MOST NOTEWORTHY: PetSmart, Marsh & McLennan and Pinnacle Airlines were today's noteworthy upgrades:

• Banc of America upgraded PetSmart (NASDAQ:PETM) to Buy from Neutral on valuation, as they believe the market is overly negative on the company's cyclicality.
  
• Keefe Bruyette upgraded shares of Marsh & McLennan (NYSE:MMC) to Outperform from Market Perform on increased confidence management will be able to improve margins.
  
• JP Morgan upgraded Pinnacle Airlines (NASDAQ:PNCL) to Overweight from Underweight citing the company's FCF and contract certainty.

OTHER UPGRADES:

• Hasbro (NYSE:HAS) was upgraded to Buy from Hold at Needham.
  
• Calyon raised Airtran Holdings (AAI) to Add from Neutral.
  
• Liberty Entertainment (LMDIA) was raised at Merrill to Buy from Neutral.

Anyone planning a vacation this summer should remember two words: AirTran and Jet Blue Airways Corp. (NASDAQ: JBLU).

Those were the two airlines that came out on top of a national survey of airline quality released today that underscored the sorry state of the industry. Anyone who has flown since 9-11 knows that getting your teeth pulled is more fun. Planes are filled to the brim and are often late. Luggage often goes on magical mystery tours that bypass your destination.

Last year was more of the same, according the Associated Press

"There were more lost bags, more bumped passengers, more consumer complaints and fewer on-time flights than in the previous year," the story says. "The rate of consumer complaints was up 60 percent. US Airways (NYSE: LCC) had the most complaints last year. Southwest (NYSE: LUV) had the fewest."

Bad airlines are bad for the environment because it encourages more casual fliers to drive to their destinations. Even with soaring gas prices, flying isn't worth the trouble. I may have to fly this summer and I'm already dreading it.

--Freelance writer Jonathan Berr edits the blog Ketchup and Eggs.


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MOST NOTEWORTHY: The airline sector, Siemens and Internap were today's noteworthy downgrades:

• Lehman downgraded the airline sector to Neutral from Positive, citing higher fuel costs and the weakening economy. AirTran (NYSE: AAI) and U.S. Airways (NYSE: LCC) were downgraded to Equal Weight from Overweight. UBS said it can no longer recommend airline stocks due to weakening economy, high fuel prices, and less likely industry consolidation. The firm downgraded Continental Airlines (NYSE: CAL), Delta Air Lines (NYSE: DAL), Northwest Airlines (NYSE: NWA) and U.S. Airways to Neutral from Buy.
  
• Goldman removed shares of Siemens (NYSE: SI) from their Conviction Buy List as they believe the company may book additional charges of $1.2B this year.
  
• Jefferies cut Internap (NASDAQ: INAP) to Underperform from Buy as they believe the 10-K filing delay and revenue quality questions reduce visibility into the health of the business.

OTHER DOWNGRADES:

• Wachovia lowered Amgen (NASDAQ: AMGN) to Market Perform from Outperform.
  
• SI International (NASDAQ: SINT) was downgraded to Neutral from Outperform at Cowen.
  
• Citigroup cut Assured Guaranty (NYSE: AGO) to Hold from Buy.

MAJOR PAPERS:

• The Wall Street Journal's "Heard on the Street" reported that VCG Special Opportunities Master Fund, a $58M asset hedge fund which is owned by an investment firm that also owns a Puerto Rican investment bank, is separately suing Citigroup Incorporated (NYSE: C) and Wachovia Corporation (NYSE: WB) for requiring it to pay money from "credit default swaps" as the value of mortgage backed bonds fell.

OTHER PAPERS:

• In an attempt to cut back its growth plans due to higher fuel costs, AirTran Holdings Inc (NYSE: AAI) CEO Bob Fornaro said the Orlando-based airline will sell two jets next month. The Orlando Sentinel reported that record fuel costs could also impact AirTran's negotiations with its pilots union.
• Fnac is in talks with Apple Inc (NASDAQ: AAPL) to sell the iPhone in France, Le Figaro reported. The head of PPR SA's Fnac Chain, Denis Olivennes, said France Telecom's (NYSE: FTE) exclusivity rights for the iPhone in France are "inadmissible."

WEB SITES:

• Bloomberg reported that the head of Dubai International Capital, Sameer al-Ansari, said that as losses increase from the subprime mortgage market turmoil, Citigroup may need additional capital from outside investors.

