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Northwest Airlines Corporation

Northwest Airlines Corporation

2700 Lone Oak Parkway
Eagan, Minnesota 55121
U.S.A.

Telephone: (612) 726-2111
Fax: (612) 726-7123
Web site: http://www.nwa.com

Public Company
Incorporated:
1926 as Northwest Airways
Employees: 39,342
Sales: $11.279 billion (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: NWAC
NAIC: 481111 Scheduled Passenger Air Transportation; 481112 Scheduled Freight Air Transportation

Northwest Airlines Corporation is a holding company whose primary interest is Northwest Airlines Inc., America's oldest carrier with continuous name identification and the world's fourth oldest and largest airline. Based in Minneapolis, the airline offers both domestic and international flight service to some 750 cities in 120 countries. In September 2005, in an industry plagued by debt and rising oil prices, Northwest filed for Chapter 11 bankruptcy protection, reporting debts of some $17 billion. The company vowed to continue operations while it restructured.

Roaring to Life in the 1920s

The history of Northwest can be traced to the 1920s. After passage of the Kelly Airmail bill in 1926 the Ford Transport Company, a subsidiary of the auto manufacturer, was awarded the Chicago to St. Paul airmail route. They commenced business on June 7 of that year, but a series of airplane crashes over the summer forced Ford to sell the company to Northwest Airways by October. Northwest ran Ford's open-cockpit, single-engine biplanes until the winter weather compelled them to cease operations. In the spring of 1927 Northwest resumed business. By July the company was hauling passengers on their short trunk routes. Once again, however, the harsh northern winter forced them to close for the season.

During the flying seasons of 1928 to 1933 Northwest secured an expansion of routes through the Dakotas and Montana, and eventually to Seattle, Washington. The man largely responsible for the company's westward growth was Croil Hunter. While Hunter only occupied a position in middle management, it was his initiative to enter new markets and win new airmail routes that gave Northwest its early preeminence. By 1933 Hunter was vice-president and general manager of the airline.

In the years before World War II Northwest directed its expansion eastward to New York. The company survived the government's temporary suspension of airmail contracts in 1934 with virtually no loss in business, and began operating mail services and passenger routes along the northern corridor. Moreover, new and modified airplanes enabled Northwest to continue operations through the winter. The planes were modified further when it became obvious that finding light-colored, downed planes in the snow was a difficult task. The tail fins of all the company's planes have since been painted a bright, contrasting red. In 1937 Croil Hunter, who had been credited with the airline's success, was named president of the company.

In the attempt to establish northern routes to Asia, Northwest pilots made expeditions to Alaska and across the Aleutian Islands. The northern route had been passed up by Pan Am, which was unable to win landing rights in the Soviet maritime provinces and Japan. Instead, Pan Am decided to open a route to the Philippines and China, via Hawaii and Guam. Pan Am crossed the ocean first, but Northwest held the promise of a faster route.

When the Americans became involved in World War II in 1941, Northwest was chosen to operate the military support routes to the strategically important Aleutian Islands. The airline's experience with cold weather aviation and its predominance in the region made it a logical choice. The Army Air Corps flew its C-46s, C-47s, B-25, and B-26 bombers directly from the production line to Northwest facilities in Minneapolis, Minnesota, and Vandalia, Ohio, in order for them to be modified for cold weather and long distance routes. Northwest's expertise in this area contributed significantly to the effectiveness of the Allied war effort.

During the war passenger flights were strictly limited to people with priority status. Regardless of the suspension of commercial business, however, Northwest benefited from the war. With a healthy military allowance from the War Department, Northwest improved its facilities and upgraded its technology.

Postwar Competition

When the war ended Northwest lobbied the Civil Aeronautics Board to award the airline rights to fly to the Orient from Alaska. This so-called "great circle" route was actually about two thousand miles shorter than Pan Am's transpacific route. When Congress rejected airline magnate Juan Trippe's proposal to make Pan Am America's international flag carrier, the Civil Aeronautics Board was free to certify Northwest for "great circle" routes to the Orient.

With the government's reaffirmation of competition within the industry, all the companies hurried to modernize their airline fleets. It was both a matter of cost-efficiency and prestige. Northwest looked to the Martin Company's new 202 airliner to replace the aging DC-3 model, and complement the company's fleet of Boeing 377 Stratocruisers. The Stratocruiser, with its lower level bar and intimate "honeymoon suites," was extremely popular with newlyweds and business travelers. The Martin 202, however, did not remain in service for very long; its reputation for malfunctioning became widespread. Fortunately, the 202 was quickly replaced by the DC-4.

When the Korean War started in 1950, Northwest employed many of its DC-4s to assist the United Nations forces. They ferried men and transported equipment, including bomber engines and surgical supplies, to various points in Japan and Korea. The military utilization of the airline, which lasted for several years, was carried out without any interruption of its regular commercial services.

In 1952 Hunter relinquished the presidency to Harold R. Harris, but retained his position as chairman of the board. After two uneventful years Harris was replaced by Donald Nyrop. After he received his law degree, Nyrop served in the military transport group during World War II. Later, he headed the Civil Aeronautics Board. For many years after joining Northwest he set an austere tone for the organization. For example, the Minneapolis headquarters was located in a large windowless building that he planned would become a maintenance hangar at some point in the future. Nyrop also had a chart showing the inverse relationship between the number of vice-presidents and profits. Needless to say, Northwest had a minimal number of vice-presidents.

On the other hand, Nyrop brought Northwest into the jet age quickly, purchasing the Lockheed L-188 prop-jet Electra, the DC-8, and the Boeing 707 and 727. Through the early 1960s Northwest consolidated its service across the northern United States and along the "great circle" to its Asian destinations. Profits were consistent and growth remained slow and cautious.

Perhaps the one outstanding event of the period occurred on Thanksgiving Eve of 1971. A man who identified himself as Dan Cooper boarded a Northwest 727 in Portland, Oregon, bound for Seattle, Washington. He claimed to have a bomb and demanded $200,000 and two parachutes. His demands were met and the airplane departed. Somewhere over southwestern Washington, at about 25,000 feet, Cooper ordered the airplane's rear bottom door opened. He walked down the stairs and jumped into the densely clouded, cold and black night. Cooper and most of the money were never found. He was, however, rumored to have died in a New York hospital in 1982.

In 1978, after 24 years in charge, Donald Nyrop retired. He was replaced by Joseph M. Lapensky, an accountant who was promoted from within the company. Many industry analysts expected Lapensky to continue Nyrop's management policy. In fact, Lapensky must be regarded as an interim figure, one who represented a definite but subtle change in direction for the company.

Soaring Under Deregulation in the 1980s

Lapensky inherited the leadership on the eve of deregulation. For many of the large airlines the new era of competition resulted in the loss of large amounts of revenue. Northwest, however, was quite firmly established in its various markets, and remained largely unchallenged. Lapensky's most important problem, however, was the ruptured state of labor relations which resulted from his predecessor's attempts to weaken the unions. In one instance, when Northwest employees threatened to strike, Nyrop decided to confront the unions. He enlisted the help of a 15-airline mutual aid fund established to enable the companies to withstand the effects of a long-term strike. When Nyrop realized the effort was stalemated, he gave in to union demands. Nyrop's union problem became Lapensky's union problem, and before long Lapensky retired.

In October 1983 Steven G. Rothmeier became Northwest's new president. Rothmeier gained Lapensky's favor after writing a paper on a deregulated airline market as a student at the University of Chicago. Rothmeier's case study of Northwest had so impressed people at the airline that they offered him a job in 1983. Like Lapensky, he rose through the company, albeit quickly, to the top executive position. Under new management the airline formed a holding company, Northwest Airlines, Inc., which assumed responsibility for the airline and its subsidiaries. On January 1, 1985, Rothmeier was named chief executive officer, confirming his position as the leader of Northwest.

Company Perspectives:

The Vision of Northwest Airlines: To build together the world's most preferred airline with the best people; each committed to exceeding our customers' expectations every day.

In 1985 United Airlines proposed to buy the Asian and Pacific routes of Northwest's competitor Pan Am. Rothmeier led the opposition to the sale, arguing that it would leave only two airlines competing in Asia. Northwest invested many years of negotiation and costly waiting to achieve and maintain its Pacific markets. According to Rothmeier, it was hardly fair that United could simply purchase a competitive share. Regardless of the opposition, the sale of Pan Am's Asian routes to United was approved in 1986.

Northwest, which had suffered from not having a computerized reservations system, purchased a large share of TWA's PARS system, which the two companies jointly operate. The company has also made arrangements with four smaller independent airlines to generate more "feeder" traffic to Northwest.

In 1986 Northwest purchased its regional competitor Republic Airlines. The $884 million sale barely won federal approval since the two airlines operated many of the same routes. At first the Civil Aeronautics Board was concerned that Northwest would operate monopolies in too many markets. Republic had established hubs in Detroit and Memphis, in addition to Minneapolis. However, Republic's north-south route structure provided the ideal "feeder" for Northwest's longer-haul east-west structure, despite a certain amount of overlap. As a result of this merger, John F. Horn was named president of Northwest and NWA, Inc. Rothmeier, still chief executive officer, assumed the position of chairman, vacant since Lapensky's retirement in May 1985.

