MINNEAPOLIS (AP) — The wave of airline bankruptcies that began after the September 11, 2001, terrorist attacks ends today when Northwest Airlines Corp. finishes its reorganization.
Northwest comes out of Chapter 11 a little smaller, a lot more efficient, and with some of the lowest costs among the major carriers. It has slashed debt by $4.2 billion, cut $400 million a year in the cost of its fleet, and trimmed unprofitable routes.
It cut labor costs by $1.4 billion a year, too, in a bruising four-year fight with its unions that did nothing to erase Northwest’s reputation for terrible labor relations. Yesterday, flight attendants and pilots in St. Paul, Minn., protested executive pay by rallying around a giant inflatable rat clutching bags of money in its paws. Northwest’s 400 top managers are set to receive a collective 5 percent equity stake in the reorganized company worth an estimated $297 million.
“They’re going to have dramatically different economics post-bankruptcy, which is the good news,” said Vaughn Cordle, who runs number-crunching firm Airline Forecasts and is an airline pilot. “The bad news is they’ve beaten down labor so much that they’ve got morale problems.”
Like the rest of the airline industry, Northwest has been on a roller coaster the past decade.
On Sept. 10, 2001, the airline industry was coming off the 1990s economic boom, as business travel rose and fuel prices stayed low. U.S. airlines raked in around $5 billion a year in profits from 1997 through 1999 and almost $2.5 billion in 2000, according to government statistics compiled by the Air Transport Association, the trade group for the major airlines.
But September 11, the slowing economy and the run-up to the Iraq war hurt business travel, and rising fuel prices hurt airline profitability. Northwest also was hurt by the SARS scare in Asia, where it and United Airlines are the two largest U.S. carriers. Northwest and Delta Air Lines Inc. both filed for bankruptcy protection on Sept. 14, 2005, putting four of the nation’s seven largest carriers into Chapter 11.
At the end of 2005, Northwest’s costs were higher than every other airline except U.S. Airways Group Inc., according to government figures. By the end of 2006, when most of the airline restructuring was finished, Northwest’s costs were lower than those at U.S. Airways, Delta, and Continental Airlines Inc., though still higher than costs at American Airlines and arch-competitor United.
Labor costs per mile flown, meanwhile, are now lower than at those carriers and only slightly higher than at Southwest Airlines Co., Mr. Cordle said. Southwest workers still make more on average than Northwest employees.
Mr. Cordle said Northwest has done an excellent job reducing its costs in bankruptcy. But he worries that Northwest’s debt, while lower than it was, is still higher than is healthy — especially considering that Northwest’s fleet is old and that the company soon will be spending money to upgrade it. Northwest plans to emerge from bankruptcy with roughly $9.2 billion in debt. But it also plans to spend $1.4 billion this year and almost $1.8 billion next year adding to its fleet, including the addition of Boeing’s new 787 Dreamliner next year.
“Northwest may have shed $4 billion in debt, but they’re still an over-leveraged airline,” Mr. Cordle said.
Moody’s Investors Service rated Northwest’s debt one notch higher than Delta’s when Delta emerged from bankruptcy last month.
Moody’s analyst George Godlin said Northwest’s routes in Asia and its relative dominance in the Midwest justified that. Delta, meanwhile, is reshuffling its domestic routes and adding international flights, including new routes to Africa, which may take time to become profitable, he said.
“We felt that sticking to the knitting and doing things that they do really well” will give Northwest an advantage, he said.
One advantage Northwest will have is that its new labor contracts lock workers into lower pay rates and more company-friendly work rules through the end of 2011, longer than any of its U.S. competitors. Flight attendants, for instance, now see their pay top out at about $35,400 a year, down from $44,190 before Northwest filed for bankruptcy protection, according to the union.
Northwest Chief Executive Officer Douglas Steenland acknowledged that workers are upset in a hot-line message to employees earlier this month.
“For many, these prospects in the restructuring are bittersweet, because as exciting as they are, they have been made possible only at significant cost,” he said. “We must honor these sacrifices through a careful and caring stewardship of our airline and its future.”
Even with the restructuring by the major carriers over the past five years, it’s still a volatile business and no one is ruling out future trips to Chapter 11.
“I can see that the next economic downturn may not be as severe as September 11, but it’s going to put a lot of pressure on them again,” airline consultant Alan Sbarra said of the industry in general. “I think the big lesson everyone should learn from this is that the industry has not fundamentally changed.”
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