Dirty Little Air War
For a few short hours between the morning crush of travelers and the late-afternoon round of returning planes, the Minneapolis-St. Paul International Airport's Hubert H. Humphrey Terminal goes quiet. So quiet you can hear Dave DiSalvo's dress shoes squeak against the vinyl floor as he paces the rows of stanchions that cordon off the paths to Sun Country Airlines' ticket counters.
"This is called the interlocking-S configuration," DiSalvo says sardonically, squatting behind one of the matte-black posts to make sure the row is razor-straight. "Other airlines actually send you to stanchion school." He stands, snickers, stoops and sights again. "The trick is to use the lines on the floor." He waves a finger at the cracks between the squares of vinyl. Then he stands, walks five feet further, and rocks another post back and forth until its base sits smack-dab astride the line.
The manager for Midwest operations at Sun Country Airlines, the Twin Cities' newest scheduled carrier, DiSalvo has been at the airport since 3:00 a.m. On any given morning he may see the sunrise from the open end of a recalcitrant jetway that needs help snuggling up to a 727. Then he may spend a few luckless minutes trying to boot the right screen on one of the brand-new computers tucked beneath the ticket counter, or helping figure out how to arrange the sharp new purple seats in the boarding area.
In short, DiSalvo routinely performs tasks other companies delegate to entire departments. Need proof? Take a five-minute ride north to the Lindbergh Terminal, home to the 800-pound gorilla of an airline Sun Country has decided to challenge head-on.
Here, instead of DiSalvo's two twisty stanchion queues, vast mazes of posts and ropes funnel passengers to hundreds of feet of red-and-gray Northwest Airlines ticket counters. Travelers who'd like to skirt the lines can check their bags at the curb or at the electronic kiosks staffed by flocks of uniformed customer-service agents. Behind the metal detectors and beyond the marble-floored shopping promenade, one of Northwest's 400-plus planes takes off every four minutes; altogether, the airline occupies 54 of the terminal's 70 gates.
The scene hardly suggests a business under siege. And yet the stretch of tarmac and road between the two terminals has become the no man's land in what some call the hottest air war in the nation--a corporate conflict that has been simmering for more than a year.
The stakes for local consumers are so high that just six weeks after taking the oath of office last winter, Minnesota Attorney General Mike Hatch announced his intention to jump into the fray alongside federal regulators. Volumes of data indicate that Northwest's near lock on the Twin Cities market gouges Minnesotans, Hatch told reporters. So he would be keeping an especially sharp watch on the airline's response to Sun Country's foray into ten of its busiest routes.
Richard Hirst, Northwest's senior vice president for corporate affairs, wasted little time in protesting. On February 22 he penned a sharply worded letter to the attorney general, declaring that his company had done nothing to deserve the attack.
"Most people are unaware of the fact that Northwest has historically provided Sun Country Airlines with a wide range of services and facilities," Hirst wrote. "We recently renewed and extended Sun Country's lease of the hangar it occupies, at half the rental rate it was paying previously. We provide ground handling services to Sun Country at various places on our system outside Minneapolis. We train their pilots. We de-ice their planes. On request, we provide maintenance trouble-shooting for them. While we will compete with Sun Country for every passenger, as we do with every other competing airline, it is not our policy and has never been our practice to use airport facilities and vendor services as competitive weapons."
Yet interviews with Sun Country managers, industry analysts, and government regulators, along with documents from state and federal investigators, suggest that even as Hirst composed his letter, Northwest was engaging in exactly the kind of corporate monkeywrenching he said they didn't--and more.
In the past year, as Sun Country has steadily edged its way onto Northwest's turf, the hometown airline has canceled contracts to train the rival's workers; terminated deals to handle its bags and clean its planes in other cities; and ended a spare-parts and equipment exchange that is standard in the industry. The upstart's administrators also suspect Northwest had a hand in its eviction from coveted gate space at the airports in Boston and Los Angeles.
If the idea of Sun Country constituting a serious threat to Northwest seems laughable, experts say it's not so far-fetched. Over the past few years, the nation's seven largest airlines have increasingly turned to a form of competition that consists in large part of staying out of each other's hubs, and raising or lowering their fares in near lock step. A "low-fare entrant," in industry-speak, led by a feisty CEO and catering to anti-corporate sentiment--that kind of airline could begin to upset the whole apple cart.
James Olsen, a Sun Country co-founder and the company's vice president for strategic planning, likens his competitor to a giant toddler: "When you fly one passenger one mile out of Minneapolis-St. Paul, they think that passenger belongs to them," he says of Northwest. "If they see you playing with something they don't have, they want it."
Not so, counters Northwest spokesman Jon Austin: In fact, it's Sun Country that needs to quit whining and take its lumps in the marketplace. "Sun Country has been spreading false information, and [the current] allegations sound like more of the same," says Austin. "Sun Country would like to construct a conspiracy that's all aimed at them. And I think they have burned through their credibility.
