An unprecedented spike in jet fuel prices has Northwest Airlines thinking what might seem unthinkable these days: seeking even more concessions from workers.
Northwest has insisted since late March that it must slash annual labor costs by $1.1 billion to remain competitive. So far, it has made modest progress.
Its 4,400 union mechanics and cleaners launched a strike Aug. 19 rather than agree to job cuts and wage and benefit reductions to help the carrier meet that target. Two other unions representing flight attendants and ground workers have dug in against cuts.
Meanwhile, since Northwest set its cost-cutting target, runaway prices have added about $900 million to its annual fuel bill.
To cope, the Eagan-based airline may set the bar even higher for cuts it needs from workers. "We're going to have to take a look at it," chief executive Doug Steenland told the Pioneer Press this week.
It would not be the first time the airline has revised its target. Its March declaration for $1.1 billion in cuts was $150 million over its original goal, an increase it attributed in part to rising fuel prices at the time. Northwest has posted operating losses of some $3 billion since 2000.
The airline can't do a thing about fuel prices because it buys fuel as needed rather than in advance as some rivals do to lock in lower prices. That leaves two options: increase revenue by raising fares or slash expenses by cutting labor costs.
Airlines have passed along small fare increases, but the $40 or so in combined hikes is not enough to soften the blow of increased fuel bills. Airlines are loath to raise fares further because they fear losing customers to rivals.
Cutting labor costs might be more palatable, but Northwest hasn't been terribly successful at persuading unions to give up jobs, money and benefits. For some, it means 25 percent pay cuts along with increased duties and less say over schedules.
Pilots signed on in November to an agreement that saves the airline $265 million annually, far less than the airline wants from that group. Nonunion workers have kicked in $35 million. Northwest still seeks $107 million from ground workers and $143 million from flight attendants, but talks have been slow going.
Mechanics balked at an agreement that Northwest said would have saved $176 million a year. They took up picket signs instead.
Experts say asking for more, especially with the mechanics on strike, will make negotiations tougher. Still, it's a likely scenario for Northwest, said Rich Gritta, an aviation economist at the University of Portland in Oregon.
"That's what I think they're thinking," he said. "If you're smart, you're thinking this may do us for this year, but we may be back later."
The problem is that the unions already are angry, and upping the ante will aggravate them further and make them less likely to yield, Gritta said. "That's where it gets dangerous."
That may be, but thus far, airline unions across the country have repeatedly agreed to negotiate concessions, said Gary Chaison, an industrial relations expert at Clark University in Worcester, Mass. "There's very little the union can do, because the alternative is bankruptcy," he said.
And rising fuel costs provide a persuasive argument. "If you can make a credible case, you can ask for more," Chaison said.
Northwest has the big numbers needed to plead a case for more concessions. Its numbers show an airline being eaten alive by fuel costs.
Northwest's rule of thumb is that every $1 increase in the price of oil raises annual operating costs by $50 million. Oil has risen throughout the year and on Thursday hit $67.49 a barrel, the highest closing price since 1983, when oil was first traded on the New York Mercantile Exchange.
Northwest buys about 2 billion gallons of fuel a year to keep its fleet of more than 400 planes flying. Given those prices, Northwest says its annual fuel bill has increased about $1.2 billion since Jan. 1.
Northwest spent $2.2 billion on fuel last year and would spend an estimated $3 billion this year, based on current prices. Oil prices are expected to remain high for the foreseeable future, due to strong demand in China and India.
So, why not just raise prices?
Airlines argue there is just too much of their product out there, meaning they are afraid to raise prices because customers will flock to competitors who don't follow suit. The rise in Internet ticket purchasing has transformed home computers into powerful price-comparing machines.
That said, eight small increases have raised prices for round-trip tickets, perhaps $40 on average since mid-February, said Terry Trippler, an airline expert at online booking company cheapseats.com.
Trippler believes fares must increase substantially. "The average price has got to increase, or the number of airlines in America today is going to decrease," he said. "You can't just cut your way to profit."
The Associated Press contributed to this story. Tim Huber can be reached at [email protected] or 651-228-5580. Julie Forster is at 651-228-5189 or [email protected].
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