Midwest Connect (Republic Airlines) ERJ-170-100SU N813MA (17000031) climbs from Rwy 25R at Los Angeles International Airport (LAX). (Photo by Michael Carter)Midwest Airlines Inc. is being acquired by Republic Airways Holdings Inc., a move that ends 25 years of local control for the largest airline to fly out of Milwaukee's Mitchell International Airport, it was announced Tuesday.
The Midwest name will remain alive under Republic's ownership, and the vast majority of Midwest's 1,640 employees will keep their jobs, said Bryan Bedford, Republic CEO and future CEO of Midwest. Timothy Hoeksema, Midwest's long-time CEO, will retire when the acquisition is completed within a month or so.
But there will be job cuts, coming mainly from the ranks of administrative and back-office employees who are doing similar work performed by their Republic counterparts, Bedford said. Midwest's 112 union pilots and 120 union flight attendants will likely face pay cuts as they are integrated into Republic's labor contract, which pays lower salaries to its union flight crews than what Midwest flight crews earn.
Also, Republic plans to restore some of the destinations Midwest cut last year when the Oak Creek-carrier reduced service by 40% after jet fuel prices spiked. But Republic will be flying Midwest passengers on its Embraer jets. That aircraft has fewer wide Midwest "signature" seats than Midwest's nine remaining Boeing 717 jets, which will be phased out.
It adds up to big changes for Midwest, which celebrated its 25th anniversary this month. But some things will remain the same.
People who've booked future Midwest flights don't have to worry: those tickets will be honored once Republic acquires Midwest. Members of Midwest's frequent flier program will see their awards continue to be honored, Bedford said. And the chocolate chip cookies will still be served.
But the biggest challenge might be for Republic to convince local passengers, many of whom remain loyal to the hometown airline, that Midwest will continue to offer good service.
Bedford said the 94-seat Embraer 190 jets, which Midwest will begin flying non-stop to Los Angeles on Aug. 1, will include 10 seats that are the wide "signature" seats. He said that will help Midwest compete with other airlines, including low-care carriers Southwest Airlines and AirTran Airways.
The biggest distinction for Midwest will be that it will fly to more nonstop destinations from Milwaukee than its competitors, Bedford said.
Speculation about Republic possibly buying Midwest had been building among airline industry observers in recent months.
Tuesday's announcement comes just two weeks after Midwest said it was getting additional financing and jet service from Republic. As part of that transaction, Republic said it was lending Midwest $6 million.
Republic's role at Midwest has been growing since last fall, when Republic lent financially troubled Midwest $25 million. That loan, which helped Midwest avoid Chapter 11 bankruptcy, comes due in September. It was tied to the first Midwest-Republic contract, with Embraer 170 jets replacing 16 Boeing 717s, leading to a layoff of 240 Midwest employees.
Under the acquisition terms, Republic will provide $31 million - $6 million in cash, and a $25 million five-year note convertible to Republic stock - to TPG Capital, a Fort Worth-based investment firm that owns a 53% stake in Midwest. Republic also is acquiring Delta Air Lines' 47% stake in Midwest. Delta acquired that stake last year when it bought Northwest Airlines Corp., which joined TPG in the January 2008 purchase of Midwest for $452 million. Northwest had previously written off its investment in Midwest.
Republic is among the few U.S. airlines that is profitable at a time when the recession has hurt demand for air travel. Republic in 2008 reported total revenue of $1.48 billion and posted net income of $84.6 million. It flies regional routes for larger carriers, such as United Express for United Airlines Inc. Midwest accounts for about 5% of Republic's regional airline services revenue.
Republic's revenue and profits have grown steadily since it became a publicly traded company in 2004. Its largest customers for flying regional routes include Delta Air Lines Inc., US Airways Inc., United Airlines, Continental Airlines Inc. and American Airlines Inc. Republic carries a lower cost structure than those larger airlines in part because Republic's pilots earn less money, and because Republic isn't burdened with a heavy pension liability, industry consultant Vaughan Cordle said. "They're a little bit more efficient than everybody else," Cordle said.
With the Midwest acquisition, and Republic's disclosure Monday of its plans to buy Denver-based Frontier Airlines, Republic could end up owning two separate carriers, along with its business of flying regional routes for large airlines. Bedford said buying and operating Midwest and Frontier carries higher risk but also provides a way for Republic to diversify its revenue.
MIDWEST AIRLINES HISTORY
1948: Kimberly-Clark Corp. begins providing air transportation for executives traveling between its headquarters and company mills
1969: The company's expertise in operating a corporate air shuttle leads to the formation of K-C Aviation
1984: K-C Aviation and Kimberly-Clark form Midwest Express Airlines, which begins commercial operations with two planes serving three destinations from Milwaukee.
1989: Under an agreement with Midwest, Mesa Airlines Inc. operates a commuter feeder system for Midwest called Skyway Airlines
1994: Skyway Airlines becomes Midwest Connect
1995: Midwest Express Holdings Inc., the parent company of Midwest Express, holds its initial public stock offering
2003: Midwest Express changes its name to Midwest Airlines.
2007: Midwest fends off a hostile takeover attempt by AirTran Holdings Inc.
2008: Fort Worth-based TPG Capital and Minneapolis-based Northwest Airlines Corp. close on purchase of Midwest, with TPG owning a 53% stake. Later in the year, Northwest is acquired by Delta Air Lines.
2009: Indianapolis-based Republic Airways, which has provided air services and loans to Midwest, announces the purchase of the airline.
(Milwaukee-Wisconsin Journal Sentinel)
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