Midwest Air Group, Inc.

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Midwest Air Group, Inc.

6744 South Howell Avenue
Oak Creek, Wisconsin 53154
U.S.A.
Telephone: (414) 570-4000
Toll Free: (800) 452-2022
Fax: (414) 570-9666
Web site: http://www.midwestairlines.com

Public Company
Incorporated: 1984 as Midwest Express Airlines
Employees: 3,300
Sales: $522.99 million (2005)
Stock Exchanges: American
Ticker Symbol: MEH
NAIC: 481111 Scheduled Passenger Air Transportation; 481112 Scheduled Freight Air Transportation; 481211 Nonscheduled Chartered Passenger Air Transportation

Midwest Air Group, Inc., is the holding company for Midwest Airlines, Inc., Milwaukee's leading airline. Though relatively small, Midwest Airlines is an industry leader, finding profits where other airlines struggle, and leading the nation in customer service and satisfaction. Unlike many of its larger rivals, Midwest was able to avoid bankruptcy in the industry confusion that followed the September 11, 2001, terrorist attacks on the United States. Midwest is by far the dominant carrier at Milwaukee's General Mitchell International Airport. The airline also has a smaller hub in Kansas City, Missouri. Midwest Airlines is famous for the luxurious amenities on its Signature Service flights, including gourmet food served on china plates with linen napkins, and chocolate chip cookies baked onboard. The airline also offers a low frills Saver Service from ten cities oriented toward the tourist market. Both levels of service offer extra leg room.

Midwest Airlines flies to 20 cities in the United States, while its feeder subsidiary, Skyway Airlines, offers connecting flights to another 30 smaller cities under the Midwest Connect brand. At the end of 2005 Midwest Airlines' fleet numbered three dozen jets, while Midwest Connect had 21 planes. About one-third of the company's roughly 3,000 employees were employed at Midwest Connect.

BEGINNINGS WITH KIMBERLY-CLARK

Midwest Express Airlines began originally as an air transport service run by the Kimberly-Clark Corporation for the benefit of its employees. Kimberly-Clark was a paper products company, known particularly for its Kleenex brand tissue. Beginning in 1948, it used its own aircraft to fly workers out to mills in difficult-to-reach locations. By 1969, Kimberly-Clark's flight department evolved into a subsidiary, called K-C Aviation. This company ran Kimberly-Clark's small fleet of planes and also provided servicing work on the planes of the parent company's corporate clients.

By 1982, Kimberly-Clark's transportation needs increased, as it was having to shuttle employees between its headquarters near Appleton, Wisconsin, and a forest products research center in Atlanta. K-C Aviation became a regularly scheduled shuttle airline, serving Appleton, Atlanta, and Memphis.

The president of K-C Aviation was Timothy Hoeksema, a former pilot with the company. He oversaw a period of rapid growth at the flight subsidiary, helping it move from a 53-person operation in 1977 to a firm that employed 500 people and brought in $50 million in the early 1980s. Hoeksema had a feel for the airline industry, and he was instrumental in helping K-C Aviation become a full-fledged airline. The airline industry had been deregulated in 1978, allowing many small start-ups to get into the market. K-C Aviation was already doing much of what a small airline did anyway, making regularly scheduled flights for business people. It was not much of a change, then, to re-christen the company Midwest Express Airlines and begin nonstop service from Milwaukee to Boston, Dallas, Atlanta, and Appleton.

The new airline aimed small, at first wanting only to fill what looked like an available niche. One apparently shrewd business choice was claiming Milwaukee as its home base. Milwaukee's Mitchell Field airport had just undergone major renovations, and it had the advantage of being relatively close to north suburban Chicago. Chicago's O'Hare was both huge and congested, while Mitchell was by comparison much easier to negotiate. Hence the airline believed customers both in southern Wisconsin and northern Illinois would enjoy the ease of flying out of Milwaukee.

