AirTran circling rival?
by Lou Whiteman
Updated 06:25 PM EST, Aug-18-2005
A recent shelf registration by AirTran Airways Inc. has industry analysts wondering if the discount airline is preparing a bid for one of its rivals.
AirTran filed with the Securities and Exchange Commission earlier this week to sell up to $225 million in debt securities, preferred and common stock and warrants. The Orlando, Fla., company said it would use proceeds for general corporate purposes, which could include debt retirement, working capital or "acquisitions of other airlines or their assets."
While the language of the filing was routine, it has rekindled talk by some in the industry that AirTran might be pursuing a bid for Midwest Air Group Inc., parent of Midwest Airlines. Oak Creek, Wis.-based Midwest now flies from its Milwaukee hub to about 24 large cities nationwide, as well as to nine markets from Kansas City, Mo.
Midwest has a market capitalization of about $42 million and about $66 million in total debt. The airline carried more than 2.3 million passengers in 2004, according to the Bureau of Transportation Statistics, ranking it 32 among all carriers, including independent airlines serving as regional affiliates.
By comparison, AirTran flew more than 13 million passengers last year across its mostly East Coast and Southern route map. The company, financially healthier than most airlines, has already shown its interest in expanding in the Midwest.
The airline last October struck a deal with ATA Holdings Corp. to acquire ATA Airlines' hub at Chicago's Midway Airport, along with other assets, for $87.5 million in cash. The U.S. Bankruptcy Court for the Southern District of Indiana, where ATA is reorganizing, scuttled that deal after Southwest Airlines Co. outbid AirTran for the Chicago assets.
"ATA was 'plan A,' but other options exist," said one person familiar with AirTran. While cautioning that he had no knowledge of negotiations between the carriers, the source called Midwest "a good fit at a similar cost" as the ATA deal for AirTran.
Analysts say AirTran seeks to grow in order to lessen its dependence on the its Atlanta hub, where the company is engaged in cutthroat competition with hometown Delta Air Lines Inc. The battle for Atlanta could become more difficult for AirTran in the months to come should Delta bring its costs down by declaring bankruptcy, which many believe could happen before 2006.
"They are clearly looking for a window to expand outside of Atlanta," Robert Mann, a Port Washington, N.Y.-based airline consultant, said of AirTran.
In addition to growing its operation in the heartland, a deal with Midwest also would give AirTran access to more Boeing 717 aircraft, the workhorse of the company's fleet. Midwest Airlines operates 19 717s, according to Federal Aviation Administration records, along with about a dozen older MD-80 jets.
AirTran has deals in place to acquire up to 100 larger Boeing 737s capable of flying longer missions, but the additional 717s could help the company connect more of the dots on its East Coast route map while deploying the 737s to expand its cross-country network.
A representative for AirTran cited a company policy of not commenting on rumors; a Midwest spokesman also declined comment.
Evergreen, Colo.-based airline analyst Michael Boyd said purchasing Midwest would give AirTran access to the lucrative Chicago market, its goal in trying to buy assets from ATA. However, a merger could spark a competitive response from Northwest Airlines Corp.
"Northwest has expanded significantly in Milwaukee," Boyd said. "I am not sure that wasn't to send a message to AirTran not to even think about moving in."
One downside to a purchase of Midwest is the company's ownership of Skyway Airlines Inc., which operates as Midwest Connect using smaller regional jets and turboprop aircraft. AirTran has previously experimented with using regional jets on some of its routes, but ultimately abandoned the concept.
Should a deal with Midwest fail to materialize, another potential AirTran target could include privately held Spirit Airlines Inc. of Miramar, Fla. Spirit has raised $225 million since February 2004 from private equity sources led by Oaktree Capital Management LLC in a move to build its operation across the Caribbean and Latin America, but the airline faces mounting competition as airlines big and small target tourist destinations such as those Spirit serves.
AirTran also could make another run at ATA should that company's agreement with Southwest falter, or attempt to purchase gates or other assets at Washington's Dulles International Airport from struggling FlyI Inc. should that company need to restructure.
But Boyd said AirTran has enough organic growth opportunities that it does not need to buy another airline, and cautioned the company against overextending itself in a deal.
"Airlines don't go out of business by missing opportunities," he said. "They go out of business jumping at them."
