Northwest joined with TPG Inc., a big buyout firm that has invested in other airlines, to buy Midwest for $424 million. Or at least, they hoped that bid would get them Midwest. Late on Tuesday afternoon, AirTran upped its offer to $445 million.
Northwest has yet to respond to the new offer, but the company still has a strong incentive to keep Midwest from going to AirTran. Northwest and Midwest already have a partnership to sell seats on each others planes.
Midwest would give AirTran a strong foothold in the Upper Midwest, making it a serious competitive threat to Northwest in its home territory.
George Hamlin, with the consulting firm Airline Capital Associates, says Northwest undoubtedly wants to keep AirTran from gaining control of Midwest's hub in Milwaukee. He says that would cost Northwest some business.
"A no-holds-barred, low-cost, low-fare carrier, if that appears in Northwest's territory, that will cause them problems on the revenue side," he said.
AirTran charges Northwest's partial ownership of Midwest would raise antitrust concerns because it would stifle competition. And AirTran argues TPG would likely cut service and jobs at Midwest to boost short-term returns.
Antitrust experts say the combined market share of Midwest and Northwest in Milwaukee would surely raise regulatory eyebrows. Midwest says it carries about 50 percent of passengers whose trips begin or end in Milwaukee. And Midwest says Northwest has about a 20-percent share of the Milwaukee market.
"That's a big red flag,"says Richard Pierce, an antitrust law expert at the George Washington University Law School. He believes regulators would be wary of allowing two airlines that are financially linked to control so much of market.
Northwest insists it would be a passive investor and would not participate in running Midwest. But Pierce says Northwest's promises alone would not be enough to satisfy regulators.
"What the antitrust authorities will look at is whether they have the capability to influence managerial decisions," he said.
Nine years ago, Northwest acquired enough stock in Continental Airlines, another marketing partner, to own a majority of the voting shares. Continental said the deal protected Continental's independence. But federal regulators sued over antitrust concerns and Northwest eventually gave up most of its stake in Continental.
Northwest isn't saying yet how big its stake in Midwest would be. But Northwest is indicating it would be a minority investor.
Midwest Airlines spokeswoman Carol Skornicka says Midwest expect no legal roadblocks for the deal involving TPG and Northwest.
"The board has been advised by no fewer than five independent law firms' antitrust departments that this transaction is one that will be approved and close," she said.
A number of experts say Northwest and TPG haven't made public enough information about the deal to get a good read on how regulators might react.
That's the view of Jim Burnley, a former U.S. Secretary of Transportation and an expert on transportation law and policy.
"The devil will be in the details," he says. "If the investment is truly passive and a relatively small percentage, that will skew things in one direction. If it is a substantial minority investment and there are not strong constraints in place about how Northwest will interact with Midwest management, that will skew it in the other direction in terms of how it is viewed."
With AirTran upping its bid, Northwest's plan to invest in Midwest could be scuttled. But that will depend on how Midwest Airlines reacts to AirTran's bid and if Northwest and its investment partner counter with an even higher bid.