September 13, 2005
Bloomington, Minn. — For months Northwest Airlines has been threatening a bankruptcy filing, saying that without massive cost-cutting the airline could not survive. The rising cost of jet fuel has only made its financial situation worse.
The New York Times, citing people close to Northwest, reports the airline's management team could file for Chapter 11 protection from creditors as soon as Wednesday.
Perhaps the strongest indication of a bankruptcy lies in Northwest's decision's not to make $42 million in payments which just came due, including nearly $19 million to its regional partner Mesaba Aviation.
"These are all the classic signs of a company that's about to enter bankruptcy," according to University of Minnesota Carlson School of Management Associate Professor of Finance Rajesh Aggarwal, who says there's no question in his mind Northwest is about to seek protection from its creditors through the courts.
"Northwest has been displaying the signs of a company that was going to enter bankruptcy for really a little more than a week at this point. Obviously Northwest missing the payment to Mesaba Airline is just an indication that they are at this point in a serious cash crunch. And they're filing for bankruptcy basically means they won't have to make that payment if they're filing for bankruptcy very quickly," according to Aggarwal.
Mesaba Aviation declined to speculate whether the default is a sign Northwest is headed for bankruptcy, but a spokeswoman said Mesaba officials were not surprised the payment was not made.
Northwest officials declined to comment on the bankruptcy speculation, but in a late filing on Tuesday with the Securities and Exchange Commission, Northwest stated it is enagaged in an analisys of it debt, lease and other obligations to determine which obligation should be targeted for restructuring.
Under a Chapter 11 filing Northwest would almost certainly continue flying. It would get immediate relief from debt payments, but would still need a significant amount of cash to keep up with its operational expenses such as the costs of wages, fuel, and airport fees.
Northwest had about $1.7 billion in cash and short-term investments as of the last day of August. It's unclear how much the airline has now.
Joseph Schwieterman, an airline expert at DePaul University, says it makes a lot of sense for Northwest to seek protection under Chapter 11 earlier rather than later if bankruptcy is going to be the airline's only option.
"They don't want to make the mistake US Airways made and that's simply to limp along until virtually all the cash is gone, so when bankruptcy comes they're beholden on their creditors to keep any symbol of normalcy in place during the transition until they can reorganize. So I think Northwest may play hardball here and may well seek protection in Chapter 11 before the last of the cash is gone," according to Schwieterman.
In bankruptcy Northwest would likely be able to slash labor costs significantly. If negotiations for more concessions fail to result in a deal, Northwest could argue its case in court in hopes of convincing a judge to do impose pay cuts.
If Northwest files for bankruptcy, it will join other U.S. airlines that are either currently operating under Chapter 11 or that have emerged from it.
WHAT'S THE DIFFERENCE?
University of Dayton School of Law bankruptcy expert Jeff Morris says Northwest customers will not likely notice much of a difference. He says even accumulated frequent flyer miles will almost certainly be protected.
"You don't see disruption in those programs because it is very important to Northwest or any airline to maintain customer loyalty as much as they can," he says.
One bankruptcy attorney says creditors and customers often treat companies on the brink of bankruptcy as though they're already in Chapter 11, and if that's the case there's little reason to delay a trip to bankruptcy court.
EFFECT ON STRIKERS
Word of a possible bankruptcy filing comes as Northwest says it has begun hiring permanent replacements for its striking union mechanics. Some analysts say this signals the strike is essentially over, with the airline the victor. Union leaders, however, say the intensity of the strike will grow and mechanics remain unfazed.
Despite all the attention given to Tuesday's deadline for hiring replacements, Northwest offered few details in a one-sentence statement. "The process of hiring permanent replacement technicians is underway and proceeding smoothly," it said, although the airline declined to say how many replacements would be hired, who was applying, or where they would be located. Based upon the company's last offer to the union in talks last weekend, many believe the replacement workforce will be a fraction of the union workforce and be based primarily -- perhaps exclusively -- in Detroit and the Twin Cities.
Northwest says it's losing $4 million a day and is trying to cut labor costs to stop billions of dollars in losses.
NO IMPACT ON STRIKERS?
Under U.S. law, hiring permanent replacements technically has no impact upon the status of a strike. Union officials say the walkout will not end, and strike activities will in fact increase.
But to many industry experts, such as consultant Ernest Arvai, the hiring of permanent replacements effectively allows Northwest to leave its battle with the mechanics behind.
"Since the other unions didn't support the strike, and the airline has kept going, they've effectively broken the strike and broken the power of that union," according to Arvai.
Arvai says Northwest should be able to fill the jobs easily, given the many unemployed aircraft mechanics in the U.S. economy. Once replacements have been hired, he says it would be costly for Northwest to let them go again to make room for returning union members.
"The question is: is it too late for the union at this point? They walked away from the table, and Northwest has said, 'We don't need you anymore,' and they'd rather hire a new labor force than have one that's disgruntled," Arvai says.
But Peter Rachleff, a labor historian at Macalester College, and a labor supporter, says the move to hire replacements permanently could escalate the labor dispute, not deflate it. Rachleff says hiring permanent replacements is considered among the worst offenses to organized labor. While the Northwest mechanics have not enjoyed strong support so far from other unions within or outside the company, Rachleff says the tide is turning. He cites an $880,000 donation to the union this week from the United Auto Workers.
"There is actually a growing level of support for the mechanics within the labor movement. That may make it easier for them to survive materially without a paycheck, and it may help keep morale up. There still needs to be a strategy that really forces the public to face the question of whether it's safe to fly Northwest Airlines," Rachleff says.
Rachleff believes the circumstances of the strike will be shaped by an ongoing federal investigation of a Federal Aviation Administration inspector's concerns about safety at Northwest. Northwest says it would never compromise safety, and the FAA insists Northwest's operation is safe.
Experts say the airline's on-time performance may also shape how the labor dispute evolves if chronic lateness causes business travelers to avoid Northwest. A new analysis of all U.S. airline flights by the company FlightStats shows last week Northwest's on-time performance slipped to last place among the 20 largest airlines in the U.S. Seventy-six percent of Northwest flights landed on-time. Next lowest among Northwest's major competitors was American Airlines, with 86 percent.
To union spokesman Steve MacFarlane, this confirms what mechanics have said all along: Northwest is far too confident in its ability to carry on without them.
"This is not something Northwest has really thought through, at least this part," he says. "They anticipated we would have crossed our picket lines by now, and they really are in a bind."
The airline and the union could find the rules of the game changed entirely if Northwest declares bankruptcy.