Southwest Airlines 2012 Annual Report Download - page 94

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and certain other aircraft parts and would, therefore, also be materially adversely impacted in the event of the
unavailability of, or a mechanical or regulatory issue associated with, engines and other parts.
The Company has historically entered into agreements with some of its co-brand, payment, and loyalty
partners that contain exclusivity aspects which place certain confidential restrictions on the Company from
entering into certain arrangements with other payment and loyalty partners. These arrangements generally extend
for the terms of the partnerships, none of which currently extend beyond May 2017. The Company believes the
financial benefits generated by the exclusivity aspects of these arrangements outweigh the risks involved with
such agreements.
2. AIRTRAN ACQUISITION AND RELATED MATTERS
AirTran Holdings, Inc.
As discussed in Note 1, on May 2, 2011, the Company acquired AirTran. AirTran Airways offers
scheduled airline services, using Boeing 717-200 aircraft and Boeing 737-700 aircraft, throughout the
United States and to select international locations. In July 2012, the Company announced that the Boeing
717-200 aircraft will be transitioned out of the Company’s fleet beginning in August 2013. See Note 8 for further
information. Approximately half of AirTran Airways’ flights originate or terminate at its largest base of
operation in Atlanta, Georgia. AirTran Airways also serves a number of markets with non-stop service from
smaller bases of operation in Baltimore, Maryland; Milwaukee, Wisconsin; and Orlando, Florida. The Company
believes the acquisition of AirTran positions it to respond better to the economic and competitive challenges of
the industry because, among other reasons: (i) it allows the Company to offer more low-fare destinations by
extending its network and diversifying into new markets, including significant opportunities to and from Atlanta,
the busiest airport in the United States and the largest domestic market Southwest previously did not serve, (ii) it
expands Southwest’s presence in slot-controlled markets (New York LaGuardia/Ronald Reagan Washington
National Airport), and (iii) it provides access to near-international leisure markets in the Caribbean and Mexico.
Equity transaction
Each share of AirTran Holdings common stock was exchanged for $3.75 in cash and 0.321 shares of
common stock of the Company. The common stock consideration was based on the average of the Company’s
closing common stock price for the 20 trading days ending April 27, 2011, which was $11.90. The transaction
valued AirTran Holdings common stock at approximately $7.57 per share, or $1.0 billion in the aggregate.
Stockholders of AirTran Holdings, including those holding restricted stock awards, received approximately
44 million shares of common stock of the Company, which represented approximately 5.6 percent of the
Company’s common shares outstanding. Additionally, holders of AirTran Holdings equity received cash of
$518 million, including $7 million in cash for the fair value of AirTran Holdings stock options and performance
share units. Including AirTran debt outstanding at the acquisition date (including convertible notes outstanding at
the acquisition date) and capitalized aircraft operating leases, the total transaction value was approximately
$3.2 billion. Subsequent to the acquisition date, a portion of the convertible notes previously held by AirTran
Holdings note holders were either converted or called by the Company for an aggregate of approximately seven
million shares of the Company’s common stock and $81 million in cash. The equity transaction did not contain
any contingent consideration arrangements.
Expenses related to the AirTran acquisition
The Company is expected to continue to incur substantial integration and transition expenses in connection
with the AirTran acquisition, including the necessary costs associated with integrating the operations of the two
companies. While the Company has assumed that a certain level of expenses will be incurred, there are many
factors that could affect the total amount or the timing of these expenses, and many of the expenses that will be
incurred are, by their nature, difficult to estimate. These expenses could, particularly in the near term, exceed the
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