A Midcourse Correction For Northwest

As general manager of Lord Fletcher's, a trendy bar and grill on Minnesota's Lake Minnetonka, Alan Bell often gets called on by local charities. They like to hit him up for free gift certificates, and usually he's happy to oblige. But the other day, Bell got a request he's still shaking his head over: Northwest Airlines Inc. came around asking for free food-and-drink chits to reward airline employees who think up cost-saving ideas. Marvels Bell: "A for-profit business asking for a handout!"

It wasn't the first time. Since buying control of the carrier in a 1989 leveraged buyout, Co-Chairmen Al Checchi and Gary Wilson have displayed a penchant for innovative fund-raising. They've tapped the likes of European aircraft maker Airbus Industrie and General Electric Co. for loans. They've refinanced Northwest's Tokyo real estate. Last year, in return for building two new maintenance bases in Minnesota, they lined up an $835 million financial package from the state.

RUMORS. But the act may be wearing thin. From Minneapolis to Wall Street, people are openly speculating about Northwest's future. The airline slump, coupled with the near-insane summer fare war, is pounding Northwest. Analysts figure the thinly capitalized carrier, which has lost $618 million in the past two years, will drop an additional $200 million in 1992. Both Standard & Poor's Corp. and Moody's Investors Service recently downgraded its debt. Bankruptcy rumors, circulating since early June and strongly denied by Northwest, "are probably exaggerated," says Standard & Poor's analyst Philip Baggaley. "But it's not impossible."

The financial worries couldn't have come at a worse time. Trying to overcome the carrier's "Northworst" tag, Checchi and Wilson are spending millions to improve service and spruce up marketing. A fiscal crunch, or even rumors of one, could threaten those programs and overwhelm Northwest's efforts to resuscitate its image.

Although CEO John H. Dasburg insists "the airline is not in financial trouble," it's hurrying to cut costs. Northwest recently deferred delivery of 20 midrange A320 planes from Airbus. A source within the company says it's about to delay buying 16 A330s, though a spokesman had no comment. It sliced service at its Washington (D.C.) hub by 33% and asked unions to consider making concessions that one source close to the airline says may save $300 million. "Northwest Now" is a corporate campaign supposed to use employees' ideas to hack off $100 million in costs by summer's end. And on June 30, the company announced plans to cut 250 management jobs.

The carrier is hardly in a tailspin. Its $600 million bank credit line is virtually untapped. The company has prepaid enough LBO debt, thanks in part to the loan from Minnesota, that no big payments are due until next July. "I think they'll survive," says one member of Northwest's bank group.

`A DEBACLE.' There's not much room for error, though. With $4.2 billion in debt, Northwest currently has a negative net worth, says Joseph Francht, senior vice-president of finance. If the industry gets another shock like the gulf war or engages in another self-destructive fare fracas, Northwest will be in an exceedingly tight spot. Dasburg concedes the carrier will lose at least $40 million from this spring's brief two-for-one ticket offer. "That was a debacle," he says. Northwest has sued American Airlines Inc., which initiated the latest bargain bash, charging it with predatory pricing.

While the courtroom squabble goes on, Northwest's cash cow, its once-lucrative Pacific division, continues to bleed (chart). Much of the problem can be chalked up to Japan's faltering economy. But the airline hasn't helped matters by gaining a reputation for spotty service. United capitalized on that weakness to lure more-lucrative business passengers while eating into Northwest's overall market share. Northwest's share of U.S. carriers' trans-Pacific traffic dropped to 38% in 1991, down from 40.5% two years earlier, while United's share jumped to 41%, up from 39.8%. To its credit, Northwest is fighting back. It is aggressively courting new travel agents in Japan, changing flight times to cut the wait for connections, and upgrading in-flight service.

Elsewhere, Northwest isn't retreating, either. After several years of trumpeting plans to become "the airline of preference," the company has committed $450 million through 1995 to improve service, says Checchi. It also boosted the ad budget 50% this year, and on May 1 it rolled out a new series of snappy TV spots. Featuring R&B singer Aaron Neville, the ads' tag line is: "Some people know how to fly."

Northwest has learned more about that, too. Once the carrier with the worst on-time performance, Northwest finished first last year. And it has made steady improvement in lost-baggage rankings. But its battered image will take "at least two years" to change, predicts David H. Treitel of industry consultant Simat, Helliesen & Eichner Inc. Some competitors are more skeptical. "I think they're just flailing," says a senior executive at a rival airline. He argues that Northwest won't truly be able to compete with American, United, and Delta until it gets its finances in order.

HOLE CARDS. More cost-cutting might help. The company laid off 110 pilots on June 24. But to pare costs way back, Checchi must get concessions from his unions. He's negotiating with the mechanics, whose contract expired earlier this year, and has asked the pilots and flight attendants to make concessions. Although nothing is on the table yet, the Air Line Pilots Assn. expects a proposal by July 8. ALPA "is open to discussing" ways to save money, says spokesman Craig Hofstetter.

As usual, Checchi and Wilson may have a few financing cards up their sleeves. They are working on two deals that would bring in up to $500 million, says Francht. In one, they would pledge receivables as collateral; in the other, they'd pledge their aircraft. KLM Royal Dutch Airlines, which owns 20% of Northwest, could be another source of funds for the carrier. In fact, Checchi predicts Northwest and KLM will forge closer ties "within five years." A KLM spokesman declines to comment. But more important, Checchi needs to get Northwest's finances and operations in order. And that will take a lot more than charity from Lord Fletcher's.

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