DALLAS — With billions of dollars worth of bond-financed projects underway or on the boards, the nation’s airports began adjusting to another competitive shift Monday as Southwest Airlines announced its $1.4 billion stock swap for low-cost competitor AirTran Airways.
Coming the same week in which United Airlines and Continental Airlines Inc. are merging into the world’s largest carrier, the acquisition expands Southwest’s network into the valuable Atlanta hub of Delta Airlines, previously the world’s largest carrier.
While the stock market turned its attention to the competitive fight between carriers, muni investors were more attuned to the fortunes of the airports. The “Southwest effect” that tends to lower airfares also sets up competition between airports.
“This is a very big merger of low-fare carriers and is bound to have significant influences on some of the airports that are served,” said airport consultant Roy Williams of Louisville, Ky.
Hartsfield-Jackson Atlanta International Airport is the world’s busiest airport and AirTran’s biggest hub with a 17.8% passenger market share in 2009 — the second-largest behind Delta’s 56% market share.
A merger means Southwest, which does not currently operate at Hartsfield-Jackson, stands to gain a significant foothold in Delta’s home base.
Atlanta plans to sell $800 million of new-money aviation bonds in November to take advantage of the alternative-minimum tax holiday afforded by the federal stimulus law that expires at the end of the year.
AirTran has no direct debt tied to bonds issued by Atlanta, but is a signatory to airline agreements for operations and the payment for capital projects, said Atlanta chief financial officer Joya De Foor.
Moody’s Investors Service yesterday affirmed Southwest’s Baa3 rating and said it was putting AirTran’s Caa1 on review for possible upgrade.
“The affirmation of Southwest’s ratings reflects our view that the acquisition of AirTran should enhance Southwest’s competitive position in the consolidating U.S. passenger airline sector,” said Moody’s analyst Jonathan Root.
Fitch Ratings also affirmed Southwest’s BBB issuer default rating.
AirTran’s headquarters is in Orlando, which is home to central Florida’s mega-theme parks and a strong market for both airlines. In 2009, the two airlines ranked first and second for a combined passenger market share of 35% — Southwest had 22.64% and AirTran had 12.67%.
“We’ve been in contact with representatives of both airlines and we’ll continue to monitor the acquisition as it unfolds,” Phil Brown, executive director of the Greater Orlando Aviation Authority, said in a statement.
The Greater Orlando Aviation Authority is planning to sell approximately $80 million of refunding bonds in late October. Since the airport’s agreements with AirTran and Southwest extend through 2013, officials indicated there should be no impact on selling the refunding bonds.
At Southwest’s home base of Dallas Love Field Airport, a $519 million redevelopment project is expected to be completed by 2014, when restrictions under the so-called Wright amendment are lifted. Southwest, which operates more than 90% of Love Field’s flights, will be able to fly nonstop to any destination in the U.S. afterward. Currently, it can fly nonstop only to nearby states. AirTran’s flights from rival Dallas-Fort Worth International Airport will end with the merger.
Love Field was the template for Southwest’s original strategy, as the point-to-point carrier avoided hubs of the large carriers. In recent years, Southwest has altered that strategy, entering Denver International Airport and shifting some flights from Oakland to San Francisco International Airport.
The Southwest-AirTran merger is expected to increase competition in the Baltimore-Washington market, where both carriers operate. Southwest is the dominant carrier at Baltimore-Washington Marshall International Airport, with 171 daily flights. AirTran has 51.
“Given BWI’s role in the Southwest system, as Southwest expands and grows, BWI should benefit,” said airport spokesman Jonathan Dean.
July was the heaviest traffic month in BWI’s history and came on the heels of 13 months of growth, interrupted only by snowstorms in February.
With its lower operating costs, BWI will pressure Dulles International, which also competes with slot-controlled Reagan National Airport, Williams said. AirTran operates at both Dulles and Reagan.
“Dulles remains a relatively high-cost airport,” Williams said. “I don’t think the new Southwest is going to have much focus on it, but they’re going to want to get as much use as possible out of Reagan.”
Moody’s in July put the Metropolitan Washington Airport Authority’s Aa3 rating on negative outlook ahead of a $350 million revenue bond deal. Analysts based the outlook shift on the fact that costs per enplaned passenger at Dulles and Reagan will rise to more than $21 beginning in fiscal 2011 from $13.47.
Williams said the merger could also heat up competition in Ohio between Delta’s Cincinnati hub and the airports in Columbus and Dayton at which both Southwest and AirTran operate. Williams, a former director at the Dayton airport, said it is close enough to compete with Cincinnati.
In Chicago, AirTran and Southwest will merge operations at Midway Airport. Southwest has 216 flights at Midway to AirTran’s 12. Southwest has 85% of the flights at Midway, which is preparing to issue $256 million of revenue bonds.