"Sun Country would very much like to cast itself as a little guy put upon by a giant conspiracy," he adds. "They ought to just put their product out and let folks decide whether they want to patronize them."
A few months ago, a number of Sun Country executives needed to get together for a presentation. The company didn't have a meeting room large enough, so the big fish all trooped out to the hangar and mounted a precarious set of rolling stairs to one of the airline's four DC-10s, where the display proceeded while a staffer walked the aisles handing out sandwiches.
When Sun Country began flying in 1983, it couldn't have spared an aircraft to serve as a conference center--nor would its staff have needed one. The airline had one plane and all of thirty employees.
Among them was a pilot named James Olsen. He'd grown up in south Minneapolis near the airport, close enough to watch the planes take off, back when their tails said Northwest Orient. As a child he dreamed of flying for the airline. Instead he ended up with Braniff, a carrier that went belly-up in the early Eighties. Left jobless by the bankruptcy, Olsen approached some fellow budget-airline veterans who had opened a travel agency in Minnetonka. The agency, Main Line Travel (now known as MLT), specialized in the so-called gray market, buying seats from airlines and reselling them cheap.
A deal was struck: MLT would figure out where budget vacationers wanted to go, and a new airline owned by Olsen and other Braniff alums would fly there. For a while that meant going places where Northwest didn't have much of a presence, like Las Vegas. "Our first flight was January 20, 1983," Olsen recalls. "Six weeks later we were profitable. The first year we made $400,000 with one little plane."
In 1985 Northwest offered to buy MLT and Sun Country for $30 million--$5 million for the airline and $25 million for MLT. The agency's founders accepted the offer and sold MLT. The Sun Country folks resisted.
"We thought Northwest just wanted to put Sun Country out of business," says Olsen. "All of the ex-Braniff people didn't want to sell, because we thought we were getting ripped off." When Northwest sweetened the pot, many of the stockholders changed their minds. Olsen and another stockholder went to court to stop the sale. The case was on appeal when investor John Barry came along in November 1988 and offered to buy Sun Country. "He said he wanted to keep the airline private," Olsen remembers. "And so we sold to him at four times the amount Northwest had offered."
At that point 90 percent of Sun Country's business came from MLT. After the sale, the airline also struck deals with Chicago-based Fun Jet Vacations and other charter companies. The strategy paid off for a time: In 1994 Sun Country had pretax profits of $15 million.
But, Olsen says, it soon became clear that the carrier couldn't survive on leisure travel and package vacations alone--not at a time when the major airlines were muscling in on that business. In 1996 he started pushing the idea of inaugurating scheduled air service: He was convinced there was room in the market--especially in the two hubs Sun Country shared with Northwest, the Twin Cities and Detroit. The company was already flying to some popular Northwest destinations: Planes ferrying crews to Fun Jet's hub in Chicago had begun carrying passengers, and the low-cost tickets sold like hotcakes. "Northwest was going crazy," Olsen grins. "Little by little we found new ways to sneak in flights."
Still, he adds, Barry wasn't thrilled with the idea of spending his own money to turn Sun Country into a scheduled carrier. The airline began to languish, in part because Northwest's MLT was selling more and more tickets on charter carrier Champion Air, of which it is part owner.
Enter the La Macchias, a Milwaukee family with deep pockets and a successful charter wholesale company, called Mark Travel Corp., that specialized in flying people cheaply to Las Vegas, Mexico, Florida, and other sunny climes. In April 1997 Bill La Macchia Sr. paid a reported $41 million to buy a 75 percent stake in Sun Country from John Barry. La Macchia's 31-year-old son took over as CEO.
A former vice president of Mirage Resorts (he'd started out as a desk clerk at the Golden Nugget), Bill Jr. had learned his trade from people who understood that a 6,000-watt chandelier in the lobby makes a difference. But he quickly discovered that he was running an airline as frayed around the edges as downtown Las Vegas. Problems ranged from the picayune--the no-knee-room cabins, the overhead bins that wouldn't close, the 1970s-appliance color schemes--to the overwhelming, such as how to restore the business to profitability.
The La Macchias took a deep breath, bought out Barry's remaining shares, and started fixing. They tricked out Sun Country's planes with new fixtures and upholstery, removed seats to eliminate the cattle-car feeling, even shelled out to have the air vents cleaned so the planes would smell new. Soon the refurbished jets were beginning to fly a fixed schedule on some of Northwest's most popular routes, including Los Angeles, Seattle, San Francisco, Phoenix, New York, and Washington, D.C.
And then fate handed Sun Country a big break. In August 1998 the Northwest pilots' strike practically shut down the Minneapolis-St. Paul airport. Resentment against the airline skyrocketed as passengers struggled to get out of town; soon even business travelers, notorious for their loyalty to frequent-flyer accounts, found themselves wedged onto Sun Country's planes. Sun Country spokeswoman Tammy Lee says the airline kept fielding inquiries about rumors that the charter operation was about to become a scheduled carrier.
