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Southwest Eyes Bigger Market Share With AirTran Merger

September 27, 2010 at 8:35 PM EST
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Southwest Airlines announced plans Monday to merge with rival AirTran. Margaret Warner and USA Today's Ben Mutzabaugh discuss what the merger could means for air passengers, airline employees and fares to the cities that will be added to Southwest's network.
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JEFFREY BROWN: And to air travel, as Southwest Airlines sets its sight on expansion. Margaret Warner has the story.

MARGARET WARNER: In the 1980s, Southwest Airlines was the scrappy upstart, pioneering a new type of low-cost, low-fare, low-frills flying experience. Southwest stole market share from the major carriers by offering low and predictable prices to fliers willing to give up reserved seats and in-flight refreshments.

Today, Southwest announced it’s going to grow still more by buying a smaller low-cost rival, AirTran Airways, for $1.4 billion. For more about this deal and where the industry is going, we turn to Ben Mutzabaugh of USA Today. He joins us from Pittsburgh. And, Ben, welcome. Thanks for joining us.

BEN MUTZABAUGH, USA Today: My pleasure.

MARGARET WARNER: One-point-four billion is a lot of money in what’s been tough times for the airlines. Why is Southwest doing this? What is driving this?

BEN MUTZABAUGH: Well, you know, there are a couple of things. First of all, as you had mentioned, Southwest has been at this for a while now. While they were the scrappy upstart, say, in the ’80s and even into the ’90s, their business model is pretty mature at this point. And there aren’t many misses left for them to expand that are natural fits for their business model.

One of the best cities and the biggest one they don’t yet fly to is Atlanta. So it’s no coincidence that AirTran’s biggest city is Atlanta, and this will put Southwest into Atlanta in a big way. And it really positions Southwest to go back to a position of growth by acquiring AirTran and eventually incorporating it into its network.

MARGARET WARNER: And there are other cities that right now Southwest isn’t in, aren’t there?

BEN MUTZABAUGH: There are about 37 that AirTran flies to that Southwest doesn’t go to. So, Southwest says they will keep all of these for now, except for one, Dallas/Fort Worth.

But, of course, Southwest already flies to Dallas Love Field. So, that is not — it’s really a net break-even there in the Dallas area. But so far, Southwest says they will keep flying to the Molines, the Charlestons, the Harrisburgs of the world, and they’re going to see how profitable they are. Of course, if they are not, you can be pretty sure that Southwest will reevaluate that decision.

MARGARET WARNER: But, at the same time, they will get access to, what, La Guardia, Pittsburgh, Washington National?

BEN MUTZABAUGH: Yes. This is one of the big things that Southwest gets out of this. They have been chomping at the bit to get into Washington Reagan National for a couple of years now. And that is a slot-controlled airport where capacity is you’re hard to get.

You can only get in if another airline leaves the market. And that just doesn’t happen. So this gives Southwest AirTran’s slot at Washington Reagan National. It also gives Southwest AirTran’s slots, the ability to take — acquire takeoff and landing, in layman’s terms, at New York La Guardia, another airport they have been trying to grow.

And it really strengthens them in Boston. This comes, again, as you mentioned, as Southwest transforms itself into sort of that — from that no-frills carrier into a carrier that is more focused on business travelers. And if you are going to be a serious business traveler, you have got to be in the markets like Washington Reagan National, New York La Guardia, and Boston, and Atlanta. And this really positions them for that.

MARGARET WARNER: OK. Let’s get to the bottom line here. What is it going to mean for consumers, for fliers? Will fares go up or down?

BEN MUTZABAUGH: There are two schools of thought. You are going to have the people that say, look, this is a bigger airline. They are going to be able to dictate fares, and it’s going to be bad for consumers, because prices are going to go up. And it’s a big — people tend to fear bigger airlines.

There’s this other side that says this airline is going to bring lower, consistent, predictable fares to the cities it serves. And, sure, airlines like American, Delta, United, they undercut Southwest in a lot of markets. But even the government has studied something that known as the Southwest effect. It has been out there for years.

People at the legacy airlines hate to hear this because it’s such good press for Southwest, but it’s pretty well documented. When Southwest comes into a market, fares drop. And they tend to stay lower over the long haul.

Now, that doesn’t mean American might not have, for example, a lower fare than Southwest any given day. But once Southwest comes into a new market, fares on average drop across-the-board to all of the markets that they serve from a new city. So, you might be able to — you could make a pretty good argument that this is going to bring lower average fares to the new markets.

MARGARET WARNER: So, explain how — if Southwest is now so big — I think it’s going to be the largest domestic carrier — how and why are its fares still lower on average than the majors?

BEN MUTZABAUGH: Right. Yes, in fact, they already were the biggest domestic carrier before this, when you exclude international passengers, which is pretty amazing, considering where they started. The reason that they can do this and be more profitable than a lot of their rivals is they have a very low cost structure and they maximize their efficiency.

For example, one of the easiest examples is they try to turn their planes at almost of the airports within 25 minutes, fly the planes as often as they can on shorter routes, even if you, say, take 10 or 15 minutes out of a turnaround time once a plane arrives at a gate, multiply that by six or seven times in a given day, that pretty much lets Southwest, for example, fly an extra flight between, say, Baltimore and Pittsburgh in a given day.

So, they really squeeze the most out of their resources. Their average costs are lower than a lot of the mainline rivals. But it is interesting. Airlines like United and Delta, they have really — they have lowered their own cost structure, and they are much more competitive against Southwest than they had been in years past. I think it is one of the reasons Southwest looked into this.

MARGARET WARNER: And how are their employees paid, vis-a-vis the majors?

BEN MUTZABAUGH: You know, and that is one of the surprising things. Southwest employees actually are very well paid in general compared to employees at the other major airlines. They have a very good relationship with their labor unions. And the pilots, the flight attendants, they tend to be pretty well compensated compared to most other big airlines.

MARGARET WARNER: Yes. And so I gather that means lower turnover. Before we go — and very briefly — now, United and Continental, two of the biggest guys, are merging now. It’s going to be I think the world’s largest airline. What will that mean for consumers, more competition, lower fares, or less?

BEN MUTZABAUGH: A lot of it depends on the market where you are. If are you in a market that has very little competition, there may be less service. On the other hand, if you are in a big market like New York or say Chicago, there will be some — there will be less competition on some routes, which may send fares up, but it’s going to invite new competition.

And I — especially with the bigger Southwest, it will help domestic fares. And it could actually help service on international routes. It might position United as a big global player that can finally, some would argue, compete with the Cathay Pacifics and others of the world and maybe let United compete on a more level playing field.

MARGARET WARNER: OK. We have to leave it there. Ben Mutzabaugh, thank you so much.

BEN MUTZABAUGH: My pleasure.