Northwest Predicts Higher Revenues Post-Chapter 11

MINNEAPOLIS - Having unloaded about $4.3 billion in debt and slashing its operating expenses during its 17-month stay in bankruptcy court, Northwest Airlines unveiled a new business plan Thursday that its CEO said was crafted to enable the company to handle "virtually all environments."

By reducing its annual costs by $2.4 billion, the Eagan-based carrier can make money even if oil trades at $65 a barrel or higher, CEO Doug Steenland said in an interview with the Star Tribune in Minneapolis.

"We consciously, in the airline restructuring plan, have tried to make sure that the airline is going to be able to compete successfully in virtually all environments," Steenland said.

The extensive cost-cutting and assumptions made in the business plan are crucial to Northwest, because the airline industry has been marked by short boom times followed by steep losses when the economy slowed.

Other carriers have restructured in bankruptcy - only to learn soon afterward that their management's projections of fuel prices, revenues or other variables were flawed. US Airways has made two journeys through bankruptcy court since the 2001 terrorist attacks. Continental Airlines made two trips in an earlier era, and United Airlines is still grappling with cost issues despite having emerged not long ago from a three-year stay in bankruptcy.

Northwest employees have accused management of overreaching in its demands for wage cuts and other concessions, but the airline's executives have argued that the steps were necessary to accomplish something more than a short-term fix. As a result, Northwest's unit operating costs are now well below those at United, American and Continental airlines and slightly above Delta Air Lines and US Airways.

Steenland said that Northwest is now back on the path of growth in revenues and in the size of the business. The airline is forecasting that its revenue should grow to more than $14 billion by 2010, compared to $12.6 billion in 2006. Northwest's business plan also calls for pre-tax margins to increase to 9.9 percent by 2010 from a planned 7.7 percent this year.

Meanwhile, Northwest's flight capacity is expected to increase at the rate of 2 percent a year between now and 2010. The airline plans to add new airplanes that will be more comfortable for passengers and require less money for fuel and maintenance.

In 2008, Northwest will be the first North American airline to operate the Boeing 787 Dreamliner on long-haul flights. Northwest will acquire 18 of the 787s, with some flying from the Twin Cities.

Fuel has surpassed labor as the top operating expense at many airlines. In Northwest's business plan, management assumes that fuel will be about $1.92 a gallon this year, comparable to $65-a-barrel oil. The plan forecasts a gradual rise to $2.07 a gallon by 2010.

Steenland intends to remain as CEO of the airline, and he said that he expects no major changes in top management.

"We believe that Northwest will emerge from bankruptcy by mid-year as a tough competitor and possibly as a potential merger partner" for another carrier, Ray Neidl, an airline analyst for Calyon Securities, said in a Thursday report.

Current Northwest shareholders will get no value for their stock, under the airline's plan.

Instead, the airline's unsecured creditors would get a significant amount of stock in the reorganized company as settlement for their claims. Through the stock awards, unsecured creditors will recoup an average of 74 percent of the value of their bankruptcy claims, Northwest is projecting - a relatively high percentage for creditors who have no guarantees that they will be repaid.

The total allowed general unsecured claims is estimated at $8.75 billion to $9.5 billion.

Northwest management will also hold equity in the airline, though the company has not yet disclosed details about management's projected stake. About 400 managers held about 9 percent of the equity in Northwest prior to the bankruptcy filing, Steenland said.

He declined to say whether the airline will make any restricted stock awards, which require executives to remain with the company for a period of years to receive full value for the shares.

The company's filing with the bankruptcy court includes an analysis by Seabury Securities that puts the new estimated equity value of Northwest at about $7 billion, not counting any additional stock issued later.

That would put Northwest's equity value higher than United Airlines, US Airways and Continental, and not far behind American, the largest U.S. carrier, which has a market capitalization of about $8.3 billion.

Northwest employees, who absorbed $1.4 billion a year in cuts, stand to receive $1.5 billion in financial benefits over a five-year period, Steenland said.

The airline estimates that it will pay out $563 million in profit sharing to employees for 2006-2010. It projects the value of employee bankruptcy claims at $925 million.

The pilots and the ground workers unions already have sold part of their claims. Unsold portions would be converted to new stock.

Wade Blaufuss, a Northwest pilot and spokesman for the Air Line Pilots Association, said employees are pleased that Northwest has a positive outlook. However, he added, "This plan paints a drastically different picture than what Northwest sold to the bankruptcy court in order to extract draconian concessions from its employees.

"If any incentive plan is implemented (for management), it should include employees like the pilots who have contributed so much to the success of the reorganization," Blaufuss said.

Delta and Northwest both entered bankruptcy on Sept. 14, 2005. Under Chapter 11 proceedings, Northwest has reduced its debt load by about one-third while Delta shrunk its debt by just over 40 percent. The two held exploratory talks about a possible merger late last year and are still viewed as potential merger partners. The two firms' new creditor shareholders might encourage such a deal at some point as a way to further their gains.

Phil Baggaley, a Standard & Poor's credit analyst, noted that Delta ended its pilot pension plan in bankruptcy, while Northwest preserved its defined-benefit plans. Consequently, Baggaley said, Northwest's obligations will include the shortfalls in its pensions.

Airline analyst Patrick Murphy said Northwest's post-bankruptcy debt load - nearing $10 billion - may be easier to manage than it seems.

Lower interest rates and more favorable repayment terms can work in the airline's favor for years, said Murphy of Gerchick Murphy Associates in Washington, D.C.

U.S. Bankruptcy Judge Allan Gropper will hold a hearing on Northwest's plans March 26.


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