A low-fare battle for market share at Milwaukee’s General Mitchell International Airport is over, with Southwest Airlines emerging the clear winner.
Indianapolis-based Republic Airways Holdings Inc. acquired Denver-based Frontier Airlines out of bankruptcy protection in 2009 and absorbed Oak Creek-based Midwest Airlines under the Frontier brand in 2010. Republic pledged to add hundreds of jobs in Milwaukee and made Mitchell one of Frontier’s hubs.
However, after suffering heavy financial losses with Frontier, Republic in November announced it is considering plans to sell the airline. Since then, Frontier has announced it will cut about one-third of its 67 flights from Milwaukee. The airline is cutting several destinations served from Milwaukee, including Dallas/Fort Worth, Kansas City, Philadelphia, Minneapolis and Cleveland. The airline also has announced more than 600 Milwaukee job layoffs since September.
Meanwhile, one of Milwaukee’s other major carriers, Orlando-based AirTran Airways, was acquired by Southwest Airlines in May.
As a result of these changes, Southwest now stands as the dominant airline in Milwaukee — with few competitors on its routes.
For the past few years, passengers at Mitchell enjoyed low fares as Frontier, AirTran and Southwest vied for market share. The low fares that resulted from that fierce competition produced record passenger levels at Mitchell, which became one of the most competitive airports in the nation.
However, those days are likely over. Now that Southwest – with AirTran – has assumed a dominant market position at the airport, fares to and from Milwaukee are likely to rise. Passenger levels at the airport have already dipped from record levels in 2010.
Southwest is likely to be the dominant carrier in the Milwaukee market for the foreseeable future, but Mitchell is not an underserved airport, according to Michael Boyd, president of Colorado aviation consulting and research firm Boyd Group International Inc.
“I think it’s time to stop harking back to the days of Midwest Express,” Boyd said. “There’s not going to be another hub in Milwaukee.”
The competitive atmosphere at Mitchell over the past three years drew Southwest and AirTran into the Milwaukee market, said Bill Swelbar, a research engineer at the Massachusetts Institute of Technology’s International Center for Air Transportation.
“With (Frontier), Southwest and AirTran in the market, there was simply more service than the community could support profitably,” Swelbar said. “Milwaukee is closer to a really good one-airline town than it is to a three-airline town.”
Gaining a major airline like Southwest at an airport the size of Mitchell doesn’t entirely remove the sting from Frontier’s reductions, but it goes a long way to mitigating them, he said.
“Having Southwest in the market is the envy of every community that doesn’t have Southwest,” Swelbar said.
Milwaukee fliers were attached to Midwest because it was based in the area, but they should feel fortunate to have a financially stable carrier such as Southwest take over as the main player here, according to Jay Sorensen, president of IdeaWorksCompany.com LLC, an airline consulting firm in Shorewood.
“That’s not going to happen anymore—we’re not going to have an airline headquartered in Milwaukee,” Sorensen said. “Most airports in the country would absolutely be thrilled to have Southwest establish a focus point in their market.”
Fewer seats and routes
Southwest has taken on all of AirTran’s routes, but it probably won’t ramp up the number of seats and destinations from Milwaukee, said Robert Herbst, an independent airline industry consultant based in St. Louis and founder of Airlinefinancials.com.
That’s because the airline already has a hub nearby at Midway International Airport on the south side of Chicago.
“Southwest is not going to cannibalize the Midway operation by building up Milwaukee too much,” Herbst said.
As Southwest absorbs AirTran, it will keep most of both airlines’ destinations on the map, but reduce flight frequency and seat capacity, said Vaughn Cordle, managing partner at Airlineforecasts.com.
“When they consolidate with AirTran, there will be some shrinkage,” Cordle said. “As Frontier pulls out, Southwest can fill some of the void. To what degree, I don’t know.”
Some of the smaller cities such as Des Moines will probably get lost in the shuffle, since Frontier catered to many of those. Overall, destinations will decrease, Sorensen said.
“I think we’re close to hitting bottom (of route reductions),” he said. “If you were to take the flights that are operated now by Southwest and AirTran, if you were to add that up, I think that will be the minimum number of flights that Southwest will eventually operate.”
There will be about 25 percent fewer departures and 18 percent fewer seats out of Milwaukee from 2011 to 2012, Boyd said. Smaller destinations such as Appleton and Rhinelander will be reduced as Frontier pulls 1.1 million seats out of the Milwaukee market.
Because of the size of its network and economies of scale, Southwest should be able to fill any of the larger destinations dropped by Frontier, Cordle said.
The bottom line is that if an airline cannot make a profit on a new route, it won’t be adding the destination, Herbst said.
Fares will rise
With the reduced competition and rising costs for fuel, fares are likely to increase at Mitchell.
“Oil has been the ultimate driver of the capacity reductions in the U.S. since 2008,” Swelbar said.