Midwest Express also wanted to concentrate on service. In the early 1980s, many small airlines were entering the market hoping to compete on price. People's Express and other small carriers offered inexpensive, no-frills flying. Midwest Express wanted to go the opposite route and offer opulent accommodations, friendly service, great food, and the convenience of direct routes without cumbersome layovers. Midwest's fleet was very small, at first only four planes, but it renovated them so that they carried only 60 seats instead of 85 or more. Seats were two-by-two instead of the usual three-seat layout, and the reduced number of seats meant maximum leg room. Instead of spending as little as possible on customer food, Midwest Express went all out. Its meals were served on china, with linen napkins, and typical dinner choices offered flyers were beef Wellington or lobster. Hoeksema was sure this emphasis on service would work out, though to some it seemed a risky business strategy. Because of his long experience with business travelers, Hoeksema felt sure he knew what customers wanted most.

The airline grew slowly, adding new routes each year, and gradually increasing its number of customers served. In 1985, the company suffered a tragic reversal, when one of its planes crashed just after takeoff, killing all 27 passengers on board as well as the four crew members. No wrongdoing was attributed to the airline, but it shook consumer confidence and set the airline back considerably with the loss of one quarter of its fleet. The company operated in the red for its first several years, losing more than $3 million by 1986, according to figures from the Department of Transportation. Yet Midwest's reputation grew. Its percentage of passengers at Mitchell Field increased from less than 1 percent in its first year to close to 10 percent four years later. Consumer Reports rated the airline number one for comfort in 1985, an honor it continued to enjoy. By 1988, the company was making a profit, and it was in the black year after year from then on. When they began, Midwest's flights were only 20 percent full, but by 1988 its flights were about 66 percent full, and sales stood at around $54 million. In addition, it still had the deep pockets of parent Kimberly-Clark to help. Kimberly-Clark put $120 million into Midwest's expansion in the late 1980s, allowing the airline to boost its fleet from four planes to 11. By 1989, it was the third largest carrier flying out of Milwaukee, and its direct flights took it to 15 cities.

COMPANY PERSPECTIVES

The minute you walk onto one of our Signature Service jets, you know Midwest is different. Wide leather seats, superior service, chocolate chip cookies baked onboard and competitive fares have helped us earn our reputation as "The best care in the air." We've added new dimensions with our budget-conscious Saver Service, featuring low fares and extra legroom to some of your favorite vacation destinations. Add our Midwest Connect regional service and there's something for both business and leisure travelers alike.

EXPLOITING A NICHE

Midwest Express grew in the 1990s, but it remained a small airline and avoided direct competition with the major airlines. It carefully exploited its niche as it expanded, keeping in mind its core customer group of business travelers. Thus it offered few trips on weekends, and timed flights so that business people could make day trips. While airlines such as Northwest and American might offer trips to Washington, D.C., every hour, Midwest Express typically scheduled early morning flights, with an early evening return. Midwest did not offer discounts to people booking several weeks in advance, as other airlines did, because it depended on the quick trips business travelers made as the need arose. Midwest's standard fares were thus comparable with other airlines' regular fares, though passengers who wanted a more economical flight might have turned to a bigger carrier to get it. By catering to business travelers, Midwest gave itself another profit advantage. Business travelers rarely checked luggage, but took carry-on bags for their mainly short trips. This freed much of the cargo hold, so Midwest's planes could earn money carrying freight. The company grew and prospered in the early 1990s, though several similar full-service airlines failed. Small full-service airlines that did not make it included Air Atlanta and St. Louis's Air One.

As the airline added more destinations, it looked for a smaller airline that could act as a "feeder," bringing passengers from small cities into Milwaukee to connect with Midwest Express flights. Midwest worked out an agreement with Mesa Airlines of New Mexico, and in 1989 that company inaugurated its new Skyway Airlines, or the Midwest Express Connection, for flights into Milwaukee. At first the companies had no direct financial relationship, but Skyway soon became a subsidiary of Midwest. Skyway ran a fleet of small, 19-seat turboprop airplanes, bringing passengers between Milwaukee and such cities as Green Bay, La Crosse, and Stevens Point in Wisconsin, and operating between other Midwestern towns, including Des Moines, Flint, and Cincinnati.

