April 13, 1997 in the Pioneer
Reprinted by permission.
D. J. Tice
It's better to be lucky than smart, says E. Peter Gillette Jr.
Every once in a while, government gets something right, says Art Rolnick.
It turned out to be much ado about nothing, says Bruce Hendry.
These verbal shrugs sum up the aftermath of the great Northwest Airlines financing controversy of the early 1990s, according to one of the deal's chief architects and two of its outspoken critics.
Opinions still differ sharply about whether this state's leaders were smart five years ago to authorize for Northwest Airlines the largest public assistance package Minnesota has ever offered a private business.
But today there is agreement the state has gotten lucky.
Much ado undeniably followed when, in 1991, Northwest Airlines sought hundreds of millions of dollars in public financing in exchange for locating two new aircraft maintenance bases in economically sluggish northern Minnesota.
The Northwest proposal was decried for months by columnists and talk-show hosts as a scheme to fleece taxpayers to enrich wealthy corporate deal-makers. Some economists and investment analysts spoke against the deal, too, judging it an excessively risky bailout of a company overleveraged with debt.
Northwest, as is its habit, gave as good as it got. It answered full-page newspaper ads criticizing the deal with full-page ads and a television campaign defending it as a virtually cost-free job-creating partnership with one of Minnesota's most valuable businesses. Thousands of airline employees lobbied the Legislature.
Ultimately, on a close vote, lawmakers approved a gigantic, $800 million-plus package of loans, grants and tax credits.
The turbulence had barely begun, as 1992 was to become the worst business year in modern aviation history. Recession, high fuel prices and ruinous fare wars combined to inflict severe losses on all airlines including a staggering $1-billion loss for Northwest. Laboring under heavy debts remaining from a leveraged buyout of the airline in 1989, Northwest was soon in real danger of bankruptcyjust what critics of the financing package had predicted.
But Northwest's leadersco-chairmen Al Checchi and Gary Wilson and Chief Executive Officer John Dasburgproved themselves cool and capable corporate pilots in an emergency. They negotiated new deals with employees, creditors, vendors and others, kept NWA airborne, and put it back on course toward profitability.
Trouble was, one of NWA's crisis maneuvers in 1992 was to cancel orders for some 100 Airbus aircraftthe very planes that were to make new maintenance facilities necessary. A $270-million unrestricted loan from the Metropolitan Airports Commission had already been issued and spent. Now it seemed Northwest had no good business reason to fulfill the job-creating end of the bargain.
After more than a year of high-tension negotiations, a new agreement for smaller facilities and reduced financing was forged. Within the past year, the long-awaited Northwest facilities in northern Minnesota have opened.
How good (or how bad) a deal has the Northwest financing turned out to be? The simplest part of a complex answer is to say that the new NWA operations up north are clearly blessings to their employees and their local communities.
The heavy maintenance base at the Duluth airport, on the ridge high above the lakeside city, is one-third the size originally planned. But it remains a major addition to the Duluth economy.
Base director Larry Montford says the base's current annual payroll is $18.9 million. That constitutes roughly 1.5 percent of all wages paid in the city.
The base is a state-of-the-art maintenance operationboasting the most advanced design and technology of any owned by Northwest, says Montford. Designed to conduct maintenance checks on NWA's fleet of European-made Airbus aircraft, the base has begun work on some McDonnell Douglas aircraft as well.
The great majority of the aircraft mechanics working in Duluth have transferred up from the Twin Cities. Only about 25 have been hired locally, Montford says, because licensed aircraft mechanics are not plentiful in northern Minnesota.
Rick Palmer, communications director for the Machinists union in the Twin Cities, says it's been a dream come true for many mechanics to have the chance to move to northern Minnesota, where life is quieter, outdoor sports opportunities are nearby and an airline mechanic's handsome pay goes farther.
Palmer says the mechanics moving up north are being replaced in the Twin Cities. The union is satisfied, he says, that all the jobs in northern Minnesota are net new jobs, not just positions transferred from other NWA locations.
