NW Navigates Turbulence

By BTN / July 29, 2001

NW Navigates Turbulence

Richard Anderson in February took the reins as Northwest Airlines' CEO during a time wrought with labor and economic difficulties. Though the carrier since has settled with its mechanics union, it remains challenged, along with the rest of the industry, by weak business traffic. BTN airline editor David Jonas traveled to Northwest's Eagan, Minn., headquarters to discuss with Anderson the tough economy, as well as alliances, distribution and the carrier's new Detroit facility.

BTN: The economy is on everyone's mind right now, whether it's carriers fretting over poor performance or corporate travel managers mandated to reduce T&E costs. Do you see the light at the end of the tunnel?

Richard Anderson: You always see the light at the end of the tunnel. We happened to come off one of the great growth spurts since macroeconomics became a course of study in Western civilization. But you can't lose sight of the fact that the economy and the T&E businesses are cyclical and it will come back. It always has before. The important thing is to stay close to your core strategy and be positioned for the rebound when it comes.

BTN: Some have suggested that the rebound won't be as apparent in terms of corporate travel, because in this slowdown, corporations are learning smarter purchasing techniques and looking closely at alternatives to travel. Are these developments troubling?

Anderson: No. There is this discussion you hear that there has been a fundamental change in travel. But I believe we won't see it. Every consensus estimate based on demand shows that there will be 1 billion annual passengers in this country by 2010. There is no reason whatsoever to believe that long-term trend isn't going to continue. Customers want more value in the value proposition and we respect them for wanting that, they are right for wanting that. You will continue to see that regardless of economic cyclicality.

BTN: Being at the bottom of that cycle, are there steps you are taking with your corporate accounts to help them help you get through this?

Anderson: We believe business travel is elastic and that it does respond to price. And it does respond to stimulus in the form of contractual changes, both hard- and soft-dollar initiatives. We are working closely with our corporate accounts, and most particularly our important distributors and partners, to take all reasonable steps to stimulate business travel.

BTN: With the economy in mind, is it time to be more aggressive or more patient with your corporate customers?

Anderson: I believe you have to be patient because the larger budget cycle in corporations is what really drives much of their thought right now. It is important to maintain that appropriate amount of patience while, at the same time, sticking with your good corporate customers and taking reasonable steps to work with them and stimulate demand. The strategy depends on market, volume, region, alliance partners and a variety of factors in a given situation. You want to be a good partner through thick and thin.

BTN: Are you planning to keep Northwest as the spoiler in terms of derailing fare hikes?

Anderson: We do not relish the role of spoiler, but instead we take an objective measure of what our customers are telling us, the value proposition, the demand curve and what an appropriate price is in the marketplace. On that basis, we make a unilateral, reasonable judgment. If you look at all the fare increases to the walk-up rack rates in 2000, they amounted to almost 20 percent. But industry yield was up about 3 percent to 4 percent. So, in many instances, those walk-up fares were not providing value for our customers. That creates an environment where there is a lot more gamesmanship. At a certain price point, customers will game the system in order to avoid paying those higher walk-up fares. Others may view it as spoiling something for them, but we view it as being independent-minded, while evaluating demand in the marketplace.

BTN: So, did listening to customers prompt you to expand your BizFlex fares into the first class cabin?

Anderson: Yes. It has been very popular with our customers. We have a very large first class, 16 seats in most of our domestic airplanes. We have our ConnectFirst product and the BizFlex fares. We see nice returns on those decisions and I think our customers appreciate that, particularly our important business customers. What we are trying to do for them, in key markets, is provide them an opportunity to travel in first class. We also do complementary premium cards in our frequent flyer program for some of our larger customers.

BTN: Switching gears, how goes the partnership with Continental Airlines?

Anderson: It is all guns firing. There are really two parts to the Continental arrangement. In terms of the structural piece, we have been able to put together a large network that benefits both of us. We have done a lot of work together to close the seams that passengers see. Our frequent flyer programs essentially are the same, as are our checkin policies, baggage policies, ticketing and refund policies, etc., and we have joint electronic ticketing on E-Service devices across our system. Our staffs sit down and in laborious detail go through these policies line by line to close the seams and get the GDS display that comes from structural marketing.

The next piece of the puzzle is presence marketing. That includes jointly offering these end-to-end networks in the corporate contracting world. That has been very successful and the total number is in the hundreds. It has allowed us to qualify to bid, in many cases, because the combined network has utility that a large global customer demands. Moving forward, we are always looking at further opportunities, such as expanded codesharing. Also, in terms of facilities, we are always looking in airports where we need to be located closer together, like Boston and Los Angeles. The reason we don't have codesharing in some of those markets is we don't want to confuse passengers.

BTN: Broadening our scope to the international front, your partner, KLM, seems to be flirting with everyone.

