Pan Am Joins as Possible Suitor for Northwest : Smaller, Money-Losing Air Carrier Sees Merger With NWA as Route to New Life

Ailing Pan Am Corp., joining the crowd of possible contenders for the parent of Northwest Airlines, said Tuesday that it is considering bidding for the much larger and stronger airline.

Pan Am said the wealthy Bass family of Ft. Worth would be one of its financial partners if it proceeds with a bid for NWA Inc.

At the company’s annual meeting here, Pan Am Chairman Thomas G. Plaskett said a merger would create a huge global carrier, combining Northwest’s dominance in the Pacific market with Pan Am’s strength in the North Atlantic. “It seems to us a classic end-to-end merger,” Plaskett told Pan Am’s stunned shareholders.

A merger with Northwest could revive money-losing Pan Am, transforming it overnight into the biggest U.S. air carrier, with 470 aircraft, and the leader in the coveted Atlantic and Pacific markets.

Surprise Interest

In making its announcement, Pan Am became the first airline to cast an acquisitive eye at Northwest. The company invited offers from investors a month ago, after rejecting as too low a hostile $2.7-billion bid from Los Angeles oilman Marvin Davis. Since then, Davis has been joined in the bidding for the airline by Los Angeles financier Alfred A. Checchi and, possibly, Northwest’s machinists union, along with Pan Am.

Pan Am’s interest in Northwest came as a surprise. Just three months ago, Plaskett said the airline needed a strong merger partner to survive. Airline industry analysts said American Airlines and other carriers looked at Pan Am but decided it was too sick to save.

Now, apparently, Pan Am is considering making an acquisition of its own. A deal for Northwest, Plaskett said, was “something we should take a good hard look at.”

Edmund Greenslet, an airline analyst in Jacksonville, Fla., said the thinking at Pan Am probably was, “you might as well trade up if you can’t do anything else. If no one else will buy you, you have to make the move.”

He continued: “Pan Am is strong where Northwest is not. They complement each other. Northwest has a domestic system, which Pan Am desperately needs.”

During the past several years, Pan Am has sold a number of key assets, including its New York headquarters and its valuable Pacific route system, to stay financially afloat. Last year, it lost $72 million on $3.6 billion in revenue.

Northwest, the largest U.S. carrier to Japan and the North Pacific and the nation’s fifth-biggest airline overall, earned $135 million last year on $5.7 billion in revenue.

In weighing a bid, Pan Am has enlisted several well-heeled financial partners. Plaskett said that besides the Basses, Equitable Life Assurance Co. and Prudential-Bache Securities were prepared to participate. He said the group stood ready to make a “substantial equity” investment.

Pan Am didn’t say how much it was prepared to spend to buy Northwest, and Plaskett cautioned that Pan Am hasn’t yet decided to bid. The carrier has asked for permission to review Northwest’s books, he said. “We will not make a bid if we cannot satisfy ourselves that a combined entity would be viable.”

Beat the Deadline

Northwest Chairman Steven G. Rothmeier said his airline’s board would consider Pan Am’s request for information. Northwest had established a deadline of last week for requesting information, according to informed sources.

Pan Am had contacted Northwest before the deadline but didn’t sign a confidentiality agreement with Northwest. Northwest is requiring all prospective bidders to sign the agreement before it opens its books to them.

Pan Am director Walter B. Wriston said a Pan Am-Northwest merger would be “a terrific fit.”

“We need an American international carrier to compete in the global market,” said Wriston, former chairman of Citicorp, which is providing financing for Davis’ bid. He said there would be little problem in getting financial backing for a merger. “There are a lot of investors out there with hot money in their hands,” he said. “They like the synergy here and they want to make a buck.”

Airline industry analysts noted that Northwest and Pan Am have only eight routes that overlap. Besides gaining financial strength from Northwest, Pan Am has about $1 billion in tax loss carryforwards that it could use to shield the income of a combined airline, analysts said.

A Pan Am-Northwest merger would make Pan Am the largest U.S. air carrier, with 16.5% of the air travel market, according to Airline Economics, a Washington consulting group. Currently, United is ranked No. 1, with 16.46% of the market.

But industry watchers cautioned that a combination would be difficult to execute. Both airlines have tense relationships with their unions that wouldn’t be helped by a merger, analysts said. Northwest management hasn’t settled important seniority issues with its pilots stemming from its 1985 merger with Republic Airlines.

“The seniority issues would be difficult,” said Kirk Faupol, head of the Northwest’s pilots union. “Pan Am has a very senior work force.”

Additionally, analysts said, merging pay scales at the airlines might be tricky, because Northwest employees earn more than Pan Am workers. The highest-paid Pan Am pilot earns $115,000 a year, compared to $162,000 for the highest-paid Northwest pilot.

Daniel A. Hersh, an airline analyst with Bateman Eichler, Hill Richards in Los Angeles, was among those who doubted the ability of the management at Northwest or Pan Am to smoothly integrate the airlines. He noted that Northwest’s problems with lost baggage and late flights after merging with Republic earned it the nickname “Northworst.”

From an antitrust standpoint, Washington aviation lawyer Robert P. Silverberg said a merger between the two airlines didn’t seem to present any serious problems. He said the airlines overlap only on a small number of international routes to Ireland, Scandinavia and London, and that Pan Am could simply give up those routes to get merger approval.

“I would say that Pan Am can feel somewhat comfortable that this is an approvable transaction,” he said.

Pan Am stock rose 62.5 cents a share to $5 on the New York Stock Exchange and NWA fell 50 cents to $104.25 a share.

Robert E. Dallos reported from Washington and Denise Gellene reported from Los Angeles.

PAN AM-NWA AT A GLANCE

A quick comparison of Pan Am Corp. and NWA Inc.

Pan Am NWA Financial Data* Revenue $3,569 $5,650 Profit (Loss) (72.7) 135.1 Assets 2,149 4,372 Liabilities 2,445 589.1 Operations Revenue passenger miles 29.4 billion 40.9 billion Average daily departures 390 1,339 Cities served 118 218 Employees 22,467 35,532 Current fleet** 141 330

*Amounts in thousands of dollars. All figures are for 1988.

**Pan Am figures include aircraft utilized by Shuttle but exclude Pan Am Express aircraft.