Mesaba Airlines has served notice that it no longer wants to play second fiddle to Express Airlines I when Northwest Airlines orchestrates the distribution of its next tranche of regional jets. Eyeing an opportunity to grab a piece of a firm order for 75 Bombardier CRJ440s placed by Northwest last year, the Minneapolis-based Airlink affiliate has redoubled its efforts to improve its competitive standing after watching Northwest’s wholly owned subsidiary from Memphis feast off a diet of 42 fifty-seat CRJs ordered by the major airline in 1999.
While reporting on the company’s fiscal third-quarter financial results (ending December 31), Mesaba CEO Paul Foley applauded the airline’s improvements in on-time performance, from 69.4 percent during the same period a year ago to 88.8 percent, and flight completion rate, from 94.5 percent to 98.7. In addressing cost control, Foley could not issue a review quite as sanguine, as higher landing fees, insurance and security expenditures increased unit costs from 14.4 cents to 15.8 cents during the period. He stressed, however, that the airline’s austerity efforts yielded significant drops in payroll, training, vendor and discretionary expenses.
Despite the improvements, Mesaba must reach an agreement on a new labor contract with its pilots before Northwest considers awarding its independent affiliate more jet opportunities. It must also regain some of the good will it lost during last year’s third fiscal quarter, when bad weather, pilot shortages and a billing dispute that prompted Northwest to withhold $3.4 million resulted in one of the most discouraging periods in Mesaba’s history.
Considered the “golden child” of the Northwest Airlines family during the late 1990s, Mesaba lost much of its luster not long after Northwest bought the assets of its Express Airlines I partners’ and reorganized its feeder networks based on fleet type rather than the location of its partners’ bases. That meant awarding Express I all its CRJs, allowing the Memphis-based carrier to expand back into its former secondary bases in Minneapolis and Detroit, while Mesaba moved some of its Avro RJs to Memphis. Now Express I has transferred its remaining 11 Saab 340 turboprops to Mesaba, essentially completing Northwest’s plan to organize its two affiliates according to aircraft type.
As part of the deal, Mesaba offered to reduce its service fees to Northwest by 10 percent during the fourth quarter, a move borne more out of an attempt by Mesaba to curry favor with Northwest than any direct pressure from its mainline partner. Although the loss of revenue certainly contributed to Mesaba’s $1.3 million net loss for the period, Foley suspects it has already paid dividends in the form of $35 million in annual business Mesaba took from Express I in Memphis. He also hopes it will raise Mesaba’s standing when Northwest decides who will fly the seventy-five 44-seat CRJ440s scheduled for first delivery by the end of the year.
“In the days immediately following September 11, we were getting general feedback from the marketplace that the majors would seek rate relief from their regional partners,” said Foley. “We initiated contact with Northwest to demonstrate behavior consistent with how a good partner would act during a time of crisis, and we were frankly expecting the same behavior from all of our major vendors.” Of course, Northwest still has not rationed the final 12 fifty-seat CRJs from its order for 54, and Mesaba hopes to contend for those airplanes as well. “We’ve shown tangible evidence in our commitment to building the infrastructure needed to compete for future Northwest Airlines business,” said Foley, referring to a new partnership with Pan Am International Training Academy and on-site pilot training in Minneapolis that began last month. Unfortunately for Mesaba, the events of September 11 resulted in far less need for training than it expected because turnover has virtually ended. Once training needs return to historical levels, however, Mesaba expects to save between $5 million and $8 million a year in travel expenses and other costs related to contracted training.
A Return to Normalcy
Foley predicted “near break-even” financial performance for its fiscal quarter ending March 31, due largely to a return to normal rates it charges Northwest Airlines for its services and an increase in flying from Memphis resulting from the transfer of the 11 Saab 340s from Express Airlines I. Although the contract contains no mechanism to account for increased costs related to security, landing fees and labor negotiations, Foley said that the government will cover most of the security costs.
He also said he intends to talk with Northwest this month about adjusting terms to account for post-September 11 cost increases. “I don’t think the spirit of our contract assumed these types of increases, and that will be the basis of our argument,” said Foley.
Even with the extra flying out of Memphis, Mesaba expects this quarter’s Saab 340 capacity to run some 15 percent lower than during the same period last year. However, it expects to return to pre-September 11 capacity with its fleet of 36 Avro RJ85s after it reduced departures in the 69-seat jets by some 5 percent in the quarter ending December 31.
This quarter could also prove a pivotal period in Mesaba’s relationship with its pilot group, as its collective-bargaining agreement with ALPA inches ever closer to its June amendable date. While characterizing progress toward a new agreement as “tediously slow and painful,” Foley expressed confidence that the airline would reach terms by the end of the year. “The next round of regional jets is conditioned upon labor harmony and successfully negotiating that contract,” said Foley. “So we fully appreciate the importance of negotiating a contract that allows us to attract, retain and motivate the best pilots in the industry.”
Foley stressed that even if Northwest wanted to award an RJ contract before Mesaba reached an agreement with its pilots, he would not want to bid for such a large volume of business until he could precisely budget the associated labor costs. Taking into account the time needed to add another simulator, train crew and introduce another airplane type onto the certificate, he estimated that Mesaba could begin taking delivery of its first CRJs some six months after it finishes negotiations with its pilots. Of course, when exactly that might happen remains uncertain. “Ideally we could conclude on schedule in June, which at the current pace is unlikely,” said Foley. “But if we conclude the negotiations in September, we can take the first airplanes in March; if we conclude in December, then six months from then.”