Air Tran closer to Midwest Acquisition?

[LGA Fleet Service]

AirTran Holdings Inc said Thursday holders of nearly 57 percent of Midwest Air Group shares backed its hostile takeover bid, bringing it a step closer to completing the deal.

"We view the significant level of tenders to date as a ringing endorsement of the business plan," said AirTran Chief Executive Joe Leonard in a statement. "We would expect Midwest's management to take this as a serious vote of no-confidence."

Midwest,which has called the roughly $389 million bid inadequate, wasn't immediately available for comment.

AirTran said 13.9 million Midwest shares, or 56.6 percent of its equity, were tendered under AirTran's cash and stock offer that expired Thursday. AirTran Thursday extended the offer, which is currently valued at about $15.89 a share, to June 8.

Midwest shares closed on Wednesday at $15.10.

AirTran, the 10th-largest U.S. airline by revenue, has been seeking to acquire its rival for months and has raised the bid twice.

The current offer consists of $9 in cash and 0.5842 shares of AirTran common stock for each Midwest share.

Orlando, Florida-based AirTran, parent of low-cost carrier AirTran Airways, made its initial offer worth $290 million in October and publicized it in December. It raised the offer to $345 million in January and then to $389 million in April.

Milwaukee-based Midwest has asked investors to pass on the bid and has offered a stand-alone expansion plan that calls for additional routes and fleet replacement.

 

[whlinder]

Midwest is going to have a tough time fighting them off it seems if they want to stay independent.

Considering all the issues with US integrating pilots, what would pilot integration be like at new Air Tran? Is FL union? ALPA?

 

[citrus jock]

Midwest is going to have a tough time fighting them off it seems if they want to stay independent.

Considering all the issues with US integrating pilots, what would pilot integration be like at new Air Tran? Is FL union? ALPA?

We have an in-house union (The National Pilots Association). Representatives from our union have met/talked with representatives of their pilots. What integration would look like depends on who's answering that question.

 

[whlinder]

What integration would look like depends on who's answering that question.

That's not a good start..

My first thought (as a 100% outsider) was that since these aren't massive carriers with widebodies or more than 2 fleet types that it wouldn't be a big deal, but then I thought about it further. FL has tons of 73Gs on order; I would assume that guys in the right seat and in the 717 expect to fly those as they come online, no? But then FL goes and buys YX with the stated plan of retiring the MD80s and replacing them with their 73Gs. Well now those MD80 pilots have to go somewhere. Do they go to the 73Gs that are coming online to replace them, pissing off the FL pilot who was there when those 73Gs were orded and expected to move into? Or do the YX MD80 pilots go to the back of the line and watch FL pilots take their captain's jobs on new 73Gs? And just how upset would each group be at each outcome, and would they be upset enough to disrupt the operation and the merger?

Or am I completely off?

 

[citrus jock]

You're not off at all. In fact, you only listed a few of many possible scenarios. When you bring pilot bases into the equation, things could really get interesting.

To respond to some of your comments/questions: Our 717 and 737 pilots make the same pay per hour. The only advantages of being on one plane versus the other is leg lengths (west coast is all 737) and seniority (being more senior on one plane compared to the other). One thing I've heard is that we don't want any MD80s. So, if this thing goes through, what do you do with those guys? Whether they go to the 717 or the 737, life suddenly becomes very different for them. Will there be enough flying in MKE for them to hold MKE as their base (on a 717), or do they have to commute to ATL? They may have to choose between sitting reserve in MKE (and thus a big cut in pay) and commuting to ATL to make the same, or less money than they were before. If that's someone's choices, they're not going to be happy. On the other hand, that same person may be told they're going from the MD80 to the 737, but they don't have a class date for 3 months, so take the next 3 months off with (minimum 70 hr. guarantee) pay. Again, that may or may not make a person happy. Having said that, I understand that in any business, especially this one, there is no "right" or "guarantee" to be happy. But that kind of brings me to your comments about disgruntlement amongst the different groups.