The gossipmongers turned out to be right. In January of this year--four months after the Northwest strike ended--La Macchia announced that while the airline would continue to provide seasonal vacation charters, by June Sun Country would also offer scheduled service to ten U.S. cities. Within weeks Sun Country unveiled the first of a series of promotions playing on its underdog status: Newspaper readers were treated to ads depicting a Pez dispenser topped by the younger La Macchia's head, inviting them to mail in coupons for a chance to win a year's worth of free airfare. "Honk if you want another airline," one Sun Country billboard suggested, while another simply read, "You're Welcome."
Shortly after Sun Country's announcement, Northwest quietly slashed its prices on many flights in markets where it would now be competing with the upstart. In many cases, ticket prices dropped to half or a third of what they had been previously. Northwest also beefed up service to most of the destinations served by both carriers--adding flights to Orlando, doubling the number of seats to Anchorage, and boosting the number of passengers it could ferry to Phoenix and Los Angeles. Meanwhile, even more cheap seats were becoming available on Champion Airlines--the charter carrier Northwest partially owns--and MLT, the airline's discount tour operator.
So far, it was standard air-war fare, the kind of technique big airlines describe as healthy competition and which critics--including some federal regulators--often call "predatory pricing." But Northwest's combat tactics didn't stop at the ticket counter. The airline, according to those who have watched the conflict unfold, mustered its considerable resources to identify myriad ways of making it difficult for Sun Country to keep the planes in the air.
Hidden from public view behind Dave DiSalvo's perfectly aligned stanchions, beyond the new carpeting, snazzy purple seats, and bright lights at the Humphrey terminal, things take a decided turn for the subterranean. The wattage doesn't drop quite enough to mask the fact that pretty much everything is dingy. The floors are too yellow to ever truly shine again. So many people trying to share each cubicle and desk that the technical manuals and books of federal regulations threaten to bury hapless workers in paper avalanches. The bean counters are frequently forced to take over DiSalvo's Yugo-size office.
While quarters are uniquely cramped at Humphrey--a former United Airlines cargo hangar--crowding is a familiar problem at airports throughout the nation. One of the peculiarities of the airline industry is that most large cities have outgrown their airports but few are going to get new ones; as a result tenants are expected to work, play, and share space like neighbors, not like bitter rivals.
Airlines routinely hire one another to do everything from unloading baggage to collecting boarding passes from passengers; they also swap parts, use the same vendors, and help each other meet the complex array of federally mandated inspections. The network of "over-the-ramp friendships," as one aviation consultant puts it, is particularly tight between Sun Country and Northwest; the two airlines have historically shared everything from gas tanks to engine stands, and they often recruit from each other's ranks.
As Sun Country's vice president for airport affairs, Dale Kariya has long relied on those cooperative arrangements in cities dominated by the major airlines. But over the past year, Kariya says, he noticed Northwest systematically cutting off Sun Country contracts, even as it left other competitors alone.
In October of last year, Northwest announced that it would no longer sell ground-handling services--baggage handling, plane cleaning, and the like--to Sun Country in Los Angeles and Boston. Kariya accepted Northwest's explanation that the outside contracts were hampering Northwest's own performance. But then, a week later, he got a letter from the management company that runs the airport's Terminal 2, home to Sun Country's lone gate. Sun Country, it said, had 30 days to vacate the building.
The decision came as a surprise. Just a few weeks earlier, Kariya says, the management firm had finally granted Sun Country permission to put up permanent signs on its ticket counters. When he asked what had prompted the change, he was told it was "for business reasons." But, he notes, other tenants with less seniority were left alone, and for at least two months Sun Country's former gate stood empty.
By Kariya's lights, the eviction notice might as well have come directly from Northwest. Terminal 2 was remodeled in the late Eighties at a cost of $94 million; the project was financed by Northwest and four other carriers. Two of the five airlines that drew up the original deal are no longer in business. (Managers at Terminal 2 did not return repeated phone calls for this story.)
Within days, Sun Country lost its tenuous hold on a gate in Boston as well. Northwest had been leasing the space to charter carrier American Trans Air (better known as ATA), which does business with the La Macchias' Mark Travel, and which subleased the gate to Sun Country. But in December ATA stopped flying to Boston, and Northwest evicted Sun Country.
Again, says Kariya, he was told the decision had been made "for business reasons." Again, he adds, the gate sat empty for months. Northwest also canceled Sun Country's sublease of its offices in the Boston airport.
Northwest spokesman Jon Austin says Sun Country's accusations about the lost gates are "false," but won't elaborate further. On the matter of contracts, the company has more to say: Austin's office has prepared a six-page memo refuting Sun Country's allegations on that and other points. Regarding the ground-handling agreements, the document sets out the same explanation Kariya was given: "Northwest has concluded that fulfilling its contractual commitments to serve other carriers can distract its employees from their primary mission: to serve Northwest customers."
As he was frantically trying to jury-rig substitute gate arrangements in L.A. and Boston, Kariya received a phone call from someone at Northwest. The caller, whom he doesn't want to identify, asked where else the two airlines had agreements. Kariya says he nearly laughed himself sick before refusing to answer.
