AirTran's Changing Competitive Position on the East Coast

AirTran Airways today announced new service to Charleston, South Carolina. AirTran will bring much-needed relief to the travelers of South Carolina who have had to endure Delta's high fares for many years. AirTran will offer two daily nonstop flights between Charleston and Atlanta, starting June 7, 2007. The service is indicative of one of AirTran's many survival strategies on the East Coast. With so many new jets coming online, AirTran has been trying to figure out how to place them, and the airline has developed a few different tactics that allows them to compete effectively against larger carriers. One strategy is simply a head-to-head fight with Delta in Atlanta. Since both airlines share a hub in Atlanta, they operate many of the same routes to/from the city. And in the past, Delta has been able to offer high fares because it had a monopoly on many routes to/from Atlanta, but AirTran's new competition, particularly to small or mid-sized markets relatively close to Atlanta, has lowered fares considerably. This is what is happening in Charleston. It's a city close to Atlanta that will benefit enormously from AirTran's connection opportunities, opportunities that many passengers have lacked because of Delta's high fares. AirTran has lowered fares substantially in other small markets around the Southeast that had previously been dominated by Delta including Pensacola, Mobile, Savannah, and Gulfport/Biloxi, and AirTran seems to have succeeded in gaining market share in these cities. They should be able to do the same in Charleston. By targeting markets that are smaller than ones typically targeted by low-cost carriers such as Southwest and JetBlue, AirTran has been able to avoid competition from other low-cost carriers in smaller markets while at the same time making an easy target of legacy carriers like Delta that charge high fares. This strategy has proved successful for AirTran in the past, and I predict that it will again prove successful for AirTran in the future. Other markets in South Carolina such as Colombia or Greenville/Spartanburg could probably support two daily AirTran flights, depending on fares and the amount of capacity Delta and other airlines add to compete with AirTran. When AirTran recently announced service to another small market, Newburgh, New York, Delta retaliated and added new service to the market simply to compete with AirTran. While due to the nature of the capacity additions (service on high-cost regional jets), Delta's new service likely won't have a major effect on AirTran's loads, it does demonstrate that Delta is willing to fight back when AirTran tries to take market share, which could make it more difficult for AirTran to enter markets that are Delta strongholds. If Delta retaliated by adding new flights on regional jets in a market Delta doesn't care about, think about the retaliation Delta could inflict on AirTran if AirTran expands into a Delta stronghold in the Southeast. So far, AirTran has survived, but AirTran has plenty of unserved markets in the Southeast because of a fear of Delta retaliation that could make the route unprofitable to operate.

But a head-to-head battle with Delta isn't AirTran's only tactic. AirTran is one of many airlines trying to take on JetBlue. Unlike other airlines, such as Delta's former Song brand, Southwest, Continental, US Airways, and others, AirTran has a reasonable chance of damaging JetBlue. Instead of trying to copy JetBlue with many attractive amenities and a hip style, AirTran has consistently offered lower fares than JetBlue's. And given that AirTran has the lowest cost structure in the industry, (I cannot overemphasize this point) AirTran is still able to break even or make a profit, even with load factors under 70%. AirTran has done a remarkable job of taking away market share from JetBlue in markets that they once dominated. In Rochester, for example, AirTran has expanded to offer nonstop service to Tampa, Orlando, and Fort Lauderdale in addition to flights to AirTran's Atlanta hub. JetBlue only offers service from Rochester to New York City, and hasn't added Orlando flights like they have in Syracuse (where AirTran doesn't fly) because AirTran has forced prices down so much on Florida flights. AirTran is not only trying to target smaller markets that are dominated by Delta's regional jets (or those of their outside regional jet contractors like SkyWest), but they are also trying to target mid-sized markets that are inhabited and in some cases dominated specifically by JetBlue. AirTran has tried to battle JetBlue in as many markets as possible, and AirTran will continue to announce new routes from the Northeast, especially from smaller markets such as Newburgh or White Plains. AirTran may add further service to upstate New York, including service to Albany or Syracuse. But AirTran may also soon enter another market that JetBlue is dominant in. With great fanfare, JetBlue started service to Portland, Maine last year with four daily flights on large A320 aircraft. With 600 seats a day in a mid-sized market, JetBlue made a large commitment and took a big risk in Portland, but so far their service has been a hit with passengers. However, other low-cost airlines like AirTran may be able to lower fares further and offer more convenient service to customers.

