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"Instead of going into a defensive mode, the board of directors made a decision to maximize shareholder value," the former executive says.
The way Checchi tells the story now, you'd think the people of Minneapolis turned out to strew rose petals in his path when the deal was announced. "When we first presented ourselves, in the eyes of the public we were greeted as saviors of the company, as white knights," Checchi says.
But Peter Gillette, a former member of the Minnesota governor's Cabinet, recalls an undercurrent of distrust among the state's business leaders.
"We're very Midwestern and very populist," Gillette says. "In the main, the notion of leverage and leveraged buyouts was anathema to most of the business community. These two men were not of local ilk. They came out of a fast-moving crowd that was reprehensible to many at the time. There was a lot of gnashing of teeth on the part of the broader business leadership."
As the deal was finally negotiated, Checchi's group agreed to pay $3.65 billion -- or $121 a share -- to buy Northwest. Less than a billion of that was actually put up in cash, most of which came from investors other than Checchi, Wilson, or Malek.
KLM Royal Dutch Airlines kicked in $400 million in return for about 20 percent of Northwest's stock. Another $80 million came from Elders IXL, the largest company in Australia, which owns, among many other things, Fosters Brewing.
Yet another $100 million was brought into the deal by San Francisco investment banker Richard Blum, husband of U.S. Sen. Dianne Feinstein. An investment company headed by Blum still owns about 5 percent of Northwest, which could prove touchy if Feinstein decides to enter the Democratic gubernatorial race herself. Political handicappers predict she will, although Feinstein has offered little insight into her plans.
(Checchi says he and Blum remain friendly, and still see each other at Northwest board meetings. Checchi says he sat down with Blum before announcing his candidacy and told Blum he was planning to run. "He said, 'It's a free country,' " Checchi recalls. Blum, for his part, won't discuss Checchi's candidacy. "Mr. Blum says he will not be talking to the press about Mr. Checchi," a secretary told SF Weekly.)
Altogether, Checchi and the other investors came up with about $700 million in cash to buy the airline. The remaining $2.9 billion had to be borrowed, and more than 100 banks kicked into the loan package. With various transaction fees added on, Northwest wound up with about $3.2 billion in debt when its new owners took over in early August 1989.
Paying that money back would be quite painful for the airline.
Trouble was not slow in coming for Al Checchi and the new owners of Northwest. Airlines are a particularly fickle business, and the early 1990s were brutal for the entire industry.
Iraq invaded Kuwait, the Gulf War ensued, and jet fuel prices soared. The United States and Japan both suffered recessions, fears of terrorism prompted numerous warnings about air travel, and many customers -- including high-paying business travelers -- cut back on flying.
"This was a very grim period for everybody associated with the airline industry," Checchi says. In 1991 alone, six major U.S. airlines filed for bankruptcy, and only three proved able to fight their way back out.
Just as those problems were starting to subside, American Airlines launched a vicious round of fare cutting in 1992, forcing other airlines to match its bargains. The price war caught some airlines in a cruel trap -- they were scrambling to attract passengers, but losing money on many of the tickets they sold.
Almost immediately after buying Northwest, Checchi and Wilson began looking for money to pay back the banks. The company sold planes for cash, then leased them back. Northwest wrangled millions of dollars in loans out of two major suppliers -- Airbus and GE, which makes the engines for Airbus planes. The real estate in Tokyo was mortgaged for about $380 million.
But those steps couldn't keep up with Northwest's declining revenue. The airline lost $302 million in 1990 and another $320 million in 1991. Checchi and partners had turned Northwest around, all right, but they were flying the wrong way. An airline that had never before lost money was sinking in debt.
Checchi lays full blame for the financial hemorrhaging on forces beyond Northwest's control. "In modern American history -- the 20th century -- there has never been an industry that had a decline as precipitous as the U.S. airline industry," Checchi says. "There was an 18-month period where [the industry] lost everything that it had earned since the Wright brothers."
Financially healthy airlines took advantage of the chaos, shopping for bargains on equipment, routes, and gates amid the industry wreckage. But the dramatic downturn was particularly unwelcome at an airline carrying $3.2 billion in debt. If Northwest had been cash-rich and debt-free -- as it was before the takeover -- it would have been able to snap up some bargains itself during the industry downturn. The post-Checchi airline, however, was struggling just to stay alive.
"Stronger competitors such as American, United and Delta were able to scoop up prized assets at bargain-basement prices," says a Harvard Business School case study of Northwest Airlines. "Northwest also pursued some of these opportunities, but its deteriorating financial condition placed it at a disadvantage in most bidding situations."
Northwest had hoped to raise more cash by selling aircraft and leasing them back, or by trading in the options it held on future delivery of new planes. But buyers for planes became scarce after the industry cratered, and Northwest was unable to generate additional cash from its fleet.
The company needed a new pool of money to tap. It wound up turning to the state of Minnesota.
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