MOST NOTEWORTHY: ING Group, Innerworkings, Kenexa, AirTran Holdings and AMR Corp were today's noteworthy downgrades:

• Bear Stearns downgraded shares of ING Group (NYSE: ING) to Peer Perform from Underperform after the company's Q3 results, given continued concerns regarding the US mortgage market.
  
• Jefferies lowered its rating on Innerworkings (NASDAQ: INWK) to Hold from Buy on valuation, as they see limited upside after the in-line Q3 results.
  
• Kenexa (NASDAQ: KNXA) was downgraded to Market Underperform from Market Perform at JMP Securities. The firm downgraded shares following the disappointing Q3 report and guidance as pressure on its business is likely to continue.
  
• UBS downgraded AirTran Holdings (NYSE: AAI) to Neutral from Buy and AMR Corporation (NYSE: AMR) to Sell from Neutral. The firm cited weakening corporate demand for the downgrades.

OTHER DOWNGRADES:

• NICE Systems (NASDAQ: NICE) was downgraded to Neutral from Buy at Banc of America.
  
• Deutsche Bank downgraded Gol Linhas Aereas (NYSE: GOL) to Hold from Buy.
  
• Wachovia downgraded the Broker Sector to Market Weight from Overweight, also downgrading Goldman Sachs (NYSE: GS) to Market Perform from Outperform.
  
• Goldman removed Maxim (NASDAQ: MXIM) from its Conviction Buy List.

Midwest Air Group (NYSE: MEH) agreed last week to be acquired by TPG Capital, and CEO Tim Hoeksema relieved investors concerned about its independence by proclaiming, "The cookies stay." The move closed the door on AirTran's (NYSE: AAI) two-year hostile takeover attempt, but reports have now emerged that could allow Northwest (NYSE: NWA), the "passive investor" in the acquisition, to actually own Midwest outright one day.

TPG partner Richard Schifter is quoted by The Associated Press saying "The equity firm may want to cash out of the deal some day, and Minneapolis-based Northwest could become the sole owner." Schifter told the Kansas City Business Journal that a potential acquisition of Midwest by Northwest would be "several years out and isn't anything we expect in the near future."

The potential for Northwest to acquire Midwest one day has definitely ruffled some feathers in the region. The Milwaukee Journal Sentinel said in an editorial that TPG's recent conference call with reporters was "not encouraging" and that questions remain, including if Midwest could survive in the business. The Journal also questioned how "passive" Northwest's relationship with Midwest will be in the future, especially with its "spotty service record."

TPG Capital has a history of working with airlines. Since the main purpose for private-equity companies is to make a profit on their investments, it is only logical to think that Northwest could one day own Midwest outright. It's also possible that TPG could sell the company to AirTran years down the tarmac. Either way, the cookies are safe, for now.

Those were the words from Midwest Airlines (AMEX: MEH) CEO Tim Hoeksema after he announced late last night that Midwest has made a decision, according to the Milwaukee Journal Sentinel. After four hostile attempts from AirTran Holdings (NYSE: AAI) and nearly two years of rejection, Midwest Airlines has finally agreed to be acquired -- by TPG Capital for $450 million.

Hoeksema is expected to remain at the CEO of Midwest. Under AirTran's ownership, he would have been forced to resign.

Midwest Airlines will get to keep its name, identity and independent status with the sale to TPG Capital, as well as the cookies.

USA Today's Ben Mutzabaugh had an interesting Q&A session with Richard Branson, founder of the Virgin Group and Virgin Atlantic Airways, on last week's inaugural flight from New York JFK Airport to San Francisco. Reading Branson's description of the new Virgin flights made me want to book a flight to San Fran immediately.

What interested me from the start of the interview was one of things that Branson said would set Virgin America apart from the other U.S. carriers, something he planned to introduce called "premium economy class." He described this as seating that would be "for people who want more legroom but can't afford first class." Mind you that the most expensive first-class tickets Virgin America has right now are approximately $650, but who wants to pay that for a flight when you can have "premium economy class?"

A quick check on Virgin Atlantic's website, because Virgin America has yet to initiate this service, and they show me that premium economy seating has 38 inches of leg room, compared to the standard 33 inches in economy seating, and a seat width of 21 inches. This is has to be a dream! Once this "premium economy class" comes to Virgin America, I'm certainly going to think of using them for my next flight. More space for less money, it's an amazing concept. I just hope they can last that long in the States with Northwest Airlines (NYSE: NWA), AirTran (NYSE: AAI), Southwest Airlines (NYSE: LUV), US Airways (NYSE: LCC), JetBlue Airways (NASDAQ: JBLU), United Airlines (NASDAQ: UAUA) and all the other U.S. carriers competing for the same ticket.

