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Northwest losses come amid 'perfect storm' of problems
by Jeff Horwich, Minnesota Public Radio
July 26, 2005

For the quarter ending June 30, Northwest said it lost $2.59 per share, compared with a loss of $182 million, or $2.11 per share, a year ago. (MPR file photo)

Eagan-based Northwest Airlines says it lost $225 million in the second quarter of the year. Investors seemed to like the news, which was not as bad as most had expected.

But Northwest CEO Doug Steenland said he is running out of words to describe how poor the airline's financial situation has become. Northwest officials discussed the company's earnings Tuesday amid a perfect storm of rising fuel prices, threats of bankruptcy, and a potential strike by mechanics.

St. Paul, Minn. — There was good news buried amid another quarter of red ink at Northwest. Passenger traffic rose almost 7 percent, despite the airline's earlier prediction that growth this year would be flat.

Northwest planes were 84 percent full, a new record. And even with a pending strike, the airline says ticket reservation trends look good. All this means revenues rose more than 11 percent during the second quarter.

But as with any company, there are revenues and there are expenses. At Northwest those expenses were up even more than revenues -- 18 percent over the year before, creating a net loss of $225 million for the quarter. The loss is even greater, $279 million, if you exclude the profits from some shares in another company the airline was able to sell.

The main culprit, as usual, was the price of jet fuel. Northwest paid 58 percent more to gas up its planes than it did one year ago.

Company officials say the solution, also nothing new, is to cut labor costs. Speaking on a conference call to financial analysts and the media, CEO Doug Steenland said Northwest's labor costs are now the highest in the industry.

"We are benefiting from $300 million in annual pay and benefit costs taken by our pilots, management and salaried employees starting last December," said Steenland. "But that is not enough."

The airline says it needs another $800 million in annual savings from its major unions. Northwest officials are negotiating with groundworkers and flight attendants, though the most pressing contract battle is with mechanics.

Mechanics say they are ready to strike on Aug. 19 over Northwest's proposal to save $176 million a year through job and wage cuts. Steenland revealed that the two sides are set to talk again next week, starting Tuesday, in Washington D.C.

Northwest officials restated their confidence that they can weather a mechanics strike with no schedule disruptions. This is disputed by mechanics, who say replacements will be poorly prepared to turn planes around quickly in an unfamiliar airport.

But according to Northwest's chief of marketing and distribution, Tim Griffin, travelers have not been scared away by the pending strike.

"We have not seen any impact in our advance bookings, either the absolute totals or when we look at relative bookings -- that is, our share of bookings from travel agents seem not to be impacted," Griffin said.

Griffin also says less than 1 percent of callers to Northwest reservation centers have asked about the possible strike.

Many observers say a mechanics strike could be much more difficult for Northwest if flight attendants refuse to cross the picket line. CEO Steenland addressed this question, saying the flight attendants' contract has no provision allowing for a sympathy strike.

Even though Northwest is training replacement flight attendants, Steenland says he has assurances from flight attendant union leaders that no sympathy strike will happen.

Professional Flight Attendants Association board member Peter Fiske, though, says his union has given no such assurance, and has the right to a sympathy strike under federal law.

"Our contract is silent on the issue of whether we can do something like that or not. However, the Railway Labor Act is very clear that we are permitted to do something like that. And while we have not made that decision, we are keeping our options open," said Fiske.

Flight attendants would have to vote before they could strike in support of mechanics. Fiske also says unlike mechanics, there is some movement in contract talks between his union and the airline.

In addition to labor cost cuts, Northwest has said Congessional relief of its pension funding obligations is critical to avoid bankruptcy.

The Senate Finance Committee has just approved a bill CEO Doug Steenland says is acceptable. It would give troubled airlines at least 14 years to pay off their pension deficits, provided they freeze their current plans before accumulating further losses, something Northwest is trying to do. A similar bill is working its way through the House.