Talk about a screwup.
On Oct. 8, when Northwest Airlines boldly outbid Southwest Airlines to win control of bankrupt Midway Airlines, it looked as though Al Checchi, Northwest's dealmaking chairman, had scored a coup. Not only had he gained access to Midway's 21 gates at Chicago's convenient Midway airport, but he had also outflanked Southwest, a tough potential competitor.
Now, though, Midway Airlines Inc. is grounded for lack of cash, the carriers are headed for a court battle, and Northwest Airlines Inc. has plenty of egg on its face. Worse yet, a new Price Waterhouse study, prepared for a Minnesota agency that is getting ready to lend Northwest $320 million, suggests that the airline is under financial pressure.
FALSE DATA? Northwest Co-chairman Gary Wilson insists the airline is on firm financial ground. But the study casts doubt on whether Checchi has the resources to attempt a much-talked-about merger with Continental Airlines Inc. Indeed, Checchi's best hope these days may be a merger between British Airways PLC and KLM Royal Dutch Airlines, which controls 20% of Northwest's common equity. BA and KLM won't discuss their plans, but KLM's unions have insisted such a deal is under way. If so, Northwest might get access to BA's deep pockets. And traffic fed from BA's transatlantic service could help fill Northwest's U. S. flights.
Northwest walked away from the Midway deal on Nov. 13, charging that Midway had given false revenue data to the Transportation Dept. -- data Northwest used to prepare its bid. Midway's own books, Northwest contends, show that Midway had overstated operating results by $35 million. Midway's denial of the charges gained support when Robin A. Caldwell, director of Transportation's Office of Airline Statistics, rechecked Midway's data. Says Caldwell: "We have no factual evidence Midway's data is anything but accurate." Midway has sued Northwest for fraud. Northwest vows to countersue.
Northwest may simply have been looking to save face. Wilson says the deal "didn't make sense, no matter what our financial position." But with Midway losing more than $600,000 a day, Northwest probably never could have afforded the $174 million deal. The Price Waterhouse study, prepared for the Minneapolis-St. Paul Metropolitan Airports Commission, says Northwest will end 1991 with just $31 million in cash. As of midyear, cash flow barely covered interest and aircraft rentals.
Northwest's condition may be worse than it has been willing to admit. While the carrier's internal projections show plenty ef money to cover its $4.2 billion in total long-term debt, Price Waterhouse casts doubt on those numbers (chart). Adjusting the Northwest data to reflect revenue-growth projections supplied by industry analysts, Price Waterhouse figures Northwest will generate $1.2 billion less in cash than it projects, leaving it hard-pressed to cover some of its obligations. Northwest responds that it has an untapped $600 million line of credit to provide liquidity and could cut capital spending or sell receivables to generate more cash if needed.
The bottom line: Northwest isn't going under, but its dealmaking ability is constrained. "They can make targeted investments that don't require a lot of cash," says a person involved in the report. It doesn't help that Northwest expects a $253 million loss in 1991 on top of last year's $302 million loss.
ANGRY AGENCY. Given his financial troubles, Checchi hardly needed the Midway debacle. Northwest has been vilified in Chicago by Mayor Richard M. Daley and at rallies by angry Midway employees. Transportation is mad that Northwest pulled out of the Midway deal without first informing Secretary Samuel K. Skinner. Says one official at the agency: "We read about it in the newspaper." Since Checchi is trying to persuade Skinner to give Northwest, and not Delta Air Lines Inc., authority to fly from Detroit to London, angering Transportation was hardly a cagey move.
For now, Checchi's first priority has to be the deal with Minnesota. In return for Northwest building big maintenance facilities in Hibbing and Duluth, Checchi hopes the state will come through with $835 million in financing, including a $320 million loan to help pay down acquisition debt.
Midway, however, puts even that in jeopardy. All the bad publicity, coupled with the Price Waterhouse report, is making Minnesotans uneasy. Still, State Senator Donald Frank, among others, thinks the package will pass. But Checchi may someday wish he never tried to buy Midway Airlines.