David Field WASHINGTON DC
Having taken over the reins at under-fire Northwest Airlines, co-heads Richard Anderson and Doug Steenland will use rare peace with labour to put the carrier back on the right track
Co-regents, so the historians tell us, run the risk that their reigns are spent either avoiding or tripping over each other. However, in the Twin Cities of Minneapolis-St Paul the two who now run Northwest Airlines - Richard Anderson and Doug Steenland - say their tenure will be different.
The pair took over running the airline last month after the unexpected departure of long-time chief John Dasburg, who quit in February to become head of fast-food chain Burger King. Upon Dasburg's departure, Anderson became chief executive and Steenland became president. So closely are the two aligned that neither will be interviewed without the other present. "We've been sticking our heads around the corner into each other's office for years. We began working together in the law department and have always had offices near each other," says Anderson. The two think enough alike that each will finish the other's sentences, and some of Steenland's duties are continuations of projects that Anderson began. Anderson, 45, who was Northwest's chief operating officer, started there as a lawyer and recruited Steenland, 49, to the airline's law department over a decade ago.
In their current capacities, Anderson will continue to oversee operations and marketing, while Steenland will manage "hazardous-missions" and represent the carrier in Washington DC. As such, Steenland takes charge of such delicate matters as labour, legislation and alliances.
Steenland's first responsibility is particularly vital at Northwest, an airline that has seldom enjoyed extended periods of labour tranquillity. The 1950s and 1960s saw strikes as often as snow storms. More recently, a pilots strike which lasted over two weeks in 1998 was the nation's longest and most bitter since the job actions that led to the demise of Eastern Airlines.
Within hours of finishing the interview - carried out at the government affairs office in Washington at which Steenland is a regular visitor - the airline and the union representing its mechanics reached a tentative agreement, apparently averting a strike or slowdown that could have begun in the middle of May. The deal, which came just days before a presidentially-appointed panel was to make recommendations for settling the dispute, would give the airline a healthy spell of labour peace before it must start the process of negotiating a new pilot contract.
Given this history of labour relations, Steenland's achievements perhaps should elicit a broader smile than one sees behind his neatly trimmed beard. It appears that his labour armistice effectively has bought Steenland's counterpart on the operations and marketing side a year of peace. And the two have plenty to do, even without addressing the question of what their ultimate goal is: do they want to ride out the current US consolidation wave or are they actively seeking a sale?
Anderson's view is that Northwest will stay independent unless it is forced to react to larger forces of consolidation - and then would participate in merger activity only reluctantly. Both feel that putting two airlines together represents an "enormously disruptive and expensive" process.
The airline views its size - just below the mega-carriers - as an advantage, not a vulnerability. Additionally, says Anderson, most of the benefits of merger can be obtained through alliance, as the Northwest/KLM relationship shows. In any case, Anderson says he knows that he has serious housekeeping to do no matter what shape industry consolidation takes.
Starting afresh Foremost among his tasks is to give the airline's unions reason to believe that the peace is more than a cease-fire, while simultaneously winning back passengers. The second half of the equation may prove the more difficult, as it was Northwest's customers whose near revolt against the company made it a congressional and public policy whipping boy and encouraged thinly financed start-ups to challenge the carrier on the assumption that in dislike lay the door to profitability.
Given the truce with labour which Steenland has gained, this may be the right time to tackle the job. Many believe Anderson may well be the right man for it. "Richard is the first Northwest guy I have met in a long time who is not a bean counter, "says Glenn Engle airline analysts at Goldman Sachs. "He knows the value of intangibles and is willing to spend a buck to make a buck. At Northwest that hasn't always been the case."
Indeed, one of Anderson's primary, self-assigned tasks is to dedicate funds to "work on service recovery issues". That is a phrase he uses to describe cleaning up messes, a task at which he has become accomplished, thanks to events such as the headline-grabbing fiasco at Detroit Airport. On that now infamous weekend, during new Year 1999, a snowstorm snarled the airport yet Northwest continued to land planes which the snowbound terminal could not accommodate. The result was that over a thousand passengers were trapped on aircraft for up to eight hours. The incident was a watershed in US airline history.
Coming from an airline that was already widely criticised by some local and federal legislators, the event helped spark a call for congressional action that could still result in a "passengers' bill of rights". Although the airline industry headed off the congressional action in 1999 and 2000, powerful senators, including the chair of the Senate Commerce Committee John McCain, have renewed their push for legislation this year.
Even if the passenger bill of rights now has a larger target in the entire airline industry, the Detroit incident remains in the public mind. For many, Northwest will stand as a symbol of every delay and flight snafu.
