Status of the Midwest/AirTran Deal Uncertain

Midwest's new board of directors will welcome three new members on Tuesday: the three new directors who were backed by AirTran and elected to the board a week and a half ago. Midwest's senior management has promised to listen to AirTran's pitch, now that shareholders have voted for a change in approach to the AirTran deal, but it's unclear whether AirTran will get the change in attitude necessary from management and the other board members to secure a deal. On July 16, AirTran will give a formal presentation to Midwest concerning aspects of the proposed takeover. And after that date, a deal is possible, depending on how well the presentation and the three new board members sway their colleagues. However, it's also possible that a deal will wait at least a year, until the next Midwest board meeting when three additional board members will be elected. If AirTran-backed candidates win at that meeting, then a deal is virtually certain. But until then, Midwest may try to stall AirTran through provisions in Wisconsin law that currently give Midwest the upper hand. A recent Milwaukee Journal Sentinel article discusses Midwest's paradigm.

Midwest is in a very difficult situation. The airline is being pressured by competitors on all sides, and the company recently reported a reduction in earnings. Midwest will have difficulty turning itself around, even with its "Strategic Plan". Unfortunately, the company lacks two things that its competitors have. The first is size. Midwest is simply too small a carrier with costs that are too high in order to compete in a cutthroat marketplace. With a restructured Northwest that has lower costs, Midwest will have continuing difficulties as it struggles to match the fares of its competitors. Moreover, with higher fuel prices, Midwest will be paying more for fuel per passenger than some other carriers, including AirTran, because its planes are older and consume more fuel. The second thing Midwest lacks is a strong, unifying identity that customers can recognize. Midwest used to serve "The Best Care In The Air" throughout its fleet, with 2x2 seating, free meals (even on china in some cases), and unbeatable service. But after 9/11 and the downturn that Midwest was forced to weather, the airline created two separate service standards, "Saver Service" and "Signature Service". Saver Service were flights similar to those on any airline, with 2x3 seating throughout the cabin, like coach on most airlines, as well as a reduction in meal service (the cookies were still available for free). But, with Saver Service, Midwest was able to offer lower fares, because now that Midwest could fit more seats onto a given plane, it could extract more potential revenue from a given flight, so each passenger could pay less and Midwest would still profit. Signature Service, however, also saw a decline in the same service standards that once made Midwest the standard-bearer for amenities and service in the industry. Meal service was trimmed (and the china was eliminated), but the 2x2 seating remained. However, Midwest only kept Signature Service on routes which had a large concentration of business travelers, who were more willing to pay higher prices for better service and amenities. But the difference in service standards left Midwest with a split identity, and the company didn't have a clear vision for the future. The company had to market itself to two distinct sets of customers with two distinct products, and that confused consumers and left the airline struggling to balance this dichotomy. Unfortunately, this lack of vision has left the company where it is, in a predicament in an industry where management must be constantly reevaluating the company to determine whether it needs to change to compete more effectively. What separates good managers from bad managers is the kinds of changes they make. And unfortunately, Midwest had some bad managers who didn't make decisive enough changes in order to better prepare the airline for the changes the industry now faces.

The AirTran deal is far from perfect, but it will leave the airline in a better position than it is in currently. Midwest management must try to negotiate the best deal for the airline and its shareholders, which includes trying to secure an offer that's better than the $15 AirTran is currently making. Ultimately, however, Midwest management must accept the AirTran deal because it will help modernize the airline, provide additional service to the Milwaukee and Kansas City regions, and provide long-term job security for most current Midwest employees. Whether this deal goes through or not after July 16 is an open question, but in my mind, and in the minds of at least a substantial minority, if not a majority of Midwest investors, the takeover deal should be executed.