What a Time to Become Northwest's Pilot

Despite threats of a mechanics strike and the choppy economy, new CEO Richard Anderson says: We can weather this just fine

It's a good thing that Richard H. Anderson had been prepping for the top job at Northwest Airlines Inc. (NWAC ) long before he became chief executive officer on Feb. 19. He has taken on a planeload of problems with the new position. As soon as May 11, Northwest could be grounded by striking mechanics. Meanwhile, the airline's larger rivals -- UAL Corp. (UAL ) and AMR Corp. (AMR ) -- could get word within weeks from regulators on their plans to acquire US Airways Group (U ), a deal that industry insiders argue would pressure Northwest to find a merger partner of its own.

As if that's not enough, the bottom has fallen out of the high-margin business-travel segment. In fact, one of Anderson's first tasks as CEO was to warn that the $11 billion carrier lost as much as $150 million in the first quarter.

Not to worry, says Anderson. The 45-year-old sees a path through each bramble. To make up for slackening ticket sales, Anderson on Mar. 20 imposed a plan to cut costs by $200 million this year. Among the measures: He and other Northwest execs will forego raises and bonuses in 2001. As for industry consolidation, Anderson argues that Northwest, the nation's fourth-biggest carrier, can do just fine without a merger, thanks to its marketing alliances with No. 5 Continental Airlines Inc. (CAL ) and such big foreign airlines as KLM.

On the labor front, Anderson notes that management has offered Northwest's 9,400 mechanics raises that would make them the highest-paid in the industry. Bargainers for the Aircraft Mechanics Fraternal Assn. want even more, however. Anderson says the company also will accept whatever the Presidential Emergency Board proposes Apr. 11. The three-member board was created by President Bush in March, when he took the rare step and blocked a strike. But the union, after nearly five years of talks, has declined to make a similar pledge.

How has Anderson managed? For one thing, he knew the job was coming. Though his ascension was sooner than expected -- he was promoted when his predecessor, John H. Dasburg, recently surprised the board by quitting to run Burger King Corp. -- Anderson had been the heir apparent since 1998, when he named chief operating officer. His readiness may also due to his legal training. A one-time prosecutor in Harris County, Tex., Anderson was hired by Northwest in 1990 as deputy general counsel after three years in the legal department at Continental Airlines.

Recently, Anderson sat down with BusinessWeek Correspondent Michael Arndt in Northwest's headquarters in suburban St. Paul, Minn. Sitting at a conference table overlooking a frozen pond and sipping an espresso he had just brewed, Anderson talked about consolidation, labor troubles, and the shortcomings of the Railway Labor Act of 1926, which governs the airline industry. Following are edited excerpts from the conversation:

Q: You've got rising labor costs. You're going to have to pay those mechanics sooner or later. And you've got the other costs of operating an airline. Are there other ways to trim back expenses to keep the bottom line from becoming completely blood red?


That's really our goal. We are in a cyclical business in a cyclical economy. We want to show Wall Street that unlike previous economic softenings this industry has been through, we can weather this one just fine. Our goal is to keep our unit costs among the lowest in the industry. We intend to maintain discipline and to be very prudent and cautious with respect to our capital spending.

Q: Do you have any sense about how long this slowdown will last? Is it a one-quarter phenomenon?


We would all like to meet the person who has the answer to that question. My sense is that it is a relatively mild downturn, based on what we are seeing.

Q: Do you think the current labor law is working? Or is there a better way to handle labor issues in the airline industry?


It's clear that the current application and practice under the Railway Labor Act are not effective, given that we have labor problems at virtually every airline in the U.S., in some form or fashion. The act was designed and its application was intended to resolve disputes without disruptions to passengers. And today it is not achieving that objective effectively. I don't know that my criticism would be that there's something inherently wrong with the act -- it could be the application of the act. But it's clear that the system we have isn't effectively serving the traveling public.

Q: You, as management, have said you will accept whatever the Presidential Emergency Board (PEB) recommends. What happens if the board says give these guys the raise they're demanding? You've said that if you give them that kind of raise, it would be more money than Northwest has ever made in a year.


Right. The number they have on the table for retro pay, for instance, is $880 million. And the company has never come close to that number in pretax profit in its history. But I think the process involved in a PEB is relatively well-known, so I don't think we're taking a risk.

And I would back up and say we also accepted binding arbitration, and we did not know who the arbitrators would be, nor did we know what the outcome would be. Binding arbitration is sort of fundamentally American. It's due process. Everybody has an opportunity to be heard. You have fundamental fairness in the process. And you have an objective third party weighing all the evidence and arguments and external factors and making a reasonable judgment. How could you ever argue with that?

Q: Is that something that might be smart to do?


We would obviously be satisfied with a process like that. We need a process that has some objective finality in the event the parties aren't able to reach a negotiated settlement. The commerce of the country moves on airplanes. And it has become an important part of the social fabric of our country. People are on the plane every day. As such, there must be mechanisms to avoid disruption.

Q: One of the reasons UAL has given for its merger with US Airways is it would make UAL a more economical airline. It would become bigger and basically have more clout. Does that logic make sense to you -- that the bigger an airline is, the stronger it is?


Generally, scope and scale are important in this business, because what the business traveler and large corporations demand is a network that allows them to conduct their business in all the important centers in the world. But we believe you can effectively obtain scope and scale through a robust network of alliances, which we have.

Q: There are lots of advantages to alliances -- you don't have to spend money buying another airline, for instance -- but are there any disadvantages?


Our rule of thumb is that, properly executed, you can obtain 80% of the benefits [of a merger] without any of that merger pain. What you don't obtain is cost savings through synergy. But it's not clear from the mergers I've been through in this industry that there is much synergy you can achieve. It is extraordinarily difficult to put airlines together.

Q: I was on a conference call with Continental Airlines Chairman Gordon Bethune recently, and he was saying this might be a golden opportunity for the folks who aren't merging. The airlines that are merging are going to be very busy just trying to keep their airplanes in the air.


Absolutely. It is havoc. Airplanes look the same on the outside, but they are completely different inside. Maintenance programs differ. The procedures pilots use differ. People have different computer systems. They have different flight-dispatch systems. They have different pricing systems. They have different accounting systems.

At airports, you're at opposite ends of the airport. So that means you've got to negotiate with all those other lease holders at the airports. If you're at Concourse A, and the person with whom you're merging is on Concourse D, and you want them to move their operation with you on A, but next door to you on Concourse A is Northwest Airlines, we're not moving. If you want us to move, get your checkbook out.

Edited by Douglas Harbrecht

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