An Airline Merger’s Turbulent Flight

It had some of the ingredients of a spy thriller: clandestine rendezvous at secluded restaurants, meetings in hotel rooms under fictitious names. And there were some casualties.

It all began in June, 1985, at the Cherokee Sirloin Room, a family restaurant in a suburb of St. Paul, Minn.

“The steaks were great,” recalls Steven G. Rothmeier, chairman of Northwest Airlines, of his first secret meeting with Stephen M. Wolf, head of Republic Airlines.

“In the summer you find softball teams, bowling teams and ladies’ groups there,” Rothmeier said in a recent interview. “We were the only people wearing suits. Nobody even paid attention to us.”

But the two airline executives, sitting in the restaurant for three hours, were beginning the talks that would eventually lead to the nation’s biggest airline merger--Northwest’s $884-million acquisition of Republic.

After a year of merger-and-acquisition frenzy in the airline industry, the deal provides a case study making clear the effects of mergers on airlines, their employees and their passengers.

Despite the economic benefits expected by merging airlines, employees are plagued by the fear or reality of firings and lower pay, and passengers suffer from confused schedules, missed flights and lost baggage.

Ultimately, the Northwest-Republic merger created the fifth-largest U.S. air carrier in terms of revenue passenger miles. Northwest, the nation’s second-oldest airline (after Western), used two rented open-cockpit biplanes to begin flying mail on Oct. 1, 1926, only 23 years after the Wright brothers’ first flight.

Republic was created in 1979 when North Central Airlines and Southern Airways were combined. Later, Republic acquired Hughes Airwest.

Now, just a year after the Jan. 23 announcement of the marriage, the benefits to the company are clear:

- Northwest dominates its three hub airports: 79% of all departures at Minneapolis, 77% at Memphis and 60% at Detroit.

- The acquisition of Republic has given Northwest a strong domestic feed into its East Asian and European routes.

- The elimination of duplication of everything from overlapping routes to side-by-side ticket counters allows better use of assets and is saving the merged company millions of dollars.

- Northwest has also developed a strong management team consisting of the top executives of each airline. Since both airlines were based in Minneapolis, there were few, if any, personnel dislocations.

Northwest, which now has 311 airliners, is the only major airline to have earned a profit in every year since Congress deregulated the airlines in 1978. And Paul Karos, airline analyst for L. F. Rothschild, Unterberg, Towbin, a New York brokerage house, said in an interview that he thinks “Northwest’s profitability will improve substantially as a consequence of its acquisition of Republic Airlines. We expect them to report a profit for the 1986 fourth quarter. And that’s a quite an achievement.

“If they can make money with all of the problems they had in that three-month period, what’s going to happen when times are good, when they’ve got this thing working smoothly?”

Still Some Uncertainties

But, as Karos indicated, the merger path has not been without pitfalls, for the airline and its passengers alike. And there are still uncertainties and serious hurdles to overcome.

For one thing, largely as a result of union problems, the two carriers have not yet been fully combined. And, although conditions have improved in the past few months, there are still problems with lost baggage, including some reportedly resulting from deliberate actions by disgruntled workers.

Long check-in lines and unanswered reservation phones have resulted in severe customer dissatisfaction. Most serious, the FBI, the unions and the airline are investigating several instances of sabotage of airplanes.

There have been three or four cases of such tampering. All of the incidents involved electrical equipment on DC-9s that were undergoing routine repair at the former Republic hangar.

A landing gear warning light wire was cut, gauges were smashed on a test panel used to check the accuracy of flight instruments and wires to communications and navigation gear were cut. The company has said the incidents did not endanger passengers because the damage was obvious and there was little chance of it being overlooked.

Guy K. Cook, president and general chairman of Air Transport District Lodge 143 of the International Assn. of Machinists & Aerospace Workers (AFL-CIO), said the union is conducting its own investigation of the incidents and is cooperating with the FBI and the Federal Aviation Administration.

The FAA has increased its watch over Northwest maintenance as a result of the tampering.

“I hope the company or the FBI finds them first,” he said in an interview. “They don’t want to be caught by our people.”

Morale Is Suffering

Employee morale at Northwest is suffering. Former Republic workers feel that they are underpaid. And there is uneasiness about the dogmatic Rothmeier, a former Notre Dame football player, who now, as chairman of the combined airline, runs it like an Army division.

On the day the merger was approved, for example, he issued a memo that said:

“The workday begins at 8 a.m. for all Northwest officers just as it does for managers, supervisors, clerks. . . . There are no exceptions. This is the kickoff time. No one starts cold, so I expect the officers and department heads to be here before 8 o’clock in the morning to prepare their departments for the workday. . . . No one is required to work on Saturdays. However, given the structure of our management team, it is virtually impossible to get the job done without Saturday work.”

