Midway goes into financial nosedive By JEFF ZIMMER : The Herald-Sun jwz@herald-sun.com Aug 14, 2001 : 11:05 pm ET

Midway Airlines, the only commercial airline based in North Carolina, is in a financial tailspin that has the Triangle’s principal air carrier fighting for its life.

Just after midnight on Monday, the airline announced it had filed for Chapter 11 bankruptcy protection and was taking a host of severe cost-cutting steps that included laying off 700 workers, reducing its fleet by 17 aircraft and discontinuing service to nine destinations.

The abruptness of Midway’s actions was triggered by a "calamitous drop in business traffic" that hit the Morrisville-based air carrier this year, the company said. A $7 million second-quarter loss -- which gives Midway a loss of $15 million six months into 2001 -- pushed the airline’s executives to seek bankruptcy protection.

"The only way I would describe it is hideously disappointing," Midway President Robert Ferguson said Tuesday. "The events of the last 60 days are simply appalling."

The ride could get even bumpier for the airline, which in 1995 moved from Chicago to Raleigh-Durham International Airport.

The company expects to lay off another 300 employees by the end of the year, bringing the total job cuts to 1,000 out of a work force that started the year at about 2,250 employees strong.

And it will be tough for Midway to attract the same number of passengers with bankruptcy hanging over the company, said Michael Boyd, president of Boyd Group, an aviation research group in Evergreen, Colo.

"That doesn’t make people rush to the phone to book a seat -- it’s pretty hard to pick yourself up after this," Boyd said. "It’s lethal."

But Ferguson said the company has a plan for profitability.

"Despite economic conditions that have made a portion of our route network unprofitable and unsustainable, we are confident we will return to profitability by reorganizing and reducing our route network to traditionally profitable routes," he said in a release.

That plan included:

-- The immediate end of Midway flights to Buffalo, N.Y.; Dayton, Ohio; Pittsburgh; Rochester, N.Y., and Washington, D.C. The airline also will end flights to Los Angeles beginning Aug. 19; Birmingham, Ala., on Aug. 20 and Providence, R.I., and San Jose, Calif., both on Aug. 31.

-- The elimination of 700 jobs, including 189 pilots, 126 baggage handlers, 99 flight attendants and 292 others. The layoffs were the largest single round of job cuts to hit the Triangle this year. About 95 percent of the workers live in the Triangle, according to a Midway official.

-- The reduction of the airline’s fleet by 17 aircraft, including four of its Fokker F-100 aircraft and 13 of the 24 Canadair Regional Jets.

But it’s far from certain that those steps will be enough to pull the airline out of a dive that took many by surprise and sent Midway ticket holders to their phones for more information.

"I’ve been calling since 8 a.m. this morning," said Jeanne Stringall, a Hillsborough resident, late Tuesday afternoon. "I’m holding tickets for my family going to Orlando, so they’re ready to pack and go and we don’t know if they’re going or not."

The announcement also caused the Nasdaq exchange to halt trading in Midway’s stock until the company provides "additional information requested." When trading stopped Tuesday morning, Midway’s stock stood at $2.75 -- about a dime short of its 52-week low. It’s also 82 percent less than the stock’s initial selling price of $15.50 back in December of 1997 when the airline became a publicly traded company.

A trio of trouble

But it’s not the company’s stock price that’s causing problems for Midway.

Competition, fuel costs and a steep decline in business travel have combined to threaten the future of the airline, which is the most popular air carrier at RDU with 825,555 passengers -- 33 percent of the airport’s travelers -- using the company in the first quarter of 2001.

The trio of challenges came at the worst possible time for Midway, which last year started receiving some of the 15 Boeing 737-700s it ordered as part of a makeover of its fleet. Also, just last month, Midway significantly expanded its service to Florida from RDU, adding flights to Orlando, Tampa, Miami, Ft. Lauderdale and Jacksonville. And it started serving five new destinations in 2000, including San Jose, Calif.

"They expanded their route structure at a time there was an unpredictable, significant contraction in the economy," said John Kasarda, a professor of management at the UNC Kenan-Flagler Business School. "So they were caught in a downdraft."

The business decisions weren’t necessarily bad moves -- Midway had to expand in the face of stiff competition, said Kasarda, who has followed the airline industry for 15 years.

But it’s an unforgiving business, he said.

"The airline industry is among the most competitive in the world and very few make much money," Kasarda said. "Announcing bankruptcy -- it came as a surprise but not a total shock."

Boyd, the aviation expert in Colorado, said Midway was asking for trouble when it announced plans in 1999 to replace its Fokker F-100 jets with 15 new, larger Boeing 737-700 planes. While Midway has never said how much the new planes cost -- they now have 12 of them -- as of May the company owed $359 million for its aircraft purchases, according to a Securities and Exchange Commission filing from the company.

