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.


time having tried to acquire 14 gates at Midway two years ago, before being

outbid by Southwest Airlines. AirTran has only four gates at the airport.

Leonard also told investors that the company was "laser focused" on the

Midwest bid and was not thinking about any further acquisitions at this time.

However, he pointed out in response to an observation that the combined carriers

still lacked a strong West Coast presence, AirTran had forged a deal with

Frontier for consumers to book each other's flights and earn frequent flier

miles as well. (RAN, November 20, p.1)

While Leonard touted the synergies of their similar fleets and cultures,

there is little overlap between the two networks and is limited to four

overlapping nonstops between Milwaukee and Atlanta, Orlando, Tampa and Fort

Myers, Fla. The combined carriers would grow AirTran into the nation's 10th

largest carrier in terms of enplanements. With $1.45 billion in revenues last

year, it is currently the eleventh largest based on revenues. It employs 8,000

and is continually expanding its employment roster and network. Midwest is now

the 15th largest carrier with revenues of $700 million and 3,300 employees. The

combination would result in an carrier with $3.5 billion in revenues

Calyon Analyst Ray Niedl said the merger makes sense given the route

networks are complementary and their strong fleet commonality as well as

continued pressure for industry consolidation. AirTran would also jettison the

more costly MD-80s in Midwest's fleet in favor of Boeing 737s which will save 30

percent in operating costs alone. He also indicated these facts make the

regulatory gauntlet more likely to approve the deal and added that the emergence

of a new national low-cost carrier might force JetBlue (JBLU) into a merger in

order to create the critical mass to compete. Even so, Midwest has protected

itself from hostile takeovers having put in place a poison pill.

AirTran, which said it is looking for a friendly takeover, expects

network synergies of $40 million per year driven by improved fleet and capacity

utilization as well as increased aircraft utilization. AirTran stated that cost

synergies of $20 million annually will be obtained through replacement of MD-80s

with cost-efficient 737 aircraft and by gaining efficiencies on maintenance and

facilities. AirTran believes there would be $35-$40 million of transaction costs

for reconfiguration of aircraft and rationalizing facilities, according to

Niedl.

Combining Two Strong Airlines

: Primary Hub AirTran Airways : Atlanta Hartsfield-Jackson International Airport Midwest Air Group : Milwaukee General Mitchell International Airport : Smaller Hubs /Focus Cities AirTran Airways : Baltimore-Washington, Boston, Orlando, Chicago-Midway Midwest Air Group : Kansas City : Fleet at Year End AirTran Airways : 87 Boeing 717-200s 40 Boeing 737-700s 60 Boeing 737 deliveries Midwest Air Group : 25 Boeing 717-200s 11 MD-80s Regional Jets 2 MD-80 deliveries : 2006E Revenue AirTran Airways : $1.9 B Midwest Air Group : $0.7 B : Current Mkt. Capitalization AirTran Airways : $1.2 B Midwest Air Group : $0.2 B

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