Northwest Airlines Banking on Pacific for Its Prosperity : Travel: Co-chairmen Alfred A. Checchi and Gary Wilson are trying to improve the carrier’s service so it can better compete with Asian airlines and the U.S. giants American, Delta and United.

The history and sprawling home of Northwest Airlines lie here in the snowbound fields of the American Midwest.

But the future and fortune of the nation’s fourth-largest airline lie in Asia. Far from the serene surroundings of the home office, the cramped and chaotic confines of Tokyo’s Narita Airport hosts Northwest’s largest money-making hub and shines as the crown jewel in a valuable web of Pacific routes.

“The principal focus of our energy is the Pacific, which is the great strength of this company,” said co-Chairman Alfred A. Checchi, the Los Angeles-based businessman who, with partner Gary Wilson, engineered the $3.65-billion takeover of the airline in 1989.

For Northwest, the Pacific means much more than fat profits--it means survival. If it were not for its Pacific routes, Northwest would have been written off by now as another debt-laden airline struggling to secure a place for itself in a shrinking field of players.

“The Pacific is vital to their future,” said Dean Sparkman, president of Sparkman & Cole, a Washington-based airline consulting firm. “Without that, they would have a very difficult time surviving too long in the domestic arena.”

The Pacific routes may not be enough to make up for Northwest’s shortfalls, however. Even in the Pacific, Northwest faces problems, including bruising competition from United Airlines in a once-placid market.

The airline is weighed down with about $4 billion in debt--some of it related to the 1989 takeover--and claims a smaller share of the domestic market than its major competitors. Despite committing hundreds of millions to improve customer service, the carrier is haunted by years of such indifferent service that it was commonly derided as “Northworst.”

Northwest executives concede that they still have a ways to go. “By all customer perceptions, we were way down in the middle of the pack, especially in transpacific routes,” said Wilson during a joint interview with Checchi in Minnesota.

Checchi and Wilson took control of Northwest with little airline experience. Close friends for more than two decades, Checchi, 43, and Wilson, 52, have worked as corporate strategists and financial advisers for such companies as hotelier Marriott Corp. and entertainment giant Walt Disney Co.

The duo ended up in California in the mid-1980s when Disney hired Wilson as chief financial officer and Checchi embarked on a failed political career. Both men split their time between Minnesota and California and own homes across the street from each other in Beverly Hills.

“We kind of act like one (individual),” said Wilson, the more easy-going of the pair.

“We can end each other’s sentences,” added Checchi, interrupting Wilson in mid-thought.

Although Checchi maintains a higher public profile than Wilson, the pair have been equally involved as co-chairmen of the company, said Richard C. Blum, a San Francisco money manager whose investment group owns 10% of Northwest.

“I think Al focuses on the larger picture,” Blum said. “His (Checchi’s) relationship with the employees and the labor unions are very important. While Gary isn’t as visible publicly, I think he is very much an equal partner. He is very much more involved in the bricks and mortars of the business and the expansion of the airline.”

Checchi and Wilson had amassed personal fortunes when they led a group of investors--including KLM Royal Dutch Airlines, Bankers Trust and Blum & Associates of San Francisco--in a leveraged buyout of Northwest in August, 1989.

As part the deal, the airline pays a Los Angeles investment company owned by Checchi and Wilson $10 million a year for investment banking advice and services.

Northwest’s Pacific routes, which have historically generated most of the company’s profits, were a major attraction for the new owners. Along with now-defunct Pan American World Airways, Northwest--once known as Northwest Orient--was given extraordinary access to Asian cities after the end of World War II. The value of those routes soared along with the economies of Asia.

“It’s the biggest asset this company has,” Wilson said of Northwest’s Far East routes. “We can fly as many flights a day (as possible) from most major American cities.”

The Pacific routes and a large U.S. network make Northwest a highly attractive merger partner as the world’s airlines race to expand their global reach, Northwest officials say. The airline was recently involved in failed talks to create a global carrier, including British Airways and KLM Royal Dutch Airlines, which owns 20% of Northwest.

While lacking airline experience, Checchi and Wilson say lessons learned about the service industry at Marriott are applicable at Northwest. Improving customer service is a major part of their strategy to attract more business passengers, who tend to pay higher fares than leisure travelers.