Prior to the merger, Republic flew to over 100 cities in 34 states, Canada, and the Caribbean. Northwest's network covered 74 cities in 27 states and 16 countries in Western Europe, the Far East, and the Caribbean. Until the purchase of Republic Airlines, Northwest had always been "underleveraged," or virtually free of debt. Northwest's management used to be proud of this fact, but came to recognize that, for tax and other purposes, it was good to carry "some debt."

In 1989 financiers Alfred Checchi and Gary Wilson bought control of Northwest in a $3.65 billion leveraged buyout deal, after which the airline became a private company. One year later, former Beatrice CEO Frederick Rentschler was named North-west's new CEO. One of the first tasks facing the new management was rectifying the service record of the airline, whose poor service and on-time performance record in recent years led dissatisfied business travelers to give it the unfortunate nickname "Northworst." Flush with optimism over the company's future, Checchi and Wilson embarked on a program of acquiring the assets of other airlines and committed $450 million through the year 1995 to improving service. They purchased Eastern Airlines' Washington, D.C., hub, bought Asian routes from Hawaiian Airlines, and made their desire to deal further well-knownat various times, they began negotiations to buy all or major portions of Continental, Midway, and Qantas.

However, Northwest was soon struck by business and image setbacks. Two 1990 incidentsthe conviction of several Northwest pilots for flying under the influence of alcohol and a runway collision of two Northwest jets, killing eight, which was later blamed on crew errortarnished the airline's public reputation further. The airline's hopes to expand through acquisitions proved hampered by its $4.2 billion debt, the product of the leveraged buyout coupled with extant debt from the purchase of Republic, which left the airline with a negative net worth. Moreover, Northwest was hit by the general financial troubles that affected the industry in the late 1980s, including rising fuel costs, declining traffic caused by a weakening economy, and pricing wars. In 1990 and 1991, when these problems were exacerbated by recession and war in the Middle East, Northwest lost $618 million. As leading airline United began aggressive expansion into the Pacific market, Northwest's inability to match United's purchases left it vulnerable in its traditionally strongest area.

Management attempted a number of plans to raise operating funds, including pursuing incentive funds from the state of Minnesota, in which the airline is based. In 1991, the company received $835 million in aid from the state for opening two maintenance bases there. In order to stave off bankruptcy, the company also embarked on an aggressive cost-cutting campaign, cutting service by a third at its Washington, D.C., hub and seeking concessions from its six unions, although many of its workers already received wages below the industry average.

Northwest appeared to have escaped the catastrophic effects of recession and deregulation that felled such competitors as Eastern and Pan Am, but its massive debt left it at a disadvantage at a time when other airlines were employing a strategy of buying routes and expanding globally. However, Checchi and Wilson's creative debt-cutting measures and their expenditures to improve the airline's service record bore some fruit: in 1991 the airline finished first in on-time performance, a category in which it had been dubbed the worst.

A Merger in the 1990s

In 1992 Northwest and KLM Royal Dutch Airlines applied to the United States Transportation Department to merge the operations of the two companies and function as one. Since the United States had recently signed a treaty with the Netherlands allowing companies a good deal of leeway, the Transportation Department approved the combination, allowing Northwest and KLM to coordinate prices, available seats, sales forces, and data, while sharing revenues. An added bonus was the injection of KLM's equity stake in the company. The alliance nearly doubled the pair's share of transatlantic traffic, to 12 percent.

Fortunately for Northwest, the industry pulled out of its slump by 1994. A public stock offering early in the year reflected investors' optimism. Northwest posted revenues of $8.33 billion for the year and income of $830 million. These figures rose to $9.09 billion and $902 million in 1995.

Key Dates:

1926:
A two-plane cargo airline operation is founded in Minneapolis.
1948:
The company introduces its "red tail" logo.
1960:
Northwest begins service to Asia.
1986:
Republic Airlines is acquired.
1988:
Northwest becomes the first domestic airline to ban smoking on all flights.
1991:
The company partners with the Dutch carrier KLM to offer air travel between Minneapolis and Amsterdam.
2005:
Northwest files for Chapter 11 bankruptcy protection.

Although the Northwest/KLM alliance proved fruitful for investors on both sides of the AtlanticWilson and Checchi's 20 percent stake grew from $40 million to nearly $1 billion and KLM's $400 million investment reached a value of $1.6 billiona bitter power struggle unfolded behind the scenes. KLM's overtures for more control of Northwest prompted Wilson and Checchi to insert "poison pill" provisions into Northwest's charter preventing KLM from acquiring more than its 19 percent share of the company. This in turn prompted a lawsuit from KLM, which also lobbied to loosen the regulations preventing foreign companies from owning controlling interests in U.S. airlines. In addition, KLM President Pieter Bouw's separate discussions with the pilots' unionthe two parties together controlled half of Northwestinfuriated Wilson, according to Fortune.

Even this relationship could be mended, however. Bouw resigned as KLM president in May 1997. By August, KLM had dropped its poison pill lawsuit and agreed to sell back its Northwest shares gradually through the year 2000. The working bonds seemed as strong as ever: the pair announced their considerable cargo operations would cooperate more closely, and the expanded KLM alliance gave Northwest a passage to India (via Amsterdam) beginning in June 1997.

At the same time, Northwest's Pacific operations were threatened by political forces abroad. Northwest had already suffered from an excess of capacity in Japan, and the Japanese government sought to curtail the carrier's rights to fly passengers beyond Japan to other Asian destinations. Nevertheless, Northwest's $10.23 billion in revenues brought in a net income of $596.5 million. At approximately $2 billion, its debt had been reduced to half the 1993 level.

A strike by Northwest pilots, eager to claim their share of the company's bounty and opposed to various management strategies, finally grounded the airline in late August 1998. Northwest laid off 31,000 employees during the crisis and did not resume full operations until September 21. The shutdown resulted in a $224 million loss for the third quarter of 1998 on revenues of $1.93 billion (the carrier had earned $290 million in the third quarter of the previous year).

Although its confrontations with KLM and its labor problems seemed to have been resolved, Northwest would have to successfully navigate the U.S. government's interests as well as those of the Japanese. Northwest's announced intentions to purchase control of Continental Airlines, the fifth largest U.S. carrier, prompted scrutiny from the Justice Department, as did its "predatory" price competition against budget carriers such as Pro Air and Reno Air.

Northwest's losses deepened to $285 million by the end of 1998, its stock reaching a year-end low of $18.63 per share, a 71 percent drop from the first-quarter high of $65.31. Two more profitable years followed, with net income of $300 million in 1999 and $256 million in 2000. The airline's lingering troubles were exacerbated, however, by such factors as a general economic downturn beginning in 2000; the September 11, 2001, attacks on the World Trade Center and Pentagon; subsequent wars in Afghanistan and Iraq; and the Severe Acute Respiratory Syndrome (SARS) epidemic of November 2002 to July 2003, all of which kept non-business and even some business travelers at home. Coupled with ever-increasing jet fuel costs, the global drop in travel sent Northwest scurrying to cut costs wherever possible as 2001's $423 million loss was followed by steep drops in stock prices and losses of over $1.7 billion between 2002 and 2005. Federal aid relating to the September 11 attacks in the amount of $249 million and an additional $61 million in writedowns helped lessen Northwest's losses by $100 million in 2001, but prospects continued to look gloomy. By year end 2004, Northwest's stock had dropped to $7.09, down almost 90 percent from its 1998 high. Only a one-time writedown taken in 2003 prevented Northwest from showing a loss of $265 million that year; the airline finished 2003 in the black with a net income of $248 million, compared to losses of $798 million one year earlier. The relief was only temporary, however; in 2004, the company posted net losses of $862 million.

Rate Hikes, New Fees, No Pretzels

To counter the losses, Northwest began laying off workers and scaling back amenities for its coach services, even eliminating the small bag of pretzels given to passengers in flight, a move that company sources estimated would cut $2 million in costs per year. Transpacific and Asian routes and a Detroit-to-Rome nonstop service were cut in 2001. Four of the airline's facilitiesreservations centers in New York State and Hawaii, a flight attendant base in Chicago, and a pilot base in Honoluluwere shut down in 2001. The company stated in a press release: "We will continue our aggressive plans to acquire new aircraft, modernize our hub airport facilities, especially the new $1.2 billion Detroit Midfield complex, and enhance premium World Business Class and first class products."

