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Home | Opinion Exchange | Editorials

Editorial: Incentives for NWA? Proceed with caution

State has leverage in commitments on headquarters, hub.

Last update: January 25, 2008 - 6:22 PM

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A GENTLE REMINDER

"I wanted to take this opportunity to respectfully remind you of the commitments NWA has made to Minnesota. The Metropolitan Airports Commission recently entered into a lease agreement with NWA. As part of that agreement, NWA committed to keep both a hub presence and its headquarters in Minnesota.''

Gov. Tim Pawlenty, in a Jan. 17 letter to Northwest CEO Doug Steenland and Delta CEO Richard Anderson

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When a hometown company as important as Northwest Airlines is in jeopardy, there's predictable pressure on elected officials and public agencies to try to do something about it.

We saw that in 1992, when the airline came close to filing for Chapter 11 bankruptcy court protection and the Metropolitan Airports Commission (MAC) came up with a $290 million loan to help shore up its finances. We saw it again last year, when the airline was in Chapter 11 and the MAC negotiated rent and other concessions valued at more than $200 million.

Now we're facing the possibility that Northwest will merge with Delta, which could mean the loss of a Fortune 500 headquarters in Minnesota. Elected officials have weighed in, saying they're concerned, and are promising to do what's necessary.

We're not sure what "necessary'' means, nor is it clear how much more government can do to "partner'' with the company at this point. Market forces are driving consolidation in the airline industry, and those conditions have little to do with the MAC or the Minnesota Department of Employment and Economic Development (DEED).

What MAC and DEED can do to protect Minnesota is to remind Northwest and any merger partner that moving the headquarters out of the state would carry a significant price tag.

Northwest's lease terms require the airline to forfeit rent reductions valued at about $68 million and a cut of airport concessions totaling nearly $147 million through 2020 if the carrier doesn't maintain its headquarters and hub here.

That means the airline must operate with its chief executive officer, chief financial officer and the majority of its senior staff at a Minneapolis headquarters. Failing to do so also would require Northwest to repay $245 million in bond debt dating back to the $290 million loan made in 1992. The headquarters and hub covenants give the commission and state some protection, not to mention much-needed leverage.

There's a good chance executives in a newly merged airline would approach the MAC and the state seeking some sort of deal. If the MAC is asked to forgive any existing terms, we can only hope the commission would demand a significant return.

What might that be? The state cannot be expected to save Northwest's Minnesota headquarters operation: CEOs and boards of directors will make that call. The Minneapolis-St. Paul hub, on the other hand, is an asset that no merger partner would want to lose. Other assets, such as operations and reservations centers, would be analyzed for cost and efficiency, and that's where MAC's leverage could come into play. If the MAC and Minnesota make yet another deal with Northwest, the payback should be guaranteed.

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