WisBusiness: Midwest Air Could Be Back in Black for 2006

By Brian E. Clark


MILWAUKEE — Despite being battered by hurricane-driven high jet fuel prices this year, Midwest Air Group President and CEO Tim Hoeksema says his company could return to profitability next year.

For that to happen, analysts have said, overall capacity across all airlines will need to decline by around 3 percent and fuel prices — which are back to $2 per gallon from a high of $3 last month — will need to remain relatively stable.

“Fuel prices just went crazy this year,” Hoeksema said, noting that jet fuel cost only $1.30 a gallon for the first six months of 2004.

He said company planners had hoped for jet fuel costs of $1.42 for 2005.

“We would kill for those prices today,” he said during a Milwaukee Press Club event on Wednesday.

If the overall number of seats available in the industry decreases, Hoeksema said, Midwest Airlines could raise prices without losing customers.

“I think we will be pleasantly surprised,” said Hoeksema, who noted that his company’s stock price was $2.89 on Wednesday, up $1 from last year.

For the third quarter, the company reported that its losses doubled because of fuel costs and over-capacity. It had a net loss of $26.9 million, or $1.54 per share. Those figures were $13.4 million, or 77 cents per share, for the third quarter in 2004. The company said fuel costs jumped nearly 70 percent, almost $20 million, in the quarter. The sky-high fuel expenses pushed earnings down by $13.4 million, or 77 cents per share.

If the company eventually makes money, it would be a major turnaround since 9-11 terrorist attacks brought the industry to its knees.

In spite of its losses, he said Midwest had $76 million in unrestricted cash at the end of the third quarter. That means it should be able to handle additional losses before the hoped-for industry turnaround next year.

Hoeksema said his company has reduced costs by 28 percent and is now on par with low-cost carriers. He said Midwest Air also has updated its fleet, replacing DC9s with Boeing 717s that use 25 percent less fuel.

“However, we haven’t been able to pass on the majority of our fuel price increases because of over-capacity,” he said. “But we are hoping that will change next year,” he added.

He said fares have risen 12 percent in recent months and are up 16 percent from a year ago.

“And they will have to continue to increase or the industry will struggle greatly,” he said. “They can’t go too high, however, or ridership will suffer from sticker shock. But fares have been extremely low for a long time and have to go up.”

Hoeksema said competitors such as Northwest, Delta and United – all now in bankruptcy – are cutting their offerings, while Midwest has expanded its capacity, destinations and passenger loads.

“The industry can’t keep losing billions like it has and have 50 percent in bankruptcy,” said Hoeksema. “Something has to change.”

He said 2006 could be good for Oak Creek-based Midwest, which now has a market share of 50 percent in Milwaukee and is gaining in other cities such Kansas City. This is due in part, he said, to Northwest reducing its flights out of Milwaukee. It now has about 24 daily departures, down from a high of 38 this summer.

“We are focusing on the right things,” he said. “Our cost structure, excluding fuel, is close to that of the low-cost carriers, we have redesigned fare schedules, upgraded our fleet and are working to improve customer service.”

He noted that a recent Zagat Air Travel Survey listed Midwest as the best domestic airline for the fifth time in as many years.

“Our focus on customer service has never been stronger,” he said. “And it’s very important that we keep our service level high.”

But he also apologized for major service problems this summer when Midwest and Skyway Airlines merged its ground crews. The cost-cutting move caused delays and angered passengers.

“Frankly, we did a poor job of managing that transition,” said Hoeksema, who worked as part of a crew for a day to learn more about the problems.

“It was a painful couple of months, but in the long run, it was the right thing to do,” he said.