MIT research engineeer named William S. Swelbar.

His verdict? He thinks the acquisition is a smart move for Southwest, on multiple levels. But he also suggests it's a sign that the country's most famous upstart airline isn't such an upstart anymore:

With AirTran come slots at New York’s LaGuardia and Washington’s Reagan National Airports.  Along with slots, Southwest gains meaningful entry into the one remaining legacy carrier hub where it offers no service – Atlanta.  It also gains entry into Charlotte, a US Airways hub.

Should Delta at Atlanta and US Airways at Charlotte be concerned with this transaction?  No, and there are a number of reasons why not.  First and foremost, the network carriers already compete with the low cost sector for nearly 85 percent of their domestic revenues.  Whereas AirTran serves 37 markets that Southwest does not serve, some of them smaller, there will be some new competition for passengers in those markets.  But for the most part, those cities already enjoy the low fares delivered via AirTran’s initial entry.  ...

If you ask me, the losers in this announcement are not the network carriers but rather Frontier and Spirit.  jetBlue will survive just fine.  But Frontier is now confined to one [maybe two] traffic base for all intents and purposes.  And that makes them vulnerable.  As for Spirit, which just announced its intentions to launch a $300 million Initial Public Offering, it is one thing to have a highly fragmented market competing inside their network.  It is a totally different animal to have Southwest and AirTran focused on carrying traffic to the Caribbean. ...

In its press release Southwest said: “Based on an economic analysis by Campbell-Hill Aviation Group, LLP*, Southwest Airlines’ more expansive low-fare service at Atlanta, alone, has the potential to stimulate over two million new passengers and over $200 million in consumer savings, annually. These savings would be created from the new low-fare competition that Southwest Airlines would be able to provide as a result of the acquisition, expanding the well-known “Southwest Effect’” of reducing fares and stimulating new passenger traffic wherever it flies.” ... [But] the “Southwest Effect” as we knew it is dead.  The truth is today’s stimulation is largely diversion from another market or another carrier. ...

What I find most interesting in Southwest’s potential bid for AirTran is that the carrier is being forced to act just like the network legacy carriers in seeking a consolidation scenario that would lead to an improved revenue line systemwide. ...

I can’t wait to hear the arguments Southwest uses in Washington to gain regulatory approval, particularly as it will be hard pressed to make the argument that acquiring AirTran would further lower airfares in the US domestic marketplace.  After all, Southwest is not the only airline offering low fares, no matter what its boosters in Washington may think.

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posted in: jonathan cohn, airtran, southwest airlines, southwest

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