In August 2004, Northwest courted the wrath of the travel industry by attempting to offset $180 million in booking fees incurred through discount travel Internet sites and travel agents by levying a $7.50 fee per round-trip ticket and a $3.25 fee per one-way ticket. Calling the fees the equivalent of a fare increase, agents and Internet discounters immediately lashed back, threatening to stop booking Northwest flights or to feature Northwest's fares less prominently on web sites. SABRE Group, a large booking agency, filed suit with the airline for breach of contract and moved Northwest listings to a less prominent spot on their Internet site, prompting Northwest to file a countersuit for breach of contract. A few days after the initial announcement, Northwest rescinded the fees because other airlines failed to match them.

In June 2005, another attempt at raising fares failed for similar reasons. A $50 each-way hike in costs for business travelers, $5 to $10 increases in fares that competed with discount carriers' fares, and a two-night stay provision added on to certain fares were overturned when competing airlines refused to match Northwest's prices and stay requirements. Chairman Gary Wilson responded to Northwest's troubles by dumping 59 percent of his shares in the company, valued at $15.1 million, causing stock price to dive 12 percent amid rumors of impending bankruptcy. Desperate for cost savings and effectively unable to increase rates, the airline instituted a $50 per person fee (capped at $200 per family) for employees and eligible family members who wished to participate in the airline's longstanding employee benefit, "pass travel," free travel in empty seats available at flight time.

The fee imposed on pass travel was only one of the concessions Northwest attempted to wring from its employees, most of whom were represented by four unions: the Air Line Pilots Association International (ALPA), the International Association of Machinists & Aerospace Workers (IAM, which represents agents, clerks, equipment service employees, and stock clerks), the Professional Flight Attendants Association (PFAA), and the Aircraft Mechanics Fraternal Association (AMFA). From its early days Northwest was known for its acrimonious relationship with its workers, and its labor relations in the harsh business environment at the beginning of the 21st century proved no exception to history. Seeking to cut $1 billion in labor costs, the airline demanded $35 million in pay, benefit, and job cuts from its nonunion workers, then turned to the labor unions for more.

In 2005, Northwest's problems came to a head. As the economic recession deepened and oil prices rose precipitously, Northwest's mechanics went on strike, and a few weeks later Northwest announced that it would seek bankruptcy protection under Chapter 11, coincidentally on the same day as competitor Delta. Recovery in the industry, which suffered losses of some $30 billion in the early 2000s, was a much-discussed topic. Airline bankruptcy attorney William Rochelle, quoted in a September 2005 Associated Press article, postulated "We are reading the first page in a thriller that will end either in resurrection or the death and burial of an entire industry as we know it today."

Principal Subsidiaries

Northwest Airlines, Inc.; MLT Vacations Inc.; Northwest PARS, Inc.

Principal Competitors

AMR Corporation; Delta Air Lines, Inc.; UAL Corporation.

Further Reading

Arndt, Michael, "Northwest's CEO Deplanes," Business Week Online, October 4, 2004.

"Bad News Hurts Airline's Stock," Seattle Times, June 14, 2005,p. C2.

"Bill Could Ward Off Chapter 11 for Delta, Northwest, CEOs Say," Airline Business Report, June 20, 2005.

Broderick, Richard, "Aircraft Mechanics Negotiate Contract with Airline," St. Paul Ledger, April 19, 2001.

Burr, Barry B., "Penalty Possible," Pensions & Investments, February 3, 2003, p. 23.

Carey, Susan, "Northwest May Be Heading for Chapter 11," Wall Street Journal, June 13, 2005, p. C1.

Compart, Andrew, "NWA Fees Target Consumers, Trade," Travel Weekly, August 30, 2004, p. 1.

Daniel, Caroline, "U.S. Airlines Hit by Ratings Downgrades," Financial Times, July 1, 2002, p. 27.

Davies, R.E.G., Airlines of the U.S. Since 1914, New York: Putnam, 1972.

De Young, Dirk, and Tim Huber, "Northwest Deal Will Boost Cargo," Minneapolis-St. Paul CityBusiness, August 1, 1997.

Doyle, Andrew, "Operations: Crisis-Hit Airlines Shed Routes, Jobs," Flight International, April 1, 2003, p. 8.

Elliott, Stuart, "American Companies Are Adjusting Almost Everything that Represents Them Overseas," The New York Times, April 4, 2003, p. C5.

Fedor, Liz, "Is NWA Following a Strike Path?," Star Tribune (Minneapolis), June 2, 2005, p. 1D.

, "Chairman's Sales Fuel NWA Bankruptcy Fears," Star Tribune (Minneapolis), June 14, 2005, p. 1D.

, "Managers Training to Be Northwest Flight Attendants," Star Tribune (Minneapolis), June 15, 2005, p. 2D.

"Fitch Downgrades Northwest Airlines to 'CCC+'; Outlook Negative," Business Wire, June 1, 2005.

Flesher, John, "Large Airlines Must Cut Costs to Survive," Grand Rapids Press (Michigan), June 3, 2005, p. C2.

Freed, Joshua, "Delta, Northwest Seek Bankruptcy Protection," Associated Press, September 15, 2005.

Greenhouse, Steven, "Toll Mounts as Northwest Plans to Cut 10,000 Jobs," New York Times, September 22, 2001, p. C5.

Gwynne, S.C., "Flying into Trouble," Time, February 24, 1997.

Jackson, Robert, The Sky Their Frontier: The Story of the World's Pioneer Airplanes and Routes, 19201940, Airlife, Ltd., 1983.

Johnson, Tim J., "Northwest Strike Sparks PR Battle," Minneapolis-St. Paul CityBusiness, September 7, 1998.

Kaydo, Chad, "Northwest Airlines Strikes Out," Sales & Marketing Management, November 1998, p. 22.

Keane, Angela Grelling, "Northwest Is Ready," Traffic World, October 27, 2003, p. 24.

Kelly, Kevin, "A Midcourse Correction for Northwest," Business Week, July 13, 1992.

Kontzer, Tony, "Northwest Airlines Imposes Charge for Independent Web Sites," InternetWeek, August 27, 2004.

Laibich, Kenneth, "Winners in the Air Wars," Fortune, May 11, 1987.

Martinez, Michelle, "Airport Unit Lures New Airlines, but Northwest Is Sensitive to Competition," Crain's Detroit Business, April 4, 2005, p. 3.

Maynard, Micheline, "For Air Travelers, the Frill Is Gone," International Herald Tribune, June 10, 2005, p. 12.

McKenna, Ed, "Freight Flies Higher," Traffic World, November 1, 2004, p. 29.

, " 'Robust' Year for Air Cargo," Traffic World, January 31, 2005, p. 29.

Moylan, Martin J., "Northwest Airlines Mechanics Ready for Strike," Saint Paul Pioneer Press (Minnesota), June 2, 2005.

, "Mechanics Talk Tough," Saint Paul Pioneer Press (Minnesota), June 9, 2005.

, "Northwest Airlines Employees Will Have to Pay Fee for 'Pass Travel' Program," Saint Paul Pioneer Press (Minnesota), June 11, 2005.

, "Northwest Mechanics, Cleaners Union to Accept Concessions," Saint Paul Pioneer Press (Minnesota), June 25, 2005.

"Negotiations Leave Northwest Airlines Circling," Corporate Report-Minnesota, August 1997.

"Northwest Adds," Air Cargo World, February 2005, p. 5.

"Northwest Airlines," Air Transport World, July 2004, p. 89

"Northwest Asks Pilots for 20% Pay Cuts," The New York Times, February 27, 2003, p. C3.

"Northwest Has Loss and Sees No Upturn Soon," The New York Times, April 17, 2003, p. C4.

"Northwest Pilots Agree Labour Deal," Airline Business, November 1, 2004, p. 16.

"Northwest Shares Tumble 12%," Cincinnati Post, June 14, 2005, p. C9.

Reinan, John, "Up in the Air: Seven Days on Northwest Airlines," Star Tribune (Minneapolis), August 29, 2005,

Torbenson, Eric, "Northwest's Fare Hike Fails," Dallas Morning News, June 14, 2005.

Tully, Shawn, "The Big Daddy of CFO's," Fortune, November 13, 1995.

Tully, Shawn, and Therese Eiben, "Northwest and KLM: The Alliance from Hell," Fortune, June 24, 1996.

"U.S. Airlines Flying Low," Corporate Finance, November 2004, p. 4.

"U.S. Bailout Helps Northwest Post a Profit," The New York Times, June 27, 2005, p. C12.

Zagorin, Adam, "Hunting the Predators," Time, April 20, 1998.

Zellner, Wendy, "How Northwest Gives Competition a Bad Name," Business Week, March 16, 1998, p. 34.

John Simley
updates: James Poniewozik; Frederick C. Ingram;
Jennifer Gariepy

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Northwest Airlines Corporation

Northwest Airlines Corporation

5101 Northwest Drive
St. Paul, Minnesota 55111-3034
U.S.A.
(612) 726-2111
Fax: (612) 727-7617
Web site: http://www.nwa.com

Public Company
Incorporated: 1926 as Northwest Airways
Employees: 49,000
Sales: $10.23 billion (1997)
Stock Exchanges: NASDAQ
Ticker Symbol: NWAC
SICs: 4512 Air Transportation, Scheduled

Northwest Airlines Corporation is the holding company for Northwest Airlines, Inc., described as Americas oldest carrier with continuous name identification and the worlds fourth oldest airline. It has flown across the Pacific for 50 years, more than anyone else. Northwest serves as the United States northern regional air carrier, and flies 1,700 flights each day to 400 cities in 80 countries. More than 97 percent of the revenue of Northwest Airlines Corporation comes from Northwest Airlines, Inc.