Judging from our last merger (AirTran and Valujet), there will be various groups/individuals that are unhappy, as there is no way to please everyone. The willingness and ability to adversely affect operations depends on, among other things, who/how many are unhappy. During that merger, things got ugly because Valujet pilots (being the buyer), generously offered date-of hire. AirTran pilots, who had an ongoing seniority dispute of their own, rejected the offer. So, there was animosity between AirTran pilots, and between Valujet and AirTran pilots. This deal, I fear, has the same potential for hostility. My understanding is that the most senior Midwest pilots have a date-of-hire of 1984, while the most senior AirTran pilot's is 1993. As the buyer, I don't see us offering DOH. If you do a ratio method (10 of us, 1 of them, or something to that effect), you could have one of them who is 10 numbers junior to someone hired 9 yrs. after him, and he's 11 numbers senior to one of his fellow new-hire classmates. The classmate, who was #2 at the old company, is now #22, and everyone ahead of him, except for one person, was hired at least 9 years AFTER him. By the time you throw in what their contract says versus what our contract says, sprinkle in a few dozen lawyers and at least a half dozen individual lawsuits and stir, you've got one hell of a mess that, from past observation, takes years to play out. I will say that during the AirTran-Valujet merger, my observance was that the infighting between the two groups did not spill over into daily operations. At that time, my own seniority was only affected by 5 numbers, and for about 2 years. If my seniority was affected by a couple hundred numbers, for many years, and I had to commute, I probably would have felt different. Different enough to do something to disrupt operations? The answer to that question is the wild card in this situation, if this current buyout goes through. Until you're in someone else's shoes, and experience their pain, you really can't say what you would or wouldn't do. Also, during the last merger, decisions about seniority were handed down by an arbitrator. You were told, "Here's the way it is. If you don't like it, leave - or file a lawsuit." So, lawsuits were filed, more decisions handed down, more lawsuits filed, etc. Again, nothing spilling over into daily ops, but it wasn't a very nice working environment.

I don't know if any of that answered your questions. It's due to all the "what ifs" and unknowns that I'm against this deal. The big wigs at corporate can show you on paper why this is a good thing. The things I mentioned don't show up on their balance sheet.

 

[CynicalResAgent]

I have flown on FL 3 times and was neither impressed nor dissappointed, the gate agent was a long time friend and I was upgraded twice. The service was pretty standard and I can't complain but wasn't wowed either.

I have never flown YX but have some clients who have and they love them. I guess it's because YX has its roots in corprate travel, they just seem in touch with what great service is. I am taking my first flight on them in July, I had my choice of flying AA nonstop to SFO or taking YX thru MKE. I chose YX because I wanted to see what they were like. I wish both airlines well but personally hope this deal doesnt go thru because the industry would loose a unique competitor.

 

[whlinder]

Thanks Citrus. I guess my basic question at this early stage was "could there be issues with pilot integration" and the answer seems to be yes.

We'll see what happens. I would prefer YX stays independent since I love Signature service, but won't get overly worked up over the outcome. At least FL won the DCA-ATL slots so if it goes through hopefully they won't steal DCA frequencies from YX's routes.

 

[citrus jock]

Thanks Citrus. I guess my basic question at this early stage was "could there be issues with pilot integration" and the answer seems to be yes.

The possibility exists for "issues" not just from pilots, but from other labor groups as well. I don't mean to sound defensive in saying that, but your comment brought up another point. For example, we're (AirTran pilots) currently in contract negotiations; we have been for many months. During that time, I've heard of a select number of pilots who've taken it upon themselves to do certain things, because of the protracted negotiations, to (in their own minds) "speed things up" negotiation wise. This takes place in the form of intentionally delaying flights, wasting fuel, etc. I don't subscribe to this philosophy, but a few do. In the event that the buyout goes through, the potential does exist for individuals from each labor group to display their ignorance ("I didn't get what I wanted, so I'll try to make everyone else miserable") through intentional delays, etc. The difference between contract negotiations and integration issues (seniority, equipment and base bids, etc.) is that at some point, integration issues are permanently decided; once an arbitrator issues his final ruling, and once the subsequent lawsuits are filed and ruled on, there is a finality to everything. With negotiations, if someone's ingenious plan to single-handedly save the pilot group by delaying flights, causing the CEO to wake up one morning exclaiming, "Oh my gosh, another delayed flight. Let's give the pilots anything they want!", doesn't result in the group getting exactly what it wants, there's always the opportunity to do it all over again during negotiations for the next contract. I've certainly seen some pilots hold a grudge for a long time over a seniority issue; but at some point, they understand there's nothing they can do about it. With negotiations, there can be a "we'll get 'em next time" attitude.

I'm not sure of the working environment at Midwest (i.e. how happy they are). At AirTran, it's pretty good. A worst case scenario would be if things were bad all over, and then you throw in seniority issues. All it takes is one disgruntled labor group to louse things up. But that can happen at any airline, for reasons other than a buyout.

 

[delta777]

Midwest is going to have a tough time fighting them off it seems if they want to stay independent.

Considering all the issues with US integrating pilots, what would pilot integration be like at new Air Tran? Is FL union? ALPA?

