Airline’s Legacy Colors Checchi’s Governor Race

On Thanksgiving Day 1991, Minnesota’s two largest newspapers carried a full-page advertisement with the bold headline: “The wolf is at your door. And his name is Al.”

Depicting a vicious predator with $100 bills gripped in its teeth, the ad was an attack on Alfred Checchi, then co-chairman of Northwest Airlines--now running for California governor.

The ad was a backlash against a controversial proposal by state and local governments to grant Northwest an $838-million loan to build new facilities and create 1,500 jobs in Minnesota. Just two years earlier, Checchi and some partners had acquired Northwest in a $3.65-billion leveraged buyout, leaving the airline laden with debt just as the industry unexpectedly plunged into it deepest slump ever.

Even with the public loans--which critics saw as a Chrysler-like bailout--Northwest nearly went bankrupt. But the airline eventually righted itself and today, as the world’s fourth-largest air carrier, is highly profitable and well regarded despite some service problems.

“Northwest is a better company today than it was when they acquired it,” said Glenn Engel, financial analyst with the brokerage firm Goldman Sachs.

Checchi, whom some describe as a born politician, is trying to ride Northwest’s remarkable turnaround to Sacramento. The lifelong Democrat points to his Northwest stewardship as his main qualification.

“It’s the best work I ever did in my career,” Checchi, 49, said in a November appearance at the Commonwealth Club in San Francisco, “and I am happy to be judged as a prospective governor of California on every day that I spent in that environment.”

Checchi--a natural and charismatic salesman who has worked fiscal magic at four large enterprises, becoming one of the 300 or so richest Americans along the way--says he would use the strategic, financial and deal-making skills he honed in the private sector to run California. Thus he joins a growing list of millionaires--H. Ross Perot, Michael Huffington and Richard Riordan--who believe that their status as captains of industry entitles them to pilot the ships of state.

An admitted political neophyte who left Northwest last year to prepare his run for governor, Checchi presents himself as a change agent who has succeeded by identifying a company’s advantages, setting strategies to exploit them and hiring the right people to do the job. He would do the same for California, he says, refocusing priorities and making key appointments.

“With 2,400 appointments [in the governor’s control], I can change the world,” he said at his campaign headquarters in Los Angeles overlooking the La Brea Tar Pits.

No one questions Checchi’s personal or business success. He moves with confidence and charm among the financial elite, counting as friends and business partners Michael Eisner, chairman of Walt Disney Co.; businessman Richard Blum, husband of Sen. Dianne Feinstein; and trial attorney F. Lee Bailey. He has butted heads with such heavy hitters as Los Angeles oilman Marvin Davis and American Airlines Chairman Robert Crandall.

Still, Checchi left a mixed legacy at Northwest. His tenure is debated in the best business schools--Harvard University did a lengthy and inconclusive case study of Northwest last year--and it sparked a public policy debate on whether states should be allowed to compete for economic development.

While the story of Northwest’s fall and rise has been widely documented, less clear is whether Checchi’s balancing act went too far--whether the mark he left on Northwest is that of savior or satan. His name continues to stir a range of emotions among the public, business executives and rank-and-file workers in Minnesota and elsewhere. He is characterized as both a greedy egotist and an enlightened financial engineer. The truth may be that he is a bit of both.

Checchi claims to have rescued a dowdy, poorly managed airline from corporate raiders and aggressively improved service, labor relations and profits. The task was interrupted by events beyond the airline’s control, he says; Northwest escaped bankruptcy by deft financial footwork and strategic wizardry.

And he believes the lessons learned there can be applied to California’s $1-trillion economy. Checchi says he will be an economic advocate for the state, stimulating new investment, jobs, exports, housing and other projects. “I will use my business skills as governor,” he said.

But critics in the Twin Cities say the near-death of Northwest at Checchi’s hands is heavy baggage for the candidate. In the good-government Gopher State, he is demonized by some as a smooth-talking Gordon Gekko with a Beverly Hills address and Hollywood good looks.

