Two of the nation's three largest low-fare carriers are set to square off at Milwaukee's General Mitchell International Airport.

Southwest ( LUV) announced Wednesday it will begin service late this year to Milwaukee, where AirTran ( AAI) has been growing rapidly and is now the airport's second largest carrier with a 20% market share.

Southwest said it will begin Milwaukee service late this year with multiple, unspecified destinations. The move will enable the carrier, which already operates at Chicago Midway, to "better serve the Northern Chicago Area," CEO Gary Kelly said in a prepared statement.

At one time, such announcements were feared by incumbent carriers because of Southwest's low fares, low costs and efficient operations. But now, low fares are more widespread, Southwest's costs are rising, and the two other major low-fare carriers, AirTran and JetBlue ( JBLU), offer more amenities -- an imbalance Southwest is moving to correct.

"I feel pretty good about our ability to compete," says Kevin Healy, AirTran senior vice president of marketing and planning. "We've done it before and now, as opposed to entering a market they are in, they are coming to a market that we have been building for several years."

AirTran has been growing particularly rapidly at Milwaukee since it dropped out of a bidding war for hometown carrier Midwest Airlines in 2007, trumped by a $450 million bid from Northwest Airlines and private equity firm TPG.

AirTran said Wednesday it will add gates at Milwaukee and offer 34 daily departures, representing a 57% growth rate since last year. On Thursday, it will add flights to Denver and St. Louis, after recently adding Branson, Mo. and Minneapolis. Existing destinations include Atlanta, Baltimore, New York LaGuardia, Washington National, Denver, four Florida cities and five West Coast cities.

While Southwest did not say what cities it will serve from Milwaukee, its five largest airports include Las Vegas, Chicago Midway, Phoenix, Baltimore and Houston.

Meanwhile, Midwest is shrinking in the face of the troubled economy and competition from AirTran. When AirTran first bid for the carrier in December 2006, Midwest carried about 50% of the airport traffic, including about 12% on its regional subsidiary, according to airport statistics. In March, Midwest carried about a third of the traffic, split nearly evenly between the mainline carrier and two independent regional affiliates.

"For years, Southwest wouldn't compete with Midwest," Healy says. "Southwest was successful because they managed expectations (for amenities) to the lowest level, while Midwest had a quality product and a reputation for the best in-flight service. They were at the two extremes of the spectrum. But that Midwest is largely gone."

Now, General Mitchell Field is positioned to emerge as a low-fare airport for the northern Chicago area. "The airport folks have been trying to build the Northern Illinois market, and this will bring even greater attention, and what's good for Milwaukee is good for AirTran," Healy said.

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