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Bankruptcy question a cloud over Northwest
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Mark McClain, head of the powerful Northwest pilots union, has urged other unions to agree to concessions, as the pilots did last year. (MPR Photo/Mark Zdechlik)
Northwest Airlines is heading into the summer with the threat of bankruptcy looming, and mounting tensions with its mechanics union. Some mechanics union leaders are now saying a strike looks inevitable. Wall Street analysts say the question facing Northwest is whether the airline will reach cost-cutting agreements with its unions in time to head off bankruptcy.

St. Paul, Minn. — The consensus on Wall Street appears to be that Northwest Airlines is on a path toward a Chapter 11 bankruptcy, and that its hope for solvency lies in securing more than $1 billion in annual labor cost savings, including wage and job cuts.

Since 2001, Northwest has lost nearly $3 billion. In addition to those operating losses, the airline faces a staggering pension obligation of nearly $4 billion, with hundreds of millions due this year.

"Looking at Northwest, the market has been pricing in bankruptcy," says Ray Neidl of Calyon Securities in New York.

Analysts agree Northwest can't continue burning cash reserves, restructuring debt and selling assets to finance operations that are unprofitable. And they agree Northwest needs significant wage decreases to return to profitability. But there's disagreement about just how much time the airline has, and about the likelihood Northwest will be able to convince its unions to go along with cutbacks.

Looking at Northwest, the market has been pricing in bankruptcy.
- Analyst Ray Neidl of Calyon Securities

Earlier this week, Merrill Lynch upgraded its outlook for Northwest on the expectation the airline will be able to use the threat of bankruptcy to win worker concessions.

However also this week, Fitch Ratings downgraded its assessment of Northwest's situation, citing primarily Northwest's "protracted struggle with labor over wage and benefit concessions."

More than two years ago, Northwest's pilots' union concluded the airline's workforce needed to accept wage concessions to ensure the airline's survival. Late last year the pilots agreed to a 15 percent wage cut. Leaders of the pilots' union have been criticizing other unions for not following suit.

Captain Mark McClain, who heads up the pilot's union, says now is the time to "fish or cut bait."

"We don't know of any other places where there's cash available," McClain says.

McClain says it's difficult to estimate how long Northwest can stay out of bankruptcy without more labor cuts.

"Certainly not indefinitely," McClain says. "As far as in the near term, we're hoping that there'd be an improving revenue environment this summer, and fuel prices have started to moderate some. And either one of those would have some impact on the bottom line."

In May, Northwest asked the National Mediation Board to release it from negotiations with its mechanics union. Northwest contends the talks have stalled out and that the Aircraft Mechanics Fraternal Association, known as AMFA, is unwilling to acknowledge worker concessions are necessary.

AMFA leaders characterized Northwest's request as premature. They declined to discuss the threat of bankruptcy for this report, saying only that the union realizes "difficult times lie ahead for Northwest."

If the NMB goes along with Northwest's request, a 30-day cooling-off period would ensue, after which a strike could occur. However, some observers say it's unlikely the NMB would open the door to a strike during the busy summer travel season. The union claims Northwest has already hired replacement mechanics in preparation for a walkout.

Strike threats and rogue worker protests have cost Northwest and other airlines ticket sales in the past. Observers agree, losing business this summer would accelerate the timeline for a potential Northwest bankruptcy.

Northwest did not respond to a request for comment.