AIRBORNE PROFITS

By DEBORAH SHAPLEY

In the brave new world of deregulation, airlines have foundered from a deadly mix of overexpansion and downward pressure on fares. Then there is Midwest Express Airlines, an upstart based in Milwaukee, Wis., that pampers customers with wide leather seats, free champagne and provisions that arrive on china--and thus far has a habit of pulling premium fares from passengers' pockets.

Tim Hoeksema, 50, Midwest's chairman and CEO, is a walking advertisement for the benefits of deregulation. He started as a pilot with Kimberly-Clark Corp. in 1969, back when the government assigned routes and set profit margins, assuring existing carriers a captive market and barring new entrants. It was partly because Kimberly-Clark's headquarters, then in Neenah, Wis., was off the beaten path that the company started its private fleet. "Air travel was difficult and expensive. We were frustrated," Hoeksema says. The paper company named its unit Midwest Express Airlines and began offering service to the public--specifically the well-heeled business public--in 1984, the year the Civil Aeronautics Board was abolished and a flood of new airlines entered the market.

Hoeksema saw the company's net income triple from 1994 to 1995, the year before Kimberly-Clark sold the airline. Net income grew by more than 12% in 1996, to around $20 million. Midwest now flies to 23 cities in the U.S. and Canada from hubs in Milwaukee and Omaha, Neb. Compound annual growth has averaged about 20% over the past five years--significantly better than that of most other airlines. Now Hoeksema plans a third hub--location to be announced--assuming the good times continue to roll.

The secret of Midwest's success is niche marketing: customer-first service to business travelers from underserved locations in the Midwest, plus nonstop flights to major cities elsewhere. For both, customers pay extra to be pampered. Those premium fares in turn pump up Midwest's revenue per passenger mile, or yield. Midwest's 24 DC-9s feature leather seats set two by two with no center seats. Dealing with a third fewer seats than standard passenger planes have, flight staff can give more individual attention. Besides, says Bob Bell, president of the Greater Omaha Chamber of Commerce, "they have hot, freshly baked chocolate-chip cookies."

Midwest has a good record on safety, although it had one crash, which killed 31, in 1985. It has been profitable every year since 1987. Lately the fresh-cookie airline has pitched itself to pleasure travelers--though there are limits on how much it can push the price in that segment. Says Wally Durso, president of Travel Dynamics of Brookfield, Wis., a Milwaukee suburb: "I don't believe fares are No. 1. If Midwest Express is within $50 of a competing airline, a lot of my clients will go with Midwest Express."

"With deregulation, airlines have become like restaurants, ranging from four stars to budget chains," says Clifford Winston of Washington's Brookings Institution and co-author of The Evolution of the Airline Industry. On the other hand, he notes, Midwest's reach may be limited in the long term by the industry's trend toward lower costs and cheaper fares to match, exemplified by that mass-transit paragon, Southwest Airlines.

The paradox for small airlines like Midwest is that they too may succumb to the swings in traveler demand to which the big airlines are particularly vulnerable. Thus far Midwest has succeeded because of its rural network and boutique-customer culture, but the strong economy has also played an important role. At the moment, of course, the economy's future also looks golden.

So pass those warm cookies. And the champagne.

--Reported by Marc Hequet/St. Paul

With reporting by Marc Hequet/St. Paul