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AirTran Hits the Right Note in Midwest Bid

The carrier hopes its expansion plans for the Milwaukee airline will help it win merger OK.
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While the proposed merger of

US Airways

(LCC)

and

Delta

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has gone the way of the dodo, the effort to combine

AirTran

(AAI)

and

Midwest

(MEH)

still has wings.

The failed US Air/Delta deal died of multiple causes: It was a tough sell to regulators, employees and Congress, and it was opposed by Delta management. The combination of AirTran and Milwaukee-based Midwest, however, suffers from fewer maladies.

While Midwest management is most certainly

opposed, regulators likely would not be. Wisconsin politicians are opposed, but employees seem less concerned than Delta employees were.

Contraction vs. Expansion

Fundamentally, US Airways had far different intentions than AirTran has. The former, which last week

withdrew its $10 billion bid for Delta after a rejection by bankruptcy creditors, planned to shrink the combined fleet's capacity by 10%.

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AirTran, which last week extended a $345 million tender offer for Midwest until March 8, wants to use the carrier as a platform for expansion.

"Our play is about facilitating growth," Kevin Healy, AirTran vice president of planning, said in an interview. "It involves leveraging the strength of both carriers, which have complementary networks, to create a truly national low-cost carrier. The two

takeover efforts are at opposite ends of the spectrum."

To be sure, the deals look the same to targeted managements who feel they have fixed their airlines since the Sept. 11 attacks triggered a restructuring of the airline industry. Delta remade itself into an international carrier poised to extract maximum benefit from its position as the biggest carrier at the world's busiest airport in Atlanta.

Midwest has also remade itself. "Prior to 9/11, we were high cost, high yield, with 50% yield premiums," CEO Tim Hoeksema said at the Raymond James airline conference last week. "During the last five years, we have been working very hard to restructure our company, to do a lot of things that would make us stronger. We brought our costs down 32%. The results of lots and lots of work and effort are beginning to show in 2006."

Last week, Midwest reported net income of $5.4 million for 2006, reversing a year-earlier loss of $64.9 million, and forecast nearly twice the 2007 per-share earnings that analysts had expected.

Hoeksema said the airline now plans to expand its fleet. Short term, it has signed a deal for a partner to provide up to two dozen 50-seat regional jets, and it plans to acquire two MD-80 jets. Long term, it is talking to both

Airbus

and

Boeing

(BA) - Get Boeing Company Report

about replacing its 13 MD-80s. Midwest also has 25 Boeing 717s.

AirTran's Healy said Midwest's problem is that a demand glut means it will have trouble securing competitively priced aircraft. AirTran, by contrast, has firm orders for 60 Boeing 737-700s, acquired at low cost because the order was placed in 2003 when few carriers were buying.

Carol Skornicka, Midwest corporate counsel, counters that AirTran's problem is it has too many aircraft orders. "We don't need to be fixed," she says. "AirTran needs to be fixed. They went crazy and bought 100 airplanes, and now they don't know where to put them."

Local Hubbub

Midwest's Milwaukee hub would be the centerpiece of AirTran's expansion efforts. Daily departures would grow from about 85 today to about 150 within two years. AirTran would add destinations, including West Coast cities that Midwest is only minimally equipped to serve nonstop because few of its MD80s have sufficient range, Healy said.

That is a far cry from the potential fate of Charlotte, US Airways' largest hub, if a merger with Delta had occurred. US Airways had indicated it planned to reduce capacity at Charlotte -- substituting small jets for big ones that could have been better used in Atlanta, potentially reducing the number of banks and giving up gates.

Despite the growth prospects, the proposed takeover of Milwaukee's hometown airline has generated opposition. In a letter to AirTran CEO Joe Leonard, U.S. Sen. Herb Kohl, a Wisconsin Democrat, wrote: "It is in the interest of Wisconsin consumers, as well as the greater Milwaukee economy, for Midwest Airlines to operate as a locally based, independent airline." An antitrust subcommittee Kohl heads would review the proposed merger -- although it appears to raise minimal antitrust concerns.

Additionally, leaders of the Midwest chapter of the Air Line Pilots Association unanimously passed a resolution supporting Midwest's stand-alone plan. The pilots were initially neutral but said they had since studied the plan. They are clearly more restrained than were Delta pilots, whose leader Lee Moak had vowed to "kill the merger."

Healy said the contrast in the two deals explains the difference in the pilots' positions. The US Airways deal failed to win support, he said, because if "you get rid of airplanes, it's usually not a good thing for the guys flying them." Midwest pilots, he said, would have far better career opportunities at a rapidly expanding carrier.