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.

"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.

That's not the case now. Mesaba has plenty of pilots who have made it to the top of the union seniority list with 18 years of service. They earn an average of $45,000—not much compared with Northwest pilots, but twice as much as the starting salaries Mesaba is currently proposing.

From the vantage point of labor, the ability to play one group of unions off another, known as "whipsawing" in the trade, is one reason why major airlines contract with several feeders. Mesaba currently competes for business with Pinnacle, a Memphis-based airline that is a Northwest spin-off. Northwest is hoping Pinnacle, too, can wrest concessions from its unions.

Adding to the pressure on both regional services, Northwest is in the process of creating a third player, Compass, which will be a wholly-owned subsidiary that could be flying as many as three dozen jets within a few years. Northwest has ordered 72 jets for mid-range flying, but has not said whether all will go to Compass. Until they arrive, Compass may start flying with one of the jets Mesaba was scheduled to start flying in the weeks prior to the onset of bankruptcy. Not surprisingly, Northwest's pilots opposed Compass's creation, and won a provision in their most recent contract allowing them to retain the right to fly any plane with more than 76 seats.

In 1997, Wychor says, Northwest took away half of Pinnacle's routes and gave the business to Mesaba. During that round of negotiations, Mesaba hired a number of laid-off Pinnacle pilots. This time, with the largest jets being taken from Mesaba's fleet and sold to buyers in Dublin and Paris, some of Mesaba's pilots are actually following their planes overseas, he says. The routes Mesaba can serve with the planes left in its fleet—49 Saabs, the smallest planes in Northwest's fleet of regional feeders with 30-34 seats—are the least cost-effective.

But even that business isn't guaranteed. Northwest says it will not sign new contracts with Mesaba until it has reduced its labor costs. When both sides started wrangling earlier this year, Mesaba wanted wage cuts of 19.4 percent for six years; management has since backed down to 17.5 percent for up to five and a half years. The unions have agreed to cuts of 15 percent, but want a shorter contract. Union officials say their proposal gives Mesaba a 6 percent profit margin; the company's reorganization plan calls for 8 percent.

"There's really a sinister aspect of this," says Nick Graneth, an attorney representing the unions. "You have Mesaba, and behind them you have MAIR, and behind them you have Northwest. So there's this puppetmaster aspect of this. Who is negotiating with MAIR for MAIR? With MAIR for Northwest?"

This week, judges in two different courtrooms are deciding whether Mesaba can impose unilateral wage cuts and whether its unions can strike in response. At press time, Mesaba was under court order not to cut pay until midnight, Thursday October 26, and a separate ruling on the airline's request to bar a strike was pending.

In either case, it remains to be seen whether any Mesaba employee with the possibility of work elsewhere will stick around to walk the picket line. "It's not a particularly great job to have at the moment," says the U of M's Aggarwal. "If you have any other option at this time, you take it."

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