AirTran Holdings (NYSE: AAI) made another bid for Midwest Air Group (NYSE: MEH) today, pushing to total up to $445 million. The new cash-and-stock offer of $16.25 bid surpasses the $16-a-share cash offer made TPG Capital and Northwest Airlines (NYSE: NWA) on Sunday and is 50 cents higher than their previous last-ditch effort on Sunday, hours before the Midwest Board said it would pursue a rival bid.

This is the fourth time AirTran has raised its bid for Midwest since December. Despite AirTran receiving support from nearly 63% of Midwest shareholders, management refused to relinquish control to the Orlando-based discount airline. Midwest's Board said it would "take AirTran's revised offer under consideration."

While the Board deliberates, let's take a look at exactly what would happen to Midwest if they were to be acquired by either AirTran or TPG/Northwest:

• AirTran wants to rebrand the airline under its own name and integrate Midwest's operations into its broader network.

• Under the TPG offer, Midwest would maintain its brand name and its current management. Northwest, a company that has had nothing but problem after problem since it emerged from bankruptcy earlier this year, would not participate in the management or have any direct control over Midwest. Instead, Northwest hopes to explore cost reduction strategies like joint fuel purchasing.

AirTran President Bob Fornaro said the Midwest Board is required to not only consider the price of a takeover offer but also the effect on employees and the community, according to USA Today. But what about the shareholders? A total of 63% of Midwest shareholders were willing to side with AirTran after a $15.75 offer, and now the offer has been improved to $16.25. It seems pretty clear who the shareholders want to be with.

MOST NOTEWORTHY: Airtran Holdings Inc (NYSE: AAI), UAL Corporation (NASDAQ: UAUA) and the REIT sector were today's noteworthy downgrades:

• Calyon downgraded shares of Airtran Holdings to Neutral from Add, citing concerns with AAI's yield trends.
• The firm also downgraded shares of UAL Corp to Add from Buy based on higher fuel prices and slightly weaker-than-expected RASM increases.
• Stifel downgraded the REIT Sector citing rising interest rates and mutual fund outflows, among other reasons. Companies that include Cedar Shopping Centers Inc (NYSE: CDR), Kimco Realty Corporation (NYSE: KIM), Kite Realty Group Trust (NYSE: KRG), Ramco-Gershenson Properties Trust (NYSE: RPT), Simon Property Group Inc (NYSE: SPG) and Tanger Factory Outlet Centers Inc (NYSE: SKT) were downgraded to Hold from Buy.

OTHER DOWNGRADES:

• Morgan Joseph downgraded shares of Penn National Gaming Inc (NASDAQ: PENN) to Hold from Buy on valuation.
• CBOT Holdings Inc (NYSE: BOT) was downgraded to Neutral from Outperform at Credit Suisse.
• JP Morgan downgraded shares of Netflix Inc (NASDAQ: NFLX) to Underweight from Neutral, as the firm believes the company's growth will be impacted by Blockbuster Inc's (NYSE: BBI) Total Access offer.

MOST NOTEWORTHY: Lear Corp (LEA) and Tellabs Inc (TLAB) were today's most notable upgrades:

• Lear Corp (NYSE: LEA) was upgraded to Neutral from Underperform at Credit Suisse following the $2.31B cash bid from Carl Icahn.

• Merrill Lynch upgraded Tellabs Inc (NASDAQ: TLAB) to Buy from Neutral, citing expectations for an improvement in cross-connect demand and margins; the firm expects Tellabs to benefit from AT&T's (NYSE: T) new broadband initiatives, a demand recovery at Cingular, T-Mobile 3G deployment plans and an increase in Sprint/Nextel (NYSE: S) base stations.

OTHER UPGRADES:

• JP Morgan upgraded Nvidia Corp (NASDAQ: NVDA) to Overweight from Neutral based on expectations for gross margin upside to be driven by improved unit costs and market share gains in the notebook segment.

• Raymond James upgraded shares of AirTran Holdings Inc (NYSE: AAI) to Outperform from Market Perform with a $14 target.