Checchi and Wilson, who hired executives from outside the industry to fill positions in advertising, product development and corporate planning, have little respect for airline traditions, particularly when it comes to marketing and customer service.

“If you look at this industry, it is not very sophisticated in the area of marketing,” Checchi said. “If you think about this product that we have, everybody flies the same kind of equipment. They all charge you the same amount. The only way to differentiate yourself is in terms of service.”

Northwest officials want to boost the size of the airline to keep up with the big three U.S. airlines--American, Delta and United. But most attempts to expand have proved fruitless. An agreement to operate the Trump Shuttle fell through, and Northwest pulled out of a merger with Midway Airlines after it contended that Midway inflated passenger traffic figures. Midway was subsequently liquidated.

Northwest also had discussions with Continental Airlines, which operates major airports across the Sun Belt, where Northwest is weak. Continental continues to operate under bankruptcy court protection, and federal officials are seeking to recover hundreds of millions of dollars to cover the airline’s underfunded pension plans. Recently, reports surfaced that Houston financier Charles E. Hurwitz was negotiating to buy Continental.

Northwest’s search for a partner, however, has often taken a back seat to more pressing concerns. Beginning in late 1990, the Persian Gulf conflict and the U.S. recession delivered a stunning blow to the airline industry, which lost billions of dollars.

The troubled climate raised fears about Northwest’s financial health as it struggled under a heavy load of debt. Northwest lost $301 million in 1990 and $316.9 million last year, 25% larger than expected.

Northwest officials point out that despite the industry turmoil, the company paid off about half its buyout debt, increased the size of its work force and expanded service in some markets. In addition, the company said that by some measures, its debt level--much of it in lower-interest bank loans--is no more of a problem than at American, United or Delta, which are regarded as the financially strongest carriers.

Many industry observers are unconvinced, however. Northwest reduced much of its takeover debt by refinancing it with longer-term debt and by selling and leasing back aircraft. In addition, American, United and Delta have larger shares of the market and thus are in a better position to grow, industry analysts say.

“I don’t think that Northwest is particularly at risk, but the debt is the most onerous challenge that they have,” said industry consultant Ernest Arvai, who conducted a study of Northwest for the state of Minnesota.

“The Big Three are expanding while Northwest has holes in its (route) structure that need to be filled,” Arvai said. “So, it makes it a bit tougher to expand when you are already struggling with cash flow.”

Northwest has also struggled to shed a reputation for lackluster service, the legacy of frosty management-labor relations--which have improved dramatically in the Checchi-Wilson years--and a poorly organized merger with Republic Airlines in 1986.

“They have an image of just being blah,” said Thomas Nulty, president of Santa Ana-based Associated Travel. “That’s why they want to get people on their planes so badly” to dispel the old image.

“I think they have come a long way in the past several years,” he said. “But it’s going to be a long campaign for them.”

Service is a top priority on longer Pacific routes, where higher fares and longer flight times raise passenger expectations and demands about food, comfort and attention. That’s why Northwest’s service improvements--from additional flight attendants to personal video screens that allow each passenger to watch movies or shop--first show up on its Pacific routes.

While Northwest plays catch-up, Asian carriers long ago earned a reputation for delivering the kind of five-star service that draws the affluent, full-fare passengers Northwest covets. Meanwhile, United and American rate highly among U.S. business travelers.

Despite a reputation for profitability and fast growth, airlines serving the Pacific and Asia saw passenger traffic and revenue tumble in 1991, primarily as a result of the Gulf War and the U.S. recession. Northwest was no exception, with passenger traffic falling by half in 1991, but results are expected to improve this year.

Growing signs of economic weakness in Japan may also spell trouble for the Pacific market. Travel between the United States and Japan dominates transpacific routes, and Japanese passengers account for more than half of Northwest’s business on the flights.

Despite the bumpy ride Checchi and Wilson have experienced as co-chairmen of Northwest, both said they will apply their lessons at the airline to “other things,” as Checchi put it.

One lesson will stand out. The airline business is “even more complex that we thought it was,” Wilson said.