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WisBusiness: Midwest Air chief details return to profitability

By Brian E. Clark

OAK CREEK – Speaking at a Milwaukee Press Club event almost exactly a year ago, Midwest Air Group President Timothy Hoeksema predicted his airline would be in the black in 2006.

His forecast – for a company that had barely avoided bankruptcy in 2003 – seemed a bit like wishful thinking at the time.

But in spite of fuel-price spikes this summer that sucked away millions in revenue, the airline has turned a profit for the first half of the year – thanks to a variety of measures including greater productivity, more expensive fares and fuller airplanes.

“Even if we only make a dollar, we’ll be profitable for 2006,” Hoeksema said in a recent interview with WisBusiness.com editor Brian E. Clark. “We have definitely turned this airline around.”

Brian Clark: What has made Midwest profitable again?

Timothy Hoeksema:
We have done a lot of things to position ourselves for the new economy in the airline industry. First of all, our cost for available seat mile – which is the unit of cost measurement in the industry excluding fuel – is down more than 30 percent since 2001.

Clark: How did you do that?

Hard, hard work. We eliminated some things, including free meals. We used to serve complimentary wine and champagne, shrimp scampi and filet mignon. But with one phone call, we cut $20 million overnight by not having that kind of food anymore.

We have replaced that with what we think is a pretty good “buy onboard program” with Mader’s Restaurant here in Milwaukee. They offer international cuisine on our flights. The quality is great and it has gone over extremely well. Their head chef manages our whole food program.

Clark: What do the meals cost?

They are $5, $7.50 and $10, depending on what you order. Food is still important, but we couldn’t afford to give it away anymore in this crazy industry.

Clark: And that was $20 million you cut in one phone call?

Yes. We had a huge food program prior to 9/11.

Clark: And the chocolate chip cookies?

We will never stop serving the chocolate chip cookies as long as I’m here. That’s one thing that won’t go. It’s kind of a trademark for us and we have served millions and millions of them.

Clark: What else did you do?

There has been a real focus on productivity and efficiency. We used to fly our planes nine-and-one-half hours a day. Now we fly them about 11 hours a day, so that is a big gain and we are getting a lot more use out of our assets.

And just hard work because we looked in every area of the company and said, 'How can we do this more effectively and efficiently?' Everyone in the company has worked very hard to reduce our costs significantly.

Clark: How about your labor costs?

We got more efficiency and productivity from our employees. Since 9/11, we have had various pay freezes and reductions and thaws. But we are back now to doing some salary increases. We also furloughed a lot of people in the first few years. We had never furloughed anyone before 9/11. The industry furloughed tens of thousands of employees. So we are more efficient and productive in labor as well.

Clark: How unionized is your workforce?

Our pilots and our flight attendants are unionized.

Clark: What sort of pay rollbacks did they accept?

In 2003, the pilots kept pay rate the same, but accepted work rule changes to get more efficiency and productivity. For flight attendants, there was a slight pay cut. Everyone has had to participate and do their part. In every phase of the company, there have been cost reductions.

Clark: Can you talk a little about the earnings side?

We have increased connecting activity and flows and aircraft utilization so we are getting more revenue from the same number of planes. Those types of things have paid dividends. This year we have seen a little bit of fare increase. The domestic capacity came down 2 percent to 3 percent this year for the first time in a long time. That allowed the industry to push prices up a bit.

Today, prices are 12 to 15 percent higher than they were a year ago. That is still 12 to 18 percent lower than they were five years ago, but at least it’s inching up to levels that are a little closer to where they should be.

We looked at virtually everything we could control – from the revenue side to cost side – while maintaining a high level of customer service.

Clark: Have you done much outsourcing?

We have done a little of that. But we’ve also done insourcing. In the food program I talked about, we run that in partnership with Mader's in our own facility, with our own people delivering all the food to the planes. We just contract for the food prep.

That has saved us a lot of money, so that we are actually making money from our buy-on-board food program. We took a huge cost center and turned it into a profit center. Every phase of our business has been reviewed and modified to some extent to lower costs and increase revenues. It has been a very tough five years in this industry.

Clark: How close was the company to bankruptcy in 2003?

Close. ... We restructured labor agreements and everything we had contracts with. We came close enough. It was something we never wanted to do and fortunately, we didn’t. But had we not gotten everything worked out, we would have had to do it.

Clark: When did the company make the transition to the black again?

Our first profitable quarter in four years was the second quarter of this year. And we are profitable for the first half. At least a couple of the analysts who follow us say we’ll make a profit this year, which would be very nice.