Even without his help, Northwest seemed to be locating plenty of Sun Country deals to cancel. In Seattle, maintenance and training contracts between the two airlines were suddenly terminated; a deal under which Northwest trained Sun Country's pilots and flight attendants at its simulation facility in Minneapolis ended recently. And on June 6, less than a week after Sun Country officially began service as a scheduled carrier, one of Northwest's vice presidents sent out a companywide memo barring its new rival from buying or borrowing spare parts.
Because it's almost impossible for any airline to keep a full inventory outside its hub, swapping parts is a standard practice in the airline industry. It's hardly charity; in addition to the cost of the part, the airline in need usually pays a hefty fee. According to maintenance administrators at Sun Country and other airlines, the practice helps keep everyone flying safely and on time.
When news of the ban surfaced in the New York Times, a Northwest spokesman was quoted as saying the directive had come after Sun Country was found using too many Northwest parts. In its recent memo, the company makes the same point, adding that while it may turn a profit on the parts, the revenue isn't worth the hassle: "Northwest is not in the parts business, it is in the airline business....Northwest is not willing to impose on its parts department the burden of answering the phone, looking for parts, and putting them on trucks to deliver to Sun Country."
Besides, adds the document, it's only logical that the relationship between the two airlines should have changed: "[In the past] Northwest had a direct financial interest in the operational integrity of Sun Country's services because, for the most part, Sun Country was carrying MLT passengers. If a Sun Country flight could not operate because it needed a part, that service failure directly affected MLT and Northwest." The incentive to keep Sun Country flying disappeared along with the charter partnership, the memo states.
Sun Country's Lee says that seems disingenuous: Northwest is continuing to give parts to plenty of competitors, she claims, and Sun Country's requests have dropped steadily for the past three years. The ban, Lee argues, is evidence of the paranoia with which the bigger airline greets even the smallest threats. "What Northwest is trying to do is to sew up every aspect of the community, dominate market share, and squeeze out competition," Lee asserts. "The lengths they've gone to are incredible."
For example, she says, whenever La Macchia speaks in public someone from Northwest is in the audience; Lee figures the rival execs seek to divine, political-campaign style, what the subtext of his speeches might portend. And indeed, when La Macchia took to the podium to address a recent luncheon of the Bloomington Chamber of Commerce, Jon Austin was there, periodically setting down a forkful of haricots verts to applaud.
George Wozniak's penchant for spilling the beans has long made him a thorn in the airline industry's side. He is the owner of Hobbit Travel, a high-volume Minneapolis travel agency that bills itself as "the low-fare company"; ten years ago he did a weekly travel segment for KSTP-TV's Good Company. On the show he talked frankly about financial back-scratching arrangements in air travel--things like how wholesalers operate and how agents shop for fares.
"I do get some calls from people asking me not to touch these subjects, people saying there's no need for the consumer to know," he told the magazine Travel Weekly in 1989. "In fact, one operator threatened a suit, but nothing ever came of it." Wozniak has talked dirty secrets twice on Oprah and used to host radio and cable programs on travel; over the years he has also built Hobbit into a household name that did a reported $110 million in sales in 1997.
It's no surprise, then, that Wozniak relishes a chance to expound on the current air war. "Northwest loves to play with the market," he declares before launching into a trademark lecture. Today's topic: The computer reservation systems that allow travel agents to book flights and issue tickets.
All but one of those systems, Wozniak explains, are owned by airlines; by Congressional mandate, all must carry the fare data of every airline that asks to be included. The systems are the reason major airlines can raise and lower fares in harmony without ever having the backroom conversations that would violate antitrust laws: With a mere peek at a computer, executives can figure out where their competitors are flying, and for how much.
But the systems have allowed airlines to do something else, the travel agent explains: Major carriers have used them to create a powerful set of incentives for travel agents to push their tickets. The airline that dominates a particular market simply calculates which portion of each agency's business it should be winning, based on overall travel patterns in that market. If an agency is selling more than that average, the airline pays it an "override"--a bonus commission that usually hovers around 5 percent of the ticket price, but can be as high as 17.
According to Wozniak, Twin Cities agencies can't earn overrides from Northwest unless roughly three-quarters of the tickets they sell are on that airline--the typical ratio for a hub city, according to industry publications. And at a time when commissions from airlines to travel agents have been falling, those bonuses are almost impossible to pass up. In reviewing the books of local travel agencies that were up for sale last year, Wozniak says, a theme quickly became apparent. "If they didn't have the override, they wouldn't have made any money," he says. "That makes it hard for Sun Country to come in here and compete."
At a recent industry gathering, Wozniak says, he asked the owner of a large Twin Cities agency whether he was now selling more Sun Country tickets. "He told me, 'I can't. I would lose too much money.' Instead, Sun Country has driven down fares so travel agents can offer Northwest as an alternative."
