Maybe Al Checchi's Eyes Are Bigger Than His Wallet

Got an airline for sale? Need some cash to prop up your carrier in bankruptcy court? Call Al Checchi, chairman of Northwest Airlines Inc. He's buying--or at least he's trying to.

During a summer of turmoil in the airline industry, Checchi has appeared wherever assets might be for sale. Eastern gates, the Trump Shuttle, America West--you name it, he has stalked it. Despite persistent wheeling and dealing, however, Checchi has yet to land the big deal he believes is necessary to keep Northwest in league with the industry giants. Union squabbles created insurmountable problems for a shuttle deal, and a $20 million cash infusion for bankrupt America West Airlines Inc. is securing just a marketing pact between the two carriers for now.

Unbowed, Checchi is driving hard to cut deals with two more bankrupt carriers: Chicago's Midway Airlines Inc. and a much bigger fish called Continental Airlines Holdings Inc. Both airlines need lots of work, inspiring heavy skepticism about Checchi's ambitions. "It's kind of like sweeping up after the dance," snipes an American Airlines Inc. executive. He insists that American, United, and Delta already have picked off the best assets shaken loose by the current industry travails.

Checchi knows scavenging can pay rich dividends. The question is whether anybody has the savvy to pull off two successful acquisitions with an airline company strapped for cash and heavy on debt. Even if Checchi can come up with enough money to make a credible bid for Midway and Continental gates, planes, and routes, he'll have to convince bankruptcy judges and scores of creditors in both cases that he's offering the best deal. Then, if he manages to win the assets, Checchi faces the long, expensive slog of integrating workers and meshing service. That's a job that has stymied many a veteran airline executive, something Checchi is not.

CASH-POOR. The first step, of course, is finding enough cash. Northwest officials declined to comment for this story. But sources close to the airline say a Continental deal could take $600 million in cash up front. Checchi has already shelled out $20 million to Midway for 21 gates at Chicago's Midway Airport. It would need another $100 million to buy the rest of the airline. Problem is, Northwest and its parent company have only $90 million in cash while struggling under $3.7 billion in total debt. Checchi will get some help from a proposed $715 million financing package from the State of Minnesota. But much of that is slated to build a new maintenance facility, and an additional $200 million cash infusion from the state's pension fund may not come through. Minnesota pensioners aren't so sure they want to tie their futures to Northwest's.

So, Checchi and partner Gary Wilson are scouting for investors. After years of cutting deals at Walt Disney and Marriott before moving to Northwest, they are tight with banks and institutions worldwide. And a source with knowledge of the talks says British Airways has also spoken to the Checchi camp about going in on a deal.

It will help that Checchi is getting an enthusiastic response from the airline, partly because he is close friends with Continental Chairman Carl R. Pohlad. But even his impressive connections don't assure clear sailing. Some of Continental's creditors are already concerned that the company's management, including Pohlad, is running something less than a full-fledged bidding process to find investors for the airline.

Even some Continental directors are leery of Checchi's propensity for financial gymnastics. "Northwest has a tendency to go right up to the brink and start cutting back their offer," says a source close to the board. Consequently, it would hardly be surprising to see either the creditors or the board courting other bidders once the end game for Continental begins. If the case of Pan Am Corp. is any guide, bidding contests in bankruptcy court often heat up at the 11th hour.

Continental also has the kinds of skeletons in its closet that can kill a deal before its gets started. Besides its $700 million unfunded pension liability, a grand jury in Brooklyn is investigating charges that the carrier illegally transferred to itself millions of dollars of Eastern Air Lines Inc. assets before its sister airline fell into bankruptcy in 1989. Los Angeles financier Marvin Davis has taken a close look at Continental, but sources close to Davis say he pulled out of the bidding Sept. 24, partly because of the grand jury inquiry.

SUN AND SNOW. For all the hurdles, though, it's easy to see why Checchi wants Continental and Midway. Both Northwest, the No. 4 carrier, and Continental, No. 5, think they need more bulk to survive against the megacarriers. Northwest, with its snowbelt focus, fits neatly with Continental's sunbelt and East Coast system. And Checchi could save money by shrinking Northwest's Memphis and Boston hubs, relying instead on Continental's strong Houston and Newark operations. Midway, meantime, has a strong presence out of Midway Airport, which offers high-paying business travelers a downtown alternative to the madness of O'Hare International Airport.

To ease the strain of combining two carriers as large as Northwest and Continental, Checchi would likely merge them into one system over a two-year period. Northwest would keep roughly two-thirds of Continental's jets and most of the company's employees. But a key element to the merger would be trying to boost cash by renegotiating the leases on Continental's jets while systematically cutting unattractive routes.

To keep his unions happy, Checchi would limit the seniority levels of Continental employees. And he would try to keep some of Continental's labor-cost advantage--for a time at least--by bringing its employees up to Northwest pay levels over several years. Continental employees might not like that kind of treatment but they wouldn't revolt. Given Continental's tenuous position, the reasoning goes, they would be happy just to be rescued.

Relying on labor to stay quiet, however, cuts against the grain of almost all previous airline mergers. Disruptions in service and millions in hidden costs are more the norm. While plentiful in recent years, mergers in general are the bane of any airline executive. Doing a deal such as Midway would be tough; doing Midway and Continental may be impossible. Checchi clearly thinks sweeping the dance floor is the only way to keep up with the big guys. But it will take some fancy footwork to really clean up.

       $20 million for 25% ownership
       $20 million in financing and $15 million for the right to buy Japanese route
      TRUMP SHUTTLE          SEPTEMBER, 1991
      Deal for Trump Shuttle collapsed. Checchi was to pay $15 million, then pay down 
      QANTAS AIRWAYS                 PENDING
      Checchi wants to buy 49% of Australian airline. There are other bidders, and 
      the deal needs government approval
      MIDWAY AIRLINES                PENDING
      Checchi in discussions to buy assets of ailing carrier
      Checchi in discussions to buy all or part of carrier
      DATA: BW
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