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Northwest files for bankruptcy
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A traveler is seen in line in the Northwest Airlines' terminal at O'Hare International Airport on Wednesday in Chicago. (Tim Boyle/Getty Images )
Northwest Airlines Corp., pummeled by high labor costs and soaring fuel prices, filed for bankruptcy protection Wednesday, entering Chapter 11 on the same day as its larger rival, Delta Air Lines Inc.

St. Paul, Minn. — The filings put three of the nation's four largest airlines in bankruptcy court.

The company said in a news release it would continue to fly its normal schedule while reorganizing.

"We had developed a plan to restructure Northwest outside of Chapter 11 and have been implementing that plan," Doug Steenland, Northwest president and CEO, said in a statement. "Unfortunately, in addition to an uncompetitive cost structure, our efforts have been overtaken by skyrocketing fuel costs."

Kathy Gerhardt of Carlson Wagonlit Travel Services, one of the country's largest travel agents, says a bankruptcy won't have a big effect on travellers. Gerhardt says they'll retain benefits such as frequent flyer miles. And she says customers will likely pay as little attention to a Northwest bankruptcy it as they did to bankruptcies at United and US Airways.

"Honestly I don't think consumers would notice much if one or two other airlines went into bankruptcy. Basically it would be a business as usual situation for them," she says.


And state economist Tom Stinson says a Northwest Airlines bankruptcy -- or even a total liquidation -- won't imperil the Minnesota economy. He says that's because air travel isn't the fulcrum of the state's financial health.

"Minnesota's economy is more than $225 billion, and even if all airline traffic in the state and all airline traffic in the state were to disappear -- and it certainly wouldn't -- that would be less than a 1 percent decline," he says.

Stinson says a Northwest bankruptcy wouldn't even cause a big ripple in unemployment numbers. He says the airline's current plans to cut its striking mechanics workforce by 75 percent will probably have a more significant effect in that area.

"That loss in jobs that's going on right now because of this labor action could conceivably be a larger change in employment than any change in employment coming from declaring bankruptcy," he says.


But travel expert Edward Hasbrouck says it's conceivable there might not be a Northwest at a certain point. He says bankruptcy sometimes goes hand in hand with total cessation of service. He points to the shutdowns of Southeast Airlines in 2004 or Midway Airlines in 2001.

"You have no guarantee that an airline is still going to be flying. Once an airline has filed for bankruptcy, it has placed its future in the hands of the bankruptcy court, which will allow it to continue to operate only as long as the bankruptcy court thinks that has a reasonable chance of getting the creditors repaid. The bankruptcy court does not supervise the airline's operations for the benefit of travellers; it supervises them in order to maximize the chances of repayments of creditors," says Hasbrouck.

Hasbrouck is one of the few analysts who say bankruptcy is a real threat to Northwest's existence.

The airline itself isn't taking Chapter 11 lightly. The company has long maintained that bankruptcy would be the worst possible answer to its financial crises.


Labor law experts seem to agree that Northwest Airlines' filing on Wednesday will position it to reduce its labor costs. The airline would still be obligated to bargain in "good-faith" with its unions, but if there's no progress, a federal judge could impose new employment terms.

The filing does not immediately wipe out contract agreements between Northwest Airlines and its union workers in favor of a federal court settlements.

UCLA Law School bankruptcy expert Lynn LoPucki, says bankruptcy law requires management and labor to work toward mutually acceptable agreements.

"There actually have to be negotiations. Both sides are obligated to bargain in good faith first before anything can be done unilaterally," LoPucki says.

Northwest Airlines' cost-cutting proposals would dramatically reduce the size of its union workforce. The airline has also been calling for significant wage and benefit reductions.

Airline industry analyst Ray Neidl of Calyon Securities predicts the reductions Northwest wanted prior to bankruptcy would grow even larger in bankruptcy.

"If you look at some other airline bankruptcy filings the cost cuts across the board including labor are usually much deeper than what was requested before bankruptcy and I expect the same thing to happen in this case as well. The airline will have to very sharply cut costs and if they're in bankruptcy they might as well do it right and they'll do it deeply," he says.

Neidl says bankruptcy could mean the type of major restructuring unions often flight. For example the airline could decide to farm out more flights to less-expensive regional partners; that takes jobs away from the pilots and flight attendants' unions.

Bankruptcy also allows management to ask a federal judge to abrogate existing contracts and impose wage and benefit packages.

LoPucki, from UCLA, says that threat often changes the dynamics of negotiations in a way that gives management more power.

"Bankruptcy makes no direct legal difference in what these offers are going to be, but there is a psychological impact of the bankruptcy and even more so there is a psychological impact of the employer being able to suddenly determine wages and working conditions aside from the collective bargaining agreement between the parties," according to LoPucki.


What's unclear is how bankruptcy would effect Northwest's striking mechanics union.

Leaders of Aircraft Mechanics Fraternal Association have expressed optimism that they might fair better in bankruptcy court than at the table with Northwest.

"I think they're probably dreaming as far as that goes," says Ray Neidl. "Basically the strike is over with AMFA at Northwest. They struck and they walked off of the property and they're being replaced now from what I understand."

Other experts disagree.

They say a judge would get involved in the dispute between Northwest and its mechanics if they're unable to come to an agreement with the Chapter 11 filing just as with non-striking unions.

"It isn't over and technically Northwest could still settle with them," says University of Minnesota Carlson School of Management labor relations professor John Remington, who says Northwest-AMFA would be unlikely to negotiate a settlement in bankruptcy. But that that union mechanics would likely have a chance to propose a package of wages and benefits to the bankruptcy judge.

"AMFA continues to be the exclusive representative of mechanics, of that bargaining unit of people, so initially at least it would be AMFA who would be representing the mechanics and in this bankruptcy proceeding, who would have an opportunity to make a presentation on behalf of those employees," says Remington.

The striking mechanics aside, Neidl from Calyon Securities, says Northwest would likely be compelled to try to come to peace with its union workers in bankruptcy. Neidl says if those workers can't get an agreement that acceptable to them, Northwest's effort to reorganize and emerge from Chapter 11 could be hurt significantly.

"I think Northwest would try," he says. "That's the best method to go. It is a service business and you do need the cooperation of your employees and the bankruptcy courts encourage that so if you could work something out even in bankruptcy with your employees that would have a much better chance of sailing through more smoothly and quickly."