Midwest Air: It's Not Such a Wonderful Life

America loves nothing more than an underdog, and that's exactly what Midwest(MEH) is.

The Milwaukee-based airline is a Jimmy Stewart kind of company, run by nice Midwestern people, ingrained in its community, battling the big guys on principal, and known for the chocolate chip cookies it bakes on its planes.

But baking cookies is antithetical to an industry where Delta, in the mid-1990s, cut the lettuce leaf liner from its salad plates and saved $1.4 million a year, and where American CEO Bob Crandall liked to brag that he saved $40,000 a year by eliminating olives from salads.

Now, the harsh realities of the airline business may be catching up with Midwest as it battles a takeover effort by AirTran(AAI).

In the first quarter, domestic operating conditions worsened throughout the airline industry, as capacity increased and competition mounted. Midwest, in response, reduced its full-year guidance to between $1.30 and $1.50 a share, down from $1.70, because of the impact of weather, an engine overhaul and industry trends. AirTran, meanwhile, was a bright spot. It beat estimates, reversed a year-ago loss and said its costs are falling as it adds new fuel-efficient aircraft.

Midwest reported first-quarter net income of $8 million, or 31 cents a share, compared with a loss of $8.7 million, or 49 cents a share, a year earlier. But the company's accounting raised questions. Two analysts surveyed by Thomson Financial had estimated a loss of 41 cents a share, evidently after including the impact of fuel hedging. Had Midwest excluded fuel hedging, it would have reported an operating loss of $13.2 million, or 51 cents a share, AirTran opined in a prepared statement.

Midwest spokeswoman Carol Skornicka acknowledged the 51 cent per share loss represents a reliable calculation, but said the company followed generally accepted accounting principles.