Sunday, October 24, 1999

Comair faced tough decision to sell

The Cincinnati Enquirer

        This much was certain: Comair Inc. would cease to exist as it had for the past two decades.

        Years of record-setting profits would come to an end. A track record as the fastest appreciating airline stock would be over. And the story of the little airline that changed the industry would have an abrupt ending.

        David Mueller knew that two Saturdays ago when he stepped off the plane from Atlanta and 15 minutes later, stepped into the boardroom at Comair's Erlanger headquarters. The fate was sealed in another five hours, after the airline's board of directors voted unanimously to sell the company to Delta Air Lines for $23.50 a share.

        ''Was there an emotion of, 'God, I wish there was things that we could do to keep this thing going as it was the last 15 years?' That wasn't going to happen. It's not going to happen,'' said Mr. Mueller, who founded the airline 22 years ago and continues to be its holding company's chairman and CEO.

        ''Our company was going to be a different company one way or another in the very near future, and it was our job to figure out what that looks like.''

        During those five hours Oct. 16 in the boardroom -- the third meeting in two weeks -- the directors contemplated three possible paths that had emerged:

        Sign another agreement with Delta. That would enable Comair to continue feeding the major carrier passengers from small and midsized cities. Because of increasing competition in the regional airline arena, any new agreement promised to significantly cut Comair's revenues and potential for growth. The 10-year agreement under which Comair has been flying as a Delta Connection carrier expires this month.

        Don't sign the contract. That would allow Delta to join with another airline and leave Comair to either seek another major carrier or risk the uncertain skies alone.

        Sell the company to Delta. The cost: a share price that's a 31 percent premium over its most recent close.

        None of the options were what Mr. Mueller -- who piloted Comair's first flights to northern Ohio in 1977 -- or other executives wanted to do. The option they chose, however, might have been inevitable.

        ''There's a lot of things in life that you may want to do or may not want to do -- but know you have to do because it's best,'' Mr. Mueller told The Enquirer Wednesday, two days after announcing Comair's sale to Delta.

        Mr. Mueller said the first two options were seriously considered. Company executives spent weeks compiling and analyzing industry data, such as looking at similar agreements between major and regional carriers. Other regionals are catching up with Comair's use of the jets that revolutionized the industry and led to record-setting profits -- but they're flying them for a smaller piece of the revenue pie.

        Comair executives concluded that a new agreement with Delta -- or any other major carrier -- would be different enough that Comair's revenues, profits and stock value could not be sustained. Analysts agree that one way or another, the good times were over.

        ''In my opinion, Delta was going to use their leverage to take some of Comair's revenues,'' said Jim Parker, airline analyst and managing director of SunTrust Equitable Securities in Atlanta. ''Profits would come down, and in turn, the stock price would come down.''

        Mr. Parker said slashed profits and share prices also would result if Comair risked becoming an independent airline.

       Still, taking risks is nothing new to the Mueller family. David Mueller started at age 15 taking those risks by learning to fly. He sought to get into commercial aviation during the late 1970s, during the uncertain atmosphere of federal deregulation.

       In 1977, Mr. Mueller and his father, Raymond, sunk almost $60,000 -- mostly from their collective savings -- into buying the assets of Wings Air, another commuter airline that was in bankruptcy. They wanted to risk succeeding where another had failed.

       The elder Mr. Mueller remains on Comair's board but has not been involved in the operation of the airline for about 12 years. He retired as chairman in 1990. Contacted at his Florida home last week, he declined to be interviewed.

        David Mueller said he and his father leveraged many of their assets, especially in those early days when cash flow tightened after a crash in 1979. An engine inexplicably died, sending the plane down and killing 8 people. The start-up carrier then had such a hard time attracting Cincinnati passengers that it moved the bulk of its operations to Dayton for eight months.

       ''Dad had to make some (investment) moves, I had to make some moves, but we got out of that relatively quickly,'' Mr. Mueller said.

       During even those hardest times, with two small children at home, Mr. Mueller said he never thought about giving up.

        ''I would always take a big risk for something that I believe in,'' he said. ''You've got to have the idea and the intelligence to pursue that idea.''

        Comair's biggest risk came in the early 1990s when Mr. Mueller sought to introduce regional jets to the flying public. No one had considered using the aircraft, which are more expensive to buy and operate than the industry-standard turboprops.

       But jets are quieter, are more comfortable, are faster and can fly farther than other commuter aircraft.

        And they were right. The jets' popularity, along with a revenue-sharing agreement signed in 1989 that didn't account for the jets' profitability, are keys to Comair's wild success on Wall Street.

        ''We bet the company in 1990 when we ordered the first jet. That was a billion-five ($1.5 billion for 50 jets) on a company that at that time had a net worth of $100 million, $150 million,'' Mr. Mueller said. ''But we all believed that was the wave of the future and as it turned out now everybody's trying to play catch up.''

        Indeed, most regional carriers -- including others that fly as the Delta Connection in other parts of the country -- have added jets to their livery and have hundreds more on order. Atlantic Coast Airlines last month signed a contract to fly 45 of their jets for Delta in the Northeast.

        ''I will bet my bonus that it's nowhere near what our contract that expires is like,'' Mr. Mueller said.

        The explanation is still hard to take for shareholders like Joe Dooley, a 28-year-old cellular technician who bought several hundred shares of Comair for $25.50 each in March.

        Mr. Dooley said he bought Comair as a long-term investment after researching the company and finding it performed well for shareholders. But now, he wants to avoid selling.

        ''I'm going to take a substantial loss,'' he said. ''It's not going to bankrupt me, but it's a disappointment to me.''

       Mr. Mueller said the disappointment could be worse with the alternatives the board considered. Airline stocks in general have been sluggish in recent months, and Comair's showed no promise of repeating its 10-year average annual return of almost 35 percent.

        ''The way our stock was headed, they might have woken up Monday morning with a $15 stock price,'' he said.

        At $23.50 a share, Mr. Mueller personally stands to make $23.4 million from selling his 1.3 percent stake in the company. His stock options are worth at least another $12 million, while his contract with Comair guarantees him almost $1.7 million if the company changes hands.

        Mr. Mueller knows that he's set for life. With almost nothing out of his financial range, he plans to travel and pursue other interests after fulfilling his three-year commitment to Delta as an adviser.

        He might breed horses; he might travel to Asia; he might spend more time with his family. Whatever he does, he'll do it with the knowledge that in October 1999, he did the best thing he could.

        ''Is it emotional? Hell yes, it's emotional,'' he said.''But I can tell you that the board members, employees, shareholders, customers, we can all hold our heads high.''


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