Already Deep in Debt, Northwest Airlines Grasping For Growth
Oct. 09, 1991
MINNEAPOLIS (AP) _ Pressed to expand but hampered by debt, Northwest Airlines is on a dizzying spree of dealmaking in its quest to become the U.S. airline industry's fourth mega-carrier.
But analysts say the latest step in that campaign - acquiring Midway Airlines - doesn't assure Northwest's future.
The $174.7 million deal for Chicago-based Midway, approved Tuesday by the bankruptcy judge overseeing Midway's Chapter 11 case, came as Northwest negotiates a possible combination with troubled Continental Airlines. Northwest also has opened a mini-hub at Washington National Airport purchased from defunct Eastern Airlines.
America West Airlines and Hawaiian Airlines have provided overseas routes and a route option to Northwest in exchange for financial help. And the carrier is still fighting before the Department of Transportation to get Pan American World Airways' Detroit-London route, which Northwest hopes to carve out of a large package of Pan Am assets being purchased by Delta Air Lines.
Despite the flurry of expansion efforts, which included failed talks to buy the Trump Shuttle, industry analysts say Northwest is still a long way from clinching the mass of routes and planes it needs to survive the current wave of airline consolidation.
''What they have to do is expand the airline at minimal cost,'' said Mike Hamilton of The Leuthold Group in Minneapolis.
The Midway deal, expected to be approved by federal regulators, would increase Northwest's domestic presence by about 15 percent and lift its national market share by about 1 percentage point, into the 12 percent to 13 percent range.
Still, Northwest would be a distant fourth in size behind American Airlines, United Airlines and Delta, each of which will control 16 percent to 18 percent of the domestic market when Delta completes its purchase of Pan Am assets.
''Northwest can't compete as a full-sized airline without growing,'' said Paul Turk of Avmark Inc., an aviation consulting firm in Arlington, Va.
The biggest roadblock to that growth is debt. Northwest parent Wings Holdings Inc. is saddled with about $2.78 billion in long-term debt from its February 1989 buyout of the airline. Moreover, the profit outlook is grim and operating losses have mounted to more than $485 million since the buyout.
To ease the pinch, Northwest is bargaining with the state of Minnesota for a $390 million, low-interest loan. In exchange, Northwest would create nearly 2,000 jobs by 1999 at two maintenance facilities to be built in northern Minnesota with state financing.
The low-interest loan could be a key to other deals at a critical juncture for the airline.
''I wouldn't consider it vital to their survival, but it certainly helps,'' said Ernest Arvai of The Arvai Group in Windham, N.H., which has provided analysis on Northwest to the state of Minnesota. ''When you're spending money, it's nice to have additional cash coming in.''
Northwest, based in Eagan, Minn., has said it could go to other sources for new capital, but analysts say public debt markets would be tough, if not impossible, to crack.
According to a report to the Minnesota Department of Finance by The Arvai Group, Northwest's parent company has $20 of long-term debt for every dollar of equity it holds.
''How much debt can they stand?'' Avmark's Turk asked. ''How far out on a limb can Northwest go and still expect to make all this work?''
A big piece of Texas-based Continental would put Northwest nearly on equal footing with American, United and Delta, in terms of size. Northwest is strong in the Upper Midwest but weak in the South and East, where Continental is strong.
''Northwest has to provide the geographic balance that the other big guys have,'' Arvai said.
Arvai's report to the state said Northwest's best chance to grow is in 1992 and 1993, when there will be few new aircraft deliveries and some easing in its debt repayment schedule. But the chances will weaken if a prolonged fare war breaks out, or a fuel crisis occurs.
''Northwest, being smaller and lacking the financial strength of its big three competitors, faces significant hurdles,'' the report said.