Let's Make a Deal

A newly rehabilitated--and temporarily stabilized--Northwest Airlines is poising itself for the next round of industry mergers and acquisitions.

Continental is doing much better financially than in previous years. Parts of its system would complement Northwest well: its hub in Houston, its operation in southern California, its European presence. It has a lower employee cost structure than Northwest's. And, four years ago, Checchi and Wilson were interested in buying Continental. So there's some degree of familiarity.

"Most of the upper management folks at Northwest come from Continental," Davner adds. Checchi is well-acquainted with the current chairman of Continental, David Bonderman; he is also friendly with Continental's former chairman, Minneapolis banker Carl Pohlad.

But there are "old labor wounds with Continental that would be hard to heal," according to Bazzachini. "Continental decertified the IAM under Frank Lorenzo, so you'd be asking one labor force of union workers to merge with a labor force of scabs."

§ Selling Northwest piece by piece

"Another consideration is that Northwest may be worth much more piecemeal than as a whole," the Northwest pilot says. "American could buy our Pacific routes. Somebody else--like UPS--could buy our cargo routes, which are severely underutilized right now. And an airline like Delta could buy our domestic routes."

This also might make the most sense from the standpoint of Northwest's investors. "They'll have tax problems if they try to sell it all at one time," says one industry official with ties to Northwest's upper management. "So they'll probably try to cut deals where they sell off parts of Northwest and get pieces of other companies at the same time." For what it's worth, this is the one scenario that Northwest adamantly denies.

Whatever the course Northwest elects to follow, timing will count for a lot. The nation's largest airlines are currently enjoying their best financial performance in nearly a decade; in the process, they're generating a ton of cash. United, American, and Delta each have more than $1 billion in cash available. Wall Street expects even better in the future. Considering the condition of the industry (with its continued low fuel prices) and the economy (steady), analysts figure the only way airlines can continue their recent growth rate is through smart mergers.

But besides the notorious volatility of the airline business, there are other specters on Northwest's horizon. According to industry consultant Aikens, "The thing people should be focusing on is the mid-term impact of the wage concession snap-backs in 1996." Labor concessions saving the airline about $280 million a year "snap back" into the picture in August 1996. (According to insiders privy to the labor situation at Northwest, the snap-back provision is "pretty much set in stone," though it's generally thought that Northwest management will try to offset as much of the $280 million as they can by extracting labor concessions on matters such as pensions, benefits, and workplace hours.)

Northwest will likely end 1995 with close to $800 million in available liquidity and cash on hand. But it faces large debt repayments beginning again with $477 million in 1996 and staying at about that level each year through 1999, according to financial statements filed with the Securities and Exchange Commission.

And if fuel prices should begin to rise again, they will have an inordinate impact on Northwest in view of the fact that the airline still operates the most fuel-inefficient fleet among the major carriers. Consider that Northwest's overall passenger yield--the amount of money on average that it makes transporting one person one mile--is no higher today than it was in 1990, when the average cost of jet fuel was roughly 50 percent higher than it is today.

"The clock is ticking. [The Checchi/Wilson team doesn't] want to be here to deal with the snap-backs or to deal with all the union contracts coming due at once," says an airline industry consultant who asked for anonymity. "The last thing you want is to be in a position where you have to negotiate with everyone all at once. It goes against the traditional rule of negotiating: divide and conquer."

And even if things will continue to go well at Northwest through 1996, there's still the fact that Checchi and Wilson bought Northwest as an investment, not to run an airline. "Remember, these guys are corporate raiders," Beyer said. "Their goal is certainly not to have an established loyalty that is too much greater than the value of their checkbooks."

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