Roaring to Life in the 1920s

After passage of the Kelly Airmail bill in 1926 the Ford Transport Company, a subsidiary of the auto manufacturer, was awarded the Chicago to St. Paul airmail route. They commenced business on June 7 of that year, but a series of airplane crashes over the summer forced Ford to sell the company to Northwest Airways by October. Northwest ran Fords open-cockpit, single-engine biplanes until the winter weather compelled them to cease operations. In the spring of 1927 Northwest resumed business. By July the company was hauling passengers on their short trunk routes. Once again, however, the harsh northern winter obliged them to close for the season.

During the flying seasons of 1928 to 1933 Northwest secured an expansion of routes through the Dakotas and Montana, and eventually to Seattle, Washington. The man largely responsible for the companys westward growth was Croil Hunter. While Hunter only occupied a position in middle management, it was his initiative to enter new markets and win new airmail routes that gave Northwest its early preeminence. By 1933 Hunter was vice-president and general manager of the airline.

In the years before World War II Northwest directed its expansion eastward to New York. The company survived the governments temporary suspension of airmail contracts in 1934 with virtually no loss in business, and began operating mail services and passenger routes along the northern corridor. Moreover, new and modified airplanes enabled Northwest to continue operations through the winter. The planes were modified further when it became obvious that finding light-colored, downed planes in the snow was a difficult task. The tail fins of all the companys planes have since been painted a bright, contrasting red. In 1937 Croil Hunter, who had been credited with the airlines success, was named president of the company.

In the attempt to establish northern routes to Asia, Northwest pilots made expeditions to Alaska and across the Aleutian Islands. The northern route had been passed up by Pan Am, which was unable to win landing rights in the Soviet maritime provinces and Japan. Instead, Pan Am decided to open a route to the Philippines and China, via Hawaii and Guam. Pan Am crossed the ocean first, but Northwest held the promise of a faster route.

When the Americans became involved in World War II in 1941, Northwest was chosen to operate the military support routes to the strategically important Aleutian Islands. The airlines experience with cold weather aviation and its predominance in the region made it a logical choice. The Army Air Corps flew its C-46s, C-47s, B-25 and B-26 bombers directly from the production line to Northwest facilities in Minneapolis, Minnesota, and Vandalia, Ohio, in order for them to be modified for cold weather and long distance routes. Northwests expertise in this area contributed significantly to the effectiveness of the Allied war effort.

During the war passenger flights were strictly limited to people with priority status. Regardless of the suspension of commercial business, however, Northwest benefited from the war. With a healthy military allowance from the War Department, Northwest improved its facilities and upgraded its technology.

Postwar Competition

When the war ended Northwest lobbied the Civil Aeronautics Board to award the airline rights to fly to the Orient from Alaska. This so-called great circle route was actually about two thousand miles shorter than Pan Ams transpacific route. When Congress rejected airline magnate Juan Trippes proposal to make Pan Am Americas international flag carrier, the Civil Aeronautics Board was free to certify Northwest for great circle routes to the Orient.

With the governments reaffirmation of competition within the industry, all the companies hurried to modernize their airline fleets. It was both a matter of cost-efficiency and prestige. Northwest looked to the Martin Company, with its new 202 airliner, to replace the aging DC-3 model, and complement the companys fleet of Boeing 377 Stratocruisers. The Stratocruiser, with its lower level bar and intimate honeymoon suites, was extremely popular with newly weds and business travelers. The Martin 202, however, did not remain in service for very long; its reputation for malfunctioning became widespread. Fortunately, the 202 was quickly replaced with the new DC-4.

When the Korean War started in 1950, Northwest employed many of its DC-4s to assist the United Nations forces. They ferried men and transported equipment, including bomber engines and surgical supplies, to various points in Japan and Korea. The military utilization of the airline, which lasted for several years, was carried out without any interruption of its regular commercial services.

In 1952 Hunter relinquished the presidency to Harold R. Harris, but retained his position as chairman of the board. After two uneventful years Harris was replaced by Donald Nyrop. After he received his law degree, Nyrop served in the military transport group during World War II. Later, he headed the Civil Aeronautics Board. For many years after joining Northwest he set an austere tone for the organization. For example, the Minneapolis headquarters was located in a large windowless building that he planned would become a maintenance hangar at some point in the future. Nyrop also had a chart showing the inverse relationship between the number of vice-presidents and profits. Needless to say, Northwest had a minimal number of vice-presidents.

On the other hand, Nyrop brought Northwest into the jet age quickly, purchasing the Lockheed L-188 prop-jet Electra, the DC-8, and the Boeing 707 and 727. Through the early 1960s Northwest consolidated its service across the northern United States and along the great circle to its Asian destinations. Profits were consistent and growth remained slow and cautious.

Perhaps the one outstanding event of the period occurred on Thanksgiving Eve of 1971. A man who identified himself as Dan Cooper boarded a Northwest 727 in Portland, Oregon, bound for Seattle, Washington. He claimed to have a bomb and demanded $200,000 and two parachutes. His demands were met and the airplane departed. Somewhere over southwestern Washington, at about 25,000 feet, Cooper ordered the airplanes rear bottom door opened. He walked down the stairs and jumped into the densely clouded, cold and black night. Cooper and most of the money were never found. He was, however, rumored to have died in a New York hospital in 1982.

In 1978, after 24 years in charge, Donald Nyrop retired. He was replaced by Joseph M. Lapensky, an accountant who was promoted from within the company. Many industry analysts expected Lapensky to continue Nyrops management policy. In fact, Lapensky must be regarded as an interim figure, one who represented a definite but subtle change in direction for the company.

Soaring Under Deregulation

Lapensky inherited the leadership on the eve of deregulation. For many of the large airlines the new era of competition resulted in the loss of large amounts of revenue. Northwest, however, was quite firmly established in its various markets, and remained largely unchallenged. Lapenskys most important problem, however, was the ruptured state of labor relations which resulted from his predecessors attempts to weaken the unions. In one instance, when Northwest employees threatened to strike, Nyrop decided to confront the unions. He enlisted the help of a 15-airline mutual aid fund established to enable the companies to withstand the effects of a long-term strike. When Nyrop realized the effort was stalemated, he gave in to union demands. Nyrops union problem became Lapenskys union problem, and before long Lapensky retired.

In October 1983 Steven G. Rothmeier became Northwests new president. Rothmeier gained Lapenskys favor after writing a paper on a deregulated airline market as a student at the University of Chicago. Rothmeiers case study of Northwest had so impressed people at the airline that they offered him a job in 1983. Like Lapensky, he rose through the company, albeit quickly, to the top executive position. Under new management the airline formed a holding company, Northwest Airlines, Inc., which assumed responsibility for the airline and its subsidiaries. On January 1, 1985, Rothmeier was named chief executive officer, confirming his position as the leader of Northwest.

Company Perspectives:

The Vision of Northwest Airlines: To build together the worlds most preferred airline with the best people; each committed to exceeding our customers expectations every day.

In 1985 United Airlines proposed to buy the Asian and Pacific routes of Northwests competitor Pan Am. Rothmeier led the opposition to the sale, arguing that it would leave only two airlines competing in Asia. Northwest invested many years of negotiation and costly waiting to achieve and maintain its Pacific markets. According to Rothmeier, it was hardly fair that United could simply purchase a competitive share. Regardless of the opposition, the sale of Pan Ams Asian routes to United was approved in 1986.

Northwest, which had suffered from not having a computerized reservations system, purchased a large share of TWAs PARS system, which the two companies jointly operate. The company has also made arrangements with four smaller independent airlines to generate more feeder traffic to Northwest.

In 1986 Northwest purchased its regional competitor Republic Airlines. The $884 million sale barely won federal approval since the two airlines operated many of the same routes. At first the Civil Aeronautics Board was concerned that Northwest would operate monopolies in too many markets. Republic had established hubs in Detroit and Memphis, in addition to Minneapolis. However, Republics north-south route structure provided the ideal feeder for Northwests longer-haul east-west structure, despite a certain amount of overlap. As a result of this merger, John F. Horn was named president of Northwest and NWA, Inc. Rothmeier, still chief executive officer, assumed the position of chairman, vacant since Lapenskys retirement in May 1985.

Prior to the merger, Republic flew to over 100 cities in 34 states, Canada, and the Caribbean. Northwests network covered 74 cities in 27 states and 16 countries in Western Europe, the Far East, and the Caribbean. Until the purchase of Republic Airlines, Northwest had always been underleveraged, or virtually free of debt. Northwests management used to be proud of this fact, but came to recognize that, for tax and other purposes, it was good to carry some debt.