Hundreds of new, well-paid residents are sure to boost Duluth's housing market and general economy somewhat. Montford says the base also has contracts with local firms for some $275,000 worth of services annually, ranging from dry cleaning of aircraft seat covers, to security, to snow removal.
The Northwest reservations center in Chisholm sits literally under the shadow of the giant sculpture of an iron miner beside Iron World U.S.A—an example of the many less-than-wildly-successful economic development efforts attempted over the years on Minnesota's aging Iron Range.
The reservations center is the newest of nine NWA telecommunication operations around the country. It specializes in handling arrangements for the airline's frequent flyer customers. While reservations sales agents earn lower salaries than the mechanics in Duluth, nearly all the unionized positions in Chisholm have been filled with local people, according to center director Pat Blacker.
With its good pay and extensive benefits package, including travel discounts, the airline is proving a more than competitive employer on the range, attracting commuters, Blacker says. Workers come from as far away as International Falls.
Should the reservations center achieve its goal of 600 workers by the year 2000, it will employ roughly one-tenth the number of Iron Range residents who work today for Minnesota's entire mining industry.
All that said, it remains true that Minnesota has gotten neither the quantity nor the quality of jobs promised when the original NWA financing deal was struck.
It has never been possible to evaluate the Northwest deal without assessing the wisdom of Minnesota taxpayers helping to re-capitalize NWA at its hour of financial crisis. Today, Northwest is profitable, and, observers agree, well positioned for future growth. The company will quite likely make good on its commitments under the financing plan.
Peter Gillette says the risk of doing nothing was greater than the risk of [the 1992 deal]. Gillette, now president of Piper Trust Co., was Minnesota's commissioner of Trade and Economic Development at the time of the Northwest financing. He enthusiastically defends the deal as safeguarding the survival of Minnesota's second largest private employer and the incredible air service that comes from being the headquarters of a major airline. As part of the deal, Northwest has promised to keep its headquarters in Minnesota.
Back in 1991, Northwest and other promoters of the financing disputed suggestions the deal was a bailout. But after the $270 million MAC loan was issued, the airline became more blunt about its financial difficulties. In hindsight, it seems clear the MAC operating loan was NWA's primary motive in seeking state aid, and that the base proposal became a secondary means to that end.
When announcing the revised base plan in April 1994, CEO John Dasburg said, If it hadn't been for the $270 million that we received at the outset of this transaction, I fear that Northwest would not be here today.
Bruce Hendry says flatly that without the MAC's $270 million, NWA most certainly would have been bankrupt.
Hendry is an investor who has long specialized in analyzing and managing large bankruptcies. A leading critic of the Northwest deal, he continues to insist that the public's fear of a Northwest bankruptcy was misplaced. Reorganization under bankruptcy laws would not have cost Minnesota its airline, he says. Instead, Northwest would have emerged stronger, relieved of excessive debts.
The state didn't save Northwest Airlines, Hendry says. It saved Checchi and Wilson. He means that averting bankruptcy merely allowed NWA's chief stockholders to maintain control and profit handsomely from the airline's turnaround.
Hendry says taxpayers ran a large risk in financing NWA when they did, and that they should have received more reward for taking that risksome ownership position in the company, for instance, as employees got in exchange for wage concessions.
Art Rolnick, another persistent critic of the Northwest deal, also focuses on the uncompensated risk taxpayers took. Director of research at the Minneapolis Federal Reserve Bank, Rolnick says the MAC loaned NWA funds at an interest rate far below what the marketplace would have demanded from a business in Northwest's condition. He calculates the interest-rate subsidy at as much as $30 million a yeara paper subsidy that measures how much unrewarded risk taxpayers ran.
The Northwest deal kindled Rolnick's thinking about the inefficiencies and inequities inherent in all special deals governments give individual businesses to lure or keep them away from other states or cities. Persuading Congress to stop intergovernmental bidding wars has since become something of a crusade for Rolnick.