This perception helped drum up public wrath at Detroit, Northwest's biggest hub, where businesses helped in 1998 to support the startup of an airline that would be a palliative for Northwest fares and service. Dubbed Pro Air, the newcomer promised lower fares and better service. As it happened, Pro Air gained far more publicity than passengers with its four aircraft and never made money. Its certificate was suspended by the Federal Aviation Administration last year over maintenance irregularities and it has yet to regain Department of Transportation (DoT) approval to resume flying.
This was not the only time that start-up carriers had ventured onto Northwest's turf without success. New entrants have complained about Northwest's responses to competition since 1996. That several secretaries of transportation have shown interest in the complaints has lent them some credibility. Northwest, predictably, disagrees.
Steenland says these small carriers, successful or not, "prove that there is entry." Their presence, he claims, rebuts the small carriers' complaints that barriers to new entry in the form of dominated hubs are too steep. Anderson closes by saying that, in any case, they are focused on running a full-service airline and, as such, it is their goal to deal with Northwest's own situation.
Focusing on the hub
In a slowing economy and period of, at best, flat yields, Northwest's future is tied to that of its hubs. As head of technical operations from 1997, and then chief operating officer from the end of 1998, Anderson helped develop the on-time obsession that pushed Northwest up in the DoT's on-time rankings. It was there that he won credibility with Northwest's pilots.
Paul Omodt of the Northwest chapter of the Air Line Pilots Association (ALPA) says that "most of our people respect Richard from his time in technical operations. They had three or four people in there over two years who just could not get a handle on it. Richard went in and got things done."
The Detroit New Year weekend proved, though, that things do not run the way they are supposed to. It also gave Anderson another important goal to achieve. After the debacle, he oversaw a revamping of the entire way that Northwest runs its biggest hub. Anderson oversaw the installation of computer software that co-ordinates aircraft with ground crews so that no plane has to sit and wait for handlers. He also oversaw the introduction of new programmes to smooth re-accommodation of passengers, and he increased the number of spare planes on the ground from eight to 12.
The next step, says Anderson, is the Midfield Terminal under construction at Detroit, which will be the showpiece of the airline's basic strategy of building up its hubs. Northwest, he says, is "the only major carrier with new runways and associated terminal capacity under construction at all of its hubs."
"At Detroit, it's not just the terminal facility but the fourth parallel runway that's being added. It's a bit misunderstood. Detroit is usually judged by the existing terminal, which by all accounts is subpar," he says. "The airfield at Detroit is actually one of the best in the USA. We are building a fourth runway that will dramatically increase the capacity. Detroit is unique among large hubs east of the Mississippi, including Chicago, in that it will not have capacity constraints."
Salomon Smith Barney airline analyst Brian Harris says it would be bold for Northwest to present Detroit as an alternative to Chicago. That is fully Anderson's intent. The $1.2 billion midfield terminal will officially open in December of this year, but is being expanded beyond its original scope and will continue as a work in progress.
In Minneapolis, the airline is close to agreement with the airport authority and environmental agencies on building a new runway, which will increase airfield capacity by 28%, while at Memphis a new parallel runway and associated terminal capacity enhancements are almost complete. "We are the only major airline that anticipated the capacity issue that we are facing now in 2001," Anderson says.
Confronting consolidation
Northwest's hubs may well operate efficiently, but do they make the carrier a more or less appealing take-over target? "From a franchise and enterprise perspective, the fact that our hubs are well developed but have clear expansion possibilities would be attractive to anyone," Steenland says. He quickly adds, however, that this does not mean that Northwest has hung up a "for sale" sign.
Anderson agrees, saying various measures have minimised the necessity of merging with another carrier. "Through our Continental alliance, we anticipated the potential of consolidation, and that clearly is one defence to it," he says. Industry watchers agree on the ability of the alliance to validate Northwest's declaration of independence. Analyst Helene Becker of Buckingham Research says that, "given its recently extended alliance with Continental, I could well see Northwest standing alone and continuing in its current form."
Although it had to sell back its Continental holding, Anderson vows to hold onto Northwest's golden share. He characterises their partnership as "a long-term, strategic alliance", which will last until at least 2025 under the recent 15-year extension that was signed after the share sell-back. Similarly, Steenland has already said that Northwest is "not interested" in waiving its golden share veto over any sale of Continental if Delta Air Lines - as it reportedly has considered - were to mount a bid.
Indeed, judging from the marketing and sales efforts that Northwest has put into the Continental alliance, the tie-up is the key element in its planning to stay independent. About 2,500 passengers per day now transfer between the two carriers, up from just over 2,000 last year and about 1,700 daily transfer passengers in 1999 "We have done a lot to make sure that we have a product in the marketplace that is seamless in policies and interface," Anderson says. Steenland agrees: "We want a Northwest-to-Continental transfer to be like a United-to-United connection. We are very close, if not there, but there are challenges at airports like Boston's Logan, which has multiple terminals."
