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Northwest files for bankruptcy
High fuel prices, lack of union wage cuts takes No. 4 carrier into bankruptcy minutes after Delta
September 14, 2005: 7:31 PM EDT
By Chris Isidore, CNN/Money senior writer
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Northwest's filing (PDF)

NEW YORK (CNN/Money) - Northwest Airlines, hit by a spike in jet fuel prices and an inability to win wage concessions from its unions, filed for bankruptcy court protection minutes after rival Delta also filed under Chapter 11.

The twin filings mean four of the nation's major airlines are operating under protection from creditors, and that nearly half of the U.S. air capacity is running on bankrupt carriers.

Northwest had been flying for nearly a month with its unionized mechanics on strike, and it said it expected to maintain its normal flight schedule in bankruptcy, limiting the impact on flyers. But some smaller cities now served exclusively or primarily by Northwest could be hurt as the airline trims its operations going forward.

Northwest and Delta follow No. 2 United Airlines (Research) and US Airways (Research). Fierce airline competition that has kept fares low and now Hurricane Katrina, which sent jet fuel prices soaring, produced a double blow to the industry.

"The US airline industry has changed permanently, and Northwest must change with it." Northwest CEO Doug Steenland said a press conference Wednesday. "Clearly this is the right and the necessary decision."

Steenland said there would definitely be layoffs at the Minnesota-based airline before the end of 2005, though he didn't give any range of the depth of the cuts.

Northwest filed for protection under Chapter 11 of the bankruptcy code, under which a company is protected from creditors as it seeks to cut costs and reorganize.

Despite filing for bankruptcy, Northwest is generally seen as being in better financial shape than Delta. As late as Tuesday afternoon, some analysts had been saying it might avoid bankruptcy altogether.

The most recent financial report from Northwest showed it had $2.1 billion in cash on hand as of June 30. While that's down from $2.5 billion at the end of 2004, it's well above the $1.7 billion in cash and short-term investments its larger rival Delta showed on its balance sheet. Still Steenland said Wednesday, "We are no longer an asset rich company."

But Northwest has been playing hardball with its unions. It virtually pushed its union mechanics into a strike, making an offer calling for 25 percent pay cuts and slashing half of the union's jobs at the carrier. It hired 1,200 replacement workers, as well as managers and outside contractors, ready to do the union's work as soon as the strike started.

"Northwest said, 'Enough of this, we'll handle it now,'" said airline consultant Michael Boyd. "This was brought on by fuel. They don't have any structure problems. Its route system is golden, it's bulletproof."

The bankruptcy filing gives Northwest a chance to force unions representing pilots, flight attendants and other ground workers to accept deep pay cuts. Northwest said earlier this year it needed an additional $1.1 billion in labor cost savings to avoid bankruptcy. It recently warned that the spike in fuel prices meant $1.1 billion wasn't enough to avoid bankruptcy.

The filing also gives Northwest a chance to dump some of its pension obligations on the federal agency that guarantees private pension plans. Its most recent filing showed Northwest faced a $3.8 billion shortfall in its pension plans, and it had been pushing for new laws to give it more time to cover the gap. Steenland said Wednesday the company would try to preserve the pension benefits earned to date and seek to avoid shedding the plans as competitors have done.

Experts said one other factor may have pushed Northwest: a change in the bankruptcy law, due to take effect Oct. 17. Under the new law, Northwest management would have only 18 months to work out a reorganization plan without competing plans from creditors. United has gone for nearly three years without facing such a challenge in its bankruptcy proceedings under the existing law.

But experts also agreed that the soaring price of jet fuel was a major factor. Northwest said in its bankruptcy announcement that it now expects that its fuel bill for 2005 will be approximately $3.3 billion. This compares with $2.2 billion for 2004, and $1.6 billion for 2003.

"Those three factors, pension, labor and fuel prices, likely were the major considerations," Philip Baggaley, Standard & Poor's senior airline credit analyst, said in comments before the Northwest filing.

Northwest also faced growing competition from low-fare, lower-cost airlines, which has hurt major hub-and-spoke carriers such as American Airlines (Research), the No. 1 airline, and the other airlines in bankruptcy.

The stiff competition has helped keep airfares lower than necessary to cover current fuel costs. Northwest's average fare per mile flow slipped 1.7 percent in the first half of the year, even as fuel costs soared.

But Northwest, with a greater percentage of its traffic coming from overseas routes, was somewhat less affected than some of its peers by the growth of the low-fare carriers, which operate almost exclusively domestic routes.  Top of page

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