By Maria Saporta
Friday, October 1, 2010
A decade ago, Joe Leonard approached Herb Kelleher to see if he might be interested in a merger of both their airlines.
At the time, Leonard was CEO of AirTran Airways Inc., and Kelleher, the founder of Southwest Airlines, was CEO of the Dallas-based airline.
In all, Leonard talked to Kelleher four times about doing a deal. And then, when Kelleher stepped down as CEO, Leonard approached Jim Parker, the then-new CEO of Southwest, on two other occasions.
Each time, no deal.
Although a combination looked great on paper, Southwest was not ready to risk losing its culture and successful formula by acquiring another major discount carrier. Also, Southwest had been known to shun large hub airports, like Atlanta.
Then, on April 21 this year, Southwest’s current CEO, Gary Kelly, called Bob Fornaro, who had succeeded Leonard as AirTran’s CEO, and said: “Let’s talk.”
Conversations turned into negotiations, and on Sept. 27, the airlines announced Southwest will buy AirTran for $1.4 billion.
“Bob did this deal,” Leonard said of Fornaro. “What I did was a failure. I didn’t get it done in six attempts. But Bob’s latest round of conversations with Southwest resulted in a merger.” The announcement caught the industry by surprise. But probably the people who were most surprised were the executives of Atlanta-based Delta Air Lines Inc.
Over the years, Delta has been extremely protective of its dominant position at Hartsfield-Jackson Atlanta International Airport, the largest in the world.
Time and time again, Delta worked hard behind the scenes to limit the competition flying into Hartsfield-Jackson. And there was no competitor Delta feared more than Southwest, the most successful airline in the country.
A former airline executive said Southwest is the toughest competitor there is. “You are talking about one of the premier airlines in the world,” he said. “AirTran has been successful, but a relatively localized, low-cost carrier, not a powerhouse like Southwest.”
It is no secret in Atlanta that Delta did everything it could to outmaneuver its competition.
When business leaders or airport executives would make a call on Southwest officials to see about it flying out of Atlanta, Delta officials would cry foul. How could Atlanta leaders turn their back on Delta, the airline that had grown with the city, and vice versa.
When it came to AirTran, Delta at first ignored the discount carrier, then it tried repeatedly to get it out of the way — unsuccessfully.
But sometimes Delta and AirTran would join forces.
At the request of Hartsfield-Jackson, Delta and AirTran began working together on a new lease agreement as far back as a year ago. The major terms of the lease, agreed to months before AirTran began talking to Southwest, would have the net effect to “keep Southwest out” by limiting the number of open gates available for the Dallas-based airline.
But by that time, Southwest had set its sights on Atlanta. The Southeast region of the country was a big hole in its national network, and there was no market more attractive for Southwest than Atlanta.
In the past 18 months, Southwest had even met with Federal Aviation Administration officials to explore coming to Atlanta. Given the lack of open gates at Hartsfield-Jackson, Southwest had few options — to help support a second passenger airport in Gwinnett County — or to acquire AirTran.
“Delta and AirTran used each other to get the best deal they could at the airport,” said someone familiar with the negotiations. “But when Delta started throwing AirTran under the bus, AirTran had an alternative. AirTran had outsmarted Delta.”
That said, Southwest probably held off buying AirTran until the Orlando, Fla.-based discount carrier had signed a new seven-year lease agreement with Hartsfield-Jackson, guaranteeing the use of at least 32 gates. That lease was signed Sept. 13, at a time when Southwest and AirTran were in intense negotiations.
“The real value was AirTran’s lease at Hartsfield,” said one industry observer. “AirTran would have never gotten $1.4 billion until they got that lease renewed.”
Don Chapman, an AirTran director who was one of the original board members of predecessor ValuJet, credited his airline’s executive team for being able to respond to all the competitive challenges it has faced.
“Personally, it’s been part of the American dream, building a business where the management of AirTran, through good times and bad times, has taken care of its people, and its people have taken care of its passengers,” Chapman said. “The people who worked so hard as members of the AirTran team are what we are proudest of as we reach this new milestone.”
But a former AirTran employee described the airline as “only one mistake away” from losing the battle to Delta.
Tad Hutcheson, AirTran’s vice president of marketing and sales, says AirTran was a strong competitor, “but Southwest is going to be an even stronger competitor because they have more financial resources, a very strong brand and legendary customer service.”
One person familiar with Southwest put it even more bluntly.
“Delta is going to feel pain like never before,” he said. “It is totally unavoidable.”
The real reason is that Southwest will “erode Delta’s pricing power” in the domestic market, where Delta already is at a disadvantage because of higher per-person operating costs.
Delta officials, however, argue that although they haven’t had to compete with Southwest in Atlanta, they do compete with it in other markets all over the country.
“If I were Delta, I would continue my strategy of dominating in the international market,” said Ken Bernhardt, chairman of the Atlanta Convention & Visitors Bureau and a marketing professor at Georgia State University’s J. Mack Robinson College of Business.
“This potentially could cause them to de-emphasize the domestic routes even more.”
Bernhardt summed up the deal this way: “I think it’s great for Atlanta and bad for Delta.”
Atlanta will win because Southwest will grow when it’s at Hartsfield-Jackson, offering Atlanta more travel options at cheaper prices. But that will put increased pressure on the fares Delta will be able to charge and make it harder for the hometown airline to make a profit.
People familiar with the historical dynamics between Delta and AirTran describe it as a David and Goliath story.
At first, Delta did not view ValuJet as a competitive threat. “They should have killed ValuJet out of the box,” said someone who has been close to AirTran.
When Delta realized that AirTran had turned into a worthy foe, it was too late, that person said.
In the late 1990s, AirTran was “content to live and let live” — Delta had the primary markets while AirTran had the secondary markets.
Then after 9/11, Delta decided to put “capacity in every single market we were in” believing they could put AirTran out of business.
AirTran responded by announcing daily service between Atlanta and Los Angeles causing Delta to lose millions. “That was the single biggest mistake Delta made,” said someone close to AirTran. “Now AirTran is in every major market out of Atlanta.”
Industry observers said Delta also miscalculated on the Southwest/AirTran deal. The Atlanta airline thought it had contained AirTran and had managed to protect Southwest from building a stronghold at Hartsfield.
“Southwest couldn’t get the gates. It would take them 20 years,” an industry leader said. “This was a quick way for them to get into a major market, the lowest-cost hub in the world. They bought their way into Hartsfield.”
Not everyone close to Delta believes this is a negative development.
“Having Southwest come in and operate out of Atlanta overall is a good thing,” said Ron Allen, who served as Delta’s CEO from 1987 to 1997. “If I were still running Delta, I would welcome this. What I learned at Delta when Eastern [Airlines] went out of business is that competition is good. Having two strong airlines was really good for Delta. It kept us on our toes.”