Regional Feed To Be Expanded If AirTran/Midwest Merge

Leonard told investors that 50 seaters were increasingly unprofitable with mainline route structures and would definitely not work with a low-cost operator.


AirTran (AAI) said it would not only retain Midwest Airlines' (MEH)

regional feeder service provided by wholly owned subsidiary Skyways, it would

expand the Midwest Connect operation, jettisoning plans for 50 seaters in favor

of larger regional jets. The statement was made by AirTran Airways Chair and CEO

Joe Leonard, whose plans to take over Midwest Airlines prompted one analyst to

say that he made it "fun to be an airline analyst again." AirTran said the

transaction could be completed by the end of the first quarter 2007 and would

create an airlines with $3.5 billion in revenues.

Midwest has a request for proposal out to select regional carriers to

provide regional jet service with 50-seat regional jets. It plans to start the

new service in 2007 to right size markets and as a vehicle for route and

frequency expansion. (RAN, November 6, p.6) However, Leonard told investors that

50 seaters were increasingly unprofitable with mainline route structures and

would definitely not work with a low-cost operator. The exact details of any

changes are pending permission by the Midwest Airlines board that AirTran can

begin the due diligence process. However, Midwest Airlines rebuffed the $290

million takeover bid for the third time, saying it would not be in the best

interest of its stakeholders to pursue a merger with AirTran, something AirTran

has been working on for over a year but announced last week. The decision to

announce its offer was likely a bid to go directly to stakeholder's. Indeed,

Leonard said, despite the rebuff, the company thought both Midwest and AirTran

stakeholders needed to know about the offer which, he said, would provide a 30

percent price premium on Midwest's 30-day stock price average and an 89 percent

premium on its average closing price during the last six months. "To an outside

observer, this is a natural," he said. The bid is for $11.25 per share in cash

and stock and, in discussions with investors, Leonard said that if, during due

diligence, further value was found, AirTran would be willing to pay for it.

Financing is already in place.

Midwest Air Group Chair and CEO Timothy Hoeksema said that the board

spent considerable time evaluating the offer, engaging investment banking firms

and an outside consulting firm in the effort.

"During their comprehensive review, those advisors considered the offer

in light of Midwest's business and strategic plans," he said. "Under that plan,

we are projecting annual capacity growth of more than 10 percent over the next

three years, including a 50-seat regional jet program, along with significantly

greater growth in profitability. Additionally, we view AirTran's offer at only

about $5 per share, because it includes approximately $6 per share in cash that

already belongs to our shareholders. While it is the fiduciary obligation of the

board to review credible offers, the board unanimously concluded that Midwest's

business plan as a stand-alone company would support a considerably better

return to our shareholders than the AirTran offer...Our product and service are

unique and are not readily compatible with a merger with another carrier."

Hoeksma added that Midwest employees have been overwhelmed by public

support of the board's decision, especially given the airline's place as the

hometown Milwaukee airline.

For now, AirTran says the deal would provide $60 million in incremental

synergies which does not include the value of their presence in their respective

hub markets at Atlanta, Milwaukee and Kansas City. The combined carrier would

have a nationwide reach and expands AirTran's largely north-south sweep to

include the east-west Midwest Airlines network and its long-sought presence in

the Great Lakes region. The company has been eyeing the Midwest market for some

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