Mating Season for Big Birds

The operations of your company reflect a continued pattern of growth, which is characteristically expensive.

That opening line in Northeast Airlines' 1968 annual report ought to win a corporate-euphemism award. Almost since its first flight in 1933, Northeast has been a kind of New Haven Railroad of the skies. It made a profit only once in the past twelve years--in 1966, when a strike grounded competitors. Otherwise, it lost up to $10 million annually. Last week, however, "The All-Steak Airline" became a pioneer of sorts. After numerous unsuccessful efforts to sell Northeast, Storer Broadcasting Co., which owns 86% of the stock, induced Northwest Airlines to take it. The merger would be the first among U.S. trunk lines since United acquired Capital in 1961, and could set off a new round of airline consolidations.

Fire Sale. For Storer, which acquired its Northeast stock from Hughes Tool Co. in 1965, the deal makes sense. True, Northwest will give only one share of its stock, worth about $35, for five Northeast shares, which traded at a total of almost $70 just before the announcement. Individual shareholders in Northeast will take a drubbing, and they have started to organize and protest; but even at the fire-sale price, Storer will get out with a profit. It has put $35 million into Northeast, and will receive Northwest stock currently worth around $38 million, plus a Northwest promise to repay with interest a $10 million Storer loan to Northeast.

The big question is what Northwest, which is the most profitable of the eleven U.S. trunk lines, wants with the money-losing carrier. St. Paul-based Northwest has earned more than $50 million in each of the past three years, flying high on routes that link the U.S. East and West coasts with the Orient. Boston-based Northeast is an odd amalgam of New England regional service, commuter runs to New York and Washington and vacation routes to Florida, Bermuda and the Bahamas. Its services to the South attract heavy traffic in the winter months, and little but heavy expenses the rest of the year.

A couple of reasons for the merger are that Northwest President Donald Nyrop, a first-class administrator who was once chairman of the Civil Aeronautics Board, will pick up Northeast's jets for a bargain price and get a tax-loss carry forward estimated at $17 million for his company. Northwest, which earns most of its profits in the spring and summer, also could use Northeast's cold weather vacation traffic. In addition, Northeast's new Miami-Los Angeles run will tie in neatly with Northwest's newly granted routes to Hawaii and Japan.

$62,000 a Year. Similar logic is likely to spur other airline mergers, if the CAB approves the Northwest-Northeast combination as expected. Airline profits have been dropping since early 1968, and Pan Am, TWA, Eastern and Western have skipped dividends this year. The volume of air travel is no longer rising as fast as the lines' ballooning expenses. American, for example, is about to sign a contract that will grant senior pilots a $62,000 annual salary for 70 hours of flying a month on the jumbo 747 jets. Pan Am and TWA are both looking for domestic acquisitions; TWA was bidding for Northeast until two weeks ago. Eastern, which lost more than $2,000,000 in this year's first nine months, is ripe for a merger. It will face stronger competition on its Florida runs from Northeast backed by Northwest's money. The names of Delta, Continental and Braniff also come up in merger talk in Washington and on Wall Street.

The CAB appears sympathetic. Vice Chairman Whitney Gillilland said last week that "the public would be better served, and at lower fares" if some local-service carriers merged with trunk lines. The CAB's new chairman, Secor Brown, has privately told airline executives that a series of mergers among trunk lines is inevitable.

The attitude of the Justice Department, which could challenge mergers that the CAB approves, is less certain. The Northwest-Northeast tie is the kind of rescue of a failing company that Attorney General John Mitchell is inclined to approve. But Mitchell has been talking a tough line against mergers of major companies generally. Some airline executives fear that he may oppose any consolidations of the largest systems --however beneficial the tie-ups seem to both financial men and passengers. In a large number of cases, such a refusal would leave three or four airlines flying mostly empty planes over the same routes.

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