TranStar Airlines said Wednesday that it is going out of business, the apparent loser of an intense, yearlong fare war with the much larger Continental Airlines.
TranStar, which is owned by profitable Southwest Airlines, will cease operations Aug. 9 and sell its assets, including 18 airplanes. Both Southwest and Continental will accept TranStar tickets after the airline folds.
TranStar, which is based in Houston, got its start as Muse Air, which attracted attention by prohibiting smoking on all flights. After suffering losses, it was acquired by Southwest in June, 1985, for $65 million in cash and notes.
Southwest changed the airline's name, introduced smoking and enlarged its 11-aircraft fleet. Under Southwest ownership, TranStar continued Muse's policy of providing such amenities as leather seats and mints for passengers as they left the airliner.
Last summer, Continental, owned by Texas Air, triggered a fare war when it initiated service from Houston's Hobby Airport, where TranStar is based. Fares from Houston to Los Angeles, for example, fell from $200 to $59, according to a TranStar spokesman.
At the same time, TranStar had trouble filling its planes. The spokesman said the airline has sold only half its seats this summer, compared to about 70% a year ago.
Herbert D. Kelleher, chairman and president of Southwest, said TranStar lost about $16 million during the first half of this year. TranStar has not had a monthly profit since September as a result of the competitive assault from Continental, he said.
Mark E. Daugherty, an airline analyst with Dean Witter Reynolds, a New York investment firm, said the fare war at Hobby Airport was "probably unprofitable for both companies" but that Continental could sustain losses for a longer period.
The price of Southwest shares rose $1.75 Wednesday, closing at $22.125 in composite trading on the New York Stock Exchange. The stock of Texas Air also went up, closing at $33.875 up $1.375.
TranStar, which employs about 1,300 people, is the second small air carrier in less than a week to say it will discontinue operations. Jet America Airlines, based in Long Beach, said it is dropping service to seven of the 11 cities it services, merging with its profitable sister airline, Alaska Airlines, because of heavy competition from major airlines.
Kelleher said Southwest had loaned TranStar between $15 million and $16 million to pay its bills during the past three or four months, but that he expects that amount to be repaid when TranStar is liquidated. He said Southwest, which is based in Dallas, might suffer a loss in the second quarter because of TranStar's problems.
Kelleher said he expects that all of TranStar's creditors will be repaid in full, but that he could not be certain until he calculates the exact value of TranStar's assets and liabilities.
He said TranStar has agreed to sell five McDonnell Douglas DC-9s and two McDonnell Douglas MD-80s to Continental for an undisclosed amount and is in talks with other carriers to sell the remainder of the planes.