Northwest Airlines under its reorganization plan:
Northwest Airlines got what it wanted out of its Chapter 11 bankruptcy case: dramatically lower operating costs that make it a more competitive carrier.
But as the USA's No. 5 carrier, based in Eagan, Minn., completes what one analyst calls a "textbook example of a good bankruptcy," it appears to have made no progress on a critical front: the relationship with its unions. In fact, Northwest's chronically tense labor-management relations are worse than ever.
In strict financial terms, the carrier's 20-month trip through bankruptcy court has been as successful as it has been quick. On top of $2.4 billion in annual cost savings, Northwest will emerge May 31 with $4.2 billion less debt. And, thanks to its huge presence in trans-Pacific and Asian markets, Northwest will still generate outsized revenue from its many long-haul business routes.
But Northwest management was at odds with its unions going into bankruptcy reorganization, and it still is. Deep cuts in wages and benefits -- some negotiated, some imposed by management -- make improved relations unlikely. In the last month, employees' resentment has been stoked to unprecedented levels by the disclosure of a nearly $300 million incentive compensation plan for the airline's top executives that workers call outrageous.
Now, Northwest must convince passengers and Wall Street that it can deliver smooth service and profits despite vocal, angry unions. "It's never a good thing to have your workers this upset," says Calyon Securities analyst Ray Neidl, who has not yet issued a recommendation on the reorganized Northwest's stock.
Airline workers don't have to strike to disrupt a carrier's operations and, over time, run customers into the arms of rival airlines. Hurting an airline through the actions or inactions of unenthusiastic, disenchanted workers "is a lot slower than death-by-strike," Neidl says. "But it still kills you."
Northwest declined to make an executive available for this story. Friday, Northwest CEO Doug Steenland said in a statement that the company plans to "provide excellent service to our global customer base." He thanked customers and creditors for their support and cited employees "for their hard work and sacrifices that helped Northwest attain its goal of repositioning the airline for long-term success."
Approved without changes
U.S. Bankruptcy Judge Allan Gropper approved Northwest's proposed reorganization plan unchanged. Upon its exit from Chapter 11 next week, it will be the fourth big U.S. carrier to finish bankruptcy reorganization since the 9/11 attacks.
Secured creditors will be repaid in full. Unsecured creditors will get stock in the reorganized company worth 66 cents to 83 cents on the dollar of what they're owed. The company's existing shares will be canceled.
Terry Trippler, a Minneapolis-based fares analyst who calls the Chapter 11 a "textbook" bankruptcy, says that achieving the $2.4 billion in annual cost savings that management targeted from the outset greatly improves Northwest's chance of earning profits.
Northwest's financial advisers peg the market value of the reorganized carrier at $7.8 billion, based on an initial share price of $27. That would give it a higher market value than all domestic competitors except Southwest and Delta, and reflects the belief of Northwest's advisers that the new Northwest will be a top performer.
"Ever since they went into bankruptcy, I've noticed a laser focus," Trippler says. "They said, 'This is what we need to do.' And, by golly, they've done it."
All of Northwest's large unions objected in court to the executive compensation plan, but their objections were overruled. On Friday, Gropper left intact the plan that could deliver to 400 executives stock in the reorganized company worth $297 million over four years. Steenland alone could get an estimated $26.6 million.
Workers, however, over the next five years will get back "maybe 20% of what we gave up," through approved bankruptcy claims against Northwest and a new profit-sharing plan, says Capt. Dave Stevens, head of the Air Line Pilots Association unit at Northwest.
"It's hard to envision a successful future for this company if its employees remain as demoralized and angry as we are now," he says.
Stevens predicts the airline's customer service will suffer because Northwest employees feel "they were taken advantage of by the same management team that took us into bankruptcy, demanded too-large concessions from us, and then turned around and gave themselves lavish financial rewards."
Under terms of the new business plan approved by Gropper, management will see pay that was cut during the bankruptcy restored, will keep raises they received in the interim, plus get bonuses and stock in Northwest, based on performance, as part of the incentive program.
Northwest pilots, meanwhile, have seen pay rates cut 24% on average. And, thanks to fleet shrinkage that pushed many pilots back down the seniority ladder into smaller planes or demoted them from captain to first officer, some pilots' pay has fallen 50%.
Flight attendants and ground workers also took pay and benefits cuts. About 4,500 mechanics lost their jobs when management hired non-union mechanics and outsourced much of the carriers' overhaul work to break a strike that began a month before the bankruptcy filing in September 2005.