Anderson: The KLM-Northwest alliance was the first alliance. It is the strongest alliance and longest-term alliance. We invented alliances at Northwest because we realized, first and foremost, that in order to gain scope and scale we needed a partner. Likewise, KLM was never going to have a presence in North Dakota, for example. Everything you see at Star and Oneworld are copycat situations.

In fact, the airlines in those alliances filed papers in the early 1990s to U.S. Department of Transportation in opposition of the Northwest-KLM alliance. But, the most important thing in putting that long-term arrangement together was that we both acknowledged that whatever solutions each of us arrived at in our respective spheres of influence, the other would be included as an alliance partner.

BTN: Any timetable for the launch of this unofficial 'Wings' alliance?

Anderson: It is probably the most discussed and well-known brand that has never been launched, but there is no timetable. We still have more work that we want to do. My idea behind a real alliance is that everything first works real smoothly with completely seamless operations and integrated systems, otherwise it is not fair to your customers. We want to make sure that with KLM, Continental, Alaska, Air China and all of our alliance partners we really have seamless technology in place.

BTN: Meanwhile, considering ongoing Open Skies discussions with the United Kingdom, is Heathrow access an ultimate goal for Northwest?

Anderson: The ultimate goal for Northwest, as for all the carriers, is to obtain Open Skies at the one airport in the United Kingdom that is not open. London Heathrow should not be allowed to maintain that kind of closed skies atmosphere. We should all be able to compete for that business that British Airways and American Airlines now protect. This issue has been around for four years and nothing has changed. All that is different now is that BA would like to collude with its number-one competitor across the North Atlantic. We saw the movie of what would happen to BA with Open Skies at Gatwick. And they retreated. The premium at Heathrow is about 30 percent and everyone should be entitled to participate in that.

BTN: Looking at distribution, many corporate travel managers are grappling with the pros and cons of purchasing direct from the airlines. Can you give us a status report on corporate.nwa.com?

Anderson: Let me hazard a philosophical statement about that. 3M is probably one of our finest and long-time customers. In the early '70s, we actually had a CTO at 3M and they did everything direct with us. That is why we owned such a big part of Sato. Now, from what we hear, there are some simple transactions in the direct corporate world that corporations ask for. They are very small organizations that have fairly simplistic travel and don't require a lot of service or back-office support. Some corporations come to us and say that they want to do some simple direct things and save some distribution costs. But for very large corporate accounts that have back-office systems, multiple airline arrangements, hotel deals, rental car deals, sales conferences, etc., the large travel management firms probably are more efficient providers of the totality of service demanded by large volume purchasers. It is not clear to me that airlines can provide all the services that Hal, Marilyn, Ken Chenault, Cendant, Navigant and those other firms can. Our reservation costs are a lot higher than their reservation costs. But my views on this are evolving, and I think there is a segment of corporate business that could go direct, dictated by the mutual customers of the large travel management firms and the airlines.

BTN: Are there any targets for trimming distribution costs?

Anderson: When you start talking about distribution costs, the antitrust lawyers tell you that you aren't supposed to say anything.

BTN: I don't see any of them in the room.

Anderson: (laughing) Yeah, but I am a lawyer. But seriously, you are always looking to reduce your costs on a per unit basis. But most of our efforts right now are aimed at non-strategic flying and reducing those kinds of costs. The real cost reductions come from retiring aging airplanes and pulling down capacity to right-size the network. We took the one initiative when we reduced Internet commissions. That has been a big money-saver for us without impacting revenues, so that was a good move. But the focus will be on big ticket items that result from significant capacity pull downs.

BTN: Are there any inflight services that have or will be trimmed?

Anderson: Nothing major, but there are a few things in coach you trim here and there on the margin, based on what your customers are telling you are or are not meaningful. But we aren't touching the high-yield business traveler and the premium product one bit. In World Business Class, we have gone to a 60-inch pitch and now we'll be putting in lie-flat electric seats in all of our 747s. Installations will commence on the first of the year with the delivery of our next two 747-400s. We built new clubs here in Minneapolis, Memphis and San Francisco, four in Detroit and one with Continental in Chicago, so we are continuing those core product investments.

BTN: Speaking of Detroit and new investments, give us a rundown of the new Detroit Midfield terminal.

Anderson: Detroit will grow at a faster rate than the other hubs once it opens this December. The terminal is about a mile in length and there is a light rail system inside on a second level. The maximum time to connect from one end to the other is about eight minutes. The immigration facility will be able to take 12 747s simultaneously. The parking garage is the largest ever built in the United States in a single pour with 1,000 feet of curbside checkin and baggage checkin in the garage.

We have 95 self-service ticketing devices spread throughout the terminal and four clubs. It will be the largest international connecting hub airport in the world and, when we open, the cost per enplaned passenger will be half of what Chicago O'Hare is today.

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