Midwest Flies in the Face of Takeover Effort

As the USA's biggest airlines jostle to get bigger and more powerful, little Midwest Airlines is happy to be itself: an anachronism.

But things could soon change for Midwest as a result of an ongoing hostile takeover effort being waged by Orlando-based AirTran Airways, the USA's third-biggest discounter.

Milwaukee-based Midwest, which most East and West coast residents have probably never heard of, has no desire to get rich quick, swallow other airlines or be swallowed itself. It flies to cities in America's heartland that the major carriers would just as soon fly over.

Only Midwest, for example, flies non-stop from Omaha to Reagan Washington National, or from Kansas City non-stop to New York LaGuardia. Along the way, flight attendants bake chocolate chip cookies that are served free, still warm and fragrant. It recently completed its first full year of profit since 2000.

The airline "has built up an amazing love affair with its passengers that I've never seen the likes of," says Midwest's marketing chief, Scott Dickson. If AirTran succeeds, he says, "There will be no vestige of Midwest Airlines left."

Over its objections, AirTran has launched a $345 million tender offer to acquire Midwest's shares directly from shareholders in hopes of forcing the board to sell. AirTran undertook the offer after Midwest's management rejected outright an earlier offer to buy the airline.

Seeking a list

AirTran, which owns a few hundred Midwest shares, has gone to court to try to get Midwest's full shareholder list and is lobbying Midwest's institutional investors, who own up to half of Midwest's shares. Shareholders' deadline to tender shares is March 8, extended from an earlier deadline of Feb. 8.

"We think we're making progress with them," says AirTran CEO John Leonard.

Even if AirTran gains traction with shareholders, Midwest's board could launch a "poison pill," diluting its shares to make the deal too costly.

AirTran has offered $13.25 in stock and cash for every Midwest share, a 46% premium over the share price on Dec. 12, the day before the offer became public. That's up from an offer of $11.25 in December.

"It's nice to be wanted," Midwest CEO Tim Hoeksema says with deadpan wit. But Hoeksema, who has run the airline for 23 years, says the offer would take the company down the wrong path.

Midwest's directors decided unanimously that the offer was too low and that the airline doesn't need a partner to succeed. Because of cost-cutting in recent years, "We are in the strongest competitive position we have ever been in," Hoeksema says. "We think we have a lot of value here."

With US Airways' withdrawal of its hostile bid for Delta Air Lines last week, the AirTran proposal becomes the only proposed merger still on the table among domestic airlines. And it is much smaller than the $10 billion US Airways offer, which would have created the USA's biggest domestic carrier. AirTran is the 12th-biggest U.S. airline, and Midwest is No. 23.

AirTran flies mainly out of Atlanta, the world's busiest airport. It competes head on with Atlanta-based Delta, the USA's third-biggest airline. Aside from some of their airplanes -- both fly Boeing 717s -- the airlines have little in common.

Starting out on paper

What is now Midwest Airlines began in 1969 as a corporate jet service for executives of paper manufacturer Kimberly-Clark out of Appleton, Wis. In 1984, the company began scheduled service and went public in 1995.

Midwest's passengers seem to love their homey little airline with its two-across, four-to-a-row leather seats on many flights. Like other airlines, Midwest started charging for meals and wine in the post-9/11 travel downturn. Even now, the food is better than most. It has won awards from Travel & Leisure magazine, Conde Nast travel publications and food reviewer Zagat.

Midwest loyalist Judy Schweikart, an Omaha lawyer, flies the airline whenever she can, and dreads the thought of a takeover.

"If they make Midwest into AirTran, they're going to lose something unique," she says. "I hope the shareholders turn it down."

Meanwhile, AirTran executives can't fathom Midwest's rejection and its refusal to even sit down for talks. Leonard, the CEO, says Midwest is profitable only because Minneapolis-based Northwest, which serves Milwaukee, has cut flights while in bankruptcy protection. Midwest disputes that assertion.

Leonard says Midwest is so small and dependent on Milwaukee that it would be crushed if Northwest set its sights on that market. Northwest still has six gates at Milwaukee Mitchell airport, and could add flights and put pressure on Midwest after exiting bankruptcy, he says.

If AirTran and Midwest merged, both would be stronger, Leonard says. AirTran would go from serving 52 cities to more than 70 overnight. AirTran could increase flights to lucrative destinations Midwest also serves, such as New York, Boston and Los Angeles.

But Hoeksema says AirTran is simply "desperate" because it has "all these airplanes coming" and needs to expand. AirTran is scheduled to receive 60 new planes between now and 2010, and needs places to put them. The merged carrier could put new Boeing 737s on routes Midwest is now serving with aging MD80s and smaller 717s.

AirTran has even offered to keep serving free chocolate chip cookies on the merged carrier if the deal goes through. But they would not be baked onboard.