Midwest to Offer Fewer Wide Seats; Pressured Airline Increasing Capacity

May 31, 2007
Midwest Airlines will increase the number of skinnier seats it offers

Midwest Airlines will increase the number of skinnier seats it offers, marking a major turn toward the three-across seating found on most U.S. airlines - including the one that wants to buy Midwest.

On its main fleet of 25 Boeing 717 jets, Midwest Airlines will have 40 wide seats, arranged in 10 two-by-two rows. The remaining 59 seats will mostly be in two-by-three rows, and will offer lower fares. The Boeing 717s currently offer 88 seats, all two-by-two.

With its secondary fleet of 11 MD-80 jets, Midwest Airlines will have 12 wide seats, arranged in three two-by-two rows. The remaining 132 seats will be narrower but cheaper. The MD-80s currently have 147 seats, all two-by-three.

The new seating arrangement will create more choices for passengers, said Timothy Hoeksema, chairman and chief executive officer of Midwest Air Group Inc., which operates Midwest Airlines.

Hoeksema and Chief Financial Officer Curt Sawyer on Tuesday said the changes, to occur this year and in 2008, will cost around $8 million in one-time expenses, and they are expected to generate $30 million to $35 million in additional annual revenue. Midwest Air posted revenue of $664.5 million in 2006.

The new seating layout is a key part of Midwest Air's growth plan, Hoeksema said. He said the seating arrangement, along with other changes, shows the company's growth plan will provide a better return to shareholders in the long term than a hostile tender offer from AirTran Holdings Inc.

"We think this will offer us a unique competitive advantage," Hoeksema said in a teleconference with reporters, investors and industry analysts.

However, industry consultant Scott Hamilton said the plan doesn't offer enough wide seats on the MD-80s, and too many wide seats on the Boeing 717 fleet.

"It's as if Midwest still can't figure out what it wants to be," said Hamilton, who operates Leeham Co., based in Issaquah, Wash.

The new seating layout shows that Midwest Air is moving closer to AirTran's business model, said Kevin Healy, AirTran vice president of planning.

"It strikes me as desperate," Healy said.

AirTran uses a traditional layout on its Boeing 717 jets: 12 business class seats arranged in three two-by-two rows, and 105 coach class seats in 21 two-by-three rows.

AirTran wants to buy Midwest Air and greatly expand flights out of Milwaukee. AirTran says it can do that by dropping most of Midwest Airlines' wide, two-across seats and replacing them with narrower two-by-three seating. AirTran says it will fit more passengers in those planes, and increase flights, by cutting fares - a move aimed at Chicago-area travelers as well as those in southeastern Wisconsin.

Healy characterized Midwest Air's new seating configuration as an imitation of AirTran while lacking the lower cost structure that comes with a larger airline. AirTran posted 2006 revenue of $1.89 billion.

Hoeksema rejected comparisons to AirTran's model.

AirTran and other airlines split their cabins into two sections - something Midwest Airlines won't be doing, Hoeksema said.

Even with the changes, he said, no other U.S. airline allots as much space in its cabins for two-across seating. On the Boeing 717 jets, 40% of the seats will still be two by two, Hoeksema said. And, with the changes, those seats will gain 2 to 3 inches of additional leg room, he said.

The new seats will offer passengers a chance to fly with lower fares on more flights, Hoeksema said. Passengers will be able to upgrade to the wider seats for an as-yet unspecified "incremental fee," he said.

A defining characteristic

Midwest Airlines was launched in 1984 and built its reputation by offering a niche product: two-across seating with a high level of customer service. That business model ran intro trouble when the economic recession hurt business travel starting in 2000, with the airline industry's woes exacerbated by the 2001 terrorist attacks.

In 2003, Midwest Airlines launched its lower-fare service, with narrower seats, to vacation destinations such as Las Vegas and Phoenix. Hoeksema said the seating changes announced Tuesday have been under consideration since 2003, with heavy analysis beginning last year - before AirTran's hostile takeover attempt.

Tuesday's announcement didn't satisfy Midwest Air's largest shareholder, New York-based hedge fund Octavian Advisors, which owns 6.6% of the company's shares.

During the teleconference, Richard Hurowitz, Octavian's chief executive officer, asked Hoeksema why Midwest Air's board won't negotiate a sale to AirTran. Hurowitz noted that over 56% of Midwest Air's shares have already been pledged to AirTran, which has extended its offer to June 8.

Hoeksema said the board still believes that AirTran's offer is inadequate. He also said most shareholders weren't privy to what board members knew about Midwest Air's growth plan, including the seating changes, at the time they made the decision to tender their shares.

AirTran's cash and stock offer was worth $16.10 a share, based on Tuesday's closing price of AirTran stock, which was $12.15 a share, up 21 cents. The AirTran offer was a 6.8% premium over Midwest's closing price of $15.07 a share, up 15 cents.

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