Assume the Crash Position
What happens if Northwest Airlines goes bankrupt? Until recently, Minnesota businesses and travelers have considered that occurrence the worst-case scenario. Now, with the Eagan-based carrier apparently losing $4 million a day and company insiders dumping its increasingly worthless stock, bankruptcy also seems like the most likely scenario.
NWA management may favor bankruptcy as a strategy to slash debt and pension obligations and sever expensive union contracts. (United Airlines has ruthlessly pioneered this in recent years, filing in 2002, while continuing to line the pockets of its executives.) The looming strike by NWA union mechanics and new federal bankruptcy rules, effective in October, that will make reorganizations more difficult, would be the triggers for this drastic business plan. Yet bankruptcy is no sure bet. US Airways has teetered since its own bankruptcy filing in August 2002 and has yet to reemerge as a profitable carrier. And only four of the eight major "legacy" airlines that have filed Chapter 11 since 1989 have managed to stay in business.
Some airline and financial analysts have expressed high anxiety that an NWA bankruptcy would decimate inbound and outbound service from MSP. (United, for instance, has slashed its fleet from more than 600 planes five years ago to 455 this year.) The fallout from these schedule cuts, experts claim, would inevitably render the Twin Cities a faint cluster of lights on the outskirts of the global economy. In a KARE-11 report aired last week, local airline expert Terry Trippler expressed the typical worries that without Northwest "we certainly wouldn't have another Best Buy, Target, Dayton's, 3M...transportation is the key."
However, some airline insiders in other cities that have experienced cuts in service and hub losses describe an opposite effect. Last year, 28 million of Minneapolis-St. Paul International Airport's 36.7 million total passengers--some 76 percent--flew on Northwest. Meanwhile, according to a study by Severin Borenstein, an industry expert at the Hass School of Business at the University of California, Berkeley, travelers to and from MSP in the second quarter of 2004 paid 24 percent above the nationwide average for airfare. A decrease in Northwest's dominance at MSP, some out-of-town sources suggest, could be a boon for travelers and local businesses.
A prime example of how this could happen is Nashville, which lost its American Airlines hub in 1995. Today, with the presence of low-cost carriers, fares are below the national average. And in the last 18 months, despite being hub-less, the city has recruited six new corporate headquarters for companies with revenues of more than $100 million per year.
Raleigh-Durham presents another example, having lost its American Airlines hub and the 200 daily departures the airline provided in 1995. After snaring Southwest in 1999, however, 8 million passengers last year were origination-destination travelers--that is, they're either coming or going from the city instead of stopping over there--as opposed to just 3.7 million when American was at its peak. And they pay less for the privilege.
Ultimately, an NWA bankruptcy filing will almost surely be disastrous for the company's many union employees. But it may not be for the market at large.
To find out how some other cities fared as a result of airline turbulence, City Pages called Janet Miller, senior VP of economic development at the Nashville Chamber of Commerce; Donna Oliver, a 37-year travel-industry vet and office manager of Travelplex in St. Louis, Missouri; and JoAnn Jenny, spokesperson for Pittsburgh International Airport. Pittsburgh's US Airways hub, which once carried 89 percent of the airport's passenger load, was downgraded to a "focus city" in November of last year.
Janet Miller, Nashville Chamber of Commerce
City Pages: What were the effects of the hub loss in Nashville?
Janet Miller: As a hub city, there may have been 10 direct flights to New York City a day from here. And we've seen those same markets get picked up, only we have less frequency. We still have very good service to all of the major cities and tier-one markets. The second- and third-tier cities see a slight drop-off. Getting to some place like, say, Norfolk, Virginia, is more challenging.
CP: How did this affect Nashville businesses?
Miller: We've actually had more success in recruiting [corporate] headquarters in the last two years than probably [we've had in] the history of the city. Having a hub is not the deal breaker when it comes to recruiting headquarters. Having diversified carriers and competitive costs has a lot to do with it as well.
CP: How long did it take Nashville to get to that point?
