Low-cost United States carrier Southwest Airlines has moved to acquire smaller rival AirTran in a deal worth approximately $1.4 billion.

In a move designed to position the Texas-based airline to take on more established giants in overseas and east coast markets, the deal will see Southwest begin to serve 38 new cities.

These will include destinations in Mexico and the Caribbean.

“The acquisition of AirTran represents a unique opportunity to grow Southwest Airlines’ presence in key markets we do not yet serve and takes a significant step towards positioning us for future growth,” said Southwest Airlines president Gary Kelly.

Combined the discount airlines carried roughly 125 million passengers last year and flew 685 jets. In contrast Delta Air Lines, currently the United States’ largest carrier, served 109 million passengers with a fleet of 740 jets.

Delta Air Lines is, however, likely to be superseded in the coming weeks as the final stages of the merger between Continental and United Airlines are completed.

Southwest – which is presently focused on the west coast of the United States - would see its biggest immediate gains from the AirTran merger, stretching farther east.

Key targets would include Atlanta - home of the busiest airport in the United States – while greater access to key east coast markets in Boston, New York, Baltimore and Washington would also be a priority.

Consumer groups have, however, warned the merger of two lost-cost carriers may reduce competition, forcing prices upward.

[stock]LUV|1m|right|Wall Street shows its approval[/stock]

Merger Deal

At Southwest Airlines’ closing stock price of $12.28 on September 24th the transaction values AirTran common stock at $7.69 per share, or approximately $1.4 billion in the aggregate, including AirTran’s outstanding convertible notes.

This represents a premium of 69 per cent over the September 24th closing price of AirTran stock.

Under the agreement, each share of AirTran common stock will be exchanged for $3.75 in cash and 0.321 shares of Southwest Airlines’ common stock.

Including the existing AirTran net indebtedness and capitalized aircraft operating leases, the transaction value is approximately $3.4 billion.

Merger Partners

AirTran revenues and operating income, excluding special items, for the twelve months ending June 30th 2010 were $2.5 billion and $128 million, respectively.

Over the same period Southwest Airlines revenues and operating income, excluding special items were $11.2 billion and $843 million, respectively.

Based on current operations, the combined organisation would have nearly 43,000 employees.

In addition, the combined carriers’ all-Boeing fleet would include 401 Boeing 737-700s, 173 Boeing 737-300s, 25 Boeing 737-500s, and 86 Boeing 717s, with an average age of approximately ten years, one of the youngest fleets in the industry.