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At Issue: A promise is a promise

Published (5/2/2008)
By Craig Green
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Ben Hirst, senior vice president - corporate affairs and general counsel for Northwest Airlines, listens to a question from a member of the House Commerce and Labor Committee April 25 about the proposed sale of NWA to Delta airlines. (Photo by Tom Olmscheid)

When Northwest Airlines was in financial trouble, the Metropolitan Airports Commission and the state helped the airline make it through. The airline kept going; the state got a promise of jobs.

But now that the airline is close to a merger — a deal that would dramatically change its presence in the state — everything is not so clear.

The bonds and covenants

In 1992, the MAC issued $270 million in general obligation bonds so Northwest could buy property and equipment. The airline agreed to make bond payments and committed to keep its corporate headquarters in the Twin Cities metropolitan area, keep its hub in Minnesota and maintain a specific employment level.

In 2005, NWA entered Chapter 11 bankruptcy. Two years later, the terminal lease agreement with the MAC was renegotiated to include rent reductions and revenue-sharing concessions. These adjustments were tied to continued compliance with the headquarters and hub covenants.

Approximately $245 million remains on the MAC loan, and $200 million would be available due to the concessions extending through 2020.

If the merger between Northwest and Delta airlines goes through, leadership of the two airlines have indicated that its corporate headquarters would be in Atlanta, breaching one of the covenants. Therefore, payment would be due on the remaining bond obligations and the reductions and concessions would discontinue.

And these are sticking points: Will the new airline honor the contract and pay the remaining bond obligations? Will it pay for consequential damages arising from Northwest pulling out of the deal early, and if not, what will be its responsibility?

Getting paid

Two bills have been introduced to make sure the MAC does everything in its power to get repaid.

HF4207, sponsored by Rep. Joe Atkins (DFL-Inver Grove Heights), would require the state to enforce any agreement that is breached, and that the state seek “all incidental, consequential, liquidated, or other damages available under the agreement with the state or otherwise.”

Atkins, who chairs the House Commerce and Labor Committee, calls the potential acquisition “the single largest economic event in Minnesota’s history,” adding that Northwest and Delta should be held accountable for the consequences of their actions, just like any other business operating in Minnesota.

An NWA flight departs from the field at the Minneapolis/St. Paul International Airport April 29. (Photo by Tom Olmscheid)Approved April 29 by the committee and by the House Local Government and Metropolitan Affairs Committee May 1, it is headed for the House Rules and Legislative Administration Committee. A companion, SF3853, sponsored by Sen. Jim Carlson (DFL-Eagan), is scheduled to be heard May 5 by the Senate Business, Industry and Jobs Committee.

Rep. Frank Hornstein (DFL-Mpls) sponsors HF4015, which also directs the MAC to adhere to all agreements, but it does not address consequential damages. Approved April 29 and by the House Local Government and Metropolitan Affairs Committee May 1, its next stop is the House Rules and Legislative Administration Committee.

Presenting the bill on behalf of Hornstein, Rep. Michael Paymar (DFL-St. Paul) said, “I believe our constituents expect nothing short of insisting that Northwest be held accountable for abiding by these contracts.”

A companion, SF3746, sponsored by Sen. D. Scott Dibble (DFL-Mpls), is scheduled to be heard May 5 by the Senate Business, Industry and Jobs Committee.

Fallout from the deal

Myles Shaver, professor and department chair of Strategic Management and Organization at the University of Minnesota’s Carlson School of Management, said the greatest impact from a potential merger would be on the Northwest headquarters, not on the hub. Jobs affected will more likely be executives, marketing and accounting, with administrative positions moving south, he said.

The hub, however, should fare better. Shaver said that with Northwest’s ability to offer non-stop flights to so many destinations, and with the Twin Cities being the 16th largest metropolitan area in the country, the demand for the hub is not going to change. “I am skeptical of hub disappearing, but I’m also skeptical that the hub would get bigger.”

Dan McElroy, commissioner of the Department of Employment and Economic Development, said that the CEOs of Delta and Northwest have indicated that approximately 1,000 jobs could be lost. Most of these jobs, McElroy said, pay $70,000 to $80,000 a year, meaning that upwards of $80 million could be lost from the local economy. The consequential loss could be as high as $300 million to $400 million, he said.

Corporate and labor

“The primary beneficiary of the merger will be the frontline employees and the communities we serve,” said Ben Hirst, senior vice president of corporate affairs and general counsel for Northwest Airlines. He said that with the price of fuel weighing so heavily on the airline industry, the deal was the best way to put the company on solid footing.

Calling it addition and not subtraction, Hirst said there will be approximately $1 billion in savings when the two airlines merge. “No hubs will be closed. The domestic and international networks of Northwest and Delta are end-to-end, so the two carriers compete only on a minimal extent today.”

Stephen Gordon, president and directing general chair of the International Association of Machinists and Aerospace Workers, District Lodge 143, disagreed.

“If the merger between Delta and Northwest Airlines is permitted to go forward, it will inevitably result in massive job loss, dislocation, consolidation and closures which will have a devastating effect on airline employees, their families and their communities here in Minnesota and throughout the Northwest system.”

Gordon said that with Delta’s Atlanta hub and Northwest’s Memphis hub only 400 miles away, something would be cut. “Do they really expect us to believe that Memphis and Cincinnati will not be closed, that no service will be eliminated, and no employees will be terminated, yet they will save billions of dollars in efficiencies through this merger?”

No Delta representatives attended the April 29 meeting, but after threatening to use subpoena power, Atkins received word April 30 that Edward Bastian, Delta president and CFO, would be available to meet with the committee on May 5.

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