There are rumors, and I want to stress that these are only rumors, but ones that are plausible nonetheless, that AirTran is considering adding service between Portland, Maine and Atlanta as well as at least one Florida destination (likely Orlando), which the company will announce within the coming weeks. Portland service would make a lot of sense for AirTran. It would allow AirTran to disrupt JetBlue's low-fare monopoly in Portland, and it would also give the airline a foothold in a market that doesn't simply attract passengers from Maine, but also some from New Hampshire and to a lesser extent Massachusetts. Just over half of the passengers departing from Portland are bound for Florida, yet there is no nonstop service between Portland and Florida. AirTran could change that, because its 717 aircraft are small enough to allow AirTran to add at least one daily Orlando flight, and possibly service to Tampa and Fort Lauderdale as well. AirTran could profitably offer Portland customers lower fares and more convenient flights than what JetBlue is offering, or even what Southwest is offering from nearby Manchester. Portland would be a perfect AirTran destination, and even if the airline doesn't announce new service soon, it will eventually announce service because Portland is in danger of becoming a JetBlue stronghold, and AirTran wants to keep JetBlue on its toes, because the last thing AirTran wants is the ability for JetBlue to have pricing power and significant market share in a midsize, New England market. It would make it difficult for AirTran to then lower fares or raise fares when it needs to, and it could ensure JetBlue's profitability in Portland for years to come. While it's entirely uncertain whether Portland will become AirTran's newest city, I believe there's enough evidence to suggest that it's a definite possibility.

The third AirTran strategy that it uses against its East Coast competitors is its focus on Florida, which ties in to both of the earlier strategies. Because AirTran has such low costs, it can pass those savings onto leisure customers bound for Florida. Combined with AirTran's convenient nonstop service to many Florida cities, not just Orlando, from a variety of midsize and large markets in the East, it makes AirTran's flight offerings very attractive for vacationers. While JetBlue has been able to gain many customers through its use of innovative entertainment, AirTran consistently offers the lowest fares. AirTran doesn't necessarily offer the lowest fare on every flight to every city, but overall, AirTran's flights are cheaper than JetBlue's or Southwest's. AirTran will continue to focus on Florida in the coming years because it's an increasingly popular destination for vacationers. AirTran must be careful when it expands to Florida markets, that it targets flights carefully. A Tuesday flight between Milwaukee and Orlando probably won't make the airline much money, since the plane will likely be half-full. But a Sunday evening flight between the same two cities will probably make AirTran thousands of dollars. AirTran has too many daily flights when it should instead focus Florida flights on Thursdays through Mondays. If AirTran freed up more of its aircraft on Tuesdays and Wednesdays, it could conduct additional maintenance and add flights between major business destinations, instead of simply flying those aircraft on a daily basis when it's unprofitable to do so. Outside of that issue, AirTran has done a good job pricing, targeting, and timing flights to Florida, and Florida will become an increasingly important for destination for AirTran as it continues to battle with JetBlue.

AirTran is well-positioned to deal with competition both from legacy carriers such as Delta, but also from low-cost competitors such as JetBlue. AirTran will continue to face challenges in the coming years, as it tries to increase its yields as well as its load factors, but overall the airline has positioned itself well, and is adding a reasonable balance of transcontinental flights to larger cities like Seattle/Tacoma and San Diego as well as short flights to smaller markets like Charleston. If the buyout of Midwest Airlines goes through, it will mean even more benefits for AirTran, but if it doesn't go through, AirTran will still be a competitive airline nonetheless. With Delta and JetBlue diversifying themselves and adding new flights to avoid competition from AirTran, AirTran appears to be making headway against these two giants, but they still have a long way to go, considering they have dozens of new aircraft on order that need to find a home in their network, and that means AirTran will continue to expand its timetable for many years to come.