When financier Al Checchi bought Northwest Airlines Inc. for $3.65 billion in July, 1989, he pledged not to behave like a typical corporate raider. He insisted he wouldn't auction the airline piecemeal to pay the debt. He swore he would expand. But then recession and the gulf crisis sent the industry into a tailspin. Suddenly, Checchi seemed poised to follow Carl Icahn and Frank Lorenzo into the ranks of raiders undone by the industry's violent mood swings.
Look again. Dealmaker Checchi hasn't expanded nearly as fast as he had hoped. But amid an industry crisis, he has baffled naysayers by wringing cash from Northwest's assets to keep the airline aloft--and growing. Since the buyout, he has raised $1.2 billion, using it to pay down debt and buy routes and gates. Now, he is engineering an innovative deal to take over the Trump Shuttle in return for managing it out of its own acute distress.
Checchi's biggest deal may be yet to come. By early June, he hopes to bag as much as $1 billion in tax breaks and loans from the state of Minnesota. His side of the deal? Locating a new aircraft maintenance plant there. An agreement would allow him to trade more of his expensive 11% buyout debt for obligations priced closer to current market rates. "He's done a great job finding cash," says a senior executive at a rival airline. "I didn't think he could do it."
BLEEDING TURNIPS. Squeezing blood from turnips has long been the forte of Checchi and partner Gary Wilson, both former Marriott Corp. financial whiz kids. At Northwest, they quickly raised $680 million through the sale-leaseback of airplanes and land, using the cash to retire acquisition debt. Last September, they pressed Airbus Industrie and General Electric Co. for a low-interest, $500 million loan in exchange for a huge order of aircraft and engines.
The deals didn't erase Northwest's leverage. While $1.7 billion of the $3.1 billion in acquisition debt is gone, the company still has an estimated $6.2 billion in total debt, including off-balance-sheet lease obligations. Yet Checchi and Wilson's financial acumen has eased the interest burden and given them the flexibility to tap some key opportunities: Northwest bolstered its South Pacific route system with the $20 million purchase of a 25% stake in Hawaiian Airlines Inc. Checchi also bought coveted gates and landing rights at Washington National Airport for $35.5 million (table).
As for the Trump Shuttle, Northwest's bank agreements restrict spending cash on a purchase that big. So Checchi found a way around his banks. Sources
involved in the negotiations between Checchi and the shuttle's creditors say Northwest could receive an undetermined equity stake in return for a $15 million, up-front investment. Northwest would operate the carrier with the mandate to pay down the $365 million in debt left over from Donald Trump's ill-fated buyout. As the debt was paid off, Northwest would get more equity. If the debt were gone at the end of five years, Checchi and Wilson would own the shuttle outright.
The deal isn't done yet. Checchi and the banks still are wrangling over the size of the initial equity stake. And sources close to the negotiations say other carriers are waiting on the sidelines. Air Canada, for one, recently offered Trump's banks $100 million for a 49% nonvoting equity stake in the shuttle.
Amid the negotiations, Northwest had plenty else to look forward to. Checchi's wheeling and dealing in Minnesota promises to raise capital to further preen the balance sheet. Nervous about the financial health of one of its biggest employers, Minnesota appears willing to fund the carrier. Says State Senator Donald Frank: "I guess we're the till of last resort."
State legislators hope soon to pass a bill authorizing the Metropolitan Airport Commission to float a $350 million bond to finance new Northwest maintenance facilities in Duluth and Hibbing. Moreover, the state is set to authorize an additional $390 million bond to mortgage Northwest gates and land around Minneapolis-St. Paul Airport. Meantime, Checchi also has asked the state pension board to lend Northwest $ 200 million.
Checchi and Wilson certainly aren't out of the woods. Since early 1990, their carrier has lost a total of $72 million. Yet one banker close to the company marvels: "These guys came in without any experience, and in the face of disaster, they figured out how to do it." While skeptics are unconvinced that Checchi and Wilson can master the day-to-day challenge of running an airline, the pair have shown one thing: An LBO doesn't have to clip an airline's wings.
WHEELING AND DEALING AT NORTHWEST
RAISING CASH EVERY WHICH WAY... Sale-leaseback of aircraft $300 million
Refinancing Tokyo real estate $380 million Low-interest loan from Airbus and
General Electric for a big order of Airbus jets with GE engines $500 million
Possible low-interest loans and tax breaks from Minnesota for a new maintenance facility. NWA also wants $590 million in fresh capital from the state $1 billion
...HAS FREED THE AIRLINE TO: Pay down acquisition debt $1.7 billion Buy a 25%
interest in Hawaiian Air and its South Pacific routes $20 million Buy five former Eastern gates and 76 takeoff and landing slots at Washington National Airport $35.5 million Earn ownership of the Trump Shuttle in exchange for managing the carrier while paying down its debt $15 million