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?

May and June ultimately could prove to be the crucial months to the outcome of the Northwest bankruptcy.

In early May, the pilots finish voting on a controversial agreement that slashes wages but saves jobs. Flight attendants are expected to start voting on their deal in May, and equipment service employees could take a second vote on the deal they turned down in March.

If one or more of the unions rejects a contract offer, Northwest still could dramatically reduce its labor costs by asking the judge to allow management to impose new pay rates and work rules. But that aggressive strategy could lead to a legal battle with the unions over the right to strike. Even if the court blocks a threatened strike, worker discontent could produce customer service disruptions during the summer travel season.

Northwest pilots are voting through May 3 on their second round of concessions, including a 23.9 percent pay cut on top of the 15 percent cut they took in late 2004.

"I have no way of predicting how this vote is going to go," said Wade Blaufuss, a spokesman for the Northwest pilots union. While the pilots' negotiating committee endorsed the pact, the union's executive council was badly split and failed to make a recommendation. The pilot cuts in the contract proposal total $358 million.

If the pilots' deal is voted down, it appears that Northwest would ask U.S. Bankruptcy Judge Allan Gropper to allow the airline to abrogate the current contract and set pay rates and work rules.

"Realization of the $1.4 billion in labor cost savings is an indispensable first step in the restructuring process," Steenland told the Star Tribune last week. Northwest must meet its labor savings goal "either through ratification of negotiated collective bargaining agreements or the imposition of terms and conditions,'' Steenland said in the statement.

Ristow, who has served as the pilots' representative on Northwest's board of directors since late 1998, said he is certain that management will not back away from the labor savings targets set for each union.

"The company is not going to improve the contract" if it's rejected, Ristow said.

On March 7, Northwest's ramp workers turned down a contract offer that would have cut their pay 11.5 percent and eliminated many jobs. In response, Northwest asked the bankruptcy court to set a hearing to allow it to reject the current IAM contract, and the judge gave the parties a May 15 court date.

The flight attendants are expected to start voting on their tentative agreement in a few weeks, but they also are having an internal battle over which union should represent them.

The rank-and-file votes are tough to predict, because employees "are angry," Ristow said. "There is uncertainty, and trust [in management] is an issue."

Fleet overhaul

Northwest said it is "continuing to resize and reshape" the airline's fleet. Northwest recently reported that it has rejected or abandoned 51 mainline and regional planes, while reaching more-favorable lease or financing agreements on 140 other planes so far in its bankruptcy. The company is attempting to cut its fleet costs by $400 million a year.

Northwest's fleet size has dropped from 439 planes at the end of 2002 to 379 in December, a 13.7 percent reduction.

Northwest plans to phase out its old DC-9s and DC-10s over time, and Mesaba Airlines has said Northwest will remove the 69-seat Avros from its fleet this year.

Northwest also is moving forward with plans to add new planes to its routes. Airbus and Pratt & Whitney have agreed to provide Northwest with the financing it needs to acquire 14 A330s this year and next year for international flying.

The Dreamliner, Boeing's 787 that seats 221 passengers, is expected to enter Northwest's fleet in 2008 for international flying.

Baggaley said Northwest also negotiated provisions in the pilots' tentative agreement that allows it to create a subsidiary for flying 76-seat regional planes manufactured by either Bombardier or Embraer. Those companies also would like orders from Northwest for planes in the 90- to 100-seat range that would be flown by Northwest pilots and deployed on some routes now served by DC-9s, as well as on some Mesaba and Pinnacle routes.

Northwest's pricing power has been strengthened since it entered bankruptcy. That is driven partly by low-cost carriers raising fares in response to high fuel prices. But Northwest also cut its seat capacity by 8.2 percent in the last quarter of 2005 and by 10.8 percent in the first quarter of this year.

Northwest halted one high-profile route, its New York-Tokyo flight, but it hasn't made wholesale changes to its route structure. Instead, it has reduced the frequency of flights on many routes and juggled the plane types assigned to many cities.

Pension challenges

Northwest's defined-benefit pension plans are underfunded by $3.7 billion and the carrier wants Congress to give it up to 20 years to fully fund them. Northwest already has frozen its plans for pilots and salaried employees, and wants to freeze accrued benefits for the third plan, which covers the rest of Northwest's workers.

United and US Airways terminated their plans in bankruptcy. But Northwest, working closely with the pilots union, has been lobbying Congress for two years to give it time to make payments and keep its pension plans intact.

A House-Senate conference committee is expected to take action on the bill after its April recess.

"Although Northwest has a reputation for taking a tough line with labor, they are trying to save pension plans, which is an item highly valued by the employees," Baggaley said.

Saving employees' pensions is one way Northwest can try to rebuild a working partnership with its employees, he added.

CEO Steenland said: "If pension legislation containing the necessary solution to permit airlines to fund their frozen pension plans as set forth in the Senate bill is enacted, Northwest will not terminate its pension plans."

Liz Fedor - 612-673-7709

NWA BANKRUPTCY CHECKLIST

After seven months in Chapter 11, Northwest has:

- Trimmed its flight schedule, but hasn't abandoned major markets.

- Restructured its fleet, rejecting some leases, renegotiating others and

ordering new planes.

- Cut capacity and raised prices.

- Lowered labor costs with temporary agreements.

CHALLENGES AHEAD

- Winning long-term pension relief from Congress for its pension obligations.

- Obtaining permanent labor cuts through still-to-be-ratified agreements with

pilots, ground workers and flight attendants.

- Surviving oil price increases that already are higher than it projected.

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