Northwest Airlines agreed yesterday to buy Eastern Air Lines's landing rights and other facilities at Washington National Airport, making it the second-largest carrier serving the airport.
The $23.2 million cash deal would give the Minneapolis-based carrier 128 landing and takeoff slots at National, where a federal ceiling on the number of flights has made it hard for new carriers to get started and difficult for existing carriers to expand. USAir is the largest carrier at National now, with 150 landing and takeoff slots.
Northwest may use some of its new slots to increase service from National to Florida, a market where Eastern was a strong presence. But most of its new capacity is expected to be used to carry passengers to its three hubs in Minneapolis-St. Paul, Detroit and Memphis, airline industry analysts said.
Although the Federal Aviation Administration has given its approval to the deal, it still must get an okay from federal bankruptcy court, where it faces potential opposition from other carriers seeking the much-coveted slots.
The transaction was just part of the fallout from Eastern's decision on Friday to end 62 years of operation. Other carriers, no longer bound to match the drastically discounted fares offered by Eastern, began raising ticket prices in what may portend a period of steeper fares in the industry.
"As the industry consolidates further, some of the lowest fares in the market may disappear," Samuel K. Skinner, secretary of the Department of Transportation, said yesterday. But if airlines are forced to retain what Skinner called the "almost desperate marketing strategies that we've seen in the current downturn," consumers could be hurt even more since such discounts could threaten the survival of some carriers, he said.
Skinner made his remarks at a National Press Club luncheon where he also announced a major turnabout in Bush administration policy aimed in part at keeping weaker carriers alive to ensure more competition. Skinner said the Transportation Department will relax limits on the amount of money that a foreign investor can put into a U.S. carrier, in effect reversing conditions federal regulators had put on the 1989 purchase of Northwest Airlines Inc. by Wings Holdings Inc.
The department had imposed strict limits on the involvement that KLM Royal Dutch Airlines could have in the takeover -- requiring KLM to reduce its investment in the airline and make other changes to ensure that it would not have a controlling interest in the carrier. Federal law prohibits foreign investors from owning more than 25 percent of the stock of a U.S. carrier or controlling an airline.
Yesterday, Skinner said that his department would allow KLM to maintain a higher level of investment in Northwest's parent company, Wings, than it had initially permitted. The decision sends a strong, encouraging signal to other foreign investors that may be eyeing carriers here, analysts said.
Skinner also said that the department will no longer view foreign lending to U.S. airlines as a potential means for them gain control of a carrier, and he relaxed limits on the number of foreign directors that can sit on a U.S. airline's board.
Skinner's change of heart appears likely to encounter congressional objections, however. Sen. Wendell H. Ford (D-Ky.) said earlier this week that Congress should be involved in the decision, and Rep. James L. Oberstar (D-Minn.), chairman of the transportation subcommittee on aviation, expressed a similar view yesterday.
"The secretary is making some broad policy pronouncements here, some individual decisions that substitute for policy," said Oberstar. "I think he would have been well-advised to delay this decision."
Skinner said that one reason for his change of heart is that Northwest's new ownership has proved "that they are firmly in control." Airline industry analyst Kevin Murphy of Morgan Stanley & Co. in New York said that the decision also reflects that the airline industry's investment climate has changed. Where a conservative interpretation of the law governing control may have once held off further leveraged buyouts in the industry, now it may "smack up against some of the trade issues that the government is working on."
Whatever its other effects, the DOT decision helps Northwest by freeing it from the requirement to spend $250 million to buy back preferred stock held by KLM. "If we don't have to find the $250 million to pay back KLM, it will improve the overall financial picture and would help us should we choose to make some acquisitions," said Northwest spokesman Bob Gibbons.