At its ten-year anniversary, Midwest Express was doing very well. The airline industry as a whole had trouble in the early 1990s, especially as customer satisfaction dropped. Out of the entire domestic airline industry, only two carriers were profitable in 1993. One was the no-frills Southwest Airlines, and the other was Midwest Express. Southwest spent on average 20 cents for passenger meals, while Midwest lavished $10 per passenger for food. Other carriers sought to imitate Southwest and cut down on frills as a way of clinging to often elusive profitability. Yet Midwest never faltered in its mission to provide first-class service and would consider trimming costs only in areas the public would never notice. It was going against the prevailing pattern in the industry, and it was working.

By 1993, Midwest Express was only the 24th largest airline in the United States, with revenues of $165 million. According to interviews with its president, Timothy Hoeksema, the airline did not have plans to expand aggressively. Hoeksema was nonetheless confident little Midwest would continue to do well despite troubling trends in the industry. In an article in Forbes from October 23, 1995, Hoeksema declared: "When you have an industry with dissatisfied customers, you have a business opportunity." In other words, as things got worse for the larger carriers, Midwest would still make money. Customers often specified they wanted to fly on Midwest. It was one of the few airlines that really had such a recognizable and positive identity. The company baked and served fresh chocolate chip cookies on board. No other carrier could beat that.

Midwest's growth was slow and controlled. In 1994 it opened a hub in Omaha. This gave it easier access to western markets, including flights into Los Angeles. By the mid-1990s the airline ran a fleet of 19 jets, and Skyway, its feeder subsidiary, had 12 smaller planes. Revenues surpassed $200 million for the first time in 1994 and continued to go up. In 1995, parent Kimberly-Clark decided to spin off the airline subsidiary. Midwest Express went public in October 1995. Kimberly-Clark hung on to 30 percent of the airline's shares, while sales of the remainder brought in $81 million. After going public, Midwest did not have the cozy backing of the large paper company, and it had to spend more money on its plane leasings because it lost the paper company's high credit rating. The new public company, however, was absolutely free of debt, with a comfortable cushion of cash.

KEY DATES

1948:: Kimberly-Clark inaugurates flight department.
1969:: K-C Aviation is founded.
1984:: Midwest Express Airlines is founded; first commercial flight occurs on June 11.
1987:: Company begins consistent profitability.
1995:: Kimberly-Clark spins off Midwest to public.
2000:: Midwest ratifies first union contract with pilots.
2003:: A major refinancing package keeps the company out of bankruptcy.

A SOARING STOCK

Midwest added a few airplanes to its fleet each year, buying slightly used planes from other carriers and renovating and refitting them. The airline grew to be a major player in Milwaukee, with about a 30 percent share of flights from Mitchell Field. It was still possible for the carrier to have an unprofitable quarter, such as a bad period in May and June 1996, when unusual fogginess around Milwaukee caused the airline to cancel a record 750 flights. Overall, the company steamed ahead, and its stock value was noted on Wall Street. By 1998, Midwest's stock was one of the stars of the market. The booming economy, good weather brought by the warm weather pattern El Niño, and a dip in fuel costs combined to bring the company's stock to an all-time high in February 1998. The company contemplated buying more planes and adding a third hub somewhere in the Midwest.

As the company encountered such good fortune, its employees began to organize. Midwest had operated without union representation through its formative years. In 1997 the Teamsters Union and the Air Line Pilots Association (ALPA) vied with each other to represent Midwest's pilots. ALPA won out after elections in December 1997, and the Association of Flight Attendants (AFA) began organizing roughly a year later. Negotiations between the unions and the company dragged out for some time. Negotiations for the first pilots' contract began in August 1998, and a federal mediator was called in the next March. With no contract imminent, ALPA took a vote on authorizing a strike in July 1999. A strike by pilots was narrowly averted in February 2000. Although the airline had been consistently profitable since the late 1980s, pay for pilots lagged behind other airlines. Other issues in the contract involved retirement pay and health benefits. At least 80 percent of the airline industry was already unionized, and settling its first contract with its pilots represented a major step in Midwest's maturation.