These detractors say the glad-handing Checchi commandeered a profitable airline and loaded it with a jumbo-jet-size debt that nearly caused a crash landing. In the process, he enriched himself while hardly risking a dime. His personal fortune today is estimated at $650 million.

“He’s a financial predator,” said Bob Covington, a leader of a business group that opposed the public loans to Northwest. “His ascendancy to California governor would be worse than any natural disaster.”

Political and business opponents acknowledge that Checchi has a knack for making money and is a savvy financial strategist. But they question whether these talents qualify him to run a state the size of California with its widely diverse political and social interests.

“He proved he can make half a billion dollars, but that doesn’t qualify him to be governor of California,” said Garry South, campaign director for Lt. Gov. Gray Davis, another Democrat who is running for the office.

Landing Northwest

Checchi was introduced to Northwest by his friend, partner and mentor, Gary Wilson, in 1988. At the time, Wilson--who sat on Northwest’s board--was the chief financial officer of Walt Disney Co. and lived in Beverly Hills across the street from Checchi.

The company that the duo would buy within a year was making record profits, but Wilson believed it was headed for trouble. Its management lacked vision, he said, and was ill-suited to flourish in an era of competition. Avoiding debt, the company had one of the oldest fleets in the air.

“The management was terribly narrow,” Wilson said.

Northwest had acquired Republic Airlines in 1986, but meshing the carriers was a disaster. Flight delays were normal and lost luggage routine. The airline became known as “Northworst.” Labor relations, already bad, got worse as pilots from the two airlines feuded.

In November 1988, Wilson resigned from the board. He and Checchi made a friendly bid for Northwest, but the airline rejected it.

Rebuffed, Checchi and Wilson began selling their Northwest shares, earning a tidy profit from the stock’s recent run-up. Then corporate raider Marvin Davis announced a hostile takeover bid, putting the airline in play.

Checchi and Wilson rejoined the chase with new partners KLM Royal Dutch Airlines and Blum, the San Francisco investor, winning the reluctant backing of labor and others because the financing contained no high-risk junk bonds.

Beating out five other suitors, Checchi and Wilson landed Northwest with an investment of merely $10 million to $12 million each, in a highly leveraged deal secured by the company’s assets. The airline went private with the purchase and took on $2.9 billion in debt, which Checchi said could be repaid even if a severe recession hit.

Northwest retained a Los Angeles firm owned by Checchi to provide management and financial consulting services for $10 million a year. Checchi said the banks funding the buyout required that contract, and analysts said such arrangements are not unusual. Disclosure of such potential conflicts of interest is not required of private companies as it is of publicly owned firms, and this one did not become public for years.

Flying High

Moving into Northwest’s headquarters in the Minneapolis suburb of Eagan, Checchi plunged into a complex and notoriously fickle industry buffeted by a diverse array of interests: unions, government regulators, community groups, investors, consumers.

With all these forces roiling at Northwest, Checchi assumed the role of Mr. Outside, dealing with workers, unions, media and the local community. Wilson was Mr. Inside, focusing on the financial restructuring.

Checchi soon showed he could be as convincing with mechanics on the tarmac as with the transportation secretary. Like a politician on the campaign trail, Checchi hit the road to sell the new operating philosophy, addressing 18,000 Northwest employees worldwide in two years.

One pilot recalls a glib Checchi preaching his triad philosophy: “He would say, ‘If the company takes care of employees, the employees would take care of customers, and the customers would take care of shareholders.’ ” Some saw him as a folk hero, others as a slick self-promoter.

Checchi told union leaders that the airline’s growth depended on a new level of labor-management cooperation. He made the first moves, disclosing financing and strategic plans.

Another early focus was improving customer service. Six months after the leveraged buyout, Northwest announced it would spend $422 million over five years on customer-service initiatives, such as employee training. A new systems operation center was built to coordinate routing, scheduling, maintenance and customer service. Ground operations were reorganized.

