It's Going To Be A Bumpy Ride, Sam

Sam Zell is a vulture investor who likes to move fast--whether it's motorcycling with his buddies across Nepal or snapping up bankrupt companies, such as mattress maker Sealy Corp. or bicycle maker Schwinn Cycling & Fitness. But recently Zell has expanded his love of speed to include the airline industry, an area he has wisely avoided before, while other savvy investors such as Warren E. Buffett, Carl C. Icahn, and the Pritzkers learned their lessons the hard way. Now it may be Zell's turn to get airsick.

Last July, Zell's $1 billion "vulture fund," Zell/Chilmark Fund LP, paid $25 million for 90% of tiny, money-losing Midway Airlines Inc. But Zell doesn't expect Midway to stay small for long. Under Zell-appointed management, Midway has moved from Chicago's overly crowded Midway Airport to Raleigh/Durham, N.C., where American Airlines Inc.'s departure has left plenty of room to expand. More surprising, Midway recently ordered four brand-new Airbus 320 jets, which list for $45 million each, at a time when many major carriers are canceling or deferring their orders. Although Midway flies to only eight cities today, the airline will add four more destinations in June and is even considering flying to the West Coast and the Caribbean, high-traffic routes where there's already a lot of competition.

"FRYING PAN." Zell insists Midway can take off. A nonunion workforce and cost structure about 35% below American's will allow it to make money where American could not, he says. Plus, Midway's core fleet of eight fuel-efficient Fokker 100-seat jets can operate on a breakeven basis when less than 50% of their seats are full. So far, Midway's results at Raleigh are ahead of schedule. "We're doing very well," says Zell.

Most airline experts, though, are very skeptical. They say the last thing the industry needs is another small, low-fare carrier flying north-south along the Atlantic coast. Continental, USAir, Kiwi, and Air South are all losing money doing just that. "Midway has jumped out of the frying pan back into the frying pan," says Michael Boyd, president

of Aviation Systems Research Corp.

Moving to Raleigh/Durham also seems questionable. Its recently expanded airport is losing market share to nearby bigger hubs dominated by major carriers--USAir Inc. in Charlotte, N.C., and Continental Airlines Inc. in Greensboro, N.C. "American, with its considerable market clout and reputation, could not make Raleigh work. How can Midway?" asks Doug Abbey, president of consultant AvStat Associates in Washington. Ironically, it was Midway President John Selvaggio who recommended that American set up its Raleigh hub.

BASIC INSTINCT. Zell, who has dubbed himself the "grave dancer," usually buys troubled companies with real assets and strong brand names. But Midway has almost no assets. Its jets are leased, it owns no gates, and even its maintenance work is outsourced. "Midway Airlines is more of a paint scheme than an airline," says Lee Lipton, an analyst with Avitas Inc., a Reston (Va.)-based aviation consultant.

And Midway is hardly a brand name. The first Midway airline went bankrupt in 1991. It was reincarnated by another investor group in 1993, but soon the red ink was flowing fast again. As of June 30, 1994, the latest figures available, the new Midway had lost $11 million and had only $762,861 in cash to offset $19 million in liabilities.

Still, the institutional investors in Zell/Chilmark are inclined to trust Zell's instincts. His list of credits include lucrative investments in drugstore chain Revco D.S., fertilizer maker Vigoro, and Santa Fe Pacific, the former rail, energy, and gold conglomerate. "We consider investing in anything," Zell says. "We're professional opportunists." Walter Knorr, Chicago's comptroller, president of the Police Pension Fund, and a Zell investor, says Zell is "a cagey, aggressive investor. He's not a guy I would like to be playing poker with." However, not all Zell's investments are thriving these days. Manufactured Home Communities Inc., one of Zell's publicly traded real estate investment trusts, posted poor fourth-quarter earnings.

Zell's risky plunge into the airline business has many people wondering what he's up to. "Maybe he's looking for a tax-loss carryforward," suggests Boyd. Zell spokesman Kirk Brewer says investors needn't worry--Zell doesn't have his ego wrapped up in this one, and Midway represents only a tiny fraction of the Zell/Chilmark Fund. That's good, because the skies haven't been too friendly lately. Buckle up, Sam.

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