Northwest Aspiring to Become Supreme US Airline

Strategic acquisitions of course are now part and parcel of the Northwest corporate diet ever since its principal owners, Alfred Cheechi (pron Checkee), Gary Wilson Uoint co-chairmen) and Fred Malek raised the necessary cash and political support to gain control of the USA’s fifth largest carrier through a gutsy though highly leveraged buyout deal. Northwest has consequently been on the acquisition warpath looking at anything and everything that might increase its presence in the marketplace. At the time of the raid, through 1988/89, the group had acquired NWA stock worth almost $US80m whilst their friendly takeover moves were consistently being rebuffed by thethen airline’s board.

Though financially healthy, Northwest was still having trouble digesting its earlier takeover of Republic and in an era of fiscal madness centered on ever more ludicrous leveraged buyouts (where essentially the pursuer uses the collateral/assets of the pursued as a stake on which to raise venture capital even though at the time the pursuer does not even have any official title to same!) a number of suitors were after the airline at a time when naturally its management were trying to keep it intact.

Well known LBO identity, Marvin Davis, had also been eyeing NWA for some time and when a stock bidding war saw the share price rapidly increasing the Cheechi group felt compelled to raise the ante and gain full control of the airline. What they apparently didn’t appreciate at the time was the rigidity of the Board in not wanting to sell at any price, something that saw the stock almost double with Cheechi’s group finally paying $US121 a share in a deal worth $US2. 9bn in bank debt plus $US700m in equity.

While the group had at last achieved control of the airline their victory was short lived as they barely saw just one quarter in the black before the effects of a looming recession and Iraq’s invasion of Kuwait began to lay waste the entire world air transport industry. Consequently, consolidated net losses since the takeover am’ount to $US410m including a $US62m loss in the first quarter of calendar 1991, though the carrier did rebound to record an encouraging second quarter net profit of $US33m despite gross revenue being down some $US60m on the same quarter of the previous year. Added to this was an excellent overall year on year load factor of 75. 5% while Northwest has also led the pack over the past year and a half in on-time performance.

Despite this, and the airline’s mid year credit downgrading by both Moody’s and Standard and Poors, Northwest has actively pursued a policy of bold acquisitions to eventually make it the largest carrier in the US and thus the world (given that Aeroflot will probably be reorganised over the next few years). Since the Cheechi led takeover in mid ’89, Northwest has acquired a 25% share in ailing Hawaiian for $US20m, a move that now sees it fly” ing to Australia using Hawaiian’s rights; has also acquired the operating rights to the failed Trump shuttle linking New York, Washington DC and Boston; has invested $US20m in America West, which is trading under Chapter 11 bankruptcy protection, in return for a wide ranging marketing agreement and a possible route sale; and has purchased failed Eastern’s strategic hub at Washington DC’s National airport.

In addition to these acquisitions, the airline is also negotiating with Chicago based Midway and Houston based Continental with the prospects of Northwest taking over their operations to make it the largest US carrier by far in one fell stroke. The only trouble is that both these carriers are already travelling under Chapter 11 protection and in Continental’s case, come with considerable baggage including a near-insoluble debt burden.

For the record, Continental has lost $US290m in the half year alone. Northwest’s potential acquisition of an ailing Continental (particularly now that its great white hope, Hollis Harris, has left) might well do for it what the relentless pursuit of an equally handicapped Eastern did for Frank Lorenzo and ultimately Continental. Midway has better prospects though few carriers have been able to realistically demonstrate that acquisition of fellow airlines (largely for their routes, slots and jets), particularly when they are in the red, has been worth the fiscal and physical effort.

PanAm eventually found National , more a liability than an asset, as did TWA with Ozark whilst the takeover of Frontier was one of the final acts of a rapidly crashing People Express. A once highly profitable USAir now fights off declaring Chapter 11 via its untimely ‘growth at any price’ driven acquisition of Piedmont whilst Eastern was the death knell for Continental (second time around) and even mighty Delta has seen only minimal joy from its absorbtion of Western.

In the past the ‘old’ Northwest was also known for its odd cross border raid. Names such as Hughes, Southern, North Central and of course Republic have all fallen to the corporate suitors at NWA. So, if Northwest was successful in gaining control of Continental would it be a asset for the Minneapolis/St. Paul carrier? Few industry experts think so as Continental would most probably pull Northwest down to its level rather than the other way round, particularly in today’s not too helpful economic climate. The extra (borrowed) funds being expended and the rapidly increased overall debt burden could hardly be deemed an asset in an industry that even in boom times is renowned for its wafer thin margins.

It is amidst this environment that one has to look at the possible acquisition of a strategic international shareholding by Northwest in Qantas with great care. If NWA did acquire a reasonably large slice of Qantas, say 30% of the total shareholding, and it subsequently went broke then what would be the benefit to Qantas?

Corporate PR dressing up of the benefits of being the much touted ‘global carrier’ would rapidly transcribe to little of any practical value in the real world. It’s not much benefit for Qantas if it is doing heavy jet maintenance work for an airline that is in Chapter 11 with a considerable debt burden and the likelihood of not getting paid? Nor is there much benefit in being a major partner with an international carrier that’s public image might at some time in the future not be up to the same high standard of your own? These scenarios of course are purely hypothetical though must obviously be considered in great detail before a linking with any foreign airline is formalised. Not everything about the ‘new’ Northwest though is negative. To their credit, the Cheechi team has gone to great lengths to discuss the airline’s past problems, and its future aspirations with their workforce. Previous NWA management was known throughout the industry for its closed door attitudes and lack of communication with key employee groups, an attitude that in part actually led to the corporate raids upon NWA stock by the LBO set that led to their eventual downfall.