It's never been easy refuting the Hendry and Rolnick criticisms of the Northwest deal. Had Northwest defaulted on the MAC loanand had its collateral, as critics warned, proved inadequatepublic outrage would have been severe and justified.
Beyond the state's failure to extract a reward from Northwest commensurate with the public's risk, there was also, in this deal, a geographic separation of risk and reward.
Twin Cities property taxpayers back the MAC loan. They took the risk. But the jobs created went to Duluth and the Iron Range. As a result, the unrewarded risk was a subsidy from one set of taxpayers to another as well as from the public to a private business.
But it must be said that Northwest has fulfilled its commitment to create good jobs in northern Minnesota. It has skillfully managed its own challenging affairs and is paying its debts.
What kind of bargain has the Northwest deal turned out to be? The answer may simply be that, given the risks and policy choices in the deal the state negotiated, no one had a right to expect it to work out much better than it has.
Aug. 5, 1989: After a five-month takeover battle, an investor group headed by California businessman Alfred Checchi completes a $3.65-billion leveraged buyout of Northwest Airlines.
Jan. 24, 1991: Northwest announces that the Twin Cities and Duluth are among the sites being considered for a new Airbus maintenance base.
Dec. 16, 1991: Following months of fierce controversy, lawmakers give final approval to a financing package for NWA maintenance bases worth over $800 million. April-May, 1992: An unrestricted loan to NWA from the Metropolitan Airports Commission goes forward, while the sale of bonds to finance the bases is blocked temporarily by a lawsuit.
May 29, 1992: NWA chief executive John Dasburg informs employees the airline needs large wage concessions from workers to survive. By the end of June, the first of some 2,000 temporary layoffs are announced.
November-December, 1992: Amid open speculation that NWA faces bankruptcy, unions agree to a three-year, $900-million concession package that gives workers part ownership of the company. NWA's bankers, aircraft manufacturers and partner KLM Royal Dutch Airlines issue an emergency $250-million loan and restructure various NWA debts. The airline also cancels orders for most of the Airbus aircraft it had planned to purchase, raising doubts about the need for the northern Minnesota maintenance facilities.
April 5, 1994: A new agreement is reached to build scaled back facilities in northern Minnesota.
April 1, 1996: NWA's $10-million Iron Range Reservations Center opens in Chisholm, Minnesota.
October 25, 1996: NWA's $47-million Northern Minnesota Maintenance Base opens in Duluth.
A three-hangar aircraft heavy maintenance facility at Duluth and an engine repair base at the Hibbing/Chisholm airport.
At least 1,000 in Duluth and 500 in Hibbing, mostly mechanics earning approximately $45,000, plus overtime and benefits.
Some $330 million, primarily through bonds backed by state, St. Louis County, Duluth and Hibbing taxpayers, and including other loans, grants and tax credits. The airline's lease payments on the new facilities would have retired the debt, except for $47.6 million in bonds to be repaid by the city of Duluth.
An unrestricted, $270-million loan from the Metropolitan Airports Commission, backed by the property-taxing authority of the seven-county metropolitan area (plus a non-tax guaranteed $60-million reserve fund).
A one-hangar aircraft heavy maintenance facility at Duluth and a telephone reservations center in Chisholm.
In Duluth, about 300, heading toward 350, mostly mechanics earning between $36,000 and $48,000, plus overtime and benefits. In Chisholm, about 400, heading toward 600, mostly reservations sales agents earning between $21,000 and $36,000, plus overtime and benefits.
Some $57 million, mostly in tax-supported bonds. Duluth will repay $11 million from city revenues and the Iron Range Resources and Rehabilitation Board will forgive a $10-million loan if NWA fulfills employment plans in Chisholm. The rest will be covered by NWA lease and tax payments.
Issued as originally planned in 1992. NWA is current on all payments.