Duluth Angry as NWA Walks Away From $46M Maintenance Base

Duluth Mayor Herb Bergson is being charitable when he says that Northwest Airlines is "not at the top of my Christmas card list."

Within the past few weeks, Northwest confirmed to him what most people in the city had feared and expected. "They made it clear that they were not interested in doing maintenance work in Duluth," he said.

The publicly owned maintenance base, which once had more than 400 Northwest workers in Duluth, has been largely idle since September when the airline's mechanics went on strike. Northwest now relies heavily on outsourcing to service its aircraft, employing only a fraction of the mechanics it once had.

The hard reality is that as part of the legacy from the early-'90s state bailout of Northwest, Duluth and the state now find themselves the owners of a 200,000-square-foot vacant structure. Designed to accommodate large aircraft, the building is "worth half of what the debt is on" it, Bergson said.

Duluth, which was supposed to get hundreds of good-paying Northwest jobs for 30 years, could find itself instead paying for the empty facility while hoping to find someone to take it off its hands.

"Northwest got a sweet deal," Bergson said. "They are not being fair to Duluth or the citizens of Minnesota. It is pretty discouraging."

An appraisal done for Northwest two years ago estimated the value of the maintenance base at $14.5 million - a number that could be smaller now considering the tough conditions in the airline industry since then. The city and state owe principal of $37 million on the base. Peter Sausen, assistant commissioner of Minnesota's Department of Finance, said principal and interest of $53.7 million might be a better measure of the total obligation.

Until recently, Northwest has made its annual property tax payments of about $560,000. That money has, in turn, been used to pay down the bonds issued to finance the base. Duluth officials say that Northwest currently owes $186,444 for shortfalls on an October property tax payment and a February bond payment. They are not sure whether Northwest will make its next property tax payment, due May 15.

Northwest also makes lease payments of about $675,000 to the state each year for the facility. The airline fell behind by about $178,000 on that obligation this year, according to the state, but the shortfall was made up by St. Louis County and Minnesota Power.

Northwest spokeswoman Jennifer Bagdade said the shortfalls were mainly pre-bankruptcy amounts and will be addressed in the bankruptcy process.

She wouldn't comment on whether Northwest intended to make upcoming payments. Northwest recently got an extension that allows it until Nov. 15 to make decisions on whether it will accept or reject leases as part of its bankruptcy.

The $46 million base at Duluth International Airport was opened in 1996 as a state-of-the-art maintenance hangar for Northwest's Airbus A320s. Owned by the Duluth Economic Development Authority, the base was part of a $371 million financial bailout package the state put together for the financially strapped carrier.

The state issued 20-year bonds in 1994 to make the deal happen, and Northwest promised to employ at least 350 workers at the base for the 30 years of its lease, a standard it last met in 2003 even though the employment levels were a condition of the lease. Northwest argues that events beyond its control, such as the strike and 9/11, caused the shortfall and that a lease provision allows for that exception.

Duluth is responsible for what is currently about $16 million in bond debt and the state is responsible for another $21 million. The city not only diverts Northwest property taxes to bond service, it also reroutes a $875,000 franchise fee that Minnesota Power annually pays to the city, for a total annual payout of about $1.5 million. What's worse, the city pledged to assume the debt obligation if Northwest voids the lease in bankruptcy.

In addition, the state would be obligated to pay principal and interest on some of the bonds if the lease is voided. This year, those payments totaled roughly $2 million.

Federal, state and city officials have looked into various possibilities for the site once Northwest leaves, and it's not an appealing picture. According to a market analysis done in determining the base's market value two years ago, there is no real local market for such a specialized facility, or at least no one who would pay even $14.5 million for the base.

Nationwide, the decommissioning of Air Force bases by the U.S. government in the late `90s glutted the market with hangar space, and the airline industry's financial problems continue to dampen demand.

The only major example of a maintenance and repair business taking on vacated space in recent years occurred in Indianapolis, in a former United Airlines facility.

"We have to be flexible," Bergson said. "If the city has to pay the rent, [to attract a new tenant] we will be very flexible. We'd entertain just about anything if we can get out from under the responsibility."

Government and private sector representatives say they are frustrated that they can't move ahead to try to attract a new occupant for the building.

"There are no jobs" at the base, said Sausen of the state Finance Department. "We know who does this [type of work] other than Northwest, and we're waiting. We don't have a facility to lease."

Rob West, CEO of the Area Partnership for Economic Expansion, a private business organization that has helped the city explore possibilities for the facility, said there is nothing more to be done until Northwest makes a decision.

"Where are we?" he said. "Nowhere."

Tony Kennedy contributed to this report. Terry Fiedler - 651-281-1166

NORTHWEST IN DULUTH

1992: State agrees to bail out Northwest Airlines in exchange for an agreement that the airline will employ more workers at various locations in the state.

1996: Maintenance base completed at cost of $46 million; Northwest promises to employ at least 350 at the facility for 30 years.

June 1999: Employment reaches 418.

January 2003: 386 workers.

March 2003: More than 150 laid off.

September 2005: Base largely idled after mechanics strike.

September 2005: Northwest files for bankruptcy.



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