For the first time ever, management has also actually formed multi skilled teams to handle existing and potential mergers. These teams include representatives from each of Northwest’s operating areas and are structured so as to be able to avoid as many of the pitfalls as possible in acquiring another airline. Obviously the lessons of the 1986 takeover of Republic are clear in the minds of all involved and the heartburn this caused as two entirely different corporate and operational cultures were merged. Another drawback of the ‘growth at any price’ near religious ethic of the eighties that still occasionally surfaces closer to home in the form of rumours of a merging of Qantas and Australian. Such proponents would do well to study the term results of the NAG merger into Air New Zealand and BOAC’s absorption of British European Airways. In industrial, emotional and operational terms they made Nightmare on Elm Street look tame by comparison!

Operationally Northwest is also not without its problems. Of its massive fleet of around 350 aircraft, only a third areChapter 3 against a US fleet average of nearer 50%. Of these, some 144 are aged DC-9s with a further 70 727s and a dozen early build 7 4 7-100s which are old enough to vote. However, on the positive side of the ledger, Northwest has 244 new jets on order worth more than $US18bn. These include up to ten more 747-400s, 80 additional 757s, 84 A320s, 30 A321s and 20 each of the A330 and long range A340 which will be used extensively on the Pacific routes from 1993 onwards. The 727s are being replaced by both the 757s and A320s whilst the DC-9 replacement may well be satisfied by A320s as the routes that these aircraft traditionally serve grow. Indeed, Airbus have a vested interest in the fiscal wellbeing of Northwest by way of a recent loan of $US500m, obviously considering the airline a crucial player in their long term North American game plan against Boeing and MDC.

Also putting money into Northwest with great verve is the State of Minnesota. NWA is of course headquartered in the twin cities of Minneapolis/St. Paul and the carrier is Minnesota’s largest single employer. In return for remaining based in the twin cities and expanding their maintenance facility, amongst other things, the State has agreed to a loan of nearly one billion US dollars to bolster the airline. Thus if an acquisition of a Qantas shareholding should eventuate the cash might well come from the good folk of far off Minnesota.

Northwest’s goal in acquiring a strategic stake in Qantas is simple. It wants to become the largest and most powerful airline in the world. Al Chechi sees a number of major positives from a direct link between his airline, Qantas and KLM. The Dutch flag carrier already owns 20% and Northwest (Foster’s Brewing also owns 15% ) would use Qantas as its means of total access to the Pacific and Asia with KLM handling the bulk of the European and beyond market.

And whilst the logic of such a link is obvious, the question for the Australian Government is whether or not the current fiscal position of America’s fifth largest carrier is such that it would be a fit and viable partner for our own national carrier. Only they can know for sure

Northwest Facts

History: Northwest Airways came into being in October, 1926 primarily as an airmail service flying a trio of Stinson Detroiters. From the mid thirties the airline grew rapidly and contributed greatly to the logistics side of the war effort to be well placed for the massive growth in commercial services that were to become a hallmark of the post war era. The airline was renamed Northwest Orient in this period reflecting its now substantial presence in the US/Asia market, entering the jet age during the late fifties via the DC-8. Through the sixties and seventies the airline continued to expand though largely building its strength through the US midwest and northeast. Network: Current major hubs are Minneapolis/St. Paul (HQ), Memphis, Washington National, Detroit with supplementary hubs at Honolulu, LA and San Francisco. International ports currently include London, Paris, Amsterdam, Frankfurt, Glasgow, Tokyo, Osaka, Seoul, Shanghai, Taipei, Manila, Singapore, Bangkok, Hong Kong and Sydney. Northwest currently operates morning 747-400 services ex Sydney to LA via Honolulu on Mondays, Wednesday, Thursdays and Saturdays. Sydney/LA nonstop is flown Monday, Wednesday and Saturday whilst Sydney/New York via Osaka is flown Tuesday, Thursday and Sunday.

Ownership: NWA employs 45,000 people worldwide and is owned by a private group headed by Alfred Cheechi, Gary Wilson and Fred Malek. KLM holds 20% of stock while Foster’s Brewing Group holds 15%.

Fleet: 10 747-100, 12 747-200, 20 747-400, 8 747F, 20 DC-10-40, 3 DC-10-30, 33 757, 8 727-100, 62 727-200, 20 A320, 8 MD-80, 33 DC-9-10, 28 DC-9-50, 6 DC-9-40, 77 DC-9-30. A total of 244 aircraft are on order or under option for delivery over the coming five years. These include 10 747-400, 80 757, 84 A320, 30 A321, 20 A330 & 20 A340. Financial: Parent company, NWA Inc, lost $US302m in ’90. Further data on parent is not available. Northwest Airlines lost $US1Om net in ’90 on revenues of $US?. 3bn and $US62m in the first quarter ’91 on revenues of $US1. 64bn. Second quarter saw a net profit of $US33m. For thefirst six months of ’91, Northwest posted a net loss of $US29m compared with a net profit of $US20m for the corresponding period last year. Operating revenues during the Jan/June period were $US3. 5bn, up from $US3. 4bn last year.