Brighter skies with AirTran?: Midwest-TPG deal may prove a Pyrrhic victory

Aug 17, 2008 (Milwaukee Journal Sentinel - McClatchy-Tribune News Service via COMTEX) -- MEH | Quote | Chart | News | PowerRating -- Aug. 17--The announcement came during a hastily called late-night news conference a year ago Saturday.

AirTran Holdings Inc. had been outbid for control of Midwest Air Group Inc., the corporate parent of Midwest Airlines, by rivals TPG Capital and Northwest Airlines Corp.

At that time, many Midwest passengers and employees saw the sale to TPG/Northwest as a victory for the company and the Milwaukee area. Oak Creek-based Midwest, known for excellent customer service, would remain independent. And its plan for steady growth was endorsed by the new owners.

A year later, however, record increases in jet fuel prices -- coupled with an economic slowdown -- are forcing Midwest Air to cut both its work force and service by 40%.

The planned elimination of 1,200 jobs by September comes after the company cut 380 jobs this spring when it hired Utah-based SkyWest Airlines Inc. to handle all Midwest Connect regional carrier flights, a move designed to save money. Meanwhile, Midwest Airlines and Midwest Connect are eliminating nonstop service to 14 cities while reducing the number of daily flights to six other cities. Those changes will affect mostly leisure travelers, with Midwest focusing on more lucrative core business routes.

It invites the question: Would Midwest employees and customers been better off if AirTran's hostile takeover attempt had succeeded?

Perhaps not, in the short run, say airline industry consultants and analysts. Orlando-based AirTran, like other U.S. airlines, has been burned by high fuel prices and faces its own service and job cuts. Also, AirTran's cash reserves would have dwindled if Midwest had accepted its offer.

But AirTran, with triple the revenue of Midwest, a much larger network and more efficient aircraft, can better cope with higher fuel prices and other economic challenges, industry observers say.

"There's probably a good chance that Midwest, as part of AirTran, would have been better off," said Brian Nelson, an airline industry analyst with Chicago-based Morningstar Corp.

But, he said, "If they had acquired Midwest, and cash had gone out the door for that deal, (AirTran) may have had a different fate. It's unknowable."

Nearly every U.S. airline has been hit hard by high fuel prices and a slowing economy, Midwest spokesman Michael Brophy said.

"Our strategy is to make fundamental and structural changes to our airline to be better positioned to grow and be profitable in the future," Brophy said in a statement. "To be sure, the changes we've had to make have been painful and difficult, particularly for our employees. So to speculate on the impact of a hypothetical acquisition in a time of such unprecedented change in the airline industry is unproductive at best."

Bidding war

Kevin Healy, AirTran's vice president of planning, said both Midwest and AirTran would have been stronger together rather than operating separately. AirTran's proposed acquisition "would have been good for the residents and businesses in the greater Milwaukee area, as well as the employees of both groups," Healy said in a statement.

The bidding war between AirTran and TPG/Northwest played back and forth over five days in August 2007.

TPG/Northwest appeared to have won the battle on Aug. 12, when Midwest Air announced it was pursuing their cash offer of $16 a share. AirTran was offering a mix of cash and stock valued at $15.75.

After bitterly conceding defeat, AirTran arose from the dead two days later with an offer of $16.25. While still a mix of cash and stock, the AirTran bid included provisions to protect against a drop in AirTran's stock price.

Two days after that last AirTran offer, Midwest's board accepted a sweetened $17 cash offer from TPG/Northwest. The $451.8 million sale was completed on Jan. 31.

AirTran executives said throughout the hostile takeover attempt that their company would greatly expand Midwest Air, adding 74 daily departures from Mitchell International Airport and 29 new destinations. Those expansion plans would create 1,100 jobs, said AirTran's chairman and chief executive officer at the time, Joe Leonard, who has since retired.

Midwest Air Chairman and CEO Timothy Hoeksema said AirTran's expansion plans were unrealistic. He also warned of large job cuts by AirTran.

However, just two weeks before completion of Midwest's sale to TPG/Northwest, Midwest Air announced it was outsourcing all Midwest Connect flights to SkyWest -- eliminating 380 jobs. Hoeksema said it would create a more efficient operation.

Bigger blows came in July, when Midwest announced that it was reducing service by 40% beginning in September and cutting its 3,000-plus work force by a similar share. Hoeksema said the cuts were necessary because of record high fuel prices.

