Through The Fly's Eyes: Northwest Airlines

From Kevin Shult of Theflyonthewall.com

Northwest Helps Midwest to go Private

Last Friday, Midwest Air Group (MEH) let AirTran Holding’s (AAI) hostile offer expire at midnight, opening the door for Northwest Airlines Corp (NWA) to come in and make an offer. As of this morning, Midwest Air said it will pursue an all-cash offer of $16 a share from private equity firm TPG, despite the fact that two thirds of its shareholders had agreed to tender shares to AirTran.

Where’s Northwest in this? The regional airliner said it would participate in the Midwest acquisition as a “passive” investor with TPG, meaning Northwest would not participate in the management or control of Midwest.

Northwest’s desire to be involved in the Midwest acquisition was strictly a strategic act. Midwest Air controls 50% of the market at Milwaukee’s Mitchell Int’l Airport, compared to Northwest’s 19% share, according to the Associated Press. Airtran, which offered as much as $15.75 a share for Midwest, pledged to bring a large number of low-fare flights to Milwaukee if the acquisition was accepted. The deal would push Northwest – which just emerged out of bankruptcy in May – right into a pricing war in order to maintain market share.

The deal would need the approval from the U.S. Department of Justice, which reviews airline mergers for potential antitrust violations. Airtran said that TPG’s offer could raise some antitrust concerns based on the passive investment from Northwest. Analysts, however, have been commenting that the airline industry has needed consolidation to reduce excess capacity for years. Northwest said the two companies post-merger could explore cost reductions, like joint fuel purchasing, according to Reuters. Midwest said it plans to sign a definitive merger agreement by Wednesday.