Miller: The first two years were the hardest, especially psychologically for the city. I'd say after two years, the airport had a very aggressive strategy. It started turning itself around really quickly. Southwest saw an opportunity here. The O&D [origination and destination] traffic was still great. If there's a demand in the marketplace, someone's going to step up to meet it. The frequency is the only number that's really down.
CP: What about ticket prices? Are passengers paying for the decrease in flights?
Miller: From a pricing standpoint, it is so much more competitive. It's very expensive to fly into Atlanta, because Delta owns that market. In Nashville you can get anywhere for around $300 to $400.
CP: What about businesses that rely on cargo flights? Have they been adversely affected?
Miller: Our experience is that the air cargo piece of it is not tied to the hub status. We've actually seen our cargo business grow dramatically since the loss of the hub status.
CP: How can a city like Minneapolis recover from a reduction in service, or worse, a hub loss?
Miller: If I were in Minneapolis in this job--I'm sure they're doing it there right now--I would be proactively developing plans for a worst-case scenario and figuring out how to backfill that service.
Having a range of carriers is a more secure position. I think that cities, though, just have to not panic when they get into this situation.
Donna Oliver, Travelplex, St. Louis
City Pages: American reduced its nonstop flights in and out of St. Louis in 2003 from 417 to 207. What's been the impact locally?
Oliver: The situation in St. Louis is pretty unique, because we had a large TWA base here. American acquired TWA [in 2001] with the promise that they would keep the hub and protect everyone's interests, that's how they approached it in Washington and that's how they approached it with the unions. But they've cancelled hundreds of flights, both since acquiring TWA and again in 2003.
CP: Have other airlines come in to fill the travel need?
Oliver: No. When somebody new tries to come in, the other airlines pounce all over it so they can't come in. American still has a large presence here, about 40 percent of all travelers, because they still have TWA. And unfortunately, a lot of people still have an allegiance to American because their frequent-flier miles transferred over from TWA. TWA had a mileage Mastercard, too, that went to American. That's how those big airlines keep you. It's just awful.
CP: So American hasn't kept any of its promises to St. Louis.
Oliver: Not at all. About half of the TWA employees lost jobs. Or they've all had to take pay cuts or move. When American first came in, they actually had a number employees could call if they saw their co-workers not doing things by the book. American is not a friendly airline. There's no customer-service portion.
CP: Have prices changed now that many passengers have to fly on connecting flights?
Oliver: I haven't seen a decrease in fares. They're pretty much what they were. And now there's a lot of problems with misconnecting because service by the major airlines is so bad.
CP: St. Louis's airport is in the process of expanding. Does this mean they're courting new carriers?
Oliver: They're hoping new carriers will come in, but I don't see any numbers that show that will work. As it is now, we have concourses that are empty.
JoAnn Jenny, Pittsburgh International Airport
City Pages: What were the immediate effects of losing the US Airways hub in November?
Jenny: We lost about 120 daily nonstop US Airways flights as a result. They went down to about 235 from about 355 a day.
CP: Traffic is down 24 percent from last year. Isn't that a dramatic decrease?
Jenny: We lost a lot of connecting traffic. But we actually attracted more competition, and we increased the number of flyers regionally. Airfares became better, and we attracted more flights. That's the problem with many hub cities: There's a monopoly, and many airlines won't compete with that. We've attracted a number of low-cost carriers, and Continental, United, and Delta have added flights.
CP: Are there destinations that are harder for passengers to get to now?
Jenny: We're still maintaining the top 50 destinations. A few smaller markets were cut. But there's been an increase in travel to markets like Atlanta, Chicago, and Philadelphia because the prices are so much more competitive.
CP: What has been the economic impact?
Jenny: While we've had cuts in flights, there's been an increase in origination passengers, so parking and rental-car revenues are up. It hasn't made up for the loss yet, but we're working on it.
Jenny: It's going to prove challenging. From the airport's perspective, it's definitely survivable. The larger impact on a city is the number of [Northwest] job losses that would come with it.
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