Northwest Airlines appears on the verge of delivering a devastating blow to Minneapolis-based Mesaba Airlines that could result in the loss of 40 percent of Mesaba's revenue and jobs.
Mesaba revealed Tuesday that Northwest might terminate its contract with Mesaba to fly 36 Avro RJ-85 jets, which are used on regional Northwest routes.
Management at the regional airline broke the news to employees late Tuesday. Mesaba spokesman Dave Jackson said they were shocked.
Northwest has not pulled the financial plug on Mesaba, but Mesaba CEO John Spanjers was not optimistic. "While Northwest is finishing its analysis, Mesaba will be developing plans to address the potential permanent removal of the RJ-85 fleet," Spanjers said in a prepared statement.
Mesaba relies solely on Northwest for its revenue because it has two service agreements to provide regional flights.
Northwest acquired the 36 Avro jets between 1996 and 2000 and allocated them
to Mesaba to fly out of the Northwest hubs of the Twin Cities, Detroit and Memphis.
Jackson said Northwest is considering ending the Avro contract in April. The two carriers already have agreed to remove three of the Avros from service in December, and another two Avros will be pulled out of service in January.
Northwest's contract with Mesaba to fly 68 Saab 340 turboprops would remain intact.
If Mesaba is reduced to flying only the Saabs, it would be a staggering blow to the carrier.
"We certainly would still stay in business, but we'd be a vastly different airline and a much smaller one," Jackson said.
Northwest spokesman Bill Mellon confirmed that Northwest wants to remove five Avros from service in the next few months. He said Northwest agreed at Mesaba's request to extend the termination notice period on the Avro contract to Dec. 15.
But Mellon declined to spell out Northwest's concern about the operating economics of the Mesaba Avro flights.
"We expect them to make this decision based on the economic impact to Northwest," Jackson said. "Northwest will make the decision based on the best interests of Northwest and its customers and its own people, not necessarily what's in the best interest of Mesaba."
Mesaba Airlines employs about 3,600 people, including about 1,500 in Minnesota, Jackson said. For more than two years, Mesaba management and the Air Line Pilots Association (ALPA) have been negotiating a contract.
A representative from the Mesaba ALPA unit was not immediately available Tuesday night to comment on how the Avro news could affect the 850 Mesaba pilots.
A termination of its Avro service would be the second major setback for Mesaba in less than a month.
Northwest said in mid-September that it would allocate 34 regional jets to Memphis-based Pinnacle Airlines instead of Mesaba.
Pinnacle is now flying 69 Canadair Regional Jets for Northwest under a regional service contract. Northwest's Mellon said Pinnacle is scheduled to get four more CRJs this year, and an additional 30 will be delivered in 2004.
Under the Northwest service contracts, Mesaba is prohibited from providing service to another carrier. That places Mesaba in an incredible bind, said Joel Denney, an airline analyst for U.S. Bancorp Piper Jaffray in Minneapolis.
First Northwest denied Mesaba a growth opportunity with the CRJs, but now it appears that it will be hit with reductions. "They have to find a way to gain more of Northwest's business or negotiate to have a separate business that is distinct from Northwest," Denney said.
The 69-passenger Avro RJ-85 has a range of 1,250 miles. The CRJ flown by Pinnacle seats 44 to 50 passengers and has a range of 1,600 miles. Northwest has several models of DC-9s that seat 78 to 125 passengers and have a range of 950 to 1,300 miles.
Northwest is expected to keep the routes that are being flown by Mesaba Avro jets, so consumers would still be able to choose the same destinations.
However, Denney said, Northwest could choose to use its DC-9s on some routes and give some of the Mesaba routes to Pinnacle to fly with its CRJs.
It's also possible for Northwest to choose another regional flying partner to serve some of the routes, such as Virginia-based Atlantic Coast Airlines or Phoenix-based Mesa Air Group. Mellon declined Tuesday to speculate on that option.
Mesaba's Jackson emphasized Tuesday that Northwest has not made a final decision to terminate its Avro contract, which was scheduled to run through 2006. However, he said, "We are very concerned," because Northwest is leaning toward termination.
He said that Northwest's early analysis indicated that the decision "might be unfavorable for us."
Northwest has lost $1.4 billion since early 2001, furloughed thousands of employees and closed maintenance bases and reservations centers.
Northwest executives are engaged in budget planning for 2004, and they are looking at all possible ways to cut costs and raise revenue.
The potentially bad contract news comes one month after Northwest's top two executives resigned from the board of MAIR Holdings Inc., the Mesaba Airlines parent. When Northwest CEO Richard Anderson and President Doug Steenland resigned from the MAIR board, the company said they wanted to "focus their attention on Northwest Airlines."
For the 2003 fiscal year that ended in March, MAIR reported net income of $4.3
million. It had $457 million in operating revenue that year. MAIR also operates
a much smaller subsidiary, Montana-based Big Sky Airlines.