In addition, fewer airlines to compete with on routes from Mitchell means Southwest’s fares will increase over time, Cordle said.
“Milwaukee has one of the lowest fare structures, particularly relative to Chicago,” Cordle said. “Less competition means fares go up.”
“The combination of competition between Southwest, AirTran and Frontier has created an environment that has provided tremendous benefit for Milwaukee-area consumers in that Milwaukee is among the leading markets in the country for low fares,” Sorensen said. “That simply won’t continue to exist because the marketplace will eventually take care of that and is taking care of that. Milwaukeeans have enjoyed a bargain for a couple of years.”
Southwest will raise its fares as much as the market will bear, Swelbar said.
“I think the one thing we have to remember in the U.S. domestic market is that if fares ever get too high, they invite competition,” he said. “If Southwest or another carrier were to price aggressively and arguably more than the consumer is willing to pay, I’m willing to bet there will be an alternative airline looking to fly the same service.”
Changes at Mitchell
Passenger numbers hit record highs during the recent competitive phase at Mitchell, with a traffic increase of more than 24 percent in 2010.
“For the past three years, particularly the past two, we’ve had a wonderful level of air service and competition here,” said Mitchell director Barry Bateman.
But that phase is over now. Two years ago, Frontier operated more than 90 flights per day out of Milwaukee. Now, it has 18, creating less traffic at the airport.
“With Frontier downsizing significantly, that level of competition is going away and we’re going to see airfares…rationalize. They were too low,” Bateman said. “It was a great run for the Milwaukee consumer, but we all know that was not sustainable.”
Other airlines already are beginning to pick up some of the Frontier slack, though routes to some smaller cities will be eliminated, Bateman said.
In April, American Airlines will add more seats to Dallas/Fort Worth, a destination Frontier recently dropped. In July, Delta Air Lines will start service to New York, both to LaGuardia Airport and John F. Kennedy International Airport.
As for other routes Bateman and his team have contacted all the other airlines and informed them of the impending changes at Mitchell, but razor thin profit margins make it an uphill battle to attract new flights.
Bateman expects a 10 to 15 percent decrease in traffic in 2012, resulting in lower airport revenues. As a result, he is deferring some planned projects such as bridges for perimeter roads and new maintenance buildings.
“We have to totally readjust our forecast now because we’re going to see a drop in traffic,” Bateman said. “The whole plan for the airport is based on flight activity and passenger activity.”
However, Bateman said Milwaukee is fortunate to have Southwest at Mitchell, because its strong brand is likely to attract travelers from throughout Wisconsin and northern Illinois.
Bateman said he is not sure yet what will happen with vacant airline ticket counters and gates. Frontier is obligated under its lease to pay rent at Mitchell through 2015.
What’s next?
As airlines across the country merge and reorganize, there aren’t many carriers that are likely to pick up routes from Milwaukee.
“We may see some other carriers stick their nose in here, such as a Jetblue, perhaps down the road a Spirit Airlines,” Sorensen said.
American Airlines and its subsidiary, American Eagle, do not plan to add new routes from Milwaukee anytime soon, particularly because the airline is in bankruptcy, said company spokesman Ed Martelle.
“Eagle is basically flying full, and we’re always looking over their shoulder to see how markets are developing and if it makes sense to put our jets in there,” Martelle said. “We’re always looking for opportunities, but at the moment, most of our fleet is pretty much spoken for.”
Southwest Airlines is waiting for approval from the Federal Aviation Administration to operate as a single carrier, and expects a Single Operating Certificate in March, said spokesman Brad Hawkins.
The first destination to roll over from AirTran to Southwest will be Seattle, on August 12.
“All of AirTran’s Seattle flights convert to Southwest, so that touches non-stop to Milwaukee and Atlanta,” Hawkins said. “Some of the first announced changes will be most evident in Milwaukee.”
Southwest expects the transition to take about two years, beginning in March.
Any further reduction in Frontier routes from Milwaukee remains to be seen. The airline did not respond to requests for comment.
Analysts agreed that Frontier is unlikely to survive on its own, but there are not a lot of possible buyers because of its dire financial state.
Republic Airways Holdings Inc. CEO Bryan Bedford told Bloomberg last month that Frontier has gone through significant restructuring and Republic hopes to find a private equity buyer.
“To be clear, we don’t know. We’ve had expressions of interest from both private equity and a few strategic partners who are at least interested in seeing what Frontier’s about, so premature to speculate on what that outcome is going to look like,” Bedford said.
Most of the company’s significant labor reductions have already been completed, Bedford said.
There are no immediate plans to change the sponsorships of the downtown Milwaukee Frontier Airlines Center and the Milwaukee Bucks’ Frontier Airlines Hometown Champions Club at the Bradley Center, according to spokespeople for those organizations.
