- Associated Press - Monday, September 27, 2010

NEW YORK | Southwest agreed to buy AirTran in a $1.4 billion deal that will combine two of the country’s largest low-fare airlines and give Southwest a bigger slice of the market in the Northeast and in Atlanta, the busiest hub in the nation.

The acquisition announced Monday moves Southwest, which already carries more passengers than any other American airline, into 37 new cities.

It gains a foothold in cities like New York and Boston, where it has already been expanding, and adds to its push to expand internationally. Southwest gains routes to Mexico and the Caribbean, where remaining discount airline JetBlue has a big presence.

Southwest has been targeting Atlanta, where AirTran currently competes with Delta Air Lines, because it is a hub for business travelers, who tend to pay higher fares.

The buyout is the latest in a wave of consolidation in the airline industry. Continental Airlines and the parent of United will combine this week to topple Delta as the largest airline in the world. Delta got the title when it bought Northwest in 2008.

For fliers, it could mean higher airfares in cities where competition is already fierce, such as Boston, New York and Baltimore.

Fares probably won’t leap dramatically anytime soon, said fare expert George Hobica, because JetBlue Airways competes on many of the routes where AirTran and Southwest overlap in the East.

But travelers also should be prepared for fewer fare sales when Southwest and AirTran combine, Mr. Hobica said. Locked in a constant battle with Delta in Atlanta and other discounters on the East Coast, AirTran puts fares on sale nearly every week. The acquisition by Southwest will take out a competitor and make fare sales less important for the combined airline.

Passengers in smaller cities like Moline, Ill., and Wichita, Kan., will have more options for flights and connections, which means more opportunities to avoid delays and cancellations.

In welcome news for weary travelers, Southwest said it will drop AirTran’s bag fees when the pair combine in 2012. Right now, AirTran charges $20 for the first checked bag, $25 for the second.

Some major airlines charge even more. Southwest claims it has lured passengers by refusing to charge for bags, and has built a marketing campaign around the policy, with baggage handlers shouting declarations of love to suitcases on the tarmac.

Southwest will remain the No. 4 airline by traffic. AirTran is the nation’s eighth-largest airline.

Last year, Southwest tried unsuccessfully to buy Frontier Airlines out of bankruptcy. Republic Airways Holdings won the auction for Frontier last August, buying it for about $109 million.

Southwest’s acquisition of AirTran is expected to close in the first half of next year. It requires both regulatory and shareholder approval.

Based on Southwest Airlines’ closing share price on Friday, the deal is worth $7.69 per AirTran share. That’s a 69 percent premium over its closing price of $4.55. AirTran shares jumped 62 percent to $7.36, while Southwest shares rose $1.73 to $14.01.

Southwest will pay about $670 million with available cash. Southwest will assume $2 billion in AirTran debt.

Southwest and AirTran said the new airline will operate from more than 100 different airports and serve more than 100 million customers.