Northwest Airlines Corp., pummeled by high labor costs and soaring fuel prices, filed for bankruptcy protection Wednesday, entering Chapter 11 on the same day as its larger rival, Delta Air Lines Inc.
MINNEAPOLIS – Northwest Airlines Corp., pummeled by high labor costs and soaring fuel prices, filed for bankruptcy protection Wednesday, seeking Chapter 11 protection on the same day as its larger rival, Delta Air Lines Inc. The filings put three of the nation’s four largest airlines in bankruptcy court.
The company, which said it had nearly $17.92 billion in debt, said it would continue to fly its normal schedule and operate its frequent flyer program while reorganizing. Its filing, made in U.S. Bankruptcy Court in the Southern District of New York, also listed $14.35 billion in assets and said Northwest had $1.5 billion in cash.
Like other airlines, Northwest has been hit by meteoric increases in jet fuel prices. But the fourth-largest airline also has the highest labor costs in the industry and has been losing money at the rate of $4 million a day.
“We had developed a plan to restructure Northwest outside of Chapter 11 and have been implementing that plan,” Doug Steenland, Northwest president and CEO, said in a statement. “Unfortunately, in addition to an uncompetitive cost structure, our efforts have been overtaken by skyrocketing fuel costs.”
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The company said it expects its fuel bill for 2005 to be $3.3 billion, compared to $2.2 billion for 2004 and $1.6 billion for 2003.
The airline has sought more than $1.1 billion in union concessions for months, warning that bankruptcy was a possibility, but only pilots agreed. Mechanics went on strike in August rather than accept deep layoffs and pay cuts, and though the airline stayed aloft with replacements, it switched to a reduced fall schedule early and saw more delays and cancellations than usual.
Steenland said the bankruptcy filing was unrelated to the strike.
Northwest also faces $2.5 billion in payments due to its underfunded pensions in the next couple of years, and has so far unsuccessfully pursued a change to federal law that would allow it to spread the payments over a longer term.
The filing, announced shortly after Delta’s, made Eagan-based Northwest the fourth major U.S. carrier to enter Chapter 11 since the Sept. 11 terrorist attacks. UAL Corp., parent of United Airlines; and US Airways Group Inc., which has filed twice in the last three years, are still in bankruptcy reorganization. Some smaller carriers also have filed for bankruptcy in recent years., including Hawaiian Airlines and ATA Airlines Inc.
Northwest, the country’s fourth-largest airline, had been in better financial shape than some of its competitors, with an extensive Asian network and cargo business both thought to be profitable.
But over the last four years, nothing has gone Northwest’s way.
The Sept. 11, 2001, attacks quickly led to a downturn for the whole airline industry. The epidemic of SARS, a virus that spread through several Asian countries, cut into a core Northwest business. Discount carriers grabbed the most profitable routes from older, hub-and-spoke carriers. And, like its competitors, it was hit by soaring fuel prices.
Northwest has responded by cutting unprofitable routes, increasing airfares when it can, and trying to cut costs wherever it could. Earlier this year it stopped giving away free pretzels on domestic flights, months after it had stopped serving free meals. The airline even stopped carrying magazines on its planes and in its club lounges.
But its most public cost-cutting effort has been aimed at workers. Northwest’s costs have always been far higher than those of discount airlines, and among the other majors, United and U.S. Airways have reduced theirs by winning concessions in bankruptcy.
In early 2003, Northwest began seeking $950 million a year worth of savings, then raised the target to $1.1 billion, and the target stood at $1.4 billion by this weekend, according to the striking mechanics union.
The bankruptcy puts the pensions of future and current Northwest retirees in jeopardy. Northwest has a $3.8 billion shortfall in its pension plans. United and U.S. Airways dumped their pension obligations on the government, and it’s possible Northwest and Delta could do the same.
Pilots would take the biggest hit if that happens. The PBGC caps payments at $45,613 a year for pension plans canceled in 2005. On top of that, federal rules force pilots to retire at age 60 — but PBGC rules reduce payments to anyone who retires before 65. But lower-paid work groups would be expected to see little if any changes in their pension checks.
By filing for Chapter 11 now, Northwest beat an Oct. 17 deadline, when the bankruptcy laws become more restrictive and make it harder for companies to cancel their debts.
The new bankruptcy laws also will make it harder to pay bonuses to managers to keep them at the company, and will generally force companies to either exit bankruptcy or liquidate faster. Northwest Chief Executive Doug Steenland said in July that the new laws would be one factor of many in deciding whether the airline filed for protection.