On Sunday, Southwest Airlines (NYSE:LUV) finally shut down its AirTran Airways subsidiary, more than four years after it announced plans to acquire AirTran. This marked another major milestone in the consolidation of the U.S. airline industry.
AirTran offered a unique take on the popular "low-cost carrier" model, competing mainly with Delta Air Lines (NYSE:DAL). AirTran's demise thus narrows the choices available for travelers. However, the combination of Southwest and AirTran creates offsetting benefits by creating a more viable national competitor to the big legacy carriers.
The AirTran model
Southwest Airlines pioneered the low-cost carrier model in the U.S. It has historically kept costs lower than competitors' by using a single fleet type (all Boeing 737s), avoiding congested and expensive major airports, operating a single-class service, focusing on point-to-point traffic, and keeping aircraft utilization high.
AirTran kept costs low despite ignoring many of these precepts. The carrier has flown both Boeing 717s and 737s for the past 10 years. AirTran also relied significantly on connecting traffic. It operated its main hub in Atlanta, which is routinely ranked as one of the busiest in the world due to Delta's massive hub there. Lastly, AirTran's planes all had business-class sections.
While AirTran certainly carried plenty of point-to-point traffic, particularly on its routes to Florida, its economic model relied primarily on a mix of low-yielding connecting leisure traffic and relatively high-yielding business traffic. Essentially, this meant that it was using its low cost structure to beat Delta at its own game.
A union of low-cost carriers
Over the past decade, as oil prices rose and legacy carriers merged and restructured in order to cut costs, it became increasingly difficult for Southwest Airlines to meet its profit goals with the same old strategies. Avoiding big airports meant missing out on lucrative business traffic.
In 2009, Southwest tried to buy Frontier Airlines in bankruptcy court in order to quickly build up a presence in Denver -- a market it had only entered in 2006. After that bid failed, Southwest turned its eye to AirTran, due in part to its large footprint in Atlanta: the last major U.S. metro area with no Southwest Airlines service.
The AirTran acquisition also gave Southwest access to Reagan National Airport near Washington, D.C., and additional slots at LaGuardia Airport in New York. This has allowed it to expand at two popular but congested airports that are preferred by high-fare business travelers.
Transitioning to a hybrid business model
Buying one of the largest competing low-cost carriers thus has been key to Southwest's transition to more of a "hybrid" business model in which it competes more actively for business travelers. By acquiring a large position in Atlanta and bulking up in New York, Washington, D.C., and a few other key cities, Southwest has become more attractive to corporate customers.
In Atlanta specifically, Southwest has cut capacity significantly, eliminating marginal routes to smaller cities. By this summer, Southwest and AirTran were offering only 151 daily departures from Atlanta, down from more than 200 around the time of the merger.
However, the remaining flights were retimed late last year to optimize the schedule for local traffic, rather than low-yielding connecting traffic. The results have been dramatic.
For the second quarter, the Department of Transportation reported that the average domestic airfare in Atlanta rose 11.3% year over year. It was the only major metro area airport to log a double-digit increase. In addition to helping Southwest, this has also been a big windfall for market leader Delta.
A legacy carrier alternative
These fare increases have made AirTran's disappearance painful for some Atlanta-area travelers. Whereas AirTran was a true low-cost alternative to hometown giant Delta, Southwest Airlines seems to be pivoting to more of a business-traveler focus. Its new schedule in Atlanta was designed as a tool to attract higher-paying customers.
However, Southwest's acquisition of AirTran has been good for travelers on the whole. While it is still less than half the size of the three big legacy carriers, Southwest Airlines has enough scale in the domestic market to compete vigorously with them.
Some people might look at Southwest's rising fares and wonder whether customers are really benefiting from its increased size. But Southwest has maintained its no-bag-fee and no-change-fee policies -- unlike AirTran. Southwest's anti-fee mentality is one of the few things preventing a barrage of new fees among other major U.S. carriers. That's something all air travelers can be thankful for.
Adam Levine-Weinberg owns shares of Boeing. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.