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Shrinking Subsidies: Can Southwest Serve Mid-Tier Cities Profitably?

Every government from the smallest municipality on up is facing a budget crisis of monumental proportions, and that means spending cuts are coming. These cuts may hurt airlines that take government subsidies at airports, but it also may help airlines in general by keeping unnecessary capacity out of the skies. This will be most interesting for Southwest (LUV), which is about to swallow one of the larger subsidy-takers in the US in AirTran (AAI).

AirTran is well known for going into small cities and accepting subsidies for flights. One of the more absurd ones out there is the State of Kansas subsidy for $5 million per year to keep low cost carrier flights in Wichita. That's now in danger as the state looks to figure out a way to cut back. In fact, the State's House has voted to kick the program to the curb.

The "Fair Fares" program was created to bring low fare service to Wichita and it worked. Both Frontier and AirTran fly there these days. But there's a big problem. These subsidies are usually supposed to simply be a way to get the airline to come in and learn what it's missing by not serving the city. Eventually, the airline should be able to support itself. In this case, the State has had to continue funding the program year-in and year-out for the last decade or so in order to keep the airlines from leaving.

Now, the budget in the state is in bad shape, and the House has voted to stop funding the $5 million per year penalty. At this point, the airlines may very well walk away from the subsidy-less routes because the flights don't make sense economically anymore, but I would argue that if they never made economic sense in the first place, they shouldn't be there. So this is a good thing.

But in this case, it's unclear what will actually happen. AirTran chases subsidies and has no problem walking away when they dry up. The airline has done this in the past and would undoubtedly do it again. But AirTran isn't going to be AirTran for very long. The airline will soon be taken over by Southwest and that changes things.

Will Southwest and its massive network be able to support a flight into Wichita on its own? Clearly the airline hasn't felt it could support service there up until now, because it hasn't gone into Wichita yet. But a few things change with the AirTran merger. The biggest change of all is the introduction of an army of smaller airplanes that it will inherit. Wichita might be the type of route that works on the smaller airplane that Southwest didn't have enough of until now.

It's also possible that AirTran alone couldn't support the flight, but Southwest's big network of potential connections could. There are a lot of mid-size cities around the country facing these same prospects right now. Will Southwest figure out how to profitably serve them or will the airline walk away?

Southwest has never been one for sustained subsidies to keep a failing market propped up, so unless the airline changes the way it does business, this subsidy's disappearance may not matter. But the real question is whether or not Southwest can serve this market profitably without the subsidy. Now that it's gone, we'll quickly get an idea of how, or if, it can.

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Photo via Southwest Airlines
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