meh1 midwest express holdings, inc. raymond james & associates january 23, 2001
TRANSCRIPT
MEH 1
Midwest Express Holdings, Inc.
Raymond James & Associates
January 23, 2001
MEH 2
Investment Highlights
• Proven Premium Service Niche Market- High cost, high yield product and service- Strong business communities/underserved markets
• Historical Growth in Revenue and Earnings
• Attractive Growth Strategy
• Plan to Improve on Poor 2000 Results
MEH 3
Business Summary
• Began commercial operations in 1984
• Recognized as “Best U.S. Airline” by leading consumer surveys
• Single-class, premium service catering to higher-yield business travelers
• Only nonstop jet service on over 60% of core routes
• Serves 27 cities from Milwaukee, 5 from Omaha and 7 from Kansas City
- Fleet of 24 DC-9 and 10 MD-80 jet aircraft in service
• Developed Skyway Airlines operations to build feeder traffic
- Fleet of 15 Beech 1900D turboprop aircraft and 6 Fairchild Aerospace 328JET aircraft
- Serves 30 cities
MEH 4
Midwest Express Airlines: Today
Midwest Express Serves 28 Destinations in 18 States
MEH 5
Growing Skyway Service
Skyway Serves 30 Markets, Enhancing the Strength of the Milwaukee Hub
MEH 6
Premium Service Product - Key Features• Superior Value
- Fare structure competitive with other airlines• Convenient Schedule
- Only nonstop service on over 60% of core markets served- Designed to allow maximum use of business day
• Most Spacious Seating- First-class leather seats- Fewer seats / no middle seat / better pitch- Consistently rated ” the most comfortable coach seat”
• Superior Amenities- Premium food served on china- Complimentary champagne, wine and newspapers- Chocolate chip cookies baked onboard on luncheon flights
• Customer Focus- Extensive employee training directed at service to the customer- Same service niche for 16 years
MEH 7
Premium Service Product - Key Benefits
• Customer Preference / Loyal Following
- Independent research shows 75% of Milwaukee frequent fliers prefer Midwest Express
• More Profitable Passenger Mix
- Higher percentage of business travelers than other airlines
- Effective yield management
• Premium Yields
- In aggregate, 30% to 40% higher than industry
MEH 8
Our Track Record
MEH 9
Consistent Revenue Growth
• 10-year compounded annual revenue growth of 14%
0
100
200
300
400
500
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Source: Midwest Express Holdings, Inc.Source: Midwest Express Holdings, Inc.
(Dol
lars
in M
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ns)
(Dol
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in M
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ns)
RevenueRevenue
MEH 10
010
20
30
40
50
6070
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Operating Income
Operating Profits for Each of the Past 14 Years• 1987-2000 operating income of $282.9 million on sales of $3.1 billion• 1987-2000 operating margin of 9.1%• 1995-2000 operating margin of 10.2%
Source: Midwest Express Holdings, Inc.Source: Midwest Express Holdings, Inc.
(
Dol
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in M
illio
ns)
(Dol
lars
in M
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ns)
Operating IncomeOperating Income
Note: Information as reported, not pro forma
11.9%9.4% 8.1% 4.0%0.5% 3.1%
9.6% 5.5%
12.1% 11.3%11.2%
14.3%13.6%
1.4%
MEH 11
Ability to Capture Premium Yields
• Midwest Express has Historically Maintained a Significant Yield Premium
0.00
0.05
0.10
0.15
0.20
0.25
0.30
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Midwest Express (jet operations)
Average of U.S. Majors
Source: Midwest Express Airlines, Inc./Airline Monitor Source: Midwest Express Airlines, Inc./Airline Monitor
(Dol
lars
)(D
olla
rs)
Revenue YieldRevenue Yield
$.193
$.133 e
MEH 12
Yield Premium ExampleOther Airline Midwest Express
Aircraft Type 737-300 DC-9-30
Seat Capacity 134 84
Load Factor 64% 64%
Fare Class Seats Fare Yield Seats Fare Yield
A 9 $215 $0.24 21 $215 $0.24
B 5 $150 $0.17 19 $150 $0.17
C 33 $125 $0.14 9 $125 $0.14
D 39 $105 $0.12 5 $105 $0.12
Total 86 54
Average Fare $127 $167
Revenue Yield $0.14 $0.19
MEH 13
Yields More Than Offset Higher Product Costs
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
1993 1994 1995 1996 1997 1998 1999 2000e
Midwest Express (jet operations)
U.S. Majors
Source: Midwest Express Airlines, Inc./The Airline Monitor (MEA information as reported, not proforma)Source: Midwest Express Airlines, Inc./The Airline Monitor (MEA information as reported, not proforma)
(Cen
ts)
(Cen
ts)
Operating Profit per ASM for Midwest Express vs. U.S. MajorsOperating Profit per ASM for Midwest Express vs. U.S. Majors
MEH 14
2000 - It Was a Difficult Year
