NWA Faces More Scrutiny

Its larger-than-expected first-quarter loss has turned up the volume on this hindsight: Why hasn't Northwest Airlines done more to protect itself from soaring jet-fuel prices? They hit $1.38 a gallon in the airline's first quarter, up 38 percent from a year ago, and fuel cost the airline a total of $630 million. That's up $180 million from the first quarter of last year.

Citing intense price competition, "increasingly noncompetitive" labor costs and the record fuel prices, the Eagan-based carrier on Thursday posted a $458 million net loss, or $5.28 a share. Excluding one-time charges, the $5.07 per share loss was higher than the $4.56 per share loss expected by analysts surveyed by Thomson Financial.

CEO Doug Steenland said it's "imperative" that Northwest achieve by the end of the year its target of cutting annual labor costs by$1.1 billion. That campaign began in January 2003, he said. So far, Northwest only has $300 million in labor savings, mostly the result of a deal with its pilots.

But some airline employees suggest Northwest has a fuel-cost problem, not a labor-cost problem.

That aroused the ire of Steenland during a Thursday conference call to discuss Northwest's first-quarter performance.

"It's very easy for people... to engage in 20-20 hindsight, and say you should have done this or that about hedging (fuel purchases)," Steenland said. "No one has a crystal ball." Hedges are contracts for fuel purchases at locked-in prices.

When it comes to fuel costs, Northwest and other carriers are being judged against Southwest Airlines, the Dallas-based low-fare carrier that has consistently made money. Southwest has hedges on 85 percent of its fuel needs this year at $26 per barrel of oil, about half the current market price. It said last week its quarterly profit almost tripled.

America West Airlines on Wednesday also reported a first-quarter profit, crediting its hedging strategy.

Northwest doesn't think it'd be wise to tie up -- or risk -- its dwindling cash supply in an aggressive hedging strategy. Its unrestricted cash amounts to about $2.1 billion.

Bernie Han, Northwest chief financial officer, said hedging is a 50-50 bet.

With a hedge, an airline enters into a contract with a bank or other financial services firm. The airline bets oil prices will go up; the other side bets they will go down. The loser must pay the difference to the other party. If you've bought heating oil or propane in the summer to heat your home in winter, you've hedged.

Northwest had 25 percent of its first-quarter fuel needs hedged at $41.75. That saved it about $21 million, about five cents a gallon.

It has no hedges in place for the rest of the year, though. And it expects to pay $1.60 to $1.70 per gallon for fuel in the second quarter and $1.55 to $1.65 for the year.

Northwest is not alone in coming up short in hedging. American Airlines had hedges on just 15 percent of its fuel needs in the first quarter. Continental Airlines had none.

"Southwest... made good calls," Han said. "But one advantage Southwest has is their balance sheet." Airlines, such as Northwest, that are deep in the red would have to pledge an untenably large portion of their cash as collateral to hedge as Southwest has, he said.

Still, Northwest should have seen the need for a more aggressive hedging effort, said Jeff Gardner, vice president of the Professional Flights Attendants Association, the union that represents Northwest flight attendants.

"It does not take a crystal ball to see that the Iraq war is not resolved," he said. Mark McClain, president of the airline pilots' union, says there's been a buzz among employees about fuel hedging.

"It's easy to do in hindsight," he said. "The buzz is that if they had hedged (more), things would be different. But they didn't."