While the rest of the airline industry promotes the idea of no-frills, virtually fat-free flying, Midwest Express is pampering its passengers with premium service. Meanwhile, in France Fairlines hopes to emulate this success.
A handful of peanuts and a dribble of Coca-Cola never satisfied anyone, least of all an airline passenger. There seems to be no contest. One the one hand, squeezing into an airline seat, jostling for elbow room with your neighbour and listening to the loud rumbles coming from their stomach. On the other, adequate leg room, with the luxury of impeccable, personal service - the flight attendants even smile. The decision has to be easy - apart from a huge price differential, that is.
Not so for Milwaukee-based Midwest Express. Passengers have long sacrificed adequate service in favour of a cheap fare. But Midwest Express has managed to amalgamate a superior product with competitive fares. The airline claims that it offers 'the best care in the air', providing passengers with luxury service at competitive coach or discounted fares, which are equivalent to those charged by the majors.
The airline's focus on customer service is very strong. 'We are very proud of our friendly staff, who are responsive to customer needs. We treat every customer as a guest in our own home,' says chairman and chief executive officer Timothy E Hoeksema.
No doubt many of the airline's customers would like an invitation to Hoeksema's home. Midwest has not only bucked the no frills, low fare trend, it is positively flaunting luxury. In most airports, passengers are offered complimentary morning coffee and newspapers prior to boarding. Once on board, passengers lounge in roomy seats in a two-by-two configuration in the airline's single class system. Midwest spends an average of US$10 per passenger meal - more than twice the industry average. The extra investment pays for luxuries such as fine china, linen napkins, and à la carte cuisine. Chocolate chip cookies, baked on-board, are the airline's trademark.
Hoeksema says the product was born out of frustration with poor service levels following deregulation of the US airline industry. 'Declining service standards mean that the needs of the business individual are not being met. We saw a need in the marketplace and looked at it as an opportunity.' In Hoeksema's opinion, cost pressures, mounting competitive forces and a proliferation of low-cost carriers have turned a full meal service with a smile into something which people merely remember fondly from the good old days of old.
Midwest's idea seems so simple - a good product at a reasonable price. You would, however, expect this to come at a cost to an airline itself. Many point to the many years of persistent profitability demonstrated by that pioneer of low-cost flying, Southwest Airlines, to vindicate the viability of the no frills concept. Yet despite being the antithesis of the Southwest model, Midwest has achieved the unusual distinction of consistent profits for the last 11 years.
Operating revenues for Midwest Express Holding, the holding company for Midwest Express and its wholly owned regional airline subsidiary, Astral Aviation, increased by 10.6 per cent to US$88.4 million for the first quarter ended 31 March 1998. Operating profits jumped by 45.3 per cent to $9.4 million.
This builds on an impressive financial performance for 1997. Revenue increased by 13 per cent to $344.6 million; operating income rose by 12 per cent to $38.5 million; and net income increased by 15 per cent to $24.9 million, a 7.2 per cent net margin. Revenue passenger miles grew by 13 per cent to 1.5 billion and capacity rose by 12 per cent.
On 27 May 1998, the airline is due to split its stock three-for-two in the form of a 50 per cent stock dividend to increase the number of outstanding shares available for institutional and retail investors from 9.5 million to 14.1 million. The split comes one year after the first stock split and two and a half years after the holding company became publicly held on the New York stock exchange. Midwest Express Holdings' stock was trading at $48.60 in April.
While the airline is profitable as an operating unit in its own right, and proud of never having received a subsidy from its former parent, Kimberly-Clark, capitalisation from Kimberly-Clark certainly benefited Midwest during its early years.
But how does Midwest still manage to achieve such healthy profits? Its unique concept of cushy service in small, underserved markets brings Midwest a big advantage: a large number of business class passengers, even on its two daily nonstop services to top leisure destination, Orlando. While the airline's fares are comparable to those of other carriers, the larger percentage of business travellers results in premium yields - 30 to 40 per cent higher than the average across the industry.
Midwest also benefits from a conservative business approach, claiming that effective revenue management, a strategic approach to managing costs, and disciplined expansion make it consistently profitable. Despite Midwest's persistent profits, Hoeksema is determined to resist rapid expansion of the type which has caused economic turmoil for other airlines. 'We have a constrained approach to growth,' he says. 'Some have bigger ideas. People don't understand our business limitations - we promote very steady, control-operated growth. ValuJet meanwhile pursued 100-150 per cent growth per year.'
The airline looks for economies in areas that don't impact its passengers. 'It's very tempting to knock off $10 million of costs by picking up the phone and ringing up the caterers. But that would only be a good short-term solution and a bad long-term solution,' says Hoeksema.
Midwest makes very efficient use of its aircraft, operating its DC-9s for nine hours a day and its MD-88s for 12 hours daily. Current Midwest destinations are served by a fleet of 24 DC-9s, two MD-88s and eight MD-80s, with eight more MD-80s on order, for delivery by 1999.
Load factors are relatively high, with last year's running at an average of 65 per cent. 'The routes we've selected are very appropriate for the type of service we provide but you need pretty strong load factors,' says Hoeksema.
Unlike the Southwest model which needs lots of frequencies, Midwest pursues a niche of underserved markets, which are deemed too small or out-of-the-way by the larger carriers and small enough to discourage low-fare rivals. 'The likes of Southwest do better in a high volume market, while we work better in smaller markets, offering nonstop services,' says Hoeksema. The result is minimal competition.
