Experts: If NWA Survives, It Should Be Strong

If Northwest Airlines manages to avoid a destructive confrontation with its unions, industry experts say the airline would be well placed to survive and perhaps even thrive once it emerges from bankruptcy.

The airline heads back to U.S. Bankruptcy Court today as hearings resume on its request to cancel its union contracts with pilots and flight attendants -- moves the company says are necessary under its plan to cut $ 1.4 billion in costs. The unions contend Northwest's demands surpass what the company needs and have threatened to strike should U.S. Bankruptcy Judge Allan Gropper rule for the company.

Northwest, which employs 7,900 workers in Michigan, has said a strike could lead to its liquidation. But if Northwest and its unions reach an understanding without a strike, analysts say, Northwest should be able to emerge from bankruptcy relatively quickly.

"The prospects of Northwest surviving are excellent," said Terry Trippler, an airline expert and longtime Northwest observer for Cheapseats.com. "I think they'll come out of this a little smaller but a much stronger airline. ... Once this hearing is over, the worst is clearly past them."

Robert Mann, an airline industry consultant, calls Northwest's problems a "three-peaked mountain" in its flight plan. In addition to its labor costs, which Northwest contends are among the highest in the industry, the company is also pushing Congress for relief from pension rules that it says would force it to terminate its pension plan, as United Airlines did last year.

And after delaying the replacement of its planes for years, the airline now faces what it estimates is an $ 11-billion tab over the next several years to upgrade an aging fleet with modern jets.

On Tuesday, Gropper allowed the carrier to freeze its pilot pension plan and approved its request to negotiate lower lease payments for certain aircraft.

The carrier and the Air Line Pilots Association agreed to the freeze of the defined benefit plan. The pilots now will get a defined contribution plan, the details of which are still being hashed out between ALPA and Northwest. The company's salaried employees saw their pension plans frozen in August. Kurt Ebenhoch, spokesman for Northwest, declined to say how much the airline would save from the pension freeze or aircraft lease proposal.

Analysts say as long as Northwest has the right costs, it should find willing investors who will back its plans to transform into a smaller, leaner air carrier despite the more than 140 U.S. airline bankruptcies since the industry was deregulated in 1978.

"They'll get out because labor will not want to lose their jobs in the final analysis, and banks will be more than happy to lend money above cost," said Vaughn Cordle, an airline industry analyst.

For many workers, the cuts are tough to swallow after repeated rounds of concessions. The International Association of Machinists District 143, Northwest's largest union representing 14,000 active ground workers, including ticket agents and ramp workers, already has agreed to $ 190 million in cuts, including permanent wage and benefit reductions.

"What's at stake here is bigger than the proposed terms. The question before you is whether anyone at Northwest will have a job in a month's time," said Robert DePace, president of the machinists union.

Bankruptcies have become commonplace in the U.S. airline industry since the Sept. 11, 2001, terrorist attacks depressed air travel and low-cost carriers such as Southwest and JetBlue stepped up their inroads to profitable routes. High fuel prices also have hit profits, and the U.S. airline industry as a whole has lost about $ 42 billion since 2000, according to the Air Transport Association trade group.

Much of those losses has been borne by legacy carriers such as Northwest, United and Delta, which have seen fares and ridership fall steeply in recent years due to new competitors. Low-cost carriers typically lack a hub such as Northwest's in Detroit, which allows them to fly their planes more efficiently. They also generally have younger planes and younger workers, which also lower costs.

Northwest's high labor costs, a jump in fuel prices and a looming payment for its underfunded pensions pushed it into bankruptcy in September. Northwest President and Chief Executive Officer Doug Steenland has said the company expects a quick trip through bankruptcy, and experts say Northwest will have fewer issues to address than Delta, which filed on the same day.

"The industry is going to grow, but this doesn't mean every airline is going to be picked up by a rising tide," said John Kasarda, director of the University of North Carolina at Chapel Hill's Kenan Institute of Private Enterprise and its Center for Air Commerce. "This is going to be painful for everybody, but the new realities of the airline industry are, if Delta and Northwest do not get further cost reductions, they will not be able to compete."

Labor tensions remain the tallest hurdle for the company, which suffered a debilitating pilots strike in 1998 and has been using replacement mechanics since the mechanics union went on strike in August. Northwest's union mechanics and plane cleaners struck the carrier after refusing to accept $ 176 million in concessions that would have eliminated about half their jobs and forced those who remained to accept at least a 25 pay cut. Northwest has asked its pilots for about $ 361 million in concessions, and $ 195 million from its flight attendants. Both proposals would cut jobs, wages and benefits.

Northwest and the two unions representing pilots and flight attendants return to court today after Gropper gave them a week to continue talks. The judge must make a ruling on Northwest's request to throw out its contracts by Feb. 16.

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