To: All Midwest and Skyway Airlines Employees
Date: October 26, 2006
From: T.E. Hoeksema
Subject: Third Quarter 2006 Financial Results
It is my pleasure to share the news that Midwest Air Group is today reporting a profit for the third quarter of 2006 -- our second consecutive profitable quarter.
Midwest Air Group posted net income of $1.7 million and diluted earnings per share of 9¢ in the quarter -- a significant improvement from the $26.9 million net loss and $1.54 per-share loss that we reported in the third quarter of 2005. Additionally, we increased operating revenue 23% on a 17% increase in traffic and 10% increase in capacity. Revenue per available seat mile was up nearly 13%, thanks to improvement in both load factor and yield.
Although fuel prices gradually decreased during the quarter, they remain considerably higher than last year. Fuel cost increases accounted for a $10.0 million negative impact on operating income, or 41¢ per share -- diluted, compared with third quarter last year. Fortunately, our strong traffic numbers helped mitigate the impact of the cost increases, as did our fuel-efficient Boeing 717 fleet and fuel conservation efforts.
With just about two months left in the year, it is critical we focus on achieving our 2006 safety, operational, customer service and financial excellence goals -- goals that hold us to the highest standards of excellence in the way we serve customers, treat each other and reward shareholders. Please remember that you are the vital link in our success.
Please accept my sincere thanks for your many contributions this past quarter and everything you will do in the quarter to come.
MIDWEST AIR GROUP REPORTS THIRD QUARTER RESULTS
Airline Reports Second Consecutive Quarterly Profit
Summary: Third Quarter 2006 vs. Third Quarter 2005
Net income of $1.7 million vs. loss of $26.9 million
Operating revenue increased 23.4% to $168.6 million
Scheduled service revenue passenger miles increased 16.8% to 1.0 billion on a 9.8% increase in capacity
Revenue per available seat mile increased 12.5% to 12.52¢
Operating income of $0.4 million vs. loss of $27.1 million
Diluted earnings per share of $0.09 vs. loss of $1.54
Higher fuel prices negatively impacted operating results by $10.0 million, or $0.41 per share -- diluted
Milwaukee, Wisconsin, October 26, 2006 – Midwest Air Group, Inc. (AMEX: MEH) today reported third quarter results for its Midwest Airlines and Skyway Airlines (dba Midwest Connect) operations.
"Broad marketing initiatives that increased passenger traffic, and an improved fare environment, contributed to our strong revenue performance and resulted in a second consecutive quarterly profit," explained Timothy E. Hoeksema, chairman and chief executive officer. He added that although fuel costs decreased in the quarter, they remain appreciably higher than a year earlier.
Comparing third quarter 2006 to third quarter 2005, operating revenue increased 23.4% to $168.6 million. Operating income improved to $0.4 million from a $27.1 million loss in the third quarter of 2005, while net income improved to $1.7 million from a $26.9 million loss. (Due to accumulated losses, Midwest Air Group discontinued recording federal income tax benefit on losses in second quarter 2004 and state income tax benefit on losses in second quarter 2005. The company did not record income tax expense in 2006 results, due to accumulated losses.) Diluted earnings per share were $0.09, compared with a $1.54 loss in the same quarter a year earlier. Results for the third quarter of 2005 included a $15.6 million ($0.89 per share) impairment charge due to the planned retirement of two MD
The revenue increase reflects a 16.8% increase in passenger traffic, due to strong customer demand in response to competitive pricing, as well as schedule and service enhancements. A 6.7% increase in revenue yield was driven by a reduction in industry capacity, a series of fare increases by a number of airlines including Midwest, and improvements in the company's yield management processes. Total operating expenses increased 2.7%, due primarily to the 9.8% increase in capacity and increased flight operations at Midwest Airlines, which led to increases in salary, wages and benefits; fuel expense; station rental, landing and other fees; commissions; and aircraft rentals. Fuel expense increased $13.4 million, or 27.8% -- of which $10.0 million ($0.41 per share -- diluted) was related to price increases (calculated by applying 2005 prices to actual gallons consumed in 2006 and comparing the result to actual 2006 expense). Fuel expense includes the effect of hedging, which negatively affected fuel cost by $0.1 million in the quarter.
