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
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