Fast Track to Recovery; Northwest's Bankruptcy Reorganization Remains on Schedule

If airlines got on-time rankings for how fast they move through bankruptcy, Northwest Airlines would be rated as so far, so good on its bankruptcy flight path.

Seven months after filing for court protection from its creditors, Northwest has rapidly slashed costs, trimmed its flight schedule, renegotiated leases and taken the first steps toward revamping its fleet. The carrier could emerge from bankruptcy as early as the first half of 2007, roughly half the three years it took United to depart Chapter 11.

"They are moving along more quickly than Delta or certainly United," said Philip Baggaley, a veteran credit analyst from Standard & Poor's.

Helane Becker, an airline analyst for the Benchmark Co., said Northwest's bankruptcy has been going "a little better and quicker" than she originally anticipated.

"There is an end game in mind for Northwest of who they are going to be five years from now and what they are going to be," said aviation consultant Darryl Jenkins.

He contrasted Northwest's restructuring progress with Delta Air Lines, which Jenkins said lacks an identity. Both carriers filed for bankruptcy the same day last year, Sept. 14.

Jenkins argued that Delta has yet to show that it's ready to drop its "pathological urge to lose money," which has been evident in the fares it has offered against low-fare competitor AirTran Airways. Delta also was criticized for introducing Simplifares in January 2005, because the reduced fares didn't generate a huge volume of extra passengers. In July, Delta retreated from Simplifares and two months later filed for Chapter 11.

Still, industry insiders say it's premature to declare Northwest's restructuring a success. High oil prices and other issues threaten to upend the airline's progress. Many Northwest employees are extremely angry about the depth of cutbacks the company has demanded from labor. It's unclear whether contract offers that have been made to the airline's three big unions will be ratified by the rank and file.

Oil prices hinder recovery

Fuel has become the "great unknown" for all airlines, Jenkins said.

United, for example, came out of bankruptcy in February with a business plan based on oil selling for well under $60 a barrel. Instead, oil has been trading in the high $60s of late, and carriers are scrambling to adjust.

"Oil prices remain alarmingly high, with the price per barrel in excess of $70, which is unprecedented and adds hundreds of millions of dollars of expense to Northwest's business plan," CEO Doug Steenland said in a statement to the Star Tribune.

The price of fuel ravaged the airline's budget in the past few years, and Northwest board member Mike Ristow said it forced the carrier into bankruptcy. In 2002, Northwest paid 69 cents a gallon for jet fuel. That price more than doubled to $1.71 a gallon in 2005, and the carrier's total fuel bill ballooned to $3.13 billion last year.

On Wednesday, the chief economist for the Air Transport Association said oil prices are expected to average $70 per barrel this summer.

Northwest has been planning its exit from bankruptcy on the assumption that oil would cost $65 a barrel this year and $60 from 2007 to 2010. However, if prices spike higher than those levels, Northwest could find itself having won billions in expense reductions but still unable to make money.

In that scenario, it's possible that fuel prices could make Northwest executives less eager to emerge from bankruptcy and the protection it affords the company from creditors until they have a business plan that can hold up to the strain.

Northwest closed out February with $1.35 billion of unrestricted cash and short-term investments. "That is adequate for near-term needs," said Baggaley of Standard and Poor's. "But it doesn't give much of a cushion in case there were a large fuel price spike."

Voluntary or imposed cuts?