Northwest Under Gun to Cut Costs

Now it's Northwest Airlines' turn.

Because its competitors have found ways to shed labor costs, Detroit Metro Airport's dominant carrier now has the highest labor costs in the industry and is one of the last to extract hundreds of millions of dollars in concessions from its union contracts.

The spotlight has been on United Airlines, which has gained approval to hand off its pension bills to the government and negotiated cost-saving contracts with its unions through bankruptcy court.

Northwest, which seeks $1.1 billion in concessions from its seven unions, has told its employees to look toward United as an example of what's to come.

"As United continues to restructure itself, the changes it experiences clearly will impact NWA," Northwest said in its employee newsletter in December.

On Tuesday, United averted a strike on two fronts when its mechanics union ratified a 5-year contract that will cut member pay by 3.9%, saving the airline $96 million a year.

Hours later, the machinists union, which represents ramp workers and ticket agents, announced it had reached a tentative deal with the carrier, a part of Elk Grove Village, Ill.-based UAL Corp.

The announcement came just before a bankruptcy court judge in Chicago was to decide whether to toss the machinists' contract for lower wages and benefits.

The two sides are still determining the details.

It was the last labor agreement United needed to exit bankruptcy protection.

Most other major airlines also have gained union concessions as they restructured. Last month, US Airways Group Inc., which has endured two bankruptcy reorganizations, and America West Holdings Corp. announced plans to combine their operations.

At Northwest, the standoff between the airline and its mechanics union could come to a head during the next few months.

Northwest's overall costs were already among the highest in the industry. During the first three months of the year, Northwest's cost to fly one seat 1 mile was nearly 11 cents, up 7.2 % compared to the year before. During the same period, that cost was 10.1 cents for United and nearly 10 cents for American Airlines. Salaries, wages and benefits make up Northwest's largest single expense, which amounts to about one-third of its costs.

The airline asked the National Mediation Board last week to declare an impasse in its talks with the mechanics.

Northwest wants to save $176 million annually by laying off more than half of its mechanics and aircraft cleaners and cutting the pay for those who remain by nearly 26%.

The mechanics union has until June 8 to respond to Northwest's request for an impasse, said Bob Rose, president of the Aircraft Mechanics Fraternal Association Local 5.

Typically, a strike or lockout can't occur until the mediation board has determined that further mediation would be fruitless, either side has rejected arbitration to settle their differences and a 30-day cooling-off period has expired.

But, Rose said, after that cooling-off period, "All bets are off. We fight the fight and the game's on."

The airline also is in talks with machinists and flight attendants.

"This one has the potential to get rather ugly," said Kevin Schorr, research director with Campbell-Hill Aviation Group based in Alexandria, Va.

The Air Line Pilots Association is the only group to reach an agreement with Northwest, based in Eagan, Minn. The pilots ratified a 2-year agreement in November that will save the airline $300 million a year through concessions from pilots and cuts from the airline's salaried employees.

On Wall Street, there is a sense that Northwest needs to start cutting costs immediately.

Northwest "must act quickly to cut unit labor costs, since it is much higher than its peers," airline analyst Ray Neidl wrote in a research report Tuesday.

"We believe the carrier may have to threaten bankruptcy to get the necessary concessions from all of its unions, which would further drive down its stock price," wrote Neidl of Calyon Securities Inc.

Northwest has the highest labor costs in the industry -- by 25% to 30% -- for most of its unionized workforce, according to one consultant's estimate. But the airline has a healthy cash balance. At the end of March, the company had $2.1 billion in cash.

"Many employees looking at that kind of a cash balance will say: 'What's the problem?' " said Robert Mann, president of airline consulting firm R.W. Mann & Co.

But that cash is being depleted, said Mann, who has worked with airlines and unions in negotiations.

"I think there's a question of credibility and that's chiefly an issue of whether or not in the long term management and employees have developed a level of mutual trust," he said.

Northwest, in its letter to the mediation board, said it has lost $3.3 billion since the end of 2001, despite saving $1.7 billion annually through nonlabor cost cutting.

Northwest's stock price rose 50 cents, or 9%, to $6.09 on news that Merrill Lynch & Co. analyst Michael Linenberg raised his rating for Northwest shares from neutral to buy. He said he believes it is unlikely that Northwest will file for bankruptcy.