At that first meeting at the steak house, Rothmeier and Wolf did not agree on much of anything, and it took half a year to reach an accord. During those six months, the two executives held on again/off again sessions at hotels all over Minneapolis under such phony names as Green Associates and ABC Investments.

(At one hotel, the management even listed a meeting of one of the fake companies on its events-of-the-day board in the lobby.)

As these meetings continued, both carriers also held talks with other airlines--which they will not identify--about the possibility of a merger.

Finally, on Jan. 23, 1986, the $17 per common share that Northwest would pay for Republic was set, and the boards of directors of both companies agreed. The secret, which had not leaked because of the precautions, was out.

Masterful Solution

The merger, eventually approved by the Transportation Department in August, was proclaimed a masterful solution to the pressures faced by both airlines in competing with the larger carriers around them.

And it set the industry’s tone for the rest of 1986, being followed by more than a dozen other airline consolidations as smaller carriers sought marriage partners to help them meet the competition of the mega-airlines.

Republic, which had lost $111 million in 1983, turned the corner under Wolf, who had been hired in 1984. In that year it made a $29.5-million profit, the largest in its history, and in 1985 it earned $177 million.

Still, Wolf, who now heads the Flying Tiger Line cargo carrier, said in a telephone interview a few days ago that Republic could not have made it on its own. “I concluded that no matter how successful Republic was, I did not believe it would be able to compete long term solely through internally generated growth.

“If one looked at American, United and Texas Air, no matter how fast you grew, the gap would continue. We had to do something of an external nature to expand.”

Wolf, who said it was he who initiated the talks with Rothmeier, felt that Northwest was the “most ideal match” for Republic. Northwest was desperate, too, as it turned out, so when Republic called, it listened.

Position Threatened

Northwest’s serious problems started when Pan American World Airways agreed in late 1985 to sell its Pacific division to United Airlines.

Northwest was threatened with losing its coveted position as the largest U.S. carrier in East Asia. United, which touches down in all 50 U.S. states, had an immense built-in passenger feed for its new Pacific division.

How was Northwest to fight back?

“What we were looking for was the critical mass in the domestic system,” Rothmeier said in his office at the new Northwest headquarters building here the other day. “We had originally set out to grow this airline internally as fast as we could in this deregulated marketplace. (But) when the Department of Transportation allowed United to acquire the Pacific routes . . . that changed the whole balance of competition.”

Now, just a year after the merger was announced, Northwest and Republic have been meshed, at least officially. The Republic name has disappeared from airliners and ticket counters, and Herman the Duck, symbol of Republic and its predecessors for more than 30 years, has been buried.

But that is only cosmetic.

Major problems prevent total integration of the two airlines. Northwest pilots still fly the bigger Northwest planes, dubbed “Red Tails,” and former Republic pilots still fly the smaller planes once owned by that carrier, the “Green Tails.”

Maintenance is still being conducted separately and spare parts are ordered individually. At some airports, such as Detroit, food is being catered by different flight kitchens. Flight attendants still wear different uniforms.

Employees Angry

But at the core of much of the post-merger problems is the anger felt by former Republic employees over the fact that, with some exceptions, they are still being paid their old, much-lower pay scales.

The airline has said that all pay levels covering Republic workers will be raised once numerous problems involving union contracts--mainly issues such as meshing seniority lists and determining representation--are resolved.

And, despite improvement since the merger, other problems linger, long after the chaos of last Oct. 1, the day Northwest and Republic tried to consolidate their routes, schedules and computer systems. It didn’t work.

Many flights were delayed. Computers were so slow that the check-in and reservation process was brought almost to a halt. Complaints of lost baggage ran high; some planes departed without any of the baggage of the passengers on board.

Sometimes, aircraft were actually “lost” in the computers, leaving passengers and crew members wandering down concourses trying to figure out where their planes were.

Often, more than one passenger was assigned the same seat. It got so bad that for a brief period the airline altogether abandoned assigning seats. Frequently, aircraft waited for long periods at their destinations because no gates were available at which they could unload.

Passengers fumed. In the weeks after the merger, they formed a group called The Angry Revengeful Frequent Flyers and wore buttons saying such things as “Fly Northwest if your only option is walking.” At Memphis, Tenn., last month, passengers trying to get to Florida for Christmas conducted a loud and angry protest at the boarding gate.

The airline had to charter planes to get them on their way a day late after putting them up in a hotel.

Couldn’t Predict Snags

Rothmeier makes few excuses for the glitches, but he said they could not have been predicted. “We spent seven months training people,” he said.

