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Southwest Airlines Co. (LUV) on Monday announced plans to buy discount rival AirTran Holdings Inc. (AAI) for about $1.4 billion in cash and stock, a move that would revive its growth strategy and intensify pressure on network carriers on the U.S. East Coast.

The agreed-upon deal promises to be transformational for Southwest, the nation's largest domestic carrier, by providing access to the large Atlanta business-travel market for the first time, as well as potential expansion to smaller cities and international destinations.

"This absolutely changes things," said Gary Kelly, Southwest's chairman and chief executive officer, on a call with analysts.

The definitive agreement marks the first combination between major U.S. low-cost carriers and is only the second large acquisition by Southwest after it failed to capture Frontier Airlines out of bankruptcy protection last year. It bought Morris Air in 1993.

Kelly said that Southwest had eyed AirTran on a number of previous occasions and that he had called AirTran CEO Bob Fornaro "in the spring" to discuss a deal.

Kelly said the enlarged Southwest would retain its distinct existing brand, avoiding bag fees and offering a single-class service. The airline said it would continue to monitor a path that has won market share but cost revenue as rivals focused on introducing a range of ancillary charges. "This fits in beautifully with the strategy we've laid out, probably for the next decade," he said.

Southwest said it would take two years to integrate the airlines, though they have to navigate meshing contracts from both carriers' unionized work forces. Southwest has yet to take the plan to employees--80% of its staff is unionized, compared with 50% at AirTran. The deal also needs to be approved by shareholders and competition authorities.

Kelly said there was little overlap between the two networks, allowing Southwest to expand after halting its rapid growth during the recession. Atlanta--a key business market where AirTran competes with Delta Air Lines Inc. (DAL)--is one priority, as are smaller cities where it could use its target's Boeing 717s. Southwest plans to keep the 717s and utilize AirTran's orders for Boeing 737-700s, which mirror its own core fleet. Southwest is also looking at larger 737-800s that would be aimed at more congested airports.

Dallas-based Southwest has changed its focus in recent years, adding flights to larger cities with more-congested airports in a bid to secure more high-paying business traffic. It has also sought access to international markets and pacts with other airlines, though both projects have stumbled. Its rapid growth plans have been trimmed during the recession, but AirTran would add $2.5 billion in revenue to Southwest's $11.2 billion last year, as well as 138 aircraft to a fleet of 547.

AirTran also has lower costs than Southwest by most measures and would provide access to the Caribbean and Mexico and provide a tougher challenge for network carriers, notably those such as Delta 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 and AirTran serve 69 and 70 cities, respectively, but overlap in only 19 markets, and Kelly said he was confident it could secure antitrust approval without having to drop any services. Under the proposed deal, AirTran shareholders will receive $3.75 in cash and 0.321 Southwest share for each share of AirTran, valuing the company at $7.69 a share, a 69% premium to Friday's closing price.

AirTran shares were recently up 62% at $7.35, with Southwest 9.6% higher at $13.46. Delta shares were down 2.3% at $11.44. 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.

The airline expects the acquisition to add to be accretive net of charges after three years, with one-time acquisition-related costs of $300 million to $500 million. The company sees cost savings of more than $400 million by 2013. The agreement carries a $39 million break-up fee.

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

(Tess Stynes contributed to this article.)

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