Southwest to buy AirTran; JetBlue shares to rise with profits


Shares in AirTran soared 61.3% to close at and Southwest shares gained 8.7% following the announcement of Southwest's USD1.4 billion acquisition of AirTran Airways. Southwest shares set a new 52-day intra-day trading high yesterday, with AirTran stock also setting a new 52-week high.

  • Southwest Airlines acquires AirTran Airways for USD1.4 billion, resulting in a significant increase in both companies' stock prices.
  • The acquisition is expected to be completed by 1H2011, pending regulatory and shareholder approvals, with full integration planned for 2012.
  • Fitch Ratings affirms Southwest's debt ratings with a "stable" outlook, citing the acquisition as a strategic fit that offers revenue and margin expansion opportunities.
  • Standard & Poor's places Southwest Airlines' ratings on CreditWatch with negative implications, expressing concerns about the potential weakening of the carrier's financial profile.
  • JetBlue's shares rise after Barron's predicts increased profitability for the airline in the coming years, with estimated earnings per share doubling by 2012.
  • JetBlue's focus on attracting premium-paying business travelers and expanding alliances with other carriers is expected to contribute to its future success.

Southwest agreed to pay USD7.69/share for AirTran's common stock, 69% more than the 24-Sep-2010 closing price of USD4.55. Under the agreement, each share of AirTran common stock will be exchanged for USD3.75 in cash and 0.321 shares of Southwest Airlines' common stock, subject to certain adjustments, based on Southwest Airlines' share price prior to closing. Including the existing AirTran net indebtedness and capitalised aircraft operating leases, the transaction value is approximately USD3.4 billion.

Completion of the transaction, which will require both regulatory and shareholder approvals, is expected to close by 1H2011. Commercial and operating integration is slated to culminate in 2012, with both carriers operating under Southwest Airlines' Federal Aviation Administration operating certificate in Dallas. Until the acquisition is approved and finalised, both carriers will continue to operate independently.

Meanwhile, Fitch Ratings affirmed Southwest's debt ratings following the announcement, with a "stable" outlook. The affirmation of the LCC's ratings reflects Fitch's view that the acquisition represents a "good strategic fit, opening up new and attractive revenue and margin expansion opportunities for LUV without driving a significant deterioration of credit metrics".

Meanwhile, Standard & Poor's Ratings Services placed Southwest Airlines' ratings on CreditWatch with negative implications in response to its announcement, commenting: "In our view, the combination will weaken Southwest's financial profile, which we characterize as intermediate--the strongest among rated US airlines."

JetBlue shares may rise with profit: Barron's

Meanwhile, shares in JetBlue gained 7.1% yesterday, after gains of approximately 10% in premarket trading, as Barron's described JetBlue as a diamond in the rough and commented that the carrier's shares could rise as the airline's profit gains over the next few years.

Barrons stated the carrier is turning its "profits around" and is expected to earn USD1/ share in 2012, up from an estimated USD 0.45 cents/share in 2010 and USD0.60 cents in 2011, for a more than doubling in price. Barron's stated Deutsche Bank analyst Michael Linenberg has a USD8 price target for the stock while Glenn Engel of Bank of America/Merrill Lynch has a target of USD12.

Barrons commented that that carrier may benefit from its strategy of targeting more premium-paying business travellers, as the New York JKF-based carrier expands alliances with foreign and domestic carriers.

Selected LCCs daily share price movements (% change): 27-Sep-2010

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