MEH 15
Several Issues Impacted 2000• Higher Fuel Prices
- $36.1 million fuel price impact- Essentially no fuel was hedged in 2000
• Threatened Pilot Labor Action - Revenue impact from travelers booking on other carriers- Higher labor costs
• Slower Capacity Growth than Planned Resulted in Higher Unit Cost- Training constraints- Aircraft refurbishment delays- Pilot attrition
• Unsuccesful start-up of Indianapolis operation- Competitive reaction- Inability to acquire Washington DC slots- Limited resources to support plan
MEH 16
Profitability: 1999-2000
Revenue $447.6 $480.0 7.3%
Oper Income 60.7 6.9 (88.7%)
Net Income 38.8 5.2 (86.5%)
Net Margin 8.7% 1.1% (7.6 pts)
Earnings/ Share $2.71 $.37 (86.3%)
Cash Flow(1) 52.0 22.2 (57.3%)
Year-to-Date as of December 31,
1999 2000 Change
Note: Represents the consolidated financial results of Midwest Express Holdings, Inc. - All dollars in millions Note: Represents the consolidated financial results of Midwest Express Holdings, Inc. - All dollars in millions except Earnings Per Shareexcept Earnings Per Share
(1)(1) Cash Flow = Net Income plus depreciation and amortizationCash Flow = Net Income plus depreciation and amortization
MEH 17
Operating Statistics: 1999-2000
Yield 18.5¢ 19.3¢ 4.1%
RPMs (millions) 1,958.5 1,974.5 0.8%
ASMs (millions) 2,993.8 3,163.2 5.7%
Load Factor 65.4% 62.4% (3.0 pts)
Revenue Per ASM 13.4¢ 13.3¢ (1.1%)
Cost Per ASM 11.5¢ 13.0¢ 12.7%
Fuel Price 60.7¢ 100.0¢ 64.4%
Year-to-Date as of December 31,
1999 2000 Change
Note: For Midwest Express OnlyNote: For Midwest Express Only
MEH 18
Areas of Focus/Opportunity
• Pilot Training - Our Solution
• Competitive Environment/Corporate Discounting - Our Strategy
• Fleet Maintenance and Fleet Plan - Our Design
• Marketing Programs - Our Vision
MEH 19
Pilot Training
• Investment in flight standards and training infrastructure
• Better long-term planning for simulator requirements
• Preferred customer status for simulator time
• In-house technology to reduce simulator requirements
• Attrition still a potential problem because of other airline pilot contracts
MEH 20
Competitive Environment
• Current competitive environment is not expected to change significantly
• Recent study supports continued targeting of business traveler segment
• Continued focus on sustaining market share dominance in Milwaukee
• Grow Kansas City with the objective of being a dominant player- Air Midwest codeshare effective March 2001- Advertising promotion focus first quarter 2001- Improve schedules/more markets
MEH 21
Fleet Maintenance
• Several aircraft maintenance issues impacted operational/financial results- Transition to phased maintenance program (MSG3)- Aircraft damage incidents increased- Aircraft conformity issues with recent aircraft acquisitions- Higher than anticipated employee turnover- Unscheduled engine repair costs abnormally high ($3.0 million)
• Situation will improve as the year progresses- Phased maintenance transition completed by mid-2001- Selective outsourcing- Organization realignment for process improvement
MEH 22
Fleet Plan
• Three additional MD80 aircraft and three additional 328JET aircraft will provide double-digit capacity growth in 2001
• Fairchild decision to cancel 428JET program will result in new aircraft type- Decision expected in first quarter 2001- Evaluating Embraer and Bombardier regional jets
• Midwest Express evaluating long-term fleet growth options- Decision expected in first quarter 2001- Evaluating Boeing and Airbus products
MEH 23
Marketing Programs
• Corporate discounting; will participate more but selectively
• Evaluating internet alternatives
• Continued focus on on-line sales
• Implementation of a corporate Web site product
MEH 24
Attractive Growth Strategy
MEH 25
Recreating the Success of Milwaukee
Omaha• Began operations in May 1994 with three jet aircraft
• Successfully replicated the business strategy from Milwaukee
• 6% overall market share, but dominant carrier in markets served
• Profitable since 10th month of operation
Kansas City• Serving Milwaukee-Kansas City since November 1989
• Initiated service from Kansas City to Boston (9/96),
New York (5/97), San Antonio (5/99),Washington Dulles (2/00), Washington National (10/00) and Atlanta (4/01)
• Consistently profitable, meeting expectations
• Announced as third base of operation in September 2000
• Air Midwest codeshare effective March 2001
MEH 26
Looking Ahead
MEH 27
Objectives in 2001
• Return to historical revenue and earnings growth
• Continued focus on customer satisfaction
• Improved operational performance
• Aggressively defend Milwaukee base and grow Kansas City
• Fleet plan decisions in first quarter