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Some good signs amid a rough 2003 for Northwest
by Jeff Horwich, Minnesota Public Radio
January 23, 2004

Passengers are returning to the skies, and analysts say there are encouraging signs amid another difficult year for Northwest. Northwest says it still hopes for wage givebacks to help further cut costs. (MPR Photo/Jeff Horwich)

2003 was a year of major changes for Northwest Airlines. Some were forced upon the carrier, including a distant war and a respiratory disease that led many travelers to stay home. Others were part of a conscious effort to adapt to a changed industry, and many analysts say Northwest is now stronger than many of its competitors. Nonetheless, executives are still calling for the one change they say will make all the difference: wage cuts for employees.

Eagan, Minn. — Year-end figures from Northwest show a $240 million profit. Airline officials, though, look at the numbers and see something quite different -- an operating loss of nearly $600 million.

The difference is $800 million Northwest brought in last year through transactions that had little to do with day-to-day operations. They went public with their regional subsidiary, Pinnacle Airlines; they sold off their stakes in travel websites and a reservation service; the federal government came through with a $200 million reimbursement for security expenses.

Take away all that, and Northwest's operating loss in 2003 was greater than either of the two previous years. Still, the mood surrounding today's earnings announcement wasn't exactly gloomy. The result beat analyst estimates.

Helane Becker, an analyst with Benchmark, says Northwest has made good moves.

"They made a lot of changes in 2003, not the least of which was selling non-core assets to focus on the core assets," she said. "They brought down debt, they got their pensions up to being fully funded, got a pretty strong cash position, so all in all they made a lot of financial improvements."

Becker says Northwest is in a much better position than peers like United and American Airlines, largely because its aircraft and debt payments have been lower.

Northwest CEO Richard Anderson, speaking on a conference call, said if executives seemed to be in good spirits it's because it's good to have 2003 behind them.

"Let's put it this way: We don't have an Iraq war, we don't have an orange alert, and there's no SARS," Anderson said. "And we're running a great airline and the employees are doing a great job."

Anderson says in terms of on-time and other performance measures, Northwest had its best year in a decade. More important, the airline has adapted its service to fit an industry that has become more competitive and less lucrative. Northwest says it has now downsized its fleet about as much as it could. The number of seats in the air shrunk five percent in 2003, through a combination of schedule changes and smaller planes. Northwest expects to start expanding again this spring.

Executive Vice President for marketing Tim Griffin says one industry change that will continue to sting is the death of the spendthrift business traveler.

"Has the volume of people paying high business fares returned? The answer is no, nor do we think they ever will. I think most business travelers are back, they're just not paying what they once were," Griffin said.

Executives say the biggest remaining challenge is cutting labor costs. Reacting to the 2003 earnings figures, some analysts said employee wages and benefits are now the one thing that keeps Northwest from matching low-cost competitors like Southwest and AirTran. It has been nearly a year since Northwest approached its unions with a request for nearly a billion dollars in givebacks.

CEO Anderson said today the airline would get the cuts "one way or another," though he declined to elaborate. Contract talks are currently open with pilots and with Northwest's biggest labor group, the groundworkers. Bobby DePace is president of the Northwest groundworkers union, the International Association of Machinists and Aerospace Workers.

"Our finances, our wages, our retirement, our pensions are below where the industry is today," DePace said. "This is not something where the union is being greedy, the union is strong-arming anybody, this is a good financial argument."

Northwest executives said concessions from the pilots alone would have swung the company from an operating loss to an equal sized profit this past year. And the pilots are talking. Union leaders will decide in March whether it is in the pilots' best interest to explore what they call "an investment" in the future of Northwest.

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