NWA protects turf with Midwest

When faced with hand-to-hand combat in the airline industry, Northwest Airlines is known for doing whatever it takes to protect its competitive turf.

That reputation was on display again Sunday when Eagan-based Northwest successfully joined forces with a Texas-based private equity firm, TPG Capital, to acquire Milwaukee-based Midwest Air Group for about $430 million.

For Northwest, the deal contains both defensive and offensive dimensions because it succeeded in blocking Orlando-based AirTran Airways from buying and merging Midwest into its growing network.

"They did not want a strong, low-cost carrier in their back yard," Bob Fornaro, AirTran's president and chief operating officer, said in an interview Monday.

But Fornaro emphasized that the deal allows Northwest to accomplish more than simply defending itself. He predicted that Northwest now is positioned to reap even more revenue in the Upper Midwest.

"If two carriers get together with a combined market share of 70 percent in Milwaukee, their track record says they'll raise prices," Fornaro said.

Ben Hirst, a Northwest spokesman, said in an interview Monday: "Milwaukee is and always has been a very important market for Northwest. It is important for Northwest to continue to serve Milwaukee and keep its code share agreement with Midwest intact."

Midwest Airlines and its Midwest Connect operators had about 50 percent of the passenger market share in Milwaukee in 2006, while Northwest and its regional affiliates controlled about 18 percent.

While Northwest and Midwest will be jointly marketing certain flights through a code-share arrangement, Hirst stressed that the two airlines will remain competitors and are subject to antitrust regulation. If AirTran and Midwest would have merged, he said, there would be one less competitor in Milwaukee.

Northwest has said it will not have a day-to-day role in operations at Midwest. Federal regulators are expected to examine the deal. Midwest and TPG-Northwest are likely to complete an agreement this week.

If AirTran had prevailed in acquiring Midwest, Fornaro said, Twin Cities residents would have been able to fly to Milwaukee on bigger planes and gained access to a national low-fare network via Milwaukee.

The Wisconsin city has been a lucrative market for Northwest. In 2003, Northwest reported that Milwaukee travelers had generated nearly $100 million in domestic revenue for Northwest in 2002.

Bill Hochmuth, a senior investment research analyst for Thrivent Investment Management, Minneapolis, said that Northwest also refused to cede any territory in Milwaukee because it wants to continue to funnel passengers from Milwaukee into its national and international route network.

Carol Skornicka, Midwest senior vice president and general counsel, said that Northwest and Midwest customers will be able to take advantage of broader route networks as a result of their code-sharing arrangement.

Northwest said that select Midwest flights that connect at Midwest's Milwaukee and Kansas City hubs will bear the Northwest code. In addition, Northwest will also be using the code sharing on Midwest flights between Milwaukee, Kansas City and Omaha to Atlanta, Boston, Hartford, Los Angeles and San Francisco. The code sharing, which will begin in the coming weeks, is designed to help travelers make connections to Northwest's European and Asian destinations.

While Northwest has benefitted financially from code-sharing arrangements with other carriers, a news source familiar with Northwest's thinking said management recognized an AirTran-Midwest merger would "alter the competitive balance in Milwaukee."

Northwest did not want to upset the advantages that it had worked hard for years to build. For example, Northwest has continued to serve Milwaukee primarily with mainline jets, while competitors, such as United, Continental and American, switched to regional jets.

TPG, formerly known as Texas Pacific Group, has experience with investments in the airline industry and the news source said Monday that Northwest viewed TPG as "one of the largest and most sophisticated private equity firms in the business."

While AirTran Airways did not win the bid to acquire Midwest Air Group, Fornaro said it is not going away. AirTran serves the Twin Cities with flights to Chicago, Atlanta and Orlando. The low-fare airline expects to take delivery of 65 Boeing 737s between now and 2012.

Will there be more flights or new destinations out of the Twin Cities?

"Certainly we are going to give the Twin Cities a look," Fornaro said. "It's a large market and still overpriced."

Fornaro and AirTran CEO Joe Leonard, both former Northwest executives, were critical of Northwest's role as a "passive investor" in the TPG bid.

TPG and Northwest, a minority investor, bid $16 a share for Midwest, while AirTran bid $15.75 a share. Northwest has not revealed how much it has invested in the Midwest acquisition, but that information is expected to be included in a regulatory filing in the coming days.

"I think the Midwest employees will be in for a rough ride," Fornaro said, and he predicted that Milwaukee will not see the kind of growth in service that AirTran proposed.

Midwest's Skornicka said the board's "primary function is to preserve and enhance shareholder value," so the board chose the all-cash high bid by TPG-Northwest over AirTran's cash and stock bid.

She said the TPG bid also allowed Midwest to remain an independent company rather than lose its identity through a merger.

Liz Fedor • 612-673-7709 • lfedor@startribune.com