Northwest Airlines last month detailed its reorganization plan and filed its statement of disclosure in bankruptcy court, helping to solidify its intention of leaving Chapter 11 protection in the first half of the year. Joining Delta Air Lines in a steady march toward the exit, Northwest CEO Doug Steenland last month said the filing is "a key milestone in our restructuring process" and signifies that the carrier has met many of its goals while under protection—bringing costs down, advancing with labor agreements and brightening its revenue picture.
Northwest this month will take its next steps with a March 26 hearing on its disclosure statement, which will be followed by the creditor approval process. Northwest seeks $750 million to fund its bankruptcy exit. A Northwest source said "the balance sheet stuff is done" and "only the creditors and the judge remain."
A valuation by Seabury Securities estimates Northwest's value to be approximately $7 billion. Steenland said that without special restructuring items, Northwest in 2006 scored its first annual profit since 2000. In its forecast, Northwest said revenue would grow to more than $14 billion through 2010. Steenland said the carrier's business plan assumes that unit revenues would grow by about 1.8 percent each year on a systemwide basis through 2010, and capacity would grow at a rate of 2 percent in that timeframe.
Steenland said the company is expecting fuel to average $65 per barrel. A source said Northwest is best suited to handle fuel prices in the $50-to-$75 per-barrel range, considering its hedge position.
Meanwhile, with creditors thwarting US Airways' takeover attempt
(BTN, Feb. 5), Delta's plan for emergence as a stand-alone carrier is expected to move it toward solvency this spring. Delta secured billions in exit financing and continually has highlighted financial gains made under Chapter 11 protection, including improved revenues and the elimination of almost $2 billion in annual costs, the carrier said. Delta in its December 2006 filing in the bankruptcy court outlined its five-year plan, which calls for a return to profitability in 2007, setting the stage for a "profitable, long-term future," while improving margins and further cutting costs.
When Delta and Northwest filed for bankruptcy on the same day in September 2005, they joined Chapter-11 protected carriers United and US Airways—which left more than 40 percent of domestic capacity in the hands of insolvent carriers
(BTN, Sept. 19, 2005). Since then, the industry has turned around. United and US Airways returned to the black, putting their bankruptcy protections behind them. Domestic capacity shrunk, load factors grew, and pricing power returned to domestic airlines.
Including earnings for Delta and Northwest, domestic carriers profited by an aggregate $2 billion in 2006—"the first annual earnings for the industry since before 9/11," Calyon Securities airline analyst Ray Neidl said. The Air Transport Association, meanwhile, said 2007 appears even more promising, with a projected net profit of approximately $4 billion, according to its annual economic outlook released this year.
At a time when four of the Big Six carriers were under bankruptcy protection, profits were relegated to the so-called low-cost carriers. However, with a marked turnaround for the industry, the legacy carriers are expected to fare well. "We still believe that the legacy carriers, with their broad systems and yield management buckets, will benefit the most in a strong U.S. industry market," according to Neidl.
Although consolidation talk among major U.S. carriers quieted after US Airways failed to capture Delta, the industry remains ripe for mergers—and the prospect could re-emerge as soon as the end of this year, according to many knowledgeable sources.
"Once all carriers are out of bankruptcy and industry conditions stabilize, the scene could be set for the show to begin, possibly by the end of the year," Neidl noted, adding that airline management and industry investors "are ready or close to being ready to support mergers," although questions remain about government regulator receptivity. Neidl noted that airline stock prices rose this year amid a fervor for mergers, "demonstrating the market's favor for consolidation."
Neidl said he expects Northwest to emerge from Chapter 11 protection "as a tough competitor and possibly as a potential merger partner."
Northwest's Steenland, however, said of the prospect of participating in a merger noted, "I've learned through all of this is the right answer is to answer that we will not speculate on this."
While the U.S. departments of Justice and Transportation have yet to signal how they would respond to major consolidation, Neidl said even they could come around, "realizing that there are too many airlines to support a financially healthy industry through the economic cycles, though many politicians still at least give lip service that they do not want industry consolidation."