Never heard of Milkshape. Like I said above, it MUST be able to convert to .ac3d format. If you don't have one that will, and are familiar with modeling software, try Blender. It's free and exports into .ac3d. Do a search in the Terrain Editor Forum for it. You'll find the Download link, tutorials and various scripts to make the conversion easier.
As for skinning, any graphics editing program (Photoshop, PhotoSuite, Gimp<-free, etc.) all work.
Side note: Last night I worked on some custom airfields. I'll post pics after throwing them into a working map(hopefully tonight). Let me bust out a few for general mission making, then I'll try to take some requests. Just please remember, map making is a tedious and time consuming thing. They take more than a couple days, especially the custom ones. I should have the first one out this week, if my kids allow it