City Pages called eight local travel agents requesting the lowest fares to Boston, one of the routes on which Northwest and Sun Country compete. Four of the agents immediately located Sun Country's $208 round-trip fare. Two more offered information on Sun Country as well as Northwest's $211 fare, and two pushed Northwest tickets. One of those suggested that Northwest's schedule was more convenient, while another complained that her computer was having a hard time displaying Sun Country data. "If Sun Country would ever come up, it would probably be the same price," she said.
The override system hasn't escaped the attention of federal agencies. The U.S. Department of Justice closed an investigation in 1996 because it was "unable to show a direct anti-competitive effect of overrides." Probes by both the U.S. Department of Transportation (DoT) and Congress's General Accounting Office (GAO) asked whether the traveling public was aware that agents' advice might be tempered by the arrangements. The DoT report noted that overrides and other incentives "move travel agents toward the role of a direct distribution agent for a particular airline."
Hobbit Travel does not have an override agreement with Northwest. A few years back, Wozniak says, the airline told his agency, "'We're not doing anything with you because you're booking so much on American.'" In practical terms, he says the disfavor means that airline sales representatives don't call on his agency and Hobbit isn't notified of special promotions and packages. (Northwest's Austin won't comment on the company's agreements with travel agents, except to note that "they are important to any airline.")
Last month Northwest joined other major carriers in cutting agents' commissions from eight percent to five percent. Two weeks ago, however, Northwest offered agents an eight percent commission for ticket sales to fourteen destinations served by Sun Country, as well as to markets served by other discounters that hadn't joined in the commission cuts. When he called to ask about the promotion, Wozniak says, he was told that Hobbit would not be included. He alerted Minnesota Attorney General Mike Hatch, who promptly announced that he considered the extra commissions an attempt to undermine Sun Country, and that his office was investigating whether it should sue Northwest.
Within a day Northwest declared that it had inadvertently excluded Hobbit and up to 40 other travel agencies from the promotion. At press time neither Hatch's office nor Wozniak had said whether that would put an end to the matter. Northwest told reporters it initiated the promotion because it had been put at a "great competitive disadvantage" on routes served by carriers that had not lowered their commissions.
Brian Nystedt, CEO of the New Departures travel agency in Minneapolis, says overrides don't make much difference to small agencies: "The pressure to book the preferred provider" is much higher in larger companies, he notes. But, Nystedt adds, airlines can tell who their best customers are--and those customers get the most help. "Getting clients cleared on a wait list, getting people on a sold-out flight--all of that pulling-rabbits-out-of a hat stuff has to do with your relationship with people at the airlines." (Federal studies of the override system have also suggested that agents who don't play lose out on free or discounted tickets for themselves.)
Nystedt's fledgling agency stands to break even this year for the first time, he says, thanks in part to an increase in travel sparked by local fare wars. "Sun Country has made it possible for more people to travel," he explains, "and Northwest matching their fares makes it possible for more people to travel." Still, he often explains to his clients that "every once in a while, honey, you've got to fly Sun Country."
Which is precisely what Northwest is afraid of, Wozniak insists: "Those guys make a few bucks and then they go out and buy a few more planes and then, bang! You're dead. Don't kid yourself. American, United, Delta--they're all watching this, too. They learned their lesson with ValuJet when they sat back on their arrogant asses." (Discounter ValuJet made headlines when it was grounded after one of its planes crashed into the Everglades in 1996. But until then, the Atlanta-based carrier was known as the only airline this decade to launch a successful assault on a major carrier--Delta, in this case--in its hometown hub.
Look north from Interstate 494 at the edge of the airport and the first thing you'll see is a veritable phalanx of white Northwest hangars. Dozens of noses and tails poke out of the blocks-long row of buildings that look sort of like marshmallows on steroids. Drive past the facility and you'll see three much smaller hangars--a new, white Sun Country structure and two older beige concrete cubes, one of them also used by the upstart.
The buildings themselves are owned by individual airlines, but the land underneath belongs to the Metropolitan Airports Commission (MAC), a government body whose 15 members are appointed by the governor and the mayors of Minneapolis and St. Paul. It is from the commission that airlines get gates, ticket counters, office space, and the like. Typically, the commission also issues the bonds that finance airlines' construction projects.
Last year, when the Northwest strike drew heightened public attention to the drawbacks of being a hub, the MAC came under fire from critics who said it should have done more to encourage airline competition. While MAC officials responded that the flurry of flak miscast their role in the fray, Sun Country and Attorney General Hatch complain that for years the agency has been indifferent to the little airline's attempts to grow.
It all began with the southernmost beige cube, a structure Sun Country has been using since its inaugural flight in 1983. Back then the edifice belonged to MLT, which sold it to Northwest in the 1985 deal. Northwest leased the hangar back to Sun Country for about $36,000 a month, according to co-founder Olsen. But in 1992, following a spat involving maintenance fees on a plane Sun Country had rented from Northwest, the monthly rent doubled and Olsen says Northwest added a proviso saying it would take the hangar back if Sun Country ever started scheduled service in the Twin Cities. At the same time, Northwest also increased the fee for performing federally mandated inspections of Sun Country's planes from $3,000 to $30,000.
