Northwest CEO Threatens Bankruptcy if Bargaining Fails

Northwest Airlines employees should know by now that they must agree to wage and other concessions at the bargaining table -- or givebacks will be forced on them in a Chapter 11 bankruptcy.

That's what Northwest CEO Doug Steenland said during a Tuesday conference call to discuss the carrier's $225 million second-quarter loss. Its operating loss of $180 million brings the Eagan, Minn.-based airline's cumulative operating losses to just under$3 billion in the past 3.5 years.

"Many of our major competitors have significantly lowered their labor costs, both in and outside of bankruptcy, leaving Northwest with the highest labor costs in the industry," Steenland said. "It is imperative that we reach labor agreements with all of our unions as quickly as possible."

Without labor savings won at the bargaining table, he added, "it's very hard to see how our hand would not be forced to pursue them in an involuntary way, using the Chapter 11 process."

Northwest is seeking $1.1 billion in annual labor savings. After a nearly 30-month effort, it has just $265 million in concessions from its pilots and $35 million from management and salaried employees.

But Steenland wouldn't give any concrete guidance about when a bankruptcy filing could come. That would depend on many factors, he said, including how much progress Northwest makes in its giveback drive, the prospects for Congress letting Northwest and other airlines stretch out payments to underfunded pension plans, the impact of mid-October changes in bankruptcy laws, and fuel costs, which for Northwest were up 52 percent in the second quarter, compared with the same period last year.

"As events unfold, we will make a decision," Steenland said. "But we're not prepared to make a prediction about a date certain."

But J.P. Morgan analyst Jamie Baker forecasts a first-quarter 2006 bankruptcy for Northwest if it doesn't get big labor givebacks and pension funding relief.

"Labor likely knows this," he wrote in a research note, "Washington (is) seemingly coming around." Meanwhile, Northwest insists it is prepared to cope with a possible strike by its mechanics, which could begin Aug. 19 if a contract settlement is not reached.

Amid all the gloom, there was some good news for Northwest in the quarter. It saw "modest" improvement in domestic revenue as it gained some pricing power. But Northwest lamented that rival Delta Air Lines has retained its relaxed minimum-stay requirements, which allows many business travelers to fly on discounted leisure fares. Northwest has had to go along with Delta to be competitive. That's costing Northwest more than $100 million a year.

Steenland expressed optimism that Congress will pass a bill giving Northwest more time to fund its pensions. A Senate committee has approved a version that gives airlines 14 years to pay off their obligations. Northwest's pensions are underfunded by $3.8 billion. As it now stands, Northwest is on the hook to make a payment of $800 million to its pension plans next year and $1.7 billion in 2007.