AirTran, Frontier Eye Bigger U.S. Role

Both see a day when they will provide domestic feeds for legacy carriers.
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The top executives from

AirTran Holdings

(AAI)

and

Frontier Airlines

(FRNT)

say they envision a day when their low-cost carriers will provide domestic feeds for legacy operators, whose primary role will be international flying.

"I believe that a really good role for AirTran to play in the domestic industry will be ... as a domestic partner," the company's CEO Joe Leonard said at the J.P. Morgan aviation conference on Thursday. "These legacy carriers will not be everything to everybody."

Leonard said he didn't expect industry consolidation this year, but noted that 2007 and 2008 "will be very active years." He said he isn't sure that mergers between legacy carriers and low-cost carriers will take place in the current cycle of airline financial losses or in the next one.

Meanwhile, Frontier CEO Jeff Potter said he has had discussions with various carriers about a variety of potential relationships, including code shares and marketing agreements. He didn't name the carriers.

"You will see an LCC

low-cost carrier work in some form or fashion with a legacy airline, much in the context that Joe Leonard described," Potter said. "I am somewhat surprised it hasn't been done at this point, but I do believe it's going to happen."

"Do I believe Frontier could play a role in that?" he continued. "Yes I do. We've had discussions on and off,

but for a variety of reasons they haven't come to fruition."

In the meantime, both executives said they are following strategies that will ensure their survival despite competition with far bigger carriers in their principal hubs -- Atlanta for AirTran and Denver for Frontier.

Leonard said that because

Delta Air Lines

(DALRQ)

has such a big hub in Atlanta, people don't realize that AirTran also has a substantial hub there with about 250 daily departures. He said he hopes that Delta successfully restructures in bankruptcy court and that it then follows a strategy designed to ensure profitability.

"We much prefer a Delta trying to make money than one that really doesn't care about making money," he said. "If they return to profitability, that's fine. If they take their lower costs and say 'let's try to kill

AirTran,' which is what they've been trying to do for the last seven years, they'll lose hundreds of millions of dollars."

As an example, Leonard said that three years ago, after AirTran announced twice-daily Atlanta-Los Angeles service, Delta responded by matching its fares. As a result, according to AirTran estimates, Delta turned a route that had been producing $30 million in annual profits to one that lost $80 million annually.

Earlier this month, in response to AirTran's announcement that it will begin Atlanta-Seattle service, a Delta market, Delta said it would fly regional jets on six AirTran routes from Orlando.

Leonard said he expects Delta to incur substantial losses on those routes as well, since the regional jets cost 16 cents a mile to operate, while AirTran's bigger jets have an operating cost of 9 cents a mile.

Potter said that Frontier competes effectively with

UAL's

(UAUA)

United Airlines, which also has a Denver hub but has higher costs. He said that when

Southwest Airlines

(LUV) - Get Report

began Denver service in January, launching 13 daily flights to Chicago, Las Vegas and Phoenix, Frontier was widely assumed to be in serious trouble, but that hasn't been the case.

Frontier responded to the incursion by boosting capacity by 22% in Southwest's three Denver routes. On those routes, round-trip fares fell by up to $100. At the same time, Frontier's traffic grew by 33%. And while revenue generated by Frontier's local passengers fell by 6%, revenue from its connecting passengers rose by 32%.

"It's better than we expected," Potter said. While the fares on the two carriers are the same, he said that Frontier has been able to retain and attract passengers because, unlike Southwest, it offers wider-than-normal seats, above-average seat pitch, advance seat assignments and onboard entertainment.