What’s in the Cards?: New Deal Has Airline Intent on Playing Its Strong Suit

By Tom Daykin, Milwaukee Journal Sentinel

Aug. 14–After years of losing budget-conscious travelers to discount airlines, the investors planning to buy Midwest Air Group Inc. are hoping to party like it’s 1999.

TPG Capital’s bid to buy Midwest Air is based partly on a belief that, even with the rapid rise of AirTran Holdings Inc. and other low-fare airlines, the high end is becoming hip again.

“TPG sees a trend for a higher service level,” said Jay Schnedorf, head of the pilots union at Midwest Airlines, who has met with TPG Capital partner Richard Schifter. “They see that trend developing just like they saw the trend for low-cost carriers developing in the ’90s.”

Midwest Air became known for a high level of service, with wide two-by-two seating and extra touches such as baked-on-board chocolate chip cookies, as it generated profits from its launch in 1984 through 1999. But losses in the first and fourth quarters of 2000 were followed by a stretch of losses that finally ended in 2006, when it recorded its first full-year profit in six years.

TPG Capital, backed by an investment from Northwest Airlines Corp., disclosed Sunday night that it was offering $16 a share in cash for Midwest, trumping a $15.75 cash-and-stock offer from AirTran, which withdrew its bid.

Midwest Air’s board hopes to reach a definitive sale agreement with TPG Capital by Wednesday.

In a letter to Midwest Air’s board, Schifter said TPG Capital was “very impressed” with Midwest Air’s managers and their “ability to maintain the company’s reputation of excellent service, while at the same time running a profitable airline.”

Fort Worth, Texas-based TPG Capital will follow Midwest Air’s current business plan of seeking steady, sustainable growth, said Carol Skornicka, Midwest Air’s senior vice president of corporate affairs. Chairman and Chief Executive Officer Timothy Hoeksema is expected to remain at the helm, she said.

Midwest Connect focus

Hoeksema’s growth plan calls for continued expansion of Midwest Connect, the regional carrier that serves Midwest Airlines. Midwest Connect began expanding earlier this year by hiring SkyWest Airlines Inc. to fly new routes from the Milwaukee and Kansas City hubs.

Also, Hoeksema announced plans in May to replace many of Midwest Airlines’ wide, two-across seats with narrower seats — boosting the number of passengers for each flight and raising revenue.

On its main fleet of 25 Boeing 717 jets, Midwest Airlines plans to offer 40 wide seats, arranged in two-by-two rows. The remaining 59 seats will mostly be in two-by-three rows, with lower fares. The Boeing 717s now have 88 seats each, all in two-by-two rows. Those changes are to occur by the fall of 2008, Skornicka said.

With its secondary fleet of 11 MD-80 jets, Midwest Airlines will have 12 wide seats. The remaining 132 seats will be narrower and cheaper. The MD-80s currently have up to 147 seats, all in two-by-three rows. Those changes take effect this fall.

Industry consultants, including some who have criticized Hoeksema’s business strategy, expressed skepticism that Midwest Air can prosper by aiming at the high-end market.

“I’m glad it’s their money, and not mine,” said Darryl Jenkins, an aviation professor at Ohio State University.

Jenkins said other low-fare airlines, such as JetBlue Airways Corp. and Southwest Airlines Co., might soon enter Milwaukee to target Midwest Airlines.

There is a demand for higher-end service, said Michael Boyd, who operates Boyd Group Inc., of Evergreen, Colo. But Boyd says keeping two-across seats throughout much of Midwest Airlines’ fleet translates to lost revenue and lost profits. He believes TPG Capital is more likely to greatly reduce the two-across seats and replace them with two-by-three rows.

“Midwest as it stands today doesn’t provide a very good return on (TPG Capital’s) investment,” Boyd said.

AirTran’s plan

If TPG Capital took Boyd’s approach, it would mirror AirTran’s plan to replace most of Midwest Airlines’ wide seats with two-by-three rows.

With more passengers and lower fares, AirTran had planned to add 74 daily departures from Mitchell International Airport and add 29 destinations. The combined Midwest Airlines and Midwest Connect operations offer about 140 daily departures from Mitchell, to just over 40 cities.

Hoeksema, however, had questioned the sustainability of AirTran’s ambitious expansion plans.

Another issue is what role Eagan, Minn.-based Northwest Airlines would play in its new role as a minority owner of Midwest Air.

Neither Northwest nor Midwest Air has specified what that level of investment will be. In a radio interview with WTMJ-AM (620), Skornicka indicated that Northwest was purchasing a 40% stake, but she said later that she had misspoken.

“At one time it looked like it would be around (40%), but we honestly do not know at this time what it actually will be,” Skornicka said.

For Northwest, the investment would help prevent AirTran from developing a hub in Milwaukee, which could threaten to siphon away travelers who fly through Northwest’s hubs in Minneapolis and Detroit, said consultant Jay Sorensen, a former Midwest Airlines marketing manager.

But Northwest would probably not be eager to see Midwest Air grow at its Milwaukee hub, said Sorensen, who provides market consulting services to airlines and other clients. Midwest Airlines and Midwest Connect have 50% of the market share at Mitchell International, while Northwest is the airport’s No. 2 carrier, with 19% of the market.

“Any growth that occurs in Milwaukee would come at (Northwest’s) expense,” Sorensen said.

Sorensen and others also noted Northwest’s troubled record of labor relations and its reputation for poor customer service.

“I can’t imagine two airlines with a greater disparity in customer service philosophies,” Sorensen said.

Flights canceled

Northwest’s latest problems came this summer, shortly after the airline emerged from Chapter 11 bankruptcy proceedings. Northwest saw an increase in canceled flights because the airline didn’t have enough pilots.

Northwest said last week it plans to hire 250 to 350 pilots within the next year. Also, Northwest has recalled nearly 400 furloughed pilots.

Schnedorf, of the Midwest Airlines pilots union, agreed that Northwest’s investment in Midwest Air is a defensive move to keep AirTran from developing a Milwaukee hub.

But he said there are other benefits for Northwest, including Midwest Air and Northwest using their combined purchasing power to buy fuel and other items at lower costs. He noted this fall’s launch of an agreement by the two airlines to sell seats on each other’s flights, a common industry practice known as “code sharing.”

Schnedorf also said he believes TPG Capital wants good labor relations with Midwest Air’s employees. He said Schifter, the TPG Capital partner, spoke about the value of having “happy employees” in order to continue providing good customer service.

“I think that bodes well,” Schnedorf said.

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