Delta, Southwest Shares Flat on Merger

While AirTran shares rose 61% after a merger announcement, the impact on Delta and Southwest is tougher to determine.
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ATLANTA (TheStreet) -- Shares in AirTran (AAI) were big winners after the carrier's acquisition by Southwest (LUV) - Get Report was announced. But analysts are debating what the deal means to shares of Southwest and Delta (DAL) - Get Report, the two other carriers that are most heavily impacted.

On Monday, AirTran shares rose 61%, with most of the rise occurring in trading before the opening bell. Shares in Southwest rose 8%. Shares in Delta lost 2%.

In early trading Tuesday, share prices for all three carriers were flat.

Despite the decline in Delta shares, JP Morgan analyst Jamie Baker noted that the list of 37 cities served by Southwest, and not already served by AirTran, represents about 10% of Delta's Atlanta demand base and less than 1% of Delta system revenues. Southwest may choose to add service in some of those cities, but "it is difficult for us to work up a sweat on this topic," Baker wrote in a report on Tuesday.

However, Stifel Nicolaus analyst Hunter Keay wrote Tuesday that the acquisition gives Southwest a 22% share in Atlanta. He said that Delta co-exists with AirTran, which has gradually reduced the share of its capacity from 90% at the start of the decade to 50% today. But Southwest is likely to target Atlanta as a growth market. "We believe this could be problematic for Delta," Keay said.

Delta, which offers 1,000 daily Atlanta departures to 212 destinations, said it is not worried. "Delta successfully competes with these

two airlines in most of the major domestic markets we serve," said Delta spokesman Kent Landers. "Customers choose Delta for our full service product offering and because no low cost carrier can match the global access we offer to more than 350 cities on six continents."

Southwest said it will have one-time costs of $300 million to $500 million and will gain annual synergies in excess of $400 million by 2013. Avondale Partners analyst Bob McAdoo called the deal a strong positive for Southwest, which will be able to expand into the East where it "has only modest penetration and to make that entrance in a relatively smooth, efficient manner." He rates Southwest market outperform.

Meanwhile, Soleil Securities analyst James Higgins wrote Tuesday that he is raising his target price for Southwest to $14 from $12 because he now estimates 2013 earnings of $1.30 a share. But he retains a hold on the shares, as does Keay. Higgins said the acquisition will not "substantially increase Southwest's longer-term growth rate after the merger benefits are realized, and in the meantime we expect significant deceleration in EPS gains."

-- Written by Ted Reed in Charlotte, N.C.

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Ted Reed

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