Performance improved rapidly. Northwest ranked 12th in on-time performance in 1988; by 1991 it was No. 1. Lost luggage reports declined 25% from 1990 to 1991, and the number of customer complaints dropped 55% over the two years.

Northwest appeared healthy in mid-1990. It had repaid a third of the buyout debt by selling aircraft and leasing them back, raising financing from suppliers and mortgaging property in Tokyo.

Then Checchi hit a brick wall in August 1990, when Iraq invaded Kuwait. Oil prices doubled, driving up annual industry fuel costs by $480 million. Fear of terrorism led to a drop in travel. And the ensuing global economic recession hit Northwest’s important hub in Japan particularly hard.

Oil prices stayed high in the aftermath of the Persian Gulf War. The airline industry lost half its net worth and accumulated $10 billion in operating losses in 1990 and 1991. Six airlines filed for bankruptcy in 1991 alone.

Northwest lost $303 million in 1990 and an additional $320 million in 1991. Major credit rating agencies downgraded its debt to junk-bond levels. Things got even worse in 1992, when American Airlines launched an aggressive fare war. Northwest racked up losses of $971 million for the year.

Wolf at the Door

With the financial crisis building, Minnesota officials approached Checchi in 1991 with an economic development proposal that created a political maelstrom.

The airline had ordered 138 new jets before the buyout, and planned to build a new maintenance base to service them outside Minnesota. After the election of Gov. Arne Carlson, Minnesota proposed new financial incentives for building the base in Duluth, home of Rep. James Oberstar, the Democrat who chaired the House aviation subcommittee.

What emerged was the $838-million package, consisting of low-interest loans, regional subsidies and tax credits. Northwest promised to build a maintenance facility in Duluth and a jet engine repair facility in Hibbing. They would employ 1,500 highly paid workers.

The proposal’s key element was a 30-year, $320-million, low-interest loan from the Metropolitan Airports Commission, which ran the Minneapolis airport. Opponents quickly dubbed the package--which Northwest could use for any purpose--a bailout, but Checchi insisted Northwest was solvent.

“This was for economic development,” Checchi said. “The state of Minnesota is not in the business of bailing out corporations.”

Then the provocative wolf ad appeared. Covington, a computer consultant who wrote the ad, said Northwest was subtly intimidating taxpayers with threats of taking jobs out of state and possibly relocating its headquarters. Worse, he said, the government wanted to use tax dollars to rescue financial speculators.

Northwest struck back with a $500,000 media blitz, and Checchi disappeared from public view--a move he now calls a mistake. “It looked like I was hiding,” he said.

The airline used the loan to repay $270 million in debt, and company officials today say the aid package helped keep the airline aloft. “We might not be here today without it,” said Senior Vice President Chris Clouser, who was hired by Checchi in 1991.

Soon afterward, Northwest canceled $3 billion in aircraft orders to conserve cash and stopped plans for the additional facilities. “This just underlined to me that they never intended to build these facilities but were just looking for cash,” said former state Sen. George Merriam, a certified public accountant who had seen Northwest’s books and been “dumbstruck to find out what rough shape they were in.”

A lesser economic package--$384 million--was renegotiated in 1994. Northwest agreed to build a smaller maintenance base in Duluth; today it employs 365 workers. The engine repair facility was replaced with a reservations office in Chisolm, where today there are 400 jobs.

Bankruptcy Brinkmanship

With higher operating costs than larger rivals, Northwest found itself at a competitive disadvantage and in a downward spiral. Preparing for the worst, it retained a bankruptcy attorney.

In June 1992, Checchi and Wilson sought $500 million in union concessions. Within a week, Northwest laid off 110 pilots, the first of a series of layoffs that would eventually total 4,300 employees. It tapped its credit line.

The pilots, machinists and flight attendants unions publicly rejected concessions unless the owners and management made sacrifices as well, and they demanded to see the company’s books. Knowing the $10-million-a-year consulting contract would become public, Checchi canceled it.

