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Storm Brewing


And they want you to take a pay cut !

Northwest said it costs 9.82 ASM
But thay only make 7.86 ASM
Is Northwest Lying?

NWA loses out on efficiency

Continental moves ahead in per-mile cost savings

Northwest Airlines cut its operating costs 6.8 percent in the first three months of the year, but Continental Airlines reduced its expenses even faster, surpassing Northwest to become the most efficient of the nation's five largest carriers.

According to Blaylock & Partners, a New York investment banking firm, Northwest cut its operating cost per seat mile -- the cost to fly one seat one mile -- to 7.7 cents.

Continental reduced its costs by 10.8 percent to 7.4 cents per seat mile.

In 2002, Continental averaged 8.3 cents to fly one mile per passenger compared with Northwest's 8.24 cents.

"Continental has more flexible work rules than Northwest," said Ray Neidl, an aviation expert with Blaylock & Partners. "They are doing a phenomenal job" at cutting costs.

Analysts said Northwest will need to bring down its costs more by the end of the year to maintain its lead over the other three major carriers: United Airlines, American Airlines and Delta Air Lines.

"Long-term, they (Northwest) would be at a real competitive disadvantage," Neidl said. "They have got time but not all the time in the world."

American and United recently won concessions from labor unions, and their operating costs are expected to drop significantly in coming months.

Eagan, Minn.-based Northwest, whose largest hub is at Detroit Metro Airport, has asked its unionized workers to accept pay cuts and more liberal work rules that would save about $1 billion annually. That would cut operating costs another 1 cent to 1.5 cents per seat mile.

Negotiations with each of its unions have begun or are scheduled to begin by July. It's uncertain how long or how successful those talks would be.

Representatives for the carrier's flight attendants, pilots, mechanics and ground staff could not be reached for comment or declined to comment until they could review the numbers.

"Northwest needs a billion dollars from their workers, and there is no real timetable," Neidl said. "They need those cuts because they can't charge a premium fare on average like American" or United, he said. "Northwest is doing a credible job (in cost cutting), but they have to get moving in the labor area."

The five largest carriers have lost billions of dollars since the Sept. 11, 2001, terrorist attacks. Northwest, for example, had lost $1.6 billion through the first quarter of 2003.

The big carriers are trying to cut costs and become more competitive with smaller, low-cost carriers like Southwest Airlines, AirTran and JetBlue Airways.

Southwest, the nation's sixth-largest airline, is the most efficient at 6.21 cents per seat mile in the first quarter, down 3.4 percent from 2002.

"Northwest has been cutting costs since February 2001," Mary Stanik, a spokeswoman, said in a statement. "Most industry analysts credit us with being more aggressive and moving sooner on our cost cutting than other airlines. And we continue to look for other cost-cutting operations."

Most of the cost reduction in the first quarter was achieved by fine-tuning operations, Neidl said. Airlines mainly slashed unprofitable routes, laid off workers and flew smaller planes to cope with the fall in demand.

The battle among airlines today is no longer about who offers top-notch service or who has a better frequent-flier program. It is not even about offering more routes or frequency. It is all about cost efficiency.



CEO says NWA has cash, still needs cuts


How can Northwest slash its union labor costs by nearly a $1 billion annually without the credible threat of bankruptcy? And how can it have a credible threat of bankruptcy when it has some $2.5 billion in cash?

That's what Wall Street is wondering. And rightly so, Northwest chief executive Richard Anderson said Tuesday at Merrill Lynch's 10th annual global transportation conference in New York.

"That's the $1 million question of the day," said Anderson, after an analyst noted that Northwest, with its stash of cash, is not an imminent candidate for bankruptcy. "You laid out our biggest challenge."

Some analysts and labor observers expect the airline won't win the union labor concessions it wants without threatening — or entering — bankruptcy.

Without the bankruptcy card in its hand, Eagan-based Northwest's push for wage and other givebacks at best promises to go much slower than it had hoped.

"The threat of bankruptcy would be necessary to ram concessions through in a hurry or allow Northwest to sit back and wait for the unions to come to it," said John Budd, a professor of human resources at the University of Minnesota's Carlson School of Management. "But without a credible threat of bankruptcy, the burden falls to Northwest to make its case much more carefully, much more thoroughly and much more patiently.... Ultimately, they could craft some concession deal if they're able to get the trust of the unions."

Winning the trust of its unions won't be easy for Northwest, though, given the history of bitter labor-management relations at the airline.

Northwest won concessions from its unions when it threatened bankruptcy 10 years ago. And in the current airline industry downturn, United and US Airways have entered bankruptcy. American has flirted with it. Northwest, which has lost $1.6 billion and jettisoned 17,000 employees since the start of 2001, has at times suggested bankruptcy looms if it fails to cut its annual labor costs by about $1 billion.

But on Tuesday, Anderson said, "A corporation should never want to file bankruptcy. And using the threat of bankruptcy has had limited success in the industry."

For now, he signaled that Northwest will have to rely on unions seeing the "inevitability of where costs have to go" and recognizing that just as their wages went up with those of employees at other big airlines, wages now must come down. He also expects the "specter of what's gone on at the other carriers" will motivate employees to grant concessions.

"It's an arduous task," Anderson said. "But it has to happen. The business has to have costs in line with revenue." To be sure, Northwest doesn't seem poised to hit what was its July 1 target date for getting concessions in place.

Northwest's pilots, the airline's highest paid employees, already have concluded that there's no need to rush their response to the carrier's pitch for big wage, benefit and work rule changes. After reviewing Northwest's finances, union leaders determined that while the airline continues to lose money, it's not in such bad shape that it'll seek bankruptcy protection soon. In fact, its cash holdings have grown by nearly $400 million since the end of the first quarter, thanks to proceeds from a debt offering and receipt of a government payment for security costs.

The pilots figure they have time to wait and see if Northwest's financials improve, lessening the need for concessions.

Anderson said Northwest will also seek to cut non-labor costs, taking an especially close look at the cost of reservation systems and back-office operations.

Anderson also said Tuesday that Northwest likely will cut its domestic capacity, measured in seat miles flown, by 4.3 percent this year.

On its Atlantic routes, capacity will fall 12.7 percent for the year, as revenue per available seat miles rises 1 percent, he said. Pacific capacity for the year likely will be off 22 percent compared to 2001. Anderson did not say how much revenue may be off in the Pacific market.