Prior to Sept. 11, we had 14 consecutive years of profitability. Only Midwest and Southwest could say that, even through the period of '90-'94, when the industry lost about $13 billion. We used to think that was a lot of money, until we lost $43 billion during the past five years. Since 9/11, it’s been extremely difficult to make money. But things should be different this year.

Clark: Fuel costs, at least at the gas pump, have fallen significantly in recent months, as much as a dollar a gallon. Is that decline reflected in airline fuel?

Not a dollar a gallon, but it is certainly down. To give you an example, six weeks ago we were paying $2.41 for a gallon and last week it was $1.97. That difference, if it were to stay for a whole year, is $50 million a year. We were paying 70 cents a gallon in 2002, so that is a couple of hundred million different than what we paid then and what we have paid recently.

So fuel is huge in terms of impact. It used to be 15 to 17 percent of our costs. Now for us and the rest of the industry, it’s about 40 percent. It is the single biggest cost factor by far. We are tiny, but one penny a gallon for us means is $1.1 million a year. The leverage is huge, so we are happy to see it come down in the past six weeks or so.

But oil prices are so volatile and very hard to predict. I’d like to think it will be the same or lower a month from now, but I really have no idea. For every “expert” analyst who says we will see $50-a-barrel oil, there is someone who says it will go to $100. Others are saying we are much more likely to see $80-a-barrel prices rather than $50. It is affected by politics in the Middle East, storms and even domestic elections.

Clark: This summer’s price run-up must have been somewhat unnerving for you.

It was. Fuel costs have been the nemesis of this industry for the past four or five years. It has cost us hundreds of millions of dollars in the past few years. Now fuel is down to just normal “horribly high” rates.

Clark: How have Northwest’s struggles affected Midwest?

They have reduced service here in Milwaukee quite a bit in the last year and that certainly has benefited us. There is no question about that. We are the market share leader here with about 52 percent of the market. Northwest is second with about 18 or 19 percent of the market. Certainly the reduction by other carriers, including Northwest, has benefited us.

We are also the number two carrier now in Kansas City with 12 or 13 percent share, behind Southwest with about a 35 percent share. American is third at about 10 shares. We passed American this summer when they reduced some flights and we added some.

Clark: Northwest has had a lot of labor trouble. How were you able to make things work with your employees?

Number one, we have very good relationships with all of our people, including our representative people. We have always tried to communicate openly, clearly and fairly with everyone. When things got really tough after Sept. 11, we met with our employees and shared everything with them and worked out pretty amicable agreements.

We had to do something together to ensure that we would be a stronger company going forward and be a survivor. We did it in a friendly, cordial and positive way because those are the kind of relationships we’ve had.

Clark: Are you back to the same number of employees you had before 9/11?

No. We are a little shy of that. But we are doing more hiring as we take on more airplanes. We took delivery of our 25th Boeing 717 earlier this year. So we have been growing. This year, our capacity growth will be about 14 percent. Last year was just under 20 percent.

Clark: In terms of passengers, where are you?

We are probably in excess of 9/11 now because our load factors are higher.

Clark: And you were recently ranked by a magazine as the number one business carrier?

We were number two the last two years behind Jet Blue, but we are now number one again, according to a Conde Nast Traveler business traveler survey. We are very proud of that.

We were number one before that, so we have regained our old position at the top. They are quite a bit bigger than we are and they are out of New York, so they have a lot more people who have flown them. They are about six times our size in terms of revenue passenger miles. The fact that an airline our size even gets recognized in one of those surveys is pretty good.

Clark: Where does Midwest rank in term of size among U.S. airlines?

We have less than half a percent of the national market share. So we are very tiny. In size, we are about number 23rd in this country.

Clark: What are the airline’s long-term plans?

We are looking at what is the right airplane to replace our MD-80s with. There are more fuel-efficient planes out there. And with the volatile cost of fuel, planes like a Boeing 737 or an Airbus A320 or something like that might be a good idea. We are looking very hard at that.

We also will most likely add some 50-seat airplanes next year to our route system to serve some cities that don’t have quite the traffic for our 88-passenger Boeing 717s. They are too big or too far in terms of distance for our 32-passenger regional jet. That will be a fair piece of our growth for next year.

Clark: What would $100-a-barrel oil do to Midwest?

I don’t even want to think about it. All airlines would have to raise prices. It would be very tough, but not just on us. It would have a huge impact on many businesses, on the whole economy. It would be very serious.

Right now, though, it’s nice to see oil costs going down and things getting better for our industry again. We’ve just tried to work on the things we can control, because there is nothing we can do about fuel.


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