AirTran Holdings has announced that it
has reviewed the stand-alone plan that Midwest Air Group released on
January 10, 2007, in the face of AirTran’s exchange offer.AirTran has stated on numerous occasions that it firmly believes that
the best strategy for both AirTran Airways and Midwest Airlines is a merger
that combines the strengths of both airlines and creates a stronger, high
quality and truly national low-cost airline. After careful review of
Midwest Airlines’ stand-alone plan, AirTran is even more convinced the
proposal to combine the two airlines is the right course for the
stakeholders of both companies. In fact, the Midwest plan in many ways
highlights the AirTran reasoning.
The Midwest Airlines’ stand-alone plan includes a few basic components:
* An agreement with Skywest Airlines to operate 15 older 50-seat regional
jets under the Midwest Connect banner, with a possibility to add
another ten aircraft.
* The addition of two older MD-80 aircraft to the Saver Service fleet.
* Reconfiguring the Saver Service all-coach product to include some
number of 2x2 seating (a configuration that AirTran offers on every
* Six new destinations and up to 12 new routes, includes recently
announced service from Milwaukee to Duluth.
* A promise of a strategic review of other “significant value-enhancing
opportunities” such as the replacement of the aging and inefficient
The plan is essentially status quo and relies on older aircraft and
outsourced regional jets, both expensive to operate and not well-suited for
low-cost competition. The vulnerability of the Midwest Airlines’
stand-alone plan is that its success is heavily dependent on a benign
competitive environment, maintaining significant fare premiums and
favorable fuel costs. While these conditions may arise from time to time,
they are unlikely to be sustainable.
Approximately 58 percent of Midwest’s revenue is concentrated in their
top 20 markets, and nearly 25 percent comes from the top five markets.
Midwest’s success is dependent on average fare premiums in markets like
Milwaukee to Boston and Milwaukee to New York—where they currently
provide the only nonstop service. These are markets likely to face
competition in the future.
Milwaukee is one of the most underserved cities in the U.S., with 61
percent fewer seats per capita than a city like Memphis, Tenn., which is
half its size. Not surprisingly, the lower-than-average capacity in
Milwaukee has resulted in higher average fares in Milwaukee’s top 20
markets, fares which are 40 percent more than fares from Chicago (Midway).
This disparity in both service and fares makes Milwaukee a prime candidate
for increased competition which will have a negative impact on average
fares. Historically, Midwest’s revenue and financial performance have
suffered when competition increases at its primary hub.
Several reports issued by Wall Street analysts support this conclusion.
Kevin Crissey, with UBS Investment Research, wrote, “We tend to agree with
AirTran’s critical assessment of Midwest’s longer-term potential. Growing
using regional jets is not particularly compelling and Midwest lacks an
industry leading cost structure to really pursue the low fare model. In our
view, Midwest is a well-liked, niche carrier with a second tier hub and few
competitive advantages to allow for significant growth.” Ray Neidl, with
Calyon Securities, wrote, “We believe a merger would make sense, given the
two companies’ route networks are complementary with limited overlap, and
combines AirTran’s strong East Coast presence with Midwest’s hubs in
Milwaukee and Kansas City. There is also a strong fleet commonality between
the carriers that creates significant cost synergies.” Helane Becker, with
The Benchmark Company, in a research article on Midwest wrote, “We believe
it would be difficult, however for [Midwest] to match the synergies that a
merger with another airline would create.”
In a recent analyst call, AirTran executives were asked why AirTran
Airways wouldn’t simply attack Midwest’s vulnerabilities to weaken the
company. That is the opposite of what AirTran Airways wants to accomplish.
The AirTran offer is not simply to purchase a fleet of aircraft or airport
leases, but rather to merge two great airlines and incorporate the Midwest
network, its employees and their expertise in brand management and customer
service, the goodwill of its customers and the communities they serve—
particularly Milwaukee and Kansas City. The value of the company is more
than simply the hard assets; combining the strengths of Midwest Airlines
and AirTran Airways will create one of the strongest airlines in the U.S.
The beneficiaries of this combination are the shareholders, employees,
customers and most certainly the communities served.
Midwest and Milwaukee need a plan that prepares them for changes in
competition, lowers costs and builds a stronger, more competitive network.
AirTran has the fleet, network breadth and cost expertise that Midwest
needs, which when combined with Midwest’s network and service expertise,
will result in one of the strongest low cost, high quality airlines in the