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The ripple effect of Northwest in bankruptcy
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Northwest CEO Doug Steenland says even though the airline has filed for bankruptcy protection, customers will see little change in its operations. (MPR file photo)
Northwest Airlines' decision to file for Chapter 11 bankruptcy protection has ripple effects that impact its employees, the state of Minnesota and the region's economy.

St. Paul, Minn. — In a conference call with reporters, Northwest's CEO Doug Steenland said the company has cut unprofitable routes, increased ticket prices, and tried to cut labor costs. But the soaring price of fuel weighed too heavily on the carrier. What's needed now, Steenland said, is for the airline to become leaner and profitable through a chapter 11 restructuring.

That likely means layoffs, and cuts in employee wages and benefits. Steenland said Northwest will continue operating normally, and will preserve its frequent flyer program, but there may be fewer flights to some cities.

"The airline is not going to look materially different, but it will be somewhat smaller. And so the Northwest people know today is going to be the Northwest as it looks going forward," Steenland said. "But instead of there being however many frequencies to Los Angeles or the like, there might be one fewer. We're talking about changes of that kind of magnitude."

Northwest's bankruptcy filing came in the fourth week of its mechanics' union strike. Steenland asserted that the filing won't affect negotiations with the Aircraft Mechanics Fraternal Association, or AMFA, the union representing Northwest's mechanics.

Steenland says the two sides no longer have a collective bargaining agreement. He says the contract was terminated when the union went on strike Aug. 19.

"So there is no forum, there will be no hearing, there will be no issues whatsoever between the company and AMFA in this bankruptcy court. It is irrelevant to that process," said Steenland.

It is the retirees, whose pensions and health care benefits are one of the key targets of a Chapter 11 restructuring, (who stand to lose the most).
- Michael Reed, bankruptcy attorney

Several AMFA members had been hoping a bankruptcy judge might give the union a contract with fewer job and pay cuts than Northwest wanted. But Ted Ludwig, president of AMFA's Twin Cities local, is now saying any negotiations between the airline and the union will be independent of bankruptcy proceedings.

Ludwig asserts that Northwest will be driven back to the negotiating table, because unqualified replacement mechanics are causing too many problems, and the company's operations are suffering.

"They're going to need some qualified mechanics. They can't go on with these temporary mechanics," says Ludwig. "They even said they're going to hire permanent replacements. But the permanent replacements they want to hire are us. They want us to cross our picket lines. Well the only way they'll get us to cross lines is to get an agreement."

Northwest says its operations are running smoothly, but it trails other major carriers in on-time performance.

Ludwig says the union wasn't surprised by the bankruptcy filing.

Nor were analysts astounded by the news. Northwest's financial situation is grim. The airline is losing $4 million a day. And while the company has more than 14 billion in assets, that's offset by almost $18 billion in debt.

In addition, while the company has $1.5 billion in cash, it owes even more than that to just one of its creditors, U.S. Bank.

Northwest filed for bankruptcy on the same day as Delta Airlines, joining United, US Airways, ATA, and Aloha Airlines -- which are all operating in bankruptcy.

But if all those bankrupt carriers are making the public used to the idea of bankruptcy, that doesn't mean bankruptcy isn't a big deal.

Michael Reed, a bankruptcy attorney at the Philadelphia firm Pepper Hamilton, says bankruptcy is still a stain on a company's record. He says bankruptcy makes it harder to run a company, because many business decisions now require the bankruptcy court's approval. Reed says there are financial downsides, too.

"There's also a significant amount of expense, attorneys' fees, accounting fees, other fees. Bankruptcy is not something companies do other than reluctantly," says Reed.

Though it might pain the company to file for Chapter 11, Reed says employees and retirees stand to lose the most.

"It is the retirees, whose pensions and health care benefits are one of the key targets of a Chapter 11 restructuring," said Reed. "In addition, the collectively bargained wages of the various unions, pilots, flight attendants, maintenance people -- what used to be very envied levels of compensation are put at risk."

Northwest owes $2.5 billion to its underfunded pensions in the next few years. The company has pushed for a federal law that would allow it to make those payments over a longer period of time. The company has said it wants to avoid defaulting on its pensions, as other bankrupt carriers have.

But it's the pension and wage cuts that have Northwest unions worried. The pilots union expressed the most chagrin over the bankruptcy filing, indicating that officials had initiated numerous phone calls and meetings with other unions to help get enough concessions to eliminate the need for bankruptcy.

So far, the pilots are the only labor group at Northwest that has agreed to concessions. The pilots have the most to lose in bankruptcy, given that their salaries are the highest of the unionized groups on the property.

Overall, Northwest employs 16,000 workers in Minnesota. According to state labor expert Steve Hine, that means the state economy could suffer a blow through the cuts in employment and wages that usually come about from a Chapter 11 restructuring.

"It certainly seems very likely there will be less income accruing to employees of NWA in the future, that could add up to a few million dollars a year, that will have an impact on local purchasing power," says Hine. "It's a small portion of total wages received in the Twin Cities, but it would certainly have an impact on purchasing power, the demand for goods and services, and ultimately, quite likely the level of employment in the transportation industry, as well as the industries from which that income would've been spent."

The state of Minnesota is also one of Northwest's creditors. Northwest has a loan through the Metropolitan Airports Commission. Commission Chair Vicki Tigwell says the balance on the loan is about $275 million, but she says Minnesota is not likely to be stuck holding the bag.

"We have collateral on that loan, so it's a secured loan, we're quite happy that we're a secured creditor. We have a two-year reserve at MAC on that loan, so we think we'll emerge from this in good shape," says Tigwell.

Travel experts say the bankruptcy may mean little disruption for Northwest customers. But for Northwest, the bankruptcy will be yet another in a string of difficult chapters as the company starts its 80th year.