In 1989 financiers Alfred Checchi and Gary Wilson bought control of Northwest in a $3.65 billion leveraged buyout deal, after which the airline became a private company. One year later, former Beatrice CEO Frederick Rentschler was named Northwests new CEO. One of the first tasks facing the new management was rectifying the service record of the airline, whose poor service and on-time performance record in recent years led dissatisfied business travelers to give it the unfortunate nickname Northworst. Flush with optimism over the companys future, Checchi and Wilson embarked on a program of acquiring the assets of other airlines and committed $450 million through the year 1995 to improving service. They purchased Eastern Airlines Washington, D.C. hub, bought Asian routes from Hawaiian Airlines, and made their desire to deal further well-knownat various times, they began negotiations to buy all or major portions of Continental, Midway, and Qantas.

However, Northwest was soon struck by business and image setbacks. Two 1990 incidentsthe conviction of several Northwest pilots for flying under the influence of alcohol and a runway collision of two Northwest jets, killing eight, which was later blamed on crew errortarnished the airlines public reputation further. The airlines hopes to expand through acquisitions proved hampered by its $4.2 billion debt, the product of the leveraged buyout coupled with debt extant from the purchase of Republic, which left the airline with a negative net worth. Moreover, Northwest was hit by the general financial troubles that affected the industry in the late 1980s, including rising fuel costs, declining traffic caused by a weakening economy, and pricing wars. In 1990 and 1991, when these problems were exacerbated by recession and war in the Middle East, Northwest lost $618 million. As leading airline United began aggressive expansion into the Pacific market, Northwests inability to match Uniteds purchases left it vulnerable in its traditionally strongest area.

Management attempted a number of plans to raise operating funds, including pursuing incentive funds from the state of Minnesota, in which the airline is based; in 1991, the company received $835 million in aid from the state for opening two maintenance bases there. In order to stave off bankruptcy, the company also embarked on an aggressive cost-cutting campaign, cutting service by a third at its Washington, D.C. hub and seeking concessions from its six unions, although many of its workers already received wages below the industry average.

Northwest appeared to have escaped the catastrophic effects of recession and deregulation that felled such competitors as Eastern and Pan Am, but its massive debt left it at a disadvantage at a time when other airlines were employing a strategy of buying routes and expanding globally. However, Checchi and Wilsons creative debt-cutting measures and their expenditures to improve the airlines service record bore some fruit: in 1991 the airline finished first in on-time performance, a category in which it had been dubbed the worst.

In 1992 Northwest and KLM Royal Dutch Airlines applied to the United States Transportation Department to merge the operations of the two companies and function as one. Since the United States had recently signed a treaty with the Netherlands allowing companies a good deal of leeway, the Transportation Department approved the combination, allowing Northwest and KLM to coordinate prices, available seats, sales forces, and data, while sharing revenues. An added bonus was the injection of KLMs equity stake in the company. The alliance nearly doubled the pairs share of transatlantic traffic, to 12 percent.

Fortunately for Northwest, the industry pulled out of its slump by 1994. A public stock offering early in the year reflected investors optimism. Northwest posted revenues of $8.33 billion for the year and income of $830 million. These figures rose to $9.09 billion and $902 million in 1995.

New Horizons for the New Century

Although the Northwest/KLM alliance proved fruitful for investors on both sides of the AtlanticWilson and Checchis 20 percent stake grew from $40 million to nearly $ 1 billion and KLMs $400 million investment reached a value of $1.6 billiona bitter power struggle unfolded behind the scenes. KLMs overtures for more control of Northwest prompted Wilson and Checchi to insert poison pill provisions into Northwests charter preventing KLM from acquiring more than its 19 percent share of the company. This in turn prompted a lawsuit from KLM, which also lobbied to loosen the regulations preventing foreign companies from owning controlling interests in U.S. airlines. In addition, KLM President Pieter Bouws separate discussions with the pilots unionthe two parties together controlled half of Northwestinfuriated Wilson, according to Fortune.

Even this relationship could be mended, however. Bouw resigned as KLM president in May 1997. By August, KLM had dropped its poison pill lawsuit and agreed to sell back its Northwest shares gradually through the year 2000. The working bonds seemed as strong as ever: the pair announced their considerable cargo operations would cooperate more closely, and the expanded KLM alliance gave Northwest a passage to India (via Amsterdam) beginning in June 1997.

At the same time, Northwests Pacific operations were threatened by political forces abroad. Northwest had already suffered from an excess of capacity in Japan, and the Japanese government sought to curtail the carriers rights to fly passengers beyond Japan to other Asian destinations. Nevertheless, Northwests $10.23 billion in revenues brought in a net income of $596.5 million. At approximately $2 billion, its debt had been reduced to half the 1993 level.

A strike by Northwest pilots, eager to claim their share of the companys bounty and opposed to various management strategies, finally grounded the airline in late August 1998. Northwest laid off 31,000 employees during the crisis and did not resume full operations until September 21. The shutdown resulted in a $224 million loss for the third quarter of 1998 on revenues of $1.93 billion (the carrier had earned $290 million in the third quarter of the previous year).

Although its confrontations with KLM and its labor problems seemed to have been resolved, Northwest would have to successfully navigate the U.S. governments interests as well as those of the Japanese. Northwests announced intentions to purchase control of Continental Airlines, the fifth largest U.S. carrier, prompted scrutiny from the Justice Department, as did its predatory price competition against budget carriers such as Pro Air and Reno Air.

Principal Subsidiaries

Northwest Airlines, Inc.; Northwest Aerospace Training Corporation (NATCO); NWA Leasing, Inc.; NWA Aircraft Finance, Inc.; Northwest Capital Funding Corporation; Montana Express; Northwest Aircraft, Inc.; MLT Inc.; Northwest PARS Holdings, Inc.

Further Reading

Davies, R.E.G., Airlines of the U.S. Since 1914, New York: Putnam, 1972.

De Young, Dirk, and Tim Huber, Northwest Deal Will Boost Cargo, Minneapolis-St. Paul CityBusiness, August 1, 1997.

Gwynne, S.C., Flying into Trouble, Time, February 24, 1997.

Jackson, Robert, The Sky Their Frontier: The Story of the Worlds Pioneer Airplanes and Routes, 1920-1940, Airlife, Ltd., 1983.

Johnson, Tim J., Northwest Strike Sparks PR Battle, Minneapolis- St. Paul CityBusiness, September 7, 1998.

Kelly, Kevin, A Midcourse Correction for Northwest, Business Week, July 13, 1992.

Laibich, Kenneth, Winners in the Air Wars, Fortune, May 11, 1987. Negotiations Leave Northwest Airlines Circling, Corporate Report-Minnesota, August 1997.

Tully, Shawn, The Big Daddy of CFOs, Fortune, November 13, 1995.

Tully, Shawn, and Therese Eiben, Northwest and KLM: The Alliance from Hell, Fortune, June 24, 1996.

Zagorin, Adam, Hunting the Predators, Time, April 20, 1998. Zellner, Wendy, How Northwest Gives Competition a Bad Name, Business Week, March 16, 1998, p. 34.

John Simley and James Poniewozik
updated by Frederick C. Ingram

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Northwest Airlines Corporation

Northwest Airlines Corporation

founded: 1926



Contact Information:

headquarters: 2700 lone oak pky.
eagan, mn 55111-3034 phone: (612)726-2111 fax: (612)727-7617 url: http://www.nwa.com

OVERVIEW

Northwest Airlines Corporation is the fourth largest airline in the nation. In addition, the company is one of the world's top air cargo carriers. Recovering from financial difficulties in the early 1990s, Northwest Airlines Corporation, 30 percent of which is employee-owned, joined forces with Alaska Airlines, South Korean Asiana Airlines, and Dutch carrier KLM to form code-sharing agreements. These are agreements between participating airlines to purchase regular flights on each others' planes in an effort to increase their serviceability. In 1998, it proposed an alliance with Continental Airlines. This strategy has allowed the company to provide air carrier service to more than 400 cities in 80 countries on 6 continents. Ranked as the number four airline in the country, Northwest has been able to keep pace with its competition due to its flourishing air-cargo business. In fact, the vast majority of its air-cargo business comes from its hub in Tokyo, which no other airline to date has capitalized. In 1998, the company was the subject of a U.S. Justice Department investigation to determine if its hub operations illegally stifled competition.



COMPANY FINANCES

Righting itself after a disastrous 1992 net loss of nearly $1.1 billion, Northwest Airlines reported a net loss of only $115.3 million and operating profits of $292.4 million in 1993. From 1994 to 1996, Northwest Airlines continued to report growing net revenues, which rose from $8.3 billion in 1994 to $9.1 billion in 1995, and rose again to $9.8 billion in 1996. Subtracting costs and expenses in the three years, Northwest Airlines wound up with operating income of almost $1.2 billion in 1994, more than $1.3 billion in 1995, and more than $1.4 billion in 1996. For 1997, Northwest reported a net income of $597.0 million and net revenue of $10.2 billion, up from $536.0 million and $9.9 billion in 1996, according to Standard & Poors Standard Corporate Descriptions.