“We spent seven months analyzing and dissecting the operation to try to forecast where the basic problems would be. (But) there has never a combination in the history of this industry of the size of the Northwest-Republic operation.

“There was no one or two or three problems. There was an aggregation of a number of smaller problems, 90% of which could never have been determined in advance. In an operation like Northwest, which is seven days a week, 24 hours a day, stretching from Hong Kong to Frankfurt . . . over three continents and 137 stations, with 30,000 employees, there is no point at which you can stop and freeze the system and say, ‘Let’s do a simulation run on the computer.’ You can’t say, ‘Let’s do a dry run and see what happens.’ ”

In October, Rothmeier said, Northwest’s on-time performance (within 15 minutes of scheduled times) dropped to 59.7%.

Before the merger, both airlines had had better than 70%. (No industry average figures are available.) Today, he said, Northwest has pulled its on-time performance back to 70%.

But, he added, Northwest has been a victim of some unfair criticism because the United States has “an air traffic control system which is not adequate, which causes delays and for which we are blamed.” Even 85% on-time performance is not good enough, he said.

Most passengers have been “understanding,” Rothmeier said. Asked about those who were so unhappy during the transition that they will abandon Northwest for other carriers, he said: “They will fly with another carrier until that carrier misconnects them or loses their bag. . . . Then they will come back. Because one thing is clear: There is no brand loyalty in this business. People fly on the basis of schedules, fares and service.”

Huge Advantages

Despite the initial problems, there have been and will continue to be huge advantages to the merger.

Rothmeier predicted that the annual savings will total $160 million once everything is in place. Because of the merger, he said, Northwest will become a much more efficient company, one that is much cheaper to operate than the two separate carriers were.

One major advantage is that Northwest’s fleet of predominantly wide-bodied airliners and Republic’s mainly narrow-bodied fleet complement each other well, providing the merged airline with improved flexibility to match its planes and markets. The nearly 40 overlapping Republic and Northwest routes have been combined.

The carrier will begin using larger planes on some heavily traveled routes, meaning that it can have fewer planes and pilots on these routes while increasing passenger capacity.

Planes freed by the switching can be used on new routes; for example, Northwest plans to begin service to Jamaica with some of the newly available aircraft.

Republic’s fleet of 168 planes was made up primarily of two-pilot, two-engine aircraft with an average capacity of little more than 100 passengers. Northwest’s 132 aircraft were primarily three-pilot, three- and four-engine jets with average capacity of 200.

By using larger planes on heavily traveled routes, Northwest can avoid what Republic was forced to do before the merger--flying “wing-tip to wing-tip.”

On the Minneapolis-St. Paul-to-Memphis route, Republic used six McDonnell Douglas DC-9s daily. At certain hours, passenger demand was so great that two planes had to depart at the same time and flew the route virtually “wing-tip to wing-tip.”

On the Detroit-Los Angeles route, Northwest flew two 184-seat Boeing 757s daily before the merger and Republic flew one Boeing 757 and three Boeing 727s, which can carry fewer passengers. Combined, the flights required 15 pilots and fuel for 15 engines to provide 1,000 seats in that market.

When Northwest substituted four 284-seat McDonnell Douglas DC-10s on the route, its capacity grew by 13.6%, while flight crew and fuel costs dropped 20%.

Once the merger was announced but before it was approved, committees with varied responsibilities began meeting to implement it.

Composed of executives from both carriers, they dealt with such things as operations, scheduling, training and maintenance. But this created some difficulties with the airlines’ lawyers, who were determined that no antitrust laws be violated.

Discussions Limited

“Basically, we had to stay out of marketing, scheduling and pricing,” John A. Edwardson, executive vice president for finance and chief financial officer of the merged carrier, recalled recently. “But the DOT (Department of Transportation) demanded a proposed joint schedule from us, though we weren’t supposed to discuss those matters. We were pushed to very narrow limits.”

Northwest executives, harried by the serious problems and complaints surrounding the merger, had one almost ludicrous matter to overcome.

As soon as the merger was approved, they wanted to put the Northwest name on all Republic planes, but the Mexican and Cuban governments stood in their way.

Republic had flown to Mexico, and the Mexicans said their agreement with Republic remained in effect, even though no airline by that name existed anymore.

Republic planes had also flown through Cuban airspace on their way to the British-owned Cayman Islands, and the Cubans insisted on continuation of the Republic name.

As a result, until about two weeks ago, about a dozen of the merged carrier’s planes retained the Republic name and carried Republic napkins and silverware and old Republic in-flight magazines. Pilots had to use the name in radio communications.

But now, that annoyance, along with many others, is a thing of the past.