It seemed like cause for celebration. On Nov. 16, Northwest Airlines Inc. and KLM Royal Dutch Airlines got preliminary approval to merge their operations--the first time that a U.S. and a foreign carrier have been granted permission to act as one. The marriage could create a formidable airline with enviable global reach. But the champagne corks aren't popping in Minneapolis or Amsterdam yet. The folks at Northwest are too busy trying to figure out how they can come up with the money they need to stave off bankruptcy.
Northwest is pressing banks to let it borrow new money and restructure debt. It's negotiating with unions to win concessions. And it is hurriedly approaching other airlines about buying some of its assets. Northwest owner Al Checchi, whose 1989 buyout has left the airline with $4 billion in debt, has angered labor and banks by refusing to dig into his own pocket for further equity. And even KLM is getting cold feet about drawing closer. The Dutch airline paid $400 million in 1989 for a 49% stake. But without a further cash infusion, Northwest is in serious trouble. The carrier has less than $300 million left--enough to last it only 90 days. Says Standard & Poor's Corp. analyst Philip Baggaley: "It's not a given that they can avoid bankruptcy."
OTHER PEOPLE'S MONEY. It's a wonder that Northwest has kept out of trouble even this long. Under CEO John Dasburg, the airline has improved operations, many industry experts say. But since the leveraged buyout, Checchi and his partner, Gary L. Wilson, have had to fly through some of the worst fiscal years in aviation history. Similarly leveraged carriers, including Midway, Eastern, and Pan Am, have gone down.
Checchi's talent for innovative financing has helped him squeeze through. In 1990, he got a $500 million loan from Airbus Industrie by placing a huge order for the European consortium's aircraft. And just a year ago, he caused jaws to drop when he persuaded the state of Minnesota to come up with $835 million in financing.
Such wizardry can hold out for only so long. Of the state's $835 million, $375 million had been dedicated to building two maintenance facilities that Northwest would have managed. But Minnesota has put off those plans until the airline's fate appears more secure. KLM may be taking a similar stance. A source close to Northwest says KLM had offered $600 million in new financing in late October, part of it in equity. But according to the source, KLM's board vetoed the deal on Nov. 6 for fear of further exposure to Northwest's losses--a report KLM denies. Northwest lost a total of $618 million in 1990 and 1991 and may lose $300 million this year.
Checchi is scouring every front, though sources say he is working in the shadows while Dasburg conducts negotiations. Asset sales are likely. Northwest has had preliminary talks about selling some of its 61 slots at Chicago's O'Hare International Airport, which could fetch $2.7 million each, say experts. One banker says the airline is trying to sell "anything that has good value that they're not fully utilizing."
COMPROMISE COMING? Northwest has also asked its unions for up to $900 million in contract concessions, possibly in exchange for equity. So far, mnly the pilots have put something on the table. And the carrier has asked its banks, KLM, and suppliers for $300 million in additional loans. Most of the banks are refusing. But in the hope of averting a Chapter 11 filing, they may compromise, says one banker, by bringing in new lenders pari passu, in which the new debt-holders get equal standing with the old. Bankers Trust New York Corp., which has an equity stake to protect, is expected to offer $50 million to $100 million to "break the ice." Bank officials would not comment.
Industry experts say they'll be surprised if KLM doesn't come forward with at least something. Without Northwest, KLM will have almost no presence in North America and would be doomed to remain a modest-size European airline. With KLM's access to the European market and Northwest's rich Pacific routes, the two carriers could be a powerful pair. And now, with immunity from antitrust laws, KLM and Northwest would be allowed to cooperate on pricing, which confers tremendous advantages in the marketplace.
Those benefits are still a long way off. Northwest's first order of business is finding the money to keep itself out of bankruptcy court. A Chapter 11 filing would undoubtedly reduce ticket sales, could wipe out KLM's $400 million equity stake, and might even jeopardize the partnership. And that's something both carriers desperately want to avoid.