Northwest Is Flying On A Threat And A Prayer

Can one more airline fit into the U. S. Bankruptcy Court's hangars? Northwest Airlines Inc., which last year lost $405 million before special charges, has been heading toward a Chapter 11 filing for months. To avoid that, Co-Chairmen Alfred A. Checchi and Gary L. Wilson demanded $900 million in concessions from Northwest's six unions last year. But as talks with the unions drag on, the carrier is running low on cash. One source close to the board says that "if there is no deal with the unions, Northwest could go into bankruptcy" as early as March.

The question now is who will blink before bankruptcy really does become inevitable. Although labor has presented a united front for months, two of Northwest's three biggest unions, the Teamsters and the International Association of Machinists, now may be willing to break with the Air Line Pilots Assn. to forge a separate peace. They are spooked, because in bankruptcy Northwest would likely sell assets, including several of its Pacific routes. The pilots' contract gives them better protection by forcing airlines that buy Northwest's routes to take them along. That's not the case for flight attendants and mechanics. As a result, their unions are willing to settle for less.

All along, the unions have been willing to grant concessions, but only if Northwest's banks kick in, too, and stretch out company debt. But the banks have refused. So to step up the pressure on labor, say union sources, NWA executives threatened to file for Chapter 11.

That was enough for the machinists and the Teamsters, who believe the carrier is losing $2 million or more a day. But NWA can't afford to let the threats become too public, lest travelers decide they'll be safer flying another airline.

The upshot: Different sources close to NWA's senior management, none speaking for attribution, give widely varying assessments of the company's future. "The company isn't approaching Chapter 11," claims one. But the source does concede that "if labor did not ultimately agree to a package, the banks may have no sympathy."

In mid-January, the unions laid out what they want for their $900 million: 80% of the carrier's common equity, plus one-third of its board seats. They also asked for veto power over such key decisions as asset sales. And they broadly hinted that they want no more of Checchi and Wilson, who became co-chairmen through a $3.65 billion leveraged buyout in 1989. Grouses Teamsters President Ronald Carey: "Checchi and Wilson ripped this company off."

TRY, TRY AGAIN. The unions said all along that they would accept a lot less if the banks and other groups took cuts, too. They turned down the company's first response, which included 15% of the stock and three board seats but no sacrifices from creditors. Now, the company plans to come back on Feb. 25 with a better offer that should narrow the gap.

The machinists and the Teamsters may be tempted to accept the offer if it includes 25% to 30% of the equity and three board seats. But the pilots say they still want the carrier's banks, which hold more than $1.3 billion in debt from the buyout, to agree to reschedule payments. "If the banks don't help now, the company will just come back to us for more concessions next year, when more bank debt comes due," says a source close to the pilots.

The banks, however, hope to avoid making any concessions at all. In December, Northwest's bank group deferred $270 million in principal payments due this year. As part of the same package, Bankers Trust Co., which also holds 11% mf the equity, ponied up $50 million toward a $250 million bridge loan that helped avert bankruptcy. Sources close to the bank group say they hope the carrier will get labor concessions and find a way to raise new equity. But that could be tough: On Feb. 4, KLM-Royal Dutch Airlines, which owns 20% of Northwest and was considered the most likely party to kick in fresh cash, wrote off the remainder of its $400 million investment in the carrier.

Even if Checchi and Wilson manage to avoid bankruptcy, Northwest's viability still may be in doubt. The airline's domestic route system is small, and its once lucrative Pacific routes have been clobbered by the recession in Japan and stiff competition from rivals such as United Airlines Inc. But that's the future. Right now, Checchi and Wilson have more immediate worries.

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