Sun Country had been looking into constructing its own hangar but had encountered resistance from the MAC. Federal regulators said that without a hangar, Sun Country couldn't keep flying. So finally the MAC, in Olsen's words, "strongly suggested to Northwest that they try to come to a deal with an extended lease." After some further wangling, he says, a deal was inked that dropped the rent to its previous level and eliminated the non-compete clause.
A little more than two years ago, Sun Country did win MAC approval for a new hangar. Right around the same time, however, MAC planners happened to alter the direction of a new runway by a few degrees--sending it right through both Sun Country's rented hangar and its proposed new facility. (Sun Country ultimately built a collapsible hangar that will be moved once the runway is completed in 2001.)
The hangar spat marked just one of many times when the MAC, in response to a request from Sun Country, suggested that the airline find an accommodation with its rivals. Last month La Macchia, the Sun Country CEO, told a congressional panel in Washington that since its first flirtation with scheduled service in 1993, Sun Country has asked the MAC for gate space at the airport's main terminal 11 times. Each time the answer was no, and the MAC always offered the same reason: Other airlines--Northwest chief among them--had long-term leases on the terminal's 70 gates.
MAC officials respond that when an airline asks for space, they routinely suggest that it explore subleasing from established tenants. If that doesn't work, they say, the MAC will find the space--by wrestling it away from a competitor, if need be.
According to La Macchia's remarks in Washington, that's not the way it worked when Sun Country went looking. "Northwest did not even respond to our request," he alleged. "The other airlines, who each have only a handful of gates, could not accommodate a 16-plane operation. The MAC, whose mission is to foster competition, refused to intervene."
Northwest spokesman Jon Austin says he's not sure what specific requests La Macchia might have been referring to. In any case, he asserts, Northwest itself is "actively seeking more gates in Minneapolis-St. Paul because we're trying to grow our operation, and we're not in a position to sublease to anybody."
MAC public information officer Wendy Burt says it's not the commission's job to get involved in airline rivalries. "When Sun Country announced it was becoming a scheduled carrier, we thought, 'That's great,'" she says. "From the beginning we've wanted to work with Sun Country." Last year the commission did offer the airline two gates; company officials say they rejected the offer because the gates were not next to one another, and because there was no ticketing or baggage space to go with them. "In the end, when [Sun Country] decided to stay in the Humphrey terminal, we really got a bad rap for how they resolved deciding where they wanted to be," Burt concludes.
But Sun Country isn't the only one complaining that the MAC has failed to foster competition. Earlier this year a DoT study found that the commission had failed to track whether some of the airport's gates were used frequently enough to justify their exclusive leases. A separate DoT report concluded that long-term leases were limiting competition in the Twin Cities and several other markets. Yet another study by the agency, released just last month, determined that Minneapolis-St. Paul and a number of other airports had failed to aggressively market their facilities to low-fare carriers.
In an opinion piece published a year ago in the St. Paul Pioneer Press, MAC executive director Jeff Hamiel insisted that the agency "has never denied an airline a gate or access to the airport. If any airline wishes to launch service, we will make gates available." Wendy Burt adds that two years ago the agency sent letters to more than sixty airlines noting that leases on two-thirds of the airport's gates were about to expire, and that it was a good time to ask for more space. She says Northwest was the only carrier to respond. The MAC also has made a special, and public, effort to woo Southwest Airlines, the popular discounter that serves more than 60 cities around the nation.
Aviation consultant Ernest Arvai, head of New Hampshire's Arvai Group, says it's no wonder the MAC has had trouble attracting new airlines: "Northwest is known for predatory behavior," Arvai says bluntly. "There are 165 other airports that would love to have Southwest. So why would Southwest come in and try to compete with a predatory competitor?"
Ask Bill La Macchia about the Metropolitan Airports Commission and he declines to repeat the complaints he aired in Washington. Relations are much better these days, he says, pointing to the evidence of updates throughout the Humphrey Terminal: The new paint. The restrooms, handicapped-accessible at last. The lights, finally bright enough to read a newspaper by. The newsstand and gift shop next to the little snack bar. And, of course, the big pile of dirt behind the building.
Come March 2001, that spot will be the site of a new, sleek, 350,000-square-foot Hubert H. Humphrey Terminal. Four times the size of the current one and designed in such a way that it could be expanded from 8 gates to 18 or 19, the project will cost the MAC some $73 million. And Sun Country will be the anchor tenant. If, that is, it hasn't gone the way of most of the low-fare airlines that have tried to break the big carriers' hold on the market in the past two decades.
Fare war became a household phrase in the early Eighties, when the Reagan administration eliminated regulations governing routes and ticket prices. A host of budget carriers sprang up--most notably People Express--and many failed just as quickly. The survivors merged with their competitors, resulting in an industry that is now dominated by just seven major domestic airlines.