In the late 1990s and into the next century, Midwest continued to stand out among domestic airlines, for the same reasons it always had. Customer complaints were high throughout the industry, and consumers railed about flights inconveniently routed through hubs and planes being overcrowded and delayed. Meanwhile, Midwest won awards for its service year after year. Business customers who could afford to pay Midwest's fares chose the airline for its direct flights and its home-baked cookies. Midwest Express was the 17th largest domestic airline carrier in the late 1990s, and it was too small to compete directly with airline giants in many markets. Still, it had the flexibility to offer what the big fliers could not. The company relentlessly pursued its niche market. Midwest's long history of profitability was quite unusual in the industry, and the little airline made no indications that it would change its winning formula.

NAVIGATING CRISES AFTER 2000

In spite of its long record of success, there were signs Midwest was headed into trouble even before the September 11, 2001, terrorist attacks on the United States (9/11) put the aviation industry into crisis. However, unlike many of its peers, Midwest was able to remain solvent through the chaotic first few years of the new millennium.

In 1998, the company had begun to augment the 19-passenger Beech 1900 turboprops on its feeder operations with 32-seat and 42-seat Dornier 328JET aircraft. Its expansion plans were skewed, however, when the manufacturer canceled plans for the larger version.

Midwest committed to a $1.15 billion fleet renewal program in April 2001. The $400 million order for 20 Embraer regional jets for Skyway was deferred after 9/11, though the company went ahead with 20 of the larger Boeing 717s for its main line operations. The group lost $38 million in 2001 as revenues slipped 5 percent to $457 million.

In 2000, Midwest had tried unsuccessfully to establish a third hub in Indianapolis, after Omaha and Kansas City. Its operations at Kansas City were thriving, however, and the airline set up a reservation center there. Midwest then set its sights on Missouri City.

In July 2003 executives arranged a massive refinancing package with 11 creditors to keep the company out of bankruptcy. At the same time, they renegotiated contracts with business partners and labor unions. The company also freed some capital with a sale-leaseback transaction on its corporate headquarters.

An updated corporate identity accompanied the changes underway. Midwest Express and its Skyway Airlines feeder were renamed Midwest Airlines and Midwest Connect, respectively, in 2003. The parent company Midwest Express Holdings, Inc., began 2004 with a new name as well: Midwest Air Group, Inc.

Faced with potential delisting on the New York Stock Exchange, the company's shares migrated from the Big Board to the American Stock Exchange in September 2005. The ticker symbol remained "MEH."

Midwest's main rival, Northwest Airlines, filed for bankruptcy protection in 2005. It drastically scaled back competing service to Midwest's Milwaukee home. At the same time, more business travelers were taking to the sky, and fares were increasing. This was good news for Midwest, but it also had to deal with very high fuel prices.

Midwest was able to maintain its stellar reputation for customer service while paring costs. In 2005 the Zagat Air Travel Survey named it Best Domestic Airline for the fifth year in a row. At the end of 2005 Midwest Airlines' fleet numbered three dozen jets, while Midwest Connect had 21 planes; most of these were leased.

A recovery seemed in hand by the second quarter of 2006, when Midwest posted its first quarterly profit in three years thanks to more passengers and higher fares. "It's nice to have a profitable quarter," Timothy Hoeksema, who was still chairman and CEO, told the Milwaukee Journal-Sentinel, "but it's not like we can take a deep breath and sigh." Midwest was planning to rework its feeder system, replacing its Beech 1900 turboprops with more flexible 32-seat Fairchild 328JETS, while soliciting a partner to operate about a dozen larger 50-seat regional jets on its behalf.

A. Woodward

Updated, Frederick C. Ingram