ATA Holdings

(ATAHQ.PK)

assets are proving attractive to rivals, who appear set to bid on them. But scooping up all or part of the carrier could prove risky.

Since the parent company of ATA Airlines filed for Chapter 11 bankruptcy protection in October, industry attention has focused as much on the 14 gates it uses at Chicago Midway International Airport as the simple fate of the airline.

So far, the company that's been most transparent about its intentions is

AirTran Holdings

(AAI)

. It reached a $90 million deal to take over the Midway gates, along with hard-to-get time slots at New York's LaGuardia Airport and Ronald Reagan Washington National Airport. Under the deal, AirTran would rely upon ATA's Boeing 737-800 jets during a six-month transition period.

That deal would render ATA a leaner airline reliant upon commercial flights from its Indianapolis hub, its traditional charter business and its Chicago Express regional flights.

But by filing for bankruptcy protection, ATA opened itself up to competing bids, and lawyers for low-cost carriers

Southwest Airlines

(LUV) - Get Report

and

America West Holdings

(AWA)

reportedly have told the bankruptcy court they will bid on all or part of the airline by a Dec. 10 deadline.

ATA plans to review bids on Dec. 13, and Judge Basil Lorch III plans to approve the winner at a Dec. 16 hearing. If another bid trumps AirTran's, the company will receive a $3.25 million termination fee.

Erica Keane, a spokeswoman for ATA, declined to comment on whether the airline has received other offers. "We're just moving forward with the AirTran agreement," she said.

Observers, however, speculate that America West could bid on a significantly larger portion of ATA's assets than AirTran. Carlo Bertolini, an America West spokesman, wouldn't say whether the airline would make a bid nor did he offer specifics.

"We've publicly affirmed we may have an interest in ATA," he said. "The most important thing we've tried to underscore is that we wouldn't be doing anything that doesn't make sense for our stakeholders, which means our employees, customers and stockholders."

By picking up ATA's Midway gates, another airline would gain or increase access to travelers in downtown Chicago. Although smaller than the more recently constructed O'Hare airport, Midway is usually easier and faster to reach from the city's center.

Southwest already has the largest Midway presence with 19 gates, but in the wake of the ATA bankruptcy, Southwest's chief executive, Gary Kelly, said the airport had become the company's No. 1 priority. The airline has unveiled plans to beef up its Midway flight schedule early next year and has expressed interest in adding six or seven gates to its total.

America West doesn't fly out of Midway, although it has flights to and from O'Hare, while AirTran operates one gate at Midway and plans to add a second in January, independent of the ATA deal.

"Chicago ranks as one of the top cities in the country, so having access to that market is important, especially for an airline like America West," said Helane Becker, airline analyst at The Benchmark Company, a New York-based brokerage. "They've been looking at a midcontinent hub for a while." (The Benchmark Company neither does nor seeks to do business with companies its analysts cover.)

AirTran's deal with ATA would significantly boost its Midway presence but give it roughly six months when it can fly ATA's Boeing 737-800 jets while it makes a transition to its own smaller 717s. "It gives them a way to get in the market in smaller increments," she said.

But developing a big Midway presence would expose either AirTran or America West to the competitive wrath of Southwest, which logged a rare profit in the industry's disastrous third quarter and possesses a formidable balance sheet.

"Increasing America West's Southwest exposure seems like a bad idea to us -- America West already has a lot of exposure at Phoenix and Las Vegas," wrote UBS analyst Robert Ashcroft in a research note last week, adding that AirTran underestimates the pain Southwest will impose. (UBS does and seeks to do business with companies covered in its research reports.)

One industry executive said taking on Southwest in a stronghold like Midway is a risky bet for any carrier, especially at a time of sky-high fuel prices.

If Southwest picks up more Midway gates, it could mean increased cross-town competition for two big legacy carriers:

UAL's

(UALAQ.OB)

United Airlines and

AMR's

(AMR)

American Airlines both use O'Hare as a key hub.

Any deal would require approval from Chicago's Department of Aviation, which controls the Midway gates; the Air Transportation Stabilization Board, a federal agency that guaranteed loans to ATA; and the Indiana Transportation Finance Authority, which is providing the company with bankruptcy financing.

Chicago officials have expressed concern about how a restructuring might affect ATA employees, and that might give an advantage to a bid from America West, believed to be considering acquiring more of the company than just gates and time slots.

Still, America West would face risks taking on new employees, according to Ashcroft at UBS.

"The last thing America West needs is the challenge of integrating ATA employees into its workforce and the additional capacity (as well as new flight type) of ATA aircraft," the analyst wrote. "America West apparently also covets ATA's ETOPS certification (a permit to fly long-range overwater operations with twin-engine aircraft). This is something America West can get for itself, but it takes time. We don't believe fast ETOPS certification (assuming it's transferable) is a sufficient reason for what we think is substantial risk. If America West makes and wins a bid for ATA, we would likely view that as a big negative unless it was more cleverly fashioned than we can currently imagine."

Ashcroft is not necessarily sanguine on the AirTran agreement, either. "We think AirTran's bid is a better idea than America West's mooted bid, but not by much," he wrote. "AirTran is seeking shelter from the storm: AirTran needs a home for 22 new aircraft in 2005 at a time when

Delta Air Lines

(DAL) - Get Report

is increasing flights in Atlanta (AirTran's main hub) and AMR is increasing Dallas service (where AirTran recently established a small base). ATA's Midway operations are likely to be more profitable plugged into AirTran's system using AirTran's smaller aircraft, and we like the fact AirTran won't integrate ATA aircraft or personnel long-term ... However, we think AirTran underestimates the downside risk from contracting with ATA in the interim."

So what's the best possible outcome?

The AirTran deal would prove beneficial for the troubled airline industry in general, said Becker at The Benchmark Company. That's because AirTran would move flights at ATA's Midway's gates to smaller planes, thus reducing capacity.

Ashcroft posits another solution, involving multiple bidders. "We think the prudent thing for AirTran is to reach an agreement giving seven Midway gates to Southwest ... Fewer gates

for AirTran would reduce/eliminate the need for AirTran to contract with ATA, a good thing we think. We believe an eight-to-ten-gate Midway operation would provide AirTran with sufficient shelter from the storm in 2005 while exposing it to less risk."