Klm Northwest: Three Years And Barely Aloft

As British Airways lays plans for a world airline empire where the sun never sets, take a look at KLM, a European rival with similar dreams of empire. Alas, its alliance with Northwest Airlines Inc. is one on which the sun can't quite manage to rise. Three years ago, KLM Royal Dutch Airlines paid $400 million for a 49% stake in the U.S. airline. Like BA and USAir Inc., the partners talked grandly of a global entente to mesh routes, cut costs, and rival the American giants. That hasn't happened. Instead, KLM has just swallowed its partner's losses.

There's plenty of blame to cast around. U.S. regulators, for instance, sought to block togetherness, nixing a financial review committee they said gave KLM too much control. And the deal may have been ahead of its time: In 1989, the U.S. was still far from the new accords that will soon make it easier for U.S. and European carriers to enter each others' markets.

RAGTAG PAST. But the main problem seems to lie with the partners. Outsiders remain baffled as to why they have done so little to bolster one another through joint marketing, training, or purchasing. Northwest set out in 1992, for example, to change its image for lousy service. Top-flight service is KLM's forte. But after budgeting $450 million for a three-year improvement program, Northwest has limited help from KLM to a casual exchange of ideas.

The two have also dragged their feet on linking flights, which would help them feed transatlantic passengers to one another instead of to competitors. Only in 1991 did KLM start flying to Northwest's Minneapolis hub. KLM added a linkup at Detroit earlier this year--although it still doesn't serve Northwest's third hub, at Boston, which some analysts say would be an ideal KLM gateway.

Northwest claims its alliance with KLM had to start slowly. The U.S. carrier was such a ragtag operation when Co-Chairmen Al Checchi and Gary Wilson bought it in a 1989 leveraged buyout that, says Checchi, "we had to change the management" before meshing with leaner, classier KLM. Indeed, the Dutch carrier is one of Europe's few profitable airlines, which in fiscal 1991 earned $76 million on revenues of $4.8 billion.

But now that BA and USAir are getting together, there's plenty of impetus for Northwest and KLM to get to work. Washington is about to offer a helping hand. It has chosen the Netherlands as the first beneficiary of its "open skies" policy, unveiled on Aug. 10. That would offer unlimited access to U.S. markets to countries that freely admit American carriers. A Dutch deal is possible by next month. And access to the U.S. is what KLM says it has been waiting for. Without that, "our ability to exploit synergies is severely limited," says an insider.

Northwest insists its Dutch connection will start blossoming in coming months. Checchi talks of sharing ticket offices and ground crews and "melding identities." A common name is possible eventually, the partners say.

But for now, BA says it's keeping KLM's U.S. experience in mind. One lesson: To avoid consolidating USAir's losses, BA will hold only USAir preferred stock for at least five years. KLM had to swallow an estimated $60 million of Northwest's losses last year.

KLM badly needs the U.S. feed that Northwest can provide. Struggling Northwest needs help as well. Watching their rivals link up may be just the thing to put a little more oomph into their long-distance relationship.

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