South Metro Airport Action Council
** S M A A C **

Delta Wins Battle to Abandon NWA Headquarters,
Loosens MAC's Grip on Future Jobs
February 10, 2009

By Dick Saunders and Jim Spensley

The Metropolitan Airports Commission (MAC) raised enough questions to delay a decision for three weeks, but voted 11-1 at a special meeting Feb. 4 to allow Delta Airlines to vacate Northwest Airlines' Eagan corporate headquarters without major penalty.

However, in the process, MAC may have, in our opinion, put the state into a weakened position as a major transcontinental airline hub for the long term Exactly how MSP will be impacted if the current world recession continues or worsens over the next several years, as a growing number of economists are hinting, is a question.

The changes at issue until last week lay in the 1992 loan agreement that used MAC's top-ranked credit ranking to float $250-million in bonds for Northwest Airlines while NWA was standing at bankruptcy's door .The new agreement extinguishes MAC's right to force repayment of the bonds if NWA had given up for any reason its Eagan offices before the bonds expired in 2022.

As part of its acquisition of NWA in October 2008, Delta agreed to pay off the balance of $183 million projected to be remaining on the loan by 2016, six years ahead of schedule. In exchange, Delta committed to a series of four hub covenants. The most important covenant requires Delta to keep at least 10,000 of its present 11,500 Minnesota jobs in the state and maintain an annual average of 400 flights a day until the loan expires.(A Delta spokeswoman said the airline currently is running 440 flights a day at the Twin Cities hub)

Commissioners Respond

In the Feb. 4 meeting, MAC Vice Chair Bert McKasy of Sunfish Lake, was the sole abstention, contending that a covenant clause not clearly understood by commissioners, the legislature or the public during January reviews, permits a 10 percent "cushion" of 40 flights (to 360 daily flights) before a penalty would be triggered. The penalty would eliminate Delta's share of MAC's annual concession revenues. (That share amounted to $7-8 million last year.)

At its first review meeting Jan. 26, Dan Boivin, representing the mayor of Minneapolis, asserted that the deal "isn't strong enough to keep Delta from coming back to the table to ask for more relief" if its corporate health worsens in a few years. "I fully expect that will happen. We are not strong enough to prevent it."

Paul Rehkamp, a 16-year commissioner from Mankato, noted that "We have in effect given up an (enforceable) contract for a series of operating covenants that remain unclear as to the definition of a breach." He later voted in favor. (The final agreement attempts to resolve those questions.)

The Delta job guarantee is 37% below Northwest's peak of 18,000 employees in 2000, indicating the extent of the "bust" cycle all airlines have faced since then. Likewise, daily flights at 440, are running about 20 percent below the 2005 peak rate. And the Atlanta-based airline, now the world's largest, has announced it plans to reduce worldwide service by a further 3-6 percent in 2009, or 27 flights if the formula is applied to MSP activity.

Even before the latest service cuts, MAC's revenues for January 2009 fell $11 million short of its budget, resulting in a $2.6 million shortfall in net profit for the month. The primary cause was a $9-million shortfall in concession revenues. A MAC executive told Southside Pride that nonetheless "there are no plans to cut MAC staff in 2009."

Delta To Add Some New Jobs

For its part, Delta has agreed to create a "Delta North" management unit on the MSP campus in the office/support building at 34th Ave. S. and I-494 once occupied by Republic Airlines. After renovation, it will house several corporate functions previously located in Eagan, as well as a new regional airline headquarters. Delta also will transfer here its Compass Airlines regional airline headquarters from Chantilly, VA.

Delta also agreed to maintain its phone reservations centers in Chisholm and Minneapolis, its pilot training center and its Mesaba Airlines regional airline headquarters in two other Eagan locations, plus large flight crews and ground crews servicing Northwest/Delta's gates at MSP.for the duration of the loan agreement.

The fate of NWA's flight systems operations center (SOC) on the MSP campus, however, remains unclear. It employs a reported 300 skilled controllers who maintain contact with air crews during NWA flights and ground crews at NWA gates. NWA must keep a separate SOC for the next 12-18 months until its FAA operating license is merged with that of Delta's.

A Delta spokeswoman said "we may not know until the end of the year" how many employees would remain at the Eagan and Delta North offices.NWA had announced plans to reduce headquarters employment by1,000 when the proposed merger was made public. Peak employment was said to be 2,000 in the mid-1990s.

As state legislators and the South Metro Airport Action Council (SMAAC) have pointed out, Delta can reduce its Minnesota employment below 10,000, provided the percentage does not exceed that of jobs cut elsewhere on its system. And they both doubt that the payrolls of any incoming regional airline employees will match those of outgoing corporate managers.

Business Outlook

While MAC and Delta officials maintain hope of a general economic recovery beginning about mid-year, others say the depth and breadth of the present recession may force Delta to make service cuts beyond the 3-6 percent target announced in November.
(Under the revised loan agreement, Delta would be prevented from invoking an old force majeure clause as it did after 9/11.

Plus, NWA faces a competitive threat from Southwest Airlines, which begins service to Chicago Midway in March.

Certainly, there is nothing in either airline's recent history to provide encouragement on the jobs scene. Passenger traffic usually lags an upturn by 3-6 months. Last year Delta cut 6,000 employees, Northwest 2,000 to reduce operating expenses. In November, Delta offered buyouts to another 2,000 Delta employees by Feb. 13. That would further reduce the combined company's worldwide employment to 73,000.

But Wall Street isn't impressed with the outlook for the merged entity.Both companies were foced into bankruptcy in 2006-2007 after years of heavy operating losses -- $29 billion in Delta's case since 2000. The stock has dropped rom 20 to about 6, a 65 percent decline since the merger was announced in 2007. Delta management has forecast a return to profitability during the last three quarters of 2009.

Two House Bills Introduced

Rep. Frank Hornstein, DFL-Minneapolis, and Rep. Joe Adkins, DFL-___________, chair of the House ________________have introduced bills to tighten MAC oversight of its airline tenants. Hornstein observed Jan. 22 that the now-stricken force majeure clause "is big enough to drive an airplane through." Adkins seeks stronger oversight practices for the legislature.

For Minnesota-based passengers, Southwest's low-fare service, not the merger, may become the biggest benefit in 2009. Some passengers, long-time critics of NWA's service, may find Delta's even worse, according to some bloggers. Meanwhile, if Delta-Northwest's 80 percent control of both long-distance and regional seat supply continues well below historical demand, MAC could enforce its use-or-lose gate lease policy to invite more low-cost airlines or legacy carriers like United to add competing service.

(Awaiting an upturn in business, Northwest is retaining rights and paying monthly rental fees on three vacant gates at the Lindbergh Terminal. Seven other vacant gates scattered elsewhere around Lindbergh could be made ready for newcomers "within 90 days," a MAC executive said.)

The downside to all of this speculation is that Delta's implicit control of rush-hour takeoff and landing times squeezes new competitors into off-hour operations, and Northwest is already aggressively marketing low fares on a few routes to fight competitors.

3 Long-Term Possibilities

Long term, we foresee three possible scenarios for MSP:

1) a bigger but less safe hub because of higher peak-hour rates once the economy recovers;

2) a prolonged recession, resulting in a 50-60 percent reduction in revenues and a consequent reduction in MAC's debt service capabilities, or,

3) a multi-line hub with more competition, better service and more airport revenue.

The last scenario, while the best one, is also the least likely. The only good news at the moment is that MAC is freer to move in that direction if the present Republican governor and his 13 MAC appointees have the courage to step back from Delta as much as Delta has stepped back from Minnesota. The next gubernatorial election is only 22 months away.

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