ANALYSTS' OPINIONS

Since 1996 many analysts have been encouraged and impressed with CEO John Dasburg in the Northwest Airlines' driver's seat. Experts in the industry have been impressed with Northwest's seat-per-mile expense of 8.8 cents, which stands as the lowest cost when compared to other major airlines. Many analysts anticipate Northwest's profits to continue to rise as they did in the early and mid-1990s.

Even with a bright financial outlook, many experts still remain cautious of the threat of other low-cost airlines to Northwest's business. Experts have pointed out that the company has been able to keep its costs high in markets like Minneapolis and Chicago because of its advantageous position in those locations. However, those financial benefits may change, analysts fear, if carriers like Southwest turn on the competitive heat. Although Northwest has been known to fly longer routes, experts point to the once-safe Atlanta hub of Delta, which was invaded by competition from ValuJet.

Calls within the industry for federal intervention as alliances were proposed involving Northwest and the industry's other top U.S. airlines also threatened the company's future.




HISTORY

In an effort to provide air mail service between Chicago and Minneapolis, Northwest Airways was launched in 1926 by a group of businessmen, headed by Colonel Louis Brittin. Within two years, the company offered a combined railroad and airline service. Changing its name to Northwest Airlines in 1934, the company expanded, adding service to Seattle and New York. By 1947, it offered service to the Far East.

Northwest Airlines remained profitable throughout the 1950s, 1960s, 1970s, and most of the 1980s. The company's profits were due in large part to President Donald Nyrop's skill at cost-cutting. After his retirement in 1978, replacement Joseph Lapensky maintained Nyrop's visions. With expansion in mind, Northwest moved on to create a holding company, NWA, which purchased Republic Airlines in 1986. Also that year, Northwest purchased a 50 percent interest in PARS, TWA's computer reservation system, which later joined with Delta's DATAS II to create WORLDSPAN.

Trouble began in the late 1980s when Northwest and its union could not reach agreements after the Republic purchase. This caused low morale among employees. Pilots had no contract in 1989, adding to the company's troubles. Increasing fuel costs and a reduction in travel due to Iraq's invasion of Kuwait caused additional financial troubles during 1990 and 1991.

Refocusing its financial concerns, Northwest Airlines Corporation made several purchases and sales during the early 1990s. First, it purchased Eastern's Washington, D.C. landing slots, and financed $20 million for America West. Northwest also purchased the failed business of Chicago-based Midway Airlines. In 1992, it sold 18 of its Midway Airport gates along with other assets to Southwest Airlines. It also sold its 25 percent interest of Hawaiian Airlines, which it had purchased in 1990.

With a new strategy Northwest Airlines added service in 1993 to include Raleigh/Durham, North Carolina; Greenville/Spartanburg, South Carolina; and Reno, Nevada. The company had hoped to expand by undertaking low-traffic air courses and teaming up with smaller airlines to provide them service into its hubs.

The company renamed itself Northwest Airlines Corporation in 1994. Also that year, the company initiated service from Osaka's new Kansai International Airport and made a code-sharing agreement with Asiana Airlines of South Korea. It also made a code-sharing agreement with Alaska Airlines the following year. Continuing to expand, Northwest began non-stop service from Detroit to Beijing in 1996, which made it the first U.S. airline to offer non-stop service to China. Mitigating such progress were calls for action by the federal government to stop its proposed merger with Continental Airlines, and a U.S. Justice Department investigation of business practices at its hub airports.

STRATEGY

With a new CEO in place in 1990, Northwest evaluated where it was losing money. This revealed several unprofitable flight destinations. Canceling many routes, the company focused on its most profitable hubs, which happened to be places where the competition was not as heavy. Cost-cutting efforts, including pay cuts, stemmed from John Dasburg's goal of narrowing Northwest to a core, profitable business. The company also formed alliances across the globe, while proposing an alliance with U.S. competitor Continental Airlines, to keep pace with the trend toward industry consolidation.


INFLUENCES

During the recession of the early 1990s, Northwest was hit hard due to an already existing $3.6 billion buyout debt. When John H. Dasburg took over as CEO in 1990, he evaluated the company's costs. An accountant, Dasburg believed Northwest was losing money because it was providing service to unprofitable markets. The new CEO closed smaller hubs in Milwaukee, Washington, and Seoul. He also got rid of North-South routes on both coasts and focused on hubs in Detroit, Minneapolis, and Memphis, where the competition wasn't as tough. In these areas, as well as Northwest's powerful Tokyo hub, he supplied more planes, flights, and marketing.

Northwest was hit hard again in the early 1990s by increasing fuel prices and decreasing travel due to the invasion of Kuwait. With bankruptcy talks on the table, Northwest's only hope was to reach an agreement with its unions to undergo pay cuts. The unions rejected such terms, forcing the company to seek filing bankruptcy. With an 8 a.m. appointment with a judge to file Chapter 11, Northwest union officials presented the company on July 6, 1993 with agreements to take pay cuts in exchange for 30 percent ownership. Northwest agreed, and the bankruptcy papers were never filed.

Dasburg continued to faithfully shrink Northwest's operations down to a core, profitable business. The strategy proved successful when, by 1994, the company became America's most profitable major carrier. Even with its $946 million debt due to be paid off by 1997, the company flourished financially and employee morale had improved.

The industry trend toward consolidation also influenced Northwest, prompting alliances across the globe and a plan in 1998 to work with Continental Airlines. This U.S. alliance triggered calls for anti-trust investigations.




CURRENT TRENDS

A successful core business led Northwest to consider several means of expansion in 1996 and 1997, including teaming up with other companies to increase serviceability. In 1998, consolidation continued within the airline industry. While Northwest proposed an alliance with Continental Airlines, the largest U.S. airlines also proposed alliances. A combined Northwest/Continental network would have 16.3 percent of the domestic market, slightly smaller than each of the Big Three airlines. Early in 1998, United and Delta, the number one and number two airlines in the United States, proposed an alliance that would have a domestic market share of 34 percent. The second and sixth largest airlines, American and US Airways, proposed an alliance that would own 25 percent of the domestic market. The proposed United-Delta and American-US Airways alliances would create massive entities unlike anything the aviation industry had ever seen. This is what Elliott Seiden, Northwest Airlines' vice president of law and government affairs, told a House Transportation and Infrastructure Aviation Subcommittee on April 30, 1998. Mike Levine, Northwest's executive vice president of marketing and international, commented that, "Our alliance with Continental would improve competition by leveling the playing field. But the Big Three are out there with bulldozers rebuilding the hills. They want to create a Big Two and a Half, with Northwest-Continental the odd half." Observers worried about any alliances by U.S. airlines and called for the U.S. Justice Department to ensure that "the airlines don't become a cartel." In May 1998, the U.S. Justice Department began an investigation of whether Northwest Airlines was monopolizing business at its hub cities.

FAST FACTS: About Northwest Airlines Corporation


Ownership: Northwest Airlines Corporation is a publicly owned company traded on NASDAQ.

Ticker symbol: NWAC

Officers: Gary L. Wilson, Chmn.; John H. Dasburg, Pres. & CEO, Marketing, 55, $989,572; Michael E. Levine, Exec. VP, 56, $681,673; Raymond J. Vecci, Exec. VP Customer Service and Operations, 55

Employees: 49,000 (1997)

Principal Subsidiary Companies: Northwest Airlines Corporation's chief subsidiaries include: Northwest Aerospace Training Corporation (NATCO); NWA Leasing, Inc.; NWA Aircraft Finance, Inc.; Northwest Capital Funding Corporation; Northwest Airlines, Inc.; Montana Express; Compass 315 Limited; Tullion Limited; Northwest Aircraft, Inc.; MLT, Inc.; and Northwest PARS Holdings, Inc.

Chief Competitors: Northwest Airlines competes worldwide with other airlines and air-cargo companies. Some of its competitors include: AirFrance; Airborne Freight; Alitalia; All Nippon Airways; America West; AmericanExpress; AMR; Brititsh Airways; Continental Airlines; Delta; DHL; FedEx; JAL; Korean Air; Lufthansa; Qantas; SAS; Singapore Airlines; Southwest Airlines; Swire Pacific; Swissair; TWA; UAL; UPS; US Airways; and Virgin Group.




PRODUCTS

In December of 1996, Northwest Airlines began plans to provide an interactive reservation service using its World Wide Web site. Teaming up with Microsoft Travel Technologies and WORLDSPAN Travel Information, Northwest's reservation service would allow customers to schedule flights on Northwest, KLM and other code-sharing airlines, investigate travel options, make hotel reservations, and conduct rental car needs. Cyber-Saver fares, frequent flier information, flight arrival/departure information, and vacation information have been made available to customers using the Internet as well.