• CIBC upgraded Kronos Inc (NASDAQ: KRON) to Sector Outperformer from Sector Perform, with a $46 target, as they find valuation attractive at current levels given their increasing confidence operations are improving.

• State Street Corp (NYSE: STT) was upgraded to Equal Weight from Underweight at Morgan Stanley following the news of the Investors Financial Services Corp (NASDAQ: IFIN) acquisition.

• Triad Hospitals Inc (NYSE: TRI) was upgraded to Neutral from Sell at Bank of America.

• Overstock.com Inc (NASDAQ: OSTK) was upgraded to Neural from Sell at First Albany, as the worst is already reflected in the stock's valuation.

• Matrix USA upgraded Estee Lauder Co Inc (NYSE: EL) to Hold from Sell based on fundamental trends.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).

As I indicated in a recent piece in Bloggingstocks.com, I thought there was a good chance that the bid for Midwest Air Group Inc. (AMEX:MEH) would get a bump. This is fairly typical for hostile deals.

Well, that's what happened today when AirTran Holding Inc. (NYSE: AAI) said it will increase its offer by 19% to $345 million. This is according to a letter from the Chairman and CEO of AirTran, Joe Leonard.

While Midwest has been resistant, it will be hard to keep this up. After all, the current offer is very enticing for shareholders. And AirTran has now made its offer directly to shareholders.

Besides, as the airline industry consolidates, a small player like Midwest can easily get shut out. In other words, it's probably inevitable that the company will cave-in to AirTran.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.

Today, AirTran Holding Inc. (NYSE: AAI) said it is making a $11.25 offer for Midwest Air Group Inc. (AMEX:MEH).

Great, huh? Not to Midwest, which rejected the overture. Yet, Wall Street is certainly not convinced. The stock price is up 22% to $11.15. In fact, it looks like the bid may go higher and other suitors may jump in.

Basically, as the major carriers engage in consolidation, it makes it even tougher for small players like Midwest Air and AirTran. So, why not bulk-up as much as possible and perhaps even sellout to a bigger player? It's becoming a quick game of Pac Man.

Moreover, the combination makes a lot of sense. With regulatory scrutiny not too onerous, there should be $60 million in costs savings.

But, according to a letter by Midwest's CEO, there appears to be no interest in a link-up. According to him: "While the Board has a great deal of respect for AirTran and for your leadership, it has concluded that it would not be in the best interests of the Company, our shareholders and other stakeholders, including customers, employees and the communities we serve, to pursue a transaction with AirTran under the current circumstances. The Board feels that the Company's strategic plan and remaining independent hold the best promise for continued growth and increased shareholder value going forward."

Then again, a higher price may make things easier, right? Shareholders will probably agree. In other words, expect a deal to get done.

Tom Taulli is the author of various books, including the Complete M&A Handbook and operates DealProfiles.com.

The cost of flying will continue to rise. Airline mergers are coming fast and furious as the year draws to a close. I think it's too late to avoid the deal risks of a merger-resistant Democratic Congress before January. Nevertheless there's a major airline merger trend underway: Continental Airlines, Inc. (NYSE: CAL) wants to combine with UAL Corp.'s (NASDAQ:UAUA) United Airlines, US Airways Group, Inc. (NYSE: LCC) is trying to buy Delta Airlines Inc. (OTC: DALRQ), Airtran Holdings (NYSE: AAI) is going after Midwest Express Group (AMEX: MEH), and private equity firms are trying to acquire Qantas Airways Ltd.

This merger wave will be bad for consumers. The fewer the number of airlines left standing, the less the competition. And the less competition, the higher the price the airlines can charge you and I. Antitrust laws are designed to encourage competition and to prevent such consumer-damaging consolidation. But it's likely that the incoming Congress will scrutinize this matter more closely than the current one.

Why the flurry of mergers? There are two major operating costs in the airline business -- jet fuel and labor. While airlines can use hedging to limit increases in jet fuel prices, there's not a huge amount that can be done to reduce them. By contrast, some companies, such as US Air, have been extremely effective at lowering labor costs by filing for bankruptcy and ripping up contracts with pilots, attendants and other workers, and resetting pay at much lower levels.

The proposed mergers will lower labor and other costs further and with fewer choices available for consumers, the airlines will earn nice profits on the spread between the lower costs and the higher prices they can charge. While airline shareholders may benefit, consumers will suffer.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm, and a Professor of Management at Babson College. He has no financial interest in Airtran, Continental, Delta, Midwest Express Qantas, or US Air.

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