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Chapter 11 for Northwest, Delta -- Struggling Airlines File for Protection; NWA to Cut Service, Workforce

Posted on: Friday, 16 September 2005, 12:00 CDT

Northwest Airlines filed for bankruptcy protection Wednesday, promising to emerge a smaller but more efficient airline.

The airline's Chapter 11 filing came on the same day as its larger rival, Delta Air Lines Inc., meaning three of the nation's four largest airlines are now in bankruptcy court.

The dual filings clearly illustrate a troubled industry whose biggest airlines have lost more than $30 billion in four years.

Northwest president Doug Steenland said the airline - the nation's fourth largest - will cut service and workforce nearly immediately, making it at least 5 to 6 percent smaller by year's end.

"We had developed a plan to restructure Northwest outside of Chapter 11 and have been implementing that plan," he said. "Unfortunately, in addition to an uncompetitive cost structure, our efforts have been overtaken by skyrocketing fuel costs."

Both cases were filed in U.S. Bankruptcy Court for the Southern District of New York, and Northwest has been assigned to Judge Allan Gropper.

Northwest listed assets of $14.35 billion. Delta, the nation's third-largest airline, listed assets of $21.6 billion, making it the ninth-largest bankruptcy in U.S. history, according to bankruptcy tracker New Generation Research Inc.

Northwest, which expects to pay $3.3 billion in fuel costs this year - compared to $2.2 billion in 2004 and $1.6 billion in 2003 - has $1.5 billion in cash and investments available for use.

"Our goal is to restructure expeditiously ... in nowhere near the three-year period which has been case for United," Steenland said.

Chapter 11 protection will help Northwest and Delta cut wages, restructure debt and make changes to pension and health benefits for workers and retirees.

And while the future remains murky for both airlines, analysts expect Northwest will right the ship quickly.

"They don't have a lot of structural problems," said Michael Boyd, aviation consultant in Denver. "They have the best route system, and the best revenue stream on the planet.

"They can get to Montgomery, and get to Seoul and carry people between the two," Boyd said. "The darling Southwest can't do that."

Consumers can expect some flight cutbacks and perhaps higher ticket prices, but few other losses, including frequent flier miles, experts say.

"Bankruptcy does not equal liquidation or shutdown; it means reorganization," said Chris McGinnis, editor of The Ticket, a newsletter for frequent fliers in Atlanta. "The whole idea behind reorganization is to maintain operations, to show the airline is confident in its ability to move forward."

Officials at Memphis International Airport say the filing will have little impact on airport finances because carriers usually make lease payments in bankruptcy.

"We don't expect an interruption in lease payments," said Larry Cox, president and chief executive officer of the Memphis Shelby County Airport Authority.

Northwest pays Memphis International about $28 million a year in landing fees and gate rentals.

It is the second largest source of revenue behind FedEx Corp. in the airport's $120 million annual budget.

In its preliminary outlook, Northwest plans to "return planes to lessors and anticipates operating a somewhat smaller airline," Steenland said.

"We have no specific plans to cut flights. But with fuel at $65 a barrel, things that may have worked before are difficult to justify," he said, adding that frequencies will be cut before destinations.

Wednesday, Northwest shares gained 19 percent, closing at $1.87 as bargain hunters bought up deals before the filing.

David Field, Americas' editor of Airline Business magazine, said the filing is about "fundamentals - competition, price resistance and other basics - not about labor in general or about one union in particular.

"Without Katrina this would probably still have happened, only later," he said.

The news kicked up rumors that a bankruptcy judge could order Northwest's striking mechanics back to work, according to the union, the Aircraft Mechanics Fraternal Association.

"Anyone returning to work would be working as a scab," the union said, "under the contract NWA imposed Aug. 20."

Northwest's mechanics walked off the job in a strike Aug. 19 after nearly a year of protracted talks over concessions.

When the two sides met in last-ditch talks last week, Northwest said its condition had further deteriorated, necessitating that union members take a 28 percent pay cut instead of the 25 percent Northwest sought in August.

AMFA says Northwest will "eventually need the talent and skills we provide to get them out of the mess they are in."

Northwest said it must still get $1.4 billion in concessions from employees and plans to continue toward bargaining through Chapter 11.

While Steenland said Northwest had recently received meaningful cost cutting proposals from its pilots and ramp and ticket workers, they "were less than we identified."

Northwest intends to save its defined benefit plans, freeze them and move forward with 401(k) plans, Steenland said.

"Employees will go through a difficult enough process in bankruptcy," he said.

"If we can avoid termination of the plans, it's one harmful effect we can avoid."

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More on the filings

Trouble in the air: Industry hasn't made money since before 9/11 A12

What happens to passengers? A bankruptcy Q&A A14

NWA: Has a nearly 80-year history A14

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Source: Commercial Appeal, The

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