CORPORATE CITIZENSHIP

In 1992 Northwest established its Northwest Air-Cares program. It cooperates with a different non-profit organization every quarter to encourage public awareness and conducts in-flight fundraising campaigns. To promote the various cooperating non-profit organizations, Northwest has an in-flight magazine, WorldTraveler, which contains articles detailing the organization featured each quarter, with enclosed envelopes for donations.

In March 1998 the Greater Minneapolis Chamber of Commerce presented Northwest Airlines with a Quality of Life Award for its innovative programs to improve the quality of life for its customers, neighbors, and employees. Northwest was selected in the category of community involvement for the Northwest AirCares efforts to provide assistance to flood victims in the Red River Valley. Over consecutive weekends, Northwest airlifted 220,000 pounds of relief supplies and more than 1,000 volunteers to Grand Forks to assist the Salvation Army and the United Way.



GLOBAL PRESENCE

Since it has formed partnerships with KLM Royal Dutch Airlines, Asiana Airlines, and Alaska Airlines, Northwest has provided service to 390 cities in 80 countries, including over 240 cities within the United States. Northwest serves six continents: North America, South America, Europe, Asia, Africa, and Australia. With more than 1,700 daily flights, the company has remained one of the top airlines in the industry.

In May 1998 Northwest Airlines, joined by its three major U.S. alliance partners, signed commercial cooperation agreements with Air China. The agreements provided the basis for an operational and marketing alliance between the fourth-largest airline in the world and China's only flag carrier and largest airline. This provided Northwest a way into China's growing travel market.

CHRONOLOGY: Key Dates for Northwest Airlines Corporation


1926:

Northwest Airways is launched

1934:

Northwest is reincorporated as Northwest Airlines, Inc.

1941:

The war effort pulls Northwest for its cold-weather expertise to fly to and from the Aleutian Islands

1971:

The infamous D.B. Cooper takes $200,000 from a Northwest flight and parachutes away

1986:

Northwest's holding company, NWA, purchases Republic Airlines and a 50 percent interest in TWA's computer reservation system

1994:

Renames itself Northwest Airlines Corporation

1996:

Becomes first U.S. airline to offer nonstop service to China

1998:

Proposes an alliance with Continental Airlines




EMPLOYMENT

In May 1998, Northwest found itself at odds with its largest union, the International Association of Machinists, under the direction of a federal mediator. During a recess, tensions had flamed between managers and union members. The 25,000-member union, which represents mechanics, baggage handlers, ticket agents, reservationists, clerks, aircraft cleaners, and other ground workers at Northwest, is the first of six unions at Northwest to negotiate financial issues as part of negotiations that started for the three largest unions in the fall of 1996. These labor problems were expected to cost the company $19 million in second-quarter profits in 1998.




SOURCES OF INFORMATION

Bibliography

chandler, susan, and david greising. "nothing but blue sky at northwest." business week, 17 october 1994.

huber, tim. "northwest airlines cuts internet commissions." minneapolis/st. paul citybusiness, 24 march 1997.

jackson, margaret. "northwest wants to buy twa, union's memo says." st. louis business journal, 17 march 1997.

kennedy, tony. "iam-northwest talks scheduled to resume after lengthy recess; federal mediator calls both sides back to negotiate wednesday in washington." minneapolis star tribune, 9 may 1998.

the northwest airlines home page, june 1998. available at http://www.nwa.com.

"nw face investigation by justice department." airline industry information, 8 may 1998.

"save competition in america's skies." business week, 11 may 1998.

smith, joel j., and shawn d. lewis. "northwest woes may cut its profits." the detroit news, 8 may 1998.


For an annual report:

write: northwest airlines, 2700 lone oak pky., eagan, mn 55111-3034

For additional industry research:

investigate companies by their standard industrial classification codes, also known as sics. northwest airlines' primary sics are:

4152 air transportation scheduled

6719 offices of holding companies

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Northwest Airlines Corporation

Northwest Airlines Corporation

2700 Lone Oak Pkwy.
Eagan, Minnesota 55121-3034
USA
Telephone: (612) 726-2111
Fax: (612) 726-7123
Web site: www.nwa.com

E-TICKET CAMPAIGN

OVERVIEW

With the "E-Ticket" advertising campaign Northwest Airlines, Inc., the largest subsidiary of Northwest Airlines Corporation, encouraged consumers to try its electronic ticketing system on the Internet instead of purchasing paper tickets via telephone or at an office such as a travel agency. The new service streamlined the process of booking a flight, checking in at the airport, and boarding the plane, and it eliminated the possibility that the ticket would be lost or stolen. Advertisements for Northwest E-Ticket began running in print media soon after the service was introduced in 1996 and continued into 1999. The campaign was developed by two Minneapolis agencies, Hunt Adkins and Valentine McCormick Ligabel.

An advertisement in Fortune magazine in 1998 illustrated the connection between a customer's computer and an airplane flight with three graphic elements: a man using a computer mouse, a binary pattern that formed an image of a Northwest jet's tail fin, and an ascending airplane. The headline read, "The Information Runway." The text read: "Select a flight and purchase a ticket from your computer with Northwest Airlines. We've taken travel planning to new heights of ease and convenience. Just hop on the Internet and jet over to WorldWeb, the Northwest Airlines web site at www.nwa.com. You can review flight schedules, check availabilities, book a seat and even purchase a Northwest E-Ticket, the convenient and paperless way to travel. With a few clicks of the mouse, you're ready to fly. It's that simple. But don't stop there. Discover all the great ways in which WorldWeb can make your travel planning a breeze. Explore vacation ideas. Save money with exclusive CyberSaver fares. Book your car rental and make hotel reservations. Verify departure and arrival times. Check your WorldPerks account and more." The ad concluded with the company's red-and-white logo above the slogan "Some People Just Know How to Fly" and a toll-free telephone number to call for more information.

HISTORICAL CONTEXT

Northwest Airlines was created by mergers among numerous airlines. The first was Northwest Airways, founded by Colonel Lewis Brittin in 1926 at Speedway Flying Field, which later became Minneapolis/St. Paul International Airport. The company initially delivered mail to Chicago and the Twin Cities but soon began carrying passengers and expanding its service regionally. Its name was changed to Northwest Airlines, Inc., in 1934. Other carriers that eventually became part of Northwest were Wisconsin Central Airlines (later known as North Central Airlines), Southern Airways, Hughes Airwest (formed by the merger of Hughes Air Corporation and Air West), Pacific Airlines, Bonanza Airlines, and West Coast Airlines (formed by the merger of Zimmerly Airlines and Empire Airlines). Through a later merger Northwest and KLM Royal Dutch Airlines became subsidiaries of a holding company named Northwest Airlines Corporation. By 1998 Northwest was one of the largest airlines in the world, serving 21 countries and transporting more than 51 million passengers.

Northwest began using computers to keep track of tickets and reservations in 1973, but consumers were not able to make travel arrangements via the Internet until two decades later. Instead the customer telephoned the airline or booked the flight through a travel agent. A paper ticket was issued and, if the reservation was made by telephone, the ticket usually had to be delivered to the buyer. Without a ticket in hand the traveler could not board the airplane. In the mid-1990s airlines began offering electronic tickets. This innovation could save a company $25 million annually in recordkeeping expenses, since the cost of handling an electronic ticket was $1 compared to $8 for a paper ticket. An electronic ticket could be purchased through a travel agent, but typically the consumer used a computer to visit an airline's home page on the World Wide Web, booked a flight there, and paid by credit card. Northwest designed its Internet site to explain the advantages of electronic ticketing and other programs, to show customers how to use the services, and to offer discounts and perks. Advertisements to publicize E-Ticket also encouraged consumers to spend time exploring the company's home page.

TARGET MARKET

Northwest E-Ticket was a popular option because paper tickets could be lost or stolen, and they were not always delivered in time for the customer to depart on schedule. In addition, people with electronic tickets were usually able to board the plane faster than other passengers. Those who booked an E-Ticket received customer itinerary receipts via E-mail and U.S. mail. At the airport these customers needed only photo identification along with either their itinerary receipts or their last names and flight numbers. Travelers with E-Ticket could check in at the ticket counter, the gate, or at one of Northwest's Electronic Service Centers. The service was particularly popular among business travelers because it eliminated the cost of overnight delivery services and the expense of replacing lost tickets. Northwest's Internet site included a search engine that could quickly find the lowest coach fares available for any round trip. Customers could also use the site to reserve hotel rooms and car rentals and to redeem frequent-flyer miles. The computer system stored data to build a profile of each customer, making note of details such as whether the person liked to sit near the aisle or a window and which individuals would require a vegetarian or kosher meal. Frequently customers could pick the exact seats they preferred for their flights. Advertisements for E-Ticket explained these advantages and emphasized that the service was quick and easy to use, a modern convenience that made air travel more pleasant.

