Northwest Airlines late last month emerged from 20 months of bankruptcy court protection, representing a new era of solvency for the domestic airline industry. Northwest is the fourth and final major domestic airline to reorganize and exit from Chapter 11 since US Airways filed in August 2002.
Northwest is preparing for the future with a fleet renewal plan, expansion opportunities and an invigorated focus on the corporate market. Emboldened by the exit and hopeful for the future, Northwest president and CEO Doug Steenland said the carrier has repositioned itself as a "stronger, globally focused airline with a great route network, a revitalized fleet, a competitive cost structure and a recapitalized balance sheet."
Calyon Securities analyst Ray Neidl said the carrier is in a "strong, competitive position" following its operational overhaul under court protection. "In bankruptcy, the airline made major achievements in reducing its cost structure by $2.4 billion annually, solved its pension problem, right-sized its fleet and network and reduced its debt by over $4 billion," Calyon's Neidl said in a research note. Its most notable weak spot, according to Neidl, remains with labor agreements. "Overall, the franchise is strong, management deep," Neidl noted. "The main concern going forward that is company-specific is labor relations."
Steenland, in an address following the carrier's relisting on the New York Stock Exchange, contrasted the Northwest that entered Chapter 11 with the Northwest that exited. "When we filed, it was not a particularly pretty picture. We had lost billions going up to that point," Steenland said, and "faced the risk of liquidation."
The turnaround, however, is evident in operating statistics provided to the Department of Transportation. Comparing results from the full year 2005, when Northwest entered court protection, with last year, as its turnaround plan began taking hold, Northwest slashed operating costs by nearly 11 percent, increased its yield—representing fare per mile—by nearly 7 percent and brought in nearly 10 percent more revenue per available seat mile.
Northwest vice president of sales Steve Sear last week said the corporate market contributed to that growth, as the carrier's Chapter 11 restructuring did not shift its approach. "We stayed committed to keeping ourselves visible in the key markets that we serve," Sear said. "We didn't have a radical restructuring of any sort." Sear said corporate revenue and contracts grew in the past year, a trend he expects will continue "in anticipation of a lot of the route changes we have coming up."
New aircraft are fueling Northwest's approaching route changes. Steenland said Northwest is "continuing to spend more than $6 billion to renew our fleet," including the introduction of the Airbus A330, which has replaced the DC-10 on European and Asian routes.
"We've always had a significant portion of our ASMs that are international," Sear said. "Despite a little bit of a pull-down in domestic capacity, you'll see stability there and maybe even a bit of growth as we take on the new 76-seaters. Internationally, we're going to grow and expand our footprint. We have the 757s that are launching from Detroit to Frankfurt, Düsseldorf, Brussels then also Hartford-Amsterdam. Next fall, we're the 787 launch carrier, so you'll start to see growth for nonstop markets beyond Japan."
Domestically, the carrier last week introduced the first of 72 dual-class regional jets, flown by subsidiaries Compass Airlines and Mesaba Airlines. Steenland said the RJs allow the carrier to offer first class seats and serve domestic markets that "were not feasible to operate with larger aircraft."
Northwest under restructuring had limited domestic growth while expanding internationally—although not as drastically as Delta Air Lines
(BTN, May 7)."Growth in domestic capacity largely comes from Southwest and Continental, and a little bit from the other low-cost carriers," said TRX's Travel Analytics vice president and general manager Scott Gillespie. "The other network carriers—other than Northwest, which was break-even—have all shrunk."
Despite the anticipated slowdown in domestic demand growth, Steenland still "feels confident" in the carrier's business plan between now and 2010. "The industry as a whole has indicated some domestic revenue softness. I would expect that this summer would be strong and then everybody will be keeping an eye out."
Meanwhile, Sear said alliancewide contracting opportunities have grown amid global consolidation and new international opportunities, particularly the U.S.-EU Open Skies deal. "Northwest-KLM is the only true joint venture. We anticipate later in the year filing for antitrust immunity with Delta, KLM and Air France. That will help us improve our coordination and seamlessness for the global contracts."
Northwest filed for bankruptcy within minutes of fellow SkyTeam airline alliance member Delta Air Lines
(BTN, Sept. 19, 2005), which exited in April. When they filed, insolvent carriers operated more than 40 percent of domestic capacity, as US Airways and United also were under Chapter 11 protection. The industry has since regained a degree of financial health, reporting its first aggregate profit in 2006 after years of losses.
Northwest reported a pre-tax profit of $100 million for the first quarter of 2007, before reorganization expenses, which brought the tally to a $292 million net loss. Steenland said, "We believe that we have a viable business plan that will continue to deliver profits in the future."