Other airlines have announced cuts. But few of those planned cuts are as steep as Midwest's.

AirTran will cut its passenger capacity by 6% to 8% in the last four months of 2008 compared with the same period in 2007, with another 4% to 8% cut coming in 2009, its latest quarterly financial report says.

The carrier plans to cut 480 pilot and flight attendant positions in September, a work force reduction of just more than 5%. AirTran also is seeking pay cuts of 5% to 15% from its flight crews.

Midwest, along with cutting a much higher share of jobs, is seeking steeper pay cuts from its union flight crews. The union that represents Midwest Airlines pilots says the company wants pay cuts ranging from 45% to 65%. Flight attendants face pay cuts averaging 28%.

Meanwhile, AirTran is adding flights in Milwaukee in response to Midwest's upcoming cuts. AirTran's schedule to Florida will have more flights to Orlando; more service to Fort Lauderdale; flights to Tampa broadened from seasonal to year-round service; and service to Fort Myers increased from weekly to daily flights. AirTran also is adding flights to its Milwaukee-Las Vegas run and converting its Baltimore seasonal service to year-round while dropping flights from Milwaukee to Reagan National Airport in Washington, D.C.

Midwest's employees and customers would have fared better under AirTran, said consultant Michael Boyd, president of Boyd Group Inc., of Evergreen, Colo.

AirTran would have been forced to reduce Leonard's Milwaukee growth plan because of changing business conditions, Boyd said.

But Milwaukee is an underserved market, and AirTran's more efficient jets would have been a better fit than the fuel-hogging MD-80 jets that Midwest flies to Los Angeles and other West Coast destinations, Boyd said. Much of Midwest's upcoming service reduction involves ditching the MD-80s and converting the nonstop West Coast flights from Milwaukee to include stops in Kansas City.

Peak travel months

Consultant Scott Hamilton said fuel prices would have led AirTran to scrap most of its growth plans for Milwaukee and Kansas City, Midwest's other hub.

But AirTran probably would not have made the deep cuts to Orlando and other Florida destinations that Midwest has announced, said Hamilton, who operates Leeham Co. of Issaquah, Wash. AirTran operates a hub in Orlando and has advantages of a bigger network to spread its costs and its more efficient aircraft, he said.

AirTran, along with having a cost advantage, also has attracted passengers even as its revenue remains flat because of pressure to keep fares low during the economic slowdown.

In July, one of the peak travel months, AirTran reported a 14.1% increase in passenger miles, which measures passenger counts multiplied by the number of miles they fly. AirTran's load factor, which measures the share of seats filled on flights, was 89.2%, up from 86% in July 2007.

Midwest reported a 16.2% decline in passenger miles for July. Its load factor was 80.3%, down from 84.6%.

Both AirTran and Midwest are losing money. AirTran lost $48.4 million during the first six months of this year. Midwest no longer reports its financial results because it's privately held. But Northwest Airlines, which owns a 47% stake, recently disclosed that it has written off its entire $213 million investment in Midwest.

Given the changes over the past year, AirTran got lucky when it was outbid by TPG/Northwest, said Darryl Jenkins, a consultant based in Marshall, Va. He and others, including Nelson, of Morningstar, said the additional debt from a Midwest acquisition would have burdened AirTran. Nelson said it could have wound up in Chapter 11 bankruptcy reorganization.

For Midwest's employees, such speculation is irrelevant, said Capt. Jay Schnedorf, head of the Midwest's pilots union.

TPG Capital and Northwest were "always going to be in a better position than AirTran to offer more money to the shareholders and make that offer in cash," Schnedorf said.

What matters is what Hoeksema, his management group and TPG/Northwest "are going to do to recover the jobs they have cut, and restore the countless lives they have destroyed in their latest decisions, which have all but obliterated the airline we all knew as The Best Care in the Air," Schnedorf said in a statement.

To see more of the Milwaukee Journal Sentinel, or to subscribe to the newspaper, go to http://www.jsonline.com. Copyright (c) 2008, Milwaukee Journal Sentinel Distributed by McClatchy-Tribune Information Services. For reprints, email tmsreprints@permissionsgroup.com, call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA.

More News:   Market Updates | Stock Alerts | All Trading News | Stock Index