Midwest Airlines Is Flying High

Midwest Air Group (MEH) runs a champagne airline in beer country. From hubs in Milwaukee and Kansas City, the company's Midwest Airlines subsidiary serves about 20 US cities. Travelers on Midwest Airlines Signature Service to business centers get wide leather seats and freshly baked cookies. Midwest Airlines also offers low-fare Saver Service to some 10 vacation destinations. The carrier's fleet of some 30 jets includes Boeing 717s and McDonnell Douglas MD-80s. Midwest Airlines' Skyway feeder carrier subsidiary, which does business as Midwest Connect, uses a fleet of about 20 Fairchild jets and Beech turboprops to serve about 30 cities, mostly in the upper Midwest.

In the last week the stock has rocketed up more than 30% on a bid by AirTran Holdings of $290 million that was summarily rejected. Buying a stock because it might be bought out is not a good strategy. The fundamentals are what drive a good investment decision. Here's how those look for MEH.

The fact that AirTran (AAI) made an official bid which was more than 40% above the stock's price lets investors know that they have something of value that the market is under pricing. Of course, unless the deal is consummated at the higher price, then the stock will drift lower, back to some level which most likely will be above the pre-bid price but certainly well below where it is now. Or another suitor may step in with a higher offer for the company. Just what makes MEH so attractive?

There are profits here, or at least about to be. For the first 9 months of this year, the company lost only 1 cent per share. The last 2 quarters have shown profits of 39 cents and 9 cents. For the year, analysts expect the loss to be 5 cents. That's well ahead of last year's loss of $2.56 a share. Next year, look for 35 cents per share on the positive side. The company hasn't shown a profit since 2000. Any airline making a profit right now is the exception. Revenues have been ramping as well, moving from $415 million in 2004 to $523 million in 2005. This year, they should hit $630 million and be at $705 million next year, if the analysts are guessing right.

A couple of factors are helping the bottom line. Fuel costs are going down. They've fallen off noticeably in the last few months. The other is occupancy levels. Passenger miles increased by 17% in October when compared to last October. That may suggest a stronger than normal fourth quarter. The company added two new flights to its schedule a week ago, out of Kansas City to New York and Milwaukee. MEH is gaining market share in KC, taking 11% of the total in September, up from 8% last year in the same month.

All airlines need to constantly update their fleets. MEH is no exception. It added a Fairchild 328 in October, bringing its 328 fleet to 11. It also flies some rather old MD-80's that will need replacing soon, most likely in the next year. That means higher capital expenditures.

This stock has skyrocketed since early 2005 when you could have bought as much as you wanted for about $1.50. It's up 700% since then, so investors have been rewarding management for improving the operations. It seems this stock would be suitable only for investors with their seat belts firmly fastened. It's hard to believe the stock will hold its current levels unless it is sold at the bidding price or another suitor emerges. While the numbers are good, they've been baked into the stock already and further advances can only come from a higher bid or an actual sale.

MEH 1-yr chart

Disclosure: Author has no position in MEH.