Since deregulation, the big airlines have all established hub-and-spoke systems that bundle much of their traffic in a few large airports. For people in hub cities, the system has made it easier and faster to fly. But critics of the system charge that hub passengers also pay a price: Travel costs more when one airline enjoys a near-monopoly on the market. Several federal probes have concluded that Twin Cities fares, for example, are higher than those of comparable, non-hub cities. Some suggested that the "hub premium"--up to 49 percent, according to a March study by the GAO--was a result of Northwest's control of some 80 percent of airport operations here.
Over the years a number of airlines have tried to capitalize on the demand this system has created by offering no-frills, budget service. The vast majority have been unsuccessful; the closest any low-fare entrant has come to commercial success was ValuJet's assault on Delta. (The former ValuJet is now back in business as AirTran, and it's among the low-fare carriers rumored to be on the verge of entering the Twin Cities market.)
Most often, low-fare carriers have been doomed simply by their competitors' ability to undersell them. For example, in 1993 tiny Reno Air began offering bargain fares from the Twin Cities to Nevada. Northwest quickly added flights to Reno and slashed its prices to match the rival. Three months after it started flying here, Reno threw in the towel.
In 1997 Reno sued Northwest, claiming the bigger company had engaged in "predatory pricing," the antitrust violation that occurs when an airline sells tickets at a loss in order to drive a competitor out of business. The suit was dropped in March, after Reno was purchased by American Airlines--which, as it happens, is itself the target of an antitrust suit filed by the Justice Department.
Experts say the problem with predatory-pricing suits is that they are extremely difficult to win. "It's mostly a question of proof," says Dan Kleinberger, a professor of business law at William Mitchell College of Law. "The major carriers all have extremely well-trained antitrust lawyers. The executives have all been taught what not to do."
For instance, in 1982 the Justice Department filed a separate antitrust suit against American CEO Robert Crandall, charging that he had conspired with the chairman of American's then-rival, Braniff, to fix prices. Tape recordings of a conversation between the two made their way into the court file: "I think it's dumb as hell, for Christ's sake, all right, to sit here and pound the [expletive] out of each other and neither one of us making a [expletive] dime," Crandall told his Braniff counterpart, according to the New York Times Magazine. "Raise your fare 20 percent. I'll raise mine the next morning....You'll make more money and I will, too." These days airlines often raise and lower their fares in unison, but they don't discuss their plans with the competition.
Earlier this year, the U.S. Department of Transportation drafted new guidelines designed to get around the need for a smoking gun: Under the new rules, a major airline would automatically trigger a federal investigation when it adds seats and slashes prices on routes being served by a newcomer.
La Macchia recently testified before a U.S. House of Representatives subcommittee debating the proposed rules. Northwest's response to Sun Country's arrival in the market "fits every one of the proposed DoT guidelines that would prompt an investigation," he told the lawmakers.
"This fight, and the proposed DoT regulations, is not about taking away the rights of the dominant airlines," he went on. "In fact, the best way to preserve the benefits of airline deregulation is to create an environment that provides all air carriers with a fair chance to compete and prosper." The DoT has announced no time line for deciding whether the guidelines will be enacted.
Northwest chose not to participate in the hearings because preparations were too time-consuming, because a representative of a major airline association did testify, and because "this was a set of hearings where there wasn't really a role for large airlines," according to Jon Austin. Besides, he adds, Northwest has "been up on the Hill this year five or six times."
Sun Country's Lee says committee staffers have told her Northwest held private meetings with some of the representatives before the hearings. Austin says he doesn't know whether that's true and wouldn't see anything wrong if it were. Northwest has a full-time governmental affairs staff, he notes: "I'm sure we meet with [members of Congress] all the time."
According to federal campaign finance records, in the last election cycle the airline's political action committee donated $1,500 to Tennessee Republican representative John Duncan, the head of the subcommittee that hosted last month's hearings. All totaled, employees of the airline and its political action committee gave $67,500 to members of the committee and its Senate counterpart.
During the same election cycle, the PAC, individual Northwest employees, and the airline itself gave almost $900,000 in federal campaign contributions and spent more than $5 million on lobbying in Washington. Neither Sun Country nor Mark Travel made any donations, though Bill La Macchia Jr. did give $250 to Minnesota representative James Oberstar, a longtime Democratic member of the committee.
Whether La Macchia's message fell on receptive ears in Washington is anyone's guess. But he has found an advocate in the Minnesota Attorney General's Office. A former state commerce commissioner and gubernatorial candidate, Mike Hatch picked fights with entrenched institutions--insurance companies, health-maintenance organizations, the state DFL Party--long before he was elected attorney general last year. After taking the oath of office, he wasted little time in announcing that he thought lower airfares were overdue in Minnesota.
The public has an interest in how Northwest deals with competition, Hatch argues, because the airline's success has been contingent on its domination of the Twin Cities airport. That airport is owned by taxpayers, he notes--taxpayers who, thanks to the near monopoly, now pay a premium to fly out of their own facilities. "We have turned over market control to one company," Hatch declares. "We've essentially turned over a public asset to a private company, and that's bad."
