No. 2 AirTran Grows Quietly in Shadow of No. 1 Southwest

Feb. 4 -- AirTran Airways is the nation's No. 2 discount airline, and it's not complaining.

The Orlando, Fla., airline has found a niche in mid-size markets such as Baltimore and Atlanta by offering routes and ticket prices that others can't match. It has agitated competitors such as low-cost leader Southwest Airlines as it has worked to expand its reach in places such as Chicago and Washington.

And now AirTran will spend the next month trying to persuade Midwest Airlines' shareholders to consent to its hostile buyout offer. If successful, AirTran would add more markets and become the top airline in Milwaukee.

Striving for No. 2 status has worked for businesses such as Avis Rent A Car and Caribou Coffee. And while AirTran executives acknowledge they're not coveting the top spots in the airline industry, they insist their strategy focuses on growing.

"Being No. 1 or No. 2 anywhere, we've never had a conversation about that," said Robert Fornaro, AirTran's president and chief operating officer. "There's no correlation between size and profitability. There's a correlation between efficiency and service and success."

He's quick to say the airline's formula puts it in an elite club of moneymakers, no matter its ranking. And that success where many others have failed has emboldened AirTran to come out of its shell somewhat by considering more new markets such as Phoenix and St. Louis.

Observers say AirTran's aggressiveness shows the mentality of a No. 2 making gains in its industry.

Smaller companies must move aggressively, faster and even unpredictably to compete with such industry giants as Starbucks and Southwest, said Ken G. Smith, professor of business strategy, management and organization at the University of Maryland, College Park's Robert H. Smith School of Business.

But Smith said if smaller companies don't have the size and resources of the top companies, they need to try to avoid direct competition.

AirTran is pursuing markets that are not in Southwest's portfolio, such as Milwaukee. But in this industry, an airline can't always avoid another carrier.

In Baltimore, for example, it has been able to compete with Southwest by flying to cities that the carrier doesn't directly serve, such as Boston and Atlanta. It also offers a few other things Southwest does not: a business class and assigned seats.

Industry consultant Robert Mann, president of R.W. Mann & Co. Inc., said AirTran -- No. 9 among all airlines in terms of passengers -- has adapted well to its role as the No. 2 discounter.

"Turning into Southwest wouldn't be the worst thing. It's just not their objective. They want to do a good job for customers, be profitable and stay off the competitive radar," Mann said.

A niche carrier

He said the carrier is like other small and medium-size airlines that seek to serve niches. These include Spirit Airlines, of Fort Lauderdale, Fla.; Allegiant Air, of Las Vegas, and Midwest of Milwaukee.

In the broader business world, Avis Rent A Car seemed proud to be second to Hertz when it debuted its "We Try Harder" marketing campaign in 1963.

And Target has long been second to Wal-Mart, although it has enjoyed better sales results of late compared with the world's largest retailer.

AirTran might be more like Caribou Coffee, the second-largest coffeehouse chain. It's growing rapidly, announcing deals with airports and Coca-Cola, but still trails Starbucks by thousands of stores.

Kathy Hollenhorst, Caribou's vice president of marketing, said the gourmet coffee chain benefited from Starbucks, which created deep demand for the product -- just as Southwest created demand in the discount airline market.

But both No. 2s have to act aggressively to identify markets with untapped potential and set themselves apart in increasingly crowded fields. Caribou's customers, she said, tell them the coffee is "smoother" and their shops are "less pretentious" than Starbucks.

'A little scrappier'

"Size-wise, with their aggressive growth it would nearly impossible to surpass them, but we can surpass them in customer experience," she said. "For a strong No. 2 like Caribou or AirTran, we have to differentiate ourselves, be a little scrappier."

AirTran customers would agree. Tom Dikeman, a salesman flying on AirTran this week from Baltimore to Boston, echoed other passengers who said the airline had "good prices," "good service" and flew directly to Boston, while Southwest does not.

AirTran was founded in 1993 and bought by the bigger ValuJet in 1997 after a fatal crash a year earlier nearly put ValuJet under. It took on AirTran's name, moved from Atlanta to Orlando, brought on new managers and made an investment in new planes and new markets to shed its damaged reputation.

Today, it continues to add flights in cities it serves from its hub in Atlanta. It now offers almost 700 daily flights to 52 cities and plans to add five more cities this year. Southwest, by comparison, serves 63 cities and has 3,200 daily flights.

AirTran uses only Boeing 717s and 737s, fuel-efficient midsize planes, to keep maintenance bills down. It aims to cut costs and improve efficiencies each year, a tough goal with fuel prices skyrocketing over the past few years.

The fuel bill contributed to a fourth-quarter loss of $3.3 million. But cost cuts elsewhere helped AirTran report income of $15.5 million for 2006. It will use the money to help pay for the 22 new fuel-efficient airplanes it took delivery of last year. It has dozens more on order, some of which could be used to replace a portion of Midwest's aging fleet if the merger proceeds.

Merger promoted

AirTran is determined to make the merger happen because it would gain more than some extra airports, said Fornaro, the company president. It would gain a new hub in Milwaukee, which would take pressure off Atlanta, the nation's busiest airport and often the one with the most delays.

In Milwaukee, he sees another Baltimore. Baltimore-Washington International Thurgood Marshall Airport saw fares drop and passenger numbers jump after 2001 when Southwest began expanding and AirTran launched service.

Midwest has won over customers with roomy seats and cookies baked aboard each plane -- something AirTran said it would maintain. But customers would defect to a new rival that offers lower fares, said Marisa E. Thompson, an analyst for independent research firm Morningstar.com.

"Eventually, a low-cost carrier will move in and [Midwest] will have to abandon the premium strategy because only a handful of people will be willing to pay if they have a choice," she said.

Discounters are the fastest- growing segment of the industry, and merging is a way for smaller carriers to compete, said David Swierenga, an airline consultant and economist. Airlines seeking mergers, however, are often criticized for trying to force together divergent cultures and work forces and failing to realize promised efficiencies.

US Airways withdrew its hostile bid to merge with Delta Air Lines last week after creditors said Delta would be better off emerging from bankruptcy alone. Midwest officials also say they would rather try to grow as an independent airline.

Conflicts likely

AirTran says it's not shying away from the Midwest merger -- and it's likely to face other conflicts as it continues to grow.

It's already had one recent high- profile clash with Southwest. When AirTran sought to take over gates abandoned by ATA Airlines at Chicago Midway in 2004, Southwest stepped in. It had the means to outbid AirTran and now controls about 73 percent of the airport's traffic to AirTran's 7 percent.

Some analysts thought, however, that it was at least in part to stunt competition from AirTran that made Southwest pursue the gates. Analysts said Southwest also may have launched service at Washington's Dulles International Airport last year to keep the likes of AirTran and fellow discounter JetBlue Airways from growing rapidly there.

In that case, AirTran seemed content to just add a few flights from Dulles. However, Smith, the professor, says the airline may not always be content not to be No. 1.

"Once AirTran builds the scale and scope economies -- moves to No. 2 in more significant markets -- it may then be able to more formally engage Southwest because it can then compete on costs. At this point, AirTran needs to be the more aggressive competitor if it is to dethrone the leader," Smith said.

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