Will Northwest make a bid?

Aug. 10--With a deadline looming, Northwest Airlines Corp. appears to be the most likely challenger to AirTran Holdings Inc.'s bid to buy Midwest Air Group Inc.

But industry sources say Midwest Air is more valuable to AirTran, giving it an edge in outbidding Northwest and other prospective buyers.

A sale of Midwest Air could be imminent. AirTran's tender offer expires at midnight, and Chairman and Chief Executive Officer Joe Leonard has vowed not to renew it when stock trading resumes Monday morning. Leonard wants a sale agreement by then.

Midwest Air said last week a committee of its directors would discuss a possible sale with AirTran and other prospective bidders. The company said there were four "interested parties."

AirTran and Midwest Air operate similar fleets and have only a handful of overlapping routes. Industry analysts and consultants have cited those factors in arguing that Midwest Air is more valuable to expansion-minded AirTran than to any other airline.

Aside from AirTran, some of the prospective bidders are thought to be equity investors whose purchase would allow Midwest Air to become a privately held company. Chairman and CEO Timothy Hoeksema would remain at the helm.

Because an equity buyout requires a high level of debt, and with equity financing sources drying up, Leonard has cast doubts on the likelihood of that scenario.

At least one of the interested parties is another airline, sources familiar with the situation said. And indications are that it's Northwest, said one source who asked not to be identified.

Airline industry consultant Michael Boyd said a Northwest bid against AirTran makes sense.

Northwest, the second-busiest carrier at Mitchell International Airport, views Milwaukee as its turf, said Boyd, who operates Boyd Group Inc., an aviation consulting firm in Evergreen, Colo. He and others said Northwest, with hubs in Minneapolis and Detroit, would buy Midwest Air mainly to prevent AirTran from building a hub in Milwaukee.

Midwest Air, which operates Midwest Airlines and regional carrier Midwest Connect, is the dominant airline at Mitchell International.

"The only way this would make sense for (Northwest) would be to head off new competition from an aggressive, healthy airline like AirTran," said Scott Hamilton, who operates Leeham Co. of Issaquah, Wash.

Representatives from Midwest Air and Northwest declined to comment.

Avoiding lawsuits

Midwest Air has said the bidding might not result in the company's sale, but Boyd expects a sale.

Nearly 60% of Midwest Air's shares have been pledged by their owners to AirTran's tender offer, Boyd said. Spurning an offer would likely result in shareholder lawsuits, Boyd said. Midwest Air's nine-member board, which includes three members nominated by AirTran and elected in June, wants to avoid litigation, he said.

AirTran's cash and stock offer is valued at $15.44 a share, based on Thursday's closing stock price of $11.02 for AirTran. That's a 6.3% premium to Midwest Air's stock price of $14.52. Midwest Air's price was $9.08 a share on Dec. 12, the day before AirTran announced its interest in the company.

Leonard says AirTran would replace most of Midwest Airlines' wide, two-by-two seats with narrower seats, boosting the revenue generated by each flight. AirTran also would slash fares to draw more passengers, including those from northern Illinois who now fly out of Chicago.

AirTran has said it eventually would add 74 daily departures from Mitchell International and add 27 destinations. The combined Midwest Airlines and Midwest Connect operations offer about 140 daily departures from Mitchell to just over 40 cities.

That increased business would create about 1,100 jobs in the Milwaukee area, AirTran executives have claimed. Midwest Air has about 2,900 employees in Wisconsin, primarily at Mitchell International and the company's headquarters in Oak Creek.

If Northwest bought Midwest, it might increase departures from Milwaukee, Boyd said, but not to the extent envisioned by AirTran.

Hamilton said Northwest would view its expanded Milwaukee operations as "an afterthought" and "totally expendable."

"There would be no security for (Milwaukee) service, nor for (Midwest Air) employees," Hamilton said.

Mixed record

Leonard has said Midwest Air is worth more to AirTran than to other prospective buyers. Milwaukee would function as a second hub for AirTran, which uses Atlanta for 68% of its departing flights. With the airlines merged, 46% of AirTran's departures would be from Atlanta and 25% from Milwaukee.

"For Northwest, with a dominant position in Minneapolis-St. Paul and Detroit, there is no strategic value in Milwaukee, just a defensive one," said Kevin Healy, AirTran vice president of planning. Northwest, he said, would "only need to maintain enough service to prevent other competition" and would likely reduce service out of Mitchell International.

Northwest has a mixed record in Milwaukee, said Dean Hill, president of Campbell-Hill Aviation Group Inc. of Alexandria, Va.

"Northwest, over the years, has had an interest in Milwaukee off and on," Hill said.

Northwest offered 38 daily flights from Milwaukee to 13 cities in summer 2005 as it tried to take market share from Midwest Airlines. But that strategy failed, and Northwest began dropping flights as it entered Chapter 11 bankruptcy in fall 2005. It now offers 15 daily non-stop departures to the airline's hubs in Minneapolis, Detroit and Memphis.

Northwest, which emerged from Chapter 11 in May, has been troubled this summer with an increase in canceled flights because the airline didn't have enough pilots. Those cancellations angered travelers from Milwaukee and other cities throughout Northwest's network.

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

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