Year to date, operating revenue increased 30.5% to $496.2 million. Operating results improved to a $1.3 million loss from a $51.2 million loss in 2005, while net income improved to $1.8 million from a $51.0 million loss in the first nine months last year. Diluted earnings per share rose to $0.09 from a $2.92 loss. Results for the first nine months of 2005 included the impairment charge, as well as excess engine overhaul expenses, capitalized expense write-offs, a litigation settlement and severance costs totaling $1.14 per share.
Midwest posted sizeable gains in market share in its Milwaukee and Kansas City hubs. In August 2006, the most recent month for which market share results are available:
Midwest Airlines and Midwest Connect carried 50.7% of all passengers departing from Milwaukee, up from 48.0% in the same month a year earlier. In August 2006, the airlines transported 165,978 Milwaukee passengers, up 4.8% from 158,364 passengers in August 2005.
In Kansas City, Midwest Airlines market share rose to 10.8% for August from 8.2% in the same month a year earlier. In August 2006, Midwest Airlines carried a total of 50,189 Kansas City passengers, up 43.2% from 35,053 passengers in August 2005.
At Midwest Airlines, passenger revenue per scheduled service available seat mile increased 16.1% in third quarter 2006 compared with the same quarter a year earlier. Load factor increased 4.6 percentage points due to a 17.5% increase in passenger traffic on a 10.6% increase in capacity. Revenue yield increased 9.3%.
Into-plane fuel prices increased 19.7% in third quarter 2006, averaging $2.29 per gallon versus $1.92 per gallon in third quarter 2005, and resulted in an $8.9 million unfavorable price impact. Fuel consumption increases resulted in a $3.4 million unfavorable impact in the quarter, primarily as a result of the increase in the number of flight operations.
In the third quarter, cost per available seat mile (unit costs) at Midwest Airlines decreased $0.0087 to $0.1156, or 7.0% (excluding fuel, decreased $0.0151 to $0.0724, or 17.2%) compared with third quarter 2005.
Note: Cost per available seat mile excluding fuel expense is an industry measurement that provides management and investors the ability to track changes in cost absent fuel-related expenses.
At Midwest Connect, passenger revenue per scheduled service available seat mile increased 7.6% in the third quarter. Passenger traffic increased 7.7% on a 0.6% increase in capacity, resulting in a 4.7 percentage point improvement in load factor, while revenue yield increased 0.5%. Cost per available seat mile increased $0.0145 to $0.2862, or 5.3% (excluding fuel, increased $0.0035 to $0.2088, or 1.7%) compared with third quarter 2005. Excluding fuel, the increase was due primarily to labor costs associated with ramp and dining services functions performed for Midwest Airlines; the transfer of ramp and dining services functions to Midwest Connect in mid-2005 has reduced the total cost of these services to Midwest Air Group. Into-plane fuel prices increased 16.5% in third quarter 2006, averaging $2.34 per gallon versus $2.02 per gallon in third quarter 2005, resulting in a $1.1 million unfavorable price impact. Fuel consumption was virtually unchanged quarter over quarter.
The company ended the quarter with $91.3 million in unrestricted cash, up from $76.2 million on September 30, 2005 and down from $99.0 million at December 31, 2005. Capital spending – net of credits used to fund such spending – resulted in a cash outlay of $6.5 million year to date and consisted primarily of the acquisition of one Fairchild 328JET and additional spare parts for the Boeing 717 fleet.
Highlights and Outlook
In the third quarter of 2006:
Midwest Airlines was awarded a five-year contract to transport express, first class and priority mail for the U.S. Postal Service. The airline has been carrying mail since 1985.
Midwest introduced a confirmed standby option, which for a $25 service fee allows passengers whose travel plans change to receive a confirmed seat on an earlier or later flight the same day. The option applies to refundable and most nonrefundable tickets, and award tickets.
Midwest Airlines came out on top in the 9th annual Business Travel Awards poll conducted by Condé Nast Traveler magazine, placing first in the single-class domestic airline category. Midwest also earned the highest scores in three of the five categories making up the single-class airline category: Seat Comfort/Legroom, Food, and Cabin Service.
