Midway Airlines Corporation

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Midway Airlines Corporation

300 West Morgan Street
Durham, North Carolina 27707
U.S.A.
Telephone: (919) 956-4800
Toll Free: 1-800-44-MIDWAY (1-800-446-4392)
Fax: (919) 595-6000
Web site: http://www.midwayair.com

Public Company
Incorporated: 1983 as Jet Express Inc.
Employees: 925
Sales: $217.95 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: MDWY
NAIC: 481111 Scheduled Passenger Air Transportation; 481112 Scheduled Freight Air Transportation

Midway Airlines Corporation puts an old name on one of the youngest all-jet fleets in the United States. The original Midway Airlines flourished briefly before finally succumbing to bankruptcy in 1991. The new Midway takes a similar tack to the original, although it relocated to less crowded Raleigh-Durham, North Carolina, in 1993 after being crowded out of its Chicago home. Buoyed by the robust Research Triangle economy, Midway flies two million passengers a year to more than two dozen destinations.

Midway I: 1976-91

Midway Airport, 11 miles from downtown Chicago, had been the world’s busiest before the major airlines relocated to the newer, more remote O’Hare International. Irving T. Tague founded Midway Airlines Inc. in 1976 along the lines of Southwest Airlines, the upstart that had won many hearts from its home at tiny Love Field near Dallas. Employing a staff of 200, Midway began flying on November 1, 1979, linking Chicago, Cleveland, Detroit, and Kansas City with three McDonnell Douglas DC-9 jets.

The red lips of Midway’s billboards and print ads bade locals to “Kiss O’Hare good-bye”; cut-rate fares, sometimes one-third those of competitors, sweetened the offer. Midway thrived in the deregulated environment and came to totally dominate Midway Airport.

In 1984 Midway acquired bankrupt Air Florida Inc. and its three Boeing 737s. It dropped most of its routes, however, which were more geared toward leisure travelers. In Midway’s “Metrolink” experiment, the carrier installed business class seating (four seats across) throughout its DC-9s. Passengers did not flock to the idea in sufficient numbers, however, and the company reverted to the industry standard, five-across rows.

Midway lost $37 million in 1984 and 1985. Chairman Arthur C. Bass was ushered out, and David Hinson was tapped as his replacement in February 1985. Hinson, a former Navy fighter pilot, had joined the airline as an investor in 1978 after a career at United Air Lines, Northwest Airlines, and Hughes Air West, under Tague. He soon restored the carrier to profitability by cutting costs and refining flight schedules, using Chicago as a hub. He also sold a couple of planes and increased daily utilization on the remaining DC-9s and 737s while reducing labor expenses.

Midway looked west for new opportunities and developed more of the low-fare, leisure traffic previous managers eschewed. The company bought commuter carrier Fischer Brothers Aviation for its feeder traffic. Cooperative agreements also were penned with Canadian Airlines, VARIG of Brazil, and Air New Zealand. Traffic grew by more than 30 percent a year in the mid-1980s. By 1986, Midway was the fourteenth largest U.S. airline with revenues of $261.4 million. Employment reached 3,000.

Originally devoted to used planes, Midway switched to new models in the name of fuel economy. Five new Boeing 737s were brought on-line in 1986 and soon after Midway ordered eight new McDonnell Douglas MD-87s. Revenues reached $412 million in 1988. Aggressive expansion (eight new cities), however, was accompanied by a drop in profits to $6.8 million.

Hinson ordered 37 MD-80 jets worth $900 million in March 1989 as Midway began flying and advertising coast-to-coast. It won a bid for assets of bankrupt Eastern Airlines—including its Philadelphia hub, two Canadian routes, and 16 DC-9s—after government regulators blocked its sale to USAir.

Although measured growth had always been Hinson’s mantra, over-expansion on the East Coast helped bring Midway to the ground. Recession, high fuel costs, and price competition with Eastern (still flying) prevented Midway from ever capitalizing on the Philadelphia hub. Hinson hired Thomas E. Schick, formerly of USAir, to help Midway survive in the summer of 1990, cutting jobs and winning concessions from suppliers. Midway sold its newly purchased slots at New York and Washington for lease back and sold its Philadelphia hub to USAir for $65 million. However, this was not enough to satisfy creditors, and the company filed bankruptcy in late May 1991. Midway had grown its fleet from three to 44 aircraft and had never had a fatal crash.

Northwest Airlines agreed to hire most of Midway’s 4,300 former employees after outbidding Southwest for Midway’s assets, for which it agreed to pay about $170 million. Northwest canceled the deal, however, after purchasing Midway’s gate assignments, which some viewed as a defensive move to ward off competition from Southwest.

Midway finally ceased operations after Northwest dropped out of its buyout deal. Northwest blamed the deal’s failure on inaccurate reporting by Midway and a newly discovered leaky fuel tank at its hangars; its defense prevailed in later lawsuits. Meanwhile, Southwest Airlines moved into the void created at Midway Airport, hiring more than 400 former Midway Airlines employees. David Hinson went on to head the Federal Aviation Administration.

Midway II: 1993 and Beyond

Jet Express, Inc., incorporated in 1983, took the name Midway Airlines Corporation in November 1993. The new investment group assembled $251 million in start-up capital. Fokker, the Holland-based aircraft manufacturer, was among the investors, and the new company’s business plan rested on the wings of eight new (leased) Fokker 100 jets.

