Northwest Faces Strike Deadline
Northwest Airlines Corp. is facing a threatened strike tonight that could push the nation’s fourth-biggest carrier to seek protection from its creditors -- and raises the prospect that four major airlines could soon be operating in bankruptcy at the same time.
Delta Air Lines Inc. also is perilously close to filing for bankruptcy protection, and UAL Corp.'s United Airlines and US Airways Group Inc. already have. Along with Northwest -- which pledges to keep flying even in the event of a strike -- the four airlines carry nearly five of every 10 domestic passengers,
The latest culprit: skyrocketing jet fuel costs, which have doubled since the beginning of 2004. Although the airlines are carrying record numbers of passengers and making painful cost cuts, the increase in one of their biggest expenses is damping profits or leading to more losses.
And it hasn’t helped that competition from low-fare carriers has kept ticket prices relatively low, making it tough for rivals to absorb the fuel cost.
“We’re in for a lot of changes,” said Tom Parsons, chief executive of travel website Bestfares.com. “The industry is being torn apart by fuel prices and competition.”
In addition to a potential quartet of airlines in bankruptcy, the turmoil is pushing the airline business toward a long-awaited shakeout, analysts say.
US Airways already has seized on a merger with America West Holdings Corp. as its ticket out of bankruptcy protection, and more airline marriages could be coming if other carriers file for Chapter 11, which allows a company to continue operating while its finances are reorganized under the supervision of a federal Bankruptcy Court judge.
For travelers, multiple airline bankruptcies aren’t likely to have a big effect -- at least not right away. As United and US Airways have shown, airlines can keep flying while they reorganize. Even if they reduce their schedules or seek a merger partner, the changes would probably come gradually over many months, experts said.
Plus, “people are now desensitized to airline bankruptcies,” aviation consultant John Pincavage said. “They know the airlines’ business isn’t going to stop and the flights are going to continue.”
But the threatened strike at Northwest, with its 1,600 daily flights, does raise an immediate concern for the public.
It’s the seventh-largest airline at Los Angeles International Airport, with 22 daily departures to seven cities, including Tokyo. It handles about 6,200 passengers a day at LAX -- about 3.5% of the airport’s total, LAX officials said.
The carrier also has 13 daily departures from San Francisco International Airport, six from San Diego International, two from Ontario International and four from John Wayne Airport in Orange County. The airline employs more than 860 people in California.
About 4,400 mechanics, plane cleaners and other members of the Aircraft Mechanics Fraternal Assn. union plan to walk out tonight at 9:01 PDT unless an agreement is reached on a new contract.
They’re protesting Northwest’s effort to eliminate about half the workforce represented by the union and to cut the remaining workers’ wages by 25%, resulting in annual savings of $176 million.
Northwest, which is losing an average of $4 million a day and laboring under $11.5 billion of debt and pension obligations, says it needs $1.1 billion in annual concessions from its employees to survive.
Northwest vows to keep flying its full schedule even if there is a strike. The Eagan, Minn.-based carrier has spent months lining up replacement workers and outside mechanics, and has kept the Federal Aviation Administration informed about its plans.
But if the job action leads to delays and cancellations, it could cause headaches for travelers because there are few empty seats available on other airlines through the Labor Day weekend, analysts said. That would make it tough for Northwest passengers to find another flight.
“I don’t know if American, Delta, United or any other airline that serves the markets of Northwest can pick up the extra load that quickly,” Parsons of Bestfares.com said.
President Bush could order the mechanics back to work if he saw a threat to the nation’s air-travel system. But the president has no plans to intervene, a White House spokesman said this week.
Northwest said the strike threat had not affected its “strong” bookings through Labor Day and the fall.
Rhonda Holguin, general manager of Montrose Travel in Montrose, said her customers hadn’t been canceling Northwest flights or booking away from the carrier, which was so confident about its strike-preparation plans that it wasn’t offering refunds or waiving penalties for changing flights.
The travel agency also has phoned or e-mailed customers with Northwest reservations “so that they’re aware there is the potential for a strike,” Holguin said.
Strike-related snags also could further shrink Northwest’s cash cushion and lead to a bankruptcy filing.
Michael Linenberg, an analyst at Merrill Lynch & Co., wrote to clients Thursday that even though the airline is “well-prepared for a possible strike, the potential disruptions could be devastating for Northwest.”
That said, the carrier’s stock surged almost 10% on Thursday, climbing 48 cents to $5.48 a share, as investors reacted favorably to the airline’s strike-preparation plans and another brokerage firm raised its rating on Northwest shares.
Travel has rebounded to its pre-9/11 levels and planes are flying nearly full. But that’s in good part because the growing clout of discount carriers such as Southwest Airlines Co. and JetBlue Airways Corp. is helping keep fares relatively low industrywide -- so low that ticket prices aren’t covering the big airlines’ costs.
And that includes jet fuel, which in Los Angeles has shot up 98% since January 2004 -- climbing to nearly $2.10 a gallon as of Aug. 12, according to the Energy Department.
Fuel is typically an airline’s second-biggest cost after labor, accounting for 10% to 15% of total expenses. An increase of just a penny per gallon can hike fuel costs industrywide by nearly $200 million a year.
The result: The airline industry, having already lost more than $30 billion since the terrorist attacks of Sept. 11, 2001, continues to lose money.
At Northwest, the added turmoil of a mechanics strike “may give them the green light” to file for Chapter 11, Parsons said.
Atlanta-based Delta, with 25 daily departures from LAX, is the airport’s fourth-busiest operator. The airline employs more than 2,600 people in the state. Delta also owns Song, a low-cost carrier that operates 12 daily flights from LAX.
Senior executives at Delta, which has lost nearly $10 billion since 2000, recently have said seeking bankruptcy protection is a possibility if the carrier can’t quickly find more substantial cost savings.
The calendar also could play a role in whether Northwest and Delta file for Chapter 11 in the coming weeks.
The Labor Day weekend marks the end of the summer travel season and the onset of a seasonal slowdown in passenger traffic. It’s also the time when the airlines are sitting on one of their best cash positions of the year. So Delta or Northwest might decide to file for bankruptcy protection shortly after the holiday, consultant Pincavage said.
In addition, new federal bankruptcy laws that take effect Oct. 17 impose stricter limits on companies reorganizing under Chapter 11 and might prompt the two carriers to seek court protection before then, analysts said.
The last major U.S. airline strike occurred in August 1998, when Northwest’s pilots walked out and grounded the carrier for two weeks.
Northwest can ill afford any loss of customers, said Michael Allen, chief operating officer of Back Aviation Solutions, a consulting firm in New Haven, Conn.
“In this ever-rising fuel environment, time is of the essence to get this [labor] problem solved,” he said. “Everybody needs to understand that the stakes are serious.”