Readers of Ingram's, Kansas City's business magazine, named Midwest Airlines the best airline serving Kansas City.
Midwest Airlines was awarded the Diamond Award, the top honor in the Federal Aviation Administration's Aviation Maintenance Technician awards program. The award recognizes exemplary training of maintenance technicians.
Midwest Airlines partnered with Abanco International to offer credit card payments for Best Care Cuisine onboard meals, alcoholic beverages and digEplayerTM entertainment units on Midwest flights. With the introduction of the new system in mid-November, onboard sales will be entirely via credit card.
Skyway Airlines appointed David C. Reeve chairman of the board, president and chief executive officer. Reeve originally joined Skyway in 1997 as president and chief executive officer, serving in that capacity until he moved to Midwest Airlines as senior vice president of operations in 1998. In 1999, he was named chairman of Skyway's board of directors.
Skyway Airlines signed letters of intent to acquire two Fairchild 328JET regional jets. One jet was purchased in third quarter 2006 and will enter scheduled service in the fourth quarter; the other was purchased in October 2006 and will enter service in first quarter 2007. Also in the third quarter, Skyway terminated its lease on one Beech 1900D aircraft.
The Wisconsin Supreme Court upheld a state property tax exemption for airlines operating hub facilities in Wisconsin. The decision exempts Midwest and other airlines that meet specific service criteria from Wisconsin state property taxes on aircraft and associated equipment.
In the fourth quarter of 2006:
Midwest Airlines reinstated its nonstop service between Milwaukee and Ft. Lauderdale and added a second nonstop daily frequency to its Kansas City-Orlando service.
Midwest Air Group increased the number of directors on its board from eight to nine, and elected James R. Boris to the new position. He is chairman of JB
Capital Management, LLC, a private investment firm.
Midwest Airlines re-launched Best Care News, its newsletter for frequent flyers, in a monthly all-electronic format -- reaching more people, more frequently, in a more cost-effective manner.
Additionally, Midwest plans to enhance schedules and upgrade equipment on a number of routes:
On November 1, Midwest Connect will reinstate Milwaukee-Columbus midday service and upgrade that service to regional jet. On November 16, the airline will upgrade Milwaukee-Dayton service to regional jet and add service on Saturdays. It will also upgrade the Milwaukee-Appleton market to regional jet, with the exception of one Saturday-morning roundtrip, and upgrade one additional Milwaukee-Grand Rapids roundtrip daily.
On December 3, Midwest Airlines will enhance its flight schedule in two key markets: Kansas City-New York La Guardia with a fifth daily nonstop and Kansas City-Milwaukee with an eighth daily nonstop. In addition to offering travelers a more flexible and convenient schedule on the routes, the new service also provides significantly more connection opportunities through Kansas City.
Midwest Airlines will enhance service between Milwaukee and Florida as part of its seasonal offerings, including daily nonstop service between Milwaukee and Ft. Myers through April 30, 2007. Midwest will also add second daily nonstop roundtrips to Ft. Myers, Ft. Lauderdale and Tampa from November 16, 2006 through April 30, 2007.
Midwest will launch new daily nonstop service between Kansas City and Ft. Myers, offering one daily roundtrip starting November 1, 2006. The airline will also add nonstop daily frequency between Kansas City and Ft. Lauderdale. The additional Ft. Lauderdale service will be offered November 1, 2006 through April 30, 2007.
Hoeksema said the company is optimistic, but cautious, as it looks forward. "We're certainly encouraged by the positive revenue and cost trends we've seen, though high fuel costs are an ever-present concern," he said. "We remain committed to maintaining profitability by doing what we do best -- running a cost-efficient organization that is dedicated to providing travelers with an exceptional travel experience."
This document contains forward-looking statements that may state the company's or management's intentions, hopes, beliefs, expectations or predictions for the future. Words such as "expect," "anticipate," "believe," "estimate," "goal," "objective" or similar words are intended to identify forward-looking statements. It is important to note that the company's actual results could differ materially from projected results due to the risk factors described in Item 1A. Risk Factors in the company's "Annual Report on Form 10-K" for the year ended December 31, 2005.
Note to employees: Financial charts for this news release are available on YXNet via a link on the home page.