Southwest Airlines said Monday it will buy AirTran for about $1.42 billion. The move will put Southwest in head-to-head competition with Delta Air Lines in Delta's home base of Atlanta.
The buyout, funded mostly with debt, will also give Southwest a bigger slice of the market in cities like Boston and New York, where it has been expanding.
Southwest , based in Dallas, carries more passengers than any other airline in the U.S. Besides its base in Atlanta, AirTran has hubs in Milwaukee and Orlando.
The announcement continues the airline industry's move to consolidate. Continental Airlines and United Airlines parent UAL will formally combine at the end of this week and become the world's largest, toppling Delta. Delta claimed that spot when it acquired Northwest Airlines two years ago.
Southwest tried unsuccessfully last year to buy Frontier Airlines out of bankruptcy. Republic Airways Holdings won the auction for Frontier last August, buying the Denver-based carrier for almost $108.8 million.
Southwest's acquisition of AirTran is expected to close in the first half of next year. It requires both regulatory and shareholder approval. The airlines expect to fully blend their operations in 2012.
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 it's closing price of $4.55.
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.
In April, AirTran Holdings CEO Roberto Fornaro signaled his interest in making a deal, saying the airline would consider a combination with another carrier if approached and if such a deal made sense for the company and shareholders.
But when asked by The Associated Press who might be a potential suitor for AirTran, Fornaro said, "I'm not sure that we're necessarily a natural fit to be gobbled up by somebody else."