Is Midwest’s 50-Seat Plan Really Aimed to Stabilize the Airline?

Midwest Airlines launched new flights today on 50-seat regional jets, operated by SkyWest Airlines. Midwest decided to launch the new service supposedly in response to demands from customers for new and expanded service from Milwaukee. However, Midwest's launch of 50-seater service comes at a time when no other American airline wants to even contemplate new 50-seat regional jet service; the planes are simply too inefficient for their needs. However, Midwest is an airline that is not only expanding, it's also one that's in the midst of a turnaround to profitability, and the company has demonstrated that it can turn itself around, as Midwest reported profits of $5.4 million last year. The 50-seat regional jets will supplement (but not replace) regional aircraft already flying for Midwest, making some routes cheaper to operate, since a 50-seat aircraft is cheaper to operate per passenger than the 19- or 32-seat aircraft which are currently flying for Midwest. However, regional jet flying, especially on 50-seat and below aircraft, seems to be a threat to any airline's profitability, even with trimmed costs. Midwest is one of the few US carriers that can command a price premium for its services, and its new regional jet service will offer convenience to business travelers who now won't have to connect to fly between certain markets. However, even with that price premium, regional jet flying is still a very risky, low-yield business, and Midwest is gambling that regional flying isn't dead. They may be right, and the shift in how airlines view regional jets may help Midwest. More and more regional jets are being placed on routes, not to small markets, but between intermediate and large markets which lack significant or any nonstop service. ExpressJet is testing whether this model will work, and whether business travelers are willing to pay a premium to fly nonstop. Midwest seems to be doing the same thing too, after all, Midwest's first routes with the jets will be service to large markets. Midwest's 50-seat planes will fly first from Milwaukee to Columbus, Ohio, as well as supplement existing service between Milwaukee and Minneapolis/St. Paul as well as Philadelphia. With the recent rise in airfares, this makes perfect sense, as regional jets are a convenient and flexible, albeit expensive, way for airlines to add capacity in small doses. This way, Midwest can slowly gain market share on routes to and from Milwaukee and become a more significant airline in the Midwest and East Coast.

However, there may be ulterior motives to Midwest's recent regional jet expansion. The expansion may be geared in part to stave off a takeover bid from AirTran Airways. Even though activity surrounding AirTran's takeover bid has died down in recent weeks, AirTran is trying to keep the bid very much alive, even if the takeover takes years to accomplish. AirTran has been mum about what exactly it would do with Midwest's regional operations if it were to take over the airline, however, it's likely that AirTran would eliminate certain, more costly, parts of Midwest which deviate from AirTran's core business model. Midwest's baked-onboard chocolate chip cookies may stay, but some of Midwest's regional routes and some of their older aircraft will likely be eliminated. But by adding new service that Milwaukee travelers will use, even if it's not very profitable service, Midwest can attempt to diversify itself enough such that AirTran will either lose interest in Midwest, because the compatible synergies between the two companies will not be sufficient to necessitate a takeover, or, if AirTran is still interested in a takeover, it will be more difficult for them to eliminate elements of Midwest they don't find suitable. It remains to be seen whether Midwest's 50-seater service will succeed, but Midwest's definition of a successful regional jet operation may be very different from ExpressJet's. For Midwest, successful service won't necessarily make money, but it will likely delay AirTran's takeover efforts.

Midwest's 50-seat regional jet operation raises some important questions about the future of third-party regional jet contractors, including SkyWest and Mesa, and whether their planes may have new missions, now that higher fares and growing demand from business travelers for nonstop service may necessitate expanded 50-seat regional jet service from some airlines. This industry is facing consolidation, and it's possible that further consolidation could ensue if Delta spins off its regional subsidiary Comair, whose fleet is primarily composed of 50-seat jets, before Delta's April 30 date to exit Chapter 11 bankruptcy protection. But I plan to discuss more about this next week, so stay tuned.

There are two interesting articles related to this post, one article about AirTran's plans to nominate three candidates for Midwest's Board of Directors at their upcoming annual meeting in order to gain influence over Midwest's business decisions, and another article about AirTran's attempts to purchase a strip club near the Milwaukee Airport from Midwest. (I lack the creativity to write a funny April Fools article on Airline Bulletin, but these writers do a good job).