The Wall Street Journal (subscription required) explains that under Wisconsin law, Midwest's management "can adopt a poison-pill defense that would block the takeover no matter what level or support it has from shareholders." The paper adds that Midwest's management "refuses to even meet with AirTran executives."

Let's not get too far ahead of ourselves. If the DAL/LCC hostile takeover attempt taught us anything, its that if the BOD of the airline being acquired doesn't ultimately get on board with the acquirer, the chances of a successful buyout/merger are slim to none. And this says nothing of the so-called "poison pill" Midwest has under Wisconsin Law. The fact that 57% of Midwest shareholders backed the Airtran offer is purely symbolic. Airtran knows this, and unless they can get the Midwest Management on board there's nothing they can do. As the article already stated, Midwest management even refuses to meet with Airtran officials, so extending the deadline for the umpteenth time will ultimately do little good.

 

[whlinder]

YX does have the poison pill but they could also be at risk to a shareholder lawsuit if they don't start considering the best interests of their shareholders. DAL only had to answer to their BK judge and creditors, and managed to convince them that their plan would bring a higher rate of return than the LCC buyout. Here we have a majority of shareholders, including big investment firms, backing the hostile takeover. If the YX BOD won't even discuss a merger they are really going to have to come up with some answers for their shareholders.

Believe me, I love YX and want them to remain independent, but I think eventually either Air Tran will raise their bid or YX will give in.

 

[flyhigh]

...that's also why FL has nominated three people to be on YX's board. If you have three people always saying no to the poison pill, plus any others already there saying it's worth talking to FL...they only need two more for a majority (I think YX's board is a 9-member board).

 

[KCFlyer]

Believe me, I love YX and want them to remain independent, but I think eventually either Air Tran will raise their bid or YX will give in.

Since Midwest has a rather large presence in the KC area, we have had a lot of letters to the editor of the KC start saying how they are very opposed to Airtran merging with them. One letter today was raving about how great Midwest is...and how the ticket price was such a bargain. Inside the business page was an article about Midwest's earnings expectations. That prompted me to write this to the Star:

I have read several letters to the editor concerning the Airtran/Midwest merger talks. Without exception, all of those letters mention the roominess of the seats and the amenities on the flight. One letter even mentioned that they couldn't believe they got all that for such a low fare. Airtran is a "low fare" carrier, Midwest is not. Wider seats and more legroom and fresh baked cookies all cost money. However they have been offering fares that are competitive with Airtran and Southwest. In the June 13 edition of the Star was an article entitled "Airlines Forecast Cloudy", which stated that Midwest said that full year results would suffer as a result of lower airfares. Midwest has fewer seats on their planes, which means that their costs per seat mile are higher than either Airtran or Southwest. Because they are price matching the true "low cost" carriers, and because of their higher seat mile costs, this outlook isn't going to get any better for them. I too enjoy flying Midwest, but for them to continue as a for profit business, their customers must be willing to pay more to fly them if they continue to expect two abreast seats and greater legroom. So are you willing to pay more? If not, expect to see more traditional seating arrangements whether Airtran is successful in their bid or not.

 

[QA4Jet-A]

...that's also why FL has nominated three people to be on YX's board. If you have three people always saying no to the poison pill, plus any others already there saying it's worth talking to FL...they only need two more for a majority (I think YX's board is a 9-member board).

You are correct,the BOD is 9. If FL is sucessful in getting their 3 in, they may be able to share some points of view I'm sure Timmy & Carol won't like to hear. One thing seems certain, the current BOD, as is, won't budge an inch from their 'Stand Alone' plan, even when a majority of the shareholders are asking them to. Glad I won't be there tomorrow when Ego City fights for their jobs.

 

[CO738]

I, for one, can't wait to see those green "a" 's busy on the ramp in MKE.

 

[whlinder]

KC- That is quite true, although YX manages to garner a much higher yield than FL. It hasn't resulted in any gangbuster profits, but they've done OK. However, YX is planning (if they stay independent) to switch from the all-signature service to part signature and part saver on all planes. IIRC the 717s that MCI mostly sees will turn into 40 seats of Signature service and 59 seats of Saver service. Pay a higher fare, get a Signature seat. Not much different from any other carrier, but the Signature seats will supposedly still be sold as coach vs. F/C class.

I think the Kansas City area also is worried about this takeover because Air Tran has been extremely focused on Milwaukee and promising to increase service there but hasn't said as much about MCI. Seems like FL has is committing to MKE as a hub but won't really committ the same or increased service to MCI. I could easily see those LGA and DCA slots that YX uses to MCI turn into flights to ATL or somewhere else.

Writing letters to the editor doesn't really matter though. Unless you're a MEH shareholder you don't have a say.