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Tough times ahead for Northwest
By Andrew Haeg
Minnesota Public Radio
September 16, 2002

Northwest Airlines has yet to emerge from the perilous downturn in the travel industry, though the airline is performing better than most of its peers. Flights are filling up, but Northwest is flying fewer planes, and making less money off their once all important business travelers. Now the Eagan-based airline is asking its employees to help it avoid sinking any further. But the airline's unions say they don't trust Northwest's management, and they will resist giving back hard-won wages and benefits.

Steve MacFarlane, president of the Aircraft Mechanics Fraternal Association Local 33, says union members feel Northwest is trying to take advantage of them.
(MPR Photo/Andrew Haeg)

Northwest's books tell the story. The airline lost $93 million in the second quarter of this year. That's 70 percent more than last year's losses. That's not good, but not as bad as American Airlines $465 million second quarter hemorrhage, or the $341 million loss at United Airlines.

"The industry is sick," says Jon Ash, president of Global Aviation Associates, an aviation research group. "It's suffering from the recession, and it's suffering from 9/11. So everything becomes relative. But in the context of the industry, Northwest is doing well."

According to Ash and other analysts, Northwest's relative success is due to the fact that it started cutting costs and otherwise preparing for a recession even prior to Sept. 11.

As a result, analysts agree Northwest may be the best poised among the major carriers to rebound when air travel does. But a rebound is nowhere in sight.

Northwest officials were not available for comment, but CEO Richard Anderson told workers via the company's employee hotline that the airline's condition is not improving.

"I wish I could report an end to the tough times. But I think the most difficult decisions are yet again ahead of us." he said.

"The industry is sick."

- Jon Ash, Global Aviation Associates

Northwest had expected to return to profitability this summer and fall, but that profit never arrived. Instead, the airline continues to lose money, while revenues remain weak.

"The fact that our business hasn't returned to profitability and we do not know when it will, is our main challenge. I've explained many times before that our revenue is at the same level as it was during the 1996-1997 time frame," Anderson said.

One of the principal causes of Northwest's woes is the decline in business travel. Even prior to Sept. 11, business people were traveling less to cut costs. That trend accelerated after Sept. 11.

"When we need to be in front of our customers, we are traveling. However when we have another way of conducting business, we'll make sure that we'll do it," says Lisa Trenda, travel manager at agribusiness giant Cargill, based in Minnetonka.

Trenda says Cargill has always been cost-conscious about travel expenses, but she says, the company has cut back even more on travel.

"For example, I manage a worldwide team of people. Fortunately, I really only need to see them face to face once a year. However we have a conference call every month. And we communicate via e-mail daily if needed, or telephone. So, what we're trying to do is use examples such as that," Trenda.

"When we have another way of conducting business, we'll make sure that we'll do it," says Lisa Trenda, travel manager at Cargill.
(MPR Photo/Andrew Haeg)

As business travelers opt to email or call instead of visit, airlines lose revenue. And Northwest is increasingly looking for ways to cut costs.

Northwest is buying and leasing fewer planes than it had planned. The company is offering incentives to employees who have viable ideas for cutting costs.

Northwest recently announced that employees with managed care health plans would have to start paying 20 percent of the cost of their benefits.

It's a sharp contrast to two years ago.

At that time, several of Northwest's unions won substantial improvements in wages and benefits for the first time since 1993, when they agreed to wage and benefits cuts to help the airline remain viable.

Now US Bancorp analyst Joel Denney says Northwest may try to take some of those wage and benefit hikes back. Denney says if it does, Northwest would join other major airlines, such as United Airlines, which is preparing to ask its employees for concessions.

"It's just a difficult time for all of the airlines. And given that it's a competitive industry, if you've got one airline giving significant concessions, the other airlines are going to have to follow suit in some fashion," Denney says

But Northwest will likely run into bitter opposition in trying to win concessions.

Steve MacFarlane, president of the Aircraft Mechanics Fraternal Association Local 33, says he understands Northwest is in trouble. But he says union members feel Northwest is trying to take advantage of them.

"The key that Northwest has really failed to communicate effectively to their employees is the dire situation that we're in. And because that message hasn't been communicated, every time they do something, there doesn't seem to be justification for it, so it's taken as a provocation, and rather than a necessary move from the business plan. And that really is where a lot of the acrimony, and really there's hatred out there for this company," says MacFarlane.

MacFarlane says Northwest executives, like former CEO John Dasburg, made a lot of money over the past decade. He says it galls workers that now the airline is in trouble, one of the first things management does is look to the employees. But he and another union leader say they will not give back the wages and benefits they've won.

"I think most of us would rather see the company go into bankruptcy and take our chances there because we know what happened before. All of the executives and the management of the company, they all benefited. Dasburg walked away from this company with millions and millions of dollars. A lot of employees of this company still haven't recovered," he says.

But the company is facing more problems than a falloff in business travel and labor problems. Fuel prices are rising, in anticipation of a war with Iraq. And low-cost carriers like Southwest Airlines and Jet Blue are capturing more of the major airlines' business.

To what extent these and other forces are still weakening Northwest will become apparent in late October, when Northwest is expected to release its third quarter earnings.