Since taking office, Hatch has researched several ways in which the state could get involved in the fight between Northwest and Sun Country. First, he suggests, his office could participate in an antitrust lawsuit filed by the Justice Department over Northwest's alliance with Continental Airlines. Alternatively, the state could file its own suit against Northwest over predatory pricing (a case, Hatch concedes, that would be difficult to prove under current law).
Officials could also push the MAC to seek more competition, the attorney general continues. "We could say that MAC ought to act as a regulator. It has an obligation to act on behalf of the public in attracting competition."
But for now Hatch's office has chosen a fourth avenue: asking the U.S. Department of Transportation to investigate Northwest Airlines for possible predatory pricing, and signaling to the Justice Department that the attorney general is concerned about antitrust issues. Hatch's complaint to the DoT, filed last spring, featured several pages prepared by Hobbit Travel owner Wozniak, showing Northwest prices on Sun Country routes and comparing them to those of a year ago.
In a 20-page response to Hatch's request, Northwest contended that he and Wozniak had chosen exaggerated examples. True, the airline admitted, it had lowered fares and added capacity on many routes served by Sun Country. But it had done so because there was demand for more air service in those markets. And it had never "undercut any fare offered by Sun Country in any market."
Northwest also refuted Hatch's suggestion that it is using its charter wholesaler, MLT, to steer traffic away from Sun Country: On the contrary, Sun Country was threatening to overwhelm MLT. "MLT and Sun Country are now in competition with each other for the charter customers they formerly served in common," Northwest argued. "In this competition it is Sun Country, not MLT, that enjoys a significant competitive advantage due to the fact that Sun Country is now owned by the Mark Travel Corporation, one of the largest tour operators in the United States."
The DoT has not said whether it will pursue Hatch's request for an investigation. But it's clear that the pencil-pushers will need a while to sift through the soup of numbers: Both Hatch's and Northwest's documents about the issue bear thick attachments comparing fares, available seats, and departure times, along with enough fine print to confound even the most zealous auditor.
And in Northwest's view, none of those details should be sorted out in Washington. The battle belongs in the marketplace, the airline insists, adding that Sun Country has a lot of changes to make if it wants to win there.
"The real question that should be asked is not whether Northwest has been unfair to Sun Country by curtailing these support services," the company's recent memo suggests, "but whether Sun Country has taken the steps it needs to take, and made the investments it needs to make, to establish the operational infrastructure to support a scheduled airline....
"It appears that Sun Country has elected to go cheap--to scrimp on the basic investments necessary to support scheduled airline service, choosing instead to try to rely on Northwest, its chief competitor, as its primary supplier of spare parts....This is not the way a scheduled airline takes care of its business."
Chances are consumers will hear plenty more bellyaching from both airlines. Industry analysts say it may take three years to find out whether the market will support Sun Country. And plenty of travel insiders are willing to bet Sun Country won't be around by the time the new Humphrey terminal opens.
But there are others--including Hatch--who say that given a fair fight, the former charter carrier might turn out to be the Southwest of the Midwest. It has been argued that in this market, a low-fare carrier could generate enough business to turn a tidy profit simply by selling tickets to people who wouldn't fly but for its discount fares.
La Macchia, however, isn't talking like a man who's willing to settle for half a loaf. "We're not in the transportation business," he proclaims. "We're in the service business. Travel is no longer just for certain classes of people. Travel is now a right, and ultimately you have to know the value of that.
"We want to get a customer one time," he adds. "If we get them one time, we'll get them back."
But La Macchia is probably also familiar with an old travel-biz adage: The best way to become a millionaire, it goes, is to start out as a billionaire and buy an airline. And so he has been hustling to get those customers now--before the Twin Cities' honeymoon with the new kid on the block ends.
Two weeks ago Sun Country staffers swathed one of their hangars in black-and-white balloons and other party trappings and invited members of the Twin Cities business community to spend the evening listening to Minneapolis's Brave New Workshop improvise comedy routines with aviation themes. There was a pitch, of course, but it was simple: If the businesspeople agreed to make Sun Country their preferred airline, the carrier would negotiate one fare to be paid by all of their employees, regardless of when or where they traveled.
The evening ended with a raffle for a trip for two to Las Vegas, complete with hotel room and show tickets. La Macchia drew even more laughs than the improv troupe when he volunteered to go to the winner's house and--in a reference to Sun Country's offbeat TV advertising campaign--take out her garbage.
As the festivities wound down, the Sun Country CEO positioned himself in front of the hangar door to shake hands while his staff dismantled departmental displays that included a DC-10 engine, a black box, and blown-up sketches of the future HHH. Some of the workers debated--and abandoned--the idea of hauling the columns of balloons over to the charter terminal. As guests filed out, they were handed free round-trip tickets as door prizes. "Try our service," the black-and-silver coupons pleaded. "We're here for you."
Interns Claire Adamsick, Chris Jones, and Ella Meyerson contributed to this story.
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