Hoeksema: defending the fortress at Midwest

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Tim Hoeksema, chairman of Midwest Air Group, has his hands full fighting off a takeover bid from AirTran Airways. He explains to Airline Business Americas editor David Field why he wants his Milwaukee-based carrier to remain independent

Build a better mousetrap, and people will beat a path to your door. That’s the old saying in marketing and retailing, but it’s under test in US airlines right now. Midwest Airlines has based its entire business model on offering a better mousetrap, in the form of high-touch service, all-leather two-by-two seats on most flights, and its trademark chocolate-chip cookies baked on board. The carrier operates as Midwest Airlines, the former Midwest Express, and regional carrier Midwest Connect. Its approach, dubbed “the best care in the air”, has worked well enough to gain the Milwaukee-based airline a strong following among business travellers through the Midwest.

And it’s also gotten the carrier a hostile takeover offer from an airline that shares very little with it except a similar fleet type. For more than a year, Midwest has been under siege by AirTran Airways, the Orlando-based low-fares carrier, and the stakes in the siege have gone up repeatedly. Midwest chief executive Tim Hoeksema tells Airline Business that the struggle is one between two very different approaches: “I’m a firm believer in the proposition that quality and service make all the difference, and that price is not the sole arbiter of survival in the business. And I’m a firm believer in keeping an airline small and manageable.”

AirTran, which has most of its flights at Atlanta’s Hartsfield airport, is not exactly a no-frills airline but it bases its selling premise on price, and then adds nice touches that make it seem a good bit more than a cattle car, such as satellite radio at every seat. But AirTran is essentially a price competitor, and it is also a growth airline, having grown to become a coast-to-coast carrier with Boeing 737s supplementing its 717 fleet. Midwest also bases its fleet around the 717, and some think AirTran wants the aircraft as much as it wants a hub and route system in the Midwestern states.

Fending off AirTran
But Hoeksema is determined to fend off AirTran, saying that the two airlines stand for very different things and that Midwest’s unique commitment to service “makes us a different company and a different culture. A lot of low-cost carriers don’t have a product that people really want to choose.”

Hoeksema, who’s been at Midwest since before it became a publicly traded carrier in 1984, insists that despite its service levels, it is a low-cost carrier. “As far as costs are concerned, we are in the best position in our history. Not counting fuel, our costs per available seat mile are down over 32% in the past five years. I don’t know of any other airline that has done that, certainly none that haven’t been in bankruptcy”. The airline has hedged about 90% of its 2007 fuel at lower prices than it paid last year, a move expected to save about $15 million, Hoeksema says. The company paid an average $2.17 per gallon in 2006 and has locked in at about $2.06 a gallon for 2007, he says. Midwest has also refinanced some $21.6 million in debt on terms that will save it some $1.5 million in annual interest expense. This positions Midwest to fend off the AirTran assault, he says, adding “we made money in 2006, and they didn’t. We are continuing to focus on the business and taking care of our customers. The outpouring of support from our customers has been amazing. They don’t want us taken over.” State officials have also supported Midwest.

As part of its defence, the airline is growing. Hoeksema says: “We’re going to add about six new cities to our route system this year. We’re also adding new aircraft that will give us about 21% growth in terms of available seat miles and in terms of our capacity in the marketplace.” It has already announced two new destinations from Milwaukee: Seattle/Tacoma and Duluth, Minnesota, and has added service between Omaha, Nebraska, and Los Angeles International, as well as setting considerable growth in feeder service operated by its Midwest Connect subsidiary and its new franchise operator, SkyWest. “We will continue to grow some in Milwaukee, to definitely grow in Kansas City and a few years down the road we’ll be looking for another focus city, like another Kansas City minihub.” Midwest is also far along in evaluating fleet replacement for its MD-80s with either Airbus A320s or Boeing 737-800s, he says. “That will be our growth platform airplane for the future.”

The year saw unit revenue growth of 12.5% and improvement in yield of 5.4%, with a $66 million improvement in operating income. Its share price had risen more than 60% last year before the AirTran approaches were revealed. That alone, Hoeksema says, demonstrates the Midwest strategy is working and that it made sense for AirTran to want to buy it. “We’re taking care of our shareholders by taking care of our customers,” he says.

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