Still, the unions slammed the arrangement--which yielded Checchi’s firm $38 million over four years--as “double-dipping” and looting. Checchi defended it, saying creditors believed Northwest needed help assessing possible acquisitions and expansion, and his firm had a solid track record in those areas.

Eventually the unions agreed to make $883 million in wage and other concessions. In return, they received 30% of the company’s common stock and three board seats. Wages would snap back to prevailing industry rates after three years.

Today, Checchi boasts that workers have more than recouped the givebacks. Since going public again in 1994, Northwest’s stock has quadrupled in value, making the union’s stake worth more than $1.4 billion. And wages have bounced back to higher levels.

“No one lost any money here,” Checchi said.

Not least of all him. Though his stock holdings were diluted by agreements with the unions, he still has 11.4 million shares valued today at about $650 million.

Despite the paybacks, many union members still resent Checchi for the human toll his layoffs took and because they believe the buyout hurt the airline by draining resources for expansion. Even so, they credit Checchi with keeping Northwest aloft against tough odds.

“The buyout hurt the airline but ultimately may have saved it by bringing in new management,” said O.C. Miller, a former pilots union negotiator. Since the buyout, 250 of the company’s top 300 executives have been replaced.

Cleared for Takeoff

Since its brush with bankruptcy, Northwest has been the most profitable U.S. airline except for American, which is twice its size. The company earned nearly $2.3 billion from 1994 to 1997.

Revenues are at all-time highs. Its profits and return on invested capital are the highest in the industry for the period. The last of its acquisition debt was paid off in 1995.

Northwest hired back furloughed workers more quickly than most other airlines, and now employs about 51,000 workers--12,000 more than before the leveraged buyout. “We came out of the toughest period the airline industry ever faced a stronger airline,” said Chief Executive Officer John Dasburg, whom Checchi hired in 1990.

Dasburg, a soft-spoken Mid-westerner, concedes that Northwest’s prosperity is partly luck: Just as things got darkest, the economy turned around and held steady, carrying the industry aloft and keeping it there. Every major airline is making money today.

But Northwest also made some key strategic moves that allowed it to soar once conditions improved, analysts say. Checchi and Wilson are credited, for example, with installing a strong management team that has implanted a new, service-oriented corporate culture and focused on business travelers.

And in an approach now being widely copied, Checchi cut back in or abandoned minor markets to focus on Northwest’s main hubs--a move that made Northwest one of the most watched carriers in the industry, with its management considered among the most forward-looking.

Another bold stroke was Northwest’s trans-Atlantic alliance with KLM. And last month, the firm acquired a controlling interest in Continental Airlines and posted record earnings.

Though there has been slippage in Northwest’s customer service record over the past 18 months, most analysts say the airline today is superior to the one Checchi took over in 1989.

Back in Minnesota, the recovery of Northwest has done little to revive the Checchi image. In that state, where it was once widely believed he would eventually seek high public office, Checchi is still reviled by some as a fast-buck artist California can keep.

Covington disparages him as “Al Nino,” saying the wreckage he left behind in Minnesota is worse than the bad weather El Nino has brought to California.

With the advantage of hindsight, however, some critics--including those who still question the risks he took with taxpayer and worker funds--have softened their views.

Merriam, an ardent critic of the government loans, said Checchi invited him to lunch last October. He described Checchi as charming and gracious, chatting about his campaign in California. When the conversation turned to Northwest, Checchi explained his views but did not try to change his guest’s mind about the loans, which Merriam still believes were a mistake.

Merriam came away impressed. “He would make a great politician,” Merriam said. “He’s very impressive in one-on-one situations. He’s very charismatic. He has drive. He knows how to translate his vision into action.”

Would such traits make a good governor? “Checchi is a brilliant businessman,” said one Minnesota executive who opposed the government bailout. “But the notion that running a government is the same as running a company is questionable.”

