Southwest Airlines: The AirTran Acquisition
1. After the deregulation of the US Airline industry in 1978, the barriers to entry within the industry came down significantly and many Low Cost Carriers emerged overtime. 2. The emergence of rival Low Cost Carriers and the improvement in the Operation Efficiencies of Full Cost Carriers progressively eroded Southwest’s competitive advantage. 3. A closer look at AirTran’s value chain and its resultant efficiency shows significant differences in the operational strategies and differentiation approach of the two companies. A seamless integration would largely depend on Southwest’s ability to merge systems, processes and organizational cultures.
2010 Revenues (M)
2010 O&D Revenue
| ~ 88 Million
| ~ 25 Million
2010 Load Factor
Source: Southwest Airlines Media / Merger Website
4. Given the increasing consolidation in the industry in general and rising dominance of major competitors such as Delta and United in particular, Southwest Airlines did not have many options but to support its languishing growth through inorganic expansion. However, the company paid a very high premium for AirTran Airways. 5. The company faces a far more challenging integration process than it had anticipated. The resultant risk is rather high and can weigh down on Southwest Airlines’ profitability in the coming years. Low Cost Carriers in the U.S. Airline Industry
The Airline Industry in the United States, after deregulation in 1978, saw emergence of a number of new carriers, primarily Low Cost Carriers (LCC). In 1997, given the growth of these airlines, the US Department of Transportation (DOT) identified a Low Cost Airline Service Revolution. Since the drafting of this report by the Department of Transportation, the growth of market share of low cost airlines has only increased further (13% in 1997 to about 30% in 2011). 1 This growth in turn has led to intense competition among all (network and low cost) airline players. Accordingly, the average domestic fare prices reduced and pressure to lower down costs increased on carriers. While low cost carriers managed to reduce their cost further to remain profitable, network carriers experienced an increase in average cost leading to almost zero net operating profit. The dynamic growth of this sector and ever increasing competition led to the entry, exit, and merger & acquisition of airlines. The merger of two large players (Southwest Airlines and AirTran Airways) in 2011, hence become an interesting subject to analyze. This report aims at performing a comprehensive analysis of the merger and its resulting impact on the cost-optimized value chain and profitability of Southwest Airlines. Growth of Low Cost Carriers
Until the early 1990s, the Low Cost Carrier market was synonymous with a dominant carrier, Southwest Airlines. Over time, a number of new Low Cost Carriers entered into the market and geographic scope of Low Cost Carriers, once limited to a small set of cities, reached virtually all corners of country. Evaluation of Porter’s Five Forces within the Low Cost Carrier Airline Industry The rapid growth of Low Cost Carriers resulted in the declining dominance of the large network carriers leading to the entry of network carriers in the Low Cost Carrier segment (United and Delta), and mergers between major network carriers i.e. American Airlines and Trans World Airlines (2001), US Airways and America West Airlines in 2005. In 2009, Southwest along with AirTran, JetBlue, ATA and Frontier were the top 5 players (Exhibit 1). 1 Overall, the Low Cost Carrier industry has not remained as attractive as it used to be, majorly because of entry of new entrants and saturation of routes. Increasing power of buyers and reducing margins for Low Cost Carriers is a big challenge for the...
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