AirTran Holdings (NYSE:AAI) is spreading its wings in the Windy City, although heady competition and stubbornly high fuel prices may make the expansion more painful than profitable, at least through 2005.
As ATA Holdings entered bankruptcy, AirTran swooped in and inked a $90 million agreement to take over the troubled company's operations at Chicago's Midway airport. The deal includes arrival and departure slots at New York's LaGuardia Airport and Ronald Reagan Washington National Airport in Washington, D.C., according to The Associated Press.
In moving into Midway, the carrier appears to have raised the hackles of discount airline granddaddy Southwest Airlines (NYSE:LUV). Even as AirTran closed in on the new gates, Southwest disclosed that it would step up operations at the Chicago airport. For its part, AirTran remained sanguine about the competition and expressed confidence that its lean operating model would allow it to achieve profitability at Midway.
While AirTran does enjoy favorable lease terms on its aircraft and boasts a young fleet of Boeing (NYSE:BA) planes, it appears vulnerable with respect to oil prices. According to its most recent quarterly filing, AirTran has contracts for just 13.2% of its fuel needs in 2005, and those arrangements limit its average fuel price to $1.07 per gallon, or the equivalent of nearly $45 per barrel. Southwest, meanwhile, is in the enviable position of having locked in 80% of its fuel costs for 2005 at $25 a barrel.
With the Department of Energy projecting that oil prices will average $47 per barrel in 2005, AirTran looks to be flying into some significant headwinds. Southwest no doubt will capitalize on this situation. In the near term at least, AirTran may find that Chicago isn't its kind of town.
Fool contributor Brian Gorman is a freelance writer living in Chicago. He does not own shares of any companies mentioned here.
