Northwest Airlines Corporation History

Address:

5101 Northwest Drive
St. Paul, Minnesota 55111-3034
U.S.A.

Telephone: (612) 726-2111
Fax: (612) 727-7617

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

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.

Company History:

Northwest Airlines Corporation is the holding company for Northwest Airlines, Inc., described as "America's oldest carrier with continuous name identification" and the world's 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 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 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 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, with its 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 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 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

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.

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 Northwest'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-known--at 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 incidents--the 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 error--tarnished 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 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, 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.

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.

New Horizons for the New Century

Although the Northwest/KLM alliance proved fruitful for investors on both sides of the Atlantic--Wilson 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 billion--a 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' union--the two parties together controlled half of Northwest--infuriated 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.

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.

Northwest Airlines Corporation History

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