The company defends the management incentives as a standard practice in corporate reorganizations. The 4.9% stake in the airline that Northwest's management will end up owning is much smaller than the 8% stake that managers at United Airlines got after United exited Chapter 11 in February 2006.
But United isn't a model of success right now. Despite cutting billions of dollars in debt and costs in Chapter 11, it lost $152 million in the first quarter. Its unions are so angry about stock payouts to management that they picketed United's first shareholders meeting in five years. In its yearly survey of customer satisfaction, the University of Michigan last week said United had the lowest rating of the six network airlines and Southwest.
Northwest entered bankruptcy protection in September 2005 in the midst of post-Hurricane Katrina fuel-price shock. At the time, it faced less competition from low-fare carriers than any other big traditional U.S. carrier and was seeing rapid growth of demand for air travel to and within Asia, where it already was a heavyweight. But it was being drained by the industry's highest operating costs. And management made clear that it was targeting labor for the biggest cuts.
Strictly by the numbers, Northwest will emerge a far more nimble and formidable competitor than the cost-bloated carrier that entered bankruptcy. Under bankruptcy protection, it slashed its annual costs by $2.4 billion with 58% of that coming from labor.
Under labor contract agreements reached during the restructuring, Northwest won't have to negotiate any new contracts until 2011. Unions for pilots and ground crews are signed up through then. Flight attendants will be voting until May 29 on a proposed contract that would run through 2011 and save Northwest $195 million annually.
They twice voted down such a deal in the past. But Gropper allowed management to impose those terms anyway. Now, if the flight attendants fail to ratify again, they lose a bankruptcy claim worth about $18,000 per person.
Other cost reductions:
*Pensions. Northwest is saving $100 million a year by freezing workers' defined-benefit pension plans and launching lower-cost 401(k)-style plans.
*Interest. It renegotiated loan terms to save $150 million in annual interest payments.
*Fleet. It's saving $400 million a year through lower aircraft costs, including maintenance. Northwest negotiated lower aircraft lease payments and was able to give back planes it no longer wanted. As a result, its passenger fleet has shrunk to 362 big jets from 421. It grounded the last of its DC-10s, fuel-guzzling jumbos from an earlier era. It took delivery of more fuel-efficient, long-range Airbus A330s.
The company, which had $2.4 billion in unrestricted cash as of March 31, expects to pick up $750 million more through the sale of its new stock to creditors as part of its settlement with them. New shares will be issued under the ticker symbol NWA and will start trading after the carrier exits Chapter 11.
Analyst Neidl is especially impressed with Northwest's success in cutting a key industry cost measure, the unit cost to fly one seat one mile. Northwest comes out at about 7.5 cents a mile vs. 8.5 cents when it filed. "They're almost a full penny below carriers like American and United," Neidl says. "With that cost structure, I think Northwest coming out of bankruptcy is going to be a very strong position."
Yet the reorganized Northwest does face business challenges in addition to its frayed labor relations.
Like its competitors, it must deal with extraordinarily high fuel prices. In addition, the competitive landscape for airlines is changing and threatens to undermine progress made in restructuring.
Though Northwest is more insulated than other big airlines, discounters such as Southwest and AirTran continue to encroach on its domestic routes.
Internationally, discount carriers are expanding in Asia. And U.S. and Chinese negotiators are exploring a new treaty that would more quickly expand U.S. competition in a U.S.-China air market dominated by Northwest and United.
For now, the company isn't publicly commenting on its strained labor relations and seems gratified to have done as much as it has. In Friday's statement, Steenland noted that 20 months ago the company pledged to cut costs, improve efficiency and fix its balance sheet.
"We accomplished those goals," the statement said. Northwest Chapter 11 reorganization
Details of Northwest Airlines' reorganization plan, which was confirmed Friday:
Chapter 11 Entered: Sept. 14, 2005 Exit: Expected May 31
Annual cost reductions $2.4 billion
Debt reduction $4.2 billion
Est. mkt. cap. $151 million $7.8 billion
Secured creditors Paid in full in cash and/or stock
Unsecured creditors Paid in stock worth 66 cents to 83 cents on the dollar of what they're owed
Ticker symbol NWAC NWA
Share price Existing shares canceled, shareholders wiped out. $25 - $30
1 -- estimated value of new shares upon issuance/exit; Sources: Northwest Airlines, bankruptcy court documents, USA TODAY research