Checchi, who remains a Northwest director, dismisses such doubts, insisting that the same daring he showed at the airline will spur California if he becomes governor.

“One of the things I learned in my business career,” he said, “is the only thing that matters is results.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

THE CHECCHI RECORD

Democrat Alfred Checchi is running for California governor based on his business record--particularly from 1989 to 1997 at Northwest Airlines, where his helmsmanship raised many questions. Here are some key issues:

ISSUE: Is Checchi a corporate raider?

* CRITICS: He is a financial predator whose leveraged buyout put a profitable airline at risk of bankruptcy. He landed it by using Northwest’s assets to acquire debt and risked little of his own money.

* CHECCHI: He says he has never done a hostile deal and used bank debt, not junk bonds, to take over Northwest, a poorly managed and undercapitalized airline. He planned to run Northwest for the long haul and not break it up.

ISSUE: Did the buyout cause Northwest’s problems?

* CRITICS: The buyout shackled Northwest with nearly $3 billion in debt. When economic conditions turned bad, the airline was unable to meet its obligations and nearly went bankrupt.

* CHECCHI: Northwest would have faced severe problems even without the buyout. The problems were caused by cataclysmic events--the Persian Gulf war, economic recession and fare wars--that left the industry awash in red ink and seven airlines bankrupt.

ISSUE: Did Checchi enrich himself at others’ expense?

* CRITICS: Checchi put up $10 million of his own money to acquire Northwest. Today his investment is worth about $650 million. He also had a $10-million yearly consulting contract. His investment was protected by taxpayer loans and union concessions.

* CHECCHI: He made a smart investment in an undervalued company. The consulting contract was required by bankers and other creditors. Loans and union givebacks have been repaid. All who invested long-term in Northwest made money.

ISSUE: Did he strong-arm Minnesota into a bailout?

* CRITICS: When the airline faltered, he pushed for a $838-million loan package, sold as an economic development deal but with the earmarks of a government bailout. Much of the loan was used to retire debt and keep the airline running.

* CHECCHI: Minnesota approached Northwest with an economic development package to entice it to build facilities and create jobs. To be competitive with other states’ offers, Minnesota gave a $320-million low-interest loan that Northwest could use for any purpose.

ISSUE: Did Checchi and Northwest renege on job promises?

* CRITICS: The government loan package was designed to create 1,500 high-paying jobs in depressed northern Minnesota. Shortly after getting the loans, the company withdrew its commitment.

* CHECCHI: Northwest canceled new jet orders to conserve cash, reducing the need for new maintenance facilities. It pared down building plans, renegotiated a smaller state aid package and reduced the number of jobs to be created.

ISSUE: Does Northwest still suffer from the leveraged buyout?

* CRITICS: A strong economy turned the airline around. Heavy debt has prevented it from upgrading an aging fleet and expanding its hub and route structure.

* CHECCHI: The buyout debt paid off in 1995, no longer a drag on Northwest, which today is among the world’s most profitable and highly regarded airlines. The strong economy helped its rebound but so have key strategic moves, such as forging global and domestic alliances.

Checchi at Northwest

* 1989--Checchi and partners buy Northwest for $3.65 billion.

* 1990--Iraq invades Kuwait. Northwest loses $303 million.

* 1991--Six airlines file for bankruptcy amid deep industry recession. Northwest loses an additional $320 million.

* 1992--American Airlines launches--and later abandons--fare war. Northwest loses $971 million, gets $320-million loan from state of Minnesota as part of $838-million rescue package, lays off 4,300 employees.

* 1993--Unions agree to $838 million in concessions.

* 1994-97--Northwest shores up main hubs in Detroit and Minneapolis, cuts back in more competitive markets and strengthens alliances with KLM and other airlines. Refocuses toward business travelers, upgrades reservation system. Earns nearly $2.3 billion. Stock price triples. By 1997, employs 12,000 more workers than before Checchi bought the airline.

* 1998--Northwest acquires controlling interest in Continental Airlines.