The two carriers are also using technology to bind the alliance and are expanding in corporate sales. They are offering a combined product that allows them to compete for corporate sales and offer a concerted response to requests from corporate travel departments. "As part of what we call the heartland strategy, we are looking to identify focus cities that are not hubs, but where our combined presence can collectively attract sales. In Indianapolis, for example, we would have a meaningful presence instead of just the 15% or so market share we have on our own," says Anderson. The Continental alliance by any measure pays dividends. Steenland says it added about $130 million to the bottom line in 2000 and about $97 million in 1999.
Foreign affairs
The contribution from the long-running alliance with KLM is less easy to put into numbers. Such, says Steenland, is the level of integration between the red tails of Northwest and the blue of KLM. "It's so scrambled you cannot tell what it's bringing in: the network has become so integrated that it is no longer possible to say what is Redtail and what is Bluetail. We make decisions as if it were a single enterprise, and decide them on the basis of who has what aircraft and how are they best deployed."
The antitrust immunity won in 1993 allows the joint venture - which Anderson says would be a $2 billion enterprise if it were a stand-alone entity - a common bottom line. Despite some rough moments (KLM had to sell its holding in Northwest after a bitter boardroom row over ownership) the two extended their alliance in 1997 to run for 10 years. Since then KLM has flirted with other allies, from Alitalia to British Airways, but has not aligned itself with another grouping.
Northwest insists that the KLM relationship will continue. This summer, some 40 aircraft will be devoted to North Atlantic flying, Anderson says, reminiscing that "this is a far cry from when I was in the law department and helped write the KLM alliance. Back then, we had five planes dedicated to the Atlantic."
Northwest's strategy for the transpacific - which accounts for about 25% of Northwest revenue and where the carrier blends alliance flying with its own strengths - is slightly different. As a beneficiary of the original USA/Japan bilateral, Northwest enjoys rights to connect Tokyo-Narita to other Asian destinations. Among US carriers, only United Airlines also holds such rights. That and their respective Narita hubs have made the two the biggest US transpacific carriers.
But Anderson cautions: "Just because you have your own hub doesn't obviate the need for alliance partners. For instance, we codeshare with Continental on about three or four dozen frequencies a week at Narita, and they provide feed there from Newark and Houston."
Additionally, Northwest's alliance with Air China supports services to Beijing and Shanghai. The carrier uses Air China equipment to serve the US West Coast, while it serves China itself via Detroit. Northwest's alliance with Malaysia Airlines was the first between a US carrier and an Asian carrier to receive US antitrust immunity, granted last year.
Interestingly, the carrier has no plans to bring a first-class section back to its aircraft, which is a disadvantage when competing for the highest yield Pacific Rim passengers. Instead, Northwest relies on a new World Business Class with lie-flat seats and enhanced in-flight entertainment to compete. Anderson insists that "it may be called a business class, but it's first class in every respect".
That may be, but given the transpacific market's unique characteristics - long flight times and highly demanding customers - a first class product is considered an important part of the package offered to customers. This point is especially important in light of the fact that Northwest must compete for business passengers with United, whose three-class service includes both first- and business-class cabins.
Rightsizing
As for other major US carriers, 2001 has not started kindly. Hurt by unusually harsh weather, high fuel costs and reduced corporate travel, the carrier posted a net loss of $123 million for the first quarter. It had lost money in the final quarter of last year too, leaving the 2000 net profit down by nearly 15%at $256 million.
To respond to this, Northwest began a series of cuts in March that will lead to the early retirement of three older McDonnell Douglas DC-10s, some route cuts, the suspension of advertising and a 5% reduction in overall management payrolls, including some layoffs and furloughs. Anderson and Steenland have not exempted themselves from the belt-tightening exercise: despite their promotions, they will not enjoy increases in pay until next February, at the earliest.
However, the cuts will not mean a complete moratorium on spending. The joint leaders plan to move forward with a fleet revitalisation. In mid-January they authorised about $5 billion to buy 52 new aircraft:20 757-300s and two 747-400s from Boeing, together with 24 Airbus A330s and six A319s. The additions are mainly aimed at replacing the ageing and expensive DC-10s. The 757-300s will replace them on domestic flights, while the A330s will take on transatlantic routes. Explaining the first-ever move to the Airbus widebody, Anderson says "we looked at the Boeing 777 and the A330 was just better suited. Oddly enough, we found the 777 to be too small for [hub-to-hub] routes across the Atlantic where we currently use 747s, while on other routes it was too much airplane."
That move makes Northwest the only carrier among the top five US majors not to operate Boeing's big-twin. It should not come as a surprise. Every decision the two leaders have taken - from consolidation to route selection - marks the course that the two are setting for their airline: it will not be bigger than it has to be.
Source: Airline Business