'We serve markets that are a little bit too small for the big guys,' says Hoeksema. Midwest offers the only non-stop flights from 65 per cent of its network destinations. The airline is the market leader in Milwaukee, with a 30 per cent market share. The selection of Milwaukee as a hub has been a key part of its success: some 70 per cent of its passengers begin or end their trips in Milwaukee. From there, it now offers nonstop service to most major UScities, except Chicago, Seattle and Minneapolis-St Paul, serving 46 cities from coast to coast in the USand Toronto, Canada. The latest destination, introduced on 4 May, is Hartford, Connecticut.
Midwest opened a second base of operations in Omaha, Nebraska, in May 1994, and plans to add a third by the year 2000. The criteria for this city are that it should have a strong business community and be underserved by the majors. Both existing bases are middle-tier airports; Milwaukee handled a total of 5.6 million passengers in 1997, while Omaha handled 3.6 million. Both cities are home to major corporations, including Harley-Davidson and Miller Brewing in Milwaukee and Berkshire Hathaway, First Data and Mutual of Omaha Insurance at Omaha.
Midwest Express has 'no plans' to go international right now, says Hoeksema. A codeshare deal with Virgin Atlantic ceased last year, but the carrier has a frequent flyer link with Swissair.
Regional carrier Skyway Airlines feeds Midwest's jet service at Milwaukee from 23 destinations stretching as far as Omaha, Nashville and Toronto. More than 25 per cent of passengers travelling on Skyway connect to a Midwest flight. Skyway is operated by Astral Aviation, a wholly owned subsidiary of Midwest Express, and flies 13 Beech 1900Ds.
In April Midwest concluded a codeshare with American Eagle, whereby Eagle feeds Midwest at Los Angeles and Dallas-Fort Worth from 39 cities. This is the first time American Eagle has agreed to feed a carrier other than American apart from American's partner, Canadian Airlines.
Wherever Midwest moves its concept to next, the airline already proves that steady profitable growth is possible by offering high quality service at reasonable prices. And Hoeksema is not prepared to change tactics. 'Our job is to offer customers what they want,' he says. Midwest's niche is unique in the US. 'As far as I know, right now nobody in the USis doing what we're doing,' says Hoeksema.
Clearly the demand for luxury increases with longer flights, and Hoeksema admits that quality of service makes little difference on a 35 minute hop. He happily concedes that there is plenty of opportunity for both types of service. 'It's not all Coke and peanuts. The type of service needed depends on the market - you need a balance,' he says.
While the need for both low-cost and luxury carriers undoubtedly exists, the fact remains that most eager, young startups have pursued the Southwest approach and failed miserably. Midwest, meanwhile, has found success with a completely different strategy.
A Fair Deal
Unlike their counterparts in the US, birth place of the fast-food joint and cheap motel, Europeans are no strangers to pampering and luxury - until they step on to an aircraft, that is. Then, a basic, no-frills service is fast becoming the accepted norm and service aspirations are quickly evaporating.
As the rest of Europe scrambles to offer the cheapest deal combined with the minimum service, Fairlines International is offering first-class accommodation at normal business class rates. The airline, based at Paris/Charles de Gaulle, has been promoting Europe's first dedicated business class service since it launched its scheduled operations in January 1998.
Fairlines president and majority owner François Arpels says that the airline aims 'to offer the most efficient service possible right now for business passengers in Europe'.
Notable differences from the 'throw a quick coffee and croissant into your lap if you're lucky' service include a single business class with 72 four-abreast leather seats on MD-80s. Each seat is fitted with an individual interactive entertainment system, with touch-screen technology offering the first intranet system onboard an aircraft. Two divans in the lounge at the rear of the aircraft are fitted with Jetphones. Wide luggage holders enable passengers to board with luggage, translating into the 'shortest boarding time possible'.
Fairlines even claims that its fares are 'very competitive' with majors' standard coach fares. Arpels insists that Fairlines' Paris-Nice return fare, which ranges from FFr1,900 to FFr3,300 (US$552), is on a par with Air France's and AOM's fares on the route. Air France's return fare currently ranges from FFr570 to FFr2,228 on Paris-Nice, while AOM charges between FFr890 and FFr2,360.
Fairlines does not want a fare war with Air France but aims to 'complement its Charles de Gaulle hub', says Arpels. Indeed, the carrier has signed an interline agreement with Air France, as well as similar deals with TWA, Saudi Arabian Airlines and Thai Airways International, and is finalising deals with other US and Asian airlines.
As well as services between Paris and Nice, Fairlines also flies from both Paris and Nice to Milan/Malpensa; all its services operate three times daily. This year, Arpels plans to add flights from Paris to Rome and either Barcelona or Madrid. The carrier operates two MD-80s, with three more due for delivery between November 1998 and March 1999. There are no plans for long-haul flights.
So far the takeup of the Fairlines concept is small, with passenger numbers averaging 15 per flight, but Arpels sees this as 'pretty good' and 'on target', although he hopes for an average of 20 by the end of the year.
Arpels expects Fairlines' revenues to reach FFr100 million ($17 million) in January 1999, after its first year of operations, and he hopes the airline will break even after two years. Arpels, whose father founded the van Cleef & Arpels jewelery firm, owns 51 per cent of the airline, while the remainder is held by four private overseas investors. The company's startup capital was US$13 million.
Fairlines keeps costs low by contracting work out and by keeping salaries in the 'lower range of what is seen today in France', says Arpels. He is adamant that Fairlines is right to give a higher standard of service, insisting that 'demand is there and very high'. He points out that 'fares for business passengers are still increasing, while coach fares are going down'.
Although he concedes that 'there is certainly a market for low fare airlines', Arpels maintains that scarcity of slots and high airport costs place them at a key disadvantage. As Europe's economy recovers and no-frills airlines proliferate, Arpels is betting that some discerning customers will aspire to something better.
Source: Airline Business
