Large Midwest Air (MEH) Holder Pequot Capital Has "Significant Concerns" About Private Equity Buyout

In a 13D filing after the close on Midwest Air Group Inc. (AMEX: MEH), 8.8% holder Pequot Capital Management disclosed a letter the company noting that they have significant concerns regarding the decision of the Board of Directors to pursue an $16 per share all-cash proposal from a private equity firm and its consortium. Pequot said it is not convinced that this taxable, all-cash indication of interest is superior to the enhanced cash and stock offer that the Issuer indicated was made by Airtran Holdings, Inc. (NYSE: AAI) this past weekend.

In the letter Pequot's Steve Pigott said, "After speaking with management this afternoon, we still have serious concerns with the Board’s decision and strongly encourage them to re-evaluate their position. Given that shareholders owning approximately 63% of Midwest’s outstanding common stock recently expressed their approval of the Airtran offer, we think the Board should keep both its mind and its options open with respect to a potential combination with Airtran."

A Copy of the Letter:

Dear Ms. Solberg and Messrs. Skinner, Erickson, Payne, Jr., Sonnentag, Albertine, Kalmbach, Treitel and Hoeksema:

Asf August 13, 2007, Pequot Capital Management, Inc. beneficially owns 2,184,200 shares, or approximately 8.8%, of the outstanding common stock of Midwest Air Group Inc. (“Midwest”). According to public filings, we believe we are Midwest’s largest shareholder.

We have significant concerns with this Board’s decision to pursue an all-cash proposal from a private equity firm and its consortium. We are not convinced that this taxable, all-cash indication of interest is superior to the enhanced cash and stock offer that you indicated was made by Airtran this past weekend. In addition, we fail to see how TPG and Northwest will be able to match the job creation and growth opportunities promised by Airtran for the benefit of Midwest’s employees, suppliers, customers and communities.

Due to the large number of synergies available in a Midwest/Airtran transaction (which may not be replicated by a private equity buyer), we believe there is significantly more upside in Airtran’s cash and stock offer than in a nominally higher all-cash deal. Specifically, we believe that, upon reaching a deal with Midwest, Airtran’s stock price would increase significantly in response to both the available synergies and the earnings accretion that such a combination would provide. Given that the Board previously focused on, among other items in its Schedule 14d-9, the proper sharing of synergies, we fail to understand why the Board now favors a deal that provides no synergies at all to its shareholders.

It is important to note that an increase in Airtran’s stock price would benefit all Midwest shareholders. In fact, we believe an announced deal with Midwest would cause the value of the Airtran offer to exceed, in a very short time, the $16 indication of interest you have currently deemed to be superior. We believe this to be the case even without taking into account the tax-free nature of the Airtran stock being offered in the deal. Despite the volatile markets cited in the TPG letter, Airtran shares rallied 14% after it was announced that Midwest had entered into a confidentiality agreement with Airtran. Taking into account Midwest’s recent operating difficulties and the recent market environment, we feel very comfortable with Airtran as a buyer. The same may not be said for a financial buyer, which would lack Airtran’s strategic rationale and typically provide greater risks to closing. We note your conclusion that the TPG indication of interest provides greater certainty than Airtran’s previously outstanding exchange offer. Consequently, we would look very skeptically at any provisions that would reduce the certainty of closing - including, but not limited to, any inability of Midwest to require specific performance from the buyers to close the transaction and any allocation of the regulatory risks to Midwest.

After speaking with management this afternoon, we still have serious concerns with the Board’s decision and strongly encourage them to re-evaluate their position. Given that shareholders owning approximately 63% of Midwest’s outstanding common stock recently expressed their approval of the Airtran offer, we think the Board should keep both its mind and its options open with respect to a potential combination with Airtran.

Respectfully,

Steve Pigott

Octavian Management Discloses 5% Stake in Midwest Air Group (MEH), Would Support Higher Offer from AirTran (AAI)

In a 13D filing on Midwest Air Group Inc. (AMEX: MEH), Octavian Management, LLC disclosed a 5% stake (1.2 million shares). The firm also letter to management of the company relating to a proposal from AirTran Airways, Inc. (NYSE: AAI) to combine the two companies.

In the letter Octavian Management said, "Octavian does not currently believe that the AirTran proposal reflects the full value of Midwest. We do believe, however, that under the right terms a combination of the two companies makes enormous strategic sense, may bring material synergies, and would significantly de-risk the enterprise for its shareholders, employees, and customers." The also said, "In the event AirTran were to materially increase its offer for Midwest Airlines to a level more reflective of the company’s value, we would strongly encourage and expect the board and management team of Midwest to abide by their fiduciary duties and immediately enter into good faith negotiations to effectuate a transaction."

A Copy of the Letter:

Dear Tim,

It was very nice seeing you when you were in New York. As you are aware, investment funds managed by Octavian currently own in excess of five percent of the shares outstanding of Midwest Air Group Inc. (“Midwest”) and we note the current offer from AirTran Holdings, Inc. (“AirTran”) to combine the two companies. As we expressed to you, Octavian believes that the management team of Midwest, under your leadership, has done an extraordinary job of steering the airline through a time of unprecedented difficulty in the industry while maintaining the highest standards of service to its customers. The many awards received by Midwest and its unusually high brand loyalty are a testament to its world-class product, its outstanding corporate culture and its commitment to excellence.

Octavian does not currently believe that the AirTran proposal reflects the full value of Midwest. We do believe, however, that under the right terms a combination of the two companies makes enormous strategic sense, may bring material synergies, and would significantly de-risk the enterprise for its shareholders, employees, and customers. Octavian believes that a combined Midwest-AirTran could offer a remarkable opportunity to combine the management teams of two of the best run airlines in the country, achieve significant efficiencies, and stimulate more traffic and business in Milwaukee and other core markets. Importantly, as part of a larger company, Midwest would be less susceptible to and better able to deal with the very real threat of new competitive entrants into Milwaukee and would have the benefit of much greater stability in a volatile industry.

In the event AirTran were to materially increase its offer for Midwest Airlines to a level more reflective of the company’s value, we would strongly encourage and expect the board and management team of Midwest to abide by their fiduciary duties and immediately enter into good faith negotiations to effectuate a transaction. We believe that many other shareholders would share that expectation. In the event of a combination, we would also strongly encourage the AirTran board and management to adopt best practices for the combined Midwest-AirTran, including incorporating many of the unique features of Midwest’s product, services and brand that have been developed over the last two decades. We also believe that AirTran would be well served by taking advantage of the unusually strong insight of Midwest’s team by inviting you and other members of the Midwest board and management onto the combined board of directors.

Thank you again and I look forward to speaking with you soon.

Sincerely,

Richard Hurowitz

Chief Executive Officer