Southwest Airlines Co. (LUV) on Monday announced plans to buy discount rival AirTran Holdings Inc. (AAI) in a move that would revive its stalled international expansion and intensify pressure on network carriers on the U.S. East Coast.

The definitive agreement marks the first combination between major U.S. low-cost carriers and marks only the second large acquisition by Southwest, the country's largest carrier of domestic passengers.

In recent premarket action, AirTran was up 55% to $7.03, and Southwest was down 4.3% at $11.75.

Southwest's business model has changed in recent years as it focused more attention on larger cities and sought access to international markets and pacts with other airlines. However, growth has been trimmed during the recession, and some of Southwest's expansion efforts have faltered.

Acquiring AirTran would provide access to the Caribbean and Mexico and provide a tougher challenge for network carriers, notably those such as Delta Air Lines Inc. (DAL) and US Airways Group Inc. (LCC) with a large East Coast presence.

The announcement comes days before United Airlines parent UAL Corp. (UAUA) and Continental Airlines Inc. (CAL) are due to close on their merger creating the world's largest airline.

Southwest lost out earlier this year in a bid to acquire Denver-based Frontier Airlines--itself once seen as a merger partner for AirTran--in part because of labor issues.

The airlines overlap in a number of cities, notably in the northeast and in Florida, though they said this represents less than 1% of total domestic industry capacity. A deal would require approval from competition authorities.

Under the proposed deal, AirTran shareholders will receive $3.75 in cash and 0.321 Southwest share for each share of AirTran, valuing it at $7.69 a share, a 69% premium to Friday's closing price. There's a bracket around the per-share price at $7.25 to $7.75.

After the deal closes, expected in the first half of next year, AirTran holders would have about 7% of the combined company. Including AirTran's net debt and capitalized aircraft-operating leases, the transaction is valued at about $3.4 billion.

Southwest Chairman and Chief Executive Gary C. Kelly said the move gives the company "significant opportunities" in Atlanta--the largest U.S. market the company currently doesn't serve--and expands its presence in other major airports including New York LaGuardia, Boston and Baltimore/Washington, as well as gaining entry to many smaller domestic cities.

The airline expects the acquisition to add to earnings in the first year, after one-time acquisition-related costs of $300 million to $500 million. The company sees cost savings of more than $400 million by 2013.

-By Doug Cameron and Tess Stynes, Dow Jones Newswires; 312-750-4135; doug.cameron@dowjones.com
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