COMPETITION

According to Aviation Week & Space Technology, United Airlines, Inc., led the U.S. segment of the industry in 1998; American Airlines was second; Delta Air Lines, Inc. was third; Continental Airlines, Inc., was fourth; Northwest was fifth; and US Airways Group, Inc., was sixth. One of the first airlines to use electronic ticketing was ValuJet, a regional carrier based in Atlanta that began operations in 1993. In January 1995 Southwest Airlines Company began offering the service, and within eight months nearly a third of its customers were making reservations electronically. Delta also began testing electronic tickets on a few flights in April 1995. Vying with Continental to be the first carrier to feature the option throughout the country, United tried electronic ticketing in selected markets in the spring of 1995 and began offering it nationwide in September. Promotions for United and Southwest discussed electronic ticketing that year, with United's ads promising "ease of use and ease of mind."

CYBERSAVERS

Consumers often saved 20 percent to 30 percent by shopping for discounted airline fares on the Internet. In 1998 Northwest Airlines stimulated interest in online reservations with a program called "CyberSavers." Every Wednesday the company announced substantially reduced fares to specific destinations. The offers expired on the following Saturday. Consumers could request weekly E-mails that listed the latest special offers. After booking a flight on-line the customer received confirmation of the reservation by E-mail and then received an itinerary receipt by U.S. mail. The flights could also be booked by telephone, but customers who purchased these fares over the Internet received an additional $20 discount.

In 1997 United discontinued its long-running "Come Fly Our Friendly Skies" slogan and introduced the straightforward "Rising" campaign, which ran through 1998. The new ads acknowledged that traveling by plane was not always pleasant, and they promised that United would rise to the challenge of improving its services. In a print advertisement the words "Your Flight is Delayed" were spelled out in a bowl of cereal. "Does the truth really need to be sugarcoated?" the text asked. The ad promised that customers would receive an honest explanation when there was a problem with a flight. Another advertisement in Travel & Leisure in 1998 simply showed a Hawaiian beach and palm trees below the headline "Fly United Airlines to Kapalua." The ad displayed the United logo above the word "RISING" in a lower corner. According to Advertising Age, United spent $63.6 million on total measured advertising in 1998 (down from $67.2 million in 1997 and $75.2 million in 1991) with $27.8 million going for television commercials and $33.6 million for print advertisements.

In second place, American Airlines advertised its electronic ticketing, "AAccess," by emphasizing that the service allowed customers to know all the details about their flights and to make better choices based on that information. An advertisement in Newsweek showed one traveler who knew nothing about his flight to Los Angeles except that he would be aboard the airplane. Another traveler profiled beside him knew the flight number, the type of plane, when and where the flight originated, its arrival time, his seat assignment, which in-flight movie he would see, and how many frequent-flyer miles he would earn from the trip. Advertising Age reported that American spent $70.7 million on measured advertising in 1998 (compared to $64.6 million in 1997 and $115.9 million in 1991), with $20.4 million going for television commercials and $47.7 million for print advertisements.

Meanwhile, Delta's surreal "On Top of the World" campaign noted that travelers had "millions of reasons to fly today; only one that matters to you." The fantasy advertisements showed Delta employees striving to meet the individual needs of passengers and to show the comfortable conditions in Delta's new transatlantic business class of seats. In January 1999 Delta added a $2 surcharge for all tickets that were not purchased electronically through the company's Internet site. Beset by angry telephone calls from consumers, Delta withdrew the fee.

In 1998 Delta and United discussed but ultimately abandoned a marketing and code-sharing alliance that would have given them nearly 39 percent of U.S. air traffic. American and US Airways considered a similar alliance to control 25 percent of the market but reduced the proposal to a reciprocal frequent-flyer plan. During 1998 Northwest and Continental began forming a partnership that would have about 16 percent of the market, a slightly smaller share than the percentage held by each of the three leading airlines. Delta had considered merging with Continental in 1997, and early in 1998 Continental received takeover proposals from both Delta and Northwest, but no agreement was reached by the end of the year.

MARKETING STRATEGY

Since electronic ticketing was a new service, the E-Ticket campaign cited the advantages of paperless tickets, explained how to buy them, and invited consumers to visit Northwest's Internet site for more information. An advertisement called "Planet Zortron," which was developed by Hunt Adkins and ran in travel agent publications throughout 1997, showed a UFO hovering against a cloudy, purple sky. The ad described "Plan A," in which tickets were booked through a travel agent who gave them to a delivery driver. En route to the customer, the driver stopped to repair a flat tire, had to escape from an evil clown who commandeered the truck, was abducted by aliens and taken to the planet Zortron, and finally delivered the tickets one minute after the customer's flight had departed. In "Plan B," the travel agent booked a Northwest E-Ticket, and the customer boarded the flight without incident. The text explained: "With Northwest Airlines' E-Ticket, there are no flight coupons to print or tickets to deliver, and you can change reservations quickly and easily without having to reissue a ticket. All of which saves you a considerable amount of both time and money. E-Ticket is now available throughout the U.S. and to Canada (sorry, not yet available to planet Zortron)."

TRADEMARK DESIGN

Since 1948 Northwest had been known for the red tail fins on its airplanes, a design that was often included in advertisements near the company's red-and-white logo.

Advertisements created by Valentine McCormick Ligabel promoted E-Ticket and Northwest's Internet site during 1997 and 1998. One magazine ad showed a sailboat, a blue-green ocean, and a sandy beach below the headline, "You're Virtually There." The text read: "On-line Vacation Planning With Northwest Airlines. Explore a whole new world of vacation planning. Fly across the Internet to WorldWeb, the Northwest Airlines web site at www.nwa.com. You can explore exciting destinations, browse the WorldVacations specials and review flight schedules. Once you pick a vacation spot, you can book your flights on-line and even purchase a Northwest E-Ticket, the convenient and paperless way to travel. While you're touring WorldWeb, take in all the other great ways in which our web site can make your travel planning a day at the beach. Verify departure and arrival times. Cruise our exclusive, money-saving CyberSaver fares. Book your car rental and make hotel reservations. Check your WorldPerks account and more." The ad showed a computer pointer clicking on the word "Vacation" in large type. It concluded with the slogan "Some People Just Know How to Fly" below Northwest's red-and-white logo.

Several times during 1998 Northwest awarded free WorldPerks Bonus Miles (frequent-flyer credits) to customers who booked E-Ticket flights. In October consumers who purchased a ticket on-line at regular rates were invited to bring a companion on a subsequent trip for only $99. Advertisements for E-Ticket ran in trade publications for travel agents, in business magazines, and in other print media. Advertising Age reported that Northwest spent $66.7 million on total measured advertising in 1998, up from $48.2 million in 1997, $49.1 million in 1992, and $35.5 million in 1991. The company budgeted $9.2 million for television commercials in 1998 (up 135.9 percent from $3.9 million in 1997) and $52.5 million for print advertisements (up 32.6 percent from $39.6 million).

OUTCOME

In 1997 about 10 percent of airline reservations were booked electronically. By March 1998 almost 30 percent of travelers used electronic tickets, and by June 1998 about 40 percent of Northwest's passengers were using them. By October 1998 more than 2 million consumers were visiting WorldWeb Reservation each day. "E-Ticket has been one of the most popular and rapidly adopted programs ever offered by Northwest. People appreciate E-Ticket's convenience and speed," said Al Lenza, the company's vice president of distribution planning. By the spring of 1999 Northwest's site on the World Wide Web was generating approximately $220 million in annual revenues, which amounted to 2 percent of its total sales, compared with $275 million in revenues (2 percent of sales) for United and $225 million (3 percent of sales) for Delta. In 1999 Business 2.0 Magazine listed Northwest Airlines among the top 100 companies making the best use of the Internet. In 1997 Northwest's WorldWeb site was named Best Airline Web Site by Internet World magazine, and Northwest ranked second on Fortune magazine's list of the world's most admired companies. The Northwest website received awards from Advertising Age, Internet World, Inside Flyer International, and other publications and organizations. In 1998 the airline generated more than 95 percent of its parent company's operating revenues, but the corporation lost $224 million during the third quarter because of a pilot strike that lasted from June to September. The corporation had revenues of $10.2 billion in 1997 and more than $9 billion in 1998.

FURTHER READING

"Choose a Winner for Your Airline Travel Needs." Association Management, September 1998, p. A34.

"Flying in Formation." Economist, January 31, 1998, p. 67.

Grimes, Paul. "The On-Line Traveler." Chicago Tribune, July 12, 1998.

Levere, Jane. "Internet Pursuit Heats Up." Airline Business, December 1998, p. 2.

"Northwest Airlines: Acclaimed nwa.com Serves as Model for Other Online Sites." M2 Presswire, June 17, 1998.

Perman, Stacy. "Allied Air Force." Time, February 9, 1998, p. 76.

Rosato, Donna. "Fliers Flock to Airlines' E-Tickets." USA Today, March 17, 1998.

Sacharow, Anya. "Here, There, Anywhere: Best Use of Newspapers." Mediaweek, May 20, 1996, p. 64.

                                             Susan Risland

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