The Midway name took to the skies again on two of the Fokkers in November 1993. It was staffed by 150 employees, most alumni of the original Midway. Kenneth T. Carlson, the new president, had been one of the original Midway’s founders before starting New York Air in 1980.

The company contracted with American Airlines for maintenance. Midway’s relationship with American extended to frequent flier miles and access to the Sabre computer reservations system. Initial traffic was brisk. Nevertheless, the company lost $11 million in its first year and a half of operations.

The Zell/Chilmark Fund L.P., led by Sam Zell, bought 90 percent of Midway Airlines for $25 million in July 1994. President John Selvaggio, a former American Airlines executive, was hired by new chairman Jerry Jacob, also formerly with American. In March 1995, the new management relocated the company to Raleigh-Durham Airport (RDU), in the heart of North Carolina’s Research Triangle, which recently had been vacated by American Airlines. The name still fit, according to company representatives, since it was now based midway between North and South. After the transfer, Midway drew comparisons to Frontier Airlines, a West Coast airline of similar size and strategy that also had taken over an old American Airlines hub.

Although Delta Air Lines and USAir had well-established hubs in Atlanta and Charlotte, respectively, two other low-fare carriers also competed on Midway’s turf: Columbia, South Carolina-based Air South (which did not survive very long) and ValuJet (later AirTran), based in Atlanta. The latter flew to two of Midway’s largest markets, Boston and Orlando.

After moving to Raleigh, Midway ditched the no-frills philosophy of Southwest Airlines. The post-RDU Midway offered better amenities than other low-cost carriers but at a premium, pitching itself as an upscale carrier. Part of the gutsy play to bring Midway back into relevancy was an order for four new $45 million Airbus A320 jets, a bit larger than the Fokker 100s that made up its existing fleet, for ventures into the Caribbean.

Midway carried 1.2 million passengers in 1995. Employment increased to 1,100 since the move to RDU. The winter of 1995-96 was a trying one, however. Many pilots were fur-loughed and Midway had to restructure payments on its leased Fokkers. Fortunately for Midway, the bankruptcy of the Dutch manufacturer helped drive lease payments down on this model. The Caribbean gamble did not pay off, however, and Midway ended up returning all but one of the A320 jets in 1996. Nevertheless, good traffic on Cancun and Las Vegas routes justified keeping the last one. Other unprofitable routes were cut. Midway still planned to expand its offerings in the northeastern United States, however. It also sought to boost its customer service, appealing to businesswomen, for example, by designating one lavatory aboard each flight for females only.

Public in 1999

In spite of the trying winter (Midway ended up losing $8 million for the year), executives were preparing for an initial public offering. They aimed for Midway to triple in size by century’s end. The company raised $20 million from two investors, allowing it to buy a few more new planes to take over the Raleigh-Atlanta route that ValuJet abandoned to Delta Air Lines after its disastrous Everglades crash.

Company Perspectives:

Midway Airlines is a community of enthusiastic, friendly employees dedicated to providing superior customer service, thus promoting employee pride and company spirit. From reservation to destination, we are committed to inspiring our passengers to feel like flying again. Our vision is of continued growth as we lead the airline industry in on-time performance, efficient operation, and customer service.

Midway blamed its commuter partner, Midway Connection, for a sudden cessation of services related to FAA violations in 1997. Midway Airlines subsequently switched to Corporate Airlines (which operated small 19-passenger British Aerospace Jetstream 32 aircraft) as a commuter affiliate. It ordered ten Canadair Regional Jets from Bombardier in November 1997.

Midway went public the next month on the NASDAQ stock exchange.

Donald Burr, People Express founder, led a bid to buy Midway for $37 million. He planned to move the carrier to New York. In 1999 two investors, James H. Goodnight and John P. Sail, launched an unsuccessful takeover attempt after amassing 47 percent of company stock. They had offered $36 million for the rest of the company.

In March 1999, Southwest Airlines announced plans to serve Raleigh while US Airways (formerly US Air) provided low-cost competition in the form of its MetroJet unit. Other unpleasant news for Midway’s managers came when the carrier’s flight attendants became unionized.

Midway ordered 15 new Boeing 737s in June 1999 to complement its smaller Fokker 100s and Regional Jets. By this time, the airline dominated Raleigh-Durham Airport the way its namesake once had at Midway Airport. Traffic was lackluster in 1999, although it did peak at the end. Midway carried 2.1 million people during the year. Profits fell to $9.4 million from 1998’s $15 million although revenues were up three percent to $218 million. The winter of 1999-2000 saw Midway increase its flight frequencies.

Principal Competitors

US Airways Group, Inc.; Delta Air Lines, Inc.; AirTran Holdings, Inc.

Key Dates:

1979:: Original Midway Airlines begins flying out of Chicago’s Midway Airport.
1986:: Midway orders a dozen new jets to service booming traffic.
1989:: David Hinson places $900 million jet order and attempts to expand into Philadelphia.
1991:: The original Midway files bankruptcy, hit by tough market conditions and over-expansion.
1993:: Jet Express, Inc. acquires the Midway name and attempts to start anew in Chicago.
1995:: Crowded out of its home airport, Midway relocates to Raleigh-Durham.
1997:: An initial public offering raises about $38 million.
1999:: Investors try to take over Midway as Southwest Airlines enters its Raleigh base.