About $180 million of that is scheduled for payment this year with the balance due in 2002, the company said in the filing.

"What you had here was a very narrow ledge to be on to start with -- the 737-700s, that’s what pushed them over," Boyd said.

A smooth takeoff

Bankruptcy wasn’t the destination Jim Goodnight had in mind in early 1997 when he kicked in about $15 million as part of a $22 million deal to gain control of Midway, which moved to RDU from Chicago in 1995. Goodnight, president of the Cary software company SAS Institute, came away with 70 percent ownership of the airline, which had lost about $7 million in 1996.

One of the new leadership’s first moves was bringing in Ferguson, former chief executive at Continental Airlines, to take over Midway’s operations. Later in 1997, Midway went public, raising $65 million from its initial stock sale.

At the time, Midway served 13 destinations in eight eastern states.

After showing losses for its first four years of business after its 1993 launch in Chicago, Midway started carving out a niche for itself in 1997 as a small carrier with a fairly unique mission -- catering to business travelers.

It worked.

By the end of 1997, the company produced an $8.9 million profit and in the following year, Midway delivered a $15 million profit. But in 1999, the airline’s net income dropped to $9.4 million because of its aircraft fleet transition, high fuel prices, a pilot shortage and competition from Southwest Airlines and U.S. Airways’ MetroJet.

By this time, John Sall, who co-founded SAS with Goodnight, had become a major Midway shareholder -- the two billionaires together owned 47.4 percent of the company.

In 2000, Midway’s balance sheet crashed and the company posted a $15.5 million loss. Competition was one of the largest factors leading to the net loss, Midway said. But it also blamed several other factors such as fuel prices, bad weather, pilot training costs and the expense of retiring some airplanes. It was also in 2000 that Goodnight and Sall expanded their holdings in the company to about 66 percent.

Toward the end of 2000, Midway and its commuter partner were serving 26 destinations in 15 states.

Things didn’t improve in 2001 with the company posting an $8.4 million loss in the first quarter. Growth-related costs -- especially for pilot hiring and training -- drove expenses up 20 percent in a quarter to quarter comparison, the company reported.

Bankruptcy

Chapter 11 bankruptcy allows a company to continue to operate while it receives more time to pay off debts. It differs from Chapter 7 bankruptcy, in which a court trustee sells off the assets of a business to pay off creditors.

"The fact they’re in Chapter 11 and didn’t proceed right to Chapter 7 is an encouraging sign," said Michael Bradley, a finance professor at Duke University’s Fuqua School of Business. But, "The fact they had to cut jobs is maybe a more onerous sign than simply filing Chapter 11."

By filing for bankruptcy protection, Midway is protected from its creditors and can reorganize the company the way it wants to. Also, Chapter 11 opens the door for financing that would allow the company to continue, Bradley said.

Ferguson said Tuesday the company has $25 million in cash and will seek partners -- as well as consider acquisition offers -- to generate money to keep the airline afloat.

"I’m certainly hopeful they can work their way through these troubled times," said James Roberson, president of Research Triangle Foundation of North Carolina. The organization manages the 7,000-acre park, which is home to 137 organizations that employ some 45,000 workers.

Midway is important to the park because one of the primary questions companies looking to locate here ask about is air service.

"The thing about Midway is they were providing service to places nobody else flew," Roberson said. "I think they truly had become a favorite, I’m just so sorry to see them fall victim to the financial considerations that are affecting so many other people."

The Associated Press contributed to this article.

Information for holders of Midway tickets

If you have a Midway ticket to a discontinued destination, or a destination that will be discontinued by your flight date, you will either be reaccommodated on another carrier, or your ticket will be refunded, the airline said Tuesday.

If you purchased your ticket from a travel agency, you should contact that travel agency for your reaccommodation or refund. If you purchased your ticket directly from Midway, you will need to call Midway reservations at 1-800-44-MIDWAY or (919) 595-MDWY in order to be reaccommodated, or see below for information on ticket refunds. Midway Airlines’ reduction in service has also necessitated changes to schedules to and from other cities. If you purchased a ticket on Midway Airlines to or from destinations other than those being discontinued, you may wish to contact your travel agent or Midway Airlines in order to confirm your flight times.

If you have a refundable electronic ticket (Easy Ticket) purchased directly from Midway Airlines, you may submit a request for a refund to Midway by 1) e-mail at refunds@midwayair.com, 2) fax at (919) 468-1193 addressed to Refunds Department, or 3) by U.S. mail to: Midway Airlines, Refund Department, 2801 Slater Road, Suite 200, Morrisville, NC 27560

For complete information on refunds, please see the Refund Section of Midway Airlines Contract of Carriage or visit www.midwayair.com.

-- Anonymous, August 15, 2001