Service and Wide Seats Helped Elevate Deal Between Midwest and TPG

The all-cash offer from TPG, backed by minority investment from Northwest Airlines Corp., beat out a rival cash-and-stock offer worth $16.27 a share from AirTran Holdings Inc.

But the formula ran into trouble when the economy faltered in 2000, followed by an even greater business travel slowdown after the Sept. 11, 2001, terrorist attacks. Unlike some other airlines, Midwest avoided a Chapter 11 bankruptcy filing, although narrowly. For that, Hoeksema deserves credit, said Dean Hill, president of Campbell-Hill Aviation Group Inc. of Alexandria, Va.

"It was only a couple of years ago that everybody had Midwest dead and buried," Hill said.

In 2003, Midwest began focusing more on cost-cutting, including wage and benefits concessions from employees, as well as some outsourcing of jobs. The free bubbly and some other amenities for passengers were dropped. Midwest Airlines also launched a lower-priced service, with narrower seats, to vacation destinations such as Orlando, Las Vegas and Phoenix.

Instead of starting that limited, lower-priced service, Hoeksema should have taken bolder steps to change Midwest Air's business model, said Hamilton, who operates Leeham Co. of Issaquah, Wash. He compared Hoeksema to "an overly protective parent who doesn't want to see his child change from the parent's own image."

Hoeksema, however, said remaking Midwest into a "commodity airline," with mostly narrower seats and cut-rate fares, would cause the loss of the very thing that draws passengers.

He also noted plans by Midwest Airlines to increase the number of narrower seats, while still maintaining a large share of two-across seats. On its main fleet of 88-seat Boeing 717 jets, Midwest Airlines plans to offer 40 wide seats, arranged in two-by-two rows. The remaining 59 seats will mostly be in two-by-three rows, with lower fares.

Wary of Northwest

Hoeksema said the new seating plan will boost the company's revenue by getting more passengers on each plane, while keeping enough two-by-two rows to create a differentiated product with competitive fares. Meanwhile, the airline plans to add two-by-two seats on flights to vacation destinations, creating more choices for passengers.

"I think we're going to make everybody happy," Hoeksema said.

TPG Capital, which has made successful investments in other airlines, buys into Hoeksema's strategy, which includes a focus on growing Midwest Air's Kansas City hub.

Still, Hamilton and others are wary of Northwest's involvement in TPG Capital's purchase of Midwest Air. Northwest, seeking to prevent AirTran from building a hub in Milwaukee, attracted TPG Capital to Midwest Air, leading to its bid. Northwest could eventually buy all of Midwest Air when TPG Capital looks to cash out years from now, Schifter said.

Northwest has had trouble with both labor relations and customer service. Northwest and Midwest - while still competitors - announced plans in May for a new partnership that allows passengers to book their entire flight on a single ticket between the two airlines. Northwest and Midwest also allow their passengers to earn frequent flier miles on each other's airline.

Citing those things, Hoeksema said he wasn't fazed when he learned of Northwest's role as an investor in TPG Capital's bid.

"My reaction was, 'That's fine,' " he said.

Copyright 2007, Journal Sentinel Inc. All rights reserved. (Note: This notice does not apply to those news items already copyrighted and received through wire services or other media.)

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