Disappearing from Radar?

As NWA and Mesaba play chicken in bankruptcy court, the future of the regional carrier looks bleak

Browsing the dirt-cheap groceries at a local Aldi not long ago, Mesaba pilot Capt. Tom Wychor was stunned to recognize the clerk ringing up his order as a colleague from the airline. The woman gushed about her job, saying she was paid better than she had been as a flight attendant at Mesaba, for less work and under better conditions. Wychor laughs as he tells the story—but wryly, because there he was, a 17-year veteran of a supposedly elite profession, in her checkout line holding store-brand closeouts.

The labor showdown underway as a part of Mesaba's year-old bankruptcy may or may not be resolved between the time this story goes to press and the hour it hits a rack near you. But whether the company folds or its unions blink, the fundamental problems at the heart of the impasse aren't likely to be resolved anytime soon. Without large concessions from its union workforce, cash-starved Mesaba can't get stopgap financing or sign new contracts to ferry passengers from small regional airports to Northwest's urban hubs. Union leaders acknowledge the company's predicament, but point out that Mesaba's proposed wages would qualify some pilots for food stamps.

Even without the concessions, leaders of all three unions say, wages are already so low they are having a hard time hanging onto workers. A hundred mechanics have walked off the job in the last year, they report, and three to five pilots on average quit each week. The ranks of flight attendants, the worst-paid of the three groups, have fallen from 500 to 300 without furloughs: An entire class of new flight attendants hired in April has since quit.

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"I love my job, I really do," says Wychor. "But I won't do it at any cost."

Mesaba is one of approximately 80 regional airlines that carry passengers from small and mid-sized communities to larger airports in the United States. Because regional air service is relatively expensive to provide, most are essentially subsidized by the larger carriers they feed. And for many companies like Mesaba, which operates as Northwest Airlink, the trickle-down economics of the airline industry mean the crises that have plagued the major carriers in recent years are now hitting home.

Northwest Airlines is Mesaba's sole customer, the leasing company from which it gets its planes, the vendor providing its fuel, and the company behind the curtain that decides where Mesaba will fly those planes and when, how much it will charge passengers, and what kind of profit it will reap for doing all of this. That predetermined profit accrues to its holding company, MAIR. MAIR has five employees to Mesaba's 3,200.

A publicly traded corporation whose largest shareholder is Northwest, MAIR is run by several former Northwest executives. Northwest owns a little more than 27 percent of its shares and has options to purchase up to 44 percent; Carl Pohlad owns nearly 10 percent. Northwest and the Pohlad family control the majority of the seven seats on the board of directors.

By all accounts, this arrangement traditionally allowed Mesaba to thrive. So much so, in fact, that Northwest announced plans in the spring of 2005 to beef up Mesaba's fleet with 15 new jets. The new planes would replace old gas-guzzlers that required a lot of maintenance, and help ensure Mesaba's long-term growth. The airline shelled out millions to retool and retrain, but by the time the members of Mesaba's three unions (pilots, mechanics, and flight attendants) were ready to take off in the new jets, Northwest had declared bankruptcy.

Mesaba's old, inefficient planes continued to ferry Northwest passengers under NWA's terms, but Northwest's problems quickly rolled downhill. Northwest took back most of Mesaba's larger planes but failed to replace them with the new economical jets. Because pilots are paid more to fly larger planes, the pilots at the top of the union's payscale found themselves demoted; consequently, everyone else did, too. Between missed payments from Northwest and the loss of half its business, Mesaba found itself in bankruptcy court within a month.

Significantly, its parent company did not. In fact, MAIR's balance sheet was flush, having received more than $100 million in "upstreamed" profits from Mesaba during the previous few months. (MAIR also owns a small regional airline operating in Montana, Big Sky, but doesn't yet reap much profit from it.)

"There's a structure in place that's led to some very perverse outcomes," says Rajesh Aggarwal, an associate professor of finance at the University of Minnesota's Carlson School of Management. "The basic issue is that you have a set of relationships that make a fair amount of sense—so long as these companies aren't in bankruptcy."

In recent years, as big carriers have struggled, regional airlines have been consistently profitable, partly because they are insulated from the ups and downs of the market. (In 2001 and 2002, as legacy carriers were reporting losses of about 13 percent, regionals boasted profits of 4 and 7 percent, respectively.) One big reason: labor costs. Historically, employees at the regional carriers have made about half as much as their major airline counterparts; in effect, the feeder airlines served as farm teams that afforded pilots and other workers a place to start their careers, with the prospect of working their way up.

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