Checchi's Checkered Record

Megamillionaire Al Checchi thinks he piloted Northwest Airlines so well that you should elect him governor. Actually, he sucked in public subsidies, strong-armed unions, reneged on promises -- and still almost flew the firm into the ground.

The deal was approved, and Minnesota's elected officials waited for Northwest to build the two new facilities and create those 2,000 high-paying jobs.

They're still waiting.

The Iron Range of northeastern Minnesota is a cold and lonely place. Unemployment runs almost double the state average, a reflection of the falling fortunes of the taconite mines that gave the region its name. The small town of Hibbing dearly wanted the payroll that Northwest's engine repair facility would bring. The town never got it.

Farther south, the city of Duluth was also eager for the 800-plus jobs that would accompany a new Northwest maintenance plant. That city, at least, has gotten part of what was promised.

Shortly after Northwest won approval of the state aid package, it promptly took $315 million from the Metropolitan Airport Commission to prop up its ailing bottom line. But the airline's finances continued to plummet, and it had to cancel orders for some of the new Airbus planes it had planned to purchase.

Northwest determined it didn't need the two new facilities that been the stated rationale for seeking money from the state in the first place.

The size of the state aid package was scaled down as Northwest retreated from its plans. Ultimately, Checchi says, the company only received about $365 million from the state, the vast majority in the form of loans that went for operating expenses.

And for a long time, nothing was built in Duluth or on the Iron Range.
Years later, Northwest did place a telephone reservations center in Chisholm, a small town near Hibbing. A local development agency -- the Iron Range Resources and Rehabilitation Board -- lent the company $9.7 million to build the reservations center, which handles toll-free calls from the airline's frequent flyers. If the center employs 604 full-time workers by the year 2008, the loans will all be forgiven. The most recent report Northwest submitted to the Rehab Board showed 208 employees at the center, says Jean Dolensek, an economic development representative at the development agency. The telephone operators, though, do not make nearly the wages that were to have been paid skilled workers at the engine repair plant that was never built in Hibbing.

A scaled-down version of an Airbus maintenance base was finally built in Duluth. The city gave Northwest $21 million to build the plant, and the state lent the airline $29 million more.

Welcome though they might be, the two facilities don't approach the 2,000 high-paying jobs Northwest dangled before Minnesota lawmakers when the company was seeking help.

"They created about half the jobs they promised, and not nearly the high-paying jobs they promised," says Berg. "They reneged on the biggest part of the agreement."

Checchi counters that Northwest had to scale back its plans. Sometime over the next few years, he says, the airline might still build the engine repair plant it promised -- and expand the Duluth maintenance base. "The irony of this is that we will end up building facilities as large as we originally intended," he says. "It's just going to take a little bit longer, and we will build those substantially with our own funds."

The facilities couldn't be built right away, Checchi says, because in 1992 Northwest plunged into even more desperate straits.

As the state's financial aid package was being finalized, Northwest and the rest of the airline industry were hit by another shock. American Airlines embarked on a round of fare cuts it called Value Pricing, and drove down ticket prices across the land.

The fare wars brutalized Northwest's already bloody bottom line, exacting an even heavier toll than the Gulf War, rising fuel prices, and recessions had a year before, Checchi says.

"We had started to see a real turnaround in the early part of 1992," Checchi says. But when American started cutting fares, "that produced a breathtaking drop in yield for the industry that was instantaneous."

For Northwest, the fare war was more bad news piled onto an already shaky company. In order to survive, Northwest determined that it would have to win major concessions from its 38,000 employees, including the three big unions -- the Airline Pilots Association, the International Association of Machinists, and the Teamsters.

In the spring of 1992, Northwest began talking pay cuts with its unions. At first labor leaders resisted, but it soon became clear that the talk wasn't just a management ploy -- Northwest was rapidly approaching bankruptcy.

Starting in late June, the company furloughed about 800 pilots, managers, reservation agents, and mechanics. The wolf was now at Northwest's door.

"In the fall of 1992, Northwest Airlines faced crises everywhere it looked," says the Harvard Business School case study of the airline. "The airline's cash position had dwindled to near zero ... as if this weren't bad enough, Northwest still owed $1.8 billion to the banks that had financed the 1989 buyout."

Ever since the takeover, Checchi's own company -- Checchi & Associates -- had been paid $10 million a year to provide management consulting advice to Northwest, but in late 1992 the situation was so grim that Checchi agreed to forgo those fees.

The airline again scrambled to borrow money, and negotiations with its unions over wage concessions continued into 1993. In January, the company laid off another 1,043 employees.

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