Fighting to Stay Afloat As High Costs, Pensions Take Toll; Rivals Rehab in Bankruptcy

By SUSAN CAREY, Staff Reporter, The Wall Street Journal

(June 13) - Now that US Airways and United Airlines have improved their chances of emerging from bankruptcy-court protection, another carrier -- Northwest Airlines -- may be steering perilously close to Chapter 11.

Bad news is stacking up at Northwest like jets circling Detroit`s Metro Airport on a stormy evening. The company`s stock has lost 42% this year but was up nine cents, or 1.4%, to $6.33 in 4 p.m. Nasdaq Stock Market composite trading Friday. On June 1, Fitch Ratings pushed the company`s senior unsecured debt rating deeper into speculative, or junk, territory, downgrading it to triple-C-plus from single-B and citing unsustainably high labor costs and pension-plan obligations.

Gary Wilson, the airline`s largest individual shareholder and its nonexecutive chairman, has been selling his stake at a brisk pace. The company is girding for possible labor strikes, and a bankruptcy-court filing could be an option if Northwest can`t persuade Congress to change pension law.

Northwest, the nation`s fourth-largest airline by passenger traffic, is being hurt by problems affecting mature U.S. carriers: weak pricing, high fuel prices and the rapid growth of discount airlines. But the Eagan, Minn., company, with a market value of about $552 million, also is facing challenges because rivals have extracted concessions in Chapter 11 or under the threat of it, leaving Northwest with the U.S. industry`s highest labor costs.

US Airways Group Inc. and UAL Corp.`s United have used Chapter 11 to significantly cut worker wages and benefits, to outsource more work and to dump underfunded pensions on a federal pension insurer. Delta Air Lines and AMR Corp.`s American Airlines also have won concessions, although Delta is a potential Chapter 11 candidate.

Northwest has excised more than $1.7 billion annually in nonlabor expenses since early 2001, and those costs are now lower than many of its peers. Recently, the airline took heat from consumers after saying it would eliminate free pretzels and magazines on flights. At the same time, the carrier has continued to spend on airport technology and to order new planes so it won`t have to play catch-up if the market rebounds.

Despite four years of operating losses capped by a $450 million first-quarter net loss, Northwest has more than $2 billion in cash and valuable assets in its Pacific route network, cargo business and fortress hubs in the upper Midwest. Until now, it appeared set to ride out the industry`s current storm.

``Unless labor unions grant cost concessions and agree to pension-plan changes, Northwest could be facing a bankruptcy filing going into 2006,`` says Evan Mann, a Gimme Credit analyst, in a research note. The independent research firm doesn`t rate or hold any shares of Northwest.

Bankruptcy court ``clearly is not the preferred choice and is not our first option,`` says Doug Steenland, Northwest`s chief executive. ``It`s clear we need to realize competitive labor costs.``

In 2004, Northwest`s unit labor cost -- the employee expense associated with each seat flown a mile -- was 4.22 cents, compared with 1.78 cents for JetBlue Airways, 3.13 cents for Southwest Airlines and 3.86 cents for American, according to Morgan Stanley. Northwest has told workers it must reduce their costs by a total of $1.1 billion a year. Pilots have agreed to an initial $265 million in savings, and management employees provided $35 million.

The carrier is negotiating with unions representing mechanics, flight attendants and other ground workers. Last month it told the Aircraft Mechanics Fraternal Association it wanted to save $176 million by eliminating 2,800 of 5,300 jobs and cutting the remaining workers` pay by 26%. Ted Ludwig, president of the AMFA local in Minneapolis that represents many Northwest mechanics, says a 50% head-count reduction would never be ratified by union members, adding: ``If Northwest continues down this path, a strike could be inevitable.`` Northwest is preparing to fly through a strike and has engaged outside vendors to meet maintenance needs and is working with a recruitment firm to line up new flight attendants.

Complicating negotiations is Northwest`s strategy for its three pension plans, which are underfunded by $3.8 billion. The company backs a Senate bill that would let U.S. carriers have 25 years to fund their plans fully instead of the current three to five. In return, the carriers -- with workers` consent -- would freeze their defined-benefit plans, which pay fixed benefits, and put future contributions into cheaper 401(k)-type plans. The federal Pension Benefit Guaranty Corp. wouldn`t have to take over the underfunded plans, as it did with US Airways and United.

Northwest`s stock slide prompted Merrill Lynch analyst Michael Linenberg this month to upgrade the shares to ``buy`` from ``neutral.`` Merrill does and seeks to do business with companies covered in its research reports. But Bear Stearns a month ago downgraded Northwest shares to ``peer perform`` from ``outperform,`` based on the view that the company ``is now within one year of Chapter 11,`` says a note by analyst David Strine. Bear Stearns has no investment-banking relationship with Northwest, nor does it hold the stock.

Adding to anxiety is heavy insider selling, paced by Mr. Wilson. According to Securities and Exchange Commission filings, Mr. Wilson had cut his stake to 1.75 million shares as of last week from 4.34 million shares on March 31. A Northwest spokesman said on Mr. Wilson`s behalf that the executive is diversifying and remains a big shareholder.