MAC in a holding pattern

09/23/2005

Terry Fiedler,
Star Tribune
September 23, 2005

Up until a few weeks ago, the Metropolitan Airports Commission was moving ahead with the first phase of a nearly billion-dollar expansion of Minneapolis-St. Paul International Airport, largely at the request of Northwest Airlines.

Now the engines are in reverse. The expansion is off and Northwest is in bankruptcy, looking to downsize and likely to seek lease concessions from the MAC, which owns and operates the airport.

And that’s not the end of possible repercussions for the airport and the body that controls it. There is, for instance, the $275 million in general obligation bonds the MAC floated for the airline. The debt is secured, but the collateral includes Northwest’s Minneapolis-to-London route (valued at $49.3 million), which the airline is suspending for about four months beginning Oct. 30.

MAC Chairwoman Vicki TigwellTom SweeneyStar TribuneMAC Chairwoman Vicki Tigwell emphasized that Northwest is current in all its obligations and that the airport is not among Northwest’s 100 largest unsecured creditors.

Detroit Metropolitan Airport, where Northwest has its other major hub, is 91st on that list because it’s owed $664,000.

The MAC is, however, among Northwest’s largest secured creditors.

Anticipating turbulence, the MAC beefed up its operating reserves in recent months to about $45 million, enough to cover five months of spending.

“We’re in a wait-and-see pattern,” Tigwell said. “I liken it to a hockey game. Our star forward has gotten checked into the boards and onto the ice, and is just getting back into the game.”

The negotiations between the airline and the airport authority promise to be complicated by a number of factors, not the least of which is Northwest’s commanding position at the airport, where it controls 101 of the 117 gates at the Lindbergh (main) terminal.

“That you’ve essentially built a terminal exclusively for them, that’s a problem,” said Douglas Baird, a bankruptcy law professor at the University of Chicago. “There is an old business saying that if you lend a little to someone, you are a creditor. If you lend a lot, you are a partner.”

Darryl Jenkins, an airline industry consultant based in Virginia, said that the flip side is that “Minneapolis is important to Northwest because [the airline] dominates and it likes to dominate. The airport will take a hit, but it won’t be a catastrophe.”

Northwest directly accounts for 35 percent of the MAC’s $200 million operating budget, but the airline’s significance is much greater than that. Its total payments due to the MAC next year are $166 million, including $26 million in financing payments and $53 million more that Northwest collects from passengers for airport facilities fees.

Quarterly payments are made on the $275 million bond issue. The first payment for 2006 is due Feb. 15. Other payments, such as landing fees, are paid monthly.

Tigwell said that, until Hurricane Katrina sent fuel prices higher, most people—including members of the MAC—believed that Northwest could go forward with expansion.

“We [the MAC] were going to start spending money in October, and that’s when they came back to us, and we said that we should push it off a year,” she said.

As for Northwest’s bankruptcy, Tigwell said it’s just a fact of life in the industry.

“Half of the seat capacity in the U.S. is in bankruptcy right now,” Tigwell said, “and some say it could soon be 90 percent.”

Northwest has not yet made any moves to renegotiate its terminal lease, which covers all its gates, and Northwest declined to comment about the situation. Such moves have been common among bankrupt carriers.

Because Northwest has a single lease, it will not be able to cherry-pick, shedding some gates and keeping others. The airline already gets a comparatively good deal from the MAC, based on industry statistics. MSP is in the lower half of large airports regarding costs to airlines per boarding passenger.

Tigwell noted that the Lindbergh terminal has no vacant gates during its busiest times, and she said she doesn’t see any need to ratchet up recruitment of other airlines to compensate for a downsizing in flights by Northwest.

“I think it’s a little bit of a myth that an airport influences where an airline is going to offer service,” Tigwell said. “Southwest and JetBlue are aware that Delta and Northwest are in bankruptcy. They don’t need to hear that from me.”

But MAC Commissioner Dan Boivin argued that it may be time for a change in attitude; that the airport might be justified in offering incentives to new carriers to make it less reliant on Northwest.

Even though Northwest will be cutting back flights, Boivin anticipates that it will try to keep all its MSP gates as a defensive measure.

“I don’t know if there will be more empty gates,” he said. “There will be less usage of gates” by Northwest.

Boivin thinks the MAC is in a reasonably strong position in any negotiations concerning the terminal lease. Northwest has an all-or-nothing choice, but, then again, so does the MAC.

As for the $275 million in bonds the MAC is on the hook for, Boivin said he has real concerns whether the debt is adequately secured by Northwest assets. The collateral is valued at $377.7 million, including $136.9 million in spare parts, $92.2 million for a flight training facility and simulators, $48.7 million in Concourse G concessions revenues, $49.3 million for the Minneapolis-London route, and two years of principal and interest worth $44.8 million already in hand.

Theoretically, the non-cash items could be sold to make the MAC whole, but the reality is that the collateral probably isn’t worth what it’s currently valued at, and, even if it was, the MAC wouldn’t move to seize any assets that could add to the financial stress of its dominant tenant.

The value of the London-MSP route, for instance, is based on the slot at London Gatwick Airport, but even Northwest, the only carrier likely to fly the route, said it isn’t cost-effective during the slow travel season between Oct. 30 and March 9.

“We’re as covered as best as we can be,” Boivin said. “There is nothing else to get. My opinion is that we’d be lucky if we got that money in liquidation. But we don’t want to go there.”