NWA files for Chapter 11 bankruptcy protection

09/14/2005

Susan Feyder,
Star Tribune
September 15, 2005

The board of directors of Northwest Airlines decided Wednesday that the company’s deteriorating finances left it no choice but to file for Chapter 11 bankruptcy for the first time in the airline’s 79-year history.

The news from Northwest, the nation’s fourth-largest airline, came the same day No. 3 U.S. carrier Delta Air Lines also filed for bankruptcy protection.

Under Chapter 11, a company continues to operate while it works out a plan to repay its creditors. However, its stock usually becomes worthless and employees often lose part of their pensions and union contracts are typically voided. Northwest stock, which has steadliy declined from about $10 a share at the the start of the year, hit a low Tuesday of $1.57, but moved up slightly to close at $1.87 a share Wednesday. Northwest announced its bankruptcy filing after the stock market closed.

Machinists man the picket lines.Glen StubbeStar TribuneNorthwest emphasized that it will continue to operate its normal flight schedule and will honor tickets as well as its WorldPerks frequent flyer and WorldPerks Visa programs. MLT, its tour subsidiary, also will continue normal operations.

Northwest, in the fourth week of a strike with its mechanics union, has lost $3.6 billion since 2001 and in recent months had warned it could file for bankruptcy unless it could sharply cut costs. The airline has continued to operate with replacement mechanics since the beginning of the mechanics’ strike Aug. 19, but even so has been burning through about $4 million a day.

The company said Wednesday its decision to file for Chapter 11 bankruptcy was not related to the mechanics’ strike.

Rather, CEO Doug Steenland said, the bankruptcy filing became necssary in order for Northwest to adjust its overall cost stucture in order to cope with a variety of cost pressures, mostly notably higher fuel costs and an intensively competitive environment.

“By filing for Chapter 11 now, we ensure that we have the means to complete the transformation of Northwest quickly and effectively,” he said. Steenland said the process will allow the company to develop a competitive cost structure for both labor and non-labor costs and strengthen its balance sheet.

NWA check-inGlen StubbeStar TribuneUnion officials said Wednesday they were not surprised by Northwest’s decision.

“We said earlier that management’s refusal to negotiate with us in good faith or agree to binding arbitration showed that they intended all along to declare bankruptcy in the hope that a bankruptcy judge would impose unreasonable terms Northwest knew it could never get through the normal negotiating process,” said O.V. Delle-Femine, national director of the Aircraft Mechanics Fraternal Association, the union representing striking mechanics. “We would rather take our chances with a bankruptcy judge than submit to managemenet’s proposed terms.”

Bobby DePace, president of District 143 of the International Association of Machinists and Aerospace Workers, has assembled a team of attorneys to make sure members’ rights are represented “both in the courtroom and at the bargaining table.” The IAM represents some 14,200 Northwest workers.

Northwest initially told its unions it needed $1.1 billion in annual labor cost savings but recently increased that, reportedly to $1.4 billion. So far, only the pilots union has said it will meet with the company to discuss a new round of savings.

However, the pressure on unions to agree to wage concessions has intensified as a result of Hurricane Katrina, which damaged oil production and refining operations on the Gulf Coast, sparking further increases in already-high fuel costs.

The filing came one day before the company was required to make a $65 million payment to its pension plans.

On Tuesday, Northwest said it had already failed to make a $19 million semi-monthly payment to Mesaba Airlines for flight operations in August and another $23 million in payments for aircraft financing.

In documents filed this week with the Securities and Exchange Commission, Northwest said it is analyzing its debt situation to determine which obligations should be targeted for restructuring. The airline has about $8 billion in long-term debt, plus $3.8 billion more tied to underfunded pension plans.

Like other major airlines, Northwest and Delta both have suffered because of high labor expenses, soaring fuel prices and competitive pressure from discount carriers such as Southwest, JetBlue and AirTran.

“I deeply regret Northwest Airlines’ decision to file for bankruptcy,” U.S. Sen Mark Dayton, D-Minn,. said in a statement. “Unfortunately, the company had little recourse, after its principal competitors had already done so.”