Worker outrage could snarl Chapter 11 exit; Exec rewards irk unions whose pay was cut

Northwest Airlines' Chapter 11 bankruptcy case lowers operating costs, but chronically tense labor-management relations are worse than ever.


Northwest Airlines under its reorganization plan:

Northwest Airlines got what it wanted out of its Chapter 11 bankruptcy case: dramatically lower operating costs that make it a more competitive carrier.

But as the USA's No. 5 carrier, based in Eagan, Minn., completes what one analyst calls a "textbook example of a good bankruptcy," it appears to have made no progress on a critical front: the relationship with its unions. In fact, Northwest's chronically tense labor-management relations are worse than ever.

In strict financial terms, the carrier's 20-month trip through bankruptcy court has been as successful as it has been quick. On top of $2.4 billion in annual cost savings, Northwest will emerge May 31 with $4.2 billion less debt. And, thanks to its huge presence in trans-Pacific and Asian markets, Northwest will still generate outsized revenue from its many long-haul business routes.

But Northwest management was at odds with its unions going into bankruptcy reorganization, and it still is. Deep cuts in wages and benefits -- some negotiated, some imposed by management -- make improved relations unlikely. In the last month, employees' resentment has been stoked to unprecedented levels by the disclosure of a nearly $300 million incentive compensation plan for the airline's top executives that workers call outrageous.

Now, Northwest must convince passengers and Wall Street that it can deliver smooth service and profits despite vocal, angry unions. "It's never a good thing to have your workers this upset," says Calyon Securities analyst Ray Neidl, who has not yet issued a recommendation on the reorganized Northwest's stock.

Airline workers don't have to strike to disrupt a carrier's operations and, over time, run customers into the arms of rival airlines. Hurting an airline through the actions or inactions of unenthusiastic, disenchanted workers "is a lot slower than death-by-strike," Neidl says. "But it still kills you."

Northwest declined to make an executive available for this story. Friday, Northwest CEO Doug Steenland said in a statement that the company plans to "provide excellent service to our global customer base." He thanked customers and creditors for their support and cited employees "for their hard work and sacrifices that helped Northwest attain its goal of repositioning the airline for long-term success."

Approved without changes

U.S. Bankruptcy Judge Allan Gropper approved Northwest's proposed reorganization plan unchanged. Upon its exit from Chapter 11 next week, it will be the fourth big U.S. carrier to finish bankruptcy reorganization since the 9/11 attacks.

Secured creditors will be repaid in full. Unsecured creditors will get stock in the reorganized company worth 66 cents to 83 cents on the dollar of what they're owed. The company's existing shares will be canceled.

Terry Trippler, a Minneapolis-based fares analyst who calls the Chapter 11 a "textbook" bankruptcy, says that achieving the $2.4 billion in annual cost savings that management targeted from the outset greatly improves Northwest's chance of earning profits.

Northwest's financial advisers peg the market value of the reorganized carrier at $7.8 billion, based on an initial share price of $27. That would give it a higher market value than all domestic competitors except Southwest and Delta, and reflects the belief of Northwest's advisers that the new Northwest will be a top performer.

"Ever since they went into bankruptcy, I've noticed a laser focus," Trippler says. "They said, 'This is what we need to do.' And, by golly, they've done it."

All of Northwest's large unions objected in court to the executive compensation plan, but their objections were overruled. On Friday, Gropper left intact the plan that could deliver to 400 executives stock in the reorganized company